Quarterly “Sweet Spot” – Weekly Commentary June 28, 2012

This week marks the end of the period leading up to the deadlines for oil-related sanctions on Iran, for the countries in Europe to ratify the permanent bailout fund known as the European Stability Mechanism, and for the Supreme Court to rule on the Affordable Care Act. This week also marks a beginning. It is the start of a six-week period that has been the best for the stock market in each quarter of recent years.

While geopolitical and macroeconomic events have captured much of investors’ attention, another factor has been acting quietly behind the scenes and driving U.S. stock market performance in recent years: profits. Over the past four quarters, profits for S&P 500 companies are up about 8%, as is the total return of the S&P 500.

Stock market valuations, measured by the price-to-earnings (PE) ratio—or what investors are willing to pay per dollar of current earnings—have not changed over the past few years and remain around 12 for the S&P 500. The climb in earnings has pulled stocks higher over the past three years, not a rise in the PE ratio on increasing optimism in the durability of the business cycle, as is often the case in the first few years of a new economic cycle.

With such a heavy reliance on earnings growth, the stock market has understandably followed a consistent pattern when it comes to the earnings season.

Earnings Season Pattern of Performance

The stock market has again this year followed the pattern of the past two years with a solid gain of roughly 10% during the first quarter, followed by a Spring Slide beginning in April of at least 10%, stemming from a combination of weaker economic growth and concerns over European debt problems. As our Spring Slide indicators predicted, this year has again followed the path of 2010 and 2011.

This year may also continue to follow the pattern of performance around earnings season. In the past nine quarters encompassing all of 2010 through the first quarter of this year, the S&P 500 posted an average gain of 3.14% during the six-week period beginning in the last week of the quarter (the end of the pre-announcement period) when the results of a little more than half of the S&P 500 companies are reported. During the other weeks of each quarter, the stock market has posted a loss, on average, of -1.46%.

This week starts this more favorable “sweet spot” period for the stock market. In all recent quarters but one (second quarter of 2011), the stock market performed better during this six-week period on a relative basis to the declines that took place from the end of one earnings season period until the next one began. However, the period was not always positive for stocks; gains have taken place two-thirds of the time.

Investor Expectations are Low

The next six weeks may again follow the pattern and offer investors better relative performance for several reasons:

1.       Investors are braced for disappointment. Companies that have “pre-announced” their second quarter results, in order to offer investors guidance on how the quarter’s results are shaping up relative to expectations, have had mostly bad news. Of the 129 companies that pre-announced second quarter earnings guidance in recent weeks, the ratio of negative-to-positive news was 3.5, worse than the average ratio of 2.3 since 1995. This is even worse than the 3.4 in the fourth quarter of 2008, during the peak of the financial crisis. This has left investors expecting more bad news, leaving the potential for stocks to perform better if the news is not as bad as feared.

2.      Expectations are low for earnings growth. Profits for S&P 500 companies are expected to be up about 6-8% from a year ago. However, they are expected to be flat compared to a year ago when excluding the Financials sector that is benefitting from a one-time boost due to a record-breaking loss recognition by Bank of America taken a year ago.

3.      Companies are already beating expectations. Of the 14 companies that have reported actual results for the second quarter, 78% have exceeded analyst estimates, so far. This suggests earnings may come in better than analysts and investors expect.

It may seem like companies are very likely to post poor results given the sluggish U.S. economy and recession in Europe. However, corporate profits are driven more by the solid growth in business spending and manufacturing than the more consumer spending-driven Gross Domestic Product (GDP) that has slowed. Overseas, while Europe is experiencing a recession, solid growth is expected in emerging economies. U.S. companies sell three times as much to the emerging markets than to Europe, supporting revenue growth. While profit growth has slowed, it is unlikely that company profits will post results that are unchanged from a year ago, excluding the one-time gains in the Financials sector.

What to Watch For

Three key items we will be watching for this earnings season are: the impact of Europe, rising pension expenses, and falling commodity prices.

1.      We will be gauging the impact of the European recession on profits and guidance for future quarters. Some companies are more exposed to Europe than others. It could be more fear of the unknown than the current impact on profits that causes some corporate leaders to lower their outlooks. While Europe is a convenient “excuse” some companies may use to justify weak results, overall, we expect relatively few Europe-driven earnings disappointments.

2.      We will be measuring how much higher pension expense weighs on profits, due to the decline in interest rates hurting both returns and increasing the amount companies must contribute to fund the pension plan. Many companies have addressed this in recent years; however, it remains an ongoing challenge for a number of companies totaling billions of dollars to maintain adequate funding. The highway bill currently in Congress includes an adjustment to how pension contributions are calculated that, if passed, should provide some relief to companies going forward.

3.      Commodity prices are major drivers of S&P 500 profit growth. Counter-intuitively, falling commodity prices weigh on corporate profits due to the weaker contributions from sectors such as Energy and Materials not fully offset by the benefit of lower fuel costs and improved disposable income from consumers. During the second quarter, commodity prices fell sharply. The moves in prices tend to impact profits with a bit of a lag. We will be watching to see how this translated into profits for Energy and Materials companies during the quarter and for clues as to how their profit growth may slow later in 2012.

Importantly, the companies that report early in the season are most often not the bellwethers they are commonly thought to be. We may not really know how overall corporate results for the quarter are shaping up until early August as the six-week period of performance draws to a close and about half of the S&P 500 companies will have reported.

IMPORTANT DISCLOSURES

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 reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing may involve risk including loss of principal.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This research material has been prepared by LPL Financial.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

LPL Financial, Member FINRA/SIPC

Transferring Assets to a 529 Plan June 26, 2012

A 529 College Savings Plan may be an attractive vehicle for those looking to save for a child’s education.¹ If you have already committed college-earmarked assets to another type of financial vehicle, such as a Coverdell Education Savings Account or a custodial account for a minor beneficiary, you may want to investigate transferring those assets into a 529 plan.

Making the Move From a Coverdell

Amounts transferred from a Coverdell account to a “qualified tuition program” (IRS lingo for a 529 plan) are viewed as qualified education expenses by the IRS and are therefore tax free as long as the amount of the withdrawal is not more than the designated beneficiary’s qualified education expenses.

There are several reasons why a college saver may want to take this course of action.

• Consolidation with a more generous contribution limit: Whereas Coverdell accounts limit contributions to $2,000 per beneficiary per year, 529 plans typically allow much higher lifetime contribution limits in excess of $200,000 per beneficiary in many states.
• No income restrictions: Unlike Coverdells, 529 plans generally do not impose income limits that restrict the ability of higher-income taxpayers to contribute.
• No taxes or penalties: Moving assets from a Coverdell to a 529 does not trigger taxes or penalties.

But there are also some drawbacks. Keep in mind that Coverdells and 529 plans are still relatively new, so legal and procedural precedents for specific strategies may not be well established yet. Since the funds in a Coverdell are owned by the beneficiary, any assets moved to a 529 plan owned by a parent could be construed as a transfer of ownership from the beneficiary to the parent. This could raise legal issues down the road if the parent subsequently changes the beneficiary. What’s more, Coverdells can be used to pay for primary or secondary school costs, whereas 529 plans are limited to college expenses.

Relocating UGMA/UTMA Assets

Many 529 plans accept rollovers from custodial accounts established for minor beneficiaries, such as those created under the provisions of the Uniform Gifts/Uniform Transfers to Minors Act (UGMA/UTMA). Be aware that the money in an UGMA/UTMA account belongs to the minor, so any subsequent withdrawals after a transfer to a 529 plan may only be used for that minor. Also, since contributions to 529 plans must be in cash, UGMA/UTMA assets first need to be liquidated, with any capital gains taxable to the minor.

Moving Savings Bond Assets

The third option for a transfer to a 529 plan involves cashing in qualified U.S. savings bonds and contributing the proceeds to the plan, in accordance with the guidelines established by the IRS and the Treasury Department’s Education Bond Program.² You can find more information at the Treasury Department’s Treasury Direct Web site: http://www.treasurydirect.gov/indiv/planning/plan_education.htm.

¹By investing in a 529 plan outside of the state in which you pay taxes, you may lose the tax benefits offered by that state’s plan. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary.

²Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, offer a fixed rate of return and fixed principal value.

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing “Investors should consider the investment objectives, risks, charges and expenses associated with the municipal fund securities carefully before investing. The issuer’s official statement contains this and other information about the investment. You can obtain an official statement from your financial representative. Read carefully before investing.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

What to Watch During the Most Important Week of the Year June 21, 2012

This week features the most market-moving events of the year, so far. Not only do they hold the potential to affect the markets this week, the decisions made this week may shape the market environment for years to come.

These events include:

• The Greek election on Sunday and the formation of a new government,
• The G20 meeting on Monday and Tuesday,
• The Iran nuclear program meeting on Tuesday and Wednesday,
• The last Federal Reserve (Fed) meeting before the end of Operation Twist on Thursday,
• The Supreme Court ruling on the health care law is likely this week.

The coverage of these events in the news will be hard to miss. Here we will detail what we will be watching for at each event.

Greek Election

The pro-bailout and austerity parties appear to have won enough votes in the election held on Sunday to form a government (unlike in the May 6, 2012 election). With the election unlikely to result in setting a precedent for countries leaving the Eurozone at the behest of Germany, a potential financial crisis stemming from runs on Southern European banks may be averted. This outcome was largely anticipated by the markets, based on polling data, with a 5% gain in the S&P 500 since June 1.

However, how quickly a new government emerges and what is said about renegotiating the terms of Greece’s second bailout is important to whether the gain is sustained. Greece is in desperate need of funds—not only to service its debts but also to provide for drugs, food, and energy (which are mostly imported) for the Greek people. Greece will run out of money in a few weeks if an agreement is not reached to deliver the next tranche of the bailout money. So far, Germany has indicated that while the bailout targets should not be changed, the timeframe in which to reach them may be extended. However, a New Democracy/PASOK coalition government will likely seek more significant changes. Tough talk on renegotiation—from either side—could undermine the markets.

Most importantly, if a path for Greece to remain in the Eurozone becomes clear, the contagion and bank run beginning to affect Spain and Italy may recede along with their bond yields. Progress towards a long-term solution for a combined Europe can continue while Greece, a very small part of the Eurozone economy, will remain in a depression but be able to afford basic necessities for its people.

In a related action, with the vote out of the way, the European Central Bank may take action to provide economic stimulus and liquidity to banks.

G20 Meeting

There are low expectations for this meeting, so any outcome would be an upside surprise for markets. We are watching for any new efforts at stabilizing the Eurozone.

• An endorsement of a framework for a Eurozone-wide deposit insurance program, essentially linking all of the individual countries’ FDIC-like programs into one program for all of the Eurozone, could be seen as progress on a banking union and would likely be welcomed by the markets and European bank stocks.

• The audit of Spanish banks’ capital needs—a precursor to the 100 billion euro Spanish bailout—may be unveiled at the G20. Once assessment of the recapitalization is complete, the amount to help shore up Spain’s banks can begin to be dispersed and may stem the rise in Spanish bond yields to unsustainable levels.

• Finally, the G20 could announce an increase to the $430 billion in IMF funds to combat the pressures in Europe.

Iran Nuclear Talks

The deadline for Iran to make concessions on its nuclear program or face U.S. oil-related sanctions against Iran’s central bank is scheduled to take effect on June 28, and European Union restrictions on oil imports from Iran begin on July 1. Iran has already seen oil orders fall sharply. Iran’s oil exports are estimated by the International Energy Agency to have fallen by an estimated 40% since the start of the year, falling to 1.5 million barrels per day in April-May 2012 from 2.5 million at end 2011.

Yet Iran remains steadfastly against the ban on all uranium enrichment, and the market expects the talks in Moscow are unlikely to yield any more ground than the prior two talks this year. Without progress the risk rises of a military move by Israel or by an increasingly embattled Iranian president, who has seen his political power erode in the Iranian parliament.

We are watching for a potential compromise involving a freeze on highly enriched uranium while allowing Iran to produce power plant grade fuel. A modest breakthrough along these lines could be an upside surprise—though unlikely to materially further lower oil prices, it may relieve some geopolitical risk overhanging the markets.

Federal Reserve

Given the weakness in recent U.S. economic data, the risks posed by the European problems, and the potential for tight fiscal policy next year including major tax hikes and spending cuts, the Fed is likely to announce a new stimulus program, such as QE3. Or the Fed may extend the current one, known as Operation Twist. If not, the markets will be disappointed. Stocks fell by 16-19%, as measured by the S&P 500 Index, after the end of each of the past two stimulus programs.

The Fed has many options, but it is the size and duration of the program that is most important. The Fed may choose a moderate-sized plan around half the size of the $400 billion Operation Twist to suggest they are keeping firepower in reserve against a further deterioration in the situation in Europe. However, a program too small—or merely opting to extend the short-rate guidance to beyond late-2014—risks disappointing the markets.

Supreme Court

A decision on the constitutionality of the Affordable Care Act will come this week—or next week at the latest—before the Supreme Court adjourns for the summer. What to watch for is not subtle: if the law is upheld, struck down, or if parts of the law are struck down.

The consensus expects the Supreme Court to strike down just the mandate requiring individuals to buy insurance with limits on pricing. This has been weighing on the stocks of HMOs and providers due to the adverse impact on profitability. However, if the court surprises investors and strikes down the entire law, HMOs would benefit while generic drug makers, hospitals, and diagnostic companies in the Health Care sector may suffer.

In addition, this decision has political implications. Striking down any of the law would be a blow to President Obama’s reelection campaign. Industries tied to the outcome of the election may fare differently. In any case, expect Republicans to make it a priority to seek to dismantle the law next year.

It is important to not get caught up in the volatility that each event this week may bring and instead stay focused on what emerges to form the bigger picture. The stock market may be near an attractive point to reinvest cash—especially as clarity emerges from the events this week and the earnings season nears.

IMPORTANT DISCLOSURES

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 reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing may involve risk including loss of principal.

The Federal Open Market Committee action known as Operation Twist began in 1961. The intent was to flatten the yield curve in order to promote capital inflows and strengthen the dollar. The Fed utilized open market operations to shorten the maturity of public debt in the open market. The action has subsequently been reexamined in isolation and found to have been more effective than originally thought. As a result of this reappraisal, similar action has been suggested as an alternative to quantitative easing by central banks.

Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Consumer Discretionary Sector: Companies that tend to be the most sensitive to economic cycles. Its manufacturing segment includes automotive, household durable goods, textiles and apparel, and leisure equipment. The service segment includes hotels, restaurants and other leisure facilities, media production and services, consumer retailing and services and education services.

Consumer Staples Sector: Companies whose businesses are less sensitive to economic cycles. It includes manufacturers and distributors of food, beverages and tobacco, and producers of non-durable household goods and personal products. It also includes food and drug retailing companies.

Energy Sector: Companies whose businesses are dominated by either of the following activities: The construction or provision of oil rigs, drilling equipment and other energy-related service and equipment, including seismic data collection. The exploration, production, marketing, refining and/or transportation of oil and gas products, coal and consumable fuels.

Financials Sector: Companies involved in activities such as banking, consumer finance, investment banking and brokerage, asset management, insurance and investment, and real estate, including REITs.

Health Care Sector: Companies are in two main industry groups—Health Care equipment and supplies or companies that provide health care-related services, including distributors of health care products, providers of basic health care services, and owners and operators of health care facilities and organizations. Companies primarily involved in the research, development, production, and marketing of pharmaceuticals and biotechnology products.

Industrials Sector: Companies whose businesses manufacture and distribute capital goods, including aerospace and defense, construction, engineering and building products, electrical equipment and industrial machinery. Provide commercial services and supplies, including printing, employment, environmental and office services. Provide transportation services, including airlines, couriers, marine, road and rail, and transportation infrastructure.

Manufacturing Sector: Companies engaged in chemical, mechanical, or physical transformation of materials, substances, or components into consumer or industrial goods.

Materials Sector: Companies that are engaged in a wide range of commodity-related manufacturing. Included in this sector are companies that manufacture chemicals, construction materials, glass, paper, forest products and related packaging products, metals, minerals and mining companies, including producers of steel.

Information Technology: Companies include those that primarily develop software in various fields such as the Internet, applications, systems and/or database management and companies that provide information technology consulting and services; technology hardware & Equipment, including manufacturers and distributors of communications equipment, computers and peripherals, electronic equipment and related instruments, and semiconductor equipment and products.

Telecommunications Services Sector: Companies that provide communications services primarily through a fixed line, cellular, wireless, high bandwidth and/or fiber-optic cable network.

Utilities Sector: Companies considered electric, gas or water utilities, or companies that operate as independent producers and/or distributors of power.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

This research material has been prepared by LPL Financial.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

LPL Financial, Member FINRA/SIPC

Euro 2012: Spain Wins! June 15, 2012

Spain secured a big win this weekend. While the defending champions in the Euro 2012 soccer tournament were unable to best Italy on the soccer field, Spain fared better against Germany by winning the best European bailout deal yet.

Spain will become the fourth country to receive a European bailout as they request the 100 billion euro offer made by European officials this past weekend to rescue the Spanish banking system. The bailout, if the full 100 billion euro loan is requested, brings the total of the bailouts to Portugal, Ireland, Greece, and now Spain—often collectively referred to in the media by the derogatory acronym “PIGS”—to about 400 billion euros. While Spain is not in the same degree of fiscal distress as the other bailout countries, any contagion to Spain is of concern, since Spain’s outstanding government debt is roughly the size of Greece, Portugal, and Ireland combined.

This was a big win for Spain for several reasons:

• Just asking for the deal lowered borrowing costs. The yield on Spain’s 10-year government bond soared during May after the government announced the nationalization of a troubled bank to 6.78%—very close to the 7% level that prompted other countries to seek bailouts. However, after it became clear Spain would seek a bailout, the yield slipped back to 6.17% on Friday as a bailout deal appeared imminent.

•  No new austerity measures or other penalties were imposed. The Spanish government will not be forced to take additional measures on the budget or economy in exchange for the bailout. This is the most remarkable aspect of the deal. European leaders, most importantly those from Germany, have now demonstrated willingness to bail out a country’s banks without penalizing the country’s economy with added austerity measures.

• Yet the deal still helps to finance the government. Since foreigners have increasingly been cutting back on buying Spanish government bonds, Spain has become more reliant on the Spanish banks to buy government bonds. The loans to banks will ease pressure on financing the Spanish government. However, it is likely that the loans would be senior to outstanding government debt, which could result in ratings downgrades and boost yields on existing government debt.

How was Spain able to score the win?

• The loan is only for the banks. One reason the deal is much more favorable to Spain than the rescue terms offered to other countries is that the loans to the Spanish government are being made only for use by Spanish banks, rather than for general government use. The deepening recession is resulting in loan losses for the banks. The loans will be channeled through Spain’s bank rescue fund.

• Spain elected leaders committed to fiscal discipline. In contrast to the elections in Greece, last November’s elections in Spain produced a clear win and mandate for fiscal discipline for the conservative People’s Party and Prime Minister Mariano Rajoy.

• Spain’s debt burden is more manageable. While the loan will add about 10 percentage points to Spain’s debt-to-GDP ratio, which was 68.5% last year, this remains well below the debt-to-GDP ratios (in excess of 100%) of Portugal, Ireland, and Greece. It is also below the ratios of Germany and France, considered the most fiscally stable countries of the Eurozone.

• Spain has already made progress on its budget deficit. While the recession makes Spain likely to miss the 6% budget deficit target for 2012, Spain has cut its budget deficit successfully in each of the past two years. The deficit went from 11.2% of GDP in 2009 to 9.2% in 2010 and 8.5% in 2011. Spain has a goal of a 3% deficit by 2014 and enacted a constitutional mandate to have a balanced budget by 2020.

Though Spain will likely request the full 100 billion euros offered, the exact amount announced this week will depend on audits of the condition of Spanish banks, which are in progress. Securing the rescue a week before elections in Greece that risk prompting that country’s exit from the euro and further movement of deposits out of southern European banks is of particular importance at building a firewall against contagion in the European banking system. 

It has been widely expected that Spain may need a bailout for some time due to the condition of its banking system, and Portugal may soon request a second bailout package. However, this should not be seen as a dramatic worsening of the European debt situation, since progress is being made by these countries toward fiscal stability. Last week, the European Commission, European Central Bank, and International Monetary Fund all certified at the conclusion of a review that Portugal is on track to meet the terms of the agreement including Portugal’s goal of cutting its deficit to 4.5% of gross domestic product in 2012.

While Spain’s bailout may reinforce the notion held by some that all of the “PIGS” can be lumped together, the loss by Greece in Friday’s opening game of the Euro 2012 and Spain’s draw is symbolic of how successfully these different countries are dealing with their respective fiscal challenges.

We believe the events in Europe this weekend suggest a stronger firewall is being put in place against a contagion effect that could trigger a market plunge. However, Europe is not the only issue overhanging the markets. Other overhangs include:  the end of the Federal Reserve’s Operation Twist this month as U.S. economic data continues to disappoint and earnings estimates are revised lower, China’s continuing economic slowdown, rising geopolitical risks as the deadline on Iran’s oil exports draws near, along with rising election uncertainty and anticipation of the budget bombshell of tax hikes and spending cuts on the horizon.

IMPORTANT DISCLOSURES

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 reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

This research material has been prepared by LPL Financial.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

LPL Financial, Member FINRA/SIPC

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tips for Transistions: Make the Most of Your Retirement Account Options June 5, 2012

It’s a fact: The average American holds nine different jobs before the age of 34.^* It’s also a fact that the decisions you make about how to manage retirement assets when changing jobs can have a direct impact on your future financial health.

Case in point: “Cashing out” retirement plan assets before age 59½ (55 in some cases) can expose your savings to immediate income taxes and a 10% IRS early withdrawal penalty. On the other hand, there are several different strategies that could preserve the full value of your assets while allowing you to maintain tax-deferred growth potential.

Well Informed = Well Prepared

Option #1: Leave the Money Where It Is If the vested portion of the account balance in your former employer’s plan has exceeded $5,000, you can generally leave the money in that plan. Any money that remains in an old plan still belongs to you and still has the potential for tax-deferred growth.^** However, you won’t be able to make additional contributions to that account.

Option #2: Transfer the Money to Your New Plan You may be able to roll over assets from an old plan to a new plan without triggering any penalty or immediate taxation. A primary benefit of this strategy is your ability to consolidate retirement assets into one account.^**

Option #3: Transfer the Money to a Rollover IRA To avoid incurring any taxation or penalties, you can enact a direct rollover from your previous plan to an individual retirement account (IRA).^** If you opt for an indirect transfer, you will receive a distribution check from your previous plan equal to the amount of your balance minus an automatic 20% tax withholding. You then have 60 days to deposit the entire amount of your previous balance into an IRA which means you will need to make up the 20% withholding out of your own pocket.^***

Option #4: Take the Cash Because of the income tax obligations and potential 10% penalty described above, this approach could take the biggest bite out of your assets. Not only will the value of your savings drop immediately, but also you’ll no longer have that money earmarked for retirement in a tax-advantaged account.

*Source: Bureau of Labor Statistics.

**Withdrawals will be taxed at ordinary income tax rates. Early withdrawals may trigger a 10% penalty tax.

***You will receive credit for the withholding when you file your next tax return.

© 2010 Standard & Poor’s Financial Communications. All rights reserved.

Banking on the Greek Election June 1, 2012

The stock market has been relatively unchanged in recent days, despite some sizable intraday swings. The movements suggest that the market is nervously awaiting a decision to be reached.

This is a big year for decisions. Another important vote takes place this week in Europe with Ireland, a country that received a bailout in 2010, holding a referendum on the European Union fiscal compact. This is a necessary step toward the end-game of Eurobonds and a collective monetary, fiscal, and debt policy for all of Europe. The recent polls in Ireland suggest it is expected to pass. A failure—or even a very close vote—may be viewed negatively by the markets. But this is not why the markets appear to be impatiently holding their breath. Instead, the vote that markets are most focused on at the moment is the June 17 Greek election. This is evidenced by the recent outsized reactions in the stock market to public polling results printed in Greek newspapers.

If the Greek election favors pro-bailout parties with enough votes to form a coalition and avoid the potential for an immediate Greek default, then investors may enjoy a potential relief rally as immediate risks subside. Progress towards a long-term solution for a combined Europe can continue while Greece, a very small part of the Eurozone economy, will remain in a depression.

However, if the outcome of the election is similar to the last one and fails to produce backing for the bailout agreement, the markets will likely continue to slide as a chain of events begins to unfold that holds the risk of a financial crisis.

Potential Post-Election Chain of Events

The series of events following the election if the anti-austerity parties garner enough votes to endanger Greece’s membership in the Eurozone may begin with an acceleration of large withdrawals of euros from Greek banks for fear of a forced conversion to a “new” drachma at a substantially devalued level. Nearly one-third of deposits have already left Greek banks over the past three years as the risk has risen. Interestingly, the Greeks voted against German influence for their economy, but want German protection for their money as Greek bank deposits flee to German banks. Greek banks have seen outflows of 70 billion euros, while at the same time, German banks have seen deposits grow by 200 billion euros as depositors around the Eurozone seek safety. This flow is already accelerating but could become a flood.

Next in line may be banks in other southern European countries. With the precedent set that countries could leave the euro at the behest of Germany, deposits may leave Spanish and Italian banks, which so far have only seen a small move.

This could then be followed by panic with banks closing their doors for “bank holidays” to halt the runs. The European Central Bank would likely have to inject massive amounts of capital to keep the banks from collapsing.

If the chain of events has not been broken by this point, the next link in the chain is for the troubled banks—most likely to be in Spain and Italy—to be forced to sell their holdings of government bonds in order to meet the outflow of deposits. This could result in losses on these bonds and push yields up even further than the 6% they are hovering around now. If these yields go high enough, other countries such as Spain may be in danger of default with devastating consequences.

This potential series of events leading to a crisis can be avoided, but it increasingly cannot be simply deferred. Europe has been circling around the potential for crisis for three years, sometimes drawing closer, sometimes moving further away, but unable to break free of its pull. The actions of policymakers have been varied and involved multiple bailout agreements and partial defaults that restructured debt obligations. But after exhausting a number of options, potential actions are now limited by the ability of Germany and Greece to come to terms and the willingness of depositors to tolerate any more uncertainty. With the most recent Greek polls supporting the idea that Greece will adopt a pro-bailout coalition government and given the amount at stake, the parties will likely come to an agreement. The outcome is anything but certain.

In the meantime, for the markets Greece’s polls are like greased polls – hard to grab on to and harder to climb on.

IMPORTANT DISCLOSURES

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