Category Archives: Investment Planning

The Next Great Market Meltdown

My Comments: My hope for the future about this is that I will be wrong. But I’m also aware that hope is not a very effective investment strategy. So, apart from my hope that you and yours have a spectacular 2015, it’s tempered by my expectations of reality. This writer is well known to those of us in this business.

This chart appeared in April of 2013. Meanwhile the market has now exceeded 18,000! What do you think is likely to happen next? I suggest you be prepared.

by Bob Veres / DEC 17, 2014

Ever since Congress and regulators failed to fix the sales incentives that drove us to the epic global meltdown of 2008, I’ve been watching for the next debacle — and I think it’s finally coming into view.

If I’m right, we’re approaching a confluence of failures that will feed on each other. The next great debacle will end up tarnishing (yet again) Wall Street’s reputation. But this time I’m afraid it will also stain the good name of financial planners and advisors.

Let’s start with nontraded REITs, which seem to be imploding right before our eyes. I warned anybody who would listen about recommending opaque illiquid products that use investor dollars to pay huge commissions and generous due diligence fees to broker-dealers.

How could anybody believe that this toxic combination adds up to a viable investment? Unless, of course, the promoter is stuffing money in your shirt pocket.

Now broker-dealers, custodians and investors have all started to back away from the sector; I suspect the stench has become so awful that they have, somewhat belatedly, gotten cautious about taking on the liability associated with selling at least some of this junk.

They may be remembering a lesson we all learned in the last go-around with investments like these, during the tax shelter era. The general partner business model for illiquid investments is only sustainable if ever-greater amounts of money are being raised. Once the sales dry up, the sponsors pack their bags and move on to the next opportunity — or retire in luxury with millions of dollars sucked right out of the accounts of workers and retirees.

If I’m right, the next great debacle will see thousands of customers — who put their trust in people who call themselves financial planners and investment advisors — discover that they can no longer afford retirement. The lawsuits over billions of lost investor dollars will, once again, test the viability of the independent broker-dealer industry. Headlines will paint the entire financial planning profession as a bunch of greedy sales agents.

YIELD-BASED APPEAL

Nontraded REITs are sold as a high-yield investment in a yield-starved marketplace. Using essentially the same pitch, a growing number of reps are also selling load-bearing fixed-income mutual funds that offer impressively higher yields than their peers.

Their secret? Load up on the diciest (unrated) private bond issues, BBB-rated or lower investments and higher-duration bonds that are going to get creamed when interest rates tick up.

The Fed has kept rates so low for so long that thousands of questionable issuers have been able to float bonds and rake in money at above-market rates that are low by historical standards. Since the Lehman Brothers collapse, aggregate corporate bond debt has increased an astonishing 53%, according to Bank of America-Merrill Lynch research, with three straight record $3 trillion years of new paper issued.

And emerging market countries set a record for debt issuance last year, at more than three times 2006 levels, according to Thomson Reuters. Kenya issued the largest sovereign bond issue ever by an African nation, equivalent to about a third of its total tax revenues — and the offering was four times oversubscribed.

This is looking like a bond bubble of epic proportions, as the potential default of some Puerto Rican bonds — a prominent holding of many of these yield-chasing funds — is starting to make clear. Any reasonable due diligence effort would question whether Puerto Rico will ever be able to pay back outstanding municipal debt that equals $18,919 per resident of that impoverished island.

Yet last year, an article in The Bond Buyer noted that a Franklin Templeton fund had amassed an astonishing 61% weighting in Puerto Rican debt, while a number of Oppenheimer funds were more than 20% invested in Puerto Rican bonds.

BOND CRASH AHEAD?
It’s not hard to predict that, early in the next great debacle, interest rates will tick up just enough that nobody on the secondary market is going to want to buy dicy paper when they can get equivalent yields from new-issue Treasuries. At current rates, even small shifts could cause risky bond values to fall hard enough to startle lay investors.

Millions of people could see losses on their quarterly statements in a part of a portfolio that their sales rep, masquerading as a financial planner, told them was rock-solid stable — and many of them are going to want to redeem their shares. A run-on-the-bank phenomenon would make the liquidity problem much, much worse.

Imagine the panic reaction if word gets out that certain funds are unable to liquidate and give investors their money back.

I’m going to go out on a limb and predict that at least some of these funds will decide to calculate their NAV using optimistic valuations for bonds that nobody wants at any price. When the regulators step in and demand a repricing, and investors see dramatically higher losses than were being reported, the whole downward spiral will go around one more turn.

In a related scandal, policyholders might discover that the universal life contracts they were sold are nowhere near performing as they were projected when these sales reps sold them the policies. As insurance companies demand new premium payments to keep the policies in force, and investors complain about double-digit losses in their bond funds, the media will have yet another reason to question the value of a financial planning engagement.

ANOTHER BIG SHOE
Somewhere in this mess, I expect another big shoe to drop. Does anybody want to bet that the wirehouses are not selling trillions of dollars worth of undisclosed, unregulated derivatives contracts that allow companies and banks to hedge against higher interest rates?

If rates jump faster than their models predict, I can envision Wall Street firms being on the hook for more than their aggregate net capital holdings — and, given the size of the derivatives market, the liability might actually be comparable to gross global GDP.

I wouldn’t be surprised if, as the next great debacle unfolds, we were to discover that the brokerage firms had also been quietly selling packaged combinations of privately issued bonds to their institutional and highly leveraged hedge fund customers — junk disguised as high-quality paper.

Welcome to the next government bailout.

I hope none of this comes to pass; I really do. But I think the next great debacle that I’ve outlined here is a grimly logical consequence of all the sales incentives that still govern so much of the financial services marketplace. It’s a shadowy world where what you make is infinitely more important than what the customer makes.

Unless those incentives are fixed — and unless the public is given a fair chance to know who is and who is not motivated to sell them junk investments — we’re going to see this same unhappy scenario play out over and over again. The particular investments and shady scams may change from debacle to debacle, but the underlying driver remains the same.

As the next great debacle unfolds, I would ask that both regulators and journalists pay close attention to the fact that those who could trigger this multiheaded scandal — ruining millions of financial lives with self-serving recommendations — were allowed to call themselves financial planners and financial advisors. But that doesn’t mean that they actually were.

Bob Veres, a Financial Planning columnist in San Diego, is publisher of Inside Information, an information service for financial advisors. Follow him on Twitter at @BobVeres.

5 Reasons Why You Should Be Afraid Of A Bear Market

question-markMy Comments: Until I found this, I had never heard of hedgewise.com. I make absolutely no assertion that they know what they are talking about. My personal solution for you is quite different from what you read below, but this part of life is almost always a guessing game.

Oct. 30, 2014 http://www.hedgewise.com/

Summary
• The Fed officially just ended its bond buying program, marking the close of a financial era.
• With the bull market now in its 6th year, stocks may struggle to continue their run without the Fed’s help.
• Many significant warning signs are signaling an oncoming bear market.
• There are smart steps you can take to better hedge your portfolio.

1) There have only been 2 longer bull markets in recent history

Beginning in January 2009, this bull market is now in its 71st month. Only two bull markets have lasted longer in the past century, during the 1920s and the 1990s.


2) Price-to-earnings ratios are approaching 2006 levels

The widely-recognized “Shiller-PE” ratio compares average inflation-adjusted earnings from the previous 10 years to the current price of the S&P 500. This helps to smooth out variance over time caused by natural fluctuations in the business cycle. The current level of the Shiller-PE ratio of over 25 is near that of 2006 and well above the mean of 16.5. While this does not indicate an imminent collapse, history would suggest that the stock market may not be the best investment for the next ten years.


3) The Fed is removing the punch bowl

Interest rates have been at historic lows for the past five years. This has created a sensational environment where stocks are one of the only reasonable investment options. However, the Fed just stopped their bond buying program altogether, and interest rates can only go in one direction. Moving forward, the market faces a cruel double-edged sword. If there is strong growth, it will prompt the Fed to begin raising rates, causing investors to demand higher returns and businesses to cut back. If there is weak growth, it will threaten corporate earnings and spark worries about another recession. Either way, stocks may fall.

4) The volume of the October rally has been light

October was a rollercoaster ride for the markets. While most of the losses have been offset here at month-end, the gains have occurred with relatively light trading volume. This suggests that the major players aren’t the ones buying.


5) Global growth is shaky

As recently studied by Larry Summers, India and China may be on the brink of a major slowdown. China has experienced a 32-year streak of extremely rapid growth, perhaps one of the longest streaks in all of history. Its economy is supported by approximately six trillion dollars of ‘shadow debt’, which may eventually create major systemic issues. While the US may not be the primary source of the next global slowdown, it would still certainly be a victim of the ripple effect.

How to Protect Your Portfolio (by hedgewise.com)

The two most likely scenarios for the economy are a rising interest rate environment with moderate growth, or a continued global slowdown which carries the risk of another recession. Unfortunately, US stocks face an uphill battle in both cases. If the Fed begins to raise rates, it will be a drag on both stocks and bonds. If rates remain low, it will probably only be due to a poor overall economic environment.

If you are seeking alternatives for your portfolio, you may want to consider a few contrarian investment options. When the Fed does raise rates, it will probably be on the heels of stronger growth and higher inflation. In that environment, Treasury-Inflation Protected Bonds (NYSEARCA:TIP) can help keep you safe from the rising price level, and commodities like gold (NYSEARCA:GLD) and oil (NYSEARCA:USO) may outperform due to a weaker dollar and stronger demand. On the other hand, if a significant slowdown occurs, investors may flee back into the safety of Treasury bonds (NYSEARCA:TLT), sending interest rates down yet again. Since it is unclear how the future will unfold, it may be wise to hedge your portfolio with some or all of these investments for the time being.

Wealth Managers Enlist Savvy Spy Software to Map Portfolios

profit-loss-riskMy Comments: I’ve been playing this financial game now for almost 40 years. And like so much in today’s world, it’s very different today than it was then. Technology forces us to embrace new thoughts and ways to deal with so much in life.

When it comes to managing your money, my role as an investment advisor and financial planner causes me to try and stay at least near the front of the line, otherwise I’ll get left behind.

Much better returns on investment (ROI) can be had today, hypothetically, than we could have hoped for 30 years ago. Do you remember when interest rates less than 10% were thought to be ridiculous? Now we are living with interest rates near zero and have been for some time. So how is it possible to predict that a 10% ROI is reasonable today?

The following article talks about people of wealth that no one around here fully understands. And so for the rest of us, it’s kind of meaningless. Except when they talk about technology and how far its come so that mere mortals like us can benefit. Having access to these technologies can make a huge difference in your life.

Posted by Steven Maimes, Contributor – on August 5th, 2014
NYT article by Quentin Hardy

Some of the engineers who used to help the Central Intelligence Agency solve problems have moved on to another challenge: determining the value of every conceivable investment in the world.

Five years ago, they started a company called Addepar, with the aim of providing clear and reliable information about the increasingly complex assets inside pensions, investment funds and family fortunes. In much the way spies diagram a communications network, Addepar filters and weighs the relationships among billions of dollars of holdings to figure out whether a portfolio is about to crash.

Professional wealth managers are going to be seeing a lot more of big data. Last spring, Addepar raised a substantial sum to take this mainstream, and although it is not the only one bringing big data to a portfolio statement, its cast of characters sets it apart.

“One of the most foundational questions in finance is ‘What do I own, and what is all of this worth?’ ” said Eric Poirier, the chief executive of Addepar. “ ‘What is my risk?’ turns out to be an almost intractable problem.”

Although the list of wealth managers who use Addepar is confidential, Mr. Poirier says it has already grown from people like Joe Lonsdale, its tech-billionaire founder, and Iconiq Capital, which manages some of the Facebook co-founder Mark Zuckerberg’s money, to include family offices, banks and investment managers at pension funds.

“In this state, some people are just getting wealthier,” said Joseph J. Piazza, chairman and chief executive of Robertson Stephens L.L.C., a San Francisco investment adviser that manages about $500 million using software from Addepar. Ten years ago, he said, “it might be a young entrepreneur with $50 million. Now it could be 10 times that, and they are thoughtful, bigger risk-takers.”

Investing used to be a relatively simple world of stocks, bonds and cash, with perhaps some real estate. But deregulation, globalization and computers have meant more choices. For a wealthy person, this could mean derivatives, private equity, venture capital, overseas markets and a host of other choices, like collectibles and Bitcoin.

And for all the computers on Wall Street’s trading floors, a lot of money management is surprisingly old-fashioned. Venture capitalists may invest in cutting-edge technology, but they sometimes still send out quarterly reports on paper. Financial custodians, which hold securities for people, often have custom-built computer systems. That makes it hard to compare a trade at one with a trade at another.

“The market is much more complicated than it used to be,” said David G. Tittsworth, president and chief executive of the Investment Adviser Association, a trade group of 550 registered firms. “The rich have bigger appetites for futures, commodities, alternative investments. There’s a lot of demand for helping them keep track of what their holdings actually are.”

Mr. Poirier, 32, a New Hampshire native who started a coding business at 14 before heading to Columbia University, worked on analyzing fixed-income products at Lehman Brothers from 2003 to 2006, before that Wall Street firm collapsed from mismanagement of its own risk. “Trying to figure out a yield, I’d work with a dozen different computer systems, with different interactions that people didn’t understand well,” he said.

He then took a job with Palantir Technologies, a company founded to enable military and intelligence agencies to make sense of disparate and incomplete data. He went on to build out Palantir’s commercial business, managing risk for things like JPMorgan Chase’s portfolio of subprime mortgages.

There were plenty of parallels between the two worlds, but instead of agencies, spies and eavesdropping satellites, finance has markets, investment advisers and portfolios. Both worlds are full of custom software, making each analysis of a data set unique. It is hard to get a single picture of anything like the truth.

Even a simple question like “How many shares of Apple do I own?” can be complicated, if some shares are held outright, some are inside a venture fund where the wealthy person is an investor and some are locked up in a company that Apple acquired.

Finance “was the same curve I encountered in the intelligence community,” Mr. Poirier said. “How do you make sense of diverse information from diverse sources, when the answer depends on who is asking the question?”

The parallel was also evident to Mr. Lonsdale, a Palantir co-founder. From an earlier stint at PayPal, he had millions in cash and on paper is a billionaire from his Palantir holdings. He also knew lots of other young people in tech who could not make sense of what was happening to their money. “Wealth management is designed for the 1950s, not this century,” he said.

Mr. Lonsdale left Palantir in 2009, starting Addepar with Jason Mirra, another Palantir employee, in 2009. “It didn’t make sense for Palantir to hire 20 or 30 people to work in an area like this,” Mr. Lonsdale said. Mr. Mirra is Addepar’s chief technical officer. Mr. Poirier joined in early 2013 and became chief executive later that year.

Besides Mr. Lonsdale, early investors in Addepar included Peter Thiel, a founder of both PayPal and Palantir. More money came from Palantir’s connections to hedge fund investors. Addepar’s $50 million funding round last May was led by David O. Sacks — another PayPal veteran, who sold a company called Yammer to Microsoft for $1.2 billion in 2012 — and Valor Equity Partners, a Chicago firm that has also invested in PayPal, SpaceX and Tesla Motors, among other companies.

Despite the pedigree, Mr. Lonsdale says Addepar, which has 109 employees, is not meant just as a tool for rich tech executives or family money. They are, he said, “just the early adopters.”
Karen White, Addepar’s president and chief operating officer, says a typical customer has investments at five to 15 banks, stockbrokers or other investment custodians.

Addepar charges based on how much data it is reviewing. Ms. White said Addepar’s service typically started at $50,000, but can go well over $1 million, depending on the money and investment variables involved.

And in much the way Palantir seeks to find common espionage themes, like social connections and bomb-making techniques, among its data sources, Mr. Lonsdale has sought to reduce financial information to a dozen discrete parts, like price changes and what percentage of something a person holds.

As a computer system learns the behavior of a certain asset, it begins to build a database of probable relationships, like what a bond market crisis might mean for European equities. “A lot of computer science, machine learning, can be applied to that,” Mr. Lonsdale said. “There are lessons from Palantir about how to do this.”

A number of other firms are also trying to map what everything in a diverse portfolio is worth. One of the largest, Advent Software, in 2011 paid $73 million for Black Diamond, a company that, like Addepar, uses cloud technology to increase its computing power and more easily draw from several databases at once.

“We’ve been chipping at the problem for 30 years,” said Peter Hess, Advent’s president and chief executive. “There is a lot more complexity now, and the modernization of expectations about how things should work is led by the new tech money. But because of Apple and Google, even my parents have expectations about how easy tech ought to be.”

3 Market Warning Signs Predict 20% Stock Tumble

My Comments: No need for any commentary from me. Just draw your own conclusions, and hope that if the author is right, you’ve talked with me about how to make money when everyone around you is losing theirs.

On the other hand, essentially this same argument was made last April and yet the crash has not happened. Yet.  Another example of the boogyman creating uncertainty. All you can do is be prepared, which I hope you are.

MarketWatch commentary by Mark Hulbert / August 3, 2014

Over the past 45 years, the stock market has lost more than 20% each time three warning signs flashed simultaneously.

After a selloff this past week dragged the Dow Jones Industrial Average into negative territory for the year, it’s worth noting that all three are flashing today.

The signals are excessive levels of bullish enthusiasm; significant overvaluation, based on measures like price/earnings ratios; and extreme divergences in the performances of different market sectors.

They have gone off in unison six times since 1970, according to Hayes Martin, president of Market Extremes, an investment consulting firm in New York whose research focus is major market turning points.

Bear in the air

The S&P 500’s average subsequent decline on those earlier occasions was 38%, with the smallest drop at 22%. A bear market is considered a selloff of at least 20%, with bull markets defined as rallies of at least 20%.

In fact, no bear market has occurred without these three signs flashing at the same time. Once they do, the average length of time to the beginning of a decline is about one month, according to Martin.

The first two of these three market indicators — an overabundance of bulls and overvaluation of stocks — have been present for several months. Back in December, for example, the percentage of advisers who described themselves as bullish rose above 60%, a level Investors Intelligence, an investment service, considers “danger territory.” Its latest reading, as of Wednesday, was 56%.

Also beginning late last year, the price/earnings ratio for the Russell 2000 index of smaller-cap stocks, after excluding negative earnings, rose to its highest level since the benchmark was created in 1984 — higher even than at the October 2007 bull-market high or the March 2000 top of the Internet bubble.

Three strikes and you’re out

The third of Martin’s trio of bearish omens emerged just recently, which is why in late July he advised clients to sell stocks and hold cash. That’s when the fraction of stocks participating in the bull market, which already had been slipping, declined markedly.

One measure of this waning participation is the percentage of stocks trading above an average of their prices over the previous four weeks. Among stocks listed on the New York Stock Exchange, this proportion fell from 82% at the beginning of July to just 50% on the day the S&P 500 hit its all-time high.

It was one of “the sharpest breakdowns in market breadth that I’ve ever seen in so short a period of time,” Martin says.

Another sign of diverging market sectors: When the S&P 500 hit its closing high on July 24, it was ahead 1.4% for the month, in contrast to a 3.1% decline for the Russell 2000.

Expect up to a 20% S&P 500 decline

How big of a decline is likely? Martin’s best guess is a loss of between 13% and 20% for the S&P 500, less than the 38% average decline following past occasions when his triad of unfavorable indicators was present. The reason? He expects the Federal Reserve to quickly “step in to provide extreme liquidity to blunt the decline.”

To be sure, Martin focuses on a small sample, which makes it difficult to draw robust statistical conclusions. But David Aronson, a former finance professor at Baruch College in New York who now runs a website that makes complex statistical tests available to investors, says that this limitation is unavoidable when focusing on past market tops, since “by definition it will involve a small sample.”

He says that he has closely analyzed Martin’s research and takes his forecast of a market drop “very seriously.”

Martin says that expanding his sample isn’t possible because most of his current indicators didn’t exist before the 1970s and “the comparative math gets very unreliable.” But he says he does use several statistical techniques for dealing with small samples that increase his confidence in the conclusions that his research draws.

Russell 2000 could take 30% hit

He says stocks with smaller market capitalizations will be the hardest hit in the decline he is anticipating, in part because they currently are so overvalued. He forecasts that the Russell 2000 will fall by as much as 30%.

Also among the hardest-hit stocks during a decline will be those with the highest “betas” — that is, those with the most pronounced historical tendencies to rise or fall by more than the overall market. Martin singles out semiconductors in particular — and technology stocks generally — as high-beta sectors.

He predicts that blue-chip stocks, particularly those that pay a large dividend, will lose the least in any decline. One exchange-traded fund that invests in such stocks is iShares Select Dividend, which charges annual expenses of 0.40%, or $40 per $10,000 invested.

The average dividend yield of the stocks the fund owns is 3%; that yield is calculated by dividing a company’s annual dividend by its stock price. Though the fund’s yield is higher than the S&P 500’s 2% yield, it nevertheless pursues a defensive strategy. It invests in the highest-dividend-paying blue-chip stocks only after excluding firms whose five-year dividend growth rate is negative, those whose dividends as a percentage of earnings per share exceed 60% and those whose average daily trading volume is less than 200,000 shares.

The consumer-staples sector has also held up relatively well during past declines. The Consumer Staples Select Sector SPDR ETF currently has a dividend yield of 2.5% and an annual expense ratio of 0.16%.

If the broad market’s loss is in the 13%-to-20% range that Martin anticipates, and you have a large amount of unrealized capital gains in your taxable portfolio, you could lose in taxes what you gain by selling to sidestep the decline. But the larger losses he anticipates for smaller-cap stocks could be big enough to justify selling and paying the taxes on your gains.

5 QLAC Questions and Answers

My Comments: QLAC? What the heck is a QLAC?

By Jeffrey Levine / July 18, 2014

On July 1, 2014 the Treasury Department released the long-awaited final regulations for Qualifying Longevity Annuity Contracts (QLACs). These new annuities will offer advisors a unique tool to help clients avoid outliving their money.

The QLAC rules, however, are a complicated mash-up of IRA and annuity rules, and clients may need substantial help in understanding their key provisions. To help advisors break down the most important aspects of QLACs, below are 5 critical QLAC questions and their answers.

1) Question: What are QLACs?
Answer: QLACs, or qualifying longevity annuity contracts, are a new type of fixed longevity annuity that is held in a retirement account and has special tax attributes. Although the value of a QLAC is excluded from a client’s RMD calculation, distributions from QLAC don’t have to begin until a client reaches age 85, well beyond the age at which RMDs normally begin.

2) Question: Why did the Treasury Department create QLACs?

Answer: Prior to the establishment of QLACs, there were significant challenges to purchasing longevity annuities with IRA money. The rules required that unless an annuity held within an IRA had been annuitized, its fair market value needed to be included in the prior year’s year-end balance when calculating a client’s IRA RMD. This left clients with non-annuitized IRA annuities with an inconvenient choice to make after reaching the age at which RMDs begin. At that time, they needed to either:
1) Begin taking distributions from their non-annuitized IRA annuities, reducing their potential future benefit, or
2) Annuitize their annuities, which would obviously produce a lower income stream than if they were annuitized at a more advanced age, or
3) “Make-up” the non-annuitized annuity’s RMD from other IRA assets, drawing down those assets at an accelerated rate.

None of these options was particularly attractive and now, thanks to QLACs, clients will no longer be forced to make such decisions.

3) Question: How much money can a client invest in a QLAC?

Answer: The final regulations limit the amount of money a client can invest in a QLAC in two ways: a percentage limit; and an overall limit. First, a client may not invest more than 25 percent of retirement account funds in a QLAC.

For IRAs, the 25 percent limit is based on the total fair market of all non-Roth IRAs, including SEP and SIMPLE IRAs, as of December 31st of the year prior to the year the QLAC is purchased. The fair market value of a QLAC held in an IRA will also be included in that total, even though it won’t be for RMD purposes.

The 25 percent limit is applied in a slightly different manner to 401(k)s and similar plans. For starters, the 25 percent limit is applied separately to each plan balance. In addition, instead of applying the 25 percent limit to the prior year-end balance of the plan, the 25 percent limit is applied to the balance on the last valuation date.

In addition, that balance is further adjusted by adding in contributions made between the last valuation and the time the QLAC premium is made, and by subtracting from that balance distributions made during the same time frame.

In addition to the 25 percent limits described above, there is also a $125,000 limit on total QLAC purchases by a client. When looked at in concert with the 25 percent limit, the $125,000 limit becomes a “lesser of” rule. In other words, a client can invest no more than the lesser of 25 percent of retirement funds or $125,000 in QLACs.

4) Question: What death benefit options can a QLAC offer?
Answer: A QLAC may offer a return of premium death benefit option, whether or not a client has begun to receive distributions. Any QLAC offering a return of premium death benefit must pay that amount in a single, lump-sum, to the QLAC beneficiary by December 31st of the year following the year of death.

Such a feature is available for both spouse and non-spouse beneficiaries. In addition, the final regulations allow this feature to be added regardless of whether the QLAC is payable over the life of the QLAC owner only, or whether the QLAC will be payable over the joint lives of the QLAC owner and their spouse.

QLACs may also offer life annuity death benefit options. In general, a spousal QLAC beneficiary can receive a life annuity with payments equal to or less than what a deceased spouse was receiving or would have received if the latter died prior to receiving benefits under the contract. An exception to this rule is available, however, to satisfy ERISA preretirement survivor annuity rules.

If the QLAC beneficiary is a non-spouse, the rules are more complicated. First, clients must choose between two options, one in which there is no guarantee a non-spouse beneficiary will receive anything; but if payments are received, they will generally be higher than the second option.

The second option is a choice that will guarantee payments to a non-spouse beneficiary, but those payments will be comparatively smaller than if payments were received by a non-spouse beneficiary under the first option. Put in simplest terms, a non-spouse beneficiary receiving a life annuity death benefit will generally fare better with the first option if the QLAC owner dies after beginning to receive benefits whereas, if the QLAC owner dies before beginning to receive benefits, they will generally fare better with the second method.

5) Question: Are QLACs available now
Answer: Yes…and no. Quite simply, the QLAC regulations are in effect already, but that doesn’t mean that insurance carriers already have products that conform to the new IRS specifications.

To the best of my knowledge, and as of this writing, QLACs exist in theory only.
It’s likely, however, that in the not too distant future, QLACs will go from tax code theory to client reality. Exactly which carriers will offer them and exactly which features those carriers will choose to incorporate into their products remains to be seen.

But make no mistake: QLACs are coming (or here, depending on your point of view). If such products may make sense for clients, it probably makes sense to reach out to them now and begin the discussion.

Increased Consumer Spending Driving Strong Economic Growth In USA

USA EconomyMy Comments: On Thursday, July 30 the market dropped 300 points. The blogosphere and media were all a chatter about “was this the start of the correction?”. Who knows ?!?

It illustrates why those of us who profess to be financial advisors are more in the dark than you are. Here we are talking about a looming market correction, one that will happen, and the longer it takes to start the more violent it is likely to be. And here I am this morning, coming to you with good news about the economy. Seems totally weird, doesn’t it?

What has to be remembered is that the markets are always forward looking. I want to invest my money before it goes up, if at all possible. If I think it’s going to crater, I’m taking my money out. At least that’s the plan, unless you use some of the approaches favored by us at Florida Wealth Advisors, LLC.

What this headline tells me is that when the correction happens, it will be relatively short term and though perhaps dramatic, it will not be systemic.

Jul. 31, 2014 / APAC Investment News

Summary
• The Bureau of Economic Analysis is reporting 4 percent growth in the second quarter, a strong rebound from the first quarter.
• Consumer spending in both durable and non-durable goods is up. Both exports and imports also rose, along with most other indicators.
• This economic growth should provide some upward pressure for markets, at least in the short term.

The United States has struggled to fully recover from the 2008 Financial Crisis. While stock markets have rebounded, unemployment has remained high and economic growth has been tepid. New data points to the U.S. economy growing a solid 4 percent in the second quarter, however, propelled by an increase in consumer spending. This should help stabilize markets and perhaps even push them higher.

With consumer spending accounting for roughly 2/3rds of America’s economy, any increase in consumer spending should come as a relief for those concerned of yet another slowdown. Still, stock markets hovered in place following the release of the data on Wednesday, likely over concerns about the Fed’s next move with interest rates and the continued wind down of its asset buying program.

Consumer Spending On The Rise
According to the Bureau of Economic Analysis consumer spending increased a solid 2.5 percent in the second quarter, up from 1.2 percent in the first quarter. Durable goods, which includes automobiles, appliances, and other similar goods, increased by an astounding 14 percent, compared with an increase of just 3.2 percent in the first quarter. Non-durable goods, which includes food and clothing, increased by 2.5 percent. The BEA presents its numbers in seasonally adjusted annual rates.

Automobiles have been performing particularly well as of late, even while General Motors is still feeling the fallout from a major scandal and many automakers are suffering a rash of recalls. There were some fears of a major slowdown following the economic contraction in the first quarter, but for now it appears that the feared slow down hasn’t materialized.

Ford did suffer a decline in sales in June, falling some 5.8 percent YOY. While this may not seem like good news, the drop was not as bad as expected. Meanwhile, General Motors sales rose 1 percent even in spite of the bad publicity from the ignition scandal, and Chrysler posted a solid 9.2 gain.

Growth Being Driven By Other Factors
Besides consumer spending, other areas of the economy have also performed well. Exports rose by 9.5 percent, following a sharp decline of 9.2 percent in the first quarter. This suggests that the global economy may also be growing. Imports also rose 11.7 percent, compared with an increase of only 2.2 percent in the first quarter.

Investment in equipment rose 7 percent, while investments in non-residential structures rose by 5.3 percent.

Interestingly, federal government consumption actually decreased by .8 percent, suggesting that the rise in spending is being driven by private businesses and consumers. This should come as a welcome sign given the government’s high debt burden. Simply put, the American government likely couldn’t afford to drive up consumption even if it wanted to.

Strong Economic Growth Should Re-enforce Markets
For now, strong economic growth should keep markets buoyant even with many factors exerting downward pressures. Sanctions on Russia, tensions in the South China Seas, political infighting in Congress, the possible fallout of the Fed curtailment of its asset buying program, and numerous other factors have created jitters. Strong economic growth can counteract these downward pressures, at the very least.

Meanwhile, as stock indexes have surged to all time highs, there have been some concerns that a bubble may be building. While stock markets have been performing well, the economy in general seemed to be suffering from sluggish growth, suggesting that something besides actual economic performance has been driving stock prices upwards. Now, however, economic growth finally appears to be in line with the rising stock market indexes.

So long as the economy continues to grow, markets should remain stable. Of course, the economy itself could quickly swing back into contraction. Government debt levels remain high, profits can evaporate over night, and consumer sentiments can change quickly.

Further, as the economy continues to grow, the Fed will almost certainly continue to cut back its stimulus measures, and eventually even raise interest rates. This, in turn, could slow economic growth. Meanwhile, stagnant wages, continued high unemployment, high debt levels, and other factors could eventually pose a threat.

Powered by the U.S., Global Assets Forecast to Hit $100 Trillion

My Comments: So, just how much is $100 Trillion?

Can you say “A lot!”?  What’s equally mind boggling to me is that in 1967 ( or maybe it was 1966?) I built a house for myself and my wife. In those days I acted as my own general contractor. Back then, I could also dig my own footers. The plans were drawn by an architect friend who charged me something but I have no idea what.

My point is the house cost less than $10 per square foot to build. And today is stands proudly in a quiet Gainesville neighborhood, though it could use a coat of paint. At the time, though the total was less than $17,000, it was a lot of money. Back then, to have been told that in 2014 it would cost at least $250,000 to build a house of similar size would have been equally mind boggling.

So while $100 Trillion is a lot of money, it’s all relative. It’s what you do with the money that counts, not how much there is. And if you can’t use it to spend on stuff you need and want, it has very little value.

By Nick Thornton / July 1, 2014

Worldwide assets under management are poised to hit $100 trillion by 2018, so long as U.S. markets continue to lead the way, according to Cerulli’s latest research.

The U.S. accounts for just under half of global assets under management.

Low interest rates around the globe have pushed cash into equity, boosting financial markets.

Cerulli’s five-year prognosis is optimistic, though the report predicts that managing assets going forward will be trickier than in the past several years.

“The dark days of late 2008 and early 2009 may be well behind us, but there continues to be pressure on net revenues,” said Shiv Taneja, a London-based managing director at Cerulli.

The firm’s annual report, now in its 13th year, is a massive analysis on markets around the world, from emerging markets to the developed economies of Europe, Asia and North America.

“For all the bashing the global emerging markets have taken over the past couple of years, Cerulli’s view is that it will be markets such as Southeast Asia and a handful of others that will top the leader board of mutual fund growth over the next five years,” said Ken F. Yap, Cerulli’s Singapore-based director of quantitative research.