What a difference a few months can make... 

At the beginning of October 2011 the S&P 500 was bottoming at 1,074.77, while the volatility index (VIX) was persistently high, holding above 40.  Equity indices were showing dramatic swings with daily moves of 2-3% occurring frequently.  Economists were calling for a recession, and Europe appeared to be teetering on the brink of disaster.

Fast forward four months…

Thursday, February 2, 2012, the S&P 500 closed at 1,325.54 showing a 23.3% gain since the bottom in October.  The VIX has fallen to 18.0 as market volatility has been greatly subdued.  This is underscored by January 2012 being the first year since 1995 where the S&P 500 has not had a single day where the index has lost a full 1.0%.  Unemployment has fallen from October’s 8.9% to 8.3% in February.  International bonds, which had been a drag on performance in 2011, have recovered nicely, significantly outpacing the Barclays Aggregate Bond Index year-to-date.

All this points to what has clearly been a shift of which assets are in favor.  The disciplined rebalancing process that we hold to at JNBA is well suited to capitalize on these very changes.  During the third quarter last year, our rebalancing process led us to add to equity and international bond positions, which has, thus far, proved profitable.  We continue to adhere to our rebalancing discipline and have recently been trimming small and mid-cap equity positions which have, in many cases, become overweight relative to the overall portfolio due to outperformance.

While conditions have clearly improved, risks still persist.  Europe, while appearing closer to resolution than four months ago, has not yet put its issues entirely to rest.   Iran is threatening to close off the Strait of Hormuz through which 20% of global oil passes, following sanctions from both the United States and the European Union.  This action would have a material impact on global energy markets and could be especially damaging to the weakest nations in Europe.

The JNBA Investment Committee will continue to monitor these global events, and maintain our disciplined rebalancing posture through which we seek to avoid concentrated risks while positioning portfolios to take advantage of long term opportunities.  If you have questions about positions specific to your own portfolio, please do not hesitate to contact your Senior Advisor at (952) 844-0995.

Around the beginning of each new year and around tax prep time, many people find themselves going through the piles of paperwork they have accumulated throughout the year and wondering what they can eliminate.  We have compiled this simple list to help our clients navigate the paper and help them get organized:

1)    JNBA quarterly reports (yellow paper): you should keep all quarterly reports until the end of the year.  You can then retain just the 12/31 year end report and shred the rest.

2)    TD Ameritrade statements:  you should keep all monthly statements until the end of the year.  You can then retain just the 12/31 year end report and shred the rest.

3)    TD Ameritrade trade confirmations: Keep all buy/sell transaction confirmations related to your taxable accounts.  You do not need to keep for IRA accounts unless you want to. 

4)    Tax returns: Our understanding is the IRS can typically audit back up to 6 years.  So, we recommend you keep the last 7 years of returns.  However, you can also discuss this with your tax professional. 

On Wednesday, the FOMC had announced “Operation Twist” in which it sells its shorter term bond holdings and buys longer term bonds in an effort to reduce intermediate to longer term rates. While the Fed hopes that this will provide adequate support to housing and spur capital investment, it was viewed by many as the “minimalist approach” with investors fearing that it was an inadequate response, contributing to the ensuing selloff. This was essentially the first time that the Ben Bernanke Federal Reserve had not gone beyond the expected course of action in providing stimulus, leaving many on Wall Street disappointed with the action, contributing to the substantial two-day decline of the major indices.

Despite reasonable valuations for stocks, the JNBA Investment Committee for the near term is sticking with our defensive posture which we began in late 2010. We favor the use of broadly diversified portfolios that have stocks underweight in favor of lower stock market correlated “alternative” strategies. This should continue to mitigate some of the day-to-day volatility. Should we begin to see improving trends in stock prices, firming in lower grade bond markets, and stabilization in European credit markets, we will likely look to be opportunistic in stock market based asset classes that offer good value after the selloff and have firmer underpinnings than the current daily volatility has presented.

While the past several months have been challenging for markets and investors, entering this period of time with well diversified portfolios has helped reduce the market’s impact. When credit markets appear less stressed and equity markets begin to show signs of firming we will look for opportunities to increase stock market exposure. For the time being we will continue to monitor fixed income markets in the U.S. and Europe for signs of improvement and leading economic indicators for signs that the current economic weakness may be bottoming.

Recent poor stock market performance has underscored the importance of managing risk within portfolios. The S&P 500 closed Wednesday at 1120.76, down 18.2% from its May 2 high of 1370.58. This decline, which has steepened in the past two weeks, has reduced the index to its September 2010 level and below prices seen in the fourth quarter of 2009.

There have been multiple factors behind the recent losses, however, the declines this week have been principally driven by the S&P downgrade of U.S. Government debt and the ongoing European financial fiasco. While the downgrade was met with a negative response in the equity markets on Monday, it has not rattled the bond market and the price of U.S. Treasuries has rallied as investors sought a safe haven from the losses and volatility stemming from the issues in Europe. Investors have voted with their dollars, and confidence in the security of U.S. Treasuries remains unshaken. On the European front, banking stocks have led the decline with French banks being hit particularly hard on Wednesday. Domestic stocks were also dragged down with large banks seeing the greatest declines.

Market volatility continues to rise, and while the news of the day that may send the market soaring or plunging cannot be predicted, according to Ned Davis Research, markets tend to average high annualized returns when volatility spikes and fear creates opportunity. Holding to our disciplined approach and taking advantage of rebalancing opportunities, we are working to rebalance our clients’ portfolios to the strategic long-term targets, and where appropriate, towards asset classes the market decline has put underweight. It is crucial in these difficult markets that we hold to this disciplined approach and not succumb to the temptation to become market timers.

When markets rally off a bottom, the initial advance is typically quick and steep.  On August 27, 2010, Ben Bernake first suggested that the Federal Reserve might institute a policy of quantitative easing; the rally was sharp, with the S&P 500 rising 3.7% in the first week and 7.3% in the first month.   After the March 9, 2009 market bottom, the move was even more dramatic with a one-week return of 11.4% and a one-month return of 26.6%. Investors who do not remain fully invested will be late re-entering the market, and will likely miss a substantial portion of the initial bounce. The Federal Reserve said in its August 9 release that interest rates will likely be maintained at “exceptionally low levels… at least through mid-2013.” The market saw a strong one-day rally on Tuesday in response to this release. Considering that Chairman Bernanke will be speaking at Jackson Hole again on August 26, it is prudent to remain fully invested.

The market decline has also created value opportunities for investors. The S&P 500 is trading at 12.3 times its trailing 12-months earnings, a valuation last seen in March 2009, which was a market bottom. Emerging market stocks are at their lowest valuation levels since January 2009. At this time, it is crucial for investors to focus on their long-term goals and tune out the short-term noise. In an environment like we have had over the past two weeks, investors are best served by focusing on the fundamental value of their investments. As Benjamin Graham said, “in the short run, the market is a voting machine, but in the long run, it is a weighing machine.” The current weight of corporate balance sheets and earnings statements is significant and in time should be reflected in their prices.

If you have additional questions about these recent happenings, or about allocations specific to your portfolio, we remain available to you. Please contact your Senior Wealth Advisor, or call JNBA and ask to speak with a member of our Investment Committee at (952) 844-0995.

Heading into the end of July, the focus of the financial world was on the U.S. debt ceiling and the potential for a U.S. default. We believed that the issues of the debt ceiling being raised were overstated, but that once through the near-term fear over potential default markets, we still had to deal with high debt levels in the U.S. and Eurozone accompanied by slowing global growth. Since the debt ceiling problems were near-term and widely followed, it was to be expected that some amount of relief rally would occur once the debt ceiling was raised and default was avoided. JNBA was of the opinion that the duration of the relief rally and percentage of rise over the coming days or weeks would likely speak to the amount of concern over debt levels and growth. The rally lasted for all of about 20 minutes Monday morning, and then a disappointing manufacturing reading sent the market lower with the Standard and Poor’s 500 dropping from over 1300 at the open Monday to 1200 by close of business Thursday.

As the robust portion of the economic expansion showed signs of slowing throughout 2010, we had been pleased with near-term economic performance. However, our long-term concerns going to the origins of the crisis remained over the structural issues of debt and deficits. As a result, JNBA had taken the approach of dividing the growth portion of portfolios to include assets with potential for capital appreciation that were less linked to the stock market. These strategies included precious metals, diversified commodities, tactical managers, and selective managers with the ability to position for higher or lower markets by incorporating short selling. These allocation decisions were taken to mute some of the volatility that was likely to occur as governments heavily indebted no longer had the ability to grow economies through increased spending. Meanwhile, excessive computerized trading has seemingly increased volatility, as Wall Street computer trading programs often follow the trend versus focus on fundamental value, which can elongate and accelerate ups and downs. In addition, portfolio rebalancing targets to stocks were reduced, and in 2010 JNBA eliminated high-yield or junk bonds to mute portfolio volatility. Despite fixed income yields remaining low, JNBA remained committed to keeping a full allocation to domestic and international bonds, choosing to focus on manager selection versus abandoning bonds for the lure of higher stock returns.

Due to a more conservative approach that has been maintained throughout the past year, we feel that while frustrating to all of us,portfolios are well positioned for market shocks when they do occur. While one can never know in advance the duration and severity of a market decline, there are reasons to believe that the current market decline while painful is unlikely to match or eclipse the losses seen in the 2000-2003 bear market or the 2008 financial panic. A brief list of those items would be:

• The position corporations have put themselves in with record cash levels on balance sheets and reasonable market valuations, that while above fair value are not nearly as stretched as bull market peak valuations of 2000 or 2008.
• Federal Reserve under Ben Bernanke has had little regard for the dollar and been willing to print money and fix extraordinarily low interest rates in efforts to increase markets and confidence.
• The current global growth engine resides in emerging markets, all of which had been raising interest rates causing economies to slow and stocks in those markets to fall. Falling market prices should ease inflationary pressures and push through accommodative monetary policy in high growth potential markets.

For the time being, we remain patient with the existing, defensively tilted allocations. We believe that portfolios are well positioned for the uncertain road ahead with enough growth to capture upside (should the markets rally), and plenty of more defensive positions for slowing growth and frequent concerns over government debt. We remain on alert to find good opportunities, and perhaps emerging market equities will be the first to lead us out, as they entered downtrends first in both 2008 and 2010 and have recently had a knack for leading to the upside. However, in the near term we plan on remaining patient as allocations remain well diversified. If you have additional questions about these recent happenings, or about your current allocations, we remain available to speak and or meet with you.  Please contact your Senior Wealth Advisor, or call JNBA and ask to speak with a member of our Investment Committee at (952) 844-0995.

While financial media feels it appropriate to put a clock on the television counting down to the “debt deadline,” several of these deadlines have come and gone to date with relatively little impact on financial markets. Ultimately, for there to be an actual default event, the U.S. Treasury would have to fail to pay bondholders, which means that for a period of time beyond the August 2 deadline the Department of Treasury could avoid default by prioritizing payments to bondholders (moving money from other sources).

Finally, at the eleventh hour we are seeing action from both the House and Senate to strike rather unremarkable, status-quo type extensions of the debt ceiling that address only mild spending cuts with no revenue component. The House plan would provide about six months of debt ceiling relief and the Senate plan around 18 months, pushing the issue past the 2012 election.

While both plans would be successful in the near term on providing the ability to issue additional debt and taking the possibility of default off the table, neither may prove sufficient enough for the U.S. to maintain it's AAA credit rating. In order for the pace of government liabilities to slow, the Federal government needs to address spending cuts, entitlement programs, and revenue. Both plans allow for debt increases on mild levels of spending cuts. While the AAA rating is in jeopardy due to the large amount of deficit spending that is likely to continue so long as the Federal Reserve has a printing press, concerns over being paid back on U.S. government liabilities is not a major worry. It is the value of those dollars' purchasing power that is the greater concern.

The concerns again are not over the short term raising of the debt ceiling. It appears likely that President Obama will have the ability to sign a plan that he probably will not be happy about signing that raises the limit. The short term impact on the already slowing economy is not a huge concern,as both plans are far more favorable in the short run than most people anticipated, and neither substantially changes spending nor does anything to increase taxes.

However, concerns are again over the long term as the plans fail to address that government spending is at the $4 trillion level annually and revenues continue at under a $2.5 trillion level. With GDP growth of 3 to 4%, that equates to about $500 billion of increases per year in government debt growth at the $1 trillion plus level is completely unsustainable. The proposed bills are not the grand bargain the President was hoping for nor the aggressive spending cuts that fiscal conservatives had wanted to see, but in large part an extension of the status quo that has seen debt to GDP growth from 61% in 2007 to 100% in 2011, which is an unsustainable path that rewards the present while borrowing from the future.

The JNBA Investment Committee does not currently view this as anything other than a short term event (the August 2 vote specifically) as it would provide some relief from the short-term uncertainty, unfortunately at the expense of continuing to further kick the can down the road. At the current time, we are not making any major changes to portfolio strategies or allocations under the premise we will not have an agreement by next week. However, our portfolios are already in alignment with what we view as the longer-term structural issues that may arise. If you have specific questions about issues that may impact your investments, call your Senior Wealth Advisor or ask to speak with someone on the Investment Committee at our office, (952) 844-0995. You can also email us at info@jnba.com.

Market headlines have recently been chock-full of concerns over the inability of lawmakers to compromise on a plan to raise the debt ceiling.  While both parties appear entrenched, the fixed income market is pricing in little possibility that eventually an increase in the debt ceiling is not worked out. Yields on 90-day Treasury Bills have at times in the past week been negative which means people are willing to lock their money in at marginally negative interest rates for a security that technically would be in default if the debt ceiling is not increased.  In Europe, bond yields on sovereign debt for Greece, Spain, Portugal, Ireland, and Italy have recently spiked pricing in potential default.  Fixed income markets in the U.S. would likely be rewarding investors more interest versus no interest at all.  The bond market appears to be telling us partisan politics is nothing new to Washington, D.C. In fact, 89 times since 1939 the debt ceiling has been raised.  Our guess is they will manage to raise the debt limit again.

The more challenging issue that may be surfacing with the recent stall in stock indices is the economy likely grew at less than 2% in the first half of the year.  Considering the debt ceiling will need to be raised higher than the current level of GDP, and the Federal government is spending about $4 trillion while taking in about $2.3 trillion, measures of increased revenue and decreased spending are needed in order to balance the budget.  Cutting spending or raising taxes at a time of low growth could prove challenging for the surge in corporate profits and the stock market.  To date, corporate profits have remained strong and stocks have sustained the upward trend that began in 2009, but the impact of austerity on already slow global growth will need to be closely monitored and adjustments made as necessary.

As the JNBA Investment Committee continues to monitor this and other economic happenings, we will post additional insights as we see necessary.  In the meantime, if you have any questions, please call JNBA or your Senior Wealth Advisor for additional clarification.

It is hard to believe that Daylight Savings Time has already arrived.  We hear a lot about the practice of replacing batteries in our smoke detectors and cleaning out our closets in conjunction with moving our clocks back an hour.  Similarly, this time of year brings about the need to begin thinking about some end-of-year planning.  As always, the best way to stay on top of your financial goals is to keep an open line of communication with your JNBA Advisory Team as well as your other financial professional partners.  However, we thought it might be helpful to provide a year-end financial checklist to help guide and motivate you in certain areas.  Keep in mind that some of these may have already been discussed with your JNBA Senior Advisor.  If this year-end process brings something new to the surface, please know that we are here to help and do not hesitate to contact your Senior Advisor.
Tax
• Consider accelerating income to hedge against a possible increase in tax rates after 2010
• Check to be sure you are getting your full 401k pre-tax savings (or at least enough to get the company match) for the year:  $16,500 with a catch-up of $5,500
• Discuss final decisions on converting traditional IRA monies to Roth
• Schedule your tax appointment now for a day and time most convenient for you
Investments
• Take a comprehensive  look at  any outside investment or retirement accounts to better understand how all the “pieces” (all accounts combined) fit together
Insurance
• Revisit your various insurance policies with your Senior Advisor or Insurance Professional to determine if changes to your income, financial goals, family situation, health issues, or property ownership have created any gaps or overages in your coverage
Estate/Gifting
• Revisit beneficiary designations on retirement accounts and benefits, life insurance policies and annuities
• Consider possible charitable contributions and execute by December 31.  If you contribute to a charitable organization (one that has received 501c3 tax-exempt status) your donations could be tax deductible if you itemize your tax return.  Don’t forget, all gifting requests must be received by JNBA by December 16 in order to meet this deadline
• There is still time to make 529 Plan and other college savings gifts.  Remember, you can give up to $13,000 per child (so a couple could contribute $26,000) and stay under the gift tax limit
• Review your estate plan (will, trust, powers-of attorney, etc.) to make sure they properly reflect your wishes as well as any changes that have taken place in the past year
• Is JNBA aware of any large purchases on the horizon for you?
Health/Medical
• Spend what’s in your Flexible Spending Account (FSA) by year-end
• Annual physicals are covered under some plans so take advantage.  Also, if you’ve maxed out on your medical deductibles and you’re needing to see the doctor some time soon, make the appointment before your deductibles reset
Other
• Check your credit report for any inconsistencies
• If you have sizable credit card debt, take the time to discuss your rates and explore consolidation options
• With the Fed’s recently announced QE2 plan, mortgage rates have fallen even further.  Are there opportunities to refinance?
• Revisit all benefits available through your employer

At the heart of every investment decision made at JNBA, lie the talent, experience and insight of our 10-member Investment committee.  The committee is made up of senior leadership, Advisors and Staff, everyone being a voting member.    This structure allows us the very best thinking and thought process to be implemented within client portfolios. We feel this process helps us best identify and take advantage of opportunities for our clients and implement them efficiently and consistently across the firm.  Examples of this include: selection of individual investments, discussions around rebalancing of portfolios, and determining portfolio allocations based on both the environment and longer-term risk and return characteristics.  All decisions made by the Committee regarding investment planning are followed by everyone at JNBA to ensure consistency and continuity across portfolio strategies.

The investment committee starts at the highest-level of the investment planning process, with the JNBA Investment Philosophy:  We believe in asset allocation with a core (foundation) and explore(tactical) strategy, combining both  fundamental and technical analysis to make investment decisions.  These decisions are made with an eye toward the macro environment, overweighting those asset classes we believe have a better risk/return profile and underweighting when that profile looks to have more risk characteristics than what the potential return justifies. 

Formal meetings are held monthly while informal meetings occur much more frequently – allowing free-flowing discussion of ideas and thoughts surrounding the economy, the investment climate, and how it pertains to investment strategy within client portfolios.  If you have any questions about the Investment Committee process, please ask your Senior Advisor.

The Economic Growth and Tax Relief Act of 2001 (EGTRRA) made significant changes in several areas of the U.S. Internal Revenue Code and in general lowered taxes.  A majority of these cuts are set to expire at the end of 2010 unless Congress acts to extend them. Specifically, federal estate tax and federal generation-skipping transfer tax are repealed for 2010 unless Congress enacts retroactive legislation.  In 2011, both taxes are scheduled to return to pre-2001 levels of $1 million exemption with a top tax rate of 55% opposed to $3.5 million and 45% in 2009.  The federal gift tax, however, was not repealed for 2010 and remains in effect with a $1 million lifetime exemption, and top tax rate at 35%

The  “step-up in basis rule”, which allows heirs to inherit assets with a fair market value as of date of death also  has been modified.  For 2010, the basis (original cost) for inherited property is the decedent’s basis (carryover of original cost) or its fair market value on the date of death, whichever is less.  However, $1.3 million of estate property is given a step-up in basis and up to $3 million of property passing to a surviving spouse receives a step-up as well.

Because uncertainty remains in terms of what Congress will do next, there may be the temptation to delay updating your estate plan.  However, these may be good reasons to update your plan now and build in flexibility to any changes in the tax law.  We also recommend as a general guideline that your plan be reviewed at least every five years and that you keep communication iwht your Senior Advisor open so they can work with your attorney to keep you on track to accomplish your goals.