College Aid- How to jump to the front of the line

jon-smallIf you have a college bound student in your home, odds are good that you’ve spent some time at the theme parks in Orlando. The secret to maintaining your sanity on those vacations is learning how to manage your fast-pass tickets so you can jump to the front of the line and avoid an hour plus wait in the cue. Competing for financial aid requires the same “fast-pass” mentality.

Each January, many of our clients ask me when they can file their taxes so they can complete their student aid forms for their children or grandchildren.  The Free Application for Financial Student Aid form (FASFA) qualifies families for a majority of Federal and State student aid as well as most institutional college aid programs.   You can file the 103 question form any time after January 1st, yet most people wait to complete the form after they’ve filed their tax returns in February or March.

Since most financial aid is offered on a first-come, first-served basis, filing the form earlier can make a big difference.  According to Mark Kantrowitz of Edvisor.com, those that file prior to March 30th receive twice as much money on average than those that file later. Because many states and colleges have earlier deadlines, you may need to file earlier as well. Here in the Volunteer State, the cutoff varies based upon need and eligibility.  Prior-year recipients receive award must apply by March 1st while the deadline for lottery scholarships is September 1st.

Here are some tips for completing the FAFSA effectively:

  1. The early bird gets the worm.  The sooner you file, the more likely you receive benefits. I recommend completing the 2015-2016 FAFSA form using 2013 tax return numbers as an estimate, and updating that information when you’ve filed your 2014 tax forms.
  2. File the FAFSA online.  The website, www.fasfa.gov  streamlines the process by eliminating the questions that aren’t applicable to your specific financial situation.
  3. Understand what assets and income to include.  The value of your retirement accounts and principal residence should not be included in your aid calculation number.  This will affect eligibility for various financial aid resources.

After completing the FAFSA form,  you’ll receive a Student Aid Report (SAR) that details how much you and your family are expected to contribute to the college education (also known as EFC, or expected family contribution).  This amount is not necessarily how much you will pay for college, but is used by the colleges to determine the amount of aid you are eligible to receive.  It is based on your household size, number of students in college, your income and your assets (not including the value of your retirement accounts or personal residence).

It’s important to file the FAFSA even if you don’t qualify for needs-based assistance because it allows you access to low-cost student loans and merit based aid.  The FAFSA does provide access to all financial resources.  Higher education can come at a high cost.  It’s important that students and their parents research and analyze all of the available funding options as they pursue their cap and gown.

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Euro QE Details

Here is a Bloomberg story on the detail of Draghi’s QE:

http://www.bloomberg.com/news/2015-01-22/draghi-commits-ecb-to-trillion-euro-qe-plan-in-deflation-fight.html

Hoy Grimm

The size (70bn us/month) was larger than what was leaked yesterday but the structure is a bit murky. The kneejerk moves was lower for the Euro and higher for Euro stocks.

 

In order to alleviate the reticence of Germany to do QE (to the detriment of their sovereign economy), Draghi is authorizing each member nation to act through their own central bank to enact the bond purchases instead of doing it at the ECB.

 

“The ECB will hold a share of the securities while requiring individual central banks to conduct the bond purchases in the hope that will make nations more responsible for the management of their economies.”

 

The problem with this structure is that German Bunds trade at negative yields out to five years. If they buy their own debt, they are buying bonds that will only create losses for the Bundesbank. Even I can figure out they won’t have much of an appetite for this. France, while not as financially solvent as Germany has a similar rate curve ( the French 10 year is 117 BP lower than the 10 year USTN). That basically leave Draghi relying on the weaker nations like Greece, Spain and Portugal to do QE in Europe.

 

Hope is an awesome plan, Mario

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January 2015 Market Commentary

Looking Back

Hoy Grimm2014 marked the end of Quantitative Easing in the United States and the beginning of QE in Europe. The effects of QE are clear to see. Through multiple iterations since March 2009, QE has been the primary driver of higher equity prices. Janet Yellen’s actions to eliminate QE has been interpreted by the market as a sign of a growing economy that no longer needs to be stimulated. Last year also embarrassed anyone who was bearish on bonds.

The taper tantrum of 2013 faded and the most hated asset class in the world provided astounding returns. 30 year Treasury bonds produced a 30% total return as yields fell from 3.90% to 2.75%. Shorter maturity bonds and municipal bonds also rallied in 2014. For commodities everything flipped from positive to negative in August. Following comments by Mario Draghi foretelling the use of QE in Europe, the Euro plunged and the dollar rallied.

 

Euro/US Dollar

 

This rapid decline in the Euro was accompanied by a similar rally in the US Dollar which in turn knocked down commodity prices to multi-year lows.

 
 
 

A New Year

To be successful in 2015, investors need to discern the right moment to break from the herd and forge ahead even if they are in the minority. Despite an exhaustive array of metrics that show the stock market is overvalued, investors have been convinced that they have no alternatives.

 

 Shiller P/E Ratio

 
 

Expensive markets can stay expensive or get even more expensive. The art is in identifying the catalyst for reality to reassert itself. The warning signs are beginning to develop.

 

VXX - Ipath S&P 500 Volatility

 

Credit spreads between lower rated, junk bonds and high quality bonds are showing signs of decoupling.

 
 

10 year US Treasury price index versus JNK

 

The divergence that started in July portends more problems for risk based assets. The bond market is telling a different story than the stock market. In the long run, they both can’t be right. Either the stock market is accurately reflect a robust economic recovery that will lead the Federal Reserve to raise rates in 2015 (the conventional view) or the bond markets relentless push to lower yields is signaling that the end of QE is the beginning of an economic slowdown that isn’t on stock investor’s radar.

 

SPX-S&P 500 versus JNK-Junk Bonds

 
 
Avoiding Bear Markets

Closing in on the 6th year anniversary of this bull market run has prompted investors to ponder the timing of its demise. In the current Central Bank-controlled environment, the tendency is for expensive markets to get more expensive. Some investors act like a bear market is years away (and they may very well be correct). Europe is planning for their own version of QE because of anemic growth and they are tired of the US exporting our deflation to their economy. That gives investors a reasonable excuse to rule out European equity markets. China and the emerging markets are growing faster than anywhere else on the planet but they have their own credit problems and growth while good is slowing down. The US with its strong dollar and bulletproof stock market is the “cleanest dirty shirt” for growth investors to consider. This feedback cycle sucks more capital into its vortex as investors become convinced that they can ride the bull to the end and exit with their gains intact. History has shown that reality never works out this way.

 

The first leg down draws investors even deeper into the trap with shouts of “Buy the Dip!” Unfortunately the cash for said purchases is coming more and more from borrowings:

 
 

The second leg down normally happens violently without immediate or obvious provocation. As this phase of a market reversal many investors react with denial even while other investors are being forced to sell to cover the aforementioned margin debt. With the bear market trap fully set, investors get flushed down 30, 40 even 50% before they know what happened.

The only way to survive a bear market is to be under-invested when it hits. Which is to say, investors have to be under invested in equities before the bull market ends. In the old days we called this “selling high”. This is a sacrilegious act today.

 

Preparing for a bear market means selling winners and buying something less appealing, something that hasn’t been a winner. In professional vernacular we call this negative correlation.

 

Putting your money into someone else’s losers offers little immediate comfort to the buyer. You probably aren’t going to realize gains quickly. You won’t be able to brag to your buddies about owning the hot IPO. In fact you would likely face severe ridicule if you talked up your book of beaten down contrarian plays to an investor who was sitting on a book of recent stock market winners. You’ll have to be patient, confident in the knowledge that you understand value and how to avoid risk.

 

This is the life of a contrarian investor and integral to understanding the methodology employed by LeConte. We are deeply contrarian. This means we sell when an investment reaches fair value. We don’t wait around to see if a buyer is willing to overpay us. We tend to leave money on the table when investors are willing to overpay. Since we buy when prices are down we have a tendency to buy early and have the discipline to buy more in the likely event that the price goes lower.

 

Our contrarian/value-based analysis was designed to take advantage of the fear surrounding the Taper Tantrum in 2013. In 2014 we began accumulating emerging markets exposure and gold. In the past 24 months we have methodically reduced our U.S. stock exposure to less than 50% of our equity allocation. In our bond portfolios we reduced our exposure to high yield bonds and added inflation protected Treasury bonds. In each instance we moved away from what we believed was an expensive asset class into a cheaper one. We’ll have to be patient and wait to see if the rest of the market will realize the value that we see in these positions. We are confident these steps will help us be prepared for the next bear market.

 

Whenever it arrives...

 

Hoy Grimm

Managing Partner

 

 

Commentary should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Content is derived from sources deemed to be reliable. Information presented does not involve the rendering of personalized investment advice and should not be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. There are no assurances that a client’s portfolio will match or exceed any particular benchmark.
 
LeConte Wealth Management is registered as an adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.
 
 
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Surviving the Middle Class Recession of 2014 (and beyond)

Hoy GrimmThe financial and economic headlines would have you believe that the economy is purring along like an expensive Italian sports car. Unemployment is down, consumer spending is up. Unfortunately this just doesn’t square with the sentiment among average Americans who are working longer for less pay and more expensive benefits. Folks are working harder than ever just to get back to where they were in 2007 before the housing crisis and recession.

Why does this strong economy feel so weak for middle class? What has the government done to help since the recession ended? The Federal Reserve has focused on something called the “wealth effect” to stimulate the economy. The Federal Reserve has indeed created a massive uptick in paper wealth but it has remained in the bank accounts of Wall Street firms and Corporations who have record profit margins.  With rising government regulations and expensive health care changes it hasn’t trickled down to the middle class.

How ironic then that our left leaning policy makers are responsible for the largest explosion of “income inequality” in modern times. To address the problem the Fed has begun to reduce the economic stimulus called Quantitative Easing and the stock market responded by declining more than 6% in January.

The dialog has shifted to enacting an increase in the minimum wage which is characterized as an effort to bring fairness to business pay practices. It sounds so simple. Give the poorest a pay raise. The problem with doing this through the minimum wage is that it has proved to be ineffective. Why? Most people earning the minimum wage are not in poor households and they are not the sole earner or primary breadwinner in their household. Economics professors from San Diego State University and Cornell studied 28 states who set their minimum wages above the Federal standard. After examining five years of data they concluded that minimum wage increases did not lower poverty rates.

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The Job (less) Market

kevin-painterThe recent government shutdown furloughed thousands of employees, closed our National Parks, and fostered an even higher level of brinkmanship between politicians in Washington.   This also caused a delay in the reporting of monthly economic data including the September jobs report.  Normally reported on the first Friday of the month, the release was postponed until after the shutdown ended almost three weeks later.

Not only did this report miss analyst expectations, it revealed some longer-term trends that are still plaguing the job market.    Although the headline showed a decline in the long-term unemployment rate, the details showed something much more sobering.   There are still 11.3 million folks that want a job looking for work.  That statistic doesn’t reflect the number of part-time workers (7.9 million) or the number of people that are marginally attached to the workforce (2.3 million).   Add all of those together and you have 21.5 million people either unemployed or underemployed.

The unemployment survey only takes into account those workers that are looking for a job that have been unemployed for less than a year.  After 365 days, workers are considered to be “not employed” and aren’t counted in the monthly surveys.  The recent numbers also showed the labor participation rate holding steady at 63.2%, but that still matches the lowest level since 1979.  The data suggests job market weakness, but the markets have rallied to record highs.

Those delayed numbers have an impact on the economy and the markets.  With fewer workers and those working only part-time, it’s difficult to forecast economic growth.  Whether it’s the troubles with Obamacare or economic uncertainty, the jobs numbers show that companies aren’t hiring full-time workers at a rapid pace.   The stock market churns ahead as the government agreed to fight another day on the debt ceiling and budget woes. Weak economic data brings hope that the Fed will continue to artificially stimulate the economy through the end of year.

Without quality job growth and increased consumer demand that follows, how can the U.S. economy and corporate earnings grow?  Unemployment may be shrinking, but for the wrong reasons.

Welcome to the job(less) recovery.

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The Only Game in Town?

Hoy GrimmThrough November the S&P 500 index was up 29% for the year. Barring a significant countertrend in December, 2013 will be one the best years for stocks since the 1990’s. If you factor in the abysmal performance of European and emerging market stocks with gold (down 27%) and the fear that bonds will be decimated when the Fed begins to increase rates, it looks like US stocks are the only place to invest.

This creates questions for investors. Do I keep my money invested in stocks or do I sell? If I sell, where do I reinvest? Should I add new money to the stock market now or wait? In previous articles, we highlighted the large cash pile that legendary investor Warren Buffett has amassed at his company, Berkshire Hathaway. We have also highlighted the Feds efforts to make stocks the only game in town and we’ve highlighted the growing disconnect between economic conditions and stock valuations.

For today’s discussion let’s focus on measuring volatility and how it affects risk. We will define risk simply as “loss of capital”. As stocks increased this year, the CBOE Market Volatility Index (VIX) which measures implied volatility versus historical volatility, declined by 30%. This demonstrates that investors have become less worried about downside risk than they were previously. We can further confirm this complacency by looking at margin debt which just hit an all time high in October.

High net worth investors are using borrowed money to buy more stocks than they have the cash to afford on their own. The Fed is fueling this buying binge by allowing these well heeled investors to borrow money at historically low rates. Our credit driven stock market is an analog of the housing bubble. From 2005 to 2007, real estate was the only game in town in places like South Florida, Las Vegas and Southern California.  Until credit evaporated leaving unfinished developments, bankrupt banks and foreclosed properties.

Margin investors don’t have the benefit of delaying their debt repayments through a lengthy foreclosure process. When a margin call is triggered they only have a few hours to cover their debt or they get sold out at whatever price the broker can get at that instant.  The same psychology that existed in real estate speculators (prices never go down) has appeared in margined up stock investors (the only game in town). When investors care more about upside volatility than downside volatility, problems ensue. Isn’t it simple prudence to prepare for a similar resolution to this behavior?

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