Brighton Perspective

Emerging markets debt - Seeking Alpha

http://seekingalpha.com/article/196319-high-conviction-emerging-markets-debt-offers-strong-potential?source=hp_wc This is a link to an article on the Seeking Alpha website regarding our interest in emerging markets debt as an appropriate fixed income strategy.

businesses react to rising cost of obamacare they're cutting benefits: Tech Ticker, Yahoo! Finance

businesses react to rising cost of obamacare they're cutting benefits: Tech Ticker, Yahoo! Finance. This shouldn't come as a surprise to the informed. Governments raise money by issuing debt and increasing taxes. Any taxes assessed on corporations are passed through to consumers via higher prices. Taxes that can't be passed through increase corporate expenses. To continue to remain profitable, corporations are then forced to cut expenses elsewhere. The largest expense for most companies? Labor. Most benefits from the new health plan won't begin until 2014 but costs will begin soon, possibly even in 2010. Assume that either prices or taxes (or both) will increase soon and adjust your portfolios appropriately.

Pimco’s Bill Gross Says Bonds Have Seen Best Days (Update2) - Bloomberg.com

Pimco’s Bill Gross Says Bonds Have Seen Best Days (Update2) - Bloomberg.com. Excellent perspective - of course, we agree with it! The domestic economy appears poised for a potential double-dip recession which could prove painful to domestic equity investors. However, strong arguments can be made that inflation is not a near-term threat (12-18 months), so we'd disagree with that part of the article. Emerging markets do offer interesting opportunities, particularly fixed income. Stronger balance sheets, net savers, fiscally and monetarily repsonsible policies and better growth prospects than developed markets create attractive investment opportunities. Of course, the emerging markets can be more volatile than developed markets and many do rely on the U.S. for export demand. Declines in U.S. consumption will have a negative impact on these countries GDP. So consider your options carefully.

Plan your Investment Strategy

Setting investment goals means defining your dreams for the future. When you're setting goals, it's best to be as specific as possible. For instance, you know you want to retire, but when? You know you want to send your child to college, but to an Ivy League school or to the community college down the street? Writing down and prioritizing your investment goals is an important first step toward developing an investment plan.

Your investment time horizon is the number of years you have to invest toward a specific goal. Each investment goal you set will have a different time horizon. For example, some of your investment goals will be long term (e.g., you have more than 15 years to plan), some will be short term (e.g., you have 5 years or less to plan), and some will be intermediate (e.g., you have between 5 and 15 years to plan). Establishing time horizons will help you determine how aggressively you will need to invest to accumulate the amount needed to meet your goals.

Although you can invest a lump sum of cash, many people find that regular, systematic investing is also a great way to build wealth over time. Start by determining how much you'll need to set aside monthly or annually to meet each goal. Although you'll want to invest as much as possible, choose a realistic amount that takes into account your other financial obligations, so that you can easily stick with your plan. But always be on the lookout for opportunities to increase the amount you're investing, such as participating in an automatic investment program that boosts your contribution by a certain percentage each year, or by dedicating a portion of every raise, bonus, cash gift, or tax refund you receive to your investment objectives.

No matter what your financial goals, you'll need to decide how to best allocate your investment dollars. One important consideration is your tolerance for risk. All investments carry some risk, but some carry more than others.How well can you handle market ups and downs? Are you willing to accept a higher degree of risk in exchange for the opportunity to earn a higher rate of return? Whether you're investing for retirement, college, or another financial goal, your overall objective is to maximize returns
without taking on more risk than you can bear. But no matter what level of risk you're comfortable with, make sure to choose investments that are consistent with your goals and time horizon.

Obama Pays More Than Buffett as U.S. Risks AAA Rating (Update3) - Bloomberg.com

Obama Pays More Than Buffett as U.S. Risks AAA Rating (Update3) - Bloomberg.com.

It's not a good sign for fiscal responsibility when corporate fixed income securities yield less than U.S. Treasuries. Treasuries were once presumed to be "default" free and hence yielded less than similar maturity corporates (which do have default risk). Is Berkshire Hathaway really "safer" than U.S. Treasuries?

Where's your 401k?

If you’re leaving your company because of a downsizing or a switch in jobs don’t forget about the assets in your 401(k) plan. All too often, departing employees leave behind their retirement plans without giving much thought to the consequences.

According to a recent survey by Charles Schwab, almost half of the money held in 401(k) plans by employees who left their jobs during the first quarter of 2008 had not been moved a year later. While there is no penalty for leaving your 401k with your prior employer, there are benefits to moving the account. In fact, you have three other principal options: take a cash distribution, move the funds to a new employer’s plan, or roll over the assets to an IRA.

The cash distribution option should be considered the last resort, hardship option only. Under this scenario, you elect to take a lump-sum distribution from a 401(k) plan when leaving. Unfortunately, that election could result in a hefty tax bill. The amount representing pre-tax contributions and earnings in the 401(k) is taxed at ordinary income rates reaching as high as 35% on the federal level. If you’re under age 59½, the IRS will generally tack on a 10% “early withdrawal” penalty. And you still have to worry about state and local taxes and state penalties.

Besides incurring tax liability now, this approach means forfeiting the future benefit of tax-deferred savings and leaving a gap in your retirement plan. After 60 days have passed, you’ll have lost the opportunity to transfer the funds to another tax-advantaged plan. The final kicker? The employer’s 401(k) administrator will automatically withhold 20% of the payout, regardless of your personal circumstances. Again, this is the last resort, hardship option only.

If and when you find another job, you often can move your 401(k) balance to another 401(k) or other tax-qualified retirement plan available through your new company. That way, your assets will continue to grow tax-deferred without interruption. This direct transfer is also exempt from the early withdrawal penalty, and there’s no tax withholding as long as you arrange a trustee-to-trustee transfer from one plan to another. Avoid taking the funds yourself, because if you do, 20% will be withheld, and you won’t be able to recover that money until you file your tax return for the year of the transfer.

Finally, you can role the 401k account into an Individual Retirement Account (IRA). This may be the most advantageous approach. An IRA generally offers greater investment flexibility, letting you invest in a wide variety of stocks, bonds, and mutual funds, compared with 401(k) choices that tend to be more limited. And the IRA may give you greater control over distributions during retirement.
Beginning in 2010, all employees now also have a fourth option—rolling over employer plan funds to a Roth IRA that provides tax-free distributions during retirement. (Previously, Roth conversions were allowed only in a year in which your adjusted gross income didn’t exceed $100,000.) But moving money to a Roth means paying income tax on the untaxed portion of your account, unless you have large tax deductions that you can claim to offset this extra income.

According to a new Mercer consulting study, 69% of participants in public and private defined contribution plans are now back to their pre-crisis account balances. That suggests most held firm and didn't shift to cash. Discipline is important to long-term success both in terms of trusting your decision making and in terms of your continued commitment to funding your account.

Is it or isn't it?

Visited Walmart this weekend and overheard several conversations among shoppers about bargains. Meanwhile, credit unions are offering 2.9% auto financing on used cars to get consumers on the lot. Businesses continue to say their markets are as bad as ever and they're just trying to tough it out.

Meanwhile, the VIX is near recent lows, equity fund manager cash balances near all-time lows, and NASDAQ and the Russell 2000 (small cap stocks) are leading equities YTD. Yet, bond managers are near all-time cash balance highs.

Are we waiting for another shoe to drop, like fixed income managers, as consumers continue to tighten their finances? or are we on the leading edge of a recovery, as equity investors apparently believe, led by something other than consumers?

VOLATILITY S&P 500 Index Chart - Yahoo! Finance

VOLATILITY S&P 500 Index Chart - Yahoo! Finance.

The VIX has been declining steadily since October of 2008 and, after a brief uptick in late January, is back to about where it began the year. The question is - are investors getting complacent again. At the risk of sounding overly pessimistic, the U.S. economy is still roughly 12,000,000 jobs short of full capacity, earnings estimates are declining, government spending continues to increase and businesses and consumers continue to reign in debt. These issues don't provide any reason, to me, as to why investors would be so sanguine regarding future investment performance.

We continue to have concerns regarding equity market appreciation in 2010 and even into 2011. Income remains the more likely source of any positive absolute returns this year. Continued complacency among investors, demonstrated by the VIX, could make positive total returns even more difficult to achieve if that complacency is shaken for any reason. Better to be skeptical than surprised!

Think income for 2010! We believe equity markets have stiff headwinds to battle and a 2010 equity index price return between -10% and +3% wouldn't be surprising. Income can come from several sources so consider your options carefully. As always, evaluate downside risk first (risk of losing money) and decide your loss tolerance before investing.

According to Fidelity, 401k plan participant balances were up 28% in 2009. That's after a roughly 27% down year in 2008. If you didn't panic and go to cash during 4Q08 and your returns were in line with the average participant, you're still down about 8% relative to year-end 2007, but you survived the "financial meltdown".