Home Sales

A report by The National Association of Realtors shows that on the national level existing home sales dropped -5.1% in the month of June, though sales are up +9.8% since last year.  The sale price of homes increased +5.2% from last month, but just +1% from last year.  With inventory up to 8.9 months of supply, there is a lot of downward pressure on home prices.

Here in the sweet, sunny South, the level of home sales is more improved that the Western states, but less so than our Northern-Eastern neighbors.  According to the National Association of Realtors seasonally-adjusted existing home sales in the South are down -6.5% from last month, but are up +11% from this time last year.  Sale prices on homes in the South are up +6.4% in June, but flat from this time last year.

I read this as being hugely influenced by the home-buyer credit.  No doubt there was a rush to buy prior to April 30, which is the deadline for having a binding contract.  (The deadline for closing on these sales was June 30, but then was extended).  Despite this volatility in monthly data, home sales are up for the year.  The question remains how much the home-buyer credit spurred buyers to come into the market that wouldn’t have otherwise, or whether the credit just encouraged those that planned to buy regardless, to do so in the first part of the year.

Harli L. Palme, CFP®

Financial Advisor

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Financial Industry Reform

The banking overhaul bill has passed!  To quote the Kiplinger Letter, “The regulatory revamping cuts a wide swath, giving broad power to Uncle Sam to protect consumers and discourage banks from engaging in risky behavior.”  The main goal of the law is to prevent a crisis like the one experienced in 2008.  Let’s hope the law will act as a warning system when greed and fear creep into decisions being made by financial institutions.  One of the key components is that the Fed now has the authority to seize big financial firms and banks before panic sets in.  The largest of banks will increase their reserves so that they are less likely to crash in economic down turns.  Harry Reid was quoted saying, “Now no bank is too big to fail.”  However, there will always be financial giants that would cause disaster in world markets if they failed.  The new higher capital requirements of the big banks will make lending standards more demanding, which will have a slight drag on the recovering economy.  GDP is expected to be 3-3.5% in 2010.  The big banks will also be required to hold 5% of the loans they underwrite in their own portfolio.  Smaller banks have less capital requirements then big banks, but they could be affected by the reduction in certain fees that can be charged to consumers.  The bill does permanently increase the FDIC insurance to $250,000 per account.  The SEC also gains authority to force corporations to let shareholders nominate candidates for boards.  The bill was not intended to provide investor protection.  However, increased transparency and disclosure by financial firms that could help prevent a meltdown will be good news to investors.

Gregory D. James, CFP®


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George, I Can Lie About My Age!!

This year, I celebrate a milestone birthday. Let’s just say I am now officially too old to be George Clooney’s girlfriend.

As often happens with milestone birthdays, you reflect about how you imagined your life would be at this stage. Perhaps you had envisioned retiring at an early age. Maybe you wanted to start your own business. Or save tons of money, quit your job, and travel around the world for a couple of years. (Hey, you can dream.)

Then, life happened. You devoted yourself to a career. You bought a home. You got married and started a family. The years go by. You wake up one day and realize you’re that age.

When you first began your journey with Parsec, your goals were just rough ideas of where you thought you wanted to be in 10, 15, 20 years. Now that time has passed, are those goals still the same? Have you been affected by any of these events:

• Started a family
• Sent a child to college
• Lost your job
• Dealt with aging parents

We would also be remiss if we overlooked the extraordinary market volatility of the last two years.  All of the above events can significantly alter your financial plan.

Do you still have the same goals now that you did before these events occurred? Has your “deadline” for achieving those goals shifted? It is very easy in the day-to-day rush to not think about these things. However, it is important to evaluate your financial situation and goals periodically so you can stay on track.

Your financial advisor is here to help you. Together, he or she can review your financial plan and work to keep it in line with your changing life. Just call him or her anytime.

Cristy Freeman, AAMS
Senior Operations Associate

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Recovery Phase is Over? Now What?

There is plenty to be worried about these days. Outside of Europe, Iran, China and taxes, it appears we are now faced with a slowing economy. Over the past few weeks, we have seen economic and earnings data disappoint versus expectations. Although it appears that the economy is slowing, it can be beneficial to understand the economic cycle to better understand what is truly happening.

The typical economic cycle lasts between 5-7 years. The textbook definition of a business cycle includes four stages: Expansion, Prosperity, Contraction and Recession. Although I may not be textbook in my thinking, I like to divide economic cycles into 7 stages: Peak, Contraction (or Recession), Trough, Recovery, Expansion, Euphoria (then Peak again).

During the Recovery phase, we typically see companies experience significant growth, not because the economy is completely healed, but rather because the growth is being compared to extreme lows (the Trough). Although this growth is welcomed by both individuals and the market, it is typically unsustainable. For example, for the last several quarters we have seen many large cap companies grow earnings by 25 – 50%. During a Recovery, the majority of this growth is achieved by extreme cost cutting and margin expansion combined with a moderate amount of revenue growth.

As the economy begins to heal, we begin to transition to the Expansion phase of an economic cycle. Although less exciting, this is typically the longest phase of an economic cycle. During this period we typically experience earnings growth, but at a slower pace. This is the phase we believe the market is now entering.

Quite often, the transition from Recovery to Expansion is met with much pessimistic volatility. While this transition is taking place, investors still have vivid memories of the past contraction. As the recovery slows, skeptics are able to pinpoint leading indicators that are showing signs of weakness. These factors help to create the “Wall of Worry” that the markets so typically climb.

The good news for our clients is that high-quality, dividend paying stocks will often outperform during an expansionary phase. This occurrence is typically due to earnings growth, dividend yield and rising interest rates, which can harm the weaker, over-leveraged companies. It is also common for high-quality fixed income to underperform during the expansionary period, again due to rising interest rates.

Although the negatives continue to grow by the day, we continue to believe the “double dip” is unlikely. We feel the positive sloping yield curve, absence of inflation, pristine corporate balance sheets and strong corporate earnings growth will provide for a normal, albeit bumpy, transition from Recovery to Expansion.

Michael Ziemer, CFP®

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The “Flash-Crash” and Stop-Loss Orders

We occasionally get questions from clients regarding stop-loss orders and why we do not use them on some or all of the positions in client accounts. I believe there is much misunderstanding about these types of orders and how they work. I will briefly try to highlight how this type of order works, and use the recent “flash-crash” as an example of its potential pitfalls.

On May 6, the Dow Jones Industrial Average lost 565 points in 7 minutes between 2:40pm and 2:47pm, and then gained 590 points in the next 10 minutes. Some stocks, such as Accenture (which opened that day at $41.94 and closed at $41.09), traded for pennies for a few seconds. Long-term investors who do not concern themselves with intraday price movements probably would not have even noticed this strange fluctuation. When we buy a stock, we intend to hold it for at least 4-5 years and possibly even longer. From our perspective, while this type of intraday fluctuation was puzzling, it did not reflect anything adverse about that particular company or its earnings prospects.

A stop-loss order is a sell order entered at some price below the current market. When the stop price is hit, the order becomes a market order. It is then automatically submitted and filled at the current bid price for that security. Let’s take an example: Say Accenture is trading at $40 and you decide you are willing to lose no more than 20% of this value, so you enter a $32 stop-loss order. If the stock trades at $32 or below on any particular day, your stop is triggered. The order is sent to the NYSE where it is filled at the current bid price. In most cases, this is reasonably close to the stop price unless it is a fast-moving market that day. But what happens in a fast market?

On the day of the flash-crash there were not enough bids on the NYSE for many securities, therefore these orders were routed to other electronic exchanges that do not have the same circuit breakers. By the time your $32 stop was routed and filled (within seconds), you could have ended up with a fill price of $1 or less. The exchanges later cancelled trades that were 60% or more away from the 2:40pm price, but that would not help you if you got filled at $20 for your Accenture shares (you would have been down about 50%, so the trade would have been honored). Then the stock ends up closing at $41.09 an hour or so later, so the stop-loss order did nothing to protect you from downside risk and got you out at an abnormally low price. The crucial thing to remember about a stop-loss order is that it is not a guarantee to get you out at a specific price!

The exact causes of the flash-crash are still being investigated and may never be completely revealed. New regulations are being proposed by the SEC to slow down or stop trading in individual stocks with large price movements during most of the trading day. Whether these regulations will be successful in reducing intraday volatility is uncertain. We remain focused on earnings and dividend growth as the drivers of stock prices over longer time periods, rather than short-term price movements.

Bill Hansen, CFA
June 18, 2010

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The Case-Shiller Index

Earlier this year, I received an email from my alma mater saying that Karl “Chip” Case was retiring after 30-plus years of teaching economics at Wellesley. Although I never took one of his classes (which I now regret), I know that he was immensely popular and beloved by his students, and will be greatly missed. One of his enduring legacies is the Case-Shiller Index (technically called the S&P/Case-Shiller Home Price Indices), which he developed with Yale economist Robert Shiller and Shiller’s graduate student Allan Weiss.

The indices are calculated based on repeat sales of single-family homes. Measuring housing prices based on median sales shows the values of different homes selling at a particular point in time, rather than tracking the sales price of the same house over time, which Case believed was a more accurate way of measuring appreciation in housing values.

The indices (now generated and published under an agreement between S&P and Fiserv) are published on the last Tuesday of the month, and have become a media staple during the downturn. The most recent report, published May 25 for data through March 2010, showed that the US National Home Price Index fell 3.2%, but is above the year-ago level. Average home prices are now at levels similar to those in the spring of 2003. Eighteen of the twenty metro areas represented in the 20-city composite showed improvements in annual returns, with the exceptions being Atlanta and Charlotte. Las Vegas was the only city to still post a double-digit decline at the end of March.

Sarah DerGarabedian
Research and Trading Associate

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What is the Real Cost of the Gulf Oil Spill?

Many years ago, and on a regular basis ever since then, we reviewed BP and decided to rate the stock a “buy” and purchase it for many of our clients. We bought Transocean stock for many clients as well. When it became clear that the Gulf oil spill was a devastating disaster, we decided to sell BP and keep Transocean. The reason for this apparent contradiction is that as it stands now, BP, who operated the oil rig, is responsible for the spill and will be financially liable for the majority of the clean-up. Currently Transocean, who owns the rig and leased it to BP, has limited liability for the clean-up. In light of this, and a significant back-log of revenue for their 140+ rigs, we see Transocean as over-sold and have decided not to sell the security at its current depressed price.

What is the Cost?

Financial analysis involves valuing a company based on estimated variables. One way we value a company is to discount future dividends using estimated growth rates. We also take the consensus earnings growth rate and estimate how that translates into a future stock price. We look at many other factors, such as the market value of the company’s debt and equity, or the present value of future earnings.

All of these factors are estimates and variable but they are known. By known, I mean they are conceivable factors. We could not have conceived of an oil spill this large, that would happen at this time, and that would be attributable to BP with any reasonable certainty. And because the estimated probability of something like that would have been so small, it would not have affected any analyst’s valuation metrics. This makes the case for portfolio diversification. In order to protect against company-specific and industry-specific risks, we put 40-50 company stocks in a portfolio, at about a 2% weighting.

Our sell/hold decision on BP/Transocean was based on the spill’s potential impact on the companies’ earnings, and thus the value of the companies. But what if we had made our decision based on the true economic impact of the spill? What if we could quantify the entire economic impact of the spill and attribute that to the companies’ earnings and value? Once we considered the injury to the livelihood of the shrimp fishers, the effect on the Gulf States’ tourism, and the government expense to clean the wetlands and beaches, would there be any earnings left at all? But this is not the charge of our Investment Policy Committee and of course, the impact could never truly be quantified.

What is the Solution?

Some of our clients have requested that we make investments for them in clean energy stocks. It seems like a simple proposition – these emerging technologies are on the cutting edge and will surely be profitable. However, that is often not the case. New industries and technologies face high costs, high barriers to entry, tough competition, and the simple risk that their technology may not be the technology that prevails in the end (think Betamax versus the VCR). For these reasons emerging industries are considerably more difficult to evaluate than established industries, and thus we have opted to buy an index of clean energy companies for those clients who have requested it, rather than invest in a single company.

There is considerable technological ability, capital, expertise and intelligence among those developing technology in the oil industry. They have developed a way to locate the presence of pockets of oil that reside miles under water and thousands of feet further underground, get major machinery down to that spot and drill down to access this reservoir, then pump the oil back up through miles of water and into vessels above the surface. With this type of might and capability, theses companies could put substantially more focus on developing alternate energy technologies. The economics of that development may show it as not yet profitable enough at first glance. But if we calculated the real costs and risks of energy production, perhaps they would see the benefit. I hope that out of this terrible environmental disaster we see an improvement in the collective understanding of the importance of clean energy.

Harli L. Palme, CFP®
Financial Advisor

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The Market

Obviously, we are going through a difficult time – again – in the market and investors fear there will be another drop similar to the last one. I read the following in an AP article on the web this morning: “Don’t panic. Think long-term. Corrections are normal.”

The idea to get out of the market when it starts to go down and get back in when it goes up just does not work. The reason it doesn’t work is that despite all the predictions you read and hear out there, no one knows when the market hits the bottom or when it will turn around. Long term investors should not be concerned about short term volatility. You should always keep enough cash for emergencies and have the proper allocation for your situation. You need a long-term plan and you also need to resist the temptation to succumb to the fear that the media generates.

I received a newsletter this week where the title concerned another bubble that is about to explode. They predict that the average $100,000 portfolio will be worth $48,000 at the end. However, if you would only take the bold steps outlined in the report you could turn that $100,000 into $2.4 million. The report is 20 pages long and outlines some compelling evidence and I can see why people would be influenced by reports such as this. If it was so easy to make so much money why is the author writing a newsletter? There are also books – that are best sellers – that are predicting dire things for the economy. There are also books that give a more balanced historical perspective, such as “Manias, Panics, and Crashes” (fifth edition) by Charles Kindleberger and Robert Aliber. While we usually hear “this time is different” the truth is that every time is different, yet surprisingly the same.

Barbara Gray, CFP®

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How to Save Millions in Two Seconds!

I love headlines like that. Tightening our belts is the topic du jour during this economic disaster. While the leading indicators show an improvement, I am sure you know people who are still unemployed, have lost their homes, or are in serious financial straits. We are hardly out of the woods yet. So, I have compiled a list of my favorite tips for saving money:

Protect your credit score. Why?

o You qualify for better interest rates when your credit score is good, which saves you money in the long run.
o Your credit score impacts your property insurance rates.
o A prospective employer may want to check your credit. A bad score could hurt your chances, depending upon the employer.

Everyone knows you should get the free, annual credit report offered through AnnualCreditReport.com. Identity theft is not the only danger, though. Excessive debt and late payments or defaults can damage your score. All your sacrifices and stringent budgeting can be undone by a lousy credit score.

Be thoughtful about all purchases, not just the big ones. I am not talking about your daily Starbucks habit, although that can add up too. A lot of purchases are driven by a perceived need, rather than an actual need.

Don’t fall victim to the “it’s on sale” syndrome. You are not saving money if you really had no intention of buying the item in the first place.

The Internet is a fabulous tool. You can comparison shop without having to leave the comfort of your home.

Tip if you are considering an appliance purchase: Go to energystar.gov. Look for the Energy Star Appliance Rebate Program button. The “cash for clunkers” program is being offered for certain appliances this year. Each state has a different budget and rollout date. Our dishwasher died here at Parsec about three weeks ago. We waited for this program to start in North Carolina and saved over $100.

Ask about discounts. Some people will give you a discount, but you have to ask. My vet will match heartworm medicine prices offered by a national catalog retailer. I saved about $50.

Yes, it takes extra work to stretch your dollar these days. Hopefully, these tips can assist you in that task.

Cristy Freeman, AAMS
Senior Operations Associate

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How to Make a Little More Money on Your Excess Cash (with a Bit of Work on Your Part):

With short-term interest rates at very low levels, many are wondering if there is any way to earn a higher return on their cash balances. We generally recommend that clients maintain an emergency reserve of 3-12 months worth of after-tax living expenses. The specific amount varies by client and depends on a number of factors such as the level and predictability of your income as well as your personal preference. Many clients choose to meet their liquidity needs by keeping a home equity line of credit available, and keeping their cash invested with a long-term focus at their desired asset allocation.

This column will focus on how to get a little more yield on an existing cash balance. Currently, money market rates at Fidelity and Schwab are almost zero. As of last week, the national average for a 1-year certificate of deposit was 0.72%. One thing to consider for small cash balances is Series I Savings Bonds issued by the U.S. Government, which are currently earning an annual rate of 3.36% for the next 6 months.

The earnings rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the life of the bond, and the semiannual inflation rate (think “I” as in “inflation”). The 3.36% earnings rate for I Bonds purchased through April 30, 2010 will apply for their first six months after issue. The earnings rate combines a 0.30% fixed rate of return with the 3.06% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The inflation rate changes every 6 months, so your earnings rate will increase with increases in inflation. The fixed rate applies for the 30-year life of I bonds purchased during each six-month period. The bonds cannot be redeemed for 12 months after issuance, and there is a penalty of 3 months’ interest if they are redeemed before 5 years. Purchases are limited to $5,000 per Social Security Number in electronic bonds and $5,000 in paper bonds, so a couple could purchase up to $20,000 annually.

So why would you want to invest a portion of your liquid cash in something that carries a penalty for 5 years? Because if you act by April 30, you are in effect creating a 1 year CD with a yield of about 2.45%.

Here’s how it works:

You go to your bank and buy a series of $1,000 I Bonds. For the next six months, these bonds will earn interest at an annual rate of 3.36%. The rate will then reset, but we already know what the inflation component will be since CPI-U has already been published. We just don’t know the fixed rate, which is set every six months by the Treasury. If the fixed rate stays the same at 0.30%, the earnings rate for the next 6 months will be an annual rate of 1.84%. So you could reasonably expect a return of at least 2.45% over the next year versus 0.72% in a bank CD.

What if there is an emergency and you need the money? You cannot redeem the bonds for 12 months, so you need to leave some liquid cash on hand. After 12 months, just pay the penalty and you are still ahead of where you would have been (say 1.77% yield if you cashed the bond in after 12 months and one day, versus 0.72% in a bank CD).

You can then repeat this process to create a ladder of bonds maturing at different points, say every 3-6 months. You can set up an electronic account at www.treasurydirect.gov and manage this process from the comfort of your couch. You can just deposit any paper bonds that you buy into your account and convert them to electronic form.

All I Bonds that are outstanding have the same inflation component, currently 3.06% annualized. The only difference is in the fixed rate that each bond offers. If the fixed rate increases significantly, just redeem some bonds and pay the penalty. Then buy some new bonds with the higher fixed rate (but remember the $10,000 annual limit on purchases for each Social Security Number).

Some other benefits of I Bonds include:

–Interest is exempt from state income tax;
–If you buy the bonds on the last day of the month, you still get interest for the full month;
–You don’t have to worry about FDIC insurance or shopping around to different banks for the best rate. I Bonds are direct obligations of the government, whereas FDIC insurance is a fund consisting of a small percentage of deposits that are covered.

Bill Hansen, CFA
April 23, 2010

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