Legacy Wealth Planning

Chris Vargas

Economic Update

July 2010

In the January 2010 edition of the Economic Update, we discussed our outlook for 2010. In brief we believed,

The recovery is likely to be sustained with economic growth in the 3-4% range in 2010.
Stocks are likely to post gains early on that are later cut in half to end the year in single-digits.
The bond market will likely post flat-to-mid single-digit gains as higher rates and wider spreads pressure returns.

At the halfway point in the year, we are maintaining the above forecast and taking the opportunity to update and refine our outlook. We now believe some of the tailwinds we cited are likely to be with us for longer. For example, the Fed is less likely to hike rates this year given the continuation of low inflation and the concerns in Europe. However, some of the headwinds we anticipated in the second half of the year have hit us sooner, such as China’s slowdown fears. Volatility will remain elevated, presenting risks to be side-stepped as well as potential opportunities. We believe that tactical approach to investing in the later half of the year of 2010 will benefit portfolios.

As some phases of the economy have recovered, not every area of the economy has. For example, the US economy shed nearly 8.5 million private sector jobs between December 2007 and December 2009. Through May 2010, the private sector of the economy has only added back 500,000 jobs. As is typical when making a transition from recovery to sustainable growth and expansion, the economy in mid-2010 faces several obstacles – most notably the labor market in the US and fiscal problems in Europe.

We believe many of the headwinds are priced into the market, but new headwinds always arise. With volatility on the rise, utilizing a more active rebalancing approach will likely benefit portfolios while reducing risk. As always, if you have any questions, I encourage you to contact me.

Best regards,

Chris

This research material has been prepared by LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

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Economic Update

June 2010

I wanted to start this Economic Update with introducing a new member to the team here at Legacy Wealth Planning, Heidi Lyon. Heidi is a Nevada native, graduated from McQueen High School in 1997, and received a Bachelor’s Degree at the University of Nevada, Reno in 2002. Heidi is an extremely organized person who focuses daily on creating a positive work environment for both internal and external clients. She takes pride in achieving personal and work oriented goals, and enjoys challenging herself while motivating and energizing others. She is regarded as extremely personable and is recognized as being a team player and an effective leader with a positive attitude. Heidi has a wonderful husband Brent and two beautiful daughters Lindsey (4) and Rylee (2).

Now onto the wonderful world of the financial markets. As we discussed in the January edition, we used the word ‘sustainability’ as a keyword for the markets for 2010. This has proven to be very true. We had a market pull back in February followed by a market peak for 2010 in late April followed a volatile pullback in May. All of the market fluctuations have come at times with huge media headlines. Greece’s national debt problems, the oil spill in the Gulf, and a trading error that created a technical sell off have grabbed the headlines. While these major predicaments have affected trading and lead to pullbacks in the financial markets. That is how we are viewing the recent events in the market, as a pullback and not a crisis. These pullback’s create uncertainty and fear in investors minds.

While fear is always an unwelcomed emotion, in investing fear may create opportunity. Since the recovery began back in early March 2009, the S&P 500 has risen approximately 70%, as of June 8, 2010but not in a straight line. In fact, along the ascent, there have been four pullbacks ranging from 5% to 10%, including this most recent market selloff. I would argue that the selloff is not the result of increasing bad news, but rather the market became priced for perfection and perfection was unrealistic. After huge market gains over the last year, expectations grew greater and greater. The bar continued to be raised until the point where, regardless of how strong the economic backdrop was, expectations were greater than reality. The result was a reset in expectations and a pullback in the market. Greece happened to be a catalyst, but the trigger could have been any report or event that did not meet the market’s expectations of near perfection. The fact remains that pullbacks, like the one we are currently in the midst of, are healthy as they serve to reset expectations and re-engage nervous, profit-taking bulls back into a recovery.

With a little patience, the commitment to a well thought out investment plan and a willingness to follow Warren Buffet’s sage advice to “be greedy when others are fearful and fearful when others are greedy” could result in turning the tone of this market pullback from danger to opportunity. The selloff we are experiencing, which is the fourth one since the market bottom of March 2009, serves as a reset of market expectations. It could provide the next springboard for the market to rally to higher levels over the coming months before running into the growing headwinds of rising rates, contested mid-term elections, and tougher year-over-year earnings comparisons for companies later in the year. For now, we believe the market is in the midst of a good, old-fashioned pullback and this is not the start of a financial crisis. As such, we feel that the mending economic backdrop supports cautious opportunistic investing at these levels in the markets. As always, if you have questions, I encourage you to contact me.

Chris

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Economic Update ~~~~~~~~~~January 2010

To say 2009 was memorable is an understatement. To future historians and economists it will be the year to which all forthcoming bear and bull markets will be compared. For investors, recovery was the word for 2009. In fact, the volume for Google searches and news references for the word “recovery” soared over the course of 2009, especially relative to the word of 2008: “recession”. 2009 began in the midst of a bear market plunge that was the worst since 1932 and the free-fall suddenly rebounded into a “V”-shaped rally of 65% from March 9 through mid-December, the most powerful nine month rally in the S&P 500 since 1933.

For 2010, ‘sustainability’ may be the word—not merely because climate change will be on Washington’s agenda, but primarily as it pertains to continuing the economic and market recovery witnessed in 2009. In brief we believe,

The recovery is likely to be sustained with economic growth in the 3-4% range in 2010.
Stocks are likely to post gains early on that are later cut in half to end the year in single-digits, and
The bond market will likely post flat-to-mid single-digit gains as higher rates and wider spreads pressure returns.

However, following a solid start to 2010, we expect a challenging second half of 2010. We anticipate the extraordinary global policy efforts that created a tailwind for markets in 2009 will fade or even transition to headwinds that contribute to a renewed slowdown in the economy and a potentially challenging latter half of 2010 for investors. Also, much like 2009 throughout 2010 there will be crosswinds that may make this transition uneven and introduce risks to our forecasts.

During 2009 our overall market outlook turned increasingly positive, but in 2010 the landscape will likely shift from rewarding risk to benefiting a more conservative stance. As global economic stimulus fades or even reverses in the latter part of 2010, similar to past rising rate environments, markets experience greater volatility and may shed some gains. As these signs emerge, investors should take profits in relatively riskier investments and, where possible, shift to more defensive, less risky ones to protect first half gains. Trimming exposure to those investments that benefited from the tailwinds to lock in profits and shifting the proceeds into those investments that may benefit from rising headwinds is a prudent plan of action. Again in 2010, a tactical approach to investing will be important to maintaining the path to long-term financial independence.

Best regards,

Chris

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Economic Update

November 2009

With the improving economic backdrop, equity markets have continued their strong rally. The Dow Jones Industrial Average, which bottomed intra-day at 6,440 on March 9, 2009 has risen above the mystical 10,000 level. The 57% advance in more than seven months is one of the largest on record. The improvement has been largely driven by the extraordinary stimulus efforts of global central banks, but more recently, is accelerating due to the return of economic expansion as consumers and businesses are slowly increasing spending.

No element of the economy—whether it is the consumer, business or government—can move an economy from recession to recovery alone. It requires a coordinated effort by market forces to “take turns” providing recovery leadership. With both consumer and business spending at multi-year lows at the start of the year, it was the strength of government stimulus and the powerful demand of China that started the economic recovery. And, while government stimulus and robust consumption by China has served as the catalyst for growth, they are not strong enough to move the global economy from contraction to expansion alone.

Corporations, through increased business spending, creation of jobs (or at least mitigate job losses), and expanded worker compensation is the next step to the recovery. In the end, there is nothing that has a bigger multiplier effect than business spending—as it benefits the economy in two ways. First, it generates demand for new goods and services through increased consumption and a shift from de-stocking to re-stocking inventories. Secondly, as business spending picks up, workers feel more secure, the average work week and overtime hours expand, temporary workers are engaged, and ultimately jobs are created.

The final key to the recovery is the consumer. Representing almost 70% of the GDP of the U.S. economy, no recovery can fully take hold until the consumer joins in. The employment situation in America needs to show signs of stabilization. When that happens we will likely be on our way to recovery. While robust consumer spending is likely quarters away, the second half of 2009 has already been ahead of expectations.

We are sitting in the middle of earnings season now, companies have shown great resiliency as nearly 80% have beaten consensus analyst expectations for earnings. Much due to cost controls. Ultimately, we are going to need to see a return to top-line revenue growth.

The 2010 pension limits will remain the same as 2009. Below are a few of the deferral limits.

401(k) Employee Deferral Limit - $16,500 401(k) Catch-up Limit (50 & older) - $5,500

Simple IRA Employee Deferral - $11,500 Simple IRA Catch-up Limit - $2,500

As always, is you have any questions, please contact me.

Chris

Portions of this research material have been prepared by LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

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Economic Update - August 2009

We are starting to see some parts of our economy begin to heal from the big bank meltdown that started last fall. And after severe declines in U.S. GDP in the fourth quarter of last year and the first quarter of this year, the second quarter report shows a modest 1% drop in real GDP. However, many areas remain weak—consumer spending, business investment, residential construction and inventory investment were all down, while net exports (due to huge declines in imports) and government spending were up.

Looking forward, one silver lining is the big inventory decline. Inventory “corrections” like this one usually set the stage for economic recoveries as production finally lifts to rebuild depleted supplies. I expect we will see modest growth in the economy in the second half of the year. However, I do not expect to see rising employment this year as businesses, small and large, remain cautious. The July report on employment showed continued, but moderating job losses, with payroll employment down 247,000 compared to the big 600-700 thousand declines in prior months and the unemployment rate actually fell slightly. Another July report from the Institute of Supply Management points toward recovery in U.S manufacturing with new orders, production, vendor deliveries and U.S. exports finally rising, while their employment measure continued to fall. This is typical of a beginning recovery—turnarounds in business activity, while cost control stays in place for some time.

Second quarter earnings season is more than halfway complete, and so far company earnings reports are generally better than expected. Viewing reports from the “glass half empty” side, revenues are weak, with just about everybody cutting back on spending and companies cutting expenses—hence the fall in business investment and employment. On the “glass half full” view, company earnings have generally been stronger than expected, though still weak because of all the cost cutting, which may set the stage for a rebound in earnings if, as I believe, the economy turns around over the second half of the year. The consensus of analysts’ 2010 earnings estimates leaves the forward Price/Earnings ratio for the S&P 500 in the 13 to 14 range, despite the significant rise in the price side of the equation since March. This looks to me to be a relatively conservative valuation, not a reflection of an optimistic outlook.

The stock and bond markets have recovered considerably since March reflecting, in my opinion, a better outlook on the economy. However, big items like the redesign of the financial system and regulatory apparatus are underway and it will be important to get this right. I will be paying careful attention to these reforms and will continue to watch the economic and financial marketplace and put your best interests at the heart of our decision making on your investments. As always, please call me with any questions or concerns.

Chris

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ECONOMIC UPDATE - July 2009

I hope you enjoyed a wonderful 4th of July! News reports stated that New York City set off 45,000 pounds (22.5 tons) of fireworks on the Hudson River—wow; that sure beats my personal best…And now, while some of us enjoyed a short vacation, others are looking for work and the markets are back to worrying about the future. It is pretty clear to me that, while there is certainly cause for worry, there is also room for optimism.

On the negative side, the employment report for June we got on the Thursday before the 4th gave us no let up—payroll employment fell 467,000, and the unemployment rate rose another notch to 9.5%—the highest rate since August 1983. I know employment declines are not considered a leading indicator, but it is safe to say that things are tough out there.

On the plus side, looking at the eight components of the Index of Leading Economic Indicators (average hours worked, vendor performance, capital goods orders, building permits, the interest rate spread, stock prices, real M2 money supply, and consumer expectations), all were up except consumer expectations. These indicators are not up a lot and are up from for the most part depressed levels, but still show some signs of coming off the bottom of this recession.

So, as I have said before, I do not think we are in the Great Depression II or looking at prolonged Japanese-style economic malaise, but we are in the midst or near the bottom of a nasty recession. I suspect we will see a slow recovery starting in the second half of the year; not enough growth to stop employment declines, just slow them over the remainder of 2009. In the private sector, just about everybody is in belt tightening mode. While, amazingly, total U.S. real-after tax personal income is still up over the last year, real consumer spending is down 1.9%, the second biggest drop on record (the drop in November 1974 was slightly worse). With income up and spending down, total U.S. personal saving has soared to an all time record high of $769 billion. This fiscal responsibility by U.S. households is also part of the healing process.

For business, it is much same. Nonfinancial corporations are still showing considerable net financial asset positions while banks, mostly large banks, have scrambled to delever their balance sheets and deal with the poor investment decisions they made. All of this effort, in my opinion helps set the stage for recovery.

On the government side we are going in the other direction. At the Federal level, the “Stimulus Package” and all sorts of other program expansions including the Federal Reserve’s massive balance sheet expansion are classic “Keynesian” anti-recession fiscal and monetary policies, but seriously ramped up. However, it will take time to feel these fiscal and monetary impacts.

In past recessions, most of the anti-recession spending took place in the midst of the recovery. I expect this will be the case this time around. The private sector does its work—cutting jobs, inventories, unsold home backlogs; postponing capital spending; renegotiating labor contracts, and the like; and then, with the house in order, labor and businesses get back to growing the economy. I think we are pretty far along in this process. As always, please call me with any questions or concerns.

Chris

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ECONOMIC UPDATE - June 2009

We are between the quarterly earnings report seasons and that has left markets free to fret about all sorts of things – economic reports, government policy announcements and actions, bankruptcy filings, various scandals, etc., etc. Right now it appears that we are “climbing the wall of worry”.

Absent earnings reports for the second quarter, U.S. equity markets have been staging a jittery recovery from the early March lows with the S&P 500 and the NASDAQ now showing positive returns year-to-date, while the Dow is still a bit below. Sector earnings reports generally improved in Q1, but Financials, Energy, Materials, and Consumer Discretionary are only back to near zero earnings per share from huge Q4 losses. Consumer Staples, Technology, Healthcare, Telecom, and Utilities avoided Q4 losses and staged modest rebounds in Q1. I expect, generally speaking, further improvements in Q2 earnings reports—the silver lining to the cloud of weak economic reports.

It looks to me that incoming data, policy actions, and other events have been less negative than expected with the economy starting to bottom out. For example, through April, real after-tax personal income was up 3.7% over the last 12 months! That is an astonishingly high number given the recession. However, consumer spending was down 1.9%—a very weak number that reflects households’ returning to the “old fashioned” virtue of saving. The personal savings rate has “soared” to 5.7% from near zero in recent years. This is a good thing. As you know, I am an advocate of saving and investing and while this is a difficult transition, I think we are headed, at least in the private sector, to a better, safer place. I expect another drop in GDP this quarter and then a flat third quarter followed by a return to growth in the fourth.

Bond markets continue to heal with Investment-Grade Corporate Bonds, Corporate High Yield bonds, Municipals, and most other non-federal debt indices rising in price. Treasury debt has been falling recently, but I view that as indicating renewed investor appetite, albeit modest, for risk—selling less risky Treasury debt and buying corporate and other sector bonds. Interest rate spreads, while tighter, still to me look attractive.

GM filed for bankruptcy last Monday, overdue in my opinion. I do not believe the apocalyptic forecasts that this event will cause a huge rise in unemployment and wreak havoc on the economy. Unlike many U.S. non-financial corporations, GM has been in trouble for years with all sorts of management, labor, and other issues that were not being addressed. Hopefully they will be now—nothing like the cold shower of bankruptcy to focus attention on longstanding problems that need to be corrected. I just hope that we taxpayers will see a return of our many billions that were put into the company this year.

Where to now? Well, I expect more jitters. This is a global recession, and there are serious problems around the globe. U.S. imports of goods have dropped an astonishing 33% over the last three quarters. A turnaround in the United States is important to the global economy. Despite reports to the contrary, we continue to fill the role of the global growth locomotive. U.S. equity and bond markets do not look overvalued to me. While we have had a substantial rebound, we are still many, many percentage points from the previous peak. As always, please call me with any questions or concerns.

Chris