Fed's Beige Book Shows Mixed Results

The U.S. economy "improved modestly" since early October, according to the Federal Reserve. Consumer spending picked up, and commercial real estate weakened.

According to the "beige book" survey of economic conditions, business continued cutting employment is November, although at a slower pace than in prior months. Private-sector U.S. jobs declined 169,000 in November, less than the 195,000 drop reported in October. Additionally, the Fed found little to no upward pressure on wages and overall prices remained stable, giving the central bank flexibility to keep interest rates low.

Despite rising unemployment, consumer spending strengthened in November. Auto sales improved, in part a rebound from the dip following the "cash for clunkers" rebate program. Overall merchandise sales improved, with retailers holding leaner inventories during the holiday season. Overall, the Fed's report indicated subdued economic recovery. Manufacturing conditions were "steady to moderately improving," while the service sector "generally strengthened somewhat."

The Fed's assessment of commercial real estate was worse than for the residential market. Conditions "were reported to have weakened in virtually all districts, with rising vacancy rates, downward pressure on rents, and little if any new development.

Net Worth Advisory Group Seminar at LaCaille

Net Worth Advisory Group will be teaching a seminar at LaCaille on Tuesday, December 1st at 7:00 pm. Both prospective clients and current clients and their guests are welcome.

We welcome the opportunity to introduce our financial planning and investment management services to anyone who will be retiring in the next couple of years, those who are currently retired, and people who are currently concerned about retirement planning. If you are a current client, even if you don’t have a guest to invite, we would love to have you in attendance as a way of showing our appreciation for your continued confidence in our firm.

We will be covering many of the topics outlined in Ray’s book (The Retiring Boomer’s Financial Handbook) and each guest will receive a complimentary copy of the book. Here are the details.

Date: Tuesday, December 1, 2009

Location: LaCaille

Time: Dinner at 7:00, Presentation at 8:00

RSVP to Lon at 566-0740 or email lon@networthadvice.com.

Thanks for your continued confidence. Please let us know if there is anything we can do to enhance the services we provide. We love our jobs, and appreciate your business.

Chart of the Day - Gold vs. the Dollar

Thanks in part to mounting US deficits and a weak US economy, the US dollar continues to trend lower. After all, a virtual collapse of the banking sector does have its consequences. For some perspective, today's chart illustrates the current trend in the US dollar (blue line) as well as that other world currency, gold (gray line). As the chart illustrates, the performance of the US dollar has varied inversely to that of gold since the latter stages of the credit bubble. It is worth noting that the US dollar is currently testing resistance of its downtrend (red line) while gold makes record highs.

The Housing Market's Impact on the Economy

Market indexes received a welcome boost on Monday when a report was released indicating existing home sales jumped over 10 percent in October. Forecasters were expecting a rise of just 2 to 3 percent. However, the impact of this strong report may be short-lived.

First, October sales were surely driven by the November 30th expiration of the first-time home-buyer tax credit (which has since been extended through mid-2010). Many individuals, who otherwise may have waited, purchased homes for the tax benefits.

Additionally, reports indicate that 23 percent of U.S.homeowners owe more on their mortgages than their properties are worth. Nevada (65 percent), Arizona (48 percent), and Florida (45 percent) skewed national averages, while most states' rate of underwater mortgages are between 6 and 22 percent. Still, nearly 10.7 million households had negative equity in their homes during the third quarter. This high percentage of mortgages in the red could provide a boost to the existing home sales number because these homes are more likely to fall into bank foreclosure and get dumped into an already saturated housing market, all with lower prices.

For a more telling picture of the direction of the housing market, look for the report on construction and sales of new homes, which is considered a leading indicator of U.S. economic activity. This report comes out Wednesday.

Chart of the Day

With a large majority of third-quarter earnings in the books (87% of S&P 500 companies have reported for Q3 2009), today's chart provides some long-term perspective to the current earnings environment by focusing on 12-month, as reported S&P 500 earnings. The chart illustrates how earnings declined over 92% from its Q3 2007 peak to its Q3 2009 trough, which makes it easily the largest decline on record (the data goes back to 1936). On the positive side, S&P 500 earnings bottomed and are moving up sharply.

Consumer Price Index Stats Revealed

According to the U.S. Labor Department, the core Consumer Price Index (CPI), which excludes volatile energy and food prices, rose 0.2% in October, primarily due to higher prices for new and used vehicles. Additionally, firming prices emerged in airfares and medical costs.

Overall CPI increased .03% on rising energy prices. It is still down .02% for the past 12 months. While the monthly increase was slightly more than economists' forecasts, a Federal Reserve official stated that the central bank could keep its key interest rate near zero until 2012, indicating that inflation is still not a primary concern.

To Rise, Inflation Faces an Uphill Climb

Today's producer-price index (PPI) indicated a rise of .3 percent in October. Economists were anticipating a rise of .5 percent. The consumer price index (CPI) is due out tomorrow morning.

Tomorrow's report could mark the start of more notable upward pressure on year-over-year inflation growth. Those who have been predicting higher inflation will certainly create a fuss over the report. However, the reason inflation may rise over the next few months may be because inflation will be measured against the worst depths of the recession, when prices fell across the board.

Mark Gongloff had an interesting article in today's Wall Street Journal. Mr. Gongloff pointed out that thus far, consumers haven't borne the brunt of higher prices as much as producers have (producer inflation has outpaced consumer inflation consistently since February 2008). Companies have responded to their higher costs by slashing their payrolls in the greatest numbers since the Great Depression.

According to Mr. Gongloff, petroleum-related costs account for just 2.3% of U.S. production costs, but employee compensation accounts for 30.3% of production costs. In fact, if rising commodity prices lead to more corporate cost cutting, then producers may re-coup this higher costs by continuing to reduce employee costs.

If the unemployment rate continues to rise, there will be less demand for products which will keep prices low. Thus, a weak labor market can keep inflation in check, even if commodity prices rise. In other words, don't look for inflation pressures to last.

Chart of the Day: Dow Rallies

The Dow achieved a 2009 high Wednesday as it moved further above the 10,000 level. To provide some perspective to the current Dow rally that began back in March, all major market rallies of the last 109 years are plotted on today's chart. Each dot represents a major stock market rally as measured by the Dow. As the chart illustrates, the Dow has begun a major rally 27 times over the past 109 years which equates to an average of one rally every four years. Also, most major rallies (73%) resulted in a gain of between 30% and 150% and lasted between 200 and 800 trading days (9.5 months to 3.2 years) -- highlighted in today's chart with a light blue shaded box. As it stands right now, the current Dow rally (hollow blue dot labeled you are here) would be classified as both short in duration and below average in magnitude.

Many Workers Will Outlive Retirement Savings

WebCPA published the following article today:

When it comes to their retirement, 50-somethings seem to be in a state of denial about how long their retirement savings will last, according to a new study.

Although the recent economic downturn has forced pre-retirees ages 50 to 59 to consider working years longer than they had hoped, their current rate of savings is unlikely to fund the retirement lifestyles they expect, according to the fifth annual Retirement Fitness Survey from Wells Fargo & Company.

Only 23 percent of pre-retirees are saving more for retirement than they were a year ago, the survey found. Fifty-seven percent are saving the same amount, and 20 percent are now saving less. Sixty-seven percent say their expectations for retirement have changed in the past year, and 56 percent now expect to work longer by an average of three additional years.

Overall, the financial positions and savings habits of this group are insufficient to last for their expected 20-plus years of retirement.

While pre-retirees surveyed expect to need $800,000 for retirement, they have saved only $300,000 (median amounts).

Pre-retirees clearly haven’t assessed how long their savings will last in retirement. They expect to live nearly 21 years in retirement, but plan on spending nearly 10 percent of their savings every year in retirement. The industry recommendation is to withdraw no more than 4 percent annually.

People have been overly optimistic about their investment returns. When they started saving (typically in their 30s), both pre-retirees and retirees expected the value of their investments to grow by 8.7 percent each year, on average. In fact, the compound annual growth rate of the S&P 500 from 1958 through 2008 was 6.6 percent.

Despite their inadequate savings, nearly two-thirds lack any formal plans for retirement savings or spending strategies. Only 35 percent of the pre-retirees have a written plan for retirement, and of this group, only 52 percent say they updated it in the past year during the market downturn.

Less than half (40 percent) wish they had been more proactive about educating themselves about retirement preparation.

Only 34 percent “wish they had cut back more on their previous lifestyle and saved more” for retirement.

“In the wake of the severe economic crisis, we had expected to find people had become more conservative in their savings and spending behavior,” said Lynne Ford, head of Wells Fargo Retail Retirement. “We were surprised to see how few people have increased their rate of savings and how many people in their 50s have no retirement plan at all. For people in the last 10 to 15 years of their working career, the failure to have a thorough retirement plan in place is like driving while blindfolded.”

Retirement Planning Educational Workshop - November 12

Attend this free educational workshop to learn about the latest strategies to prepare for and succeed during retirement.

• Determine if you still have enough money to retire
• Find a trusted advisor - discover fee-only planning
  
• How investment policy statements protect you
• Common hidden costs that deplete your nest egg and what to do about them
• Opportunity knocks - is a Roth IRA conversion right for you?

Attendees will receive a complimentary copy of The Retiring Boomer’s Financial Handbook.

Hosted by Net Worth Advisory Group, a fee-only (no commission) financial planning firm specializing in helping clients prepare for retirement.

Thursday, November 12
7:00 PM

SLCC Miller Campus
MFEC Building, Room 223
9750 South 300 West
Sandy, UT 84070
View Map

To reserve your spot in the class please contact:
Lon Jefferies
Net Worth Advisory Group
801-566-0740
lon@networthadvice.com
http://www.networthadvice.com/

What Lenders Look For on a Credit Report

1. How many inquiries you have.
"Soft" inquiries are made when you or an existing creditor checks your report; "hard" ones appear when you apply for credit. Only hard inquiries from the past year affect your credit score. The fewer, the better. Tip: Do any loan shopping within a 14-day window; all inquiries will count as only one.

2. What you're juggling.
The main part of your report lists your open credit accounts, plus those closed up to 10 years ago, with amount owed and the limit or initial loan amount. Lenders want to see that you can handle a mix of credit types. Tip: Since a long history ably managing debt looks good, keep your oldest credit cards open and active.

3. How much credit you're using.
Lenders pay particular attention to the amount you owe on credit cards relative to your limits. (Note: Creditors usually report to bureaus the day the billing cycle closes, so your statement balance is used here.) Tip: Aim to use less than 20% of your available credit.

4. How timely you've been.
Payment history is key in how lenders view you. The later you were in paying - and the more times you slipped up - the less appealing a risk you are. Tip: If you have just one late payment on your record, ask your lender if it will make a good-will adjustment on your report.

5. Whether you've really messed up.
Liens, bankruptcies, and delinquent accounts will be shown, typically for seven to 10 years afterward. Tip: You are entitled to add a personal statement to your report; consider doing so if something here needs explaining.

Again, a true fee-only financial planner can help you manage your debt and get on the road to a strong credit history. If you have questions, be sure to talk to an independent fee-only financial advisor, as most other "financial advisors" will be motivated to make your debt problems worse so they can sell you financial products.

Chart of the Day: Unemployment

Today, the Labor Department reported that the unemployment rate increased to 10.2% -- a 26-year high. For some perspective on the current state of the labor market, today's chart illustrates the unemployment rate since 1948. As the chart illustrates, today's move above the 10% threshold marks only the second time such a move has occurred during the post-World War II era. It is also worth noting that the unemployment rate has tended to peak shortly after the end of the recession. Following the previous two recessions, however, the unemployment rate kept rising for many months following the beginning of an economic "expansion."

Get Smart About Debt - Rule #5

Rule #5 of "Get Smart About Debt" is to keep up the good behavior. The tougher lending standards ushered in by the credit crisis are likely to stick around well after the recession is gone. Helping cement them are new laws that focus on consumer protection - such as stricter rules for credit card issuers, which reduce their incentive to deal with less creditworthy customers.

An even bigger factor leading to the longevity of tighter credit is the disappearance of secondary investors willing to buy risky loans from banks. "Over time, those markets will come back to life," says Bankrate.com's Greg McBride, "but bad memories won't fade fast."

The lesson? Don't let good credit habits slide, even if you're not planning to borrow right away. In fact, it never hurts to set up automatic bill payments so you are never late addressing your obligations.

Again, independent fee-only financial planners specialize in these areas. Contact a fee-only financial advisor today for help setting up a debt management program, and more tips for establishing a strong credit report.

Get Smart About Debt - Rule #4

The fourth rule of "Get Smart About Debt" is to eliminate the right debts first. Specifically, you need a one-two punch. First, reduce your spending, and second, use the additional money saved to accelerate payment on the debt that has the highest interest rate. Typically, that's your credit cards. Once you've paid off your highest-rate loan, apply the money to the next-highest rate loan, and so on.

Frequently, you may want to exclude home or student loans from this process. Interest on these types of loans create a tax deduction for the borrower, and consequently, the real interest rate being paid on these loans is less than the amount simply being paid to the bank or the educational institution. To figure out the real interest rate on these loans, multiply the nominal interest rate by one minus your marginal tax bracket. For instance, the real interest rate on a 6% marginal home loan for an individual in the 25% tax bracket is:

6% x (1-.25) = 4.5%

Note that these payments create a tax deduction only if the tax payer is itemizing deductions. If only the standardized deduction is claimed, there is no additional tax benefit.

Accelerating payments on loan balances is extremely beneficial. Consider a $5,000 credit card balance with a 15% interest rate. An individual making a $100 monthly payment would take 6.6 years to pay off the loan, and cost $2,896 in interest payments. Meanwhile, if payments were increased to $150 a month, the loan would be paid off in 3.7 years and cost the borrower only $1,509 in interest payments.

Speak to an independent fee-only financial planner about putting together a schedule to eliminate your debts. The faster you eliminate your debt, the earlier you can begin to invest, and the better your retirement will be.

Get Smart About Debt - Rule #3

Not long ago you might have drawn on a home-equity line of credit (HELOC) for college costs, emergencies, even a new car. Now, lenders have cut these credit lines and real estate values have sunk. In fact, the average real housing wealth declined 13% from 2005 to 2008. Consequently, home equity is no longer easy money. Considering these factors, rule #3 of "Get Smart About Debt" is to tap home equity sparingly.

If you are lucky enough to still have a HELOC, tap it only if you'll be left with at least 20% equity and you live in an area where home prices have leveled off - otherwise you may end up underwater on the loan. If a HELOC isn't viable, use federal loans for college (often better anyway, since their rates are fixed). In an emergency, a 401(k) loan is an option, though you'll miss out on investment growth and owe interest. Plus, typically you have to pay these loans back within 90 days if you're laid off.

Looking for a way to add liquidity to your financial portfolio? Speak to an independent fee only financial advisor who can help you establish an appropriate emergency fund. After all, an emergency fund consisting of three to six months worth of expenses should be established before investing funds elsewhere (including in a 401(k) or an IRA).

Get Smart About Debt - Rule #2

Burned by their mistakes, lenders are now far more cautious. To qualify for any loan, you must prove that you're a low default risk; to get the best terms, you must be a sure bet. Consequently, rule #2 of "Get Smart about Debt" is to position yourself to get the lowest interest rates.

This step revolves around a high FICO score, the number used by most lenders to determine your creditworthiness. Today the lowest rates generally go to those with scores of at least 760 out of a possible 850. Boost your score by paying bills on time, reducing credit card balances to less than 20% of their limits, and correcting any errors on your credit reports.

Be sure to order a credit report from annualcreditreport.com. You are allotted a free report from each credit bureau every 12 months. You'd be surprised how frequently errors show up on these reports, and fixing them can increase your FICO score dramatically. While you are on the website, you might buy the Equifax version of your FICO score for $8.

To illustrate the benefit of having a top FICO score, consider two individuals looking to get a 30-year loan on a $200,000 mortgage. An individual with a 670 FICO score may qualify for an interest rate of 5.67%, making total payments on the home equal $416,521. Meanwhile, an individual with a 760 FICO score might qualify for a 5.05% interest rate, making total payments equal just $388,715.

Getting top rates may also require a larger down payment than in the past - 20% for a house, and 10% for a car. Lastly, you will certainly have to prove you have a steady income source.

Again, debt management is an area where a qualified financial planner can certainly add value. Be sure to speak to an independent fee only financial advisor to get objective, comprehensive advice on how to benefit from your credit rather than become a slave to it.