Glassman Wealth Services LLC

As financial advisors, we look at a broad range of market and economic forces to form our investment decisions. In our monthly economic report, we take a look at the effects these forces have had on markets nationally and globally during the month. This broader perspective helps us to provide more insightful investment and financial planning advice to our clients. Click Here for report.

Consumers are an integral cog in the American economic engine, but since the financial crisis hit its crescendo, consumers have been under high attack. By most traditional measures, the economy is larger today than any time in our history, but it is hard to argue that consumers are feeling the benefits of that expansion. That said, consumers seem to be taking a new view on debt and spending, all in the name of prudence.

With the benefit of hindsight, virtually everyone can agree that consumers came through the mid-2000s with too much debt, and too little concern about how to pay that debt. Measures such as the household debt service ratio, which measures debt payments on mortgage and consumer debt, reached record highs, nearly hitting 14% in the third quarter of 2007. The good news is that those figures have actually fallen faster than they rose.

Since 2008, the debt service ratio has fallen nearly 3 percentage points and stands at levels last seen in the mid-1990s.

As consumers started to feel mildly better about the economic outlook and about their personal financial situations, they naturally began spending more money.

Throughout 2011, for instance, consumer spending posted a 2.2% gain, after rising a similar 2.0% in 2010. However, those gains are largely coming from a drawdown in savings as opposed to wage growth. After peaking at above 7%, the personal savings rate has steadily declined over the past two years and fell as low as 3.5% in November before a slight rebound in December.

One of the primary reasons consumers have been reticent to spend has been a simple lack of sustained wage growth. In recent months, wages have bounced around in a volatile fashion, falling over the summer, before jumping in the fall and weakening again as winter approached.

Consumers have at least one reason to be optimistic. Labor markets are inching toward definitive improvement for the first time since the recession ended. Initial claims for unemployment benefits have consistently tracked below 400,000 since early November, the longest such period since mid-2008.

Consumers are in better shape than 2007-08, be it from “strategic defaults” or through intentional efforts to act responsibly, but there remains a long way to go to reignite such a vital cog. The good news is that labor markets are gradually thawing, and such improvement should lead to higher wages and better employment prospects.

Yield drought fatigue syndrome has been on the rise, especially with retirees’ who depend on income from their portfolios to pay for their living expenses. It has affected a lot of other investors who have fled the volatility of the stock market in recent years for less risky assets like Treasuries.  And with Ben Bernanke’s latest announcement that the Fed plans to keep interest rates low until at least late 2014, the condition is expected to get worse.

Since there does not seem to be a cure on the horizon, is there at least a remedy that may boost yields for retirees and investors without them having to incur a lot of risk?

Barry Glassman spoke with Sharon Epperson on CNBC’s Power Lunch today about ways to overcome this lack of yield.  In the interview, Barry points out 4 things retirees and investors can do now to potentially improve their investment income.  Click HERE to see the interview.

Our research paper,  ”Yield Drought – Retirees Greatest Challenge,” first published in June, 2010, takes an  in-depth look at the causes of our yield drought, and why Barry said then that it would “exist for longer than most retirees believe, and perhaps longer than they can afford.”   It also explains some yield drought relief strategies.  Click HERE for your copy of “Yield Drought – Retirees Greatest Challenge”

Glassman Wealth Services was ranked in the top 10 nationally of RIA “Practices to Watch” by Financial Planning Magazine.  Read more about our Awards and Accolades.

As financial advisors, we look at a broad range of market and economic forces to form our investment decisions. In our monthly economic report, we take a look at the effects these forces have had on markets nationally and globally during the month. This broader perspective helps us to provide more insightful investment and financial planning advice to our clients. Click Here for report.

With France and Austria being the latest countries downgraded by Standard and Poor’s, from AAA to AA+, it doesn’t help that Europe has a $39 trillion and growing pension problem. In a recent Businessweek article by Rebecca Christie and Peter Woodfield, they point out a few sobering facts:

• State-funded pension obligations in 19 of the European Union nations were about five times higher than their combined gross debt.
• Germany accounted for 7.6 trillion euros and France 6.7 trillion euros of the liabilities.
• Economic output devoted to spending on retirement benefits is projected to rise by a quarter to 14% by 2060.
• Europe has the highest proportion of people over 60 years old in the world.
• With life expectancy in Europe rising at a rate of 5 hours per day, the number of people over 65 in the 34 countries in the Organization for Economic Cooperation and Development is forecast to more than quadruple by 2050.

Our own debt crisis infographic shows that public debt in many eurozone countries has already reached unsustainable levels.

Tough Medicine Ahead

As populations age and birth rates decrease, countries will have to make some difficult adjustments.

• Increasing the retirement age and decreasing benefits for workers.
• Governments may have to take on more investment risk to grow their pension assets, but this could backfire as hot investment sectors move from boom to bust.
• Move pension liabilities from government-funded programs to making employees responsible for their own retirement through employee-funded accounts.

Little doubt remains that public and private sector workers will have to accept changes to their retirement benefits, and share more of the burden in the years and decades to come.

Fortigent, the independent investment, research and financial reporting firm we have partnered with since our inception announced this morning that they are being acquired by LPL Financial.  LPL is purchasing 100% of the company from the current owners, Lydian Trust, Affiliated Managers Group and Fortigent management. 

During a call with a Fortigent managing director, Barry Glassman, president of Glassman Wealth Services learned of the pending merger and expressed his support of the deal.

“They told me that it is very important to the leaders of Fortigent to keep Fortigent as Fortigent,” said Glassman.  “Based on conversations I’ve had with them leading up to the deal, I anticipate that what we enjoy most about working with Fortigent should not change.”

Glassman Wealth Services is among the few elite advisors who allocate significant resources for the considerable and comprehensive investment research and due diligence services offered by Fortigent.  In addition to harnessing the expertise of their investment specialists who filter the vast universe of investment ingredients, we respect, and have come to rely on their thought leadership in formulating the recipes that are our client portfolios.  In short, they help us to remain on the forefront of investing for our clients.

Fortigent claims that the acquisition will allow more resources to be available at a faster pace, and that advisors will see greater customization.  2010 seemed to be a year of introspection for the firm, and 2011 was a “full-court press” to address their findings.  Our hope is that with LPL’s resources, more of Fortigent’s strategic wish list, and therefore ours, will come to fruition in 2012.

When investing, we certainly take into consideration economic conditions and the political landscape, however, our Historical Returns Chart reminds us why we maintain a long-term investment perspective. Over the past 15 years, the previous years’ winners may become the next year’s biggest losers. Click on chart to enlarge.

By:  Barry Glassman, CFP, president of Glassman Wealth Services

Anytime you have to redraw or resize a chart to accommodate one piece of data – a severe outlier, if you will – you have to talk about it. Since it likely means something is amiss, you ignore it at your own peril. It begs the question, then, as to why the media, economists and politicians of the world continue to furiously debate the potential ripple effects of debt-laden economies like Greece, Spain, Italy and, to a lesser extent, the U.S., while ignoring the elephant in the room: Japan.

Let’s take a step back and get some perspective. With the benefit of hindsight, most of us can look back at different points in our lives and wonder, “How did I miss that?” Take, for example, the dot-com bubble. Anyone who got burned when the bubble burst wishes they could go back in time and do things differently. But in 1998, when valuations for companies that were little more than business plans fetched millions of dollars, everyone seemed to have a reason or two to overlook the obvious flaws in this model.

Similarly, just about everyone hopped on board the real estate express train – and got burned when it derailed in spectacular fashion. When we look back at the signs – such as the 2006 home affordability index – it’s clear that the gains in home prices simply could not continue.

If we were to go back, then, and create charts using the valuations of houses and dot-com stocks as data points, we would have needed to redraw the scale of the chart to accommodate a few stratospheric outliers – a clear sign that something wasn’t quite right. Spider-Man’s “Spidey Sense” would have been ringing off the hook.

Well, what we see from the chart below should be causing our early-warning systems to shift into full air-raid mode. Not only is the bubble representing Japan’s debt crisis a big giant outlier, it looks just overripe enough to burst. Or, as John Mauldin put’s it in his book, The End Game: “Japan is a bug in search of a windshield.”

Click on image to enlarge

What Malden means by this is that any entity, whether it is an individual, family or a nation-state, can handle debt a whole lot easier when interest rates are low. But when you’re already deeply leveraged, as Japan is, even the slightest upward tick in the cost of that debt will have a massive impact on that entity’s ability to keep servicing their debt. Translation: Bug meets windshield.

Case in point: Malden estimates that a 1% hike in Japanese interest rates would eat up a full 10% of the nation’s tax revenue. Compounding the problem is that any additional small changes in the nation’s savings, growth or inflation rates could easily increase the cost of servicing its debt to a point of no return. Compare that to the U.S. where a bump in the interest rate from 2% to 3% could easily be digested.

So why hasn’t Japan made the headlines for risk?

1. First off, Japan has the lowest borrowing rate in the developed world. Even with the fallout from their recent earthquake, tsunami and nuclear meltdown, the country’s bond yields plummeted and its currency soared. Demand for government bonds has kept constant due, at least in part, to high private savings rates combined with the requirement of their multi-national banks to own Japanese bonds.
2. Japanese citizens and banks own the vast majority, some 94% of the country’s bonds. That’s why Japan, unlike the U.S., is able to fund its own debt.
3. Japan has experienced long-term deflationary pressures, which has helped to keep interest rates low.

Add in Japan’s rapidly aging population, which could soon cause a downward shift in the nation’s savings rate, and you’re left without any good long-term solution to this equation. We’re fond of saying that growth solves everything. But in the case of Japan, growth – and the accompanying spike in inflation and borrowing costs – could be its worst nightmare. While no one might want to admit it, therefore, Japan might just be too big to save.

Knowing the exact point when a bubble is going to burst is hard to predict, however, as our examples of the dot-com and housing markets show. That means that Japan might not find itself in any further dire straits for some time to come. The idea, then, is that we need to keep Japan on our radar so we can monitor any fluctuations in the nation’s borrowing rate due to things like inflation or even just plain old fear.

  This article was also published in Investment News.  Click HERE for the article.

Individual investors continue to move out of stock and stock funds  and are now heavily underweight equities in favor of bonds according to the American Association of Individual Investors.  Allocations to stock and stock funds fell 3.4% to 53.1%, while allocations to bonds and bond funds increased 2.3% to 21.3%. The remaining 1.1% found its way to cash, which currently stands at 25.7% weight.

Growing pessimism is also reflected in recent mutual fund flow data from the Investment Company Institute (ICI).  In the past six months through October, investors pulled $122 billion from equity mutual funds, with nearly all of that coming from domestic equity funds.  Foreign equity funds experienced outflows of “only” $7.5 billion. 

Naturally, money is flowing into the relative safety of cash and fixed income funds.  During the same six-month period, bond funds picked up $61 billion.  Bonds continue to receive favorable treatment from investors, despite the fact they allocated more than $620 billion into bond funds in 2009 and 2010. 

November is proving no different.  Another $12 billion fled equity funds through November 22, while $20 billion found its way into fixed income funds. 

Interestingly, Institutional investors and asset managers gradually became more optimistic and are taking a slightly different tact.  Despite market volatility and headline risks, a Reuter’s poll of US asset managers found the average allocation to equities increased 2.6% to 63.7% in November.  Bond allocations shrank 2.7% to 29.3% during the month. 

They may have cause to be optimistic.  Data from the Stock Trader’s Almanac shows that December is the single best month of the year for the S&P 500 since 1950, and the second best month of the year for the DJIA.  With an average gain of 1.7% for both indices, holiday cheer appears to overtake the markets and encourage a holiday buying spree. 

Only time can tell if this will be another holiday season to celebrate.  Given the typically inaccurate positioning of individual investors and ability of institutional investors to position ahead of rallies, it may be time to bet on black this holiday.  Of course, the lingering crisis in Europe does little to soothe frayed nerves this year, so investors not prepared to endure the volatility should probably watch this one unfold from the sidelines.