MAY  2012

The Markets:   

Some important news just happened over the weekend which will be effecting the global markets in the near future.

On Sunday, voters went to the polls in France, Greece, and Germany and the results could have a major impact on world markets. French voters sent incumbent president Nicholas Sarkozy packing and, instead, elected Socialist Party candidate Francois Hollande. Hollande "has pledged to shift the burden of economic hardship onto the rich and to resolve the protracted euro sovereign-debt crisis by softening the current prescription of austerity," according to The Wall Street Journal. While his strategy is debatable, it will likely cause a rift with Germany and add uncertainty to recent eurozone agreements.

Greek voters also went to the polls and "delivered a stinging rejection of the two incumbent parties, with many people casting ballots for smaller, far-left and far-right parties," according to the The Wall Street Journal. This, too, will likely result in more political and economic uncertainty. And in Germany, incumbent Angela Merkel's party suffered some setbacks in state elections.

What's leading to all the angst in Europe? Here are three things:

1. Recession fears - 11 European countries have now experienced two consecutive quarters of economic contraction.
2. Unemployment fears - the unemployment rate across the eurozone is at a record high.
3. Business confidence fears - April's read on the manufacturing PMI for the eurozone - a measure of confidence among businesses - fell to the lowest since June 2009.

Sources: MarketWatch, The Guardian

The bottom line is citizens are voting for change, but "political realities will complicate even more what is an already delicate economic and financial outlook for Europe, the world's largest economic area," according to Mohamed El-Arian, CEO and Co-CIO of PIMCO

These elections show that the economic crisis that began in 2008 is still rippling throughout the world.

Did You Know?

As we move toward summer, we are once again reminded of the familiar market adage "Sell in May and go away," and the uncanny historical bias with which it is substantiated. Typically, conjecture doesn't mature into adage without basis in reality, and market seasonality is just such an example as it has an impressive trend in terms of magnitude, consistency and longevity. We've discussed seasonality many times over the years and as we enter another of those seasonally biased periods (May through October) we want to revisit the subject in this month's newsletter.

Years ago we began using the reference tool, Stock Trader's Almanac, published by Yale Hirsch, and for years this has been a fantastic source of information on the stock market, so we always order a number of copies for the office each year (If you would like a copy you can visit www.stocktradersalmanac.com). The premise of their "Market Seasonality" study is essentially that, historically speaking, the market performs far better during the November through April time period than it does from May through October. On its own, that isn't a particularly profound statement or a particularly bold assertion, but when we examine the magnitude with which this effect has been chronicled over the years it becomes a very significant underpinning indeed. Consider this, if you were to invest $10,000 in the Dow Jones on May 1st and sell it on October 31st each year since 1950, you have lost money over the last 62 years! Put another way, the entire growth of the Dow Industrials since 1950 has effectively come in the "good" six months of the year.

It is also interesting to note that on a compounded basis, a theoretical $10,000 initial investment in 1950 is actually now down during the May 1-October 31 period using data thru Oct. 31, 2011. On the other hand, in looking at the seasonally strong period between November 1 and April 30 each year, an identical $10,000 initial investment grew to $702,292 at an average annual rate of 7.10% on a compounded basis.

Again, this study is not the end-all for risk management, but the study is very interesting and does expose a bias within the market that many investors are not aware of.  Investors will want to keep a close eye on the market right now and be sure the game plan is in place to adapt to any potential changes.

Challenge Corner

Riddle:

I begin and end with the letter 'e'
Have eight letters, but just one letter within me.

answer at the bottom

Wine of the Month

Sipping Sauvignon Blanc in the Spring

If there ever was a perfect pairing between a wine and a season, it would be Sauvignon Blanc in the Spring. Like Spring, Sauvignon Blanc is crisp, lively and refreshing. It is the perfect afternoons treat after a morning of yard work. You can easily picture yourself enjoying a glass on a porch or on a picnic overlooking the fields.

Though Sauvignon Blanc is produced all over the world, one of our favorite bottles is produced in Napa Valley by St Supery. All of the fruit is harvested from their certified sustainable vineyard and it is simply gorgeous. The nose and palate include beautiful notes of grapefruit, lime and fresh cut hay. The wine is dry and crisp with perfect balance between the acidity and fruit. A mouth watering effort not to be missed!

So, go out and get yourself a bottle of the 2010 St Supery Sauvignon Blanc and sip your way through the Spring!

Courtesy of David from The Old Vine, Inc. www.theoldvine.com

answer to trivia : Envelope

Best regards,

Warwick Valley Financial Advisors

Your local resource for trusted financial guidance

Many of us spent our childhood years playing sports and games. An important part of our development was learning the rules. Once we understood the rules, we could develop creative strategies for winning. When the rules changed, our strategies needed to adapt. Estate planning is no different. Late in 2010, President Obama signed into law changes to estate and gift tax rules. If you haven’t already, it’s important to review the new rules and make adjustments to existing estate planning and gifting strategies. Here are a few of the changes that may affect your plans:

Estate Taxes Reinstated

In 2010, for a single year, there was no estate tax. During 2011 and 2012, the top estate tax rate will be 35%, and the estate tax exemption amount will be $5 million, as shown in the table below. In 2013, these temporary changes will end, and we may see a return to higher estate tax rates and lower exemption amounts.

Generation-Skipping Transfer Tax Repealed

Generation-Skipping Transfers (GST) allow one person to reassign ownership of assets to another person who is two or more generations younger. For example, a grandparent might transfer ownership of property, by gift or at death, to a grandchild. Historically, GSTs have been taxed at the highest estate tax rate. However, for 2010, the GST tax was temporarily repealed. As a result, gifts made to grandchildren during 2010 were assessed gift tax and not GST tax.

The GST tax returned in 2011 with the top rate at 35%. Executors of estates for those who died during 2010 chose between the estate tax rules for 2010 and those for 2011 by filing an estate tax return within nine months of the new law’s enactment.

Gift Tax Exemption Increased

The new law temporarily increases the lifetime gift tax exemption from $1 million to $5 million. For example, with proper planning, a married couple can gift up to $10 million to future generations completely free of gift, GST, or estate taxes through 2012. This creates an opportunity for tax-free transfers of wealth that has not existed before.

Estate Tax Exemptions Become Portable

In the past, estate tax exemptions that were not used were lost. The new law makes the $5 million exemption portable through 2012. In other words, an executor can preserve any portion of unused estate tax exemptions for the surviving spouse by filing an estate tax return. As the law is currently written, portability will disappear in 2013.

The new and temporary estate tax laws provide an opportunity to develop new plays for the 2011 and 2012 estate planning playbooks. If you would like to explore these opportunities, please call us at {Insert Phone Number}. We will be happy to work with you and your estate planning attorney.

 Warwick Valley Financial Advisors

 Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act.  There is no other route to success.”~Pablo Picasso, artist

The Markets: Year in Review

“Much Ado About Nothing” is one of Shakespeare’s famous comedies and, surprisingly, the title succinctly summarizes the U.S. stock market in 2011.

There was “much ado” during 2011 as we experienced one of the most volatile years on record. For example, regarding the S&P 500 index stocks, Bloomberg said, “Individual stocks were more volatile than in 2009 and 2010, with 55 losing more than 30 percent this year compared with a total of 13 in the prior two.”

On top of that, “Stocks swung at a daily rate of twice the 50-year average after the S&P 500 reached a three-year high in April.” After hitting that high in April, the S&P 500 then plunged 19 percent over the next five months. Continuing the whiplash, the market staged a remarkable comeback and that’s where the “about nothing” comes in to play.

By the time the final trades were placed on December 30, the S&P 500 ended the year exactly where it started – and we mean exactly! It started the year at 1,257.6 and it ended the year at 1,257.6. Yet, during that time, it moved up or down a total of 3,240 points when you sum the absolute daily changes on a closing basis, according to The Chart Store via Ritholtz.com. So, after all the volatility, after all the worrying, the market ended the year right where it began. Whew!

Despite the year ending in a push, here are 10 newsworthy items that hit the headlines.

1)  Europe reached crisis mode. Several European countries experienced severe budget problems including Greece and Italy while the dithering of European politicians kept markets on edge. The three main causes of the crisis were 1) excessive government spending leading to 2) excessive government debt coupled with 3) slow economic growth.  Source: Anthony Sanders, Professor of Real Estate Finance at George Mason University, December 15, 2011

2)  Interest rates continued to fall. The 10-year Treasury ended the year yielding below 2 percent and the 30-year yielded below 3 percent. On a total return basis, the 30-year Treasury jumped 35 percent in 2011, which is higher than every stock in the Dow Jones Industrial Average!  Sources: The Wall Street Journal; Barron’s

3)  The Middle East rose in protest. Mass protests swept the Middle East, governments were overthrown, and the political landscape was dramatically reshaped. The reverberations will last for years.  Source: The Economist

4)  Apple and Steve Jobs were everywhere. Apple was 90 days away from bankruptcy in the late 1990s, but through the magic of Steve Jobs, the company briefly became the world’s most valuable company in 2011 – surpassing Exxon! The iPhone was the #1 most searched term on Yahoo! for the year. And, yes, Steve Jobs passed away from cancer at the much too young age of 56.  Sources: Bloomberg; Yahoo! News

5)  Japan was rocked with a massive earthquake and tsunami. The devastating power of Mother Nature claimed more than 15,000 lives, shocked financial markets, and disrupted business around the world. The pain and scars of this tragedy will remain for many years.  Source: Bloomberg

6)      The U.S. credit rating got “dinged.” In August, Standard & Poor’s downgraded the AAA credit rating of the United States due to political bickering and unsustainable budget deficits. The stock market promptly fell yet, surprisingly, interest rates ended the year at extremely low levels.  Source: Bloomberg

7)  Gold kept its luster. Despite weakness at the end of the year, gold prices finished the year in positive territory for the 11th consecutive year. In times of uncertainty, investors have shown a preference for the yellow metal.  Source: The Economic Times

8)  Foreign stock markets took it on the chin. Unchanged in the U.S. looks good compared to China, which fell 22 percent; Hong Kong, down 20 percent; Brazil, down 18 percent; Germany, down 14.7 percent; and Britain, down 5.6 percent. There’s no place like home!  Sources: Associated Press via Yahoo! News; Bloomberg

9)  Burgers and banks were bookends. The best performing stock in the Dow Jones Industrial Average in 2011 was McDonald’s, which rose 31 percent. At the other extreme, Bank of America was the worst performer dropping 58 percent. Looks like a lot of people ordered an extra fry with that Big Mac. Source: Associated Press via Yahoo! News

10)  “Planking” became a worldwide phenomenon. Traced back to a 20-something Australian, planking involves lying face down on the ground with your arms at your side. The “trick” is to do it in unusual places or atop peculiar objects. The unrelated “fitness” version of planking also made headlines in 2011 when a 71-year-old Wisconsinite named Betty Lou Sweeney set a new Guinness World Record by holding an abdominal plank for an incredible 36 minutes and 58 seconds. What’s even more incredible is in 2009 she was “severely overweight and nearly died from complications from an infection that went septic and shut down her kidneys.” Two years later and 100 pounds lighter, she set the world record. Yes, there’s hope for all of us!  Source: Yahoo! News

Challenge Corner

Draw four straight lines that pass through the nine dots. Each line must start where the last one ended. Don’t lift your pencil off the page. (Hint: You need to think outside the box for this one.)

Wine of the Month:

I don’t know about you, but the cold sure makes me crave a Port. Port (Vinho Porto) is produced in the Duoro Valley in Portugal. It is a fortified red wine – meaning fermentation is arrested through the addition of a wine derived spirit such as brandy. The result is a red wine with both residual sugar and a higher level of alcohol. This is exactly what the doctor orders for a cold winter night!

The Niepoort Ruby Porto is a fabulous wine full of red cherry fruit and an ABV level of 20%. The Niepoort is very well integrated and surprising balanced for an inexpensive Porto. The wine has gorgeous ruby red color, a wonderfully vibrant nose and is simply delicious on the palate. Unlike vintage Porto, this wine is ready to drink today and will likely remain fresh for several years to come. You do not need to decant this wine as it is filtered before bottling.

Prepare yourself for the cold. Go out and find yourself a bottle of the Niepoort Ruby Porto and be prepared to enjoy it with friends in front of the fire.

Courtesy of David from The Old Vine, Inc. www.theoldvine.com

December 2011

“The pessimist complains about the wind; the optimist expects it to change;  the realist adjusts the sails.”     – William Arthur Ward

The Markets

Politicians may struggle to work together, but at least the world’s central bankers can.

At 8:00 a.m. EST on November 30, the Federal Reserve released a statement that sent worldwide financial markets skyrocketing. Here’s the first paragraph of the statement:

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.

The U.S. Federal Reserve went on to say that should liquidity conditions continue to deteriorate, it has “a range of tools available” and “is prepared to use these tools as needed.” For many investors, this move meant world central banks “get it” and are ready to pull out “the big guns” to keep the worldwide economy from grinding to a halt.

Investors rejoiced and, by the end of the day, stocks had soared as the Dow Jones Industrial Average rose 4.2 percent, according to The Wall Street Journal.

While the central banks’ moves were welcome, they don’t solve the economy’s underlying problem. Certain European countries (and the U.S., too) suffer from too much debt and too little growth. The banks’ moves were akin to taking ibuprofen — they mask the pain, but don’t provide a cure.

The cure likely won’t happen until European politicians agree on a credible and enforceable, “long-term regime of fiscal discipline,” according to The Wall Street Journal. While European leaders meet frequently to discuss policy solutions, they unfortunately suffer from the old truism, “When it’s all said and done, a lot more gets said than gets done.”

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

WHO WANTS TO BE A BILLIONAIRE? Ever wonder how billionaires got to that level? Here are 10 success tips shared by four billionaires on a recent episode of the news show “20/20:”

1. Figure out what you’re so passionate about that you’d be happy doing it for 10 years, even if you never made any money from it. That’s what you should be doing.
2. Always be true to yourself.
3. Figure out what your values are and live by them, in business and in life.
4. Rather than focus on work-life separation, focus on work-life integration.
5. Don’t network. Focus on building real relationships and friendships where the relationship itself is its own reward, instead of trying to get something out of the relationship to benefit your business or yourself.
6. Remember to maximize for happiness, not money or status.
7. Get ready for rejection.
8. Success unshared is failure. Give back — share your wealth.
9. The truth is cold and hard, but it’s the first point on the path to hope and salvation.
10. Successful people do all the things unsuccessful people don’t want to do.

Even if you’re not focused on becoming a billionaire, these are some pretty good tips to live by. Which ones resonate with you?

Weekly Focus – Fun With Math

It’s been said that compound interest is the eighth wonder of the world. Compound interest simply means that you get “interest on your interest” instead of just interest on your original principal. Here are a couple math questions that display the power of compounding.

A typical piece of copy paper is 0.004 inches thick. If you were able to fold this piece of paper in half everyday for 10 days (i.e., double the thickness each day), how thick would your paper be after 10 days?

Taking this a step further, how many times would you have to fold your paper in half in order for your piece of paper to be as thick as the average distance between the earth and the moon? Here’s a hint: the average distance between the earth and moon is 238,857 miles.

Are you ready for the answers? After 10 days, your paper would be 4.1 inches thick. And, to reach the moon, you’d have to fold your paper in half each day for just 42 days. Surprised?

The power of compounding also makes a good case for reinvesting your dividends so you can get a “return on your return.”

Best regards,

Warwick Valley Financial Advisors

Monthly Commentary
November 2011

The Markets

After 14 summits in 21 months, have European leaders finally solved their sovereign debt problem? Judging by the stock market’s reaction, you might think the answer is yes.

In marathon sessions last week, European leaders agreed on a new, three-point deal to stave off a deeper debt crisis. The deal includes:

1)        A commitment by banks and other private bondholders to accept a voluntary 50% writedown on Greek government debt.

2)        A boost in the lending power of the euro-zone bailout fund.

3)        A 106 billion euro ($148 billion) recapitalization of European banks.

With Europe’s debt crisis tempered for the moment, attention now turns to the U.S. On the positive side, the U.S. economy grew at a 2.5 percent clip in the third quarter, which was the fastest pace in a year. In addition, third-quarter earnings are still coming in strong as about 75 percent of the companies reporting so far have beaten expectations, according to Bloomberg.

Looming on the horizon, the congressional supercommittee has about one month left before making its recommendations on how to cut at least $1.2 trillion from the federal budget. If the supercommittee fails, then across the board budget cuts of a like amount would ensue.

As of last week, investors were happy to breathe a sigh of relief that Europe seems to have dodged a disaster (at least for now) and the U.S. economy still has some life.

THE WEATHER AND THE STOCK MARKET HAVE A LOT IN COMMON – they’re both very unpredictable! This past weekend, the Northeast got walloped by a surprisingly strong snowstorm that dumped as much as two feet of snow in parts of Massachusetts . Central Park in New York City even set an October record with 1.3 inches of snow. And, this all happened before Halloween!

Likewise, the stock market has a habit of surprising investors with its ability to rise or fall dramatically in short periods of time. For example, remember the “Flash Crash?” On May 6, 2010, the U.S. stock market plunged for no apparent reason and briefly erased $862 billion from stock values in less than 20 minutes, according to Bloomberg. It then quickly rebounded.

As it relates to weather, we always know what season we’re in. One look at the calendar tells us whether its winter, spring, summer, or fall. And, depending on where you live, you have a pretty good idea – based on history – of what to expect for each day’s temperature. But, just like the Northeast experienced, you can have an “out of season” experience that messes up your best-laid plans.

The stock market doesn’t have four seasons, but it does have bull and bear markets, which are further divided into secular and cyclical. Market analysts have some general criteria that they use to categorize the markets into these buckets. Yet, like the weather, you could be in a bull market, but still have a nasty market drop that temporarily derails the path of the bull.

Bottom line, just like weather forecasters, market analysts may have a sense for general conditions in the market, but surprises still happen.

Challenge Corner

Perform the calculation below as fast as you can, and using only mental arithmetic (so without pen and paper, or a calculator!).

Take 1000 and add 40.

Add 1000.

Add 30 and then add 1000.

Add 20.

Add 1000 and then add 10

What is the result of this calculation?  (answer at the bottom)

Find a Fleurie for Thanksgiving

Thanksgiving is perhaps the warmest holiday of the year. It is a time for family to gather and give thanks for the “harvest” of the past year. It is also a time to feast on wonderful dishes brought to the table by many different family members. Tradition of course requires turkey, sweet potatoes and cranberry sauce; however we also see exotic stuffing, baked potatoes, vegetables and so many different desserts. How do you pair a wine with such a diverse menu? Tradition calls for Beaujolais!

Beaujolais is actually a region in Burgundy, France that produces a fresh red wine from the Gamay grape. However, not all Beaujolais wine is alike. There is Beaujolais Nouveau, standard Beaujolais, Beaujolais Superior and then there are the ten “Cru” level Beaujolais wines. Fleurie is perhaps one of the most famous of the Crus, producing wines of concentration, complexity and age worthiness. These wines exhibit the beautiful fruit of Gamay, the grace of a red Burgundy and the structure of a fine Bordeaux. Simply stated, Fleurie is a dignified choice for the Thanksgiving dinner table.

A personal favorite of The Old Vine is the 2010 Clos de La Roilette. This is a Fleurie that will not disappoint. The wine is concentrated with dark berry flavors which will complement turkey and cranberry sauce. The leathery tobacco notes will prepare the palate for the endless waves of diverse flavors that we have all come to love on Thanksgiving. Bring home a fine Fleurie this year; the 2010 Clos de La Roilette!

Monthly Commentary

October 2011

 The Markets

The word “volatile” has been so overused in the media, but it’s hard to find a better way to describe recent movements in the financial markets. On any given day, the markets can rise or fall based on the latest thinking about euro-zone sovereign debt problems, a possible U.S. or Chinese recession, weak banks, inflation, deflation, or poor job numbers.

So,  Is the market sniffing out a new recession? Possibly. Last week, the respected Economic Cycle Research Institute was quoted in MarketWatch as saying, “The U.S. economy is headed for another recession that government intervention cannot prevent.”

The financial media often takes on a “sky is falling” mentality when it comes to recession. But the bottom line is that recession is a normal part of the business cycle.

To be a successful Investor, you simply have to have a the discipline to step away from the crowd and shift away from risky, high-returning investments during times of extreme optimism, wait out the oncoming storm, and have an equal discipline to embrace risk at a time when people are shying away from it to get ahead of the cycle.

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” -Warren Buffett

Advance and Protect Update:

As most our clients know, Warwick Valley Financial Advisors employs a very discipled Advance and Protect strategy in Our Model Portfolios. With the help of quantitative computer modeling, Our models went into protection mode and advised us to raise cash earlier this year and have not signaled that a sustainable bottom has been formed yet, so we continue to play defense at the present time.

Did You Know?

Last Day for TAXES—October 17, 2011 **The traditional tax return extension filing deadline is October 15 of each year, but the IRS has approved October 17, 2011 as the tax filing deadline for 2010 Tax Returns with extensions because October 15 falls on a Saturday in 2011.  It also is the final deadline to fund a SEP-IRA or solo 401(k) for tax year 2010 if you requested an automatic extension of time to file.

Challenge Corner

Timothy’s tie rack boasts 17 blue ties, 11 yellow, 9 orange, 34 green, and 2 violet, not sorted by color. The light bulb has burned out, Timothy cannot see what color the ties are. How many ties does Timothy have to take to be sure he has at least two ties of the same color?

Wine of the Month

We all know that Oktoberfest is a grand beer festival held annually in cities all around the world. This grand event started in Munich, Germany as a celebration of the marriage between Crown Prince Ludwig and Princess Therese of Saxony-Hildburghausen. Facts aside, it is a huge festival of food and drink that kicks off the fall season. But why limit your fun to beer? Go out and get yourself a fine bottle of German Riesling – the 2010 St. Urbans-Hof Bockstein Kabinett.

St. Urbans-Hof is an award winning producer of fine wines from the beautiful Mosel region in Germany. Their 2010 Bockstein Kabinett is an off dry wine that has a wonderful level of acidity matched by the sweet flavors of peach, apricot and lime. This mouthwatering wine pairs perfectly with classic German foods such as pork roasts, grilled bratwurst, apple sausage, baked ham, and roasted chicken with caramelized onions. It is also a wonderful match with spicy Asian foods such as Thai cuisine, Chinese style dishes and even Sushi.

Find yourself a bottle of the 2010 St Urbans-Hof Bockstein Kabinett Riesling and let’s all celebrate Oktoberfest!        Courtesy of David from The Old Vine, Inc. www.theoldvine.com

Best regards,

Warwick Valley Financial Advisors

Your local resource for trusted financial guidance

**CHALLENGE CORNER ANSWER : SIX

The last time America experienced a financial crisis of the magnitude of the present one was in the Great Depression era, for about ten years from 1929. During that volatile time in the stock market, there were six complete bear and bull cycles. As history tends to repeat itself, you might be interested to know what happened to the S&P 500 over that time.

If you are a glass-half-full kind of person, you will look to the Bull periods of the Great Depression where the gains were as follows: (1) 148 days/+46.8% (2) 98 days/+111.6% (3) 344 days/+113.7% (4) 723 days/+106.9% (5) 223 days/+62.2% (6) 200 days/+29.8%.

On the other hand, the duration and magnitude of the six phases of the Bear period were: (1) 783 days/-83.0% (2) 173 days/-40.6% (3) 401 days/-31.8% (4) 390 days/-49.0% (5) 150 days/-26.2% (6) 916 days/-43.5%.

At the beginning, on 11/13/29, the S&P was at 17.66. At the end, on 10/25/1939, it was 13.21, a loss of -25.2%.

On average, the Bear periods lasted 469 days with a loss of -45.7%, and the Bull periods lasted 289 days with a gain of +78.5%.

The bottom line is that through the 1930’s, while there were six Bull runs averaging +78.5%, most investors lost immense wealth.

Are we currently repeating a similar cycle? If so you may want to re think the buy and hold approach that most advisors recommend.

September 2011

“Bear Market threatens double dip recession”

Two four-letter words — “debt” and “jobs” — are hanging over the economy like a noose that keeps tightening.

This is not news; we’ve known for several years that debt is too high and jobs too scarce. Unfortunately, they’ve become intractable problems with no solution in sight.

Last week, the government reported the U.S. economy had a net gain of zero new jobs in August. On top of that, the unemployment rate remained stuck at a disappointingly high 9.1 percent and the number of unemployed people rose to 14 million — including more than 6 million workers who have been out of work for 27 weeks or longer, according to MarketWatch.

With jobs hard to come by, consumer confidence is suffering, too. The Conference Board reported its consumer-confidence index for August fell to the lowest level since April 2009, according to MarketWatch.

The weak economy and uncertain outlook have led to a dramatic decline in interest rates. The yield on the 10-year Treasury dropped to 2.0 percent last week and the 30-year Treasury yielded just 3.3 percent, according to Bloomberg. This decline in longer-term interest rates is, “a sign of heightened fears about a recession in the U.S. and more actions from the Fed,” according to The Wall Street Journal.

When you put the pieces of the economic puzzle together, it starts to paint a picture that a new recession may be looming. While we’re not in the business of making projections like that, we do monitor the economy and, right now, it’s sending unsettling signals.

Whether a new recession is coming or not, we continue to do our job of helping you reach your financial goals regardless of what the market and economy may put in our way.

The origin of the Expressions “bull” and “bear.”

Bull [n] (bûl) An investor with an optimistic market outlook.

Bear [n] (bâr) An investor with a pessimistic market outlook.

Where do the terms “bull market” and “bear market” come from? One common myth is that the terms “bull market” and “bear market” are derived from the way those animals attack a foe, because bears attack by swiping their paws downward and bulls toss their horns upward. While this may sound like a logical explanation, it is not the true origin of the terms.

The symbol of “The Bear” is thought to have originated in a proverb that goes along the lines of, “Don’t sell the bearskin before you’ve caught the bear.” Long ago, bear skin jobbers were known for selling bear skins that they did not own; i.e., the bears had not yet been caught. This term eventually was used to describe short sellers, speculators who sold shares that they did not own, hoping for a drop in the price of the shares, and then delivered the shares at a profit.

Because baiting bulls and bears to fight one another was once a popular sport in England, the two types of animals eventually came to be seen as opposites.

In the late 1800s, editorial cartoonist Thomas Nast, who also gave us the modern depictions of Santa Claus and Uncle Sam, helped cement this perception by popularizing the bull and bear as symbols for U.S. stock market movement.

If LEAH is LOUIS’s sister,  CLARISSE is BRUNO’s sister,

if MAUD is CHRISTOPHER’s sister,  then who is HAMILTON’s sister?

IRENE, CLAIRE, SUE or PEGGY?   Scroll down to bottom of this post for the answer!

———————

WINE OF THE MONTH

A Wine for the Changing Season

As summer starts to wind down and the weather cools, our cravings for red wines begin to grow. The evenings are upon us earlier and the nights are starting to bring a familiar chill. What better time do you know of to grill some steaks and pop the cork on an easy drinking yet full bodied red?   Chateau St. Michelle 2008  Indian Wells is the perfect wine for the season and a perfect wine for the occasion.

Chateau St. Michelle is a fairly well known and a highly rated wine producer in Columbia Valley in Washington State. The Indian Wells line is produced from their select vineyards in the famous Wahluke Slope district. This delicious wine is soft, yet juicy, with concentrated black and blue berry fruit. The fruit flavors are complemented by wonderful oak treatment which adds a touch of spice and a fine leathery grip. This is a gorgeous wine from the stellar 2008 vintage. It will match perfectly with grilled meats and seasoned poultry.

This 90+ point wine will over deliver for the modest price range $16.95.

This wine of the month is from David, a WSET Certified wine consultant and the owner of The Old Vine, Inc. in Florida, NY.   www.theoldvine.com

———————

Best Regards,

Warwick Valley Financial Advisors

**CHALLENGE CORNER ANSWER:   SUE,  each name pair contains A,E,I,O,U vowels.

Welcome to the WVFA Blog.  Please subscribe to our blog to receive useful and timely information about the financial markets.

November 5, 2010

Remember Daylight Savings!

It’s that time of the year when you turn clocks back 1 hour. Daylight Saving Time ends Sunday November 7, 2010 ends at 2 a.m. This mean the daylight will begin earlier in the morning when clocks fall back and the sun will set earlier. It’s also a good time to check the batteries in your smoke and carbon monoxide detectors. Also check the clocks in your computers, DVD players and microwaves in case they don’t automatically adjust the time.

THE MARKETS

What do you think the inflation rate will average in the United States over the next 5 years?

Before you answer that question, here is some additional information to consider. During the peak of the financial crisis back in late 2008, investors were predicting that prices would decline by a small fraction of 1% for 10 years, i.e., we would have 10 years of deflation, according to a January 29, 2009 Bloomberg article.

To determine what investors expect inflation to average in the future, we simply calculate the difference in yield between Treasury Inflation Protected Securities (TIPS) and a similar maturity U.S. Treasury security. For example, if the yield on a 10-year Treasury was 2.6% and the yield on a 10-year TIPS was 0.6%, then that suggests investors expect inflation to average 2.0% over the next 10 years. This difference of 2.0% is called the “breakeven rate.”

Unlike a regular Treasury security, the principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, investors are paid the adjusted principal or original principal, whichever is greater, according to the Treasury Department. Hence, TIPS are considered a hedge against inflation, according to The Wall Street Journal.

Okay, do you have your 5-year inflation rate guess now? Unlike late 2008, investors now expect inflation to average 1.59% over the next 5 years, according to an October 25 Wall Street Journal article. For historical reference, inflation has averaged 3.0% per annum compounded annually from the beginning of 1926 to the end of 2008. On a 5-year basis, it averaged a high of 10.1% per annum compounded annually for the 5 years ending December 31, 1981 according to the Ibbotson SBBI 2009 Classic Yearbook.

By historical standards, the expected 5-year inflation rate of 1.59% is low. However, the Federal Reserve is doing what it can to stoke inflation in an attempt to prevent deflation and as a way to pay down our federal debt using “cheaper” dollars.

14% Yields on U.S. Treasury bonds?

Would you like to buy a 30-year U.S. Treasury bond that yields 14% and matures in 30 years? Believe it or not, that’s what the government was offering you back in November 1981, according to Morningstar.

It didn’t last, though, because that marked the end of a 40-year bear market in bonds that started in 1941. The ending of that bear ushered in a bull market in bonds that some say exists to this day — some 29 years later.

Since 1941, we’ve essentially made a round trip in interest rates. The yield on the 10-year note went from 2.0% in 1941 to 14.0% in November 1981 (the bear market) and back down to 2.1% in December 2008 (the bull market), according to Federal Reserve data. As of last week, the yield had risen to 2.6%. If we’ve seen the low in the yield, then December of 2008 may have been the beginning of a new bear market in bonds.

Notice how the bond market has traveled in a very long cycle. It was in a 40-year bear market and then flipped into a 29-year bull market that may or may not be over yet. Not coincidentally, that 29-year bull market in bonds overlapped significantly with a major bull market in stocks.

So, in addition to the day-to-day noise and the year-to-year fluctuations, investments, such as bonds and stocks, tend to bob up and down within a sweeping arc of bull or bear markets. Accurately knowing where you stand within one of these sweeping arcs is one key to successful long-term investing.

Right now investors have to ask which way do they think bond yield are more likely to swing, lower or back up to where they were in the 1980’s.

Nearing Retirement? Financial Advice Is Critical

Retirement planning has become an uncertain—and much more stressful—exercise for most Americans. Millions of workers watched their retirement nest eggs decline sharply in value in recent years, and “safe” investments such as money market investments and CDs have continued to offer relatively low short-term interest rates since then. Aside from current market uncertainties, there are other more constant issues to consider, such as inflation and taxes.

Investors planning for retirement need to begin addressing some important questions well in advance of their actual retirement date: How much will retirement cost? How will I pay for it? How much can I spend each year and not run out of money? Can I plan for retirement while also meeting other financial goals, such as educating children and paying off debt?

While it may be necessary to adjust your financial expectations for retirement or even postpone your retirement date, you can still achieve retirement security. But to do so, you’ll want to engage the services of a financial planning expert. Once retained only by the wealthy, financial advisors now assist all types of investors in making decisions about retirement. In fact, perhaps one of the most common reasons for people to begin financial planning is to build a retirement fund.

Countdown to Retirement
Have you begun your countdown to retirement? If so, a financial advisor can help you make a successful transition to the next stage of your financial life. Following are some critical areas to address with your advisor a few years before you expect to retire.

• Determine what retirement will cost. Many people enter retirement without the slightest clue as to what they want to do with their time or whether they have enough money to do it. Will you continue to work part time? Travel? Maintain a second residence? Make improvements to your existing home? Be sure you plan how you’ll spend your time because that decision will have a direct impact on how much retirement will cost you.

• Assess your sources of retirement income. Estimate the income and savings you can rely on during retirement. How much will you receive from Social Security, a company pension, a 401(k) plan, or other employee-sponsored retirement accounts? Contact the Social Security Administration at www.ssa.gov and/or your employer’s retirement benefits representatives to obtain a report listing the estimated income from these sources. In addition, you’ll want to confirm amounts in other accounts. Do you have retirement assets accumulating in an IRA or a taxable investment account? If your anticipated income does not equal or exceed your projected expenses, develop a plan to bring these two into alignment.

• Arrive at a spending limit. Once you have a handle on expected income and expenses, calculate how much you can withdraw from your accounts each year without spending down your principal. Your advisor can create various withdrawal scenarios based on forecasted investment returns, inflation expectations and other practical financial planning considerations.

Accounting for Uncertainty
In the past, calculating annual withdrawal amounts was done by means of simple spreadsheet analysis. A planner would use historical performance averages to project future portfolio values and automatic calculations for variables such as inflation and life expectancy. The problem with such an approach is that the lack of flexibility in the calculations makes it difficult to account for year-by-year variations in outcomes or any unexpected changes in an individual’s life or lifestyle that can affect underlying assumptions.

Fast forward to the present where sophisticated computer forecasting models, such as the Monte Carlo simulation, have become the preferred tools for dealing with the uncertainty around retirement planning. When used in investment decision making, a Monte Carlo simulation forecasts how a portfolio is likely to perform under thousands of possible scenarios based on a combination of parameters such as life expectancy, interest rates, equity returns and inflation. The simulation is typically modeled around a specific problem (e.g., How much can I accumulate for retirement?). Results are recorded and ordered according to which scenario is most likely to meet the investor’s retirement goals.

With more attention being paid to retirement planning, forecasting tools based on the Monte Carlo simulation have enjoyed a renewed popularity in investment analysis. In an uncertain world, such tools can help provide peace of mind to investors by addressing some of the toughest retirement planning challenges. But remember, any forecasting tool, no matter how sophisticated, cannot predict the future. What’s more, forecasts are hypothetical, do not reflect actual investment results and are not guarantees of future performance. For this reason, you should think of forecasts as a starting point for discussion with your advisor, not as your ultimate planning solution.*

Picture an arrow in flight that is moving toward a target. For the arrow to reach the target, the arrow must first travel half of the overall distance from the starting point to the target. Next, the arrow must travel half of the remaining distance and then half of that remaining distance and so on.

For example, if the starting distance was 10 yards, the arrow first travels 5 yards, then 2.5 yards, then 1.25 yards, and so on. By extending this further, you can imagine the resulting distances getting smaller and smaller.

Here’s the question: Will the arrow ever reach the target? Click here for the answer.