Growing Gap between Health of Consumers and Businesses March 7, 2013

Last week’s data highlighted the growing gap between the health of businesses and consumers that is starting to contribute to a widening gap in the performance of consumer and business-driven stocks, as well.

The economic reports released last week covering the time period of January and February 2013 for orders of equipment by businesses and manufacturing activity point to strengthening business demand (new orders surged). This may not be surprising, given that corporate profits have risen to record highs and companies are sitting on lots of cash.

On the other hand, the economic data released on consumer spending was weak (2% annual growth adjusted for inflation) and reflected no acceleration over the past year, and earnings reports from big retailers (such as Wal-mart and Target) reflected lackluster consumer demand.* This may be not be any new news to some, given the well-known weak income growth and hiring in the United States keeping a lid on consumer spending power and the added drain this year from higher payroll taxes and gasoline prices.

While on the subject of the last week’s data, we do not dismiss Friday’s reading of the consumer sentiment index from the University of Michigan, which showed a modest bump up in February 2013 from January 2013’s reading, but the index remains significantly below the highs of last year and is well below the pre-crisis levels seen in 2007. Sentiment surveys purport to measure how confident consumers are feeling; however, the real pulse of confidence can be measured directly by borrowing. Borrowing against the future to spend today is a sign of confidence — perhaps sometimes misplaced, but confidence nonetheless. While business borrowing has surged back near previous highs, consumers’ demand for credit has flatlined [Figure 1].

In the fourth quarter of 2012, outstanding consumer debt rose a slight 0.3% to total $11.34 trillion, according to the latest report from the Federal Reserve (Fed). But, to put in context, total debt is still way below its peak of $12.68 trillion in the third quarter of 2008 and, most importantly, has barely budged in the past couple of years. In general, consumer borrowing of all types including housing debt has been stagnant, reflecting a cautious consumer.

While in each of the past four years, consumer discretionary sector stocks outperformed the more business-spending oriented industrial sector stocks by a wide margin, they have started to lose their leadership. In the fourth quarter of 2012 and so far this year, the industrial sector has outpaced the consumer discretionary sector as business spending began to revive in the fourth quarter and gain momentum so far this year.

The next fiscal impasse is the expiration of the continuing resolution funding the government on March 27. If unavoided, this may be worse for consumers than the more recent fiscal failure to compromise over the spending cuts known as the sequester that started on Friday, March 1, 2013. As we noted in our State of the Union preview a few weeks ago, a government shutdown may hit consumers since tax refunds may take much longer than usual if IRS workers are furloughed as the seasonal peak for tax filings arrives. In 2012, the average tax refund check was nearly $3,000, and refunds totaled hundreds of billions, according to the IRS. This drag on spending power could be felt since consumers have lacked the confidence to fund spending with borrowing, as noted above. It is worth noting that the deadline is not actually March 27, because the House is in recess beginning on Thursday the 21st of March, and the Senate is only in session until the next day. Assuming Congress sticks to its schedule, this leaves only about two weeks to avoid a government shutdown and the potential consequences.

A stall in the strength of consumer-driven stocks may help to keep the stock market in a range around the current levels. Though the Dow Jones Industrial Average may soon hit an all-time high, we see this as just part of an up-and-down range-bound pattern for stocks this year, echoing what we have seen in each of the past couple of years when a new Dow milestone was reached in February [Figure 3].

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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 involves risk, including the risk of loss.

Investments in specialized industry sectors have additional risk such as credit, regulatory, operational, business, economic and political risk which should carefully be considered before investing.

Consumer Discretionary: 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.

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

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INDEX DESCRIPTIONS

Dow Jones Industrial Average (DJIA): The Dow Jones Industrial Average Index is comprised of U.S.-listed stocks of companies that produce other (non-transportation and non-utility) goods and services. The Dow Jones Industrial Averages are maintained by editors of The Wall Street Journal. While the stock selection process is somewhat subjective, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth, is of interest to a large number of investors and accurately represents the market sectors covered by the average. The Dow Jones averages are unique in that they are price weighted; therefore their component weightings are affected only by changes in the stocks’ prices.

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.

The Michigan Consumer Sentiment Index (MCSI) is a survey of consumer confidence conducted by the University of Michigan. The MCSI uses telephone surveys to gather information on consumer expectations regarding the overall economy.

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* All company names noted herein are for educational purposes only, not a recommendation, an indication of trading intent, or a solicitation of their products or services.  LPL Financial does not provide research on individual equities.

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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.

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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.

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.