| Financial Connections Group, Inc. Quarterly Newsletter
4th Quarter 2011 You should have recieved your reports for 2011 including the Realized Gains/Loss Report on wheat colored paper that should be given to your tax professional along with the 1099 that comes from TD Ameritrade. In This Issue: FOR CLIENTS AND FRIENDS OF FINANCIAL CONNECTIONS FOR CLIENTS AND FRIENDS OF FINANCIAL CONNECTIONS If you fell asleep January 1, 2011, and woke up December 31, 2011, you would think we had a boring year. For those twelve months, the S&P 500 rose 0.04 points (or 0% return). When you add dividends, the S&P 500 gained a 2% return for 2011. You would have slept through a very busy year:
You would have missed other sensational headlines:
The flight to quality reduced interest rates even further, making government bonds the best performer in 2011. Usually, markets are driven by earnings and interest rates. Last year, political risk had the biggest impact. U.S. Deficits No one will argue that the deficits need to be reduced. The issue is how to do it. Dr. David Kelly, Chief Strategist for JP Morgan, discussed his concern with how the deficit is cut. Deficits are often discussed as a percentage of Gross Domestic Product (GDP). It was 8.7% the last fiscal year (government fiscal year is October 1 to September 30) and he anticipates 2012 to be 7.1%. He is worried there will be a sharp decline in fiscal 2013 to 4.7% of GDP if the Bush tax cuts, payroll tax, AMT, and Medicare adjustments all expire in 2012. When there is a sharp drop to the deficit versus a gradual one, there is a huge drag on the economy because of the combination of increased taxes and spending cuts. Unemployment would also rise. A gradual decline allows the economy to slow and absorb the changes as opposed to a potential recession with a suddenly slowed economy. 2012 Although there are some attractively valued investments, we still anticipate continued volatility in 2012 with so many issues in the U.S. and Europe unresolved. If you would prefer to dampen volatility and give up some potential growth by reallocating a portion of your portfolio, please give us a call to discuss your investments.
DO A FAVOR FOR YOUR LOVED ONES In a client’s Christmas letter, she outlined the difficulty of dealing with her ailing father. Terry gave us permission to tell you her story. These few sentences don't begin to do justice to the amount of physical and mental energy required to make this happen. And it doesn’t speak to how fortunate I feel as a result of the way things happened. I had outstanding support from the rest of the family. I had help from friends and my father's neighbors. My father had the foresight to add me to his financial accounts years ago, so when I needed to execute the Power of Attorney and become successor trustee, the transition went smoothly. And he had most of his wishes spelled out and in legally executable form. While it was a difficult year, it could have been so much worse were it not for all that love and support — and the right legal foundation. For all you procrastinators out there — take steps to ensure your loved ones know and can honor your wishes. Financial Connections is happy to help you with this endeavor. Please give us a call. MAKING YOUR MENTAL MUSCLES STRONGER According to new research, memory that involves solving problems and reasoning can be improved by using a type of brain exercise. Daily training can improve your cognitive functioning. Below are some examples you might consider.
Sample brain exercises can be found at: http://dual-n-back.com/nback.html NEW COST BASIS REPORTING FOR 1099s Beginning in 2011, custodians such as TD Ameritrade are required to report cost basis information to the IRS. The requirements are being phased in, so 1099s in 2011 include only cost basis for stocks, and investments that trade like stocks, purchased and sold in 2011. Financial Connections Group has provided you with this information in the past and asked you to use it when preparing your taxes. However, now that the IRS considers thecustodian to be the authoritative source of cost basis information, you will need to pay closer attention to TD Ameritrade’s data. For any other 2011 cost basis, refer to your realized gains and losses report from Financial Connections Group when preparing your taxes. WELCOME LESLIE H. MILLER Leslie joined Financial Connections Group last November. For more than 20 years she was a financial advisor working with individuals, families, and businesses. Earlier, Leslie worked in the wealth management department of a bank and has been an underwriter of municipal bond insurance. Leslie is a native of Marin and very active in the community. She volunteers as:
Please join us in welcoming her to our firm. EUROPE’S DIFFICULTIES — MORE THAN DEBT To give a complete review of the European situation would take at least a novella. Instead, we’ve tried to highlight some of the financial and non-financial issues that interweave money, infrastructure, and social systems. Post World War II Financial aid flowed overseas to rebuild Europe. Many European countries grew rapidly as they set up health care, pensions, lengthy unemployment insurance, job guarantees, etc., for their populations. By U.S. standards, these benefits were generous. These and other benefits eventually became institutionalized in the labor force. The work rules made it difficult for companies to close unproductive businesses in favor of funding newer and more productive ones. A unique characteristic of our American culture is to acknowledge the right to fail and try again. Steve Jobs, for example, had several companies that did not succeed before Apple’s recent run. Flexibility is required to grow and weather crises. One of the reasons the U.S. economy tends to bounce back sooner after a crisis (like the Great Recession) and adapt more readily is part of our national consciousness. Businesses were destroyed, workers displaced, but slowly we are making our way back. It is a hardship when individuals lose their job. But frequently with re-training, employees find a job in a new type of business (as in the move from manufacturing to service industry employment). If companies can’t cease to exist and workers can’t be laid off, this flexibility and competitive advantage is lost. In Europe, such a scenario is unknown. At a conference in October, Jill heard an international mutual fund manager say that the “joke” was let’s get a job in Belgium and get fired. If you are fired in Belgium, your severance package includes wages for several years! Eurozone This union of countries was launched in 1999 to improve trade and strengthen economies—to be more competitive as a trading block. The sum of the whole was to exceed its parts. Countries were required to follow specific financial guidelines (i.e., maximum 3% deficit of GDP) that were never enforced. Most countries gave up their currencies in favor of the euro, with the European Central Bank as the equivalent to our Fed. The southern European countries with the new currency were able to borrow at lower interest rates than their previous sovereign currency (think of Greece, Italy, Spain). Northern Europe (think of Germany and France) could export its surplus to southern Europe, and its banks could lend southern Europe the money to buy the exports. This plan worked until the debt became so large that it collapsed the system. The Global Financial Crisis of 2008 was the beginning of the end, and the Greek crisis serves as the most recent catalyst. Response to the crisis Northern European banks lent large amounts of money to southern banks and governments. With the value of the bonds declining, banks’ financial positions are precarious. (Europe’s Web of Debt: http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html) The political response has been just as dismal. Germany has the strongest economy and a trade surplus. German editorials question why the Germans should work longer to pay for Greek retirements and “lavish” benefits while the Greeks don’t even pay their taxes. Conversely, Greek political cartoons depict Germany saying they finally won WW II. Future There is no clear resolution to the crisis in Europe. Recession, dissolution of the eurozone, expulsion of certain members, and bank failures are just a few potential outcomes. For the countries in trouble, leaving the European Union would be no panacea. They would likely see a collapse of the banking system in a depression-style run on the banks. Their sovereign debt would be devalued substantially. Greeks are already being arrested with suitcases of cash. Athens is out of safety deposit boxes. Germany, on the other side, would be the strongest. But its currency could be so strong as to inhibit exports. Its banking system would also be suspect, since it holds large loans of other countries’ banks. The ECB has been dragging its feet throughout the crisis. As U.S. banks and money market funds refuse to take the risk of owning European debt, the ECB might finally be forced to be a more active participant. There is some consensus that at a minimum, the ECB has to absorb government debt. Former German Chancellor Gerhard Schroeder (1998-2005) recently called for the creation of the “United States of Europe.” In an interview with Der Spiegel, he said, “The current crisis makes it relentlessly clear that we cannot have a common currency zone without a common fiscal economic and social policy. We will have to give up national sovereignty.”
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