Apr 30th

Independent Market Commentary

Author: Chris

Comments: 0

I hate to focus on the earnings season again, but given the fact that I have listened to 33 earnings calls this week, it is obviously forefront in my mind.  In tracking the earnings season, I ran across a very interesting fact that has been little discussed.  

I like most others have been primarily focusing on the earnings of the companies within the S&P 500 Index.  Last week I mentioned that over 80% of the companies in the S&P 500 that have reported earnings, have beaten estimates.  I also commented on how lackluster the markets had been in response to this strong showing.  This morning I went to update this figure and the number stands at 82.7%.  I decided to check the number for what Bloomberg considers to me the US Equity market, and it is comprised of over 5700 companies.  Guess what?  Under 45% of those companies have beaten estimates, and this includes the 350 plus in the S&P in which 82.7% beat.  I think goes a long way towards explaining why the markets have traded sideways to down during the last few weeks.  This may also indicate something about the state of the domestic economy since as a rule the companies in the S&P 500 tend to generate significantly more revenues from oversees.

Apr 30th

Nonprofit Boards: New Challenges and Responsibilities

Author: Chris

Comments: 0

Courtesy of Forefield

Nonprofit Boards: New Challenges and Responsibilities

The days are long gone when nonprofit boards were made up of large donors who expected that little more would be asked of them beyond socializing at the occasional fundraiser. Being a board member can be as demanding and rewarding as any full-time work.

Nonprofit board members are being required to do strategic planning for both long- and short-term goals. They must produce demonstrable results that are measured against specific benchmarks. And they are finding that they must stretch already tight budgets further than ever. In turn, stakeholders within and outside nonprofit organizations increasingly are holding board members to a higher standard of accountability for making sure the organization not only delivers on its mission but does so in the most effective way.

Learning how to do more with less

Of all the challenges facing nonprofits, financial issues can be especially complex. In the last decade, many nonprofits have experienced funding cutbacks. Even those whose funding has remained stable are finding that money has to go further to meet increased client loads and demands on programs and services.

In some cases, the issues can be so complex that boards are going outside the organization’s ranks to hire consultants with specific expertise in certain areas. People who stay on top of the latest developments in such fields as tax law, charitable giving regulations, and best practices in accounting can be particularly effective in helping an organization fulfill its purpose without having to add staff.

Understanding your role and responsibilities as a board member, as well as the challenges facing nonprofits today, can not only improve your board’s decision-making process, but also can help you have maximum impact. A nonprofit board member has a dual role: support of the organization’s purpose, and governance over how it attempts to further that mission. You and your fellow board members doubtless want to use your collective time efficiently. When thinking about how to focus your efforts, consider whether your organization needs help with any of the following issues.

Ensuring accountability

Limited budgets and greater demand mean that hard choices will need to be made; in many cases, it’s the board responsibility to make them. To make wise decisions, it’s important to understand the organization’s financial assets, liabilities, and cash flow situation. If you’ve had corporate experience, you may be able to help your fellow board members review the balance sheet; if not, it’s worth your time to become familiar with it yourself. For example, knowing whether your organization qualifies for state sales and/or use tax exemption could have a meaningful impact on finances. Little is more disturbing to potential donors than the feeling that their money may not be used effectively.

Also, the IRS is beginning to require more detailed information about nonprofit finances and governance. For example, Form 990, which all nonprofits with gross receipts over $25,000 must file with the IRS, has been revised as of the 2008 tax year.

Program funders also have increased reporting requirements. When deciding which grants to make, foundations are asking for more information, greater documentation, and increased evaluation of results. Gathering and analyzing accurate, timely, comprehensive data and being able to document a program’s effectiveness and impact is increasingly critical. Understanding the organization’s finances doesn’t just improve the board’s oversight capabilities; it also can make you a more effective fundraiser.

Higher standards of accountability mean that boards also should ensure that liability insurance is in place for both directors and officers. This is especially true if the organization provides services to the public, such as medical care.

Adopting enhanced governance standards

The Sarbanes-Oxley Act, passed in the wake of corporate governance scandals and nicknamed SOX, also affects nonprofits. Though the law applies almost exclusively to publicly traded companies, some nonprofits are using SOX provisions as a model for developing formal policies on financial reporting, potential conflicts of interest, and internal controls.

Two provisions of SOX also apply to nonprofits. First, organizations must have a written policy on retention of important documents, particularly those involved in any litigation. Second, they need a process for handling internal complaints while also protecting whistleblowers. Individual states have expressed interest in extending other SOX requirements to the nonprofit world, particularly larger organizations. Many nonprofit organizations hope that voluntary compliance efforts will eliminate calls for increased official regulation of such issues as board member compensation and conflicts of interest.

Ensuring effective fundraising and money management

Nonprofits have not been spared the increases in for-profit health care costs and worker’s compensation insurance that have hit corporations and small businesses. Yet fundraising for such mundane areas as day-to-day operations, staff salaries, and building and equipment maintenance has traditionally been one of the biggest challenges for nonprofits.

The twin effects of inflation and increased client loads have underscored the importance of having an adequate operating reserve. Also, corporate sponsorships can be vulnerable to the mergers and acquisitions that occur frequently in the corporate world. It makes sense to ensure a diversity of donors rather than relying on a few traditional sources.

Bringing in money is only half the battle; the day-to-day issues are equally important. Board members may be unfamiliar with operational challenges that businesses don’t generally face, such as fundraising, or recruiting and managing volunteers. However, in some cases you might be able to suggest ways to adapt businesslike methods for nonprofit use.

For example, appropriately investing short-term working capital can preserve financial flexibility while maximizing resources. If your group has an infusion of cash that won’t be spent immediately, such as a contribution for a capital spending project, consider alternatives for putting at least some of it to work rather than letting it sit idle.

Planning strategically

Having a strategic plan can lead to better evaluation of funding needs and targeted fundraising efforts; it also can help ensure that board members and staff are on the same page. Make sure your plan provides guidance, yet allows staff members to do their jobs without constant board supervision.

A board of directors also must assure that the organization can attract and retain leadership. Many nonprofits today are led by executives who came of age during the 1960s. As those baby boomers march toward retirement, some experts worry that attracting and retaining executive directors and staff will become increasingly challenging, especially when budgets are shrinking. A succession plan for key personnel might be wise.

Using your time wisely

Nonprofit board membership can be both demanding and rewarding. Understanding your group’s finances can increase your effectiveness in furthering your organization’s goals. 

Apr 30th

Weekly Economic Insight, 26 April – 30 April 2010

Author: Kenn Lamson

Comments: 0

The final week of April gave us an uninspiring (and dated) reading on housing prices, the latest snapshot of consumer sentiment, and two readings on the overall state of the US economy – one reviewing 1Q10 and the other looking at March conditions. There were few surprises in the week’s data, which showed a slowly improving economy and initial signs that while they are clearly skeptical, the American consumer may prove more resilient than expected. 

RELEASE (leading, coincident or lagging indicator)

PERIOD

ACTUAL

 EXPECTED (consensus) LAST

HIA COMMENT

Case-Shiller 20-city Home Price Index (lagging)

February

144.03

144.80

145.32

On a seasonally adjusted basis home prices fell -0.1% month-over-month but rose +0.6% year-over-year. On an unadjusted basis, prices fell -0.9% MoM.

Chicago Fed National Activity Index (coincident)

March

-0.18

N/A

-0.31

March’s level rose slightly from February and remained above the important -0.70 level.

GDP (lagging)

1Q10 advance

+3.2%

+3.3%

+5.6%

The initial look at first quarter economic growth moderated from 4Q09 anticipated, but consumer spending was stronger than expected.

Univ of Michigan Consumer Sentiment (leading)

April

72.2

71.0

73.6

American consumers’ opinion of their circumstances fell from its March reading.

 

S&P / CASE-SHILLER HOME PRICE INDEX

While the overall level of home prices appears to be slowly improving, this report suggests that the housing rebound that appeared last fall has faded.  Only one of the 20 cities saw a month-over-month price increase, and 6 cities reported new lows in prices.  However, 9 cities saw year-over-year price improvement. Prices stand at their autumn 2003 levels and are down -30.3% from their summer 2006 peak.

As with other lagging indicators, this data is a bit stale and projections made from it may be suspect.

 

CHICAGO FED NATIONAL ACTIVITY INDEX

The CFNAI is a weighted average of 85 indicators of national economic activity. The indicators that comprise the Index are drawn from four broad categories:

  • Production and income
  • Employment, unemployment and hours
  • Personal consumption and housing
  • Sales, orders and inventories

As a reminder regarding this useful but little-known Index, when the 3-month moving average value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the 3-month moving average value moves above -0.70 following a recession, there is an increasing likelihood the economic contraction has ended.  When the 3-month average moves above +0.70 more than 2 years into an economic expansion there is an increasing likelihood that a period of sustained inflation has begun.

March’s 3-month moving average rose slightly from February and remained above the important -0.70 level, suggesting that economic activity is muted but continues to improve. According to the CFNAI inflation should not be a significant problem over the coming year.

 We note, however, that the “consumption and housing” component of the index remains negative.

 

GRAPH: Chicago Fed

 

“ADVANCE” GDP

This release is a first look into the first quarter of 2010, which fell slightly short of consensus expectations. The “advance” report will be revised over the next two months as additional data becomes available.  The positive surprise in the report was the better-than-expected showing from the consumer; business investment, exports and “nonresidential fixed investment” also made positive contributions. The slowing from 4Q09 was driven by decelerations in inventory replenishment, exports and housing investment, all which have been signaled by data released earlier.

It appears as though the inventory restocking that drove GDP growth in 4Q09 has subsided and the strengthening US Dollar has taken the wind out of the sails of exporters. The question that has plagued economic observers since the beginning of this recession remains: Can the US consumer – with an unemployment rate near 10%, wage growth nonexistent and housing flat at best – drive the economy forward without creating another debt bubble?

The contributions to growth looked like this:

SEGMENT CONTRIBUTION
Consumer spending +2.55%
Gross private domestic investment +1.67%
Net exports -0.61%
Government spending and investment -0.37%
TOTAL PERCENT CHANGE AT ANNUAL RATE +3.24%

 

 

GRAPH: Bureau of Economic Analysis

CONSUMER SENTIMENT

Consumers may be losing faith in the signals of economic improvement; the U of M Consumer Sentiment Index continued its recent slide, dipping from 73.6 in March to 72.2. The measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it is a good time to buy big ticket items such as cars and homes, declined further from its cycle high in February to 81.0.  The index of expectations six months from now, which more closely projects the direction of consumer spending, also worsened again, from 67.9 to 66.5.

As we’ve noted elsewhere, economic improvement is clearly centered in manufacturing, not in housing and employment, two areas much closer to consumers.

 

Apr 29th

Boise-Nampa MSA Unemployment, March 2010

Author: Kenn Lamson

Comments: 0

The US Bureau of Labor Statistics today released March 2010 Unemployment data for the 372 metropolitan statistical areas (MSAs) it surveys. According to the BLS the non-seasonally adjusted unemployment rate for the Boise-Nampa MSA was 9.9% for the month of March, an increase of +1.4% from March 2009. Over that period, the number of unemployed workers in the Boise area rose by +4100, from 24,800 to 28,900, while the labor force shrank from 292,600 to 290,900.  The unemployment rate declined -0.8% from February 2010.

At 9.9% Boise’s seasonally unadjusted unemployment rate was lower than the national (10.2%) average, but remained stubbornly higher than the state average (9.8%) and most other areas surveyed within the state.  Boise’s +1.4% year-over-year change in the unemployment rate was also more dramatic than the national average (+1.2%) but slightly lower than the average of the Idaho cities surveyed (+1.7%).

In March 321 of the 372 MSAs had unemployment rates higher than a year earlier, and 200 MSAs had lower unemployment rates than Boise. The MSAs with the lowest unemployment rates nationally were Houma-Bayou Cane-Thibodaux LA (4.6%), Fargo ND (4.9%) and Lincoln NE (4.9%). Those with the highest rates were El Centro CA (27.0%), Merced CA (22.1%) and Yuba City CA (21.7%).

The largest decrease in the year-over-year rate were seen in Elkhart-Goshen IN (-4.9%), while the largest increase were in Farmington MN (+5.0%), Weirton-Steubenville WV/OH (+4.5%) and Yuma AZ (+4.1%).

GRAPH: Bureau of Labor Statistics

 

GRAPH: Bureau of Labor Statistics

Apr 23th

Inflation-Fighting TIPS

Author: Chris

Comments: 0

It’s easy to see how inflation affects your daily life. Gas prices are higher. Electric bills are steeper. Wallets are thinner. But what inflation does to your investments isn’t always as obvious. Let’s say your money is earning 4% and inflation is running between 3% and 4% (its historical average). That means your so-called “real return”–the stated return minus inflation–is only 1% at best. After you subtract any account fees, taxes, and other expenses, you could actually end up with a negative number.
What can you do to keep from losing the race against inflation? One of the easiest ways is to buy investments that are designed to keep pace automatically.
Take stock of TIPS
Since the U.S. Treasury introduced them in 1997, Treasury Inflation-Protected Securities (TIPS) have become the most widely known example of what are generally referred to as “inflation-protected securities.” TIPS are especially popular with long-term investors who want to preserve the purchasing power of their money over time. Many investors also like the security of knowing their investment is backed by the U.S. government.
Like other Treasury bonds or notes, TIPS are basically loans to the U.S. government. You receive interest payments every six months based on a fixed interest rate specified in advance. With most bonds, it’s easy to know the exact amount of money you’ll receive each year. You simply multiply the principal–the amount of your initial investment–by the interest rate.
TIPS work a little differently. Instead of guaranteeing how much you’ll be paid in interest, an inflation-protected security guarantees that your real return will keep up with inflation. The interest rate stays fixed; what you won’t know is the exact dollar amount of the payments you’ll receive. If inflation goes up, your return will increase to match it. With TIPS, you’re trading off the certainty of knowing exactly how much you’ll receive for the knowledge that, as long as you hold the bond until it matures, your investment will maintain its buying power.
How do TIPS work?
TIPS pay slightly lower interest rates than equivalent Treasury securities that don’t adjust for inflation. The reason for that reduced rate? Your TIPS principal is automatically adjusted twice a year to match any increases or decreases in the Consumer Price Index (CPI), a widely used measure of inflation. If the CPI increases, the Treasury recalculates your principal to reflect the increase.
For example, let’s say you buy $20,000 worth of TIPS that pay a fixed interest rate of 2.5%. Over the next six months, the CPI rises at an annual rate of 3%. Your $20,000 principal would go up by 1.5% (half of the 3% annual inflation rate) to $20,300.
This adjustment will affect the amount of your semiannual interest payments. Even though the interest rate stays the same, it’s applied to the recalculated amount of your principal. In this example, the 2.5% interest rate would be applied to the new $20,300 figure. The actual dollar amount paid in interest goes up because it’s based on a higher principal; instead of $250, your next semiannual payment would be $253.75. If inflation goes up again, your next payment will be higher still. (The return on a specific bond may be different, of course, since this is only a hypothetical illustration designed to show how the return on a TIPS is calculated.)
If the CPI figure is lower in six months, your principal will be adjusted accordingly when it’s recalculated; that in turn will affect the amount of your next interest payment. If there’s a period of deflation and the CPI is actually a negative number, your principal and interest payment would both drop.
The inflation adjustment feature means that if you hold a TIPS until it matures, your repaid principal will likely be higher than when you bought the bond. Even if the CPI turns negative and the economy experiences deflation, the amount you’ll receive when the bond matures will be the greater of the inflation-adjusted figure or the amount of your original investment.
Things to think about
You can still lose money with a TIPS if you don’t hold it until it matures. Inflation rates rise and fall, and as with any bond, the returns offered by other investments can affect the market value of your TIPS. Also, if inflation turns out to be less over time than you had anticipated when you invested, the total return on a TIPS could actually be less than that of a comparable Treasury security without the inflation-adjustment feature.

If the inflation rate over time isn’t high enough to make up for the difference between the lower interest rate of a TIPS and that of an investment without inflation protection, the TIPS has no advantage. That’s why TIPS may only be appropriate for part of your bond holdings.
There’s another catch. You’ll also need to think about the federal taxes that will be due each year on the interest and any increases in your principal. Even though the Treasury records the changes in your principal every six months, you don’t actually receive that money until the TIPS matures. However, the government still taxes that increase each year as if you’ve received the cash. Many investors prefer to postpone that tax bill by holding TIPS in a tax-deferred account such as an IRA.
How can I buy TIPS?
You can buy TIPS individually, in $100 increments and with maturities of 5, 10, or 30 years (although individual brokers may have higher minimum purchase requirements). You could choose a selection of TIPS that mature at different times. When the shorter-term bonds mature, you could reinvest that principal into either another TIPS or some other type of bond. Known as “laddering,” this strategy gives you flexibility as interest rates change. If interest rates are higher than the bond that’s maturing, you can invest at a higher rate; if rates are lower, you might prefer an investment that offers a higher return. Also, if you will need some of your principal for a specific goal, such as college tuition, you can select maturity dates that return your principal at the right time.
Another possibility is a mutual fund, which may invest in TIPS only or mix them with inflation-protected securities from other entities, such as foreign governments. Typically, a fund invests in a variety of debt instruments to balance the higher interest rates usually offered by longer-term bonds with the flexibility of shorter maturities. A TIPS mutual fund pays out not only the interest but also any annual inflation adjustments, which are taxed as short-term capital gains. Some exchange traded funds (ETFs) also invest in an index composed of TIPS with various maturities.
Before investing in a mutual fund, carefully consider its investment objective, risks, fees, and expenses, which are contained in the prospectus available from the fund. Review it carefully before investing.
Your financial professional can help you decide which choices may be appropriate as you race to keep up with rising costs.

Apr 23th

Independent Market Commentary

Author: Chris

Comments: 0

Today’s commentary is going to be short and sweet. It has been a long week of earnings conference calls and I get to drive my youngest to Reno for one of those infamous club soccer tournaments. One of the other players and his father are going to ride down with us and he is at least as opinionated as I, so the conversation should be interesting. Earnings season has gone well for us so far, however, I am not enamored with the results.
Through yesterday approximately 25% of the companies in the S&P 500 have reported earnings. Astoundingly, over 84% have beat earnings estimates. I think this is surprising given the fact that I thought analysts would have caught up with reality. But then again, I have no idea exactly what drives sell side analyst’s incentive to be ahead of the game versus behinds. Investors, on the other hand, march to their own tune. Given the number or earnings beats, it would be logical that the markets would be significantly higher since the beginning of earnings season, yet the S&P is up just under 1.5%. In my opinion this is further evidence that expectations have risen significantly and that this adds risk to further equity market appreciation unless the surprises continue to be highly positive.

Apr 16th

Independent Market Commentary

Author: Admin

Comments: 0

I guess I had to wait all week for the earnings season to become exciting. As I write this, the S&P 500 is down 1.67% for the day. GE, AMD, and Google all reported good earnings and are trading down on the day. It probably doesn’t help that the SEC is suing Goldman Sachs. At least we have great Boise spring weather to enjoy this weekend. Get your root crops in the ground. Given what is happening with the earnings season, I decided that my weekly commentary would be the equity commentary letter I finished yesterday. Enjoy!

The last 15 months in the equity markets have read like the book “A Tale of Two Cities,” by Charles Dickens. It should probably come as no surprise that I felt it necessary to include two quotations to better reflect our thoughts.
Just over one year ago investors were both fearing and feeling the worst. Yet, today’s markets reflect the attitude that all is well and calm. More important is how this change in perception has driven huge increases in the indices since that point in time. It appears that Shakespeare called this one right.
Market behavior during the quarter makes us believe that there has been a significant renewal in investors’ appetite and tolerance for risk. The fact that the Consumer Discretionary and Financial sectors were the best performing sectors supports this premise. This increased appetite for risk is evident in the character of performance within the Financial sector of the various Russell indices. We noted in the quarter a distinct shift away from lower beta Financials to higher beta Financials, primarily the regional banks, especially in the small to mid cap indices.
This was a very interesting quarter for our equity portfolios. The Large Cap Core strategy outperformed the Russell 1000 Index, while our Smid Cap Core strategy underperformed the Russell 2500 Index. What is most interesting is that our performance deviation relative to the indices was driven in both cases by security selection. Our process identifies companies that are generating above-average returns on average capital that are trading at discounted valuations. The shift to “lower quality,” those companies with lower returns on capital, has thus put our portfolios at a disadvantage. As we mentioned this shift was very notable in the small cap arena and was less pronounced in the large cap arena where there are fewer high beta Financials. As a result, we were able to hold our ground better in our large cap strategy, whereas in our smid cap strategy we were penalized for our conservative stance in the Financial sector.
From a sector perspective it should come as no surprise that we gave up performance relative to the indices due to our underweights in the Consumer Discretionary and Financial sectors. Additionally, our overweights in the Technology and Healthcare sectors did not provide the needed boost to returns as these sectors did not perform well relative to the overall indices. As we mentioned in our last commentary we are hesitant to believe the “all-clear” has been sounded with regard to the consumer-related and Financial industries, primarily small banks, and have maintained our low exposure.
As mentioned, security selection played a significant role in the quarter’s relative performance. Underperformance due to security selection was concentrated in two sectors, Financials and Technology. In the Financial sector there were not any distinguishable declines; our names just saw less appreciation than the aforementioned higher beta names. In the Technology sector, two names experienced significant declines in the quarter, Brocade Communications and Flir Systems. In both cases the companies reported fourth quarter earnings that met expectations but forecasted first quarter earnings that were below analyst’s expectations. Outperformance from security selection was most notable in the Consumer Discretionary sector as two names appreciated in excess of 25%, Big Lots and Deckers Outdoor. Both of these companies have obviously benefited from renewed consumer spending; further, both companies exceeded fourth quarter earnings estimates and guided 2010 numbers higher. In the Healthcare sector, Kinetic Concepts was a notable performer due to the company’s winning of a patent infringement lawsuit against one of their competitors, which investors saw as a major positive.
We did not make any major sector changes during the quarter. We increased our weights in the Consumer Discretionary and Financial sectors and decreased our exposure to the Materials & Processing sector, but these increases were minimal. Kenn and I have been having intensive discussions regarding the state of the consumer going forward. Our tentative conclusion is that the recent improvement in consumer spending is not signaling a return to the pre-recession levels, but that recent upticks in spending are due to pent up demand and the wealth effect of retirement portfolio-driven net worth growth. We believe that even with improvements in the job market the American consumer will be reticent to drastically increase spending and that we will not see the negative savings rates of previous years. Therefore we continue to be wary of sharply increasing our exposure to the Consumer Discretionary sector. With respect to the Financial sector, we believe that the worst is over for the majority of companies, as suggested by improving credit trends. However, we believe that current valuations already reflect most if not all of the potential operational improvement.
This has been a challenging year as returns have been primarily driven by momentum, with less focus on company-specific dynamics. We believe that as the year progresses it will be increasingly more difficult for companies to beat earnings estimates due to a combination of rising expectations and increasingly more difficult year-over-year earnings comparisons. This will especially be true if the strong increases in consumer spending do not persist.
We look forward to talking with you as the year progresses. As always, we are available for any additional questions you may have.

Apr 16th

The Joys and Financial Challenges of Parenthood

Author: Chris

Comment: 1

Courtesy of Forefield

The Joys and Financial Challenges of Parenthood

Children are special. There’s nothing like them. They can be our sweetest blessing, as well as our biggest frustration. Most of all, however, they are our greatest responsibility, as well as our most important–and expensive–commitment. Whether you are a first-time parent or a veteran of refereeing sibling squabbles and who-put-the-empty-milk-carton-back-in-the-fridge inquisitions, parenthood can be both wonderfully rewarding and frighteningly challenging. Our children give us gifts only a parent can understand–from sticky-finger hugs to “Can I come?” pleas to tag along on Saturday morning errands. We raise them with a clear goal that we secretly dread will actually take place–that someday they will be grown, independent, ready to move out into the world on their own…and our work will be over. As our children travel this long and never-dull road from infancy to adulthood, we nurture them, worry about them, scold them, love them. Most of all, we try to protect them. We want them to grow up in a stable world, one in which they are physically safe, emotionally nurtured, and financially secure. Still, meeting expenses can be a challenge.

How expensive is raising a child?

The United States Department of Agriculture estimates that the average nationwide cost of raising one child from cradle to college entrance at age 18 ranges from $210,340 to $483,750, depending on income. (Source: Expenditures on Children by Families, 2008) Then, when they turn 18, add in college expenses, and your financial outlay can get even worse. How much worse? According to the College Board, for the 2009/2010 school year, the average cost of one year at a four-year public college is $19,388 (for in-state students), while the average cost for one year at a four-year private college is $39,028. Even if those numbers don’t go up (and they have increased each year for decades), that would come to $77,552 for a four-year degree at a public college, and $156,112 at a private university. Oh, and don’t forget graduate school. The bottom line: Children are expensive! Between raising them and educating them and making sure they get a good, strong start in life, one thing is obvious when it comes to children–they are a major responsibility. Fortunately, as long as we remain alive and healthy, we manage to somehow meet these expenses. It’s part of what parenthood is all about.

Have you taken steps to protect them?

But here’s a question you need to consider: What would happen to them if something happened to you? No, it’s not the kind of question we like to dwell on. But these matters are important. This is why many financial professionals recommend that, above and beyond the day-to-day efforts to provide for their children, parents should take specific steps to help protect their financial well-being.

Review your life insurance coverage

Life insurance is one of the most effective ways to protect your family from the uncertainty of premature death. Life insurance can help assure that a preselected amount of money will be on hand to replace your income and help your family members–your children and your spouse–maintain their standard of living. With life insurance, you can select an amount that will help your family meet living expenses, pay the mortgage, and even provide a college fund for your children. Best of all, life insurance proceeds are generally not taxable as income.

Purchase disability income insurance

If you become disabled and unable to work, disability income insurance can pay benefits–a specific percentage of your income–so you can continue meeting your financial obligations until you are back on your feet. What about Social Security? If you do become permanently and totally disabled and are unable to do work of any kind, you may be eligible for benefits, but qualifying isn’t easy. For more flexible and comprehensive protection, consider buying disability income insurance.

Start building a college fund…now

College costs may seem daunting (and they are expected to continue increasing), but you have about 18 years before your newborn will be a college freshman. By starting today, you can help your children become debt-free college grads. The secret is to save a little each month, take advantage of compound interest, and have a sum waiting for you when your child is ready for college. The following chart shows how much money might be available for college when your child turns 18, if you save a certain amount each month.

Child’s Age Now $100/month $200/month $300/month $400/month
Newborn $38,735 $77,471 $116,208 $154,941
4 $26,231 $52,462 $78,693 $104,924
8 $16,388 $32,776 $49,164 $65,552
10 $12,283 $24,566 $36,849 $49,132
14 $5,410 $10,820 $16,230 $21,640
16 $2,543 $5,086 $7,629 $10,172
Table assumes an after-tax return of 6%, compounded monthly. This is a hypothetical

example and is not intended to reflect the actual performance of any investment.

Enjoy watching your children grow up. And remember, just as they are important to you, you are important to them. Make sure they’re protected financially…no matter what.

Apr 15th

Weekly Economic Insight, 12 April – 16 April 2010

Author: Kenn Lamson

Comments: 0

The week ending 12 April saw indicators that provided incremental information on exports and imports, inflation and the manufacturing and consumer sectors.  The data supports our theses that economic growth has been lead by the industrial sector and that inflation is unlikely to become a problem until the current slack in the economy is removed. That said, the strength in retail sales argues against our belief that the US consumer will remain subdued, but it remains to be seen whether the last few months’ strength will persist or fade. 

RELEASE (leading, coincident or lagging indicator)

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

International Trade (lagging)

February

-$39.7 B

-$39.0B

-$37.3B

The trade gap resumed its widening trend as imports rose more than exports.
Consumer Price Index (lagging) March  (YoY) +2.3% +2.4% +2.1%
The figure softened again due to a decline in the cost of shelter offsetting continued energy price increases.

 
Retail Sales (leading) March (MoM) +1.6% +1.2% +0.3% Month-over-month sales once again rose more than expectations and are +7.6% above March 2009.
Industrial Production (coincident) March (MoM) +0.1% +0.7% +0.1% Industrial production grew at an unexpectedly slow pace in March.
Capacity Utilization (coincident) March   73.3% 72.7%
CapU moved upward for the eighth consecutive month but remains well below its average since 1972.

 

 

TRADE BALANCE

The widening trade deficit increases the potential for a lower reading for 1Q10 GDP growth. The report was relatively balanced between petroleum and non-petroleum components, with exports and imports rising +0.2% and +0.7% respectively. The 5.5% strengthening of the trade-weighted US Dollar from its low on 12/1/09 through the end of February has been a headwind to US exporters, but the US$ is still well below its recent high in March 2009. A key takeaway in this series is a slow resurgence in the strength of the US export sector, which grew +0.2% during February after January’s -0.3% decline. Also, those with a cyclical – that is, bullish — view of the current economic situation will be heartened by the suggestion that strength in imports reflect a resurgent US consumer and demand from US companies restocking inventories.  Of note was the trade gap with China, which fell to the lowest level in a year.

 

 Graph: Bureau of Economic Analysis

 

CONSUMER PRICE INDEX

The year-over-year increase in the CPI remains driven by substantial increases in the price of energy. Perhaps unsurprisingly, the shelter component of the Index posted a -0.6% year-over-year decrease; however, the “food at home” sub-category showed its first increase since September 2008. At +1.1%, the year-over-year “core” rate remains at a 6 year low.

March’s month-over-month +0.1% increase was the product of a +4.6% spike in the price of fruits and vegetables, which accounted for about 60% of the increase in the overall Index. Gasoline was down -0.8%; however, electricity prices rose +2.1%.

The stability of the “core” rate at a historically moderate level supports the Fed’s assertion that inflation is not currently a concern and our belief that the FOMC will leave the Fed Funds rate unchanged for some time to come.

 

CHART: Bureau of Labor Statistics

 

ADVANCE RETAIL SALES

Adjusted for seasonal variations, sales at US retailers rose for the fifth time in six months, once again beating consensus expectations.  Excluding autos, sales rose a still-firm +0.6% during March.  

Month-over-month sales at the most of the largest categories of retailers were higher last month, including food & beverage stores (+0.2%), general merchandise (+0.6%), and restaurants (+0.3%). The largest category, motor vehicle & parts dealers, rose an impressive +6.7%. Even the housing related retailers got a boost, including furniture & home furnishings (+1.5%) and building materials & garden supplies (+3.1%).  Gasoline station sales fell -0.4% during March but are still up a whopping +26.4% over the previous 12 months.

 

 

 

 

INDUSTRIAL PRODUCTION

The uptick in March production data supports our thesis of stabilization in the industrial sector. The Industrial Production figures were held back by a -6.4% drop in the production of utilities (which was expected as a come-down from February’s harsh weather.). The closely-watched manufacturing sector made up for February’s pause, rising +0.9% month-over-month.

 

CAPACITY UTILIZATION

Factory capacity utilization remains low and is especially weak in the manufacturing sector, which had a utilization rate of only 70.0% in March. The manufacturing utilization rate did improve by +0.6% in March, however.  A look at the utilization for the different stages of production shows clearly where the weakness lies:

  • Crude stage = 87.4%, 0.9% above the long-term average
  • Primary & semi-finished stage = 69.5%, 12.1% below the long-term average
  • Finished stage = 71.8%, 5.7% below the long-term average

 

However, the trend for each stage of production has been positive since bottoming in mid-2009.

While a high degree of spare capacity means inflation is unlikely in the near-term, it also suggests that companies’ profit margins have not sustained the degree of pressure they have seen in prior recessions, so corporate earnings are better than in prior recoveries.

 

NATIONAL FEDERATION OF SMALL BUSINESS INDEX OF SMALL BUSINESS OPTIMISM

A few words about an economic data series that on which we don’t regularly report, but which highlights the disparity between the “haves” and “have nots” in the current economic environment.

This monthly Index posted its 18th consecutive reading below 90, falling 1.2 points in March to 86.8.  Readings below 90 are considered deeply recessionary territory, and this string is unprecedented in the survey’s 35 year history. Since the Index is based on a survey, respondents offering negative responses are subtracted from those responding positively to calculate a seasonally-adjusted net figure.

A few points of note from the March survey:

  • Workforce reductions have apparently ended, but a net -2% of small business owners plan to create new jobs and only 9% reported unfilled job openings.
  • Plans to make capital expenditures over the next few months fell back to only 3 points above the 35-year low.
  • A net -8% expected business conditions to improve in the next 6 months, an extremely pessimistic reading.
  • A net -25% reported higher nominal sales, with price cutting a large contributor to lower nominal sales.
  • A net -18% of small business owners reported gains in inventories, suggesting continuing inventory liquidation.
  • Eleven percent reported raising selling prices, but 29% reported reducing them. Inflation is not apparent in this business segment.
  • Unsurprisingly, a net -43% of business owners reported positive profit trends.
  • While 15% of firms that borrow regularly reported loans harder to get than their last attempt, a whopping 89% reported that they had no need to or did not want to borrow.

 

The contrast between the NFIB and ISM surveys is stark. Similar to the dichotomy between the Establishment and Household unemployment surveys, it is clear there’s a chasm between the opportunities and performance of large businesses versus small ones.

NFIB Small Business Optimism Index, 4/30/07 – 3/31/10

GRAPH: Bloomberg

Apr 14th

Kenn Lamson Featured on Wright Stuff Radio Show

Author: Chris

Comment: 1

Kenn was featured as the “Real Story” on April 10, 2010.  Listen to his interview and commentary. 

Wright Stuff Radio Show

If you have difficulty with the audio feed click here.

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