ProVise Management Group
July 29, 2011
· We are pleased to announce that, according to Financial Advisor, ProVise was recognized as the 118th largest independent financial planning and investment advisory firm in the country based on assets under management as of December 31, 2010. This also ranked us as the fourth largest in the state of Florida and the largest on the West Coast of Florida. We want to thank all our clients for the confidence placed in us over our 25 years in helping us achieve this milestone. The partners would be remiss if we didn’t also extend our thanks to our employees who come to work each day with smiles, and help our clients along the road toward financial independence.
· While encouraged by some of the steps taken during the recent debt negotiations, like those of the “Gang of Six” in the Senate, we simply need more people who are willing to compromise to come up with more reasonable solutions. There are no simple answers. We have faced these types of challenges in America in the past and have successfully worked our way through the issues. While we have a bumpy road ahead, we are confident that one way or the other, the problems will be solved with positive outcomes. Even with all of our “warts”, where else would you rather live?
As we head into the weekend the Democrats and Republicans in Congress, along with the White House are still playing politics with each other, but more importantly, with their constituents’ lives. The “talking heads” have been moving their mouths for the past two weeks, especially this week, with all types of dire predictions. Non-dire predictions don’t attract as many viewers. There is no need to repeat all the things being said. Rather, let’s look at some other possibilities.
The popular wisdom is that interest rates will skyrocket and that the stock market will tank. Let’s take interest rates first. There does appear to be enough money to perhaps allow for another week’s worth of paying the bills before the possibility of default happens. It will take some juggling, but it appears that even Geithner has admitted that the August 2nd date is not hard and firm because he said he is “working on a contingency plan”. If August 2nd were hard and firm, then a contingency plan would not be relevant to pay the bills for another week to 10 days. At some point, however, he will have to start making choices. It is entirely possible that, regardless of the outcome, S&P may reduce the rating of the U.S. from AAA to something less. They have threatened to do this even if the debt ceiling is raised and even if it’s only for six or eight more months as opposed to into 2013. Does a downgrade translate into higher interest rates automatically? The answer is absolutely not. Yes, there is a possibility, but it is not absolute. Let’s look at Japan as an example (by the way they are the highest creditor nation in the world and we the largest debtor nation in the world). When Japan was downgraded 20 years ago, their interest rates barely moved, and in fact, the rates remained extremely low during that entire period of time. What is more likely to be absolute is that the U.S. will still remain one of the highest rated forms of debt and that all other debt will get correspondingly downgraded in the marketplace. That is to say, the spreads between Treasuries and municipal bonds, corporate bonds, high yield bonds, and other sovereign debt will remain the same because all will move down together. That, of course, is not guaranteed, but we see this to be the more likely scenario. It’s all relative.
As to the stock market, once we get over the psychological impact of what has occurred over the past several weeks in Washington and the absurdity of not doing something sooner (bringing us to the brink of potential default), investors will look back to what is really important in the stock market – earnings. Corporations are producing record earnings and they have outstanding balance sheets. CEOs have a positive outlook. When investors turn their focus back to earnings, the fundamentals will likely be the overriding factor. Should the market take a psychological nosedive, it will be an opportunity for investors with cash to consider deploying some of it to capitalize on the long-term potential.
· Here is an important piece of information for anyone who may have someone staying at home and who is either suffering from dementia, or who cannot perform at least two of six activities of daily living: eating, toileting, transferring, bathing, dressing, and continence. Recently, the Tax Court affirmed a tax deduction a family had taken for the 24 hour supervision needed for an elderly family member. Caregivers were hired - even though they were not licensed healthcare providers - and the family took a tax deduction for the cost of these caregivers. The IRS denied the deduction, but the Tax Court affirmed it. The Court went even further by stating that the costs of maintenance and personal care services could qualify as a medical expense if a healthcare professional certifies that at least two of the six activities of daily living cannot be done without assistance. The certification must be by an MD, registered nurse, or licensed social worker. The professional must also approve the care of the patient. This is significant because often those who prefer to stay at home incur substantial costs but have not been able to deduct the costs as medical expenses. Under current tax law, all medical expenses which exceed 7.5% of adjusted gross income (AGI) are deductible. For further details, please be sure to check with your healthcare and tax professionals.
· This is a tale of two Europes. With all of the headlines out of Europe regarding Greece, Ireland, Portugal, Italy, and arguably also Spain, one has to wonder how the euro has managed to maintain its value against the dollar. It wasn’t that long ago that the euro was trading at $1.25 to €1.00 and today, it is almost $1.50 to €1.00. If Europe were really having the extent of the problems being expressed in the headlines, why isn’t the euro falling? Arguably the reason is that Europe is divided into the North and South. The industrialized and economically sound northern parts of Europe are strong enough to offset the relatively small economic countries that seem to be having the most problems. We are not just talking about Germany, but also France, Belgium, the Scandinavian countries, etc. Additionally, Europe is divided East and West, with the Western European countries being primarily developed countries, while the eastern part of Europe remains a developing group. These eastern countries that formerly were members of the Communist Block also have relatively small economies, but their potential growth far outweighs some of the weaker economies mentioned above. As these are economically absorbed into the greater part of Europe as a part of the monetary system, they will have even greater opportunities to bolster the euro against the dollar. So, does this mean that a big investment in the euro is in the offering? In general, the answer is no, as we view the United States in the top five places for growth over the next couple of years. But, perhaps this helps explain in part why the euro continues its strength against the dollar.
· We’re now 15 months away from our national election for the next President of the United States, all 435 Representatives of the House, and one-third of the Senate. What part of the last election don’t politicians get when the voters threw out the Democratic majority in the House and elected Republicans? Oh sure, if you’re a Republican, you’d like to think it’s because your “idealism” was better than the Democrats’ “idealism”. The fact is that people were simply plain tired of the “same old, same old”. As Governor Pawlenty was trying to revitalize his Presidential campaign in Iowa last week, he indicated that he continued to find the electorate reluctant to raise the debt ceiling. While it would be nice if this were not necessary, the reality is that, at the moment, there really is no choice.
But there is a message in what the people in Iowa are saying. People are tired of politicians trying to buy votes with the latest pork barrel projects, gifts, grants, and social programs that, in many cases, have an unlimited budget which they are still managing to exceed. The problems are not only being manifested in the United States, but in Europe as well, where the social programs are even more generous. By no means are we suggesting a “willy nilly” approach to reining in the spending of many governments, but rather if the politicians are unwilling to do so, the people will.
In this country, we did that when we won our freedom back from the British in the late 1700’s. This was an armed revolution and fortunately today, that is not likely to be repeated. However, it is entirely possible for a revolution to occur as the voters continue to show their frustration with the politicians who are more interested in maintaining the status quo, i.e., getting reelected and protecting old ideas rather than having the courage to find solutions to our challenges that are acceptable in modern times.
By no means do we mean to sound all “doom and gloom” because we do believe that, in our Democratic society, revolution will eventually show up in the ballot boxes. But, there is an alternative. When demagogues continue to rule with an iron hand and are no longer responsible to their citizens and/or are giving things away, then a country/civilization simply disappears (think Greece and Rome in ancient times, the Soviet Union in more modern times).
As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon. Proudly and successfully serving our clients for 25 years in 2011.
(c) ProVise Management Group
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