Back in 1997, as the Eurozone was being set up, all of the countries involved agreed they would limit their borrowing to just 3% of their economies output to avoid accumulating too much debt.  One problem when it comes to sovereign nations, rules such as these only apply as long as the individual nations want them to apply.  There were no real repercussions for any nation breaking the rules so it should come as no surprise they were broken.  Surprisingly, Germany and Italy were the first large economies to break the 3% borrowing limit followed shortly by France.  (Greece never stuck to the 3% target, hence why they are at the forefront of the problem).  What is interesting though is that outside of Greece, government debt is not the real issue.

The problems really stem from private debt and wages.  Let me explain.  When Southern Europe joined the Euro, interest rates in those countries fell to unprecedented lows as lenders all over the world put the creditworthiness of Italy, Ireland, and Spain in line with that of France and Germany.  These low interest rates encouraged a debt fueled boom in the private sector (corporations and mortgage borrowers).  All of the cheap debt helped finance more and more imports by those countries, meanwhile, Germany became an export powerhouse selling much more to the rest of the world (including Southern Europe) than it was importing.  Germany then took all of that surplus cash from exports and lent it to Southern Europe to continue to finance the boom.  Also during the boom years, wages rose in the South while German Unions agreed to hold their wages steady.  This resulted in a huge disadvantage to Italian and Spanish companies, decreasing their competitiveness and making it much harder for Southern Europe to export than Germany. 

Fast forward to today; Spain and Italy are now facing nasty recessions because no one wants to spend.  Companies and mortgage borrowers are too busy paying back their debts to spend, exports are uncompetitive compared to their northern neighbors, and governments whose borrowing exploded along with the rest of the world’s in the 2008 credit crisis are now saddled with more debt than they can handle. 

All of this goes to explain the complicated issues that the Eurozone is facing.  While cutting spending seems like the obvious conclusion, there are consequences to this, such as deepening their current recessions.  While the other option, defaulting on the debt, leaves a whole different mess to clean up.  Meanwhile, investors all over the world wait and watch as Europe tries to solve a problem with no simple solution.

called Activities of Daily Living, such as getting dressed each day, bathing, going to the bathroom, fixing meals, eating, monitoring a medical condition, and moving from the bed or a chair to another room. When a person is healthy it is easy to take for granted these normal activities. However, when someone has a degenerative condition such as Alzheimer’s, Parkinson’s, or suffers a stroke, these sometimes become impossible without assistance from another person.

A study by the U.S. Department of Health and Human Services says that people who reach age 65 will have a 40% chance of entering a nursing home. While the average stay in a nursing home is about 3 years, 10% of the people who enter a nursing home will stay there five years or more. About 30% of the U.S. population over age 65 will never need long term care assistance.

While there are a variety of ways to pay for the cost of long term care, Medicare typically only covers short term, medically necessary skilled nursing facility after a minimum hospital stay. Since the Activities of Daily Living are considered “custodial care”, after the first 100 days Medicare does not pay for these services. Another option is to self insure which means using income from pensions, social security, and assets such as retirement and other savings to cover the costs of Long Term Care.

There are generally four types of Long Term Care costs and each depends on the state, county, city, and type of care desired:
• hourly coverage by a skilled aide in your home can range from $15 to over $35 per hour
• assisted living facility care which ranges from $2,800 to over $5,000 per month
• nursing home semi private room rate which starts around $100 per day to over $300 per day
• a private room in a nursing home starts at about $135 and can cost over $450 per day

The best time to start looking at long term care insurance is between 55 and 65 years old. The reason most people do not consider coverage is the premium cost.

“The single greatest misconception held by consumers is the actual cost of coverage,” explains Jesse Slome, AALTCI’s (American Association for Long Term Care Insurance) executive director. “Most people perceive the cost is actually quite a bit higher than the real amounts paid by large percentages of those purchasing coverage.”

The Association reveals that nearly one-in-five (19.4%) purchasers in the study who were under age 61 pay between $20 and $30 a week for new policies. Over one-fourth of buyers (28.9%) in this age band pay between $1,500 and $2,500 a year with the remainder paying more. Less than one-tenth of these buyers (6.8%) pay $4,000 or over.

As you spend some time thinking about your retirement planning, estate planning, and other issues surrounding your life after 65 years old, consider reviewing how you are going to protect against a long term medical need.

Consider the below chart which shows how the S&P 500 (the 500 largest publically traded companies in the U.S. as tracked by Standard & Poor’s) have performed over the last half century. After every headline-grabbing crisis, the market ultimately moved on to newer highs. It’s likely to do so again.

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The Federal Reserve engineered an explosion in the monetary base (not the money supply) in an effort to restore confidence in the banking system and stimulate an economic recovery. For this policy action to result in inflation, a crucial next step is required: that banks actually start lending this newly available cash to households and businesses. When banks start lending, money supply (M2) aggregates eventually increase.  This is exactly the Fed’s intention – to facilitate lending in order to stimulate spending. This is happening …. gradually. In August 2011, M2’s year-over-year growth rate was +9%, up from +3% one year earlier. M2 must grow at roughly the nominal rate of trend GDP growth, say +5%, in order to provide enough new liquidity to fuel economic growth without causing deflation.

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 The stock market’s P/E ratio is a function of inflation and earnings growth expectations. It’s important to remember that the market’s P/E ratio in the 1970s and 1980s was extraordinarily impacted by the inflation spiral that peaked in 1980-81. At 13 times trailing 12-month earnings, the current P/E ratio looks very reasonable by historic comparison.

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Your Estate can consist of some or all of the following: real estate, bank and investment accounts, life insurance policies, and personal property such as automobiles, jewelry, and artwork. It’s important to have a basic estate plan in place, regardless of your age or net worth, and the plan can be very simple, but without one, you or your family are subject to the laws of your State. A good plan would identify your family members and other loved ones that you wish to receive your assets at your death; name your Executor, the individual or institution that you wish to provide authority to make sure that the terms of your Will are carried out; potentially minimize the amount of taxes that will need to be paid at death; ensure that your assets will pass to others in a timely manner and with as little costs as possible, as well as naming someone to manage your health care and financial decisions should you become incapacitated for any reason. A basic plan includes a Will, Power of Attorney documents both for financial decisions and for medical decisions (sometimes referred to as Health Care Proxy), and a Living Will or Advanced Directive. In some cases, it might make sense for additional planning to create a Revocable Living Trust now, or creation of a Trust at your death.

Finally, it’s no secret that estate planning and conversations about “post-death” planning are not fun topics to discuss, but we encourage you to have these discussions with your spouse and/or your children. Keep documents and records in a safe place, and let a family member know where to locate them should there be an untimely death or illness. Additionally, take the time to write down account numbers for each account in your name, as well as real property or partnership interests. Write down the names and numbers of your trusted financial partners: CPA, Attorney and Financial Advisor, and update all accordingly. This will help ensure a smooth transition in addition to providing support for a grieving spouse or family members.

A Plan Sponsor wanting to limit its fiduciary liability must:  understand procedures for documentation, understand and comply with 404(c) requirements, educate participants, and follow a due diligence process.  Specifically, a compliant fiduciary must answer “yes” to the following questions.

1. Do you have a written investment policy statement?
2. Are the plan’s investments compared to its peer group over varying periods of time?
3. If participants are allowed to select their own investments, have they been giving the proper information and education?
4. Do the fiduciaries maintain a fiduciary file which includes minutes from regularly scheduled fiduciary meetings?

This list is just a sample and these questions and all issues relating to fiduciary responsibility should be covered in a complete plan review with a benefits consultant and/or retirement plan provider.

The aggregate EPS estimates for these 500 companies have actually increased during 2011 and are projected to end the year at $98.65. This means the S&P 500 Earnings (red line) should continue going up. The S&P 500 Index (black line) is already below the Earnings (red line), which is rare territory to begin with. Based on this data, the stock market is cheap – really cheap. Something has to give and soon. History tells us, and we would bet, that the earnings folks have it right and that it’s the market that’s mispriced / undervalued.

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This revelation left the investment community in shock and strained the bond of trust between many individual investors and their advisors around the country. Understandably, investors began to question their own advisor’s motives. If that many people could be fooled for that long, and for so much money, it begs the question; why couldn’t it happen to me? Because there are differences in the way that Madoff ran his business compared to Smith Anglin and legitimate investment advisors. The following are the three major differences and all of these should have been major red flags warning investors to be cautious.

Custody
An independent custodian such as Fidelity helps safeguard a firm’s assets and reports major activities performed by the advisory firm directly to clients. Who had custody of all of Madoffs client’s assets? It turns out he did. Madoff’s firm was a self clearing and self custody firm. What does this mean? It means that Madoff cleared all of his trades and housed all of his client’s money under his firm’s name. Without an independent overseer, Madoff was allowed to steal money and easily create false account statements about the “returns” investors were receiving. By contrast, Smith Anglin houses all of our clients’ assets at Fidelity, an independent firm and an extra layer of protection an investor should always require.

Too Good To Be True
It turns out listening to your Mother may occasionally be a wise idea. When she said “if it’s too good to be true than it probably is”, she hit it right on the nose. What Madoff was selling was quite frankly what our Mothers warned us about. The size and constituency of his returns were out of this world. In fact, if you plotted the yearly returns of his Fairfield Sentry Limited Fund on a graph, it resembles an almost perfectly straight ascending line since its inception in 1990. No money manager, no matter how big of a superstar, can avoid the inevitable misstep or downturn in the market. Even Warren Buffett who was nicknamed the “Oracle of Omaha” due to his amazing investment acumen, still shows losses from time to time due to investment miscues and market downturns. The remarkable consistency that Madoff was reporting in his returns of 20 plus years should have sent up a bright signal flare to any person invested with him, prompting further digging into how he was pulling it off and leads me to my next point.

Transparency
To start, Madoff did not allow online access to clients. The only way to view their accounts was through the paper statements he sent out, which apparently made very little sense, even to experienced investors. Unlike the majority of advisors, including Smith Anglin, where you have the option to be able to view your account online at any time you choose. Madoff was also extremely secretive about the process he used to create his terrific returns. If asked, Madoff said he used a “split-strike conversion strategy” a complicated options trade. If anyone pushed for more info, Madoff would then get upset and ask them to leave. He was even known to “fire” clients that got too pushy in investigating how their money was invested. He made it very clear to investors that he did not like questions regarding his strategy. Unlike Madoff, here at Smith Anglin, we are an open book. In fact, if you have a question about how your money is invested, we are delighted in the opportunity to help you understand and teach you how we are handling your investments. The fact that Madoff would not share with anyone, including people who had millions of dollars invested with him, how he produced the returns should have been a gigantic red flag.

Looking back, there were some huge warning signs hanging over every move Madoff made. While Madoff’s case did erode a great deal of trust in the financial community, you can see there are some major reasons why a firm such as Smith Anglin differs from a shady operation such as his. Still, you should be wary of any financial decision you enter into and in the end it’s good to trust, but still be cautious. In any decision, be informed enough about the details and your own personal finances to allow yourself a blip on the radar when something seems amiss and when it does, give us a call. We’ll be glad to help confirm or deny your suspicions.

Another advantage to having this link is for brokerage account deposits. Rather than writing a check and mailing to us for deposit, we can “pull” the money from your bank account to your brokerage account electronically. There is no risk of delayed or lost mail, and funds are credited to the account the same day.

Many clients don’t plan to take money out of their brokerage accounts. Ever. But occasionally the unexpected situation arises when traveling, due to health reasons, a sudden death, a major purchase or repair,  or natural disaster  and funds are needed.  Now. The EFT feature allows your advisor to respond to that need immediately.