As a general rule progress comes in very small increments. Whether we’re talking about the economy or learning to play a piano, often the day-to-day gains are barely measurable. We are primed to want “more…better…now” and as time passes we reassess our long-term investments, asking “what have you done for me… lately?” Frequently the best way to appreciate a financial position is to stop and reflect on economic progress over a longer period of time. With that in mind, let’s compress time and evaluate our economic progress since the low point of the Great Recession of 2008-2009.

Before we start, we want to be up-front with an important disclosure: we’ve ‘cherry picked’ a bit (not a lot) and rounded off the numbers to give you a Big Picture that’s easy to follow.  Not all measurements are positive but certainly the majority are trending the right direction.

1. Gross Domestic Product (the measurement of the expansion of our overall economy annualized); Q3 2008- negative 8%…Q2 2013-positive 1.7%.
2. Retail auto sales (annualized); Q1-2009-nine million…Q2-2013 fifteen million.
3. New orders for durable goods; Q1 2009-$150 billion…Q2 2013-$225 billion.
4. Monthly retail sales; Q1 2009-$300 billion…Q2 2013-$380 billion
5. Total housing starts (annual rate); Q1 2009-500 million…Q2 2013-800 million
6. Industrial production (2007 = 100); Q1 2009-85…Q2 2013-100
7. Non Agriculture employment; Q2 2009-130 million…Q2 2013-136 million
8. Consumer confidence (100 = 1985); Q2 2009-25… Q2 2013-80

Yes, the economic recovery has been tepid; but we see the current trend continuing and a silver lining in the slow growth. There’s a possibility that the current expansion will last longer than most, and that inflation and borrowing costs (i.e. interest rates) will remain low.

Oh I almost forgot…one more statistic. The Dow Jones Industrial Average; Q2 2009-6500…Q2 2013 15,500.

Thanks for your business and trust,

Craig

Past performance does not assure future results. Investors cannot invest directly in the stock market indexes such as the S&P 500. Invest return and principal value of an investment will fluctuate. Investor value, when sold, may be worth more or less than their original cost. The material in this presentation is for illustrative purposes and does not reflect any particular investment.

_____________
Comments contained above are meant to be generic in nature and are not meant for specific action.

Asset Class Allocation

In March 2009 the market hit a low point (I’ll bet you still remember). Since then it has risen about 100% so we’re all feeling much better except for those ‘nagging memories’. During the last few months, as some markets have reached new all-time highs, we’ve had a lot of questions about valuations. “Is the market to high?” “How’s the economy?”. “Should I sell and wait for a correction or change my allocation?”

Let me start with the markets making new all-time highs. When I started in this business…1973…the Dow Jones was about 600-700. Today it’s about 15,000. We’re used to the markets making new highs.

Now let’s turn to the economy. At this time we see the economy continuing to chug at a modest pace for some time before encountering another normal recession. Remember that recessions are periodically needed and expected. We also do considerable on-going research and analysis on the securities in your portfolio(s) and continue to find plenty of stocks selling at what we feel are bargain prices.

Change your allocation? Sell and wait for a correction (AKA market timing)? We don’t think so.

Whenever the market has a significant move up…or down…It’s easy to wonder if it’s time to be more conservative or aggressive but recalling what you have and why can help. Equity portfolios managed by Sycamore are broadly diversified with individual holdings in Large, Mid and Small Capitalization stocks and International holdings. Additionally portfolios are invested across our economy with holdings in 11 sectors (Basic Materials, Utilities, Medical services etc.)that we’ve identified. We feel the equity portion of your portfolio(s) are adequately diversified. This leaves the selection of your portfolio’s “class” (Stocks – Bonds) as the important question for consideration. Most of you have been clients for 20,30 or (yes it’s true) almost 40 years so you’re aware that we encourage clients to hold equities as long as their time horizon and tolerance to pain (or in some cases “shock and horror”) J are adequate. Our philosophy on this has not changed over the years and remains unchanged today. Why? Results! As we look at our long term client’s portfolios we find hundreds that have had far better results with stocks than with Bonds.

Consider this (yes we’re aware that we’ve written about this before but it’s important). Rounded off for purposes of this illustration, we find historic returns of about 10% for Stocks, 5% for Bonds. At first it appears that stocks earn about twice as much as bonds. However, we feel that the only ‘return’ to our clients that counts is the net return after adjusting for taxes and inflation. When we apply this formula we get an altogether different picture. First let’s look at the simple net (after adjusting for taxes and inflation) return for each class. Stocks start at 10% less about 2% for taxes and 3% for inflation leaving a net real return of about 5%. Bonds start at about 5% less 1% for taxes and 3% for inflation leaving a net real return of 1%. 1%?…1%? Not much huh? So after adjusting for taxes and inflation we find that Stocks earn about 5 times as much as Bonds. Now let’s just assume that you’re investing $100,000 for 20 years. What would your ‘net real’ (after taxes and inflation and allowing for compounding) earnings be on each investment? Well bonds/fixed investments come in at a blistering $122,130. Stocks/equities manage $271,264. Since each investment started with $100,000 the ‘net real’ gain on bonds/fixed was $22,130 vs. $171,264 for stocks. That’s about 1200% more. OK now to even the score a bit. Bonds and other fixed/guaranteed investments can play an important role in your portfolio. They offer a safety net and a pool of money that is assessable while other investment classes like stocks or real estate are experiencing their normal fluctuations (Bear markets). They can also bring comfort to the investor during recessions etc.

So… back to the question at hand. Should you consider making any changes based on our current market and economic conditions? We aren’t finding any reasons to do so at this time but we’ll let you draw your own conclusions.

Thanks for your business and trust,

Craig

Past performance does not assure future results. Investors cannot invest directly in the stock market indexes such as the S&P 500. Invest return and principal value of an investment will fluctuate. Investor value, when sold, may be worth more or less than their original cost. The material in this presentation is for illustrative purposes and does not reflect any particular investment.

_____________
Comments contained above are meant to be generic in nature and are not meant for specific action.

More Good News

Recently the US Labor Department released the February ‘Jobs’ report and it shed additional positive light on our growing economy. The US private sector added 246,000 new jobs in February while the public sector lost 10,000 leaving a net gain of 236,000…more than anticipated. This helped reduce our nation’s unemployment rate to 7.7% and while that’s not yet the number we want, it’s the lowest level in the last 4 years and definitely heading in the right direction.

A peek at some of the detail shows jobs were created across the economy which we feel is a good sign. We had increases of about 32,000 in health care, 14,000 in manufacturing, 23,700 in retail, 73,000 in professional and business services and even 21,000 in Hollywood. However the sector that we are most pleased with is construction which added about 48,000 jobs in February. About one quarter of the eight million plus jobs that were lost during the recent recession were in construction. It appears that this sector has finally turned the corner. We think this is significant ‘long term’ good news because this industry’s recovery is in its infancy. Recent reports show single family housing starts up about 20% over last year and multi-family construction is up about 34%. We get more good news from housing by looking at prices which continue to trend slightly higher and sales which are rocket-like so far in 2013.

Other positive reports from the labor department show the average hourly wages and weekly earnings are both improving.

OK… ‘big picture’… our economy continues to grow slowly which begs the $64,000 questions…Are share prices getting ahead of themselves? Is now the time to consider being more aggressive or more conservative? We think the answers are ‘no’ and ‘stay the course you’ve set’. Our reasoning is straightforward. 1) the economy and corporate health both continue to improve. 2) It can be difficult to ‘time’ the markets.

However (don’t you hate it when this part comes), remember that in the short run the market is subject to investor emotion which is usually triggered by the latest story. That emotion generally leads to market fluctuations. Sometimes downward fluctuations…AKA corrections! They are normal and expected. It’s simply going to happen. We won’t be surprised and we don’t want you to be surprised. In fact…if they don’t occur…we begin to get a little nervous.

If you’d like to learn a bit more about market corrections, go to http://www.sycamoreweb.com/newsletter/news_091808.html and review our article. This was written in 2008 so the numbers are a bit different today but the basics remain unchanged.

Thanks for your business and trust,

Craig

Past performance does not assure future results. Investors cannot invest directly in the stock market indexes such as the S&P 500. Invest return and principal value of an investment will fluctuate. Investor value, when sold, may be worth more or less than their original cost. The material in this presentation is for illustrative purposes and does not reflect any particular investment.

_____________
Comments contained above are meant to be generic in nature and are not meant for specific action.

Fiscal Cliff Tax Changes

The ‘fiscal cliff’ brought us a last minute tax law that most investors seem pleased with. During the month of January Sycamore’s Growth and Income composite gained nearly 6%. Your portfolio likely performed about as well. Of course we’re all fully aware that this pace will not continue but it’s a wonderful start for what we feel could be a solid year for share prices. Though the markets have advanced over the last one and twelve months, most of the companies we follow have increased earnings and dividends during that same period so we are still finding many good values.

Turning to the new tax law, just how is it likely to affect you and your investment portfolio(s)?

Income Tax Changes

The top income tax rate for individuals with earned income of over $400,000 and joint filers with income of more than $450,000 will increase from 35% to 39.6%. Additionally these high income taxpayers will see the tax rate on their long term capital gains and qualified dividends raise from 15% to 20%. If you are a single filer earning less than $400,000 or a joint filer earning less than $450,000 these increases will not affect you.

Medicare Tax on Investment Income

Beginning in 2013 there will be an Medicare tax of 3.8 % applied to your ‘net investment income’ if your adjusted gross income exceeds $200,000 for a single filers and $250,000 for joint filers. ‘Net investment income’ includes interest, dividends, royalties, rent, gross income from passive activities, taxable distributions from deferred annuities, and net gain from the sale of stock. This new tax will not apply to distributions from tax deferred retirement accounts such as Ira’s or 401(k) plans. Also, it will not apply to municipal bond interest.

Estate Tax Changes

Here the news is wonderful as the ‘per person’ estate gift tax exemption of $5,100,200 that we had in 2012 has been made permanent. Going forward this amount will be indexed to inflation so for 2013 the exemption amount per individual will be approximately $5,250,000. More good news came in this law when the portability of this exemption between spouses has also been made permanent. This means that if one spouse does not use their $5,250,000 exemption the surviving spouse can add that to their own exemption and allow the couple a total exemption of $10,500,000 for the family. Of course there are still many good reasons to have an estate plan as the maximum estate tax rate has now been raised from 35% to 40%. On balance, we feel that the estate tax provisions in the new tax law will be beneficial for most of us.

Retirement Accounts

If you’re over 70 1/2, are subject to minimum distributions from your IRA or other qualified account(s) and have a charitable streak you will appreciate learning that you can once again make text free distributions from directly from your ‘qualified’ account to charities. The maximum amount you can contribute for any single tax year is $100,000. This provision has been extended only through 2013.

What effect will the new law have on your investment portfolio?

As we look back at previous tax law changes and their effect on share prices, we think the current changes are not significant from an investment perspective. It certainly has not caused us to change our focus or direction when selecting investments for your portfolio(s). In fact, if the performance of the stock market so far this year is an indicator, the law seems to have had at least a short term positive effect. It can be difficult to make the changes needed but if our federal balance sheet where to be balanced and our national debt reduced or eliminated, we think the long term benefit to our economy could be significant and hopefully we would all share through a higher standard of living. It’s likely that more tax changes are on the horizon…stand by.

As always, if you have any questions or comments, please let us know.

Craig

Notice Regarding Privacy and Confidentiality: Sycamore Financial Group reserves the right to monitor and review the content of all e-mail communications sent and/or received by its employees.

_____________
Comments contained above are meant to be generic in nature and are not meant for specific action.

Two thousand and Thirteen! Yes it is…just like that another year has passed! And, we’d like to add, a very good year for share prices. It certainly seemed ‘nip and tuck’ for most of the year but the world did not end. Stories abounded throughout the year…Greece, presidential election, Mayan Calendar, and the “fiscal cliff” were all billed as the ‘big one’ but they were not. We’re beginning to think that some exaggeration may be involved.

The Economy

On a more serious note, the economy continues to grow. It’s certainly still not growing as fast as we would like but none the less we’ve now had 13 consecutive quarters of growth and the words ‘double dip’ are faded from the pundits memories. We continue to create more jobs but not at a clip fast enough to bring the jobless rate down quickly. As we have mentioned before, there are more than a few positive things going on. Interest rates remain very low and the Federal Reserve has indicated that we can expect rates to remain low for the foreseeable future. This should help our housing industry that is finally showing signs of a sustained turn around. Additionally, low interest rates helping anyone who can refinance – from homeowners to corporations and our federal government. Technology is bringing the productivity rate up on a regular basis and while this is not good for the creation of jobs, it travels quickly to the bottom line for corporations.

The Market

The overall market gained about 16% for 2012. This is not stellar but certainly a good solid gain. As we analyze the securities in portfolios that we manage we continue to see solid gains on the earnings and dividend fronts. As more companies have cash available we’re beginning to see a pick-up in mergers, acquisitions, and stock repurchases. While most stocks are no longer the extreme bargains they were in 2009, we continue to see lower than average valuations on the securities that we follow and feel that, barring an unexpected shock to the system, 2013 has the potential to be as good as 2012.

Performance

The chart below compares the return of Sycamore’s Growth and Income Composite to the S&P 500 TR index. We feel our strength has been to hold value better than the overall market during declines, so once again we are very pleased with our relative performance during a year where we had better than average returns for the S&P 500 TR. All returns are annualized through 12/31/2012 and gross of management fees.
………………………………………………………………………..1yr…….3yr……5yr….10yr
Sycamore Growth and Income Composite…….14.67….11.33….3.68….8.31
S&P 500…………………………………………………………16.00…10.87….1.66….7.10

_____________
Comments contained above are meant to be generic in nature and are not meant for specific action.

Good news on the tax front if you are an Indiana resident. And better still if you are an Indiana resident’s beneficiary. Indiana’s inheritance tax will be completely repealed by year 2022. Starting in the year 2013, the tax will be reduced by 10% each year until it phases out entirely by 2022.

The current tax rate for Class “A” beneficiaries is from 1% to 10%. Class “A” beneficiaries include parents, children, stepchildren, grandparents, grandchildren, other linear descendants and other lineal ancestors and spouses of children or stepchildren. For these beneficiaries, the exemption has been increased from $100,000 to $250,000.

Class “B” beneficiaries, which include brothers, sisters and lineal descendants of brothers and sisters, currently pay a tax-rate between 7% and 15%. The exemption amount for this group remains at $500.

Class “C” beneficiaries, which include everyone who is not a class “A” or “B” beneficiary, are currently subject to tax rates between 10% and 20%. The exemption for this group remains at $100. This is not a typo. It’s $100. Indiana’s Inheritance Tax law is retroactive to January 1, 2012. Of course, spouses and charities are entirely tax exempt.

_____________
Comments contained above are meant to be generic in nature and are not meant for specific action.