Two weeks ago the markets had a great week, rising by more than five percent and inspiring excitement among many investors that the stalled rally may, in fact, be marching onward and upward again. Last week, however, the markets served up a good sized piece of humble pie, giving up almost all of the return they had made over the previous week on a string of weaker-than-expected economic news releases as well as a bad round of news in general. Some of the worse news of the week came from the automotive industry which had to decide the number of GM and Chrysler dealerships to close. While GM had the luxury of notifying their dealers that they will lose the GM line in 18 months, such was not the case for Chrysler dealerships, which were sent notices that they will lose their lines in the next 30 to 60 days. The criteria for figuring out which dealerships would go down are still a bit murky. Many owners are considering what, if any, legal action they can take, but the industry might already be damaged. With the announcement of so many dealerships closing, many people will feel the effect since layoffs are inevitable both at dealerships, and further up the automotive chain into sectors such as parts manufacturing, trucking, and advertising. The other bad news out of the auto industry is that GM is seeing that bankruptcy seems more and more like the only way to overcome their current situation. While the stocks markets have priced in a bankruptcy for GM, the general public has not come to terms with the impact that having two of the “big three” in bankruptcy could have on both the morale of the industry, and how people outside of the US would feel about American cars.
While the overall returns for the major indexes were much lower for the week, market volatility did not spike higher. The VIX index, which two weeks ago reached a new low for 2009, only moved up slightly over the course of last week. Gold, however, moved up almost two percent on the heels of a very strong showing two weeks ago. We can attribute some of this move to investors moving back toward gold as they feel that the market has recently rallied too quickly, and also attribute some of it to demand for gold picking up slightly around the world on the thought that the worst of the worldwide recession is behind us and economic prosperity is returning to the world. We do not think that gold will continue to rise even if the stock market rolls over and moves lower over the next month or two. Panic drove gold up last year and it has never really pulled back to reasonable levels, so much of last year’s hype is still priced in. Last week oil pulled back about half of what it had added in the previous two weeks as geopolitical tensions and demand for oil pulled back slightly.
We need more of a correction than what we saw last week in order set the market to where it could begin a meaningful recovery. After last year, recovery cannot just happen with the flip of a switch; if it were that easy, then Ben Bernanke would have flipped every switch he could find to see if any worked. The financial markets are, historically, very quick on the way down and very slow to recover, offering many opportunities that look like great buying points along the way, and many mini slides that shake out investors looking to make fast money. We are currently in wealth preservation mode, and are attempting to not get drawn into a market just because everyone else is doing it. They are just driving it higher before it could come falling down around them. We are actively looking for smart investments and stand ready to put money to work if such opportunities present themselves. Currently, many investors are becoming greedy in the markets, and as Warren Buffet has been saying recently, “Be fearful when others and greedy, and greedy when others are fearful.” It might just be the time to go the other way.
For the trading week ending 5/15/09, the returns in our portfolio models are as follows:
Last Week
Year to Date
Since 12/31/07
S&P 500 (benchmark)
-4.93 %
-1.04 %
-37.69 %
Aggressive Model
-4.87 %
4.81 %
-7.77 %
Growth Model
-3.51 %
3.98 %
-6.40 %
Moderate Model
-1.61 %
1.94 %
-7.21%
Stable Model
-2.90 %
4.04 %
-6.63 %
Over the course of last week we made a few changes in our model allocations, first we sold our recent positions in both the Rydex Internet Fund (RYIIX) and the Rydex Retail Fund (RYRIX). While both positions had been in a very strong uptrend, both broke down early in the week, looking like they could continue their way down. If these funds trend upward again, we will consider purchasing the sector again. The small-cap market sector also showed some weakness early in the week prompting us to sell half of our position and watch the remaining balance very closely. With the current state of the markets possibly having stalled out and appearing as though they could move downward, towards the end of the week we decided to put a hedge on all of our accounts to offset any major drops in our other positions. The current amount of risk in the markets has greatly increased over the last few weeks and we are allocating accordingly.
Over the past few weeks many people have been asking about their individual account performance relative to the model performance shown in these weekly commentaries. We construct the model performance by rebalancing the model’s figures back to exact model weightings every day. This is different from the way we actively manage accounts. Trading back to a target weight every day is not feasible and we, therefore, let the weightings ebb and flow as long as they do not drastically stray from the model allocation (+/- 2 percent of target). If a position moves more than two percent in either direction we evaluate the need to adjust the position and take the necessary action. This is one of the major differences between the model performance and actual performance of accounts. Over time, with positions rising and falling in actual accounts, the effect of the weighting differences compared to the models should cancel out. Times of large market moves and volatility, such as now, magnify the disparity. A second difference in performance is the cash position. The model performance is run with no return on money markets or cash positions, the actual performance of the accounts would include any return on the cash or money market positions. With the way Financially Speaking computes actual performance returns it is not possible to run inter-month figures and very difficult to run performance figures other than on a monthly basis. The quarterly reports that we send out are the most accurate way to judge performance of accounts, the model performance in the weekly commentary should not be considered the exact performance of anyone’s individual account.
Economic Wrap Up: Over the course of last week, the US economy received some news releases showing that the current economic downturn may not be over. The first piece of economic news that suggested we are not out of the woods yet was the retail sales figure released on Wednesday the 13th, which showed that retail sales for the month of April fell by .4 percent. This is a drastic improvement over the previous month’s reading of negative 1.3 percent but still way under the expected figure of zero percent growth. When we examine retail sales, not including auto, the news was even further from expectations with the release coming in at a negative .5 percent when the market expected .2 percent growth. This lower-than-expected figure was, in part, due to the uncertainty of the US auto manufacturers and the weariness of the US consumer to purchase cars in an environment where no one knows which car makers will be around to service long warranties in the future. Business inventories continued to decline during the month of March falling by approximately one percent; at some point the inventories will need to pick back up as companies start to believe that the recession is over and that the US consumer will come back full-force. Many economists have their eyes on business inventories as a sign for when the economic situation will turn around. With the negative one percent being an improvement over the previous month’s reading of negative 1.3 percent some economists believe that the worst of this cycle may be behind us – we are still skeptical of this. Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) figures which were released during the week showed slightly higher-than-expected readings, but readings were not high enough to spark concern about coming inflation. Initial jobless claims hit the markets on Thursday the 14th with the release coming in much higher than the previous week and much higher than expected. While the initial jobless claims indicator is a lagging indicator for the overall economy it has a large psychological effect on people’s perception about the health of the economy because it has a very real personal affect on many people in society.
This week is a very light week for economic news releases with housing starts and building permits kicking off the week on Tuesday the 19th. Both figures should shed some light on the current state of the US housing market and, hopefully, will show that there is some recovery taking place in the housing market. The second major economic news release for the week comes from the FOMC meeting minutes from the end of last month. The verbiage regarding the current economic state of the US will be the key to the release. If the language has changed since the previous release, it may signal that the FED thinks that the current situation will be shorter or longer than expected. Early indicators signal that the FED feels that the current recession is coming to an end more quickly than previously thought. Other than those two economic news releases there are the weekly initial jobless claims on Thursday the 21st, the Leading Indicators for the month of April, and the Philadelphia Fed figure.
Financial Planning Tip: Tax Substantiation of Charitable Deductions
This is a good time to review the Internal Revenue Service deductibility rules for charitable contributions, as many people are being inundated with mail and telephone solicitations for donations.
For cash contributions, the IRS requires either a bank record (statement or canceled check), a charge showing on a credit/debit card statement, a detailed receipt from the qualified organization, or a pay stub showing a deduction from net pay.
If the contribution is either a single payment or a series of related payments to the same charity that totals $250 or more, then the donor needs a written communication from the charity stating the amount given and that nothing was given to the donor in exchange.
The letter must be dated prior to the date of filing the tax return for the year of the contribution, including extensions. The donor can receive items de minimis, such as personalized mailing labels, cards, mugs, etc.
For contributions of property, a taxpayer must have appropriate documentation of the property donated and the condition of the property on the date of contribution.
Additional information on how the property was acquired and how the fair market value was determined on the date of the contribution must be retained by the taxpayer. The taxpayer — not the charity — has this burden of substantiation. Used property must be in good condition or better. The taxpayer can use any one of several websites to assist in determining the “thrift shop value” for use on the tax return.
On your tax return it is advisable to list each cash contribution with appropriate amounts and the name of the charity. Avoid listing a large figure for miscellaneous deductions, which might prompt an inquiry from the IRS. For donations of property, it is not necessary to attach an explanation to your return unless the contribution exceeds $500. That requires the completion of Part 2 of Form 8283 (non-cash charitable contributions).
Should the value exceed $5,000, then a qualified appraisal should be completed and submitted along with Form 8283.
Cash gifts to charities where no receipt is obtained and no bank record exists are not deductible. Placing cash in a collection plate when a charity does not use the envelope system or tossing money into the kettle during the holidays no longer qualify as charitable deductions.
Two weeks ago the markets had a great week, rising by more than five percent and inspiring excitement among many investors that the stalled rally may, in fact, be marching onward and upward again. Last week, however, the markets served up a good sized piece of humble pie, giving up almost all of the return they had made over the previous week on a string of weaker-than-expected economic news releases as well as a bad round of news in general. Some of the worse news of the week came from the automotive industry which had to decide the number of GM and Chrysler dealerships to close. While GM had the luxury of notifying their dealers that they will lose the GM line in 18 months, such was not the case for Chrysler dealerships, which were sent notices that they will lose their lines in the next 30 to 60 days. The criteria for figuring out which dealerships would go down are still a bit murky. Many owners are considering what, if any, legal action they can take, but the industry might already be damaged. With the announcement of so many dealerships closing, many people will feel the effect since layoffs are inevitable both at dealerships, and further up the automotive chain into sectors such as parts manufacturing, trucking, and advertising. The other bad news out of the auto industry is that GM is seeing that bankruptcy seems more and more like the only way to overcome their current situation. While the stocks markets have priced in a bankruptcy for GM, the general public has not come to terms with the impact that having two of the “big three” in bankruptcy could have on both the morale of the industry, and how people outside of the US would feel about American cars.
While the overall returns for the major indexes were much lower for the week, market volatility did not spike higher. The VIX index, which two weeks ago reached a new low for 2009, only moved up slightly over the course of last week. Gold, however, moved up almost two percent on the heels of a very strong showing two weeks ago. We can attribute some of this move to investors moving back toward gold as they feel that the market has recently rallied too quickly, and also attribute some of it to demand for gold picking up slightly around the world on the thought that the worst of the worldwide recession is behind us and economic prosperity is returning to the world. We do not think that gold will continue to rise even if the stock market rolls over and moves lower over the next month or two. Panic drove gold up last year and it has never really pulled back to reasonable levels, so much of last year’s hype is still priced in. Last week oil pulled back about half of what it had added in the previous two weeks as geopolitical tensions and demand for oil pulled back slightly.
We need more of a correction than what we saw last week in order set the market to where it could begin a meaningful recovery. After last year, recovery cannot just happen with the flip of a switch; if it were that easy, then Ben Bernanke would have flipped every switch he could find to see if any worked. The financial markets are, historically, very quick on the way down and very slow to recover, offering many opportunities that look like great buying points along the way, and many mini slides that shake out investors looking to make fast money. We are currently in wealth preservation mode, and are attempting to not get drawn into a market just because everyone else is doing it. They are just driving it higher before it could come falling down around them. We are actively looking for smart investments and stand ready to put money to work if such opportunities present themselves. Currently, many investors are becoming greedy in the markets, and as Warren Buffet has been saying recently, “Be fearful when others and greedy, and greedy when others are fearful.” It might just be the time to go the other way.
For the trading week ending 5/15/09, the returns in our portfolio models are as follows:
Year to Date
Since 12/31/07
S&P 500 (benchmark)
-4.93 %
-1.04 %
-37.69 %
Aggressive Model
-4.87 %
4.81 %
-7.77 %
Growth Model
-3.51 %
3.98 %
-6.40 %
Moderate Model
-1.61 %
1.94 %
-7.21%
Stable Model
-2.90 %
4.04 %
-6.63 %
Over the course of last week we made a few changes in our model allocations, first we sold our recent positions in both the Rydex Internet Fund (RYIIX) and the Rydex Retail Fund (RYRIX). While both positions had been in a very strong uptrend, both broke down early in the week, looking like they could continue their way down. If these funds trend upward again, we will consider purchasing the sector again. The small-cap market sector also showed some weakness early in the week prompting us to sell half of our position and watch the remaining balance very closely. With the current state of the markets possibly having stalled out and appearing as though they could move downward, towards the end of the week we decided to put a hedge on all of our accounts to offset any major drops in our other positions. The current amount of risk in the markets has greatly increased over the last few weeks and we are allocating accordingly.
Over the past few weeks many people have been asking about their individual account performance relative to the model performance shown in these weekly commentaries. We construct the model performance by rebalancing the model’s figures back to exact model weightings every day. This is different from the way we actively manage accounts. Trading back to a target weight every day is not feasible and we, therefore, let the weightings ebb and flow as long as they do not drastically stray from the model allocation (+/- 2 percent of target). If a position moves more than two percent in either direction we evaluate the need to adjust the position and take the necessary action. This is one of the major differences between the model performance and actual performance of accounts. Over time, with positions rising and falling in actual accounts, the effect of the weighting differences compared to the models should cancel out. Times of large market moves and volatility, such as now, magnify the disparity. A second difference in performance is the cash position. The model performance is run with no return on money markets or cash positions, the actual performance of the accounts would include any return on the cash or money market positions. With the way Financially Speaking computes actual performance returns it is not possible to run inter-month figures and very difficult to run performance figures other than on a monthly basis. The quarterly reports that we send out are the most accurate way to judge performance of accounts, the model performance in the weekly commentary should not be considered the exact performance of anyone’s individual account.
Economic Wrap Up: Over the course of last week, the US economy received some news releases showing that the current economic downturn may not be over. The first piece of economic news that suggested we are not out of the woods yet was the retail sales figure released on Wednesday the 13th, which showed that retail sales for the month of April fell by .4 percent. This is a drastic improvement over the previous month’s reading of negative 1.3 percent but still way under the expected figure of zero percent growth. When we examine retail sales, not including auto, the news was even further from expectations with the release coming in at a negative .5 percent when the market expected .2 percent growth. This lower-than-expected figure was, in part, due to the uncertainty of the US auto manufacturers and the weariness of the US consumer to purchase cars in an environment where no one knows which car makers will be around to service long warranties in the future. Business inventories continued to decline during the month of March falling by approximately one percent; at some point the inventories will need to pick back up as companies start to believe that the recession is over and that the US consumer will come back full-force. Many economists have their eyes on business inventories as a sign for when the economic situation will turn around. With the negative one percent being an improvement over the previous month’s reading of negative 1.3 percent some economists believe that the worst of this cycle may be behind us – we are still skeptical of this. Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) figures which were released during the week showed slightly higher-than-expected readings, but readings were not high enough to spark concern about coming inflation. Initial jobless claims hit the markets on Thursday the 14th with the release coming in much higher than the previous week and much higher than expected. While the initial jobless claims indicator is a lagging indicator for the overall economy it has a large psychological effect on people’s perception about the health of the economy because it has a very real personal affect on many people in society.
This week is a very light week for economic news releases with housing starts and building permits kicking off the week on Tuesday the 19th. Both figures should shed some light on the current state of the US housing market and, hopefully, will show that there is some recovery taking place in the housing market. The second major economic news release for the week comes from the FOMC meeting minutes from the end of last month. The verbiage regarding the current economic state of the US will be the key to the release. If the language has changed since the previous release, it may signal that the FED thinks that the current situation will be shorter or longer than expected. Early indicators signal that the FED feels that the current recession is coming to an end more quickly than previously thought. Other than those two economic news releases there are the weekly initial jobless claims on Thursday the 21st, the Leading Indicators for the month of April, and the Philadelphia Fed figure.
Financial Planning Tip: Tax Substantiation of Charitable Deductions
This is a good time to review the Internal Revenue Service deductibility rules for charitable contributions, as many people are being inundated with mail and telephone solicitations for donations.
For cash contributions, the IRS requires either a bank record (statement or canceled check), a charge showing on a credit/debit card statement, a detailed receipt from the qualified organization, or a pay stub showing a deduction from net pay.
If the contribution is either a single payment or a series of related payments to the same charity that totals $250 or more, then the donor needs a written communication from the charity stating the amount given and that nothing was given to the donor in exchange.
The letter must be dated prior to the date of filing the tax return for the year of the contribution, including extensions. The donor can receive items de minimis, such as personalized mailing labels, cards, mugs, etc.
For contributions of property, a taxpayer must have appropriate documentation of the property donated and the condition of the property on the date of contribution.
Additional information on how the property was acquired and how the fair market value was determined on the date of the contribution must be retained by the taxpayer. The taxpayer — not the charity — has this burden of substantiation. Used property must be in good condition or better. The taxpayer can use any one of several websites to assist in determining the “thrift shop value” for use on the tax return.
On your tax return it is advisable to list each cash contribution with appropriate amounts and the name of the charity. Avoid listing a large figure for miscellaneous deductions, which might prompt an inquiry from the IRS. For donations of property, it is not necessary to attach an explanation to your return unless the contribution exceeds $500. That requires the completion of Part 2 of Form 8283 (non-cash charitable contributions).
Should the value exceed $5,000, then a qualified appraisal should be completed and submitted along with Form 8283.
Cash gifts to charities where no receipt is obtained and no bank record exists are not deductible. Placing cash in a collection plate when a charity does not use the envelope system or tossing money into the kettle during the holidays no longer qualify as charitable deductions.
For additional information consult your tax advisor or see IRS publication 526, Charitable Contributions, http://www.irs.gov/publications/p526/index.html.
Posted in Weekly Commentary