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W E E K L Y C O M M E N T A R Y
March 8, 2010
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Personally, I thought Steve Martin and Alec Baldwin stole the show at the Oscars and made it a palatable festivity!
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COMMENTARY BY:
Joe Sturniolo
A better-than-expected report on unemployment, gains in Appleand Google and rising energy and metals prices set off a big end-of-week rally in stocks today. The jobs report surprised investors by not being awful, as many had expected, and suggested that employers will be hiring later this year. It suggested that, but obviously that is a big question and one that I have my doubts about particularly if we get an acceleration of foreclosures in residential real estate.
The Dow Jones Industrial Averageclosed up 122 points, or 1.2%, to 10,566, its first gain of 100 points or more since Feb. 16. The Nasdaq Composite Index added 34 points, or 1.5%, to2,326, and the Standard & Poor's 500 Indexhad gained16 points, 1.4%, to 1,139.
The economy erased 36,000 jobs last month, the Labor Department reported this morning, and the jobless rate remained at 9.7%, but economists had expected between 50,000 and 70,000 jobs lost and a jobless rate of 9.8%. Economists hadworried thatFebruary'ssnowstorms would have taken a worse toll on the job market. The stormsessentially shut down Washington, D.C., Baltimore and Philadelphia.
"Past performance is not a guarantee of future results. Indices are unmanaged and cannot be invested into directly and assumes that dividends are not reinvested. Crude oil and gold do not pay a dividend. The 10-year Treasury Note is simply the yield at the close of the day on each of the time periods."
The Dow ended the week up 2.3%. The S&P 500 added 3%, and the Nasdaq rose 3.8%. During the week the indexes moved into positive territory after slumping in mid-January. The Dow finished the week up 1.3% for the year, with the Nasdaq up 2.1% and the Nasdaq up 2.4%.
Solid Backdrop for High Yield
Many believe the economy can achieve a 3% to 4% level of growth in 2010. I think this, together with low rates, should provide a favorable environment for riskier fixed income asset classes, such as high yield. At this point in the economic recovery, corporate profit margins, cash flows and productivity are near record levels (relative to prior cycles), and balance sheets are generally healthy, which puts corporations in good financial condition to capitalize on the recovery.
I also believe the cyclical outlook for rising interest rates should favor credit sectors such as high yield. Over the next few years, I think the credit markets will outperform developed government debt markets, which ironically face increasing challenges of credit quality as their deficits and debt levels rise. Pioneer Funds Economist recently stated:
"While overseas debt issues in countries such as Greece, Portugal, Italy and Spain have removed the luster from some of the risk markets recently, we do not believe that these problems will significantly impact the global (especially the U.S.) high yield markets over the long-run; thus we view widening spreads as short-term in nature and would use them as buying opportunities."
High Yield Corporate Spreads are Still Attractive!
"High yield corporates are currently trading at or slightly wide to their long-term average and continue to offer value...These spreads are particularly attractive in light of the Moody's projected issuer 12-month default rate of 3%, which is significantly below the 4.90% long-term average default rate."
The prices of high yield bond funds has improved rather dramatically in the past twelve months. However, in looking back to the early 2000s, where the last sharp increase in price occurred, it is worth noting that prices remained elevated for many years after, which is typical during an expansion in the credit cycle.
Pioneer tells us that the US high yield market has enjoyed an average monthly return of 0.72% from January of 1987 to January 29 of this year. The annual return for that period was 8.57% - just shy of the 9.13% return of the S&P 500 and far outpacing the 6.95% earned by Treasuries.
The investment environment would seem to be anticipating quality improvement in corporate credit, but deterioration in government sponsored debt.
Sources:
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"Those who have prospered and profited from life's lottery, have a moral obligation to share their good fortune."
~Dick Gephardt
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| MARKET & ECONOMIC ANALYSIS
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Economic Commentary
Holly Glass Sturniolo
Finance Director
WHAT IF I WON THE LOTTERY
The other day I began the ritual fantasy, what if I won the lottery. After tallying the jackpot less taxes, age old accountant that I am, I began to think how much would actually pass to the IRS as I distributed a portion of my winnings over generations of children. Of course, I do this sort of thinking at 3am as my brain refuses to stop doing jumping jacks. Perhaps it is just the mainstay of the female brain. As usual, the nerd took hold and decided to research estate taxes around the world - and this is what I found:
Austria - called it a gift tax and abolished it completely in 2008.
Australia - abolished estate taxes in 1979.
New Zealand - abolished state duty in 1992.
Sweden - abolished inheritance tax in 2005.
India - abolished estate duty as of 1985.
Singapore - abolished estate tax in 2008.
British Virgin Islands - has no inheritance tax.
Gibraltar - has no inheritance tax.
The following chart illustrates the amount of tax applied to estates for inheritance tax purposes:
"Past performance is not a guarantee of future results. Indices are unmanaged and cannot be invested into directly and assumes that dividends are not reinvested. Crude oil and gold do not pay a dividend. The 10-year Treasury Note is simply the yield at the close of the day on each of the time periods."
It should be noted that although the US has the second highest tax rate, only 2% of estates are large enough to be affected. In addition, although Japan has a significantly higher tax rate, the triggering estate value is $15,268,000. Therefore, some of the countries that have a lower tax rate, may actually yield higher tax revenue as the rate effects a greater proportion of the taxpayers. For example, in Germany the spousal exemption is only 307,000 Euros and the exemption for children is $205,000 Euros. In Italy, each inheritor, whether it is a spouse, child, grandparent, nephew, niece, etc... has a $1million Euro exemption. This comparison highlights the confusion and misinterpretation that may result when attempting to read and interpret data without all the relevant information. A chart is only as good as the detail it represents. What is left unsaid, may significantly alter the perception.
Of course, none of this information helped defray the decimation of an inheritance when applied to generations of recipients. The only way to effectively do that - strategic estate tax planning! And what if I won the lottery - that remains a fantasy.
Sources: ACCF, Wikipedia, Global Property Guide
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"This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Investors should always consult their financial advisor before acting on any information contained in this newsletter. The information provided is for illustrative purposes only. The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc."
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Joseph S. Sturniolo and Associates, Inc.
7535 E. Hampden Street, Suite 501
Denver, Colorado 80231
Securities offered through Geneos Wealth Management Inc.
Member FINRA/SIPC
Advisory Services Provided by Joseph S. Sturniolo & Associates Inc.
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Joseph S Sturniolo | 7535 E. Hampden Avenue | Suite 501 | Denver | CO | 80231
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