The financial markets have been showing signs of increasing volatility over the last month.  This is hardly surprising, given the near vertical five-month rally in stocks since mid-November. The run-up in stock prices is directly attributable to the continuing and unprecedented levels of government bond purchases by the central banks of the developed countries around the world.  The stock market rise is despite the International Monetary Fund’s recent reduction in their growth estimates for just about every major region on the planet.  The European Union remains stagnant, as their ongoing recession, bailouts and forced austerity become increasingly challenging for a growing list of Mediterranean countries. While China’s pace of growth is no longer quite as robust, the U.S. economy’s momentum is also slowing and possibly illusory.  We firmly believe the large scale financial market manipulation, through massive bond purchase programs, has artificially inflated security values and will ultimately lead to an increase in future volatility for these same markets.

Last month gold declined dramatically and gave back some of the appreciation from recent years . We still believe gold has a viable role in in our diversified portfolios. As the central bankers continue their extraordinary amount of bond purchases and further debase their currencies in the process, we anticipate  the emerging countries of the world will view gold as a currency alternative to their investments in U.S. $ denominated Government bonds and the European Union’s € denominated bonds.  This hedge offers  China, India, South Korea, Brazil, and the other emerging economies with trade surpluses, some insulation to the depreciating $ and €. These ongoing policies of the big central banks will likely stoke demand for gold as long as the Ben Bernanke’s of the world continue their extraordinary amount of  money creation. In addition, demand for physical gold appears strong in all markets of the world and seems to have even increased since the price decline.

Our recent investments  into energy infrastructure and an absolute return fund are performing well.  Rather than Sell in May and Go Away, often embraced by much of Wall Street, we will continue managing risk through prudent diversification.

James C. Kuntz, CIMA

As 2012 fades into the memory banks, the financial markets of 2013 are beginning the year in a very similar fashion to last year.  Despite estimates for the U.S. economy to grow at a tepid 2% pace, along with a deepening European recession, stock markets around the world are off to a very optimistic start in the new year.

These strong markets are being driven by the “developed world’s” central banks unending policy of money creation.  Essentially, the USA, UK, Switzerland, Europe and Japan are attempting to inflate their economies out of their economic malaise.  Domestically, Ben Bernanke and the U.S. Federal Reserve Bank are printing $85 billion every month and then purchasing that same amount of U.S. Government and Government Agency bonds.  This ongoing effort of financial market manipulation, to keep interest rates low, encourages investment capital to move out of the safety of money markets, treasury bills and C.D.’s and into the riskier investments of stocks and real estate.  Unfortunately, the central bank’s bond-buying-strategy cannot continue indefinitely and must end at some point.  Like an addiction, the longer the market manipulation, the more reliant the financial markets become on it and the more vulnerable these markets are to future volatility.  We do not expect the Federal Reserve Bank to change their levels of bond purchases any time soon, but as the “when to reduce and/or stop the policy” debate continues, the markets are likely to become increasingly nervous. Until our U.S. Congress and President come to a long-term resolution on the budget deficit, the markets will move in fits and starts.

In recent months, we have been shifting more investments into inflation sensitive securities, while reducing our bond holdings.  Pacific Wealth Management believes these extraordinary times continue to make prudent diversification an essential part of our wealth preservation strategy.

Despite tepid GDP growth in the U.S. of around 2% (compared to the long-term average of around 3 ½%), along with a recession in the UK and most of Europe, this year’s stock markets have rallied to multiyear highs.

We believe these strong markets are being driven by the U.S. Federal Reserve Bank’s continuing policy of money creation.  The early adopters of these policies, i.e. the USA, the UK and Switzerland, were joined last year by the European Central Bank and most recently, Japan.

Domestically, the Federal Reserve Board has indicated its policy of creating $85 billion (that is billion with a b!) each month with the stroke of a pen and then purchasing the same amount of US government and government agency bonds, will continue for the foreseeable future. In an environment where risk-free money market and T-bill investments pay virtually zero, the ongoing addition of these huge influxes of cash encourage investments into the risk markets of stocks and real estate.

Financial Planning and Investment Advisory Services offered through Pacific Wealth Management, LLC, a Registered Investment Advisor · Securities offered through Girard Securities, Inc. Broker/Dealer, Member FINRA and SIPC. Pacific Wealth Management, LLC and Girard Securities, Inc. are not affiliated.

The fiscal cliff compromise extends the majority of tax cuts that were scheduled to expire at the end of 2012, in addition to retroactively reinstating some rules that had expired in 2011. The legislation also introduces a number of changes including a new top tax bracket of 39.6%, and an increase in the top long-term capital gains and qualified dividend rate to 20%. The changes under the act are permanent.

Tax Brackets

The top tax bracket rises to 39.6%, and applies to income in excess of $400,000 for individuals, and $450,000 for married couples. These thresholds are indexed for inflation (in a similar manner to all the other tax bracket thresholds). This change is effectively the same as just allowing the top tax bracket to lapse back to the old rates, as the top tax bracket was already at $388,350 in 2012. The remaining tax brackets are extended at their current levels.

Phaseout of Itemized Deductions and Personal Exemptions

The phaseout of itemized deductions and personal exemptions returns for 2013. The phaseout for itemized deductions reduces total itemized deductions by 3% of excess income over a threshold. The threshold amounts are now an Adjusted Gross Income of $300,000 for married couples, and $250,000 for individuals. These amounts are indexed for inflation.

The personal exemptions phaseout, reduces personal exemptions by 2% of the total exemptions for each $2,500 of excess income over a threshold.

Estate Taxes

The new rules make the current estate tax laws permanent, including the $5,120,000 (in 2012) gift and estate tax exemption. The top estate tax rate is increased from the prior 35% to a new maximum rate of 40%.

The portability rules for a deceased spouse’s unused estate tax exemption amount are made permanent.

Capital Gains and Dividends

The act makes permanent the 0% and 15% long-term capital gains tax rates, but increases the tax rate to 20% for any long-term capital gains that fall in the top tax bracket (the new 39.6% bracket with the $400,000 / $450,000 thresholds noted earlier).

Qualified dividend treatment is also made permanent. The top tax rate for qualified dividends has now risen to 20%.

Individuals subject to the new 20% top long-term capital gains and qualified dividends tax rate will actually find their capital gains and dividends taxes at 23.8%, due to the onset of the new 3.8% Medicare tax on net investment income that would also apply at this income levels.

Miscellaneous Extension Provisions

The American Opportunity Tax Credit (the $2,500 tax credit for college expenses that replaced the prior Hope Scholarship Credit in 2009) is extended 5 years and will now run until 2017. The Child Tax Credit and the Earned Income Tax Credit were also extended over the same 5-year time period.

A series of “extender” rules are retroactively patched for 2012 and extended one year through 2013, including the exclusion from income of discharged mortgage debt (necessary to prevent a short sale from triggering income tax consequences for the amount of debt that was discharged).

AMT Relief

The ongoing series of AMT exemption patches over the past decade are made permanent, and fixed retroactively. The new AMT exemption amount will be $78,750 for married couples and $50,600 for singles in 2012.

Source: Financial Planning Implications of HR8 – the Taxpayer Relief Act of 2012 – kitces.com | Nerd’s Eye View

http://kitces.com/blog/archives/463-Financial-Planning-Implications-of-HR8-the-Taxpayer-Relief-Act-of-2012.html

The long awaited elections are now behind us and, as we expected, nothing has changed in Washington D.C.  An equally divided American electorate has chosen to maintain the political status quo.  Our government leaders, unfortunately, do not inspire confidence and last week’s “post-election” stock market decline underscored the financial market nervousness regarding our economic prospects, while hinting at more volatility over the next few months.

Pacific Wealth Management has maintained a conservative posture to our portfolios throughout the year.  European Union challenges, the presidential election and a muddy tax outlook increased risk levels across most financial markets.  The global media is now obsessing over the looming year-end “Fiscal Cliff” issues awaiting the world’s largest economy.  If the U.S. Congress and President Obama do not compromise, the expiration of the Bush tax cuts will dramatically increase taxes and impose draconian across-the-board spending cuts and send  the tepidly-growing American economy into another deep recession.  We do believe the politicians will come to a last minute resolution, but likely play the same game of chicken we painfully watched in the summer of 2011 with the last “debt ceiling” debate.  President Obama has a little more incentive to compromise, secure his legacy and avoid lame-duck status by breaking the gridlock in Washington.  Unfortunately, we feel the most probable outcome will be another Band-Aid solution that defers the politically challenging, but much needed long term deficit reduction solution, to another day or even future year.  This political drama and resulting financial market volatility are presenting opportunities for us to further diversify into investments offering competitive long term inflation protection.

As the global economy continues to slow, we expect interest rates will stay low in the foreseeable future.  The increase we expect in  taxes is likely to diminish the economy’s ability to grow and overall investment return expectations have diminished. We  continue managing investment risk with a focus on wealth preservation.

We wish you and your family a warm and enjoyable Thanksgiving holiday and an appreciation for our many gifts.

The Social Security Administration announced the annual Cost-of-Living Adjustment to benefits in pay status and adjustments to the wage base last week so we thought it a good time for a Social Security themed segment that we will write in multiple parts titled simply “When Should I Take Social Security Retirement Benefits”.

Deciding when to begin collecting Social Security Retirement benefits is a major decision as you approach retirement age even for those who may not rely upon the income to support themselves.

You are eligible to begin collecting retirement benefits as early as age 62 but with a consequence. The system has what is called a Full Retirement Age (FRA).

Year of Birth                       Full Retirement Age
1943-1954              =                         66
1955-1959              =                         66 + 2 months for every year after 1954
1960 or Later          =                         67

If you begin receiving benefits prior to your Full Retirement Age; you will receive a reduced amount of your benefit.

Age at Benefit Commencement                  % of Scheduled Benefit
(Assuming Age 66 FRA)
62                                    =                           75%
63                                    =                           80%
64                                    =                           86.67%
65                                    =                           93.33%

If you postpone receiving retirement benefits beyond your Full Retirement Age; you will receive an increased percentage of your scheduled benefit. The benefit is increased by 8% per year thanks to what are called Delayed Retirement Credits.

Age at Benefit Commencement                % of Scheduled Benefit
(Assuming Age 66 FRA)
67                                    =                          108%
68                                    =                           116%
69                                    =                           124%
70                                    =                           132%

Advice for the Single Person
The average break-even point for a single person between collecting reduced benefits at age 62 and waiting until age 66 to collect is about age 78. This means that life expectancy should come in to play in your decision. If you expect to live past age 78 then you should consider taking Social Security retirement benefits at Full Retirement Age as the value of the increased benefits will outweigh the cost of reduced cash flow in early years over the long term.

The average break-even point between collecting at Full Retirement Age and age 70 can also be determined based on life expectancy. If you believe, based on family longevity and current health, you will live past age 82; waiting until age 70 to collect benefits will provide a higher lifetime income.

There are many other factors in play when making your decision to begin receiving Social Security Retirement benefits including taxation of benefits, opportunity cost and whether or not you just plain need the cash flow.

We will level some advice for married couples and explore more complicated planning strategies in future blog posts.

Pacific Wealth Management has maintained a conservative posture to our portfolios this year as an extraordinarily long list of complex challenges continue to increase the probability of financial market volatility.  The United States, Europe and Japan’s policy response to these challenges, and resulting tepid global economy, is focused on a strategy of government bond purchase programs to artificially manipulate the bond markets and lower interest rates.

While Europe slides deeper into recession, the United States is growing at a slow pace.  U.S. stock markets began to rally and move higher over the summer as we received confirmation of our slowing domestic economy.  Although counterintuitive, the slowdown in the American economy increased the likelihood U.S. Federal Reserve Bank Chairman, Ben Bernanke, would begin another round of U.S. Government bond purchases to keep interest rates low.  Unfortunately, the likelihood more “Quantitative Easing” will improve our economy and reduce unemployment is suspect, as recent efforts have had little long term positive impact.  Last week, Mr. Bernanke announced his latest round of mortgage-backed-securities and Treasury bond purchases, we are now describing as “QE Forever”.  Additionally, he suggested the central bank would keep their 0% interest rate policy in place through mid-2015.  With Washington unable to offer any legislative help, while mired in stifling partisan politics, it is ironic our central bank is now left in an attempt to stimulate the building and construction industry, whose excesses were primary contributors to America’s persistent economic doldrums.  Meanwhile, we continue seeing healthy investment returns from the stock, bond and gold components of our portfolios.

The U.S. economy’s ability to continue growing in 2013, albeit tepidly, will partly depend on Washington’s willingness to allow the expiration of the Bush tax cuts at year end (therefore, effectively raising present tax rates).   The financial markets are relying on Congress to avoid the “Fiscal Cliff” by delaying across-the-board spending cuts and extending most of the present tax rates in order to avoid what would likely be an inevitable recession next year.  Dallas Fed President, Richard Fisher, recently commented “I am tempted to draw upon the hackneyed comparison that likens our dissolute Congress to drunken sailors.  But patriots among you might take umbrage, noting that a comparison with Congress in this case might be deemed an insult to drunken sailors.”

As most of the world’s Central Banks continue borrowing more money to solve the global banking crisis, which originated because of too much debt, countries will ultimately reach a point where the total amount owed becomes so large that servicing that debt becomes prohibitive.  Today, Southern Europe is peering over the wall at that very real problem while the United States’ challenges will certainly get more complicated as we head down this same road.

Pacific Wealth Management® is proud to announce another well attended More to Life event last Saturday morning.  The sunny day was pristine and everybody enjoyed the informative “Behind the Scenes” tour of Petco Park, one of Major League Baseball’s most beautiful ballparks.

The More to Life series of events is designed to bring the company’s clients and friends together in a social or educational setting, rather than a business setting. “We created this series because we want to expand our personal relationships with our clients,” said James Kuntz, CIMA®, Managing Director. “Over the years, we’ve had opportunities to introduce our clients to each other, creating the impetus for new friendships, which is very rewarding. We value strengthening personal relationships, especially at a time when so much socializing is happening online.”

The next event will be after the summer tourist season, on September 29, with a private tour of the USS Midway Aircraft Carrier Museum.  Please contact Jenna Hurgin, jhurgin@pacwealth.com to reserve your spot today as space is limited.

This year’s financial markets are imitating the volatile roller coaster ride we experienced in 2011. Like last year, the large majority of forecasts for the 2012 economy were optimistic, as most of Wall Street believed the worst of the global banking crisis was behind us.  As we saw in 2011, U.S. stocks moved higher in the beginning of the year.  However, the volatility we have seen return over the last month is reminiscent of last summer.  Today, U.S. stock markets are essentially breakeven for 2012.  Pacific Wealth Management’s bond investments, and in particular U.S. Government bonds, continue rising in price, allowing us to post positive portfolio returns thus far this year.

As we have been emphasizing over the last few years, the European Debt Crisis is far from over and remains at the forefront of Pacific Wealth Management’s radar screens for 2012. Although disputed by most of Europe’s finance ministers as recently as January of this year, the Eurozone economy is now officially in recession. The sell-offs in stock markets around the world are taking Wall Street by surprise and many investors, without effective risk management, are experiencing abrupt declines once again.

A financial market truism suggests the most anticipated event is the least dangerous. The world is watching Greece in a slow motion train wreck and heading for their ultimate exit from the European Union (EU). Although the Greeks just voted to stay in the EU, we believe it unlikely they will remain so over the long term.  A less quantifiable and significantly more dangerous question remains; how will Greece’s challenges impact Portugal, Ireland, Spain and Italy’s ability to manage their crushing levels of debt? Although Angela Merkel continues to tow (talk up) the German “austerity” line, many of Europe’s political winds seem to be shifting toward more “growth” and less austere strategies. For the EU to survive, Germany’s inflation nightmare may eventually become a reality, as Europe will ultimately need to print an enormous amount of €uros to perpetuate their version of “Quantitative Easing”. We expect Germany’s desire to keep the EU together will ultimately supersede their insecurities about inflation.  Our belief is the EU’s “monetary” union, which was created with a shared €uro currency, has to evolve toward a fiscal union, where EU member countries stand behind the government debt of one another or, minimally, a newly created €uro-bond.

The United States has its own “deficit reduction” political cross road looming in the fall elections. We will see whether our country’s elected and appointed leaders have the political will to tackle our homegrown deficit challenges before we begin to look like Southern Europe.  The U.S. economy is growing slowly but remains fragile, as highlighted by the recent rise in unemployment. We believe America is vulnerable to the ongoing European challenges and the next chapter in the banking crisis. Corporate CEOs are reluctant to spend their very large reserves of cash until they see more clarity on taxes and the economic outlook.  Pacific Wealth Management portfolios remain very well diversified as our Proactive Asset Management™ discipline continues to effectively manage risk. Over the last 18 months, we have purposely under-weighted allocations toward stocks, as we have perceived risk levels remaining high.

Although uncertainties are ever-present in global economies and financial markets, we believe the precarious nature of Europe, a percolating Middle East, and the volatile domestic and international political landscape, combine to make prudent risk management vitally important. As always, Pacific Wealth Management portfolios remain built for wealth preservation.

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