Fire Tower Watchman

I recently read a newspaper article about a man whose career spanned three-and-a-half decades. It was something that he loved doing and even spent long hours fulfilling his duties. What struck me wasn’t his job (a fire tower watchman), or even the fact that he was often snow bound for long periods during winter months. It was his take-life-as-it-comes attitude and dedication to his job.

After reading this article, I began to think about the fire tower watchman and how we at Parsec Financial try to provide security to our clients. One of the obvious ways we help to provide financial security is through our investment management process. Our Investment Committee regularly reviews the investments we buy and hold for all of our clients and cycles through each of them 3-to-4 times each year. There are other ways we help our clients too.

Financial security also comes in the form of a review of insurance needs. While we typically steer away from permanent life insurance policies, we feel that term life is a good layer of protection for families with a mortgage, young children, or other financial commitments that could drain a net worth in the event of a premature death. We normally recommend carrying enough insurance that would pay off mortgages and put children through college.

Another important policy to hold is a personal disability insurance policy; such policies provide income, usually income tax-free, during a time when it’s needed the most. For the same reasons that one should have a life insurance policy, the disability policy can protect individuals and families by helping them pay for mortgages, utilities, medical bills, and maintain a certain standard of living.

I know that we’re not heroic firemen or the vigilant watchman that I read about. But as I think about the services we provide and genuine nature of helping our clients with their investment portfolio and also helping them understand how to protect their net worth, I wonder what the employees of Parsec would say about our careers after 3½ decades of work. My feeling is that each of us will look back over our careers and have a sense of pride, knowing that we acted in our clients’ best interests and helped to provide a layer of financial security like the fire tower watchman did for the mountain ranges he served.

Neal Nolan, CFP(R)
Financial Advisor

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Market Update through 6/10/11

as of June 10, 2011        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 20.38% 2.02% -4.10% -5.79%
S&P 500 19.28% 1.93% -3.77% -5.47%
DJ Industrial Average 20.59% 4.42% -2.47% -4.89%
Nasdaq Composite 20.38% 0.07% -4.74% -6.72%
Russell 2000 23.30% -0.08% -7.43% -8.08%
EAFE Index* 22.74% 0.28% -2.33% -4.04%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 6.12% 3.31% NA 0.27%
Barclays Intermediate US Gov/Credit 5.76% 2.95% NA 0.31%
Barclays Municipal  3.89% 4.48% NA 0.41%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $98.30    $100.22
Natural Gas    $4.68    $4.64
Gold    $1,525.00    $1,544.90
Euro    $1.43    $1.43
         
         
RECOVERY!        
  Since 3/09/09      
Index  Total Return TR annualized    
Stocks        
Russell 3000 103.43% 37.02%    
S&P 500 96.80% 35.02%    
DJ Industrial Average 94.29% 34.25%    
Nasdaq Composite 113.11% 39.87%    
Russell 2000 133.86% 45.76%    
EAFE Index* 82.46% 30.56%    
*EAFE index does not include dividends.        

Mark A. Lewis

Director of Operations

 

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Business Continuity Planning

Business continuity planning includes succession planning as well as disaster preparedness. The recent tornados around the country wiped out whole towns in some cases. Imagine that your home or business was lost along with all of your records. What then? Are you prepared for that? Certainly, things would not be easy. In our case, most of our documentation is stored electronically and we have a mirrored server in case the one in our Asheville office is destroyed. Our tapes are backed up daily and stored in a separate location. Also, key employees can work from home and we have the ability to have calls forwarded to our Charlotte office. Remember, we do not have custody of client assets; they are in your name at your broker, and you can always call your broker directly for information or assistance concerning your account.

For succession planning, Parsec has a policy that any employee can buy stock in the firm. A business that is employee-owned typically has low turnover and good morale. We all have the ability to have a stake in the game. Consequently, there is an interest in seeing the firm remain viable and profitable for decades to come. We, like many other firms across the country, have employees over age 60 who will be retiring some time during this decade, and that includes me. Fortunately, we also have some dynamic advisors in their 40s and 30s to continue the business – and they are all shareholders. Our policies dictate a uniformity of client deliverables with checks and testing to ensure compliance. Therefore, we are all giving similar advice to clients – depending on your own unique situation. Consequently, the transition from one advisor to another should not be eventful.

Barbara Gray, CFP®
Partner

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Market Update through 5/31/11

as of May 31, 2011        
  Total Return
Index 12 months YTD QTD May
Stocks        
Russell 3000 27.04% 8.30% 1.80% -1.14%
S&P 500 25.95% 7.82% 1.80% -1.13%
DJ Industrial Average 27.30% 9.79% 2.54% -1.53%
Nasdaq Composite 26.92% 7.28% 2.12% -1.20%
Russell 2000 29.74% 8.71% 0.72% -1.88%
EAFE Index* 27.05% 4.50% 1.78% -3.60%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 5.84% 3.02% NA 1.31%
Barclays Intermediate US Gov/Credit 5.36% 2.64% NA 1.14%
Barclays Municipal  3.18% 4.06% NA 1.71%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $100.22    $99.27
Natural Gas    $4.64    $4.29
Gold    $1,544.90    $1,497.20
Euro    $1.43    $1.41
         
         
RECOVERY!        
  Since 3/09/09      
Index  Total Return TR annualized    
Stocks        
Russell 3000 115.94% 41.29%    
S&P 500 108.18% 38.99%    
DJ Industrial Average 104.28% 37.81%    
Nasdaq Composite 128.47% 44.91%    
Russell 2000 154.43% 52.08%    
EAFE Index* 90.13% 33.44%    
*EAFE index does not include dividends.        

Mark A. Lewis

Director of Operations

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The Importance of International Diversification

Barring some client specific constraint, at Parsec we give each portfolio we manage exposure to international markets. The appropriate amount of international exposure is debatable and the merits to this exposure are not without dispute. However, we believe the benefits are worthwhile.

There are downsides to international investing. First and foremost is the cost associated with it. These costs come in the form of higher transactions costs, informational inefficiencies (you may pay too much in a foreign market because you don’t have all the relevant information to make the right decision), and various tax disadvantages. In addition, opponents argue that our global economy means that holding stock in big corporations like GE and Coke will give you all the international exposure you need without the extra cost. Indeed, these companies do offer some global diversification.

However, there are benefits to investing in foreign-domiciled countries that I believe trump these arguments. The first and foremost of these is the less than perfect correlation between US stocks and foreign-domiciled stocks. Though correlation is rising, especially during times of high volatility, there are still correlation benefits. In other words, when US stocks zig, foreign stocks will sometimes zag. The benefit to the investor is an overall reduction of risk, without the reduction of return.

This benefit is enhanced with emerging foreign markets that have much lower correlation with US stocks than larger developed foreign markets such as Europe. The caution with investing in African countries, the Middle East, Latin America, Russia, China and India, however, is the risk is also much greater, so you have to be careful about adding too much to a portfolio. A little exposure may give you a desirable return/risk benefit, but too much can substantially increase the risk to your portfolio. The outcome is heavily dependent on how the emerging market is correlated with the US, and the stand-alone risk of the emerging market itself.

Some common ways to get exposure to international markets are through passive index funds, active mutual funds and by directly buying stock if it is traded on a US exchange (ADR). Though sometimes we buy ADRs, we most heavily rely on actively managed mutual funds. There is a cost associated with this, but we believe the best managers, who are experts in their chosen markets, are skilled at finding profitable companies in international markets.

Whether the equities portion of a portfolio is 10% international or 25% international, we believe that some exposure is warranted. Emerging markets add another beneficial layer of diversification. It is impossible to know in advance what the exact country-specific exposure should be, but we are confident that adding some small portion of the markets outside the US will improve the long-term risk-return characteristics of a portfolio.

Harli L. Palme, CFP®

Financial Advisor

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Weekly Market Update through 5/13/11

as of May 13, 2011        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 18.76% 7.44% 0.99% -1.93%
S&P 500 17.90% 7.11% 1.12% -1.79%
DJ Industrial Average 19.90% 9.80% 2.56% -1.51%
Nasdaq Composite 19.37% 6.95% 1.81% -1.51%
Russell 2000 19.14% 7.04% -0.83% -3.38%
EAFE Index* 17.26% 3.60% 0.91% -4.42%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 5.70% 2.33% NA 0.62%
Barclays Intermediate US Gov/Credit 5.23% 1.99% NA 0.51%
Barclays Municipal  3.37% 3.66% NA 1.32%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $99.27    $114.39
Natural Gas    $4.29    $4.69
Gold    $1,497.20    $1,563.00
Euro    $1.41    $1.48
         
         
RECOVERY!        
  Since 3/09/09      
Index  Total Return TR annualized    
Stocks        
Russell 3000 114.23% 41.88%    
S&P 500 106.80% 39.60%    
DJ Industrial Average 104.31% 38.82%    
Nasdaq Composite 127.76% 45.92%    
Russell 2000 150.52% 52.45%    
EAFE Index* 88.51% 33.79%    
*EAFE index does not include dividends.        

 

Mark A. Lewis

Research & Trading Associate

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Weekly Market Update through 4/29/11

as of April 29, 2011        
  Total Return
Index 12 months YTD QTD April
Stocks        
Russell 3000 18.35% 9.55% 2.98% 2.98%
S&P 500 17.22% 9.06% 2.96% 2.96%
DJ Industrial Average 19.49% 11.49% 4.13% 4.13%
Nasdaq Composite 17.97% 8.59% 3.37% 3.37%
Russell 2000 22.20% 10.79% 2.64% 2.64%
EAFE Index* 15.89% 8.40% 5.58% 5.58%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 5.36% 1.70% NA 1.27%
Barclays Intermediate US Gov/Credit 4.91% 1.48% NA 1.13%
Barclays Municipal  2.20% 2.31% NA 1.79%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $114.39    $111.64
Natural Gas    $4.69    $4.39
Gold    $1,563.00    $1,511.10
Euro    $1.4884    $1.4589
         
         
RECOVERY!        
  Since 3/09/09      
Index  Total Return TR annualized    
Stocks        
Russell 3000 118.43% 44.07%    
S&P 500 110.57% 41.62%    
DJ Industrial Average 107.45% 40.64%    
Nasdaq Composite 131.25% 47.96%    
Russell 2000 159.29% 56.09%    
EAFE Index* 97.23% 37.36%    
*EAFE index does not include dividends.        

Mark A. Lewis

Research & Trading Associate

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Bond Market Update as of 4/18/11

Municipal Bonds
• The past 12 months has been a bit of a wild ride in the muni market, largely based on the big sell-off due to Meredith Whitney’s proclamation and subsequent rebound once cooler heads prevailed.
• Quarterly new issuance was at the lowest level since 2000 but that has done little to boost enthusiasm for tax-exempt debt given on-going headline risk on muni finances.
• Current yield curve remains quite steep at a 10-year high of 400 bps. Credit spreads also remain high, driving investors to lesser quality names in the hunt for yield.
• Anticipation of higher tax rates at both federal and state levels still exists. At many points along the curve, muni yields remain higher than Treasuries.

Corporate Bonds
• Approximately 64% of new issuance is being used to refinance current debt.
• According to Barclays, corporates in both the US and Europe remain focused on delevering and extending maturity profiles. Furthermore, according to Crandall Pierce, corporate profits after tax are back above peak levels reached prior to the recent recession.
• Current corporate market is shaped by a steep yield curve (500+ bps). Moody’s indicates the spread between Aaa and Baa is running around 100 bps after a peak of nearly 340 bps in 2008. Barclays reports 132 bps spread between US Treasuries and US Credit. 10-year mean is ~ 168 bps.

High-Yield Bonds
• All major high yield markets have seen fund inflows as investors become less risk averse in the search for yield.
• Default rates have plummeted. According to Barclays, the Moody’s issuer-weighted speculative-grade default rate has dropped over the past year from a peak of 14.7% in 11/09 to around 3% today. The historical average is around 5%. Projections for 2011 are around 2-2.5%.
• The current high yield spread vs. Treasuries is ~ 515 bps. 10-year mean is ~ 650 bps.

International Bonds – OIBYX (1st Quarter commentary paraphrased)
• Exposure to Argentina, the Ukraine, and Russia helped fund performance while very limited exposure to troubled Eurozone names provided some defensive strength. Germany’s economic expansion is robust.
• Despite oil price shocks, tightening by some EM central banks, and the tragic events in Japan, the global expansion is expected to continue.
• The emerging market debt universe continues to have positive long-term prospects due to burgeoning middle classes and favorable demographic support. Additionally, improving credit fundamentals bolster their positive outlook for the entire sector.

US Treasuries
• The break-even rate between yields on 10-yr Treasuries and TIPS, a measure of the outlook for consumer prices, has widened from 0.12% to 2.64% on April 11, 2011, the highest in nearly five years.
• Through 3/31/11, the year-over-year change in the Consumer Price Index (CPI) is 2.7%. The core CPI, less food & energy, is 1.2%.
• The US Treasury market is shaped by a steep yield curve (450 bps). As of April 14, 2011: 1-month T-Bill yield = 0.03%, 5-year yield = 2.13%, 10-year yield = 3.42%, 30-year yield = 4.50%.

Mark A. Lewis

Research & Trading Associate

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IRA Charitable Gifting

The option to gift charitably from your retirement account has been extended through 2011. This tactic is available only to those individuals that are age 70 ½ and who are already receiving required minimum distributions. The gift counts toward your required minimum distribution, but does not increase your taxable income – so no taxes to pay. You cannot, however, deduct the gift as a charitable contribution. Total gifts cannot exceed $100,000 and must be made directly to the charity from your retirement account.

If you are interested in gifting from your retirement account, please contact your advisor.

Barbara Gray, CFP®
Partner

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2010 Roth IRA and Regular IRA Contributions

The deadline to contribute to your Roth or Traditional IRA for the tax year 2010 is April 18, 2011. You can contribute $5,000 or the amount of earned income for the year, whichever is less. If you’re over 50, you can contribute an additional $1,000.

Your income determines if you qualify for a tax-deductible Traditional IRA contribution, or if you qualify to make a Roth IRA contribution.

Do you qualify to deduct your Traditional IRA contribution?
 If your income is less than the beginning of the phase-out range, you qualify.  If your income is over the phase-out range, you do not.  If your income falls inside the range, you partially qualify.
  Modified Adjusted Gross Income Phase-Out Range
Single, participates in an employer-sponsored retirement plan      $56,000 – $66,000
Married, participates in an employer-sponsored retirement plan      $89,000 – $109,000
Married, your spouse participates in an employer-sponsored retirement plan, but you do not.  $167,000 – $177,000
 
Do you qualify to contribute to a Roth IRA?
Single $105,000 – $120,000
Married, filing jointly     $167,000 – $177,000
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