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February 2010 Economic/Market Outlook Seminar

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February 24, 2010, presentation

February 24, 2010, presentation


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  • 1. Bread & Circuses February 2010 Investment Management & Trust Services Tower Private Advisors
  • 2. Bread & Circuses •Roman poet Juvenal around 100 AD •Roman politicians devised a plan to win the votes of the poor by giving out cheap food and entertainment. •Politicians decided that this policy “bread and circuses” would be the most effective way to rise to power. •To many it connotes the decadence and hedonism that defined the Roman Empire prior to its decline. •Spanish intellectuals between the 19th and 20th centuries complained about similar “bread and bullfights”.
  • 3. Tim Frey Vice President Portfolio Manager Investment Management & Trust Services Tower Private Advisors
  • 4. Market Outlook 2010 • Economy is recovering – Global economies are healing – Strength of recovery varies, by country and industry sector – Rally has been technical in nature - coming off lows in march-and Gov’t stimulated – Focus now will be more on fundamentals - forward earnings • Key question is sustainability – Normally (historically) need about 5 preconditions for a sustained recovery – Massive monetary & fiscal policy response, inventory replacement, financial stability, stabilization and improvement in consumer sentiment, and job growth
  • 5. Recent clouds over markets to abate • China slowing lending and increasing reserve requirements • Sovereign debt crisis – PIGS • Eurozone vs Dollar The real problem is staring us in the face (USA) • Vast majority of states running deficits • 40% are being fed currently by stimulus $$$ • Unfunded pension liabilities - $2 trillion • Another $1 trillion shortfall for health / retirement / plan assets • The elections in 2010 won’t focus much on this – 37 governor seats up for grabs! • More tax increases will be coming!
  • 6. Other Negatives • Banks aren’t lending or we aren’t borrowing- banks have $1 trillion in excess reserves (15x normal) • Mortgages will be a problem for at least 10-12 months. Applications at a 12 yr low - housing starts are flat • Foreclosures may rise (as many as 3 million) as resets and loan modification programs fail Positives • Earnings picking up, companies more productive • Industrial production was stronger in Jan, inventories slowly rising • Capital spending is on the rise (3.5% in 2010-mostly on IT) • Hiring should pick up in 2010 – 62% of S&P 500 say yes! • More stimulus coming
  • 7. What does all this mean in a secular bear market? Daily Data 1/14/2000 - 2/12/2010 (Log Scale) Cyclical Bull and Bear Markets within current Secular Bear Market Cyclical Bull Markets 29.1% 94.4% 54.3% 14399 14399 14063 Dow Jones Industrial Average 14063 13735 13735 13415 13415 13102 13102 12797 12797 12498 12498 12207 12207 11922 11922 11644 11644 11373 11373 11108 11108 10849 10849 10596 10596 10348 10348 10107 10107 9872 9872 9641 9641 9417 9417 9197 9197 8982 8982 8773 8568 You can still make money 8773 8568 8369 8369 8174 in a sideway market! 8174 7983 7983 7797 7797 7615 7615 7437 7437 7264 7264 7095 7095 6929 6929 6768 6768 6610 Total Change Over Secular Bear: -13.9% 6610 6456 Detailed Statistics for each Cyclical Market 6456 -29.7% -31.5% -53.8% Cyclical Bear Markets (Shaded) M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D (S0203D) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  • 8. Cyclical Bulls - Secular Bear Markets (1900-2009) • 18 cases historically with an average 64% gain over a mean length of 508 days • Current cyclical rally since March 09-up 49% and has lasted 350 days • There may be more left in 2010! Note: Secular Bear - flat or declining stock prices over a long time --- have averaged about 15 years from 1900 - 1999 Cyclical Bull - 30% rise in 50 days or 13% after 155 days
  • 9. GDP- Can we get to and sustain 3-4% growth? Quarterly Data 3/31/1960 - 12/31/2009 (Log Scale) Standard & Poor's 500 Quarterly Close 1397 S&P 500 Gain/Annum When: 1397 1172 (3/31/1960 - 12/31/2009) 1172 984 984 Y/Y Change of Gain/ % 826 Real GDP Is: Annum of Time 826 693 693 Above 6 -4. 6 10. 5 581 581 Between 0.5 and 6 7. 1 76. 4 488 488 * 0.5 and Below 10. 1 13. 1 409 409 344 344 288 288 242 242 203 203 170 170 143 143 120 101 3Qtr GDP 2.2% 120 101 85 71 4Qtr GDP 5.7% 85 71 60 60 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 9 9 12/31/2009 = 0.1% 8 8 7 7 Very Strong Economic Growth 6 6 5 5 4 4 3 3 2 2 1 1 0 0 Very Weak Economic Growth -1 -1 -2 -2 -3 -3 (S687) Year-to-Year Change of Real GDP ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  • 10. Inflation is in check for now Monthly Data 1/31/1950 - 12/31/2009 CPI vs CPI Less Food & Energy Inflation 14.5 14.5 14.0 14.0 13.5 13.5 13.0 Year-to-Year Changes 13.0 12.5 12.5 12.0 12.0 11.5 11.5 11.0 CPI Less Food & Energy Index 11.0 10.5 (Core Inflation) 10.5 12/31/2009 = 1.8% 10.0 ( ) 10.0 9.5 9.5 9.0 9.0 8.5 CPI Index 8.5 8.0 12/31/2009 = 2.7% 8.0 7.5 ( ) 7.5 7.0 7.0 6.5 6.5 6.0 Don’t worry – yet! 6.0 5.5 5.5 5.0 5.0 4.5 4.5 4.0 4.0 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 -0.5 Shaded areas represent -0.5 -1.0 National Bureau of -1.0 Economic Research recessions. -1.5 -1.5 (E706) 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  • 11. We are rebuilding inventories Monthly Data 1/31/1948 - 1/31/2010 ISM Manufacturing Index (PMI) 78 78 77 77 76 76 75 74 Need to get above 50 Shaded areas represent 75 74 73 National Bureau of 73 72 72 Economic Research recessions 71 71 70 70 69 69 68 67 Need to keep momentum going 68 67 66 66 65 65 64 64 63 63 62 62 61 61 60 60 59 59 58 58 57 57 56 56 55 55 54 54 53 53 52 52 51 51 50 50 49 49 48 48 47 47 46 46 45 45 44 44 43 43 42 42 41 41 40 40 39 39 38 38 37 37 36 36 35 35 34 34 33 33 32 32 31 1/31/2010 = 58.4 31 30 Source: Institute for Supply Management, ISM Report on Business Excerpt from E0225A 30 (TNT0908H) 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  • 12. There is plenty of room to grow Monthly Data 6/30/1961 - 12/31/2009 (Log Scale) The Economy (The Index of Coincident Economic Indicators) 109 109 Correct Signals: 77% 100 Expansion Mode GPA: 2.7% 100 91 Contraction Mode GPA: -1.4% 91 Buy-Hold Gain/Annum: 1.9% 84 84 Signal Dates: 1/31/1970 - 11/30/2009 77 77 71 71 65 65 60 60 55 55 Latest data point repeated for signal purposes 50 50 46 46 42 42 39 39 Signals Generated When Capacity Utilization: 36 36 Rises by 2.1% = Expansion 33 Source: The Conference Board Falls by 4.8% = Contraction 33 1965 1970 1975 1980 1985 1990 1995 2000 2005 93 12/31/2009 = 72.0% 93 92 92 91 91 90 Falling = Economy Slowing Full Capacity 90 89 89 88 87 86 Need to get above 80 again Overbought 88 87 86 85 85 84 84 83 83 82 82 81 81 80 80 79 79 78 78.7 78 77.9 77.8 77 77 76 76 75 75 74 Surplus Capacity 74 74.1 Rising = 73 73.5 73 72 Economy Accelerating Oversold 72 71 Shaded areas represent 71 70.9 National Bureau of 70 70 69 Economic Research recessions. 69 68.3 (E230) Capacity Utilization ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  • 13. Consumer sentiment has improved Monthly Data 12/31/1953 - 7/31/2010 Real GDP vs Consumer Sentiment (Smoothed Year-to-Year Changes) 46 9.6 44 Latest Consumer Sentiment Reading 9.2 42 Corresponds to 5.9% Real GDP Growth 8.8 40 38 Real GDP 8.4 36 Scale Right 8.0 34 ( ) 7.6 32 7.2 30 Correlation Coefficient = 0.54 6.8 28 6.4 26 24 6.0 22 5.6 20 5.2 18 4.8 16 4.4 14 12 4.0 10 3.6 8 3.2 6 2.8 4 2.4 2 0 2.0 -2 1.6 -4 1.2 -6 0.8 -8 0.4 -10 -12 0.0 -14 -0.4 -16 -0.8 -18 -1.2 -20 -1.6 -22 -24 -2.0 -26 -2.4 Reuters/University of Michigan -28 Consumer Sentiment Index -2.8 -30 (Moved Ahead Five Months) -3.2 -32 Scale Left Reuters/University of Michigan Source: -3.6 -34 ( ) Surveys of Consumers (E0815) 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  • 14. Consumer has retrenched Quarterly Data 3/31/1980 - 9/30/2009 Household Debt Service and Financial Obligations Ratios 18.9 18.86 18.9 18.6 Financial Obligations Ratio 18.6 18.3 9/30/2009 = 17.76% 18.3 17.98 18.0 18.0 17.7 17.7 17.4 17.4 17.1 17.1 16.8 16.8 16.5 Includes vehicle leases, rent, 16.5 16.2 insurance, property taxes 16.2 15.9 16.05 15.9 15.6 15.6 15.45 Renter Financial Obligations Ratio Homeowner Financial Obligations Ratio 30 17 9/30/2009 = 24.50% 9/30/2009 = 16.36% 29 Scale Left Scale Right ( ) ( ) 28 16 27 26 15 25 24 14 23 13.91 13.8 13.8 13.5 Debt Service Ratio Minimum Debt Service Payment 13.5 13.2 9/30/2009 = 12.85% on Mortgage Debt and Consumer Credit 13.2 12.9 as a % of Disposable Personal Income 12.9 12.6 12.6 12.38 12.3 Mean = 12.07% 12.3 12.0 12.0 11.7 11.7 11.4 11.1 Would like below 12 % 11.4 11.1 10.8 10.8 10.73 10.60 (E0509) 1980 1985 1990 1995 2000 2005 ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  • 15. Need to create jobs! Unemployment is too high! Monthly Data 1/31/1948 - 12/31/2009 (Log Scale) Barclays Capital Long-Term Treasury Bond Price Index 2324 2324 2200 2200 2082 2082 1971 1971 1866 1866 1766 1766 1672 1672 1583 1583 1498 1498 1418 1418 1343 1343 1271 1271 Long-Term Tsy Bonds Gain/Annum When: 1203 1203 1139 Unemployment Gain/ % 1139 Rate Is: Annum of Time 1078 1078 1021 * Above 6.6 2. 4 24. 1 1021 966 Between 4.4 and 6.6 -0. 2 52. 3 966 915 4.4 and Below -3. 6 23. 5 915 866 866 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 10 Shaded areas represent 10 National Bureau of 9 Economic Research recessions. Will it stay high and 9 8 Weak Employment Growth how long? 8 7 7 6 6 5 5 4 4 Strong Employment Outlook 3 3 12/31/2009 = 10.0% (B644) Unemployment Rate ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  • 16. Did you know? • During previous expansion from 2001-2007 we created about 100,000 jobs/month to keep unemployment rate under 6% (considered full employment) • Today it would take 150,000 new jobs /month for ten years to absorb the 15-17 million unemployed and keep up with population trends • If we create 200,000 jobs/month it would take 6 years to get to 6% unemployment • Our Government is going to try and create about 100,000/month from here forward— just to get the 8 million that lost jobs the past 2 years back to work
  • 17. Global recovery is still accelerating • Australia leading index up for a 7th straight month • Germany’s Purchase Manager Index surged in Feb • Japan grew at 4.6% in 4qtr after a flat 3qtr • Canada manufacturing sales rose a 4th straight month Emerging Markets are still a good place to be • Valuations have corrected some • Deficits are in better shape than most of the rest of the world • Recent commodity sell-off due to sentiment not lack of growth • Earnings are still strong – have provided great returns the past ten years
  • 18. Domestic valuations were getting stretched! Monthly Data 12/31/1968 - 12/31/2009 (Log Scale) Standard & Poor's 500 Stock Index 1426 1426 1206 1206 Price Move of: 1020 1020 863 -0.2% to Overvalued (+1SD) = S&P 500 Level of 1113.34 863 730 730 618 -25.5% to Median Fair Value = S&P 500 Level of 830.78 618 523 -50.8% to Undervalued (-1SD) = S&P 500 Level of 548.22 523 442 442 374 374 316 316 268 268 226 226 192 192 162 162 137 137 116 116 98 98 83 83 12/31/2009 = 1115.10 70 70 1970 1975 1980 1985 1990 1995 2000 2005 32 Very Overvalued 32 30 30 +2 SD 28 28 26 Overvalued 26 24 24 +1 SD 22 22 20 20 41.1-Year 18 Median = 16.5 18 Median 16 16 14 14 12 Recent sell off has helped 12 -1 SD 10 10 8 correct this somewhat 8 6 Bargains 6 12/31/2009 = 22.2 (DAVIS100) S&P 500 Median Price/Earnings Ratio (NDR Calculation) with Historical Median ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  • 19. Earnings should be strong for a few quarters Monthly Data 12/31/1979 - 1/31/2010 (Log Scale) S&P 500 vs Median Expected Earnings Growth 1446 S&P 500 Gain/Annum When: 1446 1263 1263 1103 Expected EPS Gain/ % S&P 500 Index 1103 Growth Is: Annum of Time 964 964 Above 14.2% -3. 4 12. 3 842 842 736 * Between 4.2% and 14.2% 6. 5 68. 0 736 643 4.2% and Below 17. 2 19. 7 643 561 Buy/Hold 7. 9 100. 0 561 490 490 428 428 374 374 327 327 286 250 76% met or exceeded in 4Q09 286 250 218 218 190 190 166 Calculation is median 12-month percent change in rolling one-year forecasted EPS. 166 145 Rolling one-year forecasted EPS is a time-weighted average of current fiscal 145 year's earnings estimates and following fiscal year's earnings estimates. 127 127 Forecasted EPS based on median estimates from Zacks Investment Research. 111 111 20 20 18 Median Estimated One-Year Earnings Growth 18 16 Rate for S&P 500 Index Components (%) 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 -8 -10 -10 -12 -14 Easy comparisons from 2008&2009 -12 -14 -16 -16 -18 -18 -20 1/31/2010 = 6.7% -20 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (AA380) ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  • 20. Economic roadmap
  • 21. Bonds less exciting in 2010 • Yield curve to remain steep for most of year • Short end to rise later in year as Fed removes stimulus • Fed has stated rates to stay low for an “extended period of time” • Need to show a sustained recovery for a few quarters
  • 22. Summary • Equity Markets will depend on – Earnings, valuations, sustainability – Watching macro indicators – Returns should still outperform bonds, cash – Focus on multinationals with strong balance sheets, consistent earnings, and strong dividend payouts – Maintain some international exposure (emerging markets)- cheaper dollar play – Total return possible (8-12%) • Bond Markets – Rates to rise slowly later in year – Spread product to do well (Corps) & high yield – Focus on quality – Returns to be lower (3-7%) • Asset allocation (assumes a balanced account model) – Overweight stocks – Underweight bonds and cash Note: This is subject to change daily!
  • 23. Graig Stettner, CFA, CMT Vice President Portfolio Manager Investment Management & Trust Services Tower Private Advisors
  • 24. Secular Bear Market Follow-up
  • 25. Let’s zoom in on the future… …and consider what issues we’ll have to deal with in the next few years. o Virtually inevitable inflation – when, not o $1 trillion deficits as far as the eye can see if (i.e. the “printing money” thing) o Tax hikes and bond issuance needed to o Persistently high unemployment – need fill gaps at state and Federal levels to add ~180,000 jobs per month just to o Demographics keep up with population and workforce growth
  • 26. Debt and Taxes
  • 27. …and certain things start to make sense Typical investor behavior Sentiment goes with Late ’90s the market. Market goes up, investors more bullish; goes down, investors more bearish.
  • 28. …like clients who sell as stocks rise Not this time Now sentiment goes opposite the market. Market goes up, clients more bearish (i.e. nervous); goes down, clients vindicated. Unfortunately, they’re running to the perceived safety of bonds. (More on this 2009/early 2010 shortly from Zach.)
  • 29. …which fits with post-bubble behavior Stage 1. Birth of a bubble 1. Unique profit opportunity 2. Nurturing of a bubble 2. Cheap credit facilitates 3. Euphoria 3. Gotta-get-in mentality This material from a GMO white paper, available at: 4. Critical stage 4. Smart folks sell to dumb http://www.scribd.com/doc/2706 8417/10-Lessons-Not-Learned- 5. Revulsion 5. Asset/class is shunned Montier-GMO-Feb-2010
  • 30. Smart people on the secular bear notion Bank Credit Analyst Research – 2/15/10 “ . . . the [global] economy will gradually return to Fast equilibrium over the next 3-4 years.” forward to Fidelity – 2009 the future “ . . . the secular bear market may not end for another three to five years. . . . any recovery here could be merely a cyclical bull within a secular bear.” Stifel Nicolaus – 2/13/09 “ . . . we see a multi-year trading range [to 2014.] We still believe that this is a long-term, or ‘secular’ bear market, the 4th in the past century. Such markets are typically range- bound for 13+ years.” Ned Davis Research – 1/27/10 Morgan Stanley – 8/10/09 “It will take at least six years to return to full employment.” Study of 19 secular bear markets. If the past is prologue, secular bear should end around mid-2016. Simon Hunt, London economist – 2/10 “The world is unlikely to begin a new period of sustainable growth until 2018 at the earliest.” Jeremy Grantham, GMO – May 2009 “ . . . to limp back to even a normal 50% ratio of debt to collateral. Seven years [i.e. 2016] just might do it.”
  • 31. Covered Call Writing as a Timely Investment Tactic
  • 32. Option Basics • Call option is one of two option types; the other is a put. • Call option gives the buyer a purchase option. If exercised, that right becomes an obligation to the seller. • A put option gives the buyer a sale option. • Buyers of both puts and calls pay for the option in the form of an option premium.
  • 33. Call Option Price Determinants • Time to expiry longer = higher • Volatility higher = higher • Dividends higher = lower Terminology Premium – the option price Expiry – expiration Strike price – the price at which the underlying security can be bought or sold
  • 34. The Thought Process • Writing covered calls considered when: – We’re concerned about security or market’s future. Retain some upside and cushion downside. – We have a nice profit in a security. Wondering how much upside’s left. – The option, itself, offers an attractive return.
  • 35. Math Behind Option Attractiveness 1. Add option premium to the Example stock’s upside. Alpha Natural Resources (ANR) $48.15 2. Determine % return February $50 call option premium $1.85 3. Annualize the return Upside to strike price* $1.85 Total return if assigned $3.70 7.7% Annualized (360/31 x return) 89.4% Results 1. Greater than 100%? do it 2. Between 50 – 100%? think hard 3. Less than 50%? pass
  • 36. Benefits to Clients • Additional source of return . . . by hook or by crook • Fee offset • Adds discipline to exit strategy
  • 37. Actual Example Bought Office Depot on September 23 for $6.44. Stock’s at $6.65. Return has been just $0.21, or 3.26%. Wrote covered calls twice and received total option buy option option premiums totaling $0.96, or 14.84% of the stock’s purchase price. Converted a modest 3.26% return into an 18.11% return.
  • 38. Works Well With Our Longer Term Outlook It is again this writer’s opinion that volatility will remain high in the market . . . as long as investors are nervous about their stock holdings. That could be for a considerable length of time, or for several more years, at least. If we experience a series of bull and bear markets in the future, prices are likely to remain volatile. Looking at the historical record, in the period between 1966 and 1974, three dismal bear markets and two booming bull markets occurred, and each was considerable in magnitude. In other words, prices were volatile. Between 1974 and 1982, prices were less volatile, with the market trading in a narrower range over those years. As has been noted, history never exactly repeats itself, yet it seems likely that we will undergo several years of volatile prices, as the last excesses of the huge bull market of the 1980s and 1990s are expunged, and then perhaps a period of tranquility as a base is built before the next great bull market takes place. Covered call writing will be an ideal strategy for many during that time period. New Insights on Covered Call Writing, Richard Lehman and Lawrence G. McMillan
  • 39. A Call Option, graphically option premium option strategy option strategy helps hurts
  • 40. Zach Higgins Portfolio Manager Investment Management & Trust Services Tower Private Advisors
  • 41. Pay Attention to Dividends • Why are dividends important now – Recession ended in June, so many dividend cuts are behind us – Historically dividend payers perform well after recessions end – Dividend payers are at an advantage with interest rates at zero – Dividend payers tend to be large-cap stocks, which will likely outperform during the correction phase (Q2 & Q3 2010) – Historically at this point in a cyclical bull, high quality stocks begin to outperform low quality stocks • If you insist on lower turnover – an investment approach that focuses on dividend growth is compelling • Focus on dividend growth; not dividend yield
  • 42. Pay Attention to Dividends S&P 500 Stocks by Dividend Policy 1972 - 2010 • Dividend Growers & Initiators: 9.2% • Dividend Payers w/ no Change in Dividends: 7.0% • S&P 500: 6.8% • Non-Dividend Paying Stock: 1.2% • Dividend Cutters or Eliminators: -1.3% *The above returns are annualized
  • 43. Pay Attention to Dividends • Dividend Aristocrats – Includes companies that have increased dividends for over 25 years in a row. Equally weighted and rebalanced once a year – Over the past 3, 5, and 7 years the dividend aristocrats have managed to outperform the S&P 500 by 5%, 3.7%, and 4.4% respectively – Be careful, the list included 67 stocks in 2001, it now contains 43 – Look for low payout ratios, high ROE, high free cash flow to equity, and reasonable debt levels
  • 44. Pay Attention to Dividends A few names worth considering – Wal-Mart (WMT) – Procter & Gamble (PG) – AT&T (T) – McDonalds (MCD) – Pepsi (PEP) – Family Dollar (FDO) – Becton Dickinson (BDX) – Air Products (APD) – Abbott Labs(ABT) – Cincinnati Financial (CINF)
  • 45. Williams Inference Center • Inferential Scanning • The Williams approach of inferential scanning focuses attention on those areas of the outside world where change impacts the business environment - be it economic, political, social, cultural, technological or regulatory. • Williams Inference maintains a staff of readers who monitor a broad spectrum of global information and select the anomalies.
  • 46. Bond Bubble Key Anomaly: Investors have deposited a record $280 billion into taxable bond funds & ETFs this year. The key to the bond activity is the movement of money from one bubble to another. When the Internet bubble collapsed, money found its way to real estate. Now that the real estate bubble has burst, money is finding its way into bonds. Should interest rates soar because of debt levels, this could all end very badly. Red Hot Bond Market Masks Classic Investor Debacle - Reuters Money is still pouring into U.S. bond mutual funds after last year’s record-setting $376.6 billion, a classic sign that the fixed-income market – and the forlorn small investor is ripe for bruising
  • 47. Bond Bubble Monthly Data 2/29/1980 - 12/31/2009 (Sqrt Scale) Fund Flows by Asset Class Stock Mutual Fund Net Inflows 25 25 16 12/31/2009 = $-9.0 Billion 16 9 12-Month Moving Average (---) = $-3.2 Billion 9 4 4 1 1 0 0 -1 -1 -4 -4 -9 -9 -16 -16 -25 -25 -36 -36 36 36 25 12-Month Moving Average (---) = $29.0 Billion Money is Flowing into Bonds 25 16 16 9 9 4 4 1 1 0 0 -1 -1 -4 -4 -9 Bond Mutual Fund Net Inflows -9 -16 12/31/2009 = $21.6 Billion -16 -25 -25 Money Market Fund Net Inflows 144 144 12/31/2009 = $-16.6 Billion 100 100 64 12-Month Moving Average (---) = $-44.3 Billion 64 36 36 16 16 4 4 0 0 -4 -4 -16 -16 -36 -36 -64 -64 -100 -100 Source: Investment Company Institute 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 (AA86) ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  • 48. Delayed Financial Problems Key Anomaly: Mortgage interest only monthly payments can jump as much as 75%. •According to First American CoreLogic there are $2.8 million active interest only home loans worth a combined total of $908 billion •The interest only periods, which put off the principal payments for five, seven or ten years are now beginning to expire •$71 billion in next 12 months •$100 billion the following year •$400 billion after mid/late 2011
  • 49. Delayed Financial Problems • Pension costs for counties in NY could triple over the next 3-5 years • 91% of Illinois total debt is due to pensions and retiree health care • Illinois retiree-related debt including pensions and health care is now $25,000 per household • California’s pension costs are up 2,000% over the last ten years, while revenues have only increased 24%
  • 50. Cloud Computing Key Anomaly: For some a move to the cloud might cut computer costs in half (Newsweek). •The key is cost savings •Dropping your cable TV or satellite connection in favor of watching television via the web •Medical community is tapping into patient data previously inaccessible
  • 51. Cloud Computing Shifts to the cloud are expected to remake technology as thoroughly as the Internet has. The move will produce winners and losers (Barrons). Our potential winners list includes: •VMware (VMW) •Salesforce.com (CRM) •AT&T (T) •Hewlett Packard (HPQ) •IBM (IBM) •Google (GOOG) •Cisco (CSCO) •Amazon (AMZN) •Allscripts (MDRX)
  • 52. Summary • Stock prices move higher (8-12%) total return – Correction during Q2 & Q3 – Dividend and high quality names outperform – Take advantage of volatility with covered calls – Slight bias towards large caps (global exposure) – Favor growth for now; we anticipate a shift to value later in the year – Favor emerging markets within foreign allocation • Neutral on commodities & Gold in the short term; although they remain in a secular bull • Underweight Bonds
  • 53. The New Roth Opportunity for 2010 and Beyond Bob Nicholas, CFP Investment Services Tower Private Advisors
  • 54. Important Information Securities offered through PrimeVest Financial Services, member SIPC. You should consider the investment objectives, risk, and charges and expenses of the investment options carefully before investing. Consult your legal or tax counsel for advice and information concerning your particular circumstances. Neither PrimeVest nor any of its representatives may give legal or tax advice.
  • 55. The Opportunity • Tax law changes effective in 2010 allow access to a tax- advantaged retirement and estate planning vehicle, i.e. the Roth IRA, that was previously not available to certain people
  • 56. Tax-deferred vs. Tax-free Taxes Distribution RMD Tax-deferred •Tax deduction Taxable Yes Accounts •Taxes paid when Traditional IRAs, 401(k), funds come out 403(b), 457(b), SEP & SIMPLE IRAs Tax-free Accounts •No tax deduction Potentially Tax- No Roth IRA, Roth 401(k), •Taxes paid when free Roth 403(b) funds go in
  • 57. Roth Conversion Eligibility • 2009 • 2010 & beyond! – Single & married joint – Anyone can convert filers with modified regardless of adjusted gross income income or filing (MAGI) < $100,000 status! – No conversion if married filing separately – No MAGI restrictions!
  • 58. Tax Consequences • Previously untaxed amounts converted included in income • 2010 conversions only: tax liability may be spread ratably in 2011 & 2012 • Best Practice: outside funds to pay tax liability • Low-cost conversion if convert before full market recovery
  • 59. Why Convert? • Roth IRA benefits: – Tax-free growth – No annual required minimum distribution (RMD), unlike traditional IRA – Tax-free legacy to heirs – No RMD to include in income to cause taxation of Social Security benefits – Contributions beyond 70 ½ if still working
  • 60. Conversion May be Beneficial if: 1. You are a high-income earner 2. Expect to be in a higher income tax bracket at retirement 3. Do not anticipate needing a Roth IRA for retirement income 4. Want to leave a tax-free legacy to heirs 5. Anticipate income tax rates will increase in the future
  • 61. Current and Future Tax Rates 2009 2011 (Anticipated) Highest 35% 39.6% 5th Bracket 33% 36% 4th Bracket 28% 31% 3rd Bracket 25% 28% 2nd Bracket 15% 15% Lowest Bracket 10% 15%
  • 62. Qualified Roth Distributions • Are tax-free and penalty-free (including earnings) if: – account open for 5 years, AND – one of the following: • Attainment of age 59 ½ • Death • Disability • First-time home purchase
  • 63. Retirement Plan Rollovers • Qualified plan assets may roll to a Roth IRA if you are eligible for a distribution • Are you a participant eligible for a distribution? – Have you separated from service? – Have you reached retirement age? – Can you take an in-service distribution?
  • 64. Consult Your Tax Advisor • Taxation of Social Security benefits in year of conversion may be affected • Options for paying the tax liability – Other assets – Withholding at source – Estimated tax payments • Adjust estimated tax payments to avoid penalty? Consult your legal or tax counsel for advice and information concerning your particular circumstances. Neither PrimeVest nor any of its representatives may give legal or tax advice.
  • 65. Consult a Financial Professional • Knowledge of technical rules & issues – Distribution rules – Recharacterization (exit strategy) • Evaluate your particular situation – Full or partial conversion? Over multiple years? – Estimated tax impact? – What sources should you use to pay the tax? – Establish separate Roth accounts to hedge against possible underperformance?
  • 66. Bread & Circuses Today •In modern usage it is used as a metaphor for handouts and petty amusements that politicians us to gain popular support instead of gaining it through sound public policy. •Any of these sound familiar: –Healthcare overhaul –Cash for clunkers –New home tax credit –Political spectrum of the House of Reps and Congress
  • 67. Questions? Visit our investment blog at blog.towerbank.net