In This Issue
 |
• |
Market Overview |
|
• |
Notes on "Determining Withdrawal Rates Using Historical Data", by William P. Bengen |
|
• |
Everything You Always Wanted to Know About FHLBs, (But Were Afraid to Ask) |
|
• |
Will there be new tax legislation--how to plan? |
|
|
Offices
|
|
|
|
Phoenix: |
|
1643 E. Bethany Home Rd. |
|
Phoenix, AZ 85016 |
|
Tel: |
602-997-8882 |
|
888-997-8882 |
|
Fax: |
602-997-8887 |
|
|
|
Los Angeles: |
|
2540 Huntington Dr. |
|
Suite 105 |
|
San Marino, CA 91108 |
|
Tel: |
626-286-4029 |
|
888-295-4419 |
|
Fax: |
626-286-0624 |
|
|
|
http://www.pacwestfn.com |
| |
| |
| |
| |
|
|
Market Overview
During the first quarter of 2006, the U.S. stock market rallied due to strong corporate earnings, solid consumer spending and mild inflationary data.
We expect slower growth in 2006 compared to 2005, but do not expect an economic downturn. Employment is picking up, inventories are building, and corporate spending is increasing. In 2005, companies increased dividends, bought back stock and decreased debt. In 2006, companies are spending on capital equipment and making acquisitions.
Consumer spending was the key to the recent economic recovery. Federal Reserve Data indicate that home prices went up 71% on average in the last five years and mortgage debt was up 75%. Home prices have leveled. There is minimal home equity to borrow. Consumers with adjustable mortgages have higher payments because of rising interest rates. Rising energy costs will also reduce discretionary spending. Consequently, we expect consumer spending to slow down.
Europe and Japan are increasing their interest rates. Once the Fed finishes tightening, short term rates will level off. The U.S. trade and budget deficits will put additional pressure on the strength of the dollar. Rising prices of our imports may increase inflationary pressure. Labor costs are also expected to drift higher because the employment picture has improved. Long term rates are expected to rise. The outlook of the financial markets will be tied to interest rates and inflation. Historically the market has enjoyed a period of higher prices after the Fed has finished a round of tightening. However, if the fear of inflation leads to multiple rate adjustments in the near future, the stock market will react negatively.
We continue to invest in strong companies that have reasonable valuations, across all major economic sectors. In January, we increased the weightings in international stocks. If the portfolios were too heavy in consumer discretionary stocks we have reduced the weighting. We continue to stay short in the fixed income arena, limiting new purchases to maturities of three years out or less.
Written by Grace Y. Lau, CFA
Notes on "Determining Withdrawal Rates Using Historical Data", by William P. Bengen
| Period |
Stocks-
Total Return |
Bonds-Intermediate |
Inflation |
| 1973-1974 |
-37.2 |
+10.6 |
+22.1 |
| 1937-1941 |
-33.3 |
+16.7 |
+10.5 |
| 1929-1931 |
-61.0 |
+10.5 |
-15.8 |
Three major financial events have wrecked havoc with investment portfolios in the last century, the 2000-2002 tech bubble-burst notwithstanding.
Taking actual Ibbotson returns from 1926-1992, this article answers the question, “How long will the money last?” This is the key: it uses actual annual data, not “averages.” One starts with a given withdrawal rate at the end of the first year and adjusts the withdrawal annually for actual inflation.
For portfolios that are 75% in equities that began by withdrawing 5% annually with annual inflation adjustments, there are a number of years the portfolio would run out of money in less than 40 years- 17 of the 51 time periods from 1926-1976. Most of these shortfalls occur for portfolios beginning from 1960-1974 where stocks and inflation provided a double-whammy.
For portfolios 75% in equities that began with a 4% withdrawal rate, the experience was much more pleasant. All portfolios lasted 40 years or more with the exception of 4 years- again for portfolios beginning withdrawals in the 1960’s.
It is important to note that portfolios invested 75% in equities experienced better returns (that is, the money lasted longer) than portfolios of 50% equities or 100% equities.
The scenarios presented do not take into account portfolio contributions or taxes.
This excellent article points out the crucial, yet unpredictable dependence on the returns after withdrawals start. Given the current general overvaluation of the stock market, it is more likely than not we will be entering a difficult period of returns.
Written by Carter A. Pearl, CFA, CFP
Everything You Always Wanted to Know about FHLBs, (But Were Afraid to Ask)
|
U.S. Treasury Yield Table
Source: Bloomberg |
| |
3 months |
2 years |
5 years |
10 years |
30 years |
| 06/2005 |
3.13 |
3.64 |
3.71 |
3.93 |
4.20 |
| 09/2005 |
3.54 |
4.16 |
4.19 |
4.33 |
4.57 |
| 12/2005 |
4.08 |
4.40 |
4.35 |
4.39 |
4.54 |
| 03/2006 |
4.60 |
4.82 |
4.81 |
4.85 |
4.89 |
If you’ve ever looked at your portfolio’s bond holdings, you may have noticed that your portfolio contains one or more bonds with the description of “Federal Home Loan Bank” or “Federal Home Loan Bank Consolidated”. (This is not to be confused with Federal Home Loan Mortgage, which we also own, but not as much.) This article is for any of our clients who have ever been curious about this particular bond.
The Federal Home Loan Bank (FHLB) system was created in 1932 in response to the Great Depression, which devastated US banks. About 8,000 credit unions and community banks currently borrow money through the FHLB system. By consolidating their borrowing through the FHLB, these individual financial institutions can borrow money at more favorable rates than might otherwise be available to them. The money that is raised is loaned out for the purposes of building affordable housing and investing in community development projects.
We buy FHLBs for our client accounts for the following reasons: 1) there is very little risk of default associated with them, 2) income from the bond is state and local tax exempt, but not federal, 3) yields are comparable to relatively riskier corporate bonds, 4) yields are higher compared to treasuries and 5) FHLB bonds are very liquid if a need does arise to sell them.
Written by Daniel S. Flack
Will there be new tax legislation--how to plan?
As investors and taxpayers, how do we plan in the current environment?
The 15% federal rate on most dividends and long-term capital gains is currently set to expire after 2008. At that time, the rate on long-term capital gains returns to 20% and dividends can be taxed as high as 39.6%. This provides a three year window of opportunity to take capital gains at a 15% federal tax cost. If your portfolio is heavily concentrated in a particular stock or sector, take advantage of 2006 through 2008 to diversify your net worth at a lower tax cost.
The current $2,000,000 estate tax exclusion is scheduled to increase to $3,500,000 in 2009, with full repeal for 2010 only. Under the sunset provision, the exclusion reverts to $1,000,000 after 2010. At this juncture, it seems probable that Congress will compromise on a higher exclusion prior to 2010. While a $5,000,000 exclusion would free most families from the burden of filing estate tax returns, it looks like the compromise will be much lower. Continue with your estate planning. The annual gift tax exclusion was raised to $12,000 this year. Making current annual gifts noticeably reduces the estate tax paid down the road. If the value of your estate is borderline taxable, making annual gifts could save your loved ones the burden of having to file an estate tax return.
Since the alternative minimum tax can come into play at such low levels, realizing capital gains to diversify your portfolio can put you within its grasp. If it does, you will not receive any tax benefit for your personal exemptions, taxes paid, investment advisory fees paid and other miscellaneous itemized deductions. The maximum AMT rate is 28%. However, the rate charged on qualified dividend income and long-term capital gains remains at 15%. If you know you will be subject to AMT one year and not the next, bunch these deductions into the year you won’t be affected by the alternative minimum tax.
Written by L. Jane Heist, CPA
|
