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When Will the Debt Ceiling Affect Stocks?

July 19th, 2011 | No Comments | Posted in Financial News

Will the markets feel stress as the deadline to raise the debt limit approaches?

August 2 looms. That is the absolute deadline for raising the federal debt ceiling, according to Treasury Secretary Timothy Geithner. The U.S. actually “hit” the $14.3 trillion ceiling on May 16 but took “extraordinary measures”, in Geithner’s words, to avoid default. (Those measures included suspension of Treasury payments to the Civil Service Retirement and Disability Fund and the Federal Employees’ Retirement System Thrift Savings Plan.) While Congress will surely vote to raise the debt cap by August 2, our politicians are mostly transmitting contention.1,2

Will other nations start to lose confidence in us? Our markets are pretty confident that Congress will resolve the issue. Still, the mere prospect of a default could end up doing some damage on Wall Street (and Main Street). The longer Congress dallies, the more the world questions how serious our politicians are about reaching an accord. Remember the headlines about the debt crises in Greece, Spain, Ireland and Portugal? Remember how that instability weighed on Wall Street? Well, we could give global investors a sense of déjà vu.

Bond yields could rise. We last hit the federal debt limit in 1995. Before Congress hiked it, Treasury yields rose in the preceding months. Some analysts think that if they head north just a quarter-percent as a result of this current impasse, taxpayers could collectively be on the hook for up to $500 million per month.3

If Treasury yields rise, businesses big and small will feel the pain. They want and need loans; they need to repay existing debts. They don’t need pressure on interest rates.

The world isn’t walking away from us yet. Our debt remains very attractive to foreign investors. Foreign ownership of U.S. Treasuries climbed from 37% in 1997 to 57% in 2010, and foreign governments were responsible for most of the increase.3

The dollar is still the world’s reserve currency. That fact alone will insulate us a bit in the short term. (What other currency could serve as a benchmark? The euro? Look what’s going on with that.)

When S&P downgraded the U.S. credit outlook this year, did global markets correct? No. Other economies hold a great deal of faith in ours. If our legislators get their act together, we can avoid anything reminiscent of what occurred recently in Europe.

Citations.
1 – guardian.co.uk/business/2011/may/16/us-government-hits-debt-ceiling [5/16/11]
2 – npr.org/blogs/thetwo-way/2011/05/16/136356437/debt-limit-reached-treasury-to-stop-investing-in-pension-plans [5/16/11]
3 – curiouscapitalist.blogs.time.com/2011/05/16/14292/ [5/16/11]

The Danger of Treating Your 401(k) As a Piggybank

July 19th, 2011 | No Comments | Posted in Uncategorized

Your 401(k) retirement account is meant to be a nest egg, but more employees than ever are treating these accounts as piggybanks these days, taking loans and withdrawals. Unfortunately, these moves could come back to haunt them.

“It’s never a mistake to put too much money into a 401(k) plan,” says Scott Tuxbury, director of retirement and investments with New Wealth Advisors in Tewksbury, Mass. “The mistake is using these balances, not as a retirement account, but as a rainy day account.”

Don’t get us wrong. Borrowing from a 401(k) isn’t always a bad move—if you’re borrowing for sound reasons and are sure you can pay it back, it can be better than running up high interest credit card debt. But borrowing can also be an indication that there are problems with the way you’re managing and protecting your retirement savings.

Consider the new client Tuxbury met with last fall—a 55-year-old woman making $110,000 a year, who was in 401(k) paralysis. Back in 2007, when her 401(k) was worth $230,000, she took out a $50,000 loan (the maximum allowed by law) to pay for a daughter’s wedding.  (We’ll leave others to comment on the wisdom of borrowing so much for a wedding.) Then, in 2008, during the stock market crash, the woman’s balance declined another $80,000. Panicked, she moved what was left all into fixed income investments (missing the stock market recovery) and stopped making new contributions altogether.

Tuxbury helped her undertake a complete family 401(k) makeover. She’s started contributing again, is paying the loan back over five years (as required by law), and has moved funds back into equities. Her husband, despite a $100,000 a year income, had only a $20,000 401(k) from a former employer and wasn’t contributing to a 401(k) at a new job. Now he is maxing out contributions. “They understand the severity of the matter,” Tuxbury says, adding that they are rethinking spending plans too–maybe they don’t really need that new Jacuzzi and deck they had planned to add to the back of their house.

Is it too easy to get money out of retirement accounts? Maybe, maybe not.  If you couldn’t borrow from a 401(k), some workers might be more reluctant to put their money into one. But just because you can borrow, doesn’t mean you should.

The percentage of 401(k) participants who had an outstanding loan in 2010 was 28%, a record high, according to a recent Aon Hewitt report, “Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cashouts Are Eroding Retirement Income.” Moreover, even before the recession, the percentage had been steadily rising; it was 21% in 2006; 22% in 2007; 23% in 2008; and 26% in 2009. Just as worrisome, a third of those with outstanding loans in 2010 had two or more loans outstanding at once.

While folks of all ages take 401(k) loans, those who are in their 40s and earning between $40,000 and $60,000 are most likely to have outstanding loans, the report found.  That’s not too surprising. After all, by their 40s, folks should have substantial balances from which they can borrow, and may be facing special costs, for kids’ college tuition and the like.

In such circumstances, a 401(k) loan isn’t necessarily bad —if you pay it back. That’s a big “if.” You have to pay back principal and interest (with after tax dollars) on a schedule, and if you default, the remaining amount of the loan counts as a taxable distribution (that means it’s added on to your income at tax time). Moreover, if you’re under 59.5, there’s also a 10% early withdrawal penalty tacked on.

The biggest risk for default is if you lose your job. Generally you have to pay back the loan in full within 60 to 90 days of termination. It’s the same deal if you quit. “You find people borrowing and six months later they give notice, and all of a sudden they have this big tax bite they weren’t planning on,” says Robert Demmett, a CPA with EisnerLubin in New York City.

When employees with loans terminate employment, nearly 70% subsequently default on the repayment (versus less than 3% of active employees), according to the AON Hewitt report.

An aerospace engineer with the Department of Air Force, Raymond Ryan, learned this the hard way. In 2003 at the recommendation of a coworker — not usually the best place to get 401(k) advice, although commonplace – he took out a $50,000 general purpose loan from his TSP account to pay off debt and buy a parcel of land. (The TSP is the equivalent of a 401(k) for federal employees.)

Less than two years later, the Air Force reassigned Ryan from Texas to Oklahoma and he failed to report to duty, citing medical reasons. The Air Force put him on AWOL status, and his plan closed his loan, despite the fact that he kept making payments and told his plan that he was appealing his removal from service. Long story short, a U.S. Tax Court judge has just ruled that Ryan, who paid the income tax due on the early distribution in 2006, now has to pay $979, the 10% early distribution penalty, too.

For general purpose loans, the total outstanding principal cannot exceed the lesser of 50% of your account balance or $50,000. So someone with a $120,000 401(k), could take $50,000 and someone with a $40,000 401(k) could take a loan of up to $20,000. The term of the loan must be five years or less.

In addition to general purpose loans, many plans allow special loans for the purchase of a home (your primary home, not a vacation home). In such cases, the length of the loan can exceed five years. Watch out: this doesn’t apply for home improvement loans or a refinancing, notes Glenn Sulzer, a senior pension law analyst at CCH, a Wolters Kluwer company. And read the fine print. Application fees and annual service charges are usually higher for residence loans.

In addition to loans, some employees have been raiding their 401(k)s by taking what’s called a “hardship” withdrawal. These are allowed for medical or educational expenses, burial or funeral expenses, and costs associated with avoiding eviction or foreclosure. But these really should be a last resort. Hardship withdrawals are always included in income (you don’t put the money back into the plan), and if you’re under 59.5, the 10% penalty applies. Another downside: for six months after making a hardship withdrawal, you’re not allowed to make new contributions to your 401(k), further eroding your retirement stash.

Once you reach 59.5, you face even more temptations. That’s because many plans let employees take in-service withdrawals, a fine move if you don’t like your plan and you’re rolling the funds over to an Individual Retirement Account, but a dangerous one if you’re taking the money out to spend. Similarly, Tuxbury say, the biggest 401(k) mistake he sees is retirees who get lump sum checks sent to them in the mail and deposit the full amount in their bank account. “You’ll see a real spike in expenditures,” he says. “They’ve always wanted that Cadillac.”

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The ‘D Word’ Haunts Wall Street

July 19th, 2011 | No Comments | Posted in Financial News

Is there a chance that America could actually default on its debt?

When will the debt ceiling issue be solved? The NFL, the NBA, the EU, Congress … wherever you look, it seems people would rather wrangle these days than resolve their differences. The U.S. Treasury has set a hard deadline of August 2 for Congress to settle its divide on the federal debt ceiling, and if partisan bickering interferes, the world economy could suffer a severe hit.

What would happen if we miss the deadline? According to federal budget analysts at the Bipartisan Policy Center, the Treasury would only be able to make a slight majority of its 80 million monthly payments in August. Treasury Secretary Timothy Geithner would likely be put in the same position as a struggling consumer low on cash and behind on his bills: he would have to selectively decide which debts to pay for the month and which to ignore.1

Should August 2 come and go without a solution, Congress’s inaction (and Geithner’s subsequent decisions) would have dramatic global repercussions. Most likely, his big priority would be to pay off bond investors so that a formal default wouldn’t occur. Yet even if these institutional investors are assuaged, the Treasury would still have to postpone millions of payments at home … payments to Social Security recipients, federal employees, contractors and soldiers possibly among them.1

So technically, America wouldn’t actually default come August 2 – certain federal payments would be delayed. The federal government’s existing revenue stream is decent enough so that it could still pay interest and principal on unpaid debts. 2

That said, the postponed federal payments would have a dramatic impact on cash flow, consumer spending, consumer credit and even interest rates.

S&P threatens to give America a D. The venerated credit rating agency says it will cut the U.S. debt rating from AAA all the way to D if the debt cap isn’t increased by the August deadline. (That’s right – the U.S. would go from the best credit rating to the worst.) Moody’s has indicated it would cut the U.S. rating to somewhere in the Aa range, which is three steps beneath its highest ranking.3

On Bloomberg Television, S&P sovereign rating committee chairmanJohn Chambers warned that a U.S default would rock global markets in a way that would be “much more chaotic” than the shock from the 2008 Lehman Brothers bankruptcy. Fitch Ratings is less gloomy; on June 21, it characterized the U.S. as “very likely” to raise its debt ceiling before the deadline looms.3

It may just be a matter of time. This negotiation is ultimately like so many others: a ticking clock will exert the most leverage. Given the gravity of what could happen, concessions will inevitably occur, a deal should happen (albeit probably at the eleventh hour), and both sides will put their own spin on the agreement. Until then, a hint of tension haunts Wall Street.

Citations.
1 – money.cnn.com/2011/07/01/news/economy/debt_ceiling_deadline/ [7/1/11]
2 – money.cnn.com/2011/05/23/news/economy/debt_ceiling_deadline/index.htm [5/23/11]
3 – bloomberg.com/news/2011-06-29/moody-s-would-likely-cut-u-s-debt-rating-to-aa-range-in-event-of-default.html [6/30/11]
4 – content.usatoday.com/communities/theoval/post/2011/06/poll-obama-leads-gop-candidates-but-remains-vulnerable/1 [6/3/11]
5 – montoyaregistry.com/Financial-Market.aspx?financial-market=tax-loss-harvesting&category=31 [7/3/11]

Monthly Economic Update for July

July 19th, 2011 | No Comments | Posted in Monthly Economic Update

Addressing Diversification

July 19th, 2011 | No Comments | Posted in Financial News, Videos

Top 30 Summer Songs

July 19th, 2011 | No Comments | Posted in Fun

The sun is shining, the beaches are crowded and the bodies are tanned, which can only mean one thing —
Summer 2011 is in full swing. To celebrate the return of our favorite season, we’ve scoured the Billboard chart archives and updated this definitive list of the most popular songs about summer ever recorded.

These 30 hot tunes with summer-specific themes are ranked based on each track’s performance on the Billboard Hot 100 chart from August 4, 1958 — the inception of the chart — through the chart dated May 28, 2011.

Songs are ranked based on an inverse point system, with weeks at No. 1 earning the greatest value and weeks at No. 100 earning the least.

Surfin’ Safari

The Beach Boys
1962

As is often the case, the Beach Boys pay homage to their favorite sport in their 1962 pop hit “Surfin’ Safari,” with lines about loading up their Woodie — that’s a ‘board-friendly station wagon for you gremmies — and inviting the world to the best beaches for waves. With a catchy beat and great harmonies, the song reaffirmed surf tunes’ appeal, residing on the Hot 100 for 17 weeks.

Summertime

Billy Stewart
1966

Perhaps one of the most widely covered tunes, “Summertime” epitomizes the season’s lighthearted ethos. Billy Stewart’s 1966 crossover rendition, which is embellished with jazzy horns, bluesy guitar, and funky, scatting vocals, peaked at No. 10 on the Hot 100.

Wipeout

Fat Boys and the Beach Boys
1987

The rap-n-surf-guitar track came complete with a skit-y video featuring the ultimate boys of summer, the Beach Boys and the Fat Boys, the ultimate ’80s hip-hop boys of dinner, throwing hula hoops and surfboards into the car for a sojourn to the beach. Not that anyone really needed to see either the Fat Boys in board shorts or the Beach Boys scrachin’ on the turntables. Wipeout, indeed.

Cruel Summer

Bananarama
1983

For summer days when you’re feeling down, Bananarama’s “Cruel Summer” is the companion who understands your discontent. The somewhat downbeat dance-pop track, which cozied up to the Hot 100 in 1983, bemoans the harsh heat of loneliness that can make any summer a drag.

Summertime Blues

Eddie Cochran
1958

Eddie Cochran knows how much it sucked to be a teenager, even back in 1958. His slightly rebellious hit “raised a holler” about just how much of a bummer it is to have to work all summer instead of frolicking with your girl and your friends. The tune, appropriately featured in the 1980 film “Caddyshack,” may claim there’s no cure for the summertime blues, but we’d guess it sure beats sitting in school.

A Summer Song

Chad & Jeremy
1964

Capturing the sweet sadness of saying farewell to summer love, Chad & Jeremy employ delicate, simple vocals over chugging drums and rich acoustic guitar plucks. In this tune, which entered the Hot
100 in 1964, the folk rock duo reminds the listener that there are always the memories to keep you warm in the fall.

Suddenly Last Summer

The Motels
1983

For those with any nostalgia for the decade of Pac-Man and leg warmers, The Motels’ “Suddenly Last Summer,” which peaked on the Hot 100 in 1983, will satisfy any craving for ’80s summer music. Over a catchy drum beat and spacey guitar, the emotionally distraught Martha Davis explains in a hot, dusty voice that though the seasons change, that doesn’t mean the summer has to end.

Surfer Girl

The Beach Boys
1963

The Beach Boys’ name alone should conjure images of summer, with the Cali group’s many carefree songs about surfing, cars, and girls. Peaking on the Hot 100 at No. 7 in 1963, “Surfer Girl,” a romantic ballad channeling the likes of ’50s doo wop, is no exception, with vocal harmonies that will make you yearn for a summer fling with whom to sway along.

Summer Breeze

Seals & Crofts
1972

When it peaked on the Billboard charts in 1972, “Summer Breeze” focused on a sense of simplicity and clarity in a time of Vietnam war and big cultural shifts. With its soothing combination of soft guitar,
banjo, vocal harmony and toy piano, as well as its reflective lyrics, Seals & Crofts’s first hit single is a crucial component of any mellow summer soundtrack.

School’s Out

Alice Cooper
1972

With heavy eyeliner and a snarling, guitar-driven swagger, Alice Cooper took the sweet, innocent idea of the first day of summer break, and turned it into an emancipation proclamation for ditching class
permanently. School, he growled, was not only out for summer, “School’s out forever!” The gritty tune peaked at No. 7 on the Hot 100 in 1972.

Those Lazy-Hazy-Crazy Days Of Summer

Nat King Cole
1963

Nat King Cole’s rhyme happy 1963 hit is an oldie but goodie in the truest sense of the phrase. Well into the rock era, it peaked at No. 6 on the Hot 100. Between the charm of Cole’s warm voice and the “soda and pretzels and beer” he sings about, it’s no wonder this tune is still familiar decades later.

Summer Love

Justin Timberlake
2007

While many summer tunes are relaxed, breezy numbers, Justin Timberlake took his danceable
2007 “Summer Love” in a refreshingly poppy, electronic direction. Timberlake devotees and casual fans alike flocked to the song, giving it a No. 6 climax on the Hot 100.

Saturday In The Park

Chicago
1972

With brassy horns blowing like a cool breeze off Lake Michigan, Chicago’s “real celebration” of a hot July day in the park took sights and sounds like people laughing and a man selling ice cream all the way to No. 3 on the Hot 100 in 1972. “Can you dig it?” they sing. Yes, we can.

Summer Girls

LFO
1999

The theme song to many a youthful turn of the millennium summer night, “Summer Girls” is the solid hit from the cheesy dreamboats of LFO. This 1999 lyrical masterpiece (“When I met you I said my name was Rich / You look like a girl from Abercrombie and Fitch,” anyone?) spent 17 weeks on the Billboard Hot 100 chart, peaking at No. 3.

California Girls

The Beach Boys
1965

By the mid-’60s, the Beach Boys were the kings of surf music. In 1965, the west coast poster boys for the genre sent “California Girls,” a sunny paean to the merits of Cali ladies above all attractive women from anywhere else, all the way to No. 3 on the Hot 100.

Summer

War
1976

War’s 1976 soulful slow jam “Summer” earned its peaked at No. 7 on the Hot 100 with then up-to-the-minute lyrics about cruising around town “with all the window down / eight track playin’ all your favorite sounds.” Including bongos, apparently. Do they make bell-bottom shorts? The tune starts at 2:24 in the video.

Under The Boardwalk

The Drifters
1964

In the summer of 1964, the Drifters saw their dreamy tune about catching some shade and some steamy good times literally under the boardwalk at the beach spent lots of quality time on the Hot 100. The tune has become a summer staple covered by many, including Bruce Willis and the Tempations.

Summer Of ’69

Bryan Adams
1985

A mid-’80s Bryan Adams, who had a clear penchant for leather and tight jeans, released “Summer of ’69” in 1985 and sent it to No. 5 on the Hot 100. This anthem of playing his “first real six-string” and
meeting a summer sweetie at the drive-in is a classic, nostalgic ode to the summer of the “the best days of my life.”

In The Summertime

Mungo Jerry
1970

The boys of Mungo Jerry handed the world the ultimate laid-back summer track when they released the vaguely tropical jam “In the Summertime” in 1970. The U.K. group’s only major U.S. hit, the tune also scored lots of chart love for Shaggy in the summer of 1995. His remake rose all the way to No. 3 on the Hot 100.

The Boys Of Summer

Don Henley
1984

“I can tell you my love for you will still be strong / after the boys of summer have gone,” croons Don Henley as he patiently awaits the departure of his estranged love’s summer flings so he can regain his ex’s affection. The 1984 top five hit, which ironically hit the charts during the holiday season, also scored Henley the Grammy award for Best Male Rock Vocal performance.

Summer Nights

John Travolta and Olivia Newton-John
1978

Popular everywhere from bar mitzvahs to karaoke bars, “Summer Nights” is one of those great movie songs that appeal to everyone. Made famous by John Travolta and Olivia Newton Jones in the movie “Grease” in 1978, the legacy of Danny and Sandy’s summer fling lives on in the faux-’50s tune that warmed up to the top five at the height of the disco era.

Surfin’ U.S.A.

The Beach Boys
1963

Namechecking every popular surfing spot, The Beach Boys certainly did their research for summer jam “Surfin’ U.S.A.” They sang they’d be gone all summer, and hey, if they didn’t make it back before school
starts, “tell the teacher we’re surfing.” The song, a reworking of the tune from Chuck Berry’s “Sweet Little Sixteen,” reached the top five of the Hot 100 in 1963.

Hot Fun In The Summertime

Sly & The Family Stone
1969
With a mellow, funky horns and bassline and soulful vocals, Sly & the Family Stone’s easy-going hit entered the Hot 100 the same month the group played the most iconic summer festival of all time, Woodstock. In the tune, each member expresses a line about what they love most about summer, however they all agree, “That’s when I had most of my fun… those summer days.” Particularly the summer days when you
manage to be part of music history.

Summertime

DJ Jazzy Jeff & The Fresh Prince
1991

“This is the Fresh Prince’s new definition of summer madness,” rapped Will Smith before he was an international movie star back in 1991 when he was still the rapping cohort of DJ Jazzy Jeff and a newly-minted sitcom actor. Smith was giving props to their sample of Kool & the Gang’s “Summer Madness,” and that hook helped the duo earn a No. 4 peak on the Hot 100.

Endless Summer Nights

Richard Marx
1988

“Endless Summer Nights” finds Richard Marx waxing hopeful about a summer fling he wants to develop into more, despite his girl’s resistance. This ballad must’ve done the trick, because he later married the woman he was on vacation with when he was inspired to write the song. “Endless Summer Nights” reached No. 2 on the Billboard charts in 1988.

Surf City

Jan & Dean
1963

“We’re goin’ to Surf City / ’cause its two to one” sing Jan and Dean of the girl-to-guy ratio that awaits them in some tasty beachside locale – that is, if their ’30 Ford Wagon doesn’t break down along the way. The surf rock track rode the airwaves to No. 1 on the Billboard charts in 1963.

Itsy Bitsy Teenie Weenie Yellow Polkadot Bikini

Bryan Hyland
1960

Decades before Yoplait turned it into the soundtrack to a commercial about achieving your summer perfect beach body, in 1960 Bryan Hyland hit with this ode to one girl so shy about showing her daring two-piece swimsuit at the beach that she sat wrapped up in a blanket and then hid in the water until she turned blue.

Wipe Out

The Surfaris
1962

Summer anthems are often defined by the sing-a-long factor. Aside from the manic laugh and shriek of the song’s title at the beginning, The Surfaris’ “Wipeout” is the exception to the rule, with almost 3 minutes of surf-guitar instrumental magic and one of the most memorable drum beats of all time.

Summer In The City

The Lovin’ Spoonful
1966

“All around, people lookin’ half dead… But at night, it’s a different world,” sings John Sebastian of the Lovin’ Spoonful, contrasting a New York summer’s day with the vibrant nightlife of rooftops cats out looking for kitties he much prefers. “Summer in the City,” complete with honking cabs and jackhammers, scored the band a No. 1 hit on the Hot 100 in 1966.

California Gurls

Katy Perry feat. Snoop Dogg
2010
With an unabashedly synthy beat and breathy vocals about a “warm, wet and wild” place and the women you find there, how could Katy Perry’s perfectly timed hit — with a smooth assist from Snoop Dogg, not have been the top song of summer 2010? In fact the song was so huge, it leapt from No. 18 when we first published this chart in May 2010 to No. 1 just one year later, beating out over 50 years of other hot summer songs.

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