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Spring 2009 Quarterly Newsletter

Spring 2009 Quarterly Newsletter
(view as pdf)

ANNOUNCEMENTS/EVENTS

We are excited to announce our partnership with Miami University in the research of active vs. passive management. This will help our clients receive value in a way no other Advisory can currently offer!

The Financial Planning Association’s 2008 Chicago Conference gave us insight into other Advisor’s clients and issues they are dealing with. This sharing helps us assist our clients with similar issues.

You’re invited to an online webinar -Mending a Broken Nest Egg- on Tuesday, April 21st from 6:00-6:30 PM! We will focus on how to model a retirement portfolio with a Q&A session at the end. Email info@BHAdvisory.com for login information.

Newsletters will be delivered electronically next quarter.


QUARTERLY ECONOMIC REVIEW
Mark Fissel (M.Fissel@BHAdvisory.com)

This quarter has seen a large amount of economic news and influences. In short, equity and fixed income markets appear to be normalizing a bit after an extremely dismal and volatile winter. This is not to say that the clouds have parted, bear markets can have significant short term appreciation.

After a dismal 2008 and a steep 25% selloff early this quarter the equity markets rebounded in March, although not offsetting the selloff. Value style underperformed Growth due to Banks and Real Estate underperforming and the Tech sector over performing. Small capitalization stocks underperformed large capitalization, as in total, risk was punished.

Large cap stocks (Russell 1000): (-9%)
(S&P 500):  (-10%)
Small Cap Stocks (Russell 2000): (-12%)

The fixed income markets were all over the board this quarter. The government went to great lengths to drive down yields (summarized on continuation), hoping to decrease borrowing costs. All in all, the yield curve (the yield on bonds of different maturities) has stayed relatively flat and low.

Broad Bond Market: Morningstar Intermediate Core Bond Index: +1.8%
Broad TIPS market: BarCap (fka Lehman) Treasury Inflation Protected: +4%

Below we have included a concise summary of the current stimulus in the economic pipeline. For perspective, we have also included a graphical comparison of our current recession to the Great Depression.

Notes: GDP is measured at a seasonally adjusted rate in constant (1939 and 2000); employment levels are for nonagricultural jobs; 1920s-30s figures are annual and exclude the military; price data are consumer price indexes.
Sources: National Bureau of Economic Research Macrohistory Database (Depression-era GDP and employment); Commerce Department (current GDP); Labor Department (current employment and all price data)
TAX TIME! GET YOUR IRAS FUNDED

Guest commentary: John Beneviat
Partner: Beneviat & Tortora, CPA

April Fools and Tax Day, too much fun for one month! We know this information is not new to you but we hope the timing may motivate you to do things if you have not. If you have prepared and finalized your 2008 taxes and tax deferred investments- kudos to you!

2008 IRA contributions
2008 IRA contributions are due by April 15th. Make sure you speak to your advisor about how to specifically delineate that this is a 2008 contribution should you decide to make this contribution in the next few days. If you have already made a 2008 contribution during 2009, you may want to be sure it is specified as a 2008 contribution. In the event that you have been living under a rock for the past decade, IRA contributions are typically a “no brainer” decision, it’s a free way to get tax deferral.

A few rules of thumb:

Conventional IRAs: You receive an immediate tax write off, future gains are deferred (can grow tax free), and you are taxed on the withdrawals. These are beneficial if you believe your marginal tax rates will be lower when you start to withdrawal than they will be throughout your contribution period.

Roth IRAs: You do not receive a tax write off immediately, future gains are deferred, however, you are NOT taxed on the future withdrawals. Generally, the longer the funds will be invested, the more beneficial the deferral and tax free advantages of the Roth vs. the conventional IRA. A taxpayer who expects to be in a higher tax bracket at retirement than during the contribution period would favor a Roth.

A few notes applicable to both: The current limits for contributions are $5,000 per person. If you are over the age of 50 you may deduct an additional $1,000. You must have earned-income to contribute. You must begin making minimum withdrawals as of age 70 ½ (for a conventional IRA), and cannot take withdrawals without a penalty before 59 ½.

If you or your spouse are covered by an employer retirement plan you may not be able to deduct all contributions and should speak to an accountant.

There are many changes occurring this year that will significantly change the tax landscape in the future. I encourage anyone to review the changes this year prior to year end. In addition, these broad statements cannot cover everyone’s unique situation.

In addition, there’s no reason to wait to contribute for 2009! The quicker you do it the sooner you start the tax deferral!

John Beneviat has been a practicing accountant for 25 years as a Partner with Beneviat & Tortora located in Westerville, OH. John is available for questions or comments at 614-899-1280 x12.

INFLATION
Clint Edgington (C.Edgington@BHAdvisory.com)

A predictable stream of steady price increases allows economic decisions to be made efficiently and the economy to grow at a steady pace. However, unexpected sharp surges in inflation can significantly erode the value of investment assets and fixed income streams (i.e. retirement income).

Recently, we have been experiencing a low inflationary period. From gas to houses, many items are less expensive today that they were a year ago. However, we see the potential for significant inflation in the medium to long term and want to position our clients for that prospect. This inflation can hit quickly and occur in spurts (some readers may recall inflation hitting 15% during the 70?s).

In general, stocks and real estate keep up with inflation in the medium and long term. Typical fixed income investments (bonds) and cash have their value eroded by inflation over any time horizon. Almost all investments are harmed by inflation over the short term.

What causes inflation?

There is a general consensus that inflation stems from:

  • increases in the money supply and it’s velocity
  • the economy’s output in relation to its potential output

Why have we not been experiencing inflation?

1.) Money Supply
While the money base has exploded recently (see Exhibit 1: Monetary Base), the velocity of money has slowed and the money multiplier (the effect of bank’s lending out money creating an exponential supply) has drastically slowed (see Exhibit 2: Money Multiplier). While the Fed is pushing money out into the economy banks have not been lending


Exhibit 1: Monetary Base


Exhibit 2: Money Multiplier

2.) Economic Output
The past year has seen the world’s economic output dipping well below its potential. Companies can significantly increase their output without raising their costs.

Why do we believe there are inflationary pressures in the pipeline?

The factors that will increase inflation pressures are within our government?s control, while factors that will decrease inflation are less so. Stimulative policies hit the economy with a lag, some stimulative measures can take up to 18 months to affect the economy. Elected politicians and the officials that they control have historically overshot during stimulative periods. The factors that are out of government control (bank lending and economic output) could reverse rather suddenly, however.

What to do?

1. Maintain an exposure to equities and real estate

2. We have a portion of our client’s fixed income portfolios invested in Treasury Inflation Protected Securities (TIPS). TIPS apply a return to the inflation rate experienced during a period, therefore protecting holders from inflation. An added bonus is that the principal amount is guaranteed by the U.S. Government, so there is protection in the case of deflation. The downside of these products is that during periods of relatively low inflation the returns are rather paltry. Currently, the market is pricing in low future inflation, so these securities are not expensive. TIPS are a wonderful way to maintain the fixed

Further analysis will be presented for several Beacon Hill workshops in early April and our April 16 webinar.


SEEN IN THE PRESS

“The New Retirement Realities: What to do and How to cope.” by Tom Gray,
Achieve Solutions 1/15/09 (Clint Edgington)

“Ohioans taken in by Ponzi schemes,”
by Steve Wartenberg
Columbus Dispatch 12/21/08 (Clint Edgington)

“Practice triage in your spending…”
by Gregory Karp,
Chicago Tribune 11/30/08 (Clint Edgington)

“Market Fears, Stay the Course,” by Clint Edgington,
Columbus Dispatch 10/5/08

Clint Edgington, CFA
Partner
Beacon Hill Investment Adivsory
Mark Fissel, RFC
Partner
Beacon Hill Investment Adivsory
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