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October 18, 2013

Dear Clients and Friends:

History has shown that investors are more harmed than helped when frequently reacting to current events. As advisors, we believe that our mission is to help you achieve your goals, not to generate activity for activity sake. Often the best decision is to resist the urge to act. Do not equate inaction with a lack of oversight. We understand that part of our job is to be aware of the constantly shifting investment landscape and to make recommendations for change when we believe it will enhance the achievement of your goals.

We do not believe it is prudent or necessarily beneficial to frequently communicate our thoughts on the latest economic or financial noise filling the news outlets. We understand that the media is driven to find content in order to boost ratings and sell advertising. All too often the media frenzy in building up events or magnifying concerns results in unnecessarily raising anxiety levels. It is often much ado about nothing. However, the economic and political climate has been so supercharged of late that we believe it would be helpful to provide our perspective on current issues.

Federal Spending and the U.S. Debt Limit– The default on the timely payment of interest on our national debt has been avoided, or at least postponed. Our elected representatives have once again kicked the spending and debt level cans down the road until early 2014. Below is a chart showing the relationship of total federal debt to a measure of the total U.S. economy, the Gross Domestic Product (GDP).
 The proposed spending of tax revenues and borrowed funds is shown in the following chart.


In order to make progress on total spending and decrease the need to subsidize that spending with additional debt, we have to address spending in the three largest categories shown above: Social Security & Unemployment, Medicare & Health, and Military. So far, we have not shown the political will to align these expenditures with expected revenues.

Interest Rates– The path of least resistance is for rates to advance on an uneven path. The Federal Reserve Bank (Fed) has decided to continue its efforts to suppress interest rates by buying $85 billion in outstanding long-term treasury debt every month. This interest rate suppression supports housing and stock prices. The Fed will continue to monitor economic stability looking for an opportunity to slow down its buying of debt and its influence over interest rates. When that happens the consensus is that rates would respond solely to market forces. The Fed is more concerned about the lack of consistent and meaningful economic growth than inflation. The twelve month change in the Consumer Price Index through August 31, 2013 was 1.5%. The fifty year average is 4.2%. (Source: Bureau of Labor Statistics and the JP Morgan Guide to the Markets)

U.S. Economic Growth– The most recent available measure of our annual growth rate is 2.5% from the second quarter of 2013. Many commentators believe that the ideal annual growth rate is between 2% and 3%. Concerns remain over the consistency and degree of GDP growth. The growth rates for the two previous quarters were 1.1% and 0.1%, respectively, and the magnitude of growth is lower than expected coming out of a severe recession. While there has been an improvement in the official unemployment rate, the quality of new jobs and a shrinking labor participation rate limits domestic economic growth and the stability of the middle class.

World Economic Growth– Even though emerging market growth has slowed in recent quarters, the consensus is for these markets to be the driver of future world-wide economic growth, eclipsing growth in developed markets like the U.S. and "old" Europe. While the success of emerging markets has been strongly linked to the health of buyers in the developed countries, this relationship is changing. As the consumer base in emerging markets continues to strengthen, these markets become less reliant on exports. We should note that the prospect of higher growth rates does not necessarily correlate with higher stock market returns. A certain percentage of economic growth occurs in small, privately-owned businesses, as opposed to publicly-traded companies. As a result, a segment of the growing economic pie is inaccessible to outside investors, like mutual funds. In addition, publicly-traded companies accessible to outside investors can issue more of their stock, which dilutes the value of existing shares and lowers expected returns. In summary, an investor cannot conclude that emerging market returns will be better than developed market returns simply because of their higher growth rates.

Patient Protection and Affordable Care Act– The quality and cost of available health care impacts all of our lives. It is no surprise that an attempt to revolutionize the management and delivery of health care in this country has resulted in both hope and fear. In 2011 health care expenditures accounted for 18% of the country’s Gross Domestic Product, a measure of the economy. Its share is expected to grow to 20% in 2022 according to the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS). Any legislation that impacts all citizens and that represents such a significant share of the economy deserves all the attention it gets. Our concern is how, or if, this legislation impacts the health coverage and cost issues of our clients. Unfortunately it is too early to gauge that impact. The law is too new, too vast, and has yet to be fully implemented. We continue to study and research, and to seek out guidance from health care professionals. Individuals and families who lack coverage through an employer have until December 15 to select a plan for coverage effective January 1, 2014. The open enrollment deadline is March 31, 2014. As we become aware of more provisions that could impact your coverage, your cost, and your tax liability, we will communicate guidance. If you are concerned about how any part of the law, let us know. We will do our best to get you the answers you need. We want to remain your first call for any significant financial concern you face.


Year-End Tax Planning

Our advisors will soon be engaged in year-end tax planning. Proper planning requires the review of your filed 2012 returns, and projecting your tax liabilities for 2013 and 2014. As part of this review, we will be processing Required Minimum Distributions (RMDs) from IRAs of clients who have attained at least age 70 ½. Our review will include making recommendations of federal and state income tax withholding from these distributions.

If you are employed for any period in 2013, please provide us with your most recent paystubWe cannot overemphasize the importance of responding to our requests for information as quickly as possible as the year-end approaches. Providing you with the best possible service and the best possible recommendations requires a high level of timely cooperation.

Fidelity Charitable Gift Fund

Using a charitable gift fund allows you to make a higher than normal deductible gift in one tax year and spread out the actual disbursements to charities in future years. This allows you to receive a higher tax break than making the same total contribution to charities spread out over years subject to a lower level of taxation.

This benefit is often combined with a contribution of one or more low tax basis securities to the gift fund, allowing for an immediate tax-free sale to diversify or preserve principal.

Clients wishing to set up a Fidelity Charitable Gift Fund account should contact us for assistance or to answer any questions you may have on how these accounts work. The decision to actually fund the account can be made in the tax year of choice.

Donations in Lieu of Holiday Gifts

It is a tradition at Schiavi + Dattani to deliver gift baskets to our clients during the holiday season. Clients do have the option of donating the value of their gift to charity.

Because of administrative constraints, we limit the charities eligible to participate in this program. Clients who would like to direct their gift should contact Kate Madden at our office before Friday, November 15th.    She can be reached at 302-994-4444 or via email at kmadden@sdfinancialadvisors.com.

This year’s charities include:
Boys & Girls Clubs

The mission of Boys & Girls Clubs is to inspire and enable all young people, especially those with the most need, to realize their full potential as productive, responsible, and caring citizens. Delaware clubs currently serve more than 25,000 youth annually, about one out of every five school-aged children in the state. Unless specified otherwise, clients who select this charity will have the value of their gift made to the Boys & Girls Clubs of Delaware.

Fisher House Foundation

This charity facilitates several programs that improve the lives of military families. Its signature program is the "Fisher House", a home away from home for families of patients receiving care at a military or VA medical center. There are 62 Fisher Houses in the U.S. and Germany. The charity also runs the Hero Miles program that uses donated frequent flyer miles for families to be at the bedside of injured service members. This charity is rated A+ by the American Institute of Philanthropy.

We continue to work daily to earn your trust and confidence.


Best Regards,


Vincent A. Schiavi, CFP®, CPA/ PFS                   Ravi P. Dattani, CFP®, CPA
President                                                            Vice-President


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