Underwater homeowners face a tax time bomb

For those homeowners who were under water and received a full forgive from there bank, they are not out of the woods yet.  Previously homeowners were not taxed on their debt forgiveness as part of Mortgage Forgiveness Debt Relief Act.  However that bill expires at the end of this year and could cost families billions of dollars that they don't have.

With those people who have been able to live rent free in their home while continuing to support the economy without having the burden of a mortgage payment could potentially see their buying power greatly diminished.

It will be interesting to see if the bill gets extended or kicked down the road with the other item pertaining to the fiscal cliff.

See full article in Salon.com

• The letter from Bank of America Home Loans got right to the point. “We are pleased to inform you that we have approved your Home Equity Account for participation in a principal forgiveness program offered as a result of the Department of Justice and State Attorneys General global settlement with major mortgage servicers.” In the letter, which I obtained from an anti-foreclosure activist, Bank of America offered the homeowner full forgiveness of their entire home equity loan balance of over $177,000. But then Paragraph 5 came with an ominous warning: “Please be aware that we are required to report the amount of your cancelled principal debt to the Internal Revenue Service.”
• The tax issue could significantly disrupt a still-fragile housing market and rob homeowners of the tools to pull themselves out of mortgage debt. It also represents a final indignity for homeowners who have been abused by the fraudulent mortgage practices of leading banks for years. Just when they think they get relief from their troubles, they get hit with a massive tax bill they cannot pay. “This has the effect of pulling people up with one hand, and hitting them in the face and knocking them over the cliff with the other,” said Sen. Jeff Merkley, D-Ore., who supports extending the law.

Stephen Ritz: A teacher growing green in the South Bronx

The Aftermath of the Housing Bubble

Barry Rithotz at The Big Picture, has posted this presentation by St. Louis Fed President James Bullard. Within the presentation, Bullard concludes that the housing bubble would continue to bog down the US economy as households are carrying to much mortgage debt.
BullardBipartisanPolicyCenter5June2012Final

Andrew McAfee: Are droids taking our jobs?

Why ‘I Don’t Know’ Is Often Your Best Money Answer

As investment managers or financial planners we are often expected to predict the future.  Although my crystal ball broke a long time ago, predicting the future is a part of the investment management business that I never got into.  It makes sense because even the best laid plans can go to the waste side at any moment.  This is one reason why it is so critical to review your investment or financial plan at least once per year.  You never know when a catastrophe may strike or when you may win the lottery.

At DWCM we try to educate people about investment management and financial planning.  Part of that education involves explaining to people that we may not have all of the answers.  We can only assume the outcome using various financial analysis techniques.  We often plan for conservative outcomes and hedge our positions where we can.

Someone that tells you that they have all of the answers....run as fast as you can in the opposite direction.  There is no doubt that you should turn to an expert for assistance in a time of need.  However, there is no way to get around the fact that know one knows what the future will be, how markets will perform, or what the economy will be like 10 years from now.

Remember, investment management is a continuous learning process.

In this NYT piece, fellow financial planner Carl Richard explains why ‘I Don’t Know’ is often your best money answer.

• Accepting the fact that we just don’t know allows us to let go of any anxiety around the idea that we should be able to find someone who does know. And let me share a secret with you about that: There isn’t anyone who knows what the next week, month, year or even decade will look like in the stock market. Anyone who says they do is someone you should run from.

Amazon's recommendation secret

I have often wonder how companies like Amazon can figure out how to target their consumers with various products.  I am currently reading a book, The Power of Habit by Charles Duhigg, in which Target is featured as a company who tries to learn things about their consumers without their consumers actually knowing about it.

By being able to collect data from users, voluntary or not, companies can put the pieces of the puzzle together to determine what type of consumer you are and devise ways to target you better all with the goal of increasing revenues.

This Fortune article gives a little more detail in how Amazon specifically finds out who you are.

• At root, the retail giant's recommendation system is based on a number of simple elements: what a user has bought in the past, which items they have in their virtual shopping cart, items they've rated and liked, and what other customers have viewed and purchased. Amazon (AMZN) calls this homegrown math "item-to-item collaborative filtering," and it's used this algorithm to heavily customize the browsing experience for returning customers. A gadget enthusiast may find Amazon web pages heavy on device suggestions, while a new mother could see those same pages offering up baby products.
• Judging by Amazon's success, the recommendation system works. The company reported a 29% sales increase to $12.83 billion during its second fiscal quarter, up from $9.9 billion during the same time last year. A lot of that growth arguably has to do with the way Amazon has integrated recommendations into nearly every part of the purchasing process from product discovery to checkout. Go to Amazon.com and you'll find multiple panes of product suggestions; navigate to a particular product page and you'll see areas plugging items "Frequently Bought Together" or other items customers also bought. The company remains tight-lipped about how effective recommendations are. ("Our mission is to delight our customers by allowing them to serendipitously discover great products," an Amazon spokesperson told Fortune. "We believe this happens every single day and that's our biggest metric of success.")

From Underwater to ‘Equity Poor’: Why the Housing Market Isn’t Recovering Faster

We've spoken to a few readers that are greatly affected by the "equity poor" scenario laid out in this Time article.  It is a bit of being in "no man's land" where you have a situation in which case you are not underwater with your mortgage (meaning you owe more than the house is worth) vs. having little to no equity and not being able to refinance or trade up in value.

As the article points out it is this segment of "trade up" buyers that help to fuel the real estate market by selling their smaller starter house for a bigger more expensive house.

A few highlights from the piece

• Unlike underwater borrowers — who have negative equity, with more debt on their homes than those homes are worth — equity-poor borrowers have less than 20% equity in their homes. Why 20%? In the current tight lending climate, buyers generally need to put 20% down on a home in order to get a mortgage. So if you’re currently in a $400,000 home, even if you have 20% equity, you can’t trade up to buying a $600,000 home solely on the basis of the money you would extract if you sold.
• So what should you do if you’re equity poor? First, be happy you’re not underwater. Next, probably the most prudent course is to do what the majority of Americans are doing: not much of anything. Sit tight, try to be patient — and take advantage of today’s low mortgage rates with a refinancing, if you possibly can.

Getty Images

Mass Headcount Reductions on the Rise

One of the least known facts coming out of last week's largely disappointing earnings announcements were the crushing news and detail of mass layoffs.  

Courtesy of this Mish Shedlock post, 

Firing Details

• Ford is closing its first European car-assembly factories in 10 years
• AMD, the second-largest maker of processors for personal computers, said last week it will cut 15 percent of its staff, or about 1,665 jobs, after forecasting fourth-quarter sales that fell short of analysts' estimates.
• Dow Chemical will close 20 plants in the U.S. and abroad to eliminate about 2,400 jobs
• DuPont plans to trim 1,500 jobs after third-quarter profit trailed analysts' estimates
• Cummins Inc. (CMI), a Columbus, Indiana-based engine maker, said it expects to erase as many as 1,500 jobs by the end of 2012 and lowered its forecasts for sales and profit.
• Kimberly-Clark Corp. (KMB) said this week it plans to cut manufacturing and administrative operations as it exits the diaper business in western and central Europe

Stocks and Oil Diverge

The chart below courtesy of the St Louis Fed but I picked it up at Crossing Wall Street identifies the gap between the S&P 500 return and the price of WTI crude oil.  Obviously crude oil needs to come up, the S&P 500 needs to fall, or a combination of the two.  We would say that it is likely that the S&P 500 could continue to fall.

Meet The 15-Year-Old Who Is Changing How We Test For Cancer

Many Devices, Many Files And Four Ways to Share Them

Here is a good summary of the most popular online storage services courtesy of the WSJ.  We were utilizing both Google Drive and Microsoft SkyDrive for the first half of the year.  For the last quarter we went specifically with SkyDrive because as most of our files were Excel, Word, and PowerPoint, we found it easier to update files if needed and it seemed to be easier for us to use and organize files.

Filing in the Sky

Here's how four online storage and sharing services compare:

Service	Free Storage (gigabytes)	Annual Cost for 100 Gigabytes*	Works on Both PCs and Macs?	IPhone, IPad App	Android App	Special Features
Dropbox	2	$99	Yes	Yes	Yes	Automatic photo upload
Microsoft SkyDrive	7	$50	Yes	Yes	Yes**	Built-in integration with Microsoft Office
Google Drive	5	$60	Yes	Yes	Yes	Built-in integration with Google Docs
SugarSync	5	$150	Yes	Yes	Yes	Doesn't require special folder
*Sometimes this is additive to free storage **Promised for this month

Week 43 Performance.....The Correction Continues

It was another rough week on Wall Street with all four major equity indices down as well as the DWCM Fund.  While the economic data continues to be mixed or slightly to the positive side, earnings seem to be the story behind this drag down.  To us it is becoming a stock pickers market.  

While all of the indices have been pulled down in total, not all stocks are following suite.  There is a clear distinction between those companies reporting solid earnings and giving positive guidance and having their stock prices move to the upside vs. those companies that miss expectations.  Just take a look at the restaurant sector.  

Buffalo Wild Wings BWLD (which we own in the DWCM Fund) and Chipotle Mexican Grill CMG (own in personal account) were both crushed over the past few weeks when they reported disappointing earnings.  On the other hand a stock that we have followed closely over the years, Panera Bread PNRA continues to power up close to its all time high.

This is just one example of exploring one industry and finding distinct contradictions.  Restaurant stocks would seem to be vulnerable in an economic slow down especially with the fiscal cliff approaching.  However American consumers can prove to be extremely resilient.  Once you think that they are left on the sidelines they come back and find a way to spend.

With that in mind, we added to our position of BWLD this week when it was down over 11% in one day.  We believe that BWLD can continue to grow throughout the current economic uncertainty although maybe at a slower pace than it has in recent years.  We're not going to let that scare us away from this company that still has good growth potential and solid fundamentals.  We would also look to begin a position in PNRA at as reasonable price.

During this market correction over the past 5 weeks the DWCM Fund is down about 5.5% which has been slightly worse than the four major equity benchmarks.  Most of the pain has been in our largest holding Apple AAPL.  While Apple reported good numbers this week, iPad sales were a disappointment which help push the stock lower.  Apple is down near the $600 level from its all time high of just over $700 which it broke through in mid September.  The question to ask is if this poses a buying opportunity?

If you like Apple and believe in its growth story and continued dominance, obviously it is cheaper today than it was a month ago.  There is more and more stiff competition when it comes to technology products from the likes of Samsung, Microsoft, and Google.  Since Apple is already our largest holding in the DWCM Fund, we would not be adding to our current position now.  However a bigger pullback would make for a compelling buy.

The Week Ahead
It will once again be a week of waiting until the highly anticipated jobs report this Friday.  What makes this report even more hyped is that it comes just days before Americans go to the polls to elect a President.  A lower unemployment number could help Obama stay in the White House vs. a higher number possibly giving momentum to Romney.  

Besides the jobs report, this week also has an abundance of economic data.  When you combine all of the economic data with a continuation of earnings releases you could have a very volatile week with markets going up or down.

As we have stressed previously now is a good time to have your watchlist handy as a stock sell off can become obsessive and create buying opportunities.

• Mon - Personal Income and Outlays, Dallas Fed Mfg Survey
• Tue - Redbook, S&P Case-Shiller HPI, Consumer Confidence, State Street Investor Confidence Index
• Wed - ADP Employment Report, Chicago PMI
• Thu - Motor Vehicle Sales, Challenger Job-Cut Report, Jobless Claims, Productivity and Costs, PMI Manufacturing Index, ISM Mfg Index
• Fri - Employment Situation, Factory Orders

Have a Great week!

DreamWorks Capital Management

If you are currently trying to develop your own investment plan or are seeking the help of a professional investment advisor we urge you to give us the opportunity to show you what DWCM can do for you.  No matter what stage in life you are currently at, DWCM can help you plan for your ever changing needs.

DWCM can you help you with any of the steps in your wealth management journey including;

• Addressing emergency fund needs
• Developing a retirement plan
• Sending a child to college
• Looking at various investment options
• Determining how to involve philanthropic passions as apart of your planning process

With our "SMART Principles", we can help you develop your unique goals and create a focused customized plan to achieve your financial and lifestyle goals.

Contact us at pfenner@dwcmllc.com.

Hate Small Talk? These 5 Questions Will Help You Work Any Room

Ever been to a networking event and find it hard to connect with people or hold a conversation?  Allison Graham is a corporate trainer that focuses on effective networking and business development strategies and is the author of From Business Cards to Business Relationships: Personal Branding and Profitable Networking Made Easy, 2nd Edition

Graham lays out a few of her key strategies for helping people understand networking in this Fast Company piece

• Ideally small talk will uncover common interests, business alignments, the six degrees that separate you, potential need for your product or service, and basically whether or not you enjoy each other's company. The goal is not to become best friends or a new client on the spot. Although it's nice when those instant connections happen, usually that's not the case.
• The goal of conversation at functions is to establish enough common ground to determine a reason to connect again
• Match the depth of dialogue to the environment
• Your words may be forgotten, but how you make people feel will be remembered
• It's about your attitude

Getting To Hello...And Beyond

Tongue-tied and standing in a corner? Use these easy tips for working a room.

When looking for a conversation partner in a crowded room, there are three likely scnarioes that make it easy to initiate dialogue:

--Fun, inviting groups

--White-knuckled loners who look uncomfortable and will welcome your attempt to initiate dialogue

--Familiar faces

Questions to get the conversations flowing:

"What’s your connection to the event?"This question can uncover mutual contacts and usually leads to a more robust answer than if you asked the typical “Have you been to this event before?”

"What’s keeping you busy when you’re not at events like this or at work?" This question gives the encouragement necessary for the person to share his/her passions and outside interests. It is an excellent way to add some enthusiasm into a conversation that has hit a lull, especially if he/she would prefer to be doing that activity at that moment.

"Are you getting away this summer?" This question can lead to conversations about family, reveal special interests and, if you like talking about travel, it’s a sure-fire way to keep a conversation interesting.

"Are you working on any charity initiatives?" This question makes it easy to launch into a deeper connection. If they’re not involved with any projects, they often share reasons which is usually revealing, and if they are doing something of value they will be more than happy to share.

"How did you come to be in your line of work?" For some, the path to where they are today can be quite an interesting ordeal. Having a chance to revisit their story to success can leave helpful clues along the way as to who they are and what makes them tick.

Food Report: One Harvest Away from a Catastrophe

As I was taking my weekly stroll through the grocery isles, I once again saw time and time again the rising cost of foods.  Specially I saw fruits and vegetables on the rise, baked goods, and meats.

Again I am reminded of the fact of how the 2012 drought has impacted American's bottom line.  What is worse is knowing that we have not even felt the full effect of lower crops.

Although some commodities have come down in the last week or two with the rest of the market, we do not expect food prices to come down at all.

This article at Financial Sense gives a good overview of how meek the agriculture situation looks.

• Because of the worst drought since 1988 the U.S. Department of Agriculture declared a federal disaster area in almost one-third of all the counties in the United States - more than 1,300 counties covering 29 states, the largest disaster declaration ever made by the USDA. Only in the 1930s and 1950s has a drought covered more land.

• The United States Drought Monitor shows 88 percent of corn, and 87 percent of soybean crops are in drought-stricken regions.
• Corn, the biggest ingredient in livestock feed, is a mega-crop, there are more than 4,200 different uses for corn products;
• adhesives, aluminum, aspirin, clothing starch, cosmetics, cough syrup, dry cell batteries, envelopes, fiberglass insulation, gelatin capsules, ink, insecticides, paint, penicillin, powders, rugs and carpets, stamps, sweetener’s, talcum, toothpaste, wallpaper, vitamins, processed and fast foods and of course as fuel - ethanol.

Michigan City Outsources All of Its Schools

I'm sure that the Highland Park School District is not alone in its financial struggles.  As communities have been decimated by the "great recession", families have moved and businesses have closed thus reducing the amount of tax revenue being collected.  Without revenue, school districts rack up the debt.

The solution for this one Michigan school district in particular was to outsource its entire school system.  Full piece here in the WSJ.

• Highland Park School District, one of the state's lowest-performing academically, says it will turn over its three schools and nearly 1,000 students to a private, for-profit charter school company—the second district in Michigan to take such a drastic step to avert financial collapse.
• Leona Group LLC, which promises to improve the learning environment and boost student performance in a district where only 22% of third graders passed state reading exams last school year and just 10% passed math. The results were even worse for high-schoolers: About 10% were proficient in reading, and none in math.

• Proponents say the move could offer a lifeline to other school districts in crisis. In 2011, 48 of Michigan's 793 districts ran deficits that totaled $429 million, compared with 18 districts with $59 million in combined deficits in 2004-2005, according to the most recent state data.
• The district got itself into financial trouble, in part, because it didn't cut staff as fast as its enrollment declined along with the city's population, leaving it with higher per-pupil expenditures, said Joyce Parker, who, under a controversial state law, was appointed district emergency manager in May by Republican Gov. Rick Snyder.

Walloped by weather, state's farmers nurture new business plans in season of uncertainty

Cranes is a metro Detroit business magazine that I receive on a weekly basis.  Although most of the US has been hard hit by the drought conditions that spanned across the spring and summer months, the Midwest where the bulk of the agricultural products are grown and produced has especially been exposed.

Spending my summer vacation virtually every year on my family's dairy farm in Wisconsin and growing up in a rural part of Michigan whose main business was farming, has given me a solid amount of prospectus when it comes to farming.

Farming is a brutally tough business not only physically but mentally as well.  There are so many things that are beyond a farmers control such as the weather, political decisions, and world events that can have an impact on their bottom line.

I believe that this Cranes piece will give readers a sense of what farmers are facing right now not only here in Michigan but across the US when it comes to these uncontrollable events.

• A major uncertainty: The prices that farmers will receive for their crops or dairy products have them guessing at profit margins more than usual at this point in the season.

DANIEL ACKER/BLOOMBERG

DANIEL ACKER/BLOOMBERG

• For example, if the agreed-on price was $6 per bushel of corn when the contract was signed and now the price has hit $9, then farmers who agreed to sell at $6 have left $3 a bushel on the table if their farms don't yield enough to fill the contract.  Because to fill the contract, farmers must buy the crop at $9 to sell for $6.
• "The biggest thing is, we just don't know," Woelmer said. "If you don't know what your profit margin is going to be, you kind of just put everything on hold and take a wait-and-see attitude."

The Internet Taxes that Could Be Coming

This is a follow up post to our It's time to strike down the 'Amazon exemption' piece that focused on the tax advantage that Amazon receives by not charging sales tax vs. its brick and mortar counterparts.

With literally thousands of state and local taxes codes it would be a daunting task to require internet companies to collect all of these taxes.  It is much easier to collect those taxes when you purchase an item in the store rather than online.

However with state and local entities feeling the heat from the great recession, budget cuts, and a decrease in funding, they are needing to find ways to stop the bleeding.  In addition you have a company like Best Buy who is turning into Amazon's showroom where people will go, look for a product to try out, and then go home and order it on Amazon.

Here is some additional insight into this topic via The Heritage Foundation

How the Blind Are Reinventing the iPhone

This Atlantic article takes a look at a feature of the iPhone that many of us have probably never had to utilize;  the visually impaired functionality.  I had no idea that such functionality even existed.

• For the visually impaired community, the introduction of the iPhone in 2007 seemed at first like a disaster -- the standard-bearer of a new generation of smartphones was based on touch screens that had no physical differentiation. It was a flat piece of glass. But soon enough, word started to spread: The iPhone came with a built-in accessibility feature. Still, members of the community were hesitant. 
• For its fans and advocates in the visually-impaired community, the iPhone has turned out to be one of the most revolutionary developments since the invention of Braille. That the iPhone and its world of apps have transformed the lives of its visually impaired users may seem counter-intuitive -- but their impact is striking.

Microsoft Replacing Hotmail Email Service

This WSJ headline caught my attention because admittedly I am still one of the 350M users of Microsoft's Hotmail.  According to the piece, Microsoft has announced that they will be replacing Hotmail with Outlook.com.

Full WSJ article here

• Outlook.com also has a unified address book that contains contact information for people on Outlook.com, Gmail, Facebook, LinkedIn and other services. In emails with a contact from the address book, an Outlook.com user can see the person's recent status updates from Facebook, or recent Twitter posts, and click a button to start a video chat on Skype, the video-calling service Microsoft acquired last year.
• Like the current Hotmail, Outlook.com allows people to access a free, stripped-down version of Microsoft's Office.
• Microsoft is in the midst of overhauling many of its products, including the flagship Windows operating system, the Office suite, back-end software that powers computer servers, the Internet Explorer Web browser, and the Windows Phone smartphone software.

Facebook's Slow Dance With Markets

Even though millions use Facebook FB and it may appear to be a great company, that doesn't mean you should own it as an investor.  Facebook will have to get very creative in trying to put ad's in front of users as peoples preferences shift to mobile and away from a PC.

Facebook's stock price has been crushed since it reported earnings for the first time as a public company last Friday.  However even with the decline it is still richly valued with a Fwd P/E of 34.9 and a Price/Sales ratio of 12.6.

With over 900M registered users, how much farther can Facebook grow?  We don't believe very much and until the company can figure out how to get more ads on mobile devices and get advertisers to pay for those ads, we would stay away from the stock.

Divorcé's Guide to Marriage

We are certainly not marriage therapist here at DWCM, but we do deal with married couples quite often.  Being married myself I thought that the following WSJ article gave some really good ideas about how to keep your marriage growing, prosperous, and happy.

• People who lose the most important relationship of their life tend to spend some time thinking about what went wrong. If they are at all self-reflective, this means they will acknowledge their own mistakes, not just their ex's blunders. And if they want to be lucky in love next time, they'll try to learn from these mistakes.
• Dr. Orbuch has been conducting a longitudinal study, funded by the National Institutes of Health, collecting data periodically from 373 same-race couples who were between the ages of 25 and 37 and in their first year of marriage in 1986, the year the study began. Over the continuing study's 25 years so far, 46% of the couples divorced—a rate in line with the Census and other national data. Dr. Orbuch followed many of the divorced individuals into new relationships and asked 210 of them what they had learned from their mistakes. (Of these 210, 71% found new partners, including 44% who remarried.) This is their hard-earned advice.
• Boost your spouse's mood
• Talk more about money
• Get over the past
• Blame the relationship
• Reveal more about yourself

A Woman’s Place

This is an in depth article in the New Yoker that provides a detail background of Facebook COO Sheryl Sandberg.  The piece by Ken Auletta, also gives insight into the courtship of Sandberg by Mark Zuckerberg to get her to come to Facebook.

“It was like dating,” says Dave Goldberg, Sandberg’s husband and the C.E.O. of the online company SurveyMonkey. Sandberg says they asked each other, “What do you believe? What do you care about? What’s the mission? It was very philosophical.”

“There are people who are really good managers, people who can manage a big organization,” Zuckerberg says. “And then there are people who are very analytic or focused on strategy. Those two types don’t usually tend to be in the same person. I would put myself much more in the latter camp.”


Complete article here

DreamWorks Capital Management’s 2012 Third Quarter Investment Letter, When Planning and Hard Work Payoff

DreamWorks Capital Friends and Clients,

Please find attached DreamWorks Capital Management’s 2012 Third Quarter Investment Letter, When Planning and Hard Work Payoff

The biggest news of the quarter, besides the equity markets impressive double digits return through the end of Q3, had to be the announcement by the US Federal Reserve to launch what we are calling “QE Unlimited”. 

The Fed is set to start buying back $40B worth of mortgage backed securities each month until it sees a turnaround in the economy and more specifically the unemployment rate.  Maintaining artificially low interest rates isn't doing much to stimulate the economy in any meaningful way.  One consequence of the Fed's low interest policy, has been to hurt the savers of this country.  Lower interest rates basically force people into higher risk assets in order to achieve the possible returns that they are looking for in order to produce income or achieve their financial goals. 

Whether you are receiving any interest or not, having a consistent and dedicated savings plan is still the prudent approach to take in order to accomplish financial and lifestyle goals.  As we stressed in this quarter’s lecture, Balancing Your Changing Investment Needs, emergency planning which should be your first priority within the wealth management planning process.  Having and maintaining an emergency fund is more than just having some money sitting in a liquid savings account.  This type of planning helps to protect your assets and can get you through life’s volatile storms, which is the basis for our case study this quarter.

Feel free to call if you would like to discuss our Outlook, your investments, or those of a client or friend.

Warm regards,

Paul Fenner, ChFC

President

DreamWorks Capital Management LLC

(248) 860-2279

pfenner@dwcmllc.com

www.dwcmllc.com

What if Fannie and Freddie Were Eliminated?

The Heritage Foundation tackles this challenging question; what if Fannie and Freddie were eliminated?

Full report here along with a few other reports and additional analysis

• Owning your own home is the American Dream, but suffering a foreclosure and winding up on the streets is the American Nightmare. In pursuit of encouraging the former, the federal government helped produce the latter. Government intervention by way of Fannie Mae and Freddie Mac may have given more Americans the keys to their own homes, but they bought homes they could not afford and in a marketplace that could not be sustained. As Heritage showed in an earlier paper, Fannie Mae and Freddie Mac can be phased out without disrupting the housing recovery. A better way forward is to phase out Fannie Mae and Freddie Mac and let the home market find a healthy and sustainable equilibrium.

Financial Planning 101 For Older College Students

Just as those parents out there try to determine what the cost of college is, how much they can afford, and what the best investment is.  So too should older people who are going back to hit the books.  People should ask the same questions and apply the same financial rigor as they would with their children.

This Time piece gives older students something to think about when deciding weather to go back to school and ways to make their investment pay off.

• Determine your “debt ceiling.”
• Look for alternative sources of funding
• Compare your potential earnings to the likely costs

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• Make sure you’ll have health insurance
• Plan to reenter the workforce quickly

An Entire Financial Plan In A Blog Post?

This is a great post by financial blogger Tim Maurer, who we have featured in this space previously.  Maurer reinforces some of the wealth management principles that we education and stress upon our clients and readers of this this site.

First and foremost, any wealth management plan begins with setting realistic goals.  As we talk with clients and readers about what money means to them and what they would like to do with their wealth, it can really help shape a person's views on money and the impact it can have upon one's life.

I also agree with Maurer's point below that insurance should be used to manage risk and should be as simple as possible.  People can turn insurance products into complex vehicles which can possibly do more harm than good.

See full Forbes blog here

• As we’ve learned, financial planning is not just about dollars and cents.  It starts with the recognition of the role money plays in our lives, the history we have with money, and then reshaping our view of its purpose as a means, not an end. Then, we have the privilege of making a declaration of what will mark our lives—our Personal Principles—followed by the establishment of specific, measurable, attainable, and meaningful goals that are based on those principles.  This step may also involve testing and eliminating any goals we had previously set that do not align with our principles or meet the necessary goal criteria.
• Insurance is a valuable tool, but one that should be used by a wise risk manager who seeks to avoid, reduce, and assume risk prior to insuring.  Life insurance should be one of the simplest parts of the financial plan but is often made into one of the most complex.  Don’t let it be.  Invest with investments and insure with insurance. 

Schools to Offer Free Classes Online

Although you might not receive actually credit for taking a free online course, the benefits could come in other forms.  As I have often talked to people about taking responsibility for their own retirement plans rather than having a company do it for them.  The same reasoning applies to ones own career.

Previously companies used to spend thousands of dollars on an employee to help get them the training that they needed in order to be successful at their job.  Nowadays, if you can't get the job done with the current set of skills you may be out looking for a new job.  With millions of people still unemployed, companies aren't hard up to find good talent.

So how does this tie in to free online education?  People should always be looking to improve upon their current skill sets.  Weather you are trying to improve upon your current position or have an interest in doing something new, knowledge is power and is one way to get you where you want to go.

In addition to this WSJ article here, iTunes is another great resource for free educational tools.

• Twelve top universities Tuesday joined a venture that offers free Internet courses world-wide, in a bet by some of the most prestigious institutions globally on online education.
• The schools agreed to join four others already working with Coursera, a for-profit company founded by two Stanford University computer-science professors. The schools will offer 111 mainly introductory courses this school year, including Galaxies and Cosmology, Equine Nutrition and Contraception: Choice, Cultures and Consequences.

Source: AP

• Critics worry online education waters down the classroom experience. Shanna Smith Jaggars, who studies online higher education as part of the Community College Research Center at Columbia University's Teachers College, said studies show that those taking courses online do no better than traditional students, and at the community-college level, online students are more inclined to drop out of classes. "These courses might be great for certain highly motivated students, but the typical student needs personal interaction and support and encouragement from the teacher," she said.

Idle cash piles up

According to this Reuters article, IRS data suggests that, globally, U.S. nonfinancial companies hold at least three times more cash and other liquid assets than the Federal Reserve reports, idle money that could be creating jobs, funding dividends or even paying a stiff federal penalty tax for hoarding corporate cash.

Although the data points are from March, the point no less is that companies are still hoarding cash for various reasons which could include but not limited to

• Tax avoidance
• Lack of demand
• Fiscal policy uncertainty

The list could go on but I hope that you get the point.  Full article here

• The Fed's latest Flow of Funds report showed that U.S. nonfinancial companies held $1.7 trillion in liquid assets at the end of March. But newly released IRS figures show that in 2009 these companies held $4.8 trillion in liquid assets, which equals $5.1 trillion in today's dollars, triple the Fed figure.

Think the Fed Doesn’t Sway Stock Prices? Check This Study

Data points courtesy of this WSJ piece

• “In a nutshell, the figure shows that in the sample period the bulk of the rise in U.S. stock prices has been earned in the twenty-four hours preceding scheduled U.S. monetary policy announcements,” the economists say.

• The economists conclude that such trends are seen only in stocks. Long-term fixed income and exchange rates don’t display similar patterns. But the reasoning still remains a mystery:
• We don’t find analogous drifts ahead of other macroeconomic news releases, such as the employment report, GDP and initial claims, among many others. The effect is therefore restricted to FOMC, rather than other macroeconomic, announcements. In the Staff Report, we attempt to account for standard measures considered in the economic literature that proxy for different sources of risk, such as volatility and liquidity, but they also fail to explain the return. Finally, we consider alternative theories that feature political risk, investors with capacity constraints in processing information, as well as models where stock market participation varies over time. Although these theories can help qualitatively explain the existence of a price drift ahead of FOMC announcements, they are counterfactual in some dimension of the empirical evidence.
• Our findings suggest that the pre-FOMC announcement drift may be key to understanding the equity premium puzzle since 1994. However, at this point, the drift remains a puzzle.

The Tax Cliff Is a Growth Killer

Former Ronald Regan aid Art Laffer, was out with a piece in the WSJ discussing the impact of rising taxes as part of the "Fiscal Cliff".  Laffer, has long been a proponent of seeking lower taxes in order to boost or maintain growth.

Weather you blame higher taxes, spending cuts, or Obamacare, we see growth being extremely impacted going forward.  Although the Fed has made it very accommodating to increase spending and thus growth it has not happened.  With the looming "fiscal cliff" this may make growth even harder to come by.

WSJ article here

• The rates on capital income are rising because of the expiration of the Bush tax cuts, and a 3.8% tax on investment income for the highest earners enacted as part of ObamaCare. As happens almost every year, there is a large scheduled expansion of the Alternative Minimum Tax (AMT) to ever-lower levels of income. The highest estate tax rate is scheduled to rise to 55% from 35%, with the lifetime individual exemption dropping to $1 million from $5 million. Meanwhile, tax rates will rise in many states.
• Under the current administration, scheduled tax increases have been delayed, thereby providing people with enormous incentives to accelerate income into 2012 from 2013 and beyond. As a result, growth from 2013 on will be below trend.

$100,000 income: No big deal anymore

A $100k salary isn't what is used to be according to this Bankrate.com article.  Having a $100k base salary used to be the gold standard when it came to living the good life.  And although having a $100k salary would still put you in the upper echelon of earners in America, that type of money doesn't go as far as it used too.

As we have often discussed, the inflation numbers that the government would like you to believe show inflation tame or even near historical lows.  However those figures often exclude the "volatile" food and energy costs that we actually use on a daily basis.  Not to mention increases in health care and college costs, you can see where that $100k salary is eaten away quite quickly.

Full article here

• Not only has standard inflation steadily eroded the real value of a $100,000 income, but the costs of housing, health insurance and college tuition have risen dramatically in recent years. Consider the rising costs of food, energy and the necessities of a middle class life, and that six-figure luxury quickly turns to six-figure mediocrity.
• Less than 20 percent of American households even break the six figures. But many who earn incomes near the mark find that their prized incomes don't take them as far as the hype. Many say that while breaking the $100,000 annual income mark may still be an impressive milestone, it doesn't exactly roll out the red carpet.
• "What would have cost you $100,000 in 1976 would cost you $381,000 today. That's just the inflation, and there are so many other things that have grown very expensive," says Mari Adam, Certified Financial Planner and president of Adam Financial Associates in Boca Raton, Fla.

7 equations to build a secure retirement

In his book, Milevsky reveals not just the equations, but he also provides portraits of the people and ideas that are behind all our retirement planning. Here’s a look at the equations that both students of retirement and would-be students need to know if they want to build a bulletproof retirement plan.

See all 7 equations in this Market Watch piece.

Why Millennials Don't Want To Buy Stuff

If indeed buying patterns are shifting in which people do not find the joy in purchasing things, then the US economy could be in for a rockier road than expected.

This Fast Company piece takes a look as to why our purchasing shifts are occurring especially with the younger generation know as the millennial   Contrary to popular belief, technology is not at the heart of this shift.  If anything new technology would or could lead to increased spending.

• What if it's not an "age thing" at all? What's really causing this strange new behavior (or rather, lack of behavior)? Generational segments have profound impacts on perception and behavior, but an "ownership shift" isn't isolated within the Millennial camp. A writer for USA Today shows that all ages are in on this trend, but instead of an age group, he blames the change on the cloud, the heavenly home our entertainment goes to when current media models die. As all forms of media make their journey into a digital, de-corporeal space, research shows that people are beginning to actually prefer this disconnected reality to owning a physical product.
• Humanity is experiencing an evolution in consciousness. We are starting to think differently about what it means to "own" something. This is why a similar ambivalence towards ownership is emerging in all sorts of areas, from car-buying to music listening to entertainment consumption. Though technology facilitates this evolution and new generations champion it, the big push behind it all is that our thinking is changing.
• Even in this strange new world, the economic laws of scarcity apply, and they are precisely what's shifting. To "own something" in the traditional sense is becoming less important, because what's scarce has changed. Ownership just isn't hard anymore. We can now find and own practically anything we want, at any time, through the unending flea market of the Internet. Because of this, the balance between supply and demand has been altered, and the value has moved elsewhere.

It's time to strike down the 'Amazon exemption'

Becky Quick, of CNBC who also writes for Fortune magazine tackles the Amazon advantage of not having to charge sales tax like brick and mortar stores do.  While people are required to disclose their online purchases at tax time and pay taxes then how many people do you believe voluntarily say let me pay more taxes on my online purchases?  Not many.

Full article here

• It's a great bargain for shoppers but a huge, unfair advantage for the online retailers, which have been beating up their brick-and-mortar counterparts for years. And it's a double whammy for state tax coffers: Not only do the online retailers not collect sales taxes on what they sell, but they are helping put chains like Borders and Circuit City out of business, shutting off what was once a spigot for state and local revenue.

How Apple Sidesteps Billions in Taxes

Apple is not alone in its methods to legally side step paying millions in taxes.  All major companies likely have teams or even armies of people who sole job is to find tax loop holes in order to save company profits.

What we find interesting regarding this NYT piece are the mechanics involved in how companies actually get around paying additional taxes.

Full article here

• Apple’s headquarters are in Cupertino, Calif. By putting an office in Reno, just 200 miles away, to collect and invest the company’s profits, Apple sidesteps state income taxes on some of those gains.  California’s corporate tax rate is 8.84 percent. Nevada’s? Zero.
• Apple serves as a window on how technology giants have taken advantage of tax codes written for an industrial age and ill suited to today’s digital economy. Some profits at companies like Apple, Google, Amazon, Hewlett-Packard and Microsoft derive not from physical goods but from royalties on intellectual property, like the patents on software that makes devices work. Other times, the products themselves are digital, like downloaded songs. It is much easier for businesses with royalties and digital products to move profits to low-tax countries than it is, say, for grocery stores or automakers. A downloaded application, unlike a car, can be sold from anywhere.
• Apple, for instance, was among the first tech companies to designate overseas salespeople in high-tax countries in a manner that allowed them to sell on behalf of low-tax subsidiaries on other continents, sidestepping income taxes, according to former executives. Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies.
• Without such tactics, Apple’s federal tax bill in the United States most likely would have been $2.4 billion higher last year, according to a recent study by a former Treasury Department economist, Martin A. Sullivan. As it stands, the company paid cash taxes of $3.3 billion around the world on its reported profits of $34.2 billion last year, a tax rate of 9.8 percent. (Apple does not disclose what portion of those payments was in the United States, or what portion is assigned to previous or future years.)

Demographic Time Bomb in Pictures and Dollar Amounts; Ratio of Social Security Beneficiaries to Private Employment Now Exceeds 50%

Great visual analysis by Mish Shedlock regarding the Social Security issues that we are facing.  Growing benefit payments supported by fewer works is not a winning combination.

From Mish's full post here

Quick Stats

• As of 2012-06 the civilian labor force was 155,163,000
• As of 2012-06 there were 111,145,000 in the private workforce
• As of 2012-06 there were 56,174,538 collecting some form of SS or disability benefit
• Ratio of SS beneficiaries to private employment just passed the 50% mark (50.54%)

Week 42 Performance.....One side of the "Wall of worry" is starting to Fall Down

Most of the four major equity indices were headed higher to start the week and then...major earning reports started to file in.  First the surprise from Google, then Microsoft and then to close the week with misses from McDonald's and General Electric which helped to send the DJIA down over 200 points on the 25th anniversary of Black Monday back in 1987.

Some indices took it worse than others with the NASDAQ taking the worst of it, down 1.3% for the week.  Technology names were just hammered all week as investors saw the weak earnings report as a reason to cut back.

This is now the fourth week in a row that the DWCM Fund has pulled back, down 0.5% this week.  Our YTD returns still have us far outpacing the four major equity benchmarks, but the real question is how much longer will this correction last and how deep will it go?

This is where technical analysis can lend a hand to your investment strategy by looking at key support and resistance levels.  Remember resistance levels are those prices reached at the top where a stock can either break out to the upside or head lower.  Support levels are price points in which stocks have sank to a low to where they will either bounce off those lows or breakdown to the downside.

With either support or resistance levels you need to be aware of what are called head fakes.  For example a stock could blow past it's resistance level to the upside only to begin a downward spiral.

As with most things within the stock market you never really know which way things could head which is why you make strategic bets that could limit your upside or downside but gives you the advantage of knowing specifically how much capital you have at risk.  

So what are investors to do in these types of situations?  This type of situation is precisely why we have advised clients to carry such an overweight position in cash within their portfolio holdings.  The advantage here is two fold:

1. Being in cash limits your downside exposure (although it also can limit your upside as well) by not having a big of position in the equity markets.
2. Having that much cash allows you to take a look at stocks that you have been wanting to own but have not hit your price targets.  This is in essence going on a shopping trip when the items you want are finally on sale.  This doesn't mean that prices can't continue to head lower, but it does get you into the market at a price you are comfortable with.

This week in the DWCM fund we liquidated our call option position in Google just before it reported earnings and began to descend.  We are the first to admit that our timing was more lucky than good because we had no inside knowledge that Google was going to report disappointing numbers.  This does not mean that we would not be buyers of Google because we are currently looking at buying shares right now given the 8.5% drop that it sustained this week.  We saw this as an opportunity to lock in gains and increase our cash position which now sits at 50%, the top range of the 30% to 50% range that we have been advocating to clients.  

There really are no other positions that we would be sellers of within the DWCM Fund so we are electing a wait and see approach to determine how the rest of this correction plays out.  We are comfortable about maintaining our long-term core strategy of holding agriculture names, dividend paying companies with solid balance sheets, and owning a few technology names for growth.

We are advising people to really focus on their watch lists and determine entry points to stocks that they have wanted to own in case this correction continues and even better buying opportunities present themselves.

The Week Ahead

Earnings reports are likely going to be the main source of attraction this week within the equity markets.  The FMOC reconvenes this week but we don't see them making any news headlines.  Although, Fed statements always draw such scrutiny that they could easily move markets depending upon how they are interpreted.

Last week surprising home data helped spark the markets higher early in the week only to see gains wiped out by poor earning reports.  This week economic data is a little more diverse with housing number again in the mix along with regional manufacturing indexes.  The week closes with a bang with the report of new GDP numbers and consumer sentiment data which are likely to be key market drivers.

• Mon - N/a
• Tue - FOMC Meeting Begins, Richmond Fed Manufacturing Index
• Wed - PMI Manufacturing Index Flash, New Home Sales, FHFA House Price Index, FOMC Meeting Announcement
• Thu - Durable Goods Orders, Jobless Claims, Chicago Fed National Activity Index, Pending Home Sales Index, Kansas City Fed Manufacturing Index
• Fri - GDP, Consumer Sentiment

Have a Great week!

DreamWorks Capital Management

If you are currently trying to develop your own investment plan or are seeking the help of a professional investment advisor we urge you to give us the opportunity to show you what DWCM can do for you.  No matter what stage in life you are currently at, DWCM can help you plan for your ever changing needs.

DWCM can you help you with any of the steps in your wealth management journey including;

• Addressing emergency fund needs
• Developing a retirement plan
• Sending a child to college
• Looking at various investment options
• Determining how to involve philanthropic passions as apart of your planning process

With our "SMART Principles", we can help you develop your unique goals and create a focused customized plan to achieve your financial and lifestyle goals.

Contact us at pfenner@dwcmllc.com.

The Purpose of Spectacular Wealth, According to a Spectacularly Wealthy Guy

Adam Davisdon of the NYT put together this piece in which he wanted to find out how the super rich viewed the income dispersion that has garnered so much attention in the US.  To his credit Davidson met up with someone not in the 1% but in the 0.01%, Edward Conard, formerly of Bain Capital

Conrad as Davidson notes, help build the the private-equity firm by buying, fixing up and selling off companies at a profit. Conard, who retired a few years ago at 51, has wealth most likely in the hundreds of millions; he lives in an Upper East Side town house just off Fifth Avenue; and he is one of the largest donors to his old boss and friend, Mitt Romney.

Via the NYT piece here

• Unlike his former colleagues, Conard wants to have an open conversation about wealth. He has spent the last four years writing a book that he hopes will forever change the way we view the superrich’s role in our society. “Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong,” to be published in hardcover next month by Portfolio, aggressively argues that the enormous and growing income inequality in the United States is not a sign that the system is rigged. On the contrary, Conard writes, it is a sign that our economy is working. And if we had a little more of it, then everyone, particularly the 99 percent, would be better off. This could be the most hated book of the year.
• Conard understands that many believe that the U.S. economy currently serves the rich at the expense of everyone else. He contends that this is largely because most Americans don’t know how the economy really works — that the superrich spend only a small portion of their wealth on personal comforts; most of their money is invested in productive businesses that make life better for everyone. “Most citizens are consumers, not investors,” he told me during one of our long, occasionally contentious conversations. “They don’t recognize the benefits to consumers that come from investment.”



Marvin Orellana for The New York Times