Schwartz Financial Weekly Commentary 5/26/14

 

Schwartz Financial Weekly Commentary

May 26, 2014

 

The Markets

 

Alongside the irises, daffodils, tulips, and other perennials that were popping up (in seasonal parts of the United States) last week, there was a lot of talk about the housing market and what its performance means about the state of the economy. Perceptions varied.

 

The U.S. housing market has showed improvement in recent years; however, sales slowed during 2013 as interest rates and home prices moved higher. Last week’s housing data showed sales of existing homes were up 1.3 percent for April which was lower than expected, but sales of new single-family homes were up more than expected. In addition, the S&P/Case-Shiller 20-City Composite Home Price Index showed February housing prices had reached levels last seen in 2004.

 

According to MarketWatch.com, some big-name investors are worried about the housing market’s recovery because younger investors are not inclined to take on mortgage debt. Others suggest homeownership may drop because people are marrying later. Balancing the naysayers are pundits who believe demand for housing will continue to strengthen. Finally, the minutes of the Federal Open Market Committee, which were released last week, showed the Fed recognized recovery in the housing sector remained slow, but expects economic activity to expand at a moderate pace:

 

“Most participants commented on the continuing weakness in housing activity. They saw a range of factors affecting the housing market including higher home prices, construction bottlenecks stemming from a scarcity of labor and harsh winter weather, input cost pressures, or a shortage in the supply of available lots. Views varied regarding the outlook for the multifamily sector, with the large increase in multifamily units coming to market potentially putting downward pressure on prices and rents, but the demand for this type of housing [is] expected to rise as the population ages. A couple of participants noted mortgage credit availability remained constrained and lending standards were tight compared with historical norms, especially for purchase mortgages.”

 

What are we to make of the conflicting opinions? The housing market is considered to be a leading economic indicator. This means it tends to change direction before the economy changes direction and offers some indication about where the economy may be headed. (It should be noted housing data generally is several months old before it is reported.) Housing is not the only leading indicator. The Conference Board tracks an index of leading economic indicators. For April, its Leading Economic Index® showed improvement for a third consecutive month. It’s a reminder of how important it is to pay attention to the big picture.

 


Data as of 5/23/14
1-Week
Y-T-D
1-Year
3-Year
5-Year
10-Year
Standard & Poor’s 500 (Domestic Stocks)
1.2%
2.8%
15.2%
13.0%
16.5%
5.7%
10-year Treasury Note (Yield Only)
2.5
NA
2.0
3.1
3.5
4.7
Gold (per ounce)
7.5
-6.5
-5.1
6.5
12.9
DJ-UBS Commodity Index
0.4
7.9
2.4
-5.5
2.3
-1.1
DJ Equity All REIT TR Index
-0.6
14.2
2.5
11.5
23.7
10.3

S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

 

the newest european import is the chip and pin card. Discussions about credit and debit card security were heating up even before retailers experienced data breaches last winter. Needless to say, after the breaches and a wealth of media reports touting the fact that Europe, Canada, and most of the rest of the world already have more secure payment systems than the one we use in the United States, interest in replacing our current system increased.

 

Eighty countries around the world are currently implementing Europay, MasterCard and Visa, or EMV™ technology. In some places, EMV compliance is further along than it is in others. For instance, about 95 percent of point-of-sale credit card machines (aka terminals) in Europe are EMV compliant; 79 percent of terminals in Canada, Latin America, and the Caribbean; 77 percent of terminals in Africa and the Middle East; and 51 percent of terminals in the Asia Pacific region.

 

Why is a card with a chip and pin better than a card with a magnetic stripe and a signature? One of the primary reasons, according to Forbes, is improved security:

 

“Most credit cards in the United States operate with a simple magnetic stripe that can be captured and copied relatively easily. Much of the rest of the world uses a small chip on the credit card to validate with a transaction. The chip employs cryptography and a range of other security features and measures that create a multi-layered defense against card fraud. When combined with a Personal Identification Number or PIN code (the sort used on ATM cards), it substantially raises security. Even with just a signature it makes a marked improvement over a simple magnetic stripe.”

 

The United States, until recently, was the last major market holdout. However, according to current estimates, 60 percent of merchants will have EMV compliant devices by 2015. Check your mail. A new card may be on its way soon.

 

Weekly Focus – Think About It

 

Kindness is the language which the deaf can hear and the blind can see.”

Mark Twain, American writer and humorist

 

Value vs. Growth Investing (5/23/14)

1.33
3.35
1.30
3.24
17.78
15.35
19.46
1.31
3.65
1.69
4.20
17.35
15.64
18.35
0.85
4.05
1.27
4.91
16.09
17.28
18.95
2.20
3.35
3.11
2.46
21.92
16.84
19.71
0.83
3.54
0.62
5.39
14.08
12.89
16.54
1.27
3.56
0.59
1.04
19.31
14.79
22.39
1.08
5.36
1.51
2.18
18.92
15.93
23.23
1.55
0.70
-0.03
-3.03
16.74
11.76
20.86
1.15
4.98
0.37
4.59
22.61
16.77
23.06
1.73
-0.39
-0.85
-0.48
17.66
13.72
22.14
1.61
1.36
-0.65
1.28
17.65
13.08
21.55
2.40
-4.72
-1.21
-5.06
17.21
12.52
21.04
1.24
2.13
-0.73
2.29
18.10
15.55
23.78
0.95
4.11
1.18
4.10
16.74
16.74
20.04
2.08
2.29
2.20
0.84
20.55
15.49
20.09
0.92
3.73
0.47
5.00
16.09
13.86
18.34

 ©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

 

Office Notes:

 

Attention Retirement Savers:

Retirement Accounts Are Different!

 

According to the Investment Company Institute, it is estimated that there is over $20 trillion in retirement accounts as of December 30, 2013. Retirement accounts make up the majority of many people’s assets and unfortunately, many owners of IRAs and their financial advisors are not fully aware of the complicated tax laws regarding distributions of these retirement accounts.

 

Many people focus on the investments within these accounts and their returns, which are very important, but they overlook the important strategies that can save investors and their heirs’ money in the long run.

 

Retirement accounts are different!

 

People often forget that retirement accounts have to be in the name of an individual and that the beneficiary designation will override any other estate planning document such as your trust, will, etc. Therefore, it is imperative that you separate the retirement accounts from any other part of your estate when establishing a proper plan for distribution of these assets.

 

The rules regarding these retirement accounts or IRAs can be very complex and cause many mistakes.

 

Many times, financial professionals refer to IRAs as “Individual Riddle Accounts” because they are significantly different from most other assets in your estate plan.

 

Some of the differences are they:

 

     Do not pass through the will (unless payable to an estate)

     Are not subject to probate (unless payable to an estate)

     Receive no capital gains treatment

     Receive no step up in cost basis up death

     Cannot be gifted (in most cases)

     The title cannot be transferred to a trust

     Are subject to special rules, called Required Minimum Distributions

 

IRA accounts are perhaps the only assets in your estate that will require you to take out a minimum distribution. Also, please remember that by placing a title of an IRA into a trust, you may cause immediate taxation. Once again, IRA or retirement assets are different!

 

Through proper planning, you can set up your IRA so that your heirs, whether they are your children, grandchildren or anyone else, can receive what is called an Inherited IRA. There are various tax laws, regulations, rules and even private letter rulings that may effect the decisions you make in setting up these Inherited IRAs. Investors should note that stretch or inherited IRAs are designed for individuals who will not need the money in the account for their own retirement needs.

 

In planning your retirement account, it is imperative that you review the importance of choosing the right beneficiary/beneficiaries. An informed decision can help you better understand your options, when considering tools like Roth IRAs, which were created by the Taxpayer Relief Act of 1997 and further modified by the IRS Restructuring Reform Act of 1998. Remember, Roth IRAs are significantly different than traditional IRAs and need proper planning as well.

 

Keeping current with new tax laws is another essential ingredient for successful retirement planning. In fact, The Pension Protection Act of 2006 (PPA) made some significant changes for retirement accounts.

 

The bottom line is retirement account distribution and planning, while it may look simple on the surface, is something that should be taken seriously and work through with knowledge of the rules, regulations and tax code. Sometimes even people in the financial arena or savvy investors are not familiar with these complicated tax laws.

 

Whatever you do, make sure you or who you are working with is familiar with the tax laws regarding retirement distribution rules.

 

One very basic but important thing to understand is that it is extremely important to remember that there can be two sets of rules:

 

1.     The IRA’s rules

2.     The IRA custodian or Retirement Plan Administrator’s rules

 

The law says you must use the stricter of these two sets of rules! Many people are not aware that a custodian may not be or does not have to be current with respect to allowing you to use provisions under the new tax laws. In fact, the IRS may state a particular rule that allows the entitlement that you want to use but if your custodian or administrator does not reflect that rule then you must use their rules, even though the IRS tax laws allow you to do differently.

 

In addition to understanding all the rules and regulations regarding retirement accounts and distributions, it is equally as important to know not only what the IRS laws are, but what your custodian allows. Please make sure that in addition to reviewing all the IRS rules, you also carefully review your IRA custodian or Retirement Plan Administrator’s rules. This is a crucial part of retirement planning that should be taken as serious as making your important investment decisions and choices.

 

Regards,

,

Michael L. Schwartz, RFC®, CWS®, CFS

 

P.S.  Please feel free to forward this commentary to family, friends, or colleagues.  If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added. 

 

Michael L. Schwartz, RFC, CWS, CFS, a registered principal offering securities and advisory services through Independent Financial Group, LLC., a registered broker-dealer and investment advisor.  Member FINRA-SIPC. Schwartz Financial and Independent Financial Group are unaffiliated entities.

 

This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.  Past performance is not a guarantee of future results.

 

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

 

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 

 

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

 

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

 

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

 

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

 

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

 

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

 

* Past performance does not guarantee future results.

 

* You cannot invest directly in an index.

 

* Consult your financial professional before making any investment decision.

 

* To unsubscribe from our “market commentary” please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at “mike@schwartzfinancial.com”.

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