The financial markets in 2012 are behaving in a very similar fashion to the early months of 2011.   Optimistic outlooks abound and many on Wall Street believe the worst of the global banking crisis is behind us.  After an initial surge of optimism last year, US stocks rode a roller coaster with dramatic dips and rebounds to finally finish 2011 flat, while foreign stocks were down double digits.  Over the last 3 months we are seeing signs the U.S. economy is slowly improving and stocks, bonds and gold have all begun this year on the upswing.

Although the news from Europe has improved, we believe the European debt crisis is far from over.  After all the drama over the last two years, nothing has actually been fixed.  Europe is embarking on a similar course to our own Ben Bernanke and the U.S. Federal Reserve Bank.  The European Central Bank (ECB) has injected approximately €1 Trillion euros into their banking system since December.  They are propping up their banks and effectively manipulating the bond markets by purchasing massive amounts of government bonds to keep interest rates low.  After the European banks agreed to allow Greece to default on 50% of the amount they owe, Europe will be lending Greece another €130 Billion later this month.   Germany, France, Finland and the Dutch are attempting to facilitate an “orderly” default by Greece, rather than a “disorderly” Lehman Brothers type of default, like we saw in 2008.  None of these countries want to expel a member of the European Union, but their imposed austerity measures will likely make staying in the Eurozone so onerous that leaving, ultimately, becomes a better choice.  With Europe now in recession and a long list of challenges ahead for Greece and its Southern European neighbors, we see the immediate road ahead for the financial markets littered with potholes.

After an enjoyable rally over the last few months, we expect volatility to return to the markets in the months ahead.  While Europe tries to contain its credit crisis, the Middle East is in flux once again, with Egypt seeing renewed street protests and Iran’s nuclear ambitions becoming more threatening to Israel.   Our Proactive Asset Management™ discipline is keeping our investment portfolio’s exposure to risk at lower levels while the world attempts to digest record amounts of government deficits and a dramatic increase in sovereign debt, now growing at rates looking like “J” curves. Pacific Wealth Management believes it is prudent to maintain a well-diversified portfolio built for wealth preservation.

We encourage you to contact us if you have any questions or would like some additional information.

Email: contactus@pacwealth.com

Telephone: 858.509.9797

Happy New Year! With the holidays now behind us, we send our best wishes for a healthy, productive and prosperous 2012!  As expected, 2011 was a roller coaster year for financial markets around the world. The volatility that began over the summer continued through November with stocks finally enjoying a “Santa Claus” rally to finish the year flat.

The European Debt Crisis remains at the forefront of Pacific Wealth Management’s radar screens for 2012. We are concerned the entire Eurozone may experience a financial crisis similar to the Lehman Brothers bankruptcy-induced banking crisis of 2008. The essential question is whether the debt problems and upcoming recession in Europe will torpedo a very tepid and tenuous U.S. economic recovery.

The U.S. financial markets have picked up some strength over the last couple of months. Unfortunately, Corporate CEO’s remain reluctant to spend their very large caches of cash on future growth until they see more clarity on taxes and the economic outlook.  Our elected politicians in Washington continue to inspire little confidence. The upcoming presidential election will add more drama to what is likely to be a very dramatic 2012.

Despite recent stock market strength, we expect European solvency issues to reemerge as we head further into the New Year.  The instability in Europe is likely to precipitate more volatility in the global financial markets.  Strategically, Pacific Wealth Management portfolios remain conservatively invested. Our consistent long term focus is on wealth preservation.

With the holidays upon us and 2012 right around the corner we hope you are doing well and able to share this special time of the year with family and friends.

The volatility that began over the summer is continuing as stocks around the world remain held hostage to the news of the day coming from Europe and Washington D.C. The European Debt Crisis has been at the forefront over the last few months. These problems are not new and, unfortunately, getting worse. We, at Pacific Wealth Management, remain concerned the entire Eurozone may experience a financial crisis similar to the Lehman Brothers bankruptcy-induced banking crisis of 2008. What is ultimately at stake is the integrity of the Euro Banking system and the issue of liquidity vs. solvency for a growing number of countries throughout Europe. At a minimum, we believe the EU will not look the same a year or two from now.

The European leadership, and especially Germany’s Angela Merkel, is not willing to give the European Common Bank (ECB) the authority to print money and create a backstop for, not only the Greece, Portugal and Irelands of the world, but now Italy and Spain too. The estimated size of the fund needed to provide that much-needed backstop range from €2 Trillion to €6 Trillion. Germany continues to have nightmares of the uber-inflation their country experienced in the 1920’s, which ultimately brought Hitler to power, and is adamantly opposed to the ECB printing an endless supply of €uros to support their weaker brethren. With this week’s announcement the world’s major Central Banks will provide $U.S. loans to European banks, the global stock markets rallied dramatically.  Despite this news, Germany has yet to reach a resolution and we feel Europe is likely to deteriorate further before it improves. European bond investors are driving yields on Italian and Spanish bonds higher and creating more challenges to an already fragile European economy. The essential question remains whether the debt problems and upcoming recession in Europe will torpedo a tenuous U.S. economic recovery.

The U.S. economy has recently picked up a little strength over the last couple of months. Unfortunately, our politicians are not inspiring investor’s confidence either. The failure of the Super Committee, once again, clearly illustrates the dysfunction among our political leadership in Washington. We do not expect much to be accomplished on the deficit reduction front before the seating of the 2013 congress.

Our Pacific Wealth Management portfolios remain conservatively invested and consistently focused on wealth preservation. We Americans are an optimistic group and this time of the calendar is usually conducive to better than average stock market returns as we look forward to another new year. We do believe stocks have a reasonable likelihood of experiencing an end of the year “Santa Claus” rally. Unfortunately the uncertain outlook existing today on the economic and political front will soon reemerge as we head further into 2012 and with it, more roller coaster rides in our future.

The news over the last few months continues to focus on Europe and what will be necessary to take care of Greece.  Unfortunately, Greece did not have a bright future before the European Union challenges are considered.   Since its formation in the 1820’s, modern Greece has been supported by three pillars.  First, given its location, Greece has leveraged itself by allowing external powers a means to battle other countries in their neighborhood.  In the 1800’s, the United Kingdom used Greece as a military foil against the Turks.  Later, the U.S. used Greece’s strategic location against the Soviet Union and like England before it, injected huge amounts of capital into Greece without any expectancy of payback.  In the post Cold War world, neither Turkey nor the Soviet Union are the same threats, so the capital that flowed for so many years to the Greeks has dried up.  Secondly, Greece’s coastal proximity, allowed it to become a force in shipping.  It quickly became one of their leading industries.  Unfortunately, in the modern age of super-container ships Greece can no longer compete and most of this industry has moved to Norway, China and Korea.  Thirdly, tourism is now Greece’s largest industry, but modern economies can rarely survive on tourism alone. Today those three previous pillars of support no longer exist and therefore Greece can no longer be salvaged.

We believe the path forward for Greece is bleak, unless they discover a new ongoing supply of capital that will never have to be repaid.  For Greece to survive, it must be kicked out of the European Union.  Before that can happen, independent projections, from private intelligence organizations like Stratfor, estimate the European Union must create a fund of around 2 Trillion Euro to provide the necessary support for the European continent.   This number includes the funds needed to prop up the banks left holding the defaulted Greek bonds and also the necessary back stop to support the bond refinancing needs of Portugal, Spain, Italy and Ireland over the ensuing three years.   The European Financial Stability Facility (EFSF) is already in place and the likely bailout mechanism Europe will use.  The challenge, as always, will be obtaining political support from the other 16 members of the EU to write that sobering check.  Some, like Finland, are demanding collateral for any guarantees.

October has seen the financial markets bouncing upward after the big sell off in August and September.  We see this rally continuing for the near term until the European challenges with Greece reemerge over the next few months.  The Wall Street consensus suggests a recession in the U.S. is only a 25-30% probability.  Pacific Wealth Management believes that likelihood is much higher as the world financial markets react to and digest the upcoming Greek bond default.  Our investment portfolios remain defensively positioned with wealth preservation our continuing focus.

As we expected, the financial markets are experiencing another summer of dramatic volatility amidst signs the U.S. economy is slowing and, presently, very close to stall speed.  Disconcertingly, this follows a full dose of quantitative easing, which Federal Reserve Chairman, Ben Bernanke, initiated last fall.  Unfortunately, the $600 Billion of U.S. bond purchases did little to stimulate economic growth.  The circus, that was the congressional debt ceiling debate, resulted in a less than inspiring band-aid resolution and prompted Standard & Poor’s to cut the AAA rating of U.S. Government bonds down to AA+.   This drama threw the financial markets around the world into a boil and, ironically, most of the money exiting stocks landed in those newly rated AA+ U.S. Government bonds.

At his annual Jackson Hole meeting, Bernanke acknowledged “most of the economic policies that support economic growth in the long run are outside the province of the central bank”   Although he did hint the “Fed” may embark on another round of bond purchases, it is clear the Chairman of the Federal Reserve is running out of arrows in his quiver.

Meanwhile, Europe continues to deteriorate.   We believe for the European Union to survive, Germany, France, The Netherlands and Finland must choose to either  back the concept of a Eurobond or, alternatively, let the Greece’s of the world default and write down large amounts of their weaker insolvent brethren’s debt.  This will require another recapitalization of the European banks by their respective countries, many of which will be taking massive losses.  Unfortunately, German voters are opposed to the Eurobond concept by a margin of 5-1.  We believe it will only be a matter of time before Europe has a crisis.  Although most of Wall Street places the odds of another U.S. recession at 30%, Pacific Wealth Management believes that likelihood is now over 50% and we have productively positioned our portfolios appropriately.

The extreme volatility that we are witnessing in the financial markets at this time inevitably raises anxiety among all investors. We wanted to quickly communicate with you to let you know that, once again, your accounts are weathering this storm very effectively due to the defensive positioning we have taken.

The latest catalytic event has been Friday’s downgrading of US sovereign debt by S&P from AAA to AA+. Although not without merit, the downgrade surely qualifies as an event of great significance and is exacerbating already very fragile financial markets throughout the world. Over the near-term, there will be pressures on both institutional and individual investors as they try to recalibrate what this means. We have read in the financial press concerns that S&P has made this move in an attempt to validate their business. Perhaps it is a result of pressure from Europe after their downgrading of sovereign debt in that region. Possibly they may have overreacted as a result of their previous miss of the sub-prime mortgage/real estate bubble in 2008 that has made them complicit in the first round of the financial crisis. Irrespective of the reasoning, the impact of this will take weeks, if not months, to work through.

However, we believe that the main story and the greatest risk to financial stability remains the sovereign debt crisis in Europe and its resulting potential impact upon both the European and world banking system. Unlike the US, where the world, despite the downgrade, is lining up to lend the Treasury money for 10 years at around 2½ %, several heavily indebted European countries have been unable to borrow money almost at any price requiring their central bank, once again, to backstop these entities.

Our concern now shifts to the probability that a 2012 recession is more likely as a result of the added uncertainty these events are creating.  Pacific Wealth Management has your portfolio positioned to effectively weather this volatility and we are looking for opportunities that will inevitably present themselves.  Please do not hesitate to contact us if you have any questions or concerns.

This past Saturday, many of our clients participated in a free self-defense for women seminar, hosted by Becky Black of  Pacific Martial Arts, and sponsored by Pacific Wealth Management. The two-hour class was packed with valuable tips on how women can defend themselves if needed.

One tip the women learned was a way to get free from a two arm grab, pictured below.

The seminar was part of our new More to Life series, in which we host events for our clients and their friends in a setting unrelated to business. We have found that getting to know our clients better in a more casual manner is fulfilling both personally and professionally. We get to see our clients in their “non-business” lives, and we like that.

The next event in our More to Life series is a conversation with Dr. Edgar Ling, an otolaryngologist at Scripps Health. Dr. Ling will address the allergy and environmental challenges of living in Southern California. His talk is at 6 p.m., Wednesday, Aug. 24. Clients and their friends are invited, and can RSVP by Aug. 17 to 858-509-9797.

We hope to see you there.

We’d like to congratulate Mark Hill, managing director of Pacific Wealth Management, for being named one of America’s Top Financial Advisors of 2011. You can read more about this honor on our news page at http://www.pacwealth.com/news-coverage/.

We often hear how happy our clients are with the expertise and service Mark and the rest of the staff at PWM provide, but it’s nice to hear from a disinterested third party that Mark is one of the top advisors in his profession. When you next see Mark, please join me in giving him hearty congratulations for this well-deserved honor.

A 2009 survey of CERTIFIED FINANCIAL PLANNER™ professionals found that 60% of respondents knew a consumer who had experienced fraud or abuse at the hands of another advisor and the most likely targets of financial fraud or abuse were senior citizens, aged 61-75. (According to the Elder Financial Planning Network, seniors have lost $2.6 billion to financial mismanagement or abuse.)

Here are our final two red flags in the series of “red flags,” taken from a CFP Board survey of situations reported by CFP® professionals where a consumer had been taken advantage of by a financial advisor. Each of these red flags:

• Identifies a common situation where consumers may be victimized.
• Describes the warning signs of fraud or abuse.
• Shares real-life situations in which consumers were abused.
• Shows you what you can do to protect yourself.

Common Situation #9 Follow the Money

“I can replace that with something better.”

Better for whom? Ethical financial advisors are always on the lookout for ideas and investments that make their clients’ lives better. In contrast, unscrupulous advisors typically base their buy/sell decisions on the size of their commission or fee. Because selling sometimes feels like admitting a mistake, a suggestion to sell for “something better” can be a powerful motivator for investors—and a recipe for trouble in the hands of a scam artist.

Spot the Red Flag #9

• An advisor convinces a client to replace a variable annuity as soon as its surrender charges have expired, telling the client that this is a “tax-free” transaction. The advisor makes $80,000 in undisclosed commissions on the replacement annuity. The client now faces a renewed period of surrender charges.
• At the suggestion of his advisor, a client buys an insurance policy with an extravagant premium—nearly half the client’s annual income! The client has no beneficiaries and doesn’t need the insurance for estate planning. What triggered the decision to buy? The advisor recommends the policy as a “tax-free investment” likely to perform better than other investment options.

Self Defense Moves #9

• Whenever you are presented with a proposed transaction, ask, “What does this cost me?” In particular, ask about surrender charges, loads, commissions, internal expenses, or other transaction charges. (The existence of charges isn’t an abuse; not being told about them is.)
• Always ask your advisor, “What do you get from this transaction?” Third-party payment or commission isn’t a red flag all by itself. But if the benefits for you aren’t enough to justify that commission, look for other investment options.
  
• Consider whether the timing of proposed transactions is motivating the recommendation. Too frequently, new annuities are sold just as the surrender charges on existing annuities have disappeared, or an advisor suggests a replacement insurance policy or financial product just as she moves to a new firm.

Common Situation #10 Ask, Ask, and Ask Again

“It’s very complicated. No need to bother you with all the details.”

Financial matters are complicated. That’s why we rely on advisors in the first place. Unfortunately, lack of financial expertise—or other issues, such as dementia—can make clients vulnerable to fraud.

Spot the Red Flag #10

• An elderly client asked her bank for a better rate on her CD. She walked out with an annuity that could not be surrendered for more than 10 years without a steep sales charge. The client had no idea that her new investment worked very differently from her old one.
• A client had never heard of the companies he held as individual stocks in his advisor-managed portfolio. He discovered this only after incurring substantial losses.
• A client was unaware that his brokerage company had been named as the trustee in his estate planning documents—and that the named trustee could not be replaced.

Self Defense Moves #10

• Tell your advisor when you don’t understand something. Ethical advisors will be happy to explain: they know that the best clients are well informed clients. If you don’t understand the explanation, ask again.
• Forget about handing over your financial decisions to a professional because you don’t want to be bothered. At a minimum, you must be able to assess whether your advisor is helping you.
• If necessary, get a second opinion on your advisor’s recommendations or approach. The cost of another set of eyes is trivial compared with the potential cost of fraud or abuse.
• Plan for the possibility that you may not be able to handle your own affairs. Give power of attorney to a trusted friend, relative, or professional to make financial decisions in the event that you cannot act on your own behalf.

Pacific Wealth Management hopes that you found this series of Red Flags useful.  If you would like to see the CFP Board’s Consumer Guide to Financial Self-Defense in its entirety, please click here.

A 2009 survey of CERTIFIED FINANCIAL PLANNER™ professionals found that 60% of respondents knew a consumer who had experienced fraud or abuse at the hands of another advisor and the most likely targets of financial fraud or abuse were senior citizens, aged 61-75. (According to the Elder Financial Planning Network, seniors have lost $2.6 billion to financial mismanagement or abuse.)

During the month of July, we will be sharing a series of “red flags,” taken from a CFP Board survey of situations reported by CFP® professionals where a consumer had been taken advantage of by a financial advisor. Each of these red flags:

• Identifies a common situation where consumers may be victimized.
• Describes the warning signs of fraud or abuse.
• Shares real-life situations in which consumers were abused.
• Shows you what you can do to protect yourself.

Common Situation #7 Look for the Downside

“This one’s a no-brainer. You can’t lose.”

No risks, high return. If it sounds too good to be true, that’s because it is. A fundamental principle of investing is “there’s no free lunch.” If an advisor tells you otherwise, take your business elsewhere.

Spot the Red Flag #7

• An advisor consistently sells variable annuities to seniors with the promise of no loss of the funds invested and a high return. Seniors hear all the advantages—an income stream they can’t outlive, guaranteed death benefits, high yield—and sign up. The advisor, however, doesn’t tell them about the steep surrender charges and limited options for distribution. More often than not, the annuity turns out to be a bad fit for the investor.

Self Defense Moves #7

• When your advisor recommends a fund, insurance contract, or retirement strategy, listen carefully for a fair, complete discussion of the pros and cons. Write them down. If you’re hearing only pros, you’re not getting the full story.
• Ask the advisor under what circumstances the investment will not perform as projected. Consider economic events—such as inflation or rising interest rates—as well as your personal circumstances. What happens if you need money for an unexpected event? What happens if you die early or outlive the income stream?
• Make sure the advisor focuses on your specific needs as much as on the investment.
• Ask for a description of the investment in writing, with a clear statement of its benefits and risks. In this document, you’ll see that such words as—always, guaranteed, and completely—are absent, even if they were used frequently in the verbal presentation.

Common Situation #8 Don’t Let yourself be pressured

“This offer is good for today only.”

The bigger the decision, the more time and care it deserves. After all, the choices you make today can have consequences for years to come. Ethical advisors know this—so they give clients plenty of space for making smart choices, urging action only when chronic indecision has hurt the client’s interests in the past. Unethical advisors see things differently. They might push a deal to meet sales quotas or earn bonuses. For them, the fast decision trumps the right decision.

Spot the Red Flag #8

• An advisor visits her clients at home, seeking a signature or a check. Ethical advisors may also make home visits, but only for the convenience of clients; unethical advisors invade the client’s personal space to gain an emotional advantage. (One client, visited six times by a persistent advisor, considered signing the deal as a way to make the visits stop.)
• An advisor invites clients to a free dinner and seminar. The resulting sense of social obligation created an implied pressure to sign up for the advisor’s “limited time only” investment.

Self Defense Moves #8

• Give yourself plenty of time to mull over an investment before you decide. Don’t act until you fully understand what is being offered.
• Speak up when you feel pressured. Any feeling of pressure is reason enough to delay making a decision.
• Know how the advisor earns her pay, and consider this as you evaluate her advice. An advisor who practices as a fiduciary will disclose upfront whether her compensation is tied to a specific product or recommendation. If she doesn’t mention how she is paid, ask.
• Use your “free look” period. Contracts for insurance policies and annuities often give you this period—usually 30 days—during which you can back out without incurring penalties.

Please visit us next week for final post in our series on Red Flags, Financial Self-Defense