D3 Business Update:
We are including your invitation to our Annual Client Appreciation Dinner, which we will be hosting on Saturday, November 13th at Emmett’s Ale House, which is located one block from our office in downtown Downers Grove. There is a map on the back of the invitation. Please send back the response card and let us know if you will be able to attend. We hope you can join us.
For our Comprehensive and Retainer clients with brokerage accounts, we have finished tax loss harvesting, which will lower the taxes on your 2010 tax returns. We did not execute transactions for clients with tax-loss carry forwards from previous years. We estimate that clients should save, on average, about $750 in taxes.
We’re close to finishing a review of estimated taxes to determine if our Comprehensive and Retainer clients may owe taxes to the IRS before the end of the year. We will be contacting you if we think you should make any payments to the IRS or your state’s Department of Revenue, if they are greater than the vouchers you already have.
D3 Investment Outlook and Strategy:
With economic growth noticeably slowing here in the U.S, several prominent market strategists are warning about the possibility of the U.S. economy sinking back into a recession, known as a “double-dip.” Many forecasters are calling for a 25% chance of this “double dip.” While we acknowledge that it’s a possibility, we think it’s unlikely. Currently, the excesses and imbalances in certain industries that lead to a recession are not present. Also, the sharp cutbacks in sectors that typically lead an economy into a recession, 1) housing, 2) labor, 3) business investment, and 4) consumer durable goods like autos, have already occurred. Though improvements in these sectors are likely to grow slowly, it’s unlikely they would contract much from already low levels. Auto sales have stabilized at levels higher than the depressed levels of last year, enabling Ford and GM to generate profits for the first time in years. Businesses have depreciated much of their equipment, and have stepped up their purchases of new equipment. Lastly, businesses reduced their labor forces so aggressively in 2008 and 2009, and are working their existing employees harder for longer hours, that they are unlikely to further reduce their staffing levels.
Even though many investors don’t believe the U.S. economy will slip back into a recession, interest rates are lower now than they were during all of 2009 and most of 2008, pricing in the expectation of a new recession. Many fixed income investors, including us, thought that rates would have to rise to entice buyers to buy the huge increase in U.S. government debt issued to fund the federal budget deficit. However, investors are willing to purchase U.S government bonds maturing 2 years from now with an interest rate of 0.50%, and bonds maturing in 10 years at 2.70%. 30-year mortgage rates are 4.50%. Why so low? Current investor demand for bonds is meeting or exceeding the supply. The Federal Reserve has publicly stated a commitment to keep short-term interest rates very low indefinitely, and has resumed buying longer-term U.S government bonds to keep longer-term rates low. Second, individual investors have significantly increased their demand for bonds, by adding over $400 billion to bond funds, while withdrawing cash from stock funds since last year. Third, the central banks from many countries continue to buy U.S. government bonds with their excess dollars. Fourth, uncertainty regarding the financial health of several European governments continues, encouraging investors to seek the relative safety of U.S. bonds.
We wrote last month that stock market optimists believe that, with interest rates this low, bond prices are expensive compared to the valuation of large company stocks all over the world. The optimists continue to preach that sermon. After a summer of repeatedly disappointing news both here and in Europe, the percentage of bullish stock investors has dropped to around 20%, the lowest in five years. Even notoriously bullish Wall Street analysts have tempered their enthusiasm for stocks. For contrarian investors, sentiment this low has, historically, been a buying signal. Consequently, because recent economic data has simply met or slightly exceeded Wall Street’s lowered expectations, stock prices have risen over 5% this month. However, frustration regarding the uncertainty of Congressional legislation to deal with the upcoming expiration of the Bush tax cuts is a factor keeping investors cautious. If the tax cuts are allowed to expire without new legislation, the tax rates on dividends and capital gains will rise in 2011.
Even though the yields on the short-term bond funds owned in many client accounts have also fallen significantly, their prices have either maintained or increased in value. We are extremely hesitant to exchange these funds for new funds that earn higher yields by buying bonds with longer maturity dates. Almost all bond investors, including us, know that rates will eventually rise, but are not sure when. We also think bond prices are rather expensive, and know that bond prices could fall significantly when rates rise. We strive to reduce the risk of price declines in the bond funds we buy. Consequently, we are researching a fund that buys preferred stocks and a fund that only buys bonds from companies and governments outside the U.S. This continues our effort to constantly try to improve the risk/reward balance in all of our client’s portfolios.
We look forward to seeing many of you at our Annual Dinner. Please call us anytime to discuss any concerns you have, and thank you for your confidence in us during these uncertain times.
Donald D. Duncan MBA CFA™ CPA CFP® Adam Glassberg, Financial Planner
Peter Marchese MBA CFA™ Patty Shipinski, Administrative Assistant
Michael Meyers MBA CFP®