A letter from Bart Boyer, Chairman and CEO

The longest and most severe recession since the Great Depression is coming to an end! GDP for the second quarter was -1% compared to a brutal -6.4% in the first quarter. That momentum should carry the economy into positive numbers the third (current) quarter. That would follow our chief economist, Jim Smith, predicting the recession ended May 15. We won’t know the exact date of the end for months, but it looks over to us. Also, many economists are joining Dr. Smith and are predicting 2-4% positive growth for the third quarter, a normal +3% or so year in 2010 and better yet in 2011!

As we anticipated, the $7 trillion on the sidelines in short term fixed income investments is beginning to flow into the market. A modest move of 5-10% of these balances would have a significant upwards impact on stock prices. Already the S&P is up more than 50% from the March 6 intraday low of 666.79.

We are thrilled that the vast majority of our clients avoided the fear trap and have participated nicely during the recovery. Nothing goes straight up, there will be profit taking corrections for certain, but we believe there is much more to come on the upside.

Over the last 100 years there have been three terrible decades for the economy and stock markets, the 1930’s, 1970’s and the current decade. Unless this year is better than +38.4% (very unlikely), this decade will go down as the worst ever – even worse than the 1930’s. Terrible decades have historically always been followed by well above average outperforming decades (plural). After the 1930’s, the next three decades were outstanding. After the 1970’s we had the 80’s and 90’s, two of the best decades ever, with each having six years of +18% or better returns. We believe it is a high probability that the next 20-30 years will be above average, even with one in every three or four years negative.

Thanks again for your patience and the opportunity to be of assistance. We’ve all just suffered the worst decade in stock market history and are well positioned for better times ahead.

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Unemployment Rate Falls

The big economic news today is that the unemployment rate unexpectedly fell. The rate dropped to 9.4% of the labor force, versus last month’s 9.5%. While any rate in this range is considered high, a move in the downward direction is a very good thing. This is particularly true when that drop is unexpected. In response, the stock market has surged today.

Because the unemployment rate is a lagging economic indicator, one would expect this rate to continue to climb even after the general economy improves. On average, the unemployment rate peaks 4.7 months after the end of a recession. This rate may continue to climb after a brief dip. However, the rate dropping for the first time since April of 2008 is one signal that the recession has ended, or will end in the near future. Good news!

Harli L. Palme, CFP®
Financial Advisor

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Giving Continues at Parsec

The Parsec Prize for the second quarter 2009 was recently awarded to Big Brothers, Big Sisters of Western North Carolina. The organization has been serving Western North Carolina since 1982 and provides services to eight counties.

Parsec also made donations to the Boys Home of the South, Community Foundation of Western North Carolina, Asheville Community Theater, Caring for Children, and Special Olympics of North Carolina.

As mentioned in a previous newsletter article, Parsec matches a portion of employee donations. Last quarter, our employees supported a variety of non-profit organizations such as the Susan G. Komen Breast Cancer Foundation, the American Red Cross, Western North Carolina Rescue Mission, Helpmate, and Cystic Fibrosis Foundation.

Unfortunately, charities are finding that their organizations’ needs are greater than the available funds. Maintaining our community outreach is important now more than ever. We encourage everyone to support charities whenever they can, through financial contributions and/or volunteer work.

Cristy Freeman, AAMS
Senior Operations Associate

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Stock Certificates

Decades ago it was the norm to issue a stock certificate to account holders which represented their stock purchase. When you sold shares you had to send your stock certificate to your broker, signed on the back indicating the shares were sold, and then the broker would send them off to the transfer agent. Whole departments were in charge of handling stock certificates. Those people lost their jobs when the practice was eventually changed to the Direct Registration System where your shares were registered in your name and were issued, transferred and sold electronically without using a paper stock certificate. This method, still used today, is safer and certainly more efficient. There is usually a fee to get a stock certificate today.

From time to time old stock certificates are found in safe deposit boxes or clients remember they have them “somewhere.” You can recover lost certificates, albeit with a bit of paperwork. If the company is still in business you can just sign the back of the certificate and send it to your broker to be deposited into your account. If the account holder is deceased, more paperwork is required to deposit the shares in an account. Oftentimes we find that the company no longer exists. Some historical stock certificates become collectables, but not many. In the case of a stock split, you may find that you have 100 shares in the form of a certificate and another 100 shares in book entry.

If you have stock certificates, a good plan would be to deposit them in your brokerage account.

Barbara Gray, CFP®
Partner

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News on Cost Basis

Cost basis is a hot topic around here lately due to a recent announcement that starting in 2011, all custodians (such as Schwab, Fidelity, and T.D. Ameritrade) will be required by the IRS to report a stock’s cost basis on their statements. In 2012 they will be required to report the cost basis for mutual funds, and in 2013, for bonds. This is good news for you because it makes tax reporting easier; it is not so good news for the custodian.

The reason is that cost basis is not quite as straight forward as many people think. A lot of times an investor believes that what they paid for the stock is the basis and that’s the end of the issue. But in reality, it can get complicated. What if you bought the stock multiple times over the years and subsequently sold a portion of the stock? Did you sell the initial lot that you purchased, or a later lot that you purchased, which was most likely purchased at a different price? The custodian must determine which accounting method they will use in such cases: HIFO (Highest In, First Out), LIFO, (Lowest In, First Out), or Average Cost. With mutual funds, once you use one method for a particular fund, you must continue using that method.

If you buy your stock or funds at your current custodian, they will have a designated way of tracking this and automatically do that for you unless you instruct them otherwise. If you transfer assets to that custodian, however, you will need to provide that cost basis to have it appear on your statement. You will have to ensure that you have adjusted the cost basis accordingly for spin-offs, splits and mergers and reinvested dividends (reinvested dividends increase your basis). There are software and web sites that can determine the adjusted basis for you. If you have all of the necessary information: original amount of shares purchased, price and date, as well as the information regarding subsequent sales, your Parsec advisor can help you determine the cost basis.

Harli L. Palme, CFP®
Financial Advisor

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Let Them Know You Care

Let Them Know You Care

I have always enjoyed being around positive people and listening to them converse. Only one time will I take issue with their positive words: when the conversation starts with “If I die.” I politely inform them it’s a “when,” not an “if,” conversation which usually brings laughter followed by reflective thought. Think about it, and I’m sure that you will catch yourself saying “if I die” instead of “when I die.”

One of the most important things you could ever do, difficult as it may be, is to have a frank family discussion about your wishes at death. I’ve watched families do this with surprising results. Conversations begin to revolve around what is important instead of what someone thought was important. Brothers and sisters begin to connect in a way they haven’t in years and the difficult issues that surface are navigated properly. While you thought all the kids wanted to be treated equally, you find that siblings would rather their share go to their brother or sister, for a variety of reasons. No more are loved ones confused and left guessing about motives when the Will is read. Instead, there is clarity, reasoning and often times, harmony.

Set aside a specific date, time and place-preferably a neutral one. Let your loved ones know your intention is to discuss your final wishes and request that they be open-minded. Establish some ground rules: one person speaks at a time; all will get a chance to speak; respect is paramount; etc. Then openly and honestly, share your thoughts. The feedback you receive might have you alter your plans in a way that brings you the closure you had struggled to achieve. Or, it may suggest that your plan mirrors what your family had hoped. Either way, you now have definitive answers to help guide you should you believe changes are warranted.

Yes, you are taking a risk. But, haven’t you been taking measured risks your entire life?
Why not let them know you care!

Michael E. Bruder, CFP®, CTFA
Senior Financial Advisor
Senior Trust Advisor

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The CAPM

Now that we’ve discussed beta and the Dividend Discount Model (DDM), I’d like to introduce you to one of my favorite equations, the CAPM (that’s pronounced cap-m, and it’s an acronym for “Capital Asset Pricing Model”). Right now, you’re probably asking yourself, “What sort of a person has a favorite equation?” As much as I hate to admit it, when I’m studying for the CFA exam and I come across the equation’s individual components in a practice question (Risk-free rate? Check. Beta? Check. Market risk premium? Check), I can hardly contain my excitement.

OK, so I’m slightly prone to hyperbole. But it is a very useful tool for asset valuation, and one of its merits is its simplicity. The equation is basically that of a simple linear regression, which you might remember as the equation of a line (y = mx + b). Here, “b” is the risk-free rate (the rate of return on a risk-free asset, like a Treasury bill), “m” is beta, which is a measurement of an asset’s systematic risk (see my earlier blog on beta for a more thorough explanation), and “x” is the market risk premium, or the difference between the market return and the risk-free rate of return. Plug in the variables, do a little calculation, and the result is an asset’s required rate of return, r.   

So what does this tell you? Probably that you have long since forgotten the equation of a straight line. But other than that, you might notice that the CAPM required rate of return is dependent on the equation’s inputs. For example, holding everything else constant, a higher beta will result in a higher required rate of return. That makes sense, because a higher beta indicates a higher level of systematic risk, and you would expect to be compensated for taking on more risk by the possibility of earning a higher return. We can even go a step further and tie in to the DDM, because r (the required rate of return, which can be calculated via the CAPM) is part of the DDM equation. The DDM tells us that, all else equal, a higher r will result in a lower intrinsic value.  If the stock price is higher than its intrinsic value, you may deem that stock to be overvalued.

Of course, a model can’t be this gorgeous without making a LOT of simplifying assumptions. For example, the CAPM assumes that all investors have identical expectations, and that there are no taxes or transaction costs (what a wonderful world it would be, right?). Nevertheless, the CAPM has played an integral part in the development of modern portfolio theory since its introduction in the early 1960s. Plus, I just HAD to tell someone about my favorite equation. Of course, now that summer is here, I can put aside the study books and turn my attention to other matters of great importance. Now, where did I put that issue of Us Weekly?

Sarah DerGarabedian

Research and Trading Associate

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Watch Out For That Tree!

Recently, I took a week off for a stay-at-home vacation. The Friday before the beginning of my vacation, I was in a big hurry to get to work. As I eased my car down my driveway, my mind was focused more on work than on the tree at the bottom of my driveway. The loud bang when my car hit the tree certainly redirected my attention.

I exited the car and was stunned at the damage caused by a small tree. Back in the old days, if your car hit a tree, you might knock off the dust on your car. You certainly would not cause major damage.

I was even more shocked when I learned how much the repair will cost. In a flash, I realized how important it is to have an emergency fund.

We have all read that you should have enough money to cover six months of expenses. Saving such a large sum can be a daunting task. You can understand why some people never bother, choosing instead to rely on retirement funds or credit cards for emergency expenses. It costs more in lost savings in a retirement account for an early withdrawal or exorbitant interest rates and fees from charges to your credit card, depending upon your emergency source.

I started small as I began building my emergency fund. As do most brokers and banks, Charles Schwab, Fidelity, and T.D. Ameritrade offer automatic debit programs. I have a fixed sum withdrawn from my checking account every pay period. I found that I would never “pay myself first” if I had to manually sweep the funds.

You can start an emergency fund too. Just call your Parsec investment advisor and ask about setting up an automatic debit program. The service is free and requires minimal paperwork. Even if you set aside just $10 per week, at year’s end you will have $520 that would have otherwise disappeared in your budget. It is a start!

Now, if you will excuse me, I need to surf eBay’s site. Perhaps a vintage Caddy could survive an attack from a malevolent maple.

Cristy Freeman, AAMS®
Senior Operations Associate

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Roth Conversions

Currently, you can convert your traditional IRA to a Roth IRA if your adjusted gross income is less than $100,000.  In 2010 the income limitation is being lifted for one year only, so now is the time to start thinking if a conversion is right for you. 

 

When you reach age 70 ½ you can no longer contribute to a traditional IRA.  In fact, you must start required minimum distributions at that time.   There are no required minimum distributions with a Roth account and you can continue to contribute as long as you have earned income.   A contribution to a traditional IRA is tax deductible if you meet the eligibility rules on income; a contribution to a Roth is not tax deductible.  However, all withdrawals from a traditional IRA are taxed like ordinary income; Roth withdrawals are not taxed. 

 

The downside for the conversion is that you must pay taxes on the amount you convert, but taxes on 2010 conversions can be spread out over 2010 and 2011.  Of course, we don’t know what the future will bring but I’m fairly sure it will still include taxes.  In retirement it would be a benefit to have several sources of income — taxable accounts billed at the capital gains rate, retirement money taxed at your ordinary income tax rate, and Roth money that is tax free.   Or, you could leave the Roth account to your children and they could enjoy tax free withdrawals for their lifetime. 

 

Please contact your advisor if you are interested in the Roth conversion.

 

 

Barbara Gray, CFP®

Partner

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Budgeting and Saving in Uncertain Times

The lower real estate and stock prices brought on by the economic recession has all Americans re-examining their spending priorities. The increased savings rate comes on the back of a long-period of over spending by most households in America. Everyone should have a basic household budget or cash flow statement. Keeping track of all inflows and outflows is useful exercise. Budgeting creates awareness about spending and forces consumers to prioritize the importance behind their consumption. Identifying a shortfall in inflows early on is imperative to then take corrective actions to get back on a sustainable budget.

There are many account strategies to consider when saving money. After establishing a comfortable emergency reserve, an obvious choice is to increase your savings rate to work sponsored retirement plans (401k and 403b), IRAs and Roth IRAs. Using a taxable securities portfolio should be considered once tax advantaged accounts have been maxed out. Section 529 education accounts and Roth conversion strategies are a little less known. Your advisor at Parsec Financial can guide you through the many account strategies to determine which makes the most sense, taking into consideration your unique goals and objectives.

Rick Manske, CFP
Managing Partner

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