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My wife calls me a frustrated optimist.  It is an apt description when I look at America, our economy, and even the investment markets.

Many might wonder how I can have an optimistic bone left in my body.  Those folks look at America’s staggering debt, our dysfunctional border, our nonfunctional political system, the turmoil in the EuroZone, wasteful government spending designed to placate financially powerful special interests, our refusal to address the sobering realities of federally promised entitlements, the rising wealth gap in America, and they wonder if my frustrated optimism stems from some sort of genetic defect or insanity.

I acknowledge all of these challenges.  They are substantial.  When you add in low bond yields, the appalling performance of the three major bond rating agencies, near-zero money market yields and the impact of a slowing economy on public companies, today’s economy and markets may be among the most challenging investment climates we have faced in a very long time.

At this point, you might be thinking, “I understand the frustration, but where does this infernal optimism come from?”  My optimism comes from my sense of history, and from observing my friends, colleagues, and clients.  As a country we have certainly faced daunting tasks in the past. In our 235-year history, we have broken free from British Empire.  We have survived a devastating civil war.  We have lived through several financial panics and economic downturns, including the Great Depression.  We have survived two world wars, the stagflation of the 1970′s, the dismal corrupt performance of some of our political leaders, and the longest war in our nation’s history.

We have survived, and even thrived, because when times get tough and the situation is critical, Americans have a history of pulling together and doing what needs to be done.  I expect we will rise to the occasion again.  There are a number of reasons for cautious optimism.  Corporate America has generated strong profits in 2011, and most analysts expect 2012 profits to continue to grow, albeit at a slower rate.  By many historical measures, the stock market is now considered to be undervalued. New industries and products being born in our technological revolution.

Optimism Inspired by You.  What most inspires my optimism stems from the privilege of interacting with many of you.  Despite the dismal economy, I see many of your businesses thriving.  I see you adapting and adjusting to new challenges and acting proactively to take advantage of the benefits of the latest technology and increased globalization.  Despite the political craziness, you, my friends, colleagues, and clients, continue to get up every day and figure out what you need to do to help your business grow and prosper.  Many of you are doing more than merely surviving in this difficult environment; you are thriving with strong growth in both revenue and profits.

How does all of this impact our investment strategy for 2012?  There’s no point in trying to gainsay it:  the current investment environment is very challenging and we believe it will remain so for the immediate future.  At GV Financial, the key to navigating these turbulent waters is a two-fold process.  We believe that developing and following a coherent investment process is the lynchpin to investment success; it helps keep the focus on facts and invites us to back-test both our assumptions and conclusions.

Step 1 is to focus on what we know for a fact about the present and the past instead of speculating on an unknowable future.  Our Investment Committee has been hard at work researching and analyzing a dizzying array of data and will soon release our semi-annual tactical allocations; these adjustments will be based on the facts as we see them in the current environment.  Our allocations will account for the troubles of the EuroZone, the headwinds of rising deficits and the pressure for reduced government spending and higher taxes, glowing corporate profits, and the relative valuation of different asset classes.

Step 2 is to maintain a broadly diversified portfolio whereby each piece of your portfolio seeks to protect you against a different investment risk.  The trick is not to get caught in the panic-inducing rhetoric of the financial press and bet your entire portfolio on a specific future.  Whether you bet it all on a bleak prediction or a rosy one, betting a sizeable portion of your portfolio on any one scenario is risky leaving you vulnerable to the Big Mistake that can lead to your financial undoing.  We believe a reasonable strategy is to maintain a balanced approach that will allow you to survive, and hopefully thrive, in a wide range of economic and market outcomes.  Investing requires a long-term focus and strategy, not a series of short-term Hail Mary plays.

We will be discussing investment strategies for 2012 and our views on the markets and  the economy in an upcoming teleconference and we will cover these in greater detail. Until then, from all of us at GV, Best Wishes to you and your families on a healthy, happy and prosperous 2012.

Recent newspaper headlines tell us that the world economy is the Titanic heading for an inevitable collision with an iceberg and that our captains (U.S. policymakers) are asleep at the helm.  Growing concern that Europe’s debt crisis will spread and the failure of American policymakers to reach an agreement to reduce the federal budget led the S&P 500 4.7% lower two weeks ago to its worst Thanksgiving-week loss since 1932 (Bloomberg). Then the first week of December, the S&P 500 rallied 7.4%, while the Russell 2000 Index of small-cap stocks soared 10.34% (Louis Navellier Marketmail, December 5, 2011).  As the seas ebb and flow, so does investor sentiment, alternating from despair one week to jubilation the next.  Headlines foretell the sinking of America’s economic ship due to a worrisome lack of leadership in Washington and Europe, the likelihood of a “double-dip” recession and the imminent economic doom in Greece, Portugal, Spain and Italy.

While investors face real problems in these turbulent seas, we believe that the global and U.S. economy has more in common with a sailboat than the ill-fated Titanic.  Navigation matters, but ultimately, both headwinds and tailwinds can and do affect our sailboat’s voyage.  While icebergs and obstacles certainly exist, we can make course corrections to avoid them or lessen their impact and we make small course corrections that keep us headed in the right direction and allow us to turn our sails to catch the wind.

 

Read remainder of article.Investment insights Dec 2011

Looking for a different twist on giving thanks at Thanksgiving this week?  Here are twenty questions to engage family and friends.   Print the list, cut the questions into separate strips, fold each in half and place them in a basket.  Have each guest select a question from the basket and answer it. 

Click here to access the 20 questions.

From the team at GV Financial Advisors,

HAPPY THANKSGIVING!!

Market Commentary

As of August 9, 2011, the markets are down about 15% since the beginning of July (www.finance.yahoo.com).   The United States federal credit rating has been downgraded for the first time in its history so we are indeed sailing in unchartered waters.  Here is a broader view of the current state of markets that we hope will give you some perspective beyond the immediate headlines.

Since 1962, there have been 25 market corrections greater than 10% during bull markets.  The average correction was 13.2% and lasted 118 days. Nine of those 25 corrections resulted in bear markets (defined as corrections of 20% or more), which means that 16 out of 25 times, the bull markets persisted after the correction (Laszlo Birinyi).  Put another way, based purely on this data from recent history, there is a 64% probability that this correction, as scary as it may be, is merely a correction and not the start of a new bear market.

No matter how we feel, the news is never all bad, and begin with the case for optimism, followed by the case for pessimism and finally, with some closing thoughts.

The Case for Continued Optimism.  The U.S. has a lot going for it even as we grapple with a series of monumental changes and challenges.  If we take a step back from the headlines, we find it hard to be bearish over long term when you consider the following:

  1. Corporate profits remain robust.  To date, approximately 80% of the companies included in the S&P 500 have reported their most recent quarterly results and both aggregate corporate earnings and revenue were both up about 13% from the year-ago period (Yardeni Research).  American corporations have demonstrated that they can make a lot of money even if the economy is not operating at full speed.
  2. Stock market valuations are cheap.  In terms of valuation, the run of strong earnings combined with declining stock prices translates into some attractively priced stocks.  Investors can buy earnings for less.  As recently as August 4,2011, the S&P 500′s composite Price/Earnings (P/E) ratio, based on forward earnings, stood at 13.15.  To put that P/E ratio in perspective, the long-term average ratio is closer to 16 (Bloomberg).
  3. Cash is still king. Corporate cash balances are at record levels.  A growing number of companies are using some of their cash to buy back shares and raise dividends.
  4. Consumer balance sheets have gotten much healthier.  Over the last three years, American consumers have gotten better control over their household finance (www.research.stlouisfed.org).  It appears that as a whole, we are spending less and saving more.
  5. World- wide demand is growing.  New car sales are up 5.8% year-over-year (Fidelity).  The reality is that even reluctant consumers eventually will have to replace big-ticket items (cars, refrigerators, etc.) as they reach the end of their useful life.  The same holds true for business consumers. As global growth expands, we expect the U.S. consumer to shoulder less of the world-wide buying load as demand for consumer goods picks up in other parts of the world.
  6. Oil prices have dropped.  We have seen a quiet, but massive correction in oil prices.  Since April, oil prices have dropped a whopping 30% (www.finance.yahoo.com).  Lower oil prices are good both for individual and business consumers as it cuts the cost of doing business.
  7. The Fed continues to maintain very low borrowing rates.  The Federal Reserve pledged for the first time to keep its benchmark interest rate at a record low at least through mid-2013 which could help spur growth (New York Times, August 10, 2011).
  8. The unemployment rate has improved slightly.  Even though the unemployment rate remains high, unemployment fell slightly in July to 9.1% (www.bls.gov/cps).  More than the slight decline, it is the breakdown that we find encouraging.  While governments are slashing jobs to reduce spending, the private sector is adding jobs.

The Case for Pessimism.  Lest we appear overly optimistic or blind to the serious issues we face, we also want to acknowledge there are a number of crucial challenges that are having or could have a negative impact on our economy and the markets.  Here are some of the headline-grabbing challenges we see now and in the near future:

(click here to read remainder of article….)

The Dow Jones Industrial Average dropped 634 points on the first trading day after Standard & Poor’s downgraded U.S. credit rating.[i]  After a drop of this magnitude, it is hard to find anything good at all.  Yet this is precisely what I have to tell you:  there may be good news behind the S&P downgrade.

I can only imagine what you are thinking after reading this.  Perhaps you are wondering something like this:

Wait, what did you say?  The S&P downgrade is good news?  Have you lost your mind?  I spent the last few days listening to the news, and I heard so many others tell me this is an unprecedented cataclysmic event, watched my portfolio get pummeled and you think this is good news?  Are you crazy?  

Yes, you read correctly and no, I have not lost my mind.  In my opinion, although it is likely to create short-term havoc in the markets, Standard & Poor’s decision to downgrade U.S. debt[ii] may turn out to be just the medicine our country and political leaders need to make the difficult choices to rein in our spiraling debt.

As with many medicines, S&P’s downgrade may taste terrible going down.  The market’s initial reaction has been negative, and we would not be surprised if the market were to move up and down dramatically over the next few weeks as investors adjust to the news.  On the other hand, many of us expected the market to rise last week after the debt ceiling crisis was resolved, only to observe instead the largest daily decline in several years,[iii]  once again underscoring our inability to predict the market.

The truth is, like always, we can never know how the market will react over the short term, and, for most of us, the market’s immediate, negative reaction does not really matter.

While no investment strategy can ever be guaranteed, the short-term performance of the market should not matter because hopefully you have enough cash and bonds in your portfolio to carry you through a short-term market decline; if so, you most likely will not need to spend the bulk of your equity investments for many years to come.

We are all acutely aware that our national debt is out of control.  With government spending as a percentage of GDP at an all-time high, and government revenue as a percentage of GDP at an all-time low,[iv] it is no wonder we are running record unsustainable deficits.  Our hope is that our political leaders may finally receive the message that many ordinary Americans have understood for some time:  we must act now to get our nation’s financial house in order.

Our continuing challenge is that we must make politically difficult choices to rein in our debt.  For Democrats, that means grappling with the likely reality that we need real reform to our entitlement spending.  For Republicans, that means coming to grips with the likely reality that we need to increase revenue to solve our budget woes.

That is not easy for either side.

Standard & Poor’s downgrade hints at the real costs we are likely to incur if we fail to address our national debt in a responsible way, and it puts a spotlight on the cost of simply kicking the can further down the road.  We hope our political leaders will see S&P’s downgrade as a clear warning that the time to deal with our out-of-control debt is now.

So, why do we believe S&P’s downgrade of U.S. debt may turn out to be good news?  As individuals, we know that sometimes pain is the sledgehammer that helps us break our old destructive patterns and creates the freedom to move to a happier and healthier future.  Often, real change happens only when the pain of continuing our current behavior becomes greater than the pain of effecting change.

Let us hope the same is true for our government and elected leaders.

For many Investors, emotions are understandably surging.  We fear what might happen next and we feel powerless to control the outcome.  Our first instinct may be to flee – sell our stocks and walk away from our carefully chosen investment strategies.  But if we take a moment to pause first, we can remind ourselves that we live on the brink of the unknown every day and that we are equally powerless over the markets in good times and bad.

As we witness whatever happens in the markets this week and next, let us remind ourselves that it probably does not really matter for most of us.  Let us remember that today’s scary headlines often becomes tomorrow’s forgotten news.

And perhaps most importantly, let us remind ourselves of all that we have to be grateful for – the loving relationships in our lives, our talents and skills, our tremendous personal freedoms, the wisdom we have accumulated over the years, and our ability to adapt and thrive in changing and even challenging environments.

If you are struggling with your emotions and worried about whether or not you have sufficient resources to maintain your lifestyle, speaking with one of our GV Advisors could help you assess your situation, answer your questions, and find a strategy that suits your needs.  You can reach us by email at info@gvfinancial.com or by telephone at 770-295-5600.


[i] “Wall Street Takes a Dive on First Day After Downgrade,” Associated Press, August 8, 2011.  See www.finance.yahoo.com.

[ii] On August 5, 2011, Standard & Poor’s lowered its long-term sovereign debt rating on the U.S. from the top credit rating of AAA to AA+ and stated that it did so because of “political risks” and “rising debt burden.”  See www.standardandpoors.com.  Debate continues over S&P’s analysis which failed to take into account the recent $2 trillion in spending cuts.  See “Amid Criticism on Downgrade of U.S., S.&P. Fires Back,” New York Times, August 6, 2011.

[iii] The Dow tumbled 512 points Thursday, its biggest point drop since Dec. 1, 2008. “Dow Whipsaws to a Gain,”  Wall Street Journal, August 5, 2011.  For the week, the Dow was down nearly 700 points.  “S&P Move Isn’t a Shock, But Adds to Gloom,” Wall Street Journal, August 7, 2011.

[iv] In April of this year, Senator Mark Warner (member of the “Gang of Six”) stated that government revenue was close to an all-time low at 15% of GDP, while spending was near an all-time high of 25% of GDP.  PolitiFact confirmed Warner’s figures and noted that revenues have not this low in 60 years while spending has not been this high since the height of World War II. See www.politifact.com/virginia/statements/2011/apr/22/mark-warner/mark-warner-says-federal-spending-near-all-time-hi/.

 

Given the fluid and rapidly changing nature of the debt ceiling debate, we want to provide you with an update and our current thinking on this situation.

  • Despite ongoing political gamesmanship in the debt ceiling/budget negotiations, we believe our elected leaders will get their act together and we will NOT default on the national debt. Daily rhetoric from Congress suggests that these leaders understand the potential consequences and believe that defaulting on the US debt is not an option; however, this high-stakes game of “chicken” continues and the House remains far from securing enough votes to ensure passage of any of the options thus far presented.
  •  Virtually every major player in the debate seems to agree that a US debt default is unthinkable, and clearly, no one wants to risk taking the political hit for the financial chaos that might ensue if a default were to occur.  In our view, the possibility of an outright default remains extremely low and we expect to see at least some sort of short-term increase in the debt ceiling.  As we have stated in prior emails and blogs over the past few months, this process has not been and will not be an easy one, and we expect more twists and turns before this crisis comes to a conclusion.
  • We believe that the closer we get to the August 2nd deadline, the higher the likelihood of Congress passing a short-term patch deal as it would be extremely difficult to work out the specifics of a major spending reduction and/or tax overhaul plan at the last minute.  We believe the markets likely would respond negatively in the short run to such a tepid deficit reduction plan.
  • We believe that risks to the Treasury market could affect other areas of the bond market as well.

We reaffirm our belief that Congress will raise the debt ceiling rather than risk the potentially dire consequences of default.  If so, we would expect short-term volatility to ease and investors to return their attention to positive fundamental data that is emerging in the economy such as corporate earnings.  However, in the unlikely event that Congress fails to raise the debt ceiling and we default on our debt or if rating agencies follow through on their threat to downgrade U.S. Treasury obligations, we believe there could be far-reaching, disastrous economic and market repercussions that likely would extend well beyond the Treasury market.  Of course, the U.S. has never defaulted on its debt before and we are in unchartered waters, so the future is (as always) unknown.  We have faith that even if we were to experience default or a downgrade of U.S. debt, the markets will recover over time as they have done following other crises.

The wild card in all of this is the rating agencies.  Their threat to downgrade US debt regardless of whether the debt ceiling is raised or not has emerged as the biggest potential danger to the market.  Even though default on debt may be a low probability, there is at least some chance of a downgrade of the US Treasuries from AAA to AA should the leaders fail to make substantive progress on reducing the federal deficit.  Any downgrade of the Treasury debt likely would affect all the other sectors of the bond market.  A downgrade of Treasury debt could translate into similar downgrades of municipal debt and the debt of Fannie Mae and Freddie Mac.  Moreover, the proposed austerity measures could act as a drag on the economic growth which might have a negative impact on investment grade and high yield corporate debt.  We believe these asset classes might still outperform Treasury debt given their exposure to credit risk along with interest rate risk.  We have advocated diversifying the fixed income exposure by adding foreign sovereign debt.  We believe that active bond management in such circumstances is another way to hedge your portfolio as active managers have the ability to assess credit risk, duration risk among other risks to construct a portfolio hedging the risks.

If the debt deal does happen and the reaction in the Treasury market will likely follow the perception of the success of the agreement in bringing down the long-term path of the federal deficit. The yields will decline and the market volatility will stabilize. Most sectors of the bond market will rally along with the Treasury market in such a scenario.  Some sectors of the municipal bond market may decline based on the spending cut measures and the impact on the states.

Of course, nothing is certain and there are many other scenarios that could play out, such as:

  • We fail to increase the debt ceiling; the Treasury avoids defaults by prioritizing payments.
  • We fail to increase the debt ceiling; the Treasury defaults on its debt.
  • We raise the debt ceiling and avoid default, but the deficit reduction package is modest and short term.
  • We raise the debt ceiling and avoid default, and we adopt a credible deficit reduction package.

Among the four scenarios described above, the last one probably would be the one greeted with the most enthusiasm both the bond and equity markets as well as the American people.

Investors are concerned and wondering what they can do to reduce the risks to their portfolios.  Nobody really knows the odds, but should the worst scenario play out, we believe the markets will plunge in the short term but eventually recover.  In five years, we expect this crisis likely would be a blip on the radar.

Of course, everything written above are only educated guesses.  Neither GV Financial, nor anybody else, knows what the future will hold. We will continue to monitor this situation carefully and seek out tactical opportunities to reduce risks for our investors.  Please contact one of our GV Advisors if you are nervous. We have some hedging strategies that might provide an alternative to soothe the current market volatility.

We are living through one of the most remarkable times in history, and amazingly, nobody seems to notice.  Let’s look at what has happened over the past year:

a.       Debt – We have a broad-based consensus that we need to deal with America’s staggering debt, and we have passed the first spending cuts that I can remember.  The political process remains ugly to watch, but there is real hope we will take meaningful steps to start addressing our debt.

b.      Democracy – We have witnessed the Arab spring resulting in the overthrow of seemingly invincible leaders such as Egypt’s Hosni Mubarak and Tunisia’s Ben Ali, and change now seems possible in Yemen and possibly even Libya.  While we do not yet know how these upheavals will shake out for America in the short to medium term, we are hopeful the long-term implications of greater democracy and economic freedom in the Arab world will pay dividends for all of us.

c.       Economic Growth – We are slowly recovering from the aftermath of an global credit bubble.  Yes, the growth is not as strong as we had hoped, but given many challenges, it is somewhat remarkable we are growing at all.  Historically speaking, it takes a long time to recover from credit bubbles − often seven years or longer.  Despite our government’s limited economic choices due to our bulging debt, we are slowly working our way out of our mess.  While we still have a long way to go and expect the road ahead will be full of twists and turns, we at GV are hopeful we are climbing out of the deep hole we dug for ourselves.

d.      Corporate Financial Health – The macro economy may be struggling, but America’s public companies appear to be doing just fine.  Corporate profits are currently at all-time highs, and earnings are expected to continue to rise.   We admit that the current market is not cheap.  What we find amazing, however, is that even after this remarkable increase in stock prices since the market’s low of March 2009, today’s market remains reasonably valued.  With enormous amounts of cash on the sideline (In his June newsletter, Nick Murray estimates idle cash at $7.9 trillion for households and $2.3 trillion for corporations), there is plenty of dry powder that could drive the market higher.  Those investors who were able to hold on during the market’s dark days of late 2008 and early 2009 have been amply rewarded for their faith and patience

e.      Knowledge Explosion – We continue to learn things at an amazing rate.  We are making enormous advances in both medicine and technology that may herald huge economic opportunities.  I received an iPad at the end of last year.  On this one portable device, I now can carry around thousands of songs, link into an internet radio service that chooses songs based on my preferences, look at pictures of almost anywhere on earth, point it towards the sky for an explanation of the stars in the night sky, watch a movie, read any of 1,000 books, and I can only imagine what else.

These five amazing developments give us hope and optimism about our economic future.  We believe it is likely the future could be better than the past, yet we know that tomorrow is far from guaranteed. We predict this future based on our grasp on historical trends and patterns and our expectations of how the variables that could influence economic growth will behave. The unalterable truth is that we are always living on the brink of the unknown.

We can know our past for sure, yet the future remains stubbornly unknown and unknowable − whether we are trying to predict the future in financial markets or in our personal and professional lives.   Our always uncertain future causes a great deal of anxiety for many of us.  What do you rely on as you face an uncertain future?

We have developed a tool that could help you as you plan your future in the face of the unknown.  Drop us a line and we will email you a copy.

Last month, Standard and Poor’s lowered its outlook on the United States (still) AAA debt rating from “stable” to “negative,” citing a material risk that our nation’s leaders may fail to deal with the federal budget deficit and long-term debt issues.  Bloomberg, April 19, 2011.  Though sobering, we believe this outlook downgrade has injected some needed truth into our massive budget problems.  Below, GV answers questions about the debt ceiling crisis and how it might affect your portfolio.

                  What is the Debt Ceiling?  Every day, our federal government spends more money than it takes in.  It makes up the difference by borrowing money, thereby increasing the debt.  Congress first set a legal limit on how much money the U.S. can borrow in 1917.  According to the Congressional Research Service, the debt ceiling has been raised 74 times since 1962, ten times in the last ten years alone.  CNN Money, April 15, 2011.  Sometime this summer,  the federal debt is expected to exceed the current $14.3 trillion debt ceiling.  On that date, the government must either stop spending money or raise the cap. Put colloquially, our nation has been spending on credit and is now dangerously close to maxing out its credit cards.

                  What Might Happen?  We see three possible scenarios:

  1. Congress could balance the budget.  To balance the budget, Congress would have to slash current year spending by 40%.  (Given more time, Congress could balance the budget by some combination of cutting spending and raising revenue, but even if Congress managed to balance this year’s federal budget, the U.S. still must pay the interest on our staggering debt load.)  Given the political fallout and economic ramifications that would likely ensue, we view this scenario as nearly impossible.
  2. Option two is to default on the debt.  While no one knows precisely how this scenario would play out, such a draconian action seems like political and economic suicide.  Never before in the history of our nation has the United States defaulted on its debt.  While the full impact cannot be predicted, ramifications would echo around the globe.  Imagine the consequences if the government could not legally pay interest on its debt or pay for essential obligations.  We can only imagine what would happen to the U.S. dollar, the value of U.S. Treasury bonds, and our clients’ portfolios.  The U.S. dollar is the world’s leading currency, and many countries tie their own currencies to the value of the U.S. dollar.  A default could devalue global currencies.  U.S. Treasury bonds constitute a substantial portion of other nation’s reserves which could be devalued overnight.  More to the point, a decision to default on the U.S. debt would have a significant short-term impact on your portfolio, directly affecting the value of some investments while indirectly affecting others.
  3. Congress can raise the debt ceiling for the 75th time.  Having just briefly considered the possible consequences of the other options, we think that after some contentious debate, this third option is the most likely.  Of course, while raising the debt ceiling may solve the immediate crisis, doing so does nothing to ease our current budget deficit or address our nation’s long-term debt problem.

Will the U.S. Default On the Debt?  Just as we would make the necessary last-minute adjustments to avoid driving over the cliff, we hope and expect that our political leaders will avert disaster and turn the wheel before defaulting on the federal debt.  We expect the political battle leading up to the May deadline could be fierce.  We also anticipate that both political parties may use the looming debt ceiling to position themselves for the next election, further intensifying market volatility.  As long as defaulting on the debt remains even a remote possibility, we expect the government bond market may face some challenges ahead.

We are encouraged and pleasantly surprised by the recent change in Washington’s political dialogue.  For the time being at least, partisan rhetoric seems to have taken a backseat to rational discussion about where to cut the budget, not whether to cut it.  Who would have thought that Georgia’s conservative Republican Senator Saxby Chambliss would ever work with Illinois’ liberal Democratic Senator Dick Durbin and four other Senators to create a bipartisan proposal to cut the deficit by $4 trillion over the next ten years?  We now have substantive proposals from the “Gang of Six,” President Obama and Paul Ryan − all of which favor austerity.  At long last, political leaders on both sides seem acutely aware of the gravity of the situation and (we hope) ready to take meaningful action.

How Might the Debt Ceiling Crisis and Potential Default Affect My Portfolio?  We believe the possibility of a default is small given the potential of unleashing a global economic catastrophe.  However, the political debate could pose challenges, and if the crisis worsens, the U.S. government debt (i.e., U.S. Treasuries) could falter.  Over the last 18 months, GV Financial Advisors’  Investment Committee has been discussing the potential for and likely impact of a default and we have outlined proactive measures to  minimize impact of a crisis in U.S. government debt markets on investment portfolios.  We believe being proactive is especially important when faced by such uncertainty and when the risk of inaction could have an enormous impact on an otherwise sound investment portfolio.  The specific countermeasures that could be implemented for a particular investment portfolio vary as they are tailored to each client’s income and growth needs, risk profile and ability to tolerate volatility.

No one can predict what will happen as we approach the debt ceiling.  In the final analysis, we believe that our country has sophisticated financial and political systems that are capable of recognizing and averting a default in our national debt.  We concur with Fitch’s opinion:

The likelihood of the U.S. government failing to honor its financial obligations and in particular make due and full payments on U.S. Treasury securities is extremely low. Ultimately, the recognition of the dire consequences of failing to raise the debt ceiling in a timely manner will prevail over differences on the more fundamental issue of how best to place U.S. public finances on a sustainable path over the medium- to long-term.  Fitch Ratings, April 7, 2011.

Though not without our challenges, we believe the U.S. has better growth prospects than most European nations, including Greece, another debt-laden nation to which the U.S. is often compared.  We also have the “exorbitant privilege” of issuing debt in the world’s reserve currency, which keeps the cost down.  Of course, it would be better for all of us to have our public accounts in order, and we hope the political will to address our budget issues continues beyond the current crisis.

We understand that the media headlines, the unresolved fiscal situation, the still-recovering economy and other issues might raise additional questions.  Our advisors stand ready to answer your questions or discuss your concerns.  If you would like to have one of our GV Financial Advisors analyze your portfolio for potential exposure to credit default risk and other factors or if you would like to seek advice on how to employ specific tactical asset allocation strategies to reduce volatility of your investment portfolio,  contact us.

Are You in the Top Income Tax Bracket Today, or Hoping to Get Back There Soon?  It May Be Time to Realize Income and Capital Gains.

In its most recent session, Congress failed to give Americans a permanent new tax law and uncertainty continues to make long-term planning a challenge.  With budget constraints on everyone’s mind, the odds are not in favor of tax breaks being included in the next tax package.  The savvy taxpayer may find some amazing opportunities in the recent two-year tax bill covering 2011 and 2012 (officially, the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010″), but she has to act quickly.

For 2011 and 2012, income and capital gains tax rates remain the same.  Even better, taxpayers caught in the long-ignored “AMT Tax Trap” will finally see some relief over the next two years.  The takeaway?  If you’re in a maximum tax bracket and expect to stay there going forward, and if you believe that income and capital gains rates are likely to rise starting in 2013, consider pulling income and capital gains taxable items onto your returns sometime in the next two years.  Better yet, if you used to be in a top bracket but have lower-than-normal income due to the tough economy, acting now could allow you to pay even less than you would have in headier years.

Some key ways to realize income and capital gains include:

Action Income/Capital Gain Result Sample Tax Savings If Income Incurred Now Assuming a  5% Rise in Future Tax Rates*
Exercise Non-Qualified Stock Options Difference Between Strike Price and Market Price counts as Income Exercise 10,000 Options 

$25 Strike Price & $35 Market Value

Total Income:  $100,000

Potential Tax Savings: $5,000

Exercise Incentive Stock Options Difference Between Strike Price and Market Price counts as Capital Gains 7,000 Options 

$10 Strike Price & $30 Market Value

Total Income:  $140,000

Potential Tax Savings: $7,000

Sell Highly Appreciated Investments (e.g., stocks, mutual funds, privately held businesses) Difference Between Cost Basis and Sales Prices counts as Capital Gains 5,000 shares of XYZ Company Stock 

Cost Basis $50/share & Market Value $100/share

Total Income:  $250,000

Potential Tax Savings: $12,500

*Sample Tax Savings are hypothetical and intended for discussion purposes only.  The difference between current and future tax rates are speculative in nature and for illustration purposes only.  Calculations made assume a simple 5% difference in current and future taxes and do not take into consideration the impact of marginal tax rates, alternative minimum tax calculations, present value or money, or other variables which would affect your actual tax savings.

Legal Disclaimer: GV Financial Advisors’ discussion of these planning strategies does not constitute and should not be a substitute for qualified legal or tax advice.  Consult with your tax, legal and financial advisors before taking any action on these or other strategies.  Your financial situation is unique and may make any of these ideas more or less attractive for you. Tracking No. GVFA 2011 0018 DOFU  3/2011

Although things seem to be improving, 2010 was still a tough year.  Our economy continues to be sluggish and unemployment remains high.  Many of us felt grateful that things seem to be on the upswing, yet fearful that the economy might falter into recession again.   How can we plan and build a happy and satisfying life in the face of an uncertain future?

I believe that it is virtually impossible to be happy without feeling grateful.  Most of us have much to be grateful for.  Even in tough times, we live comfortable lives.  We live in a country that protects our freedoms and gives us the opportunity to use our talents to practice our chosen professions or pursue our entrepreneurial dreams.  We are among the most fortunate people on the planet.

Yet, when times are tough, it is sometimes hard to appreciate these blessings.  We get caught up in the drama of our daily lives.  When we consider all the challenges we face, how do we avoid feeling bad much of the time?  Maybe the answer is to cultivate a sense of gratitude for our challenges.  Yes, you heard me − maybe we should be grateful for our challenges.

The truth is that all of us will face challenges in the year ahead.  That is just a part of life.  Some of us will face personal challenges, while others may face professional ones.  We cannot live rich, satisfying lives by avoiding every challenge.  Often, our greatest satisfaction comes when we overcome our challenges.

May you and yours have a healthy, happy and prosperous new year.

 

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