Sorensen Wealth Management Blog: August 2011

Monday, August 29, 2011

Weekly Market Commentary

The Markets

Like wanderers in the desert, investors breathed a sigh of relief when an oasis appeared last week. After Federal Reserve Chairman Ben Bernanke’s speech, the Dow Jones Industrial Index posted its first weekly gain in more than a month, finishing at 11,284, an increase of more than 4 percent for the week. The Standard & Poor’s Index and Dow Jones Global ex US Indices also were up for the week. In addition, the Chicago Board of Exchange Volatility Index (VIX), which is known as the ‘fear index’ because it reflects the amount of volatility investors anticipate in the next 30 days, fell by more than 10 percent. According to The Wall Street Journal, the head of

U.S.

equities index trading at Barclays Capital said that after Mr. Bernanke's speech, some investors set up options positions that are designed to profit from improving stock market stability in the future.

While stock markets reflected optimism, economic indicators provided a mixed picture. According to Barron’s:

The Commerce Department revised second quarter’s Gross Domestic Product growth number down slightly to 1.0 percent annualized from 1.3 percent.
Inflation estimates remained relatively stable.
The manufacturing sector showed strength as new orders for durable goods increased 4 percent during July.
Sales of new and existing homes fell, and the Federal Housing Finance Agency’s purchase-only house price index showed that housing prices fell quarter-to-quarter.
Despite debt-ceiling woes, a downgrade of U.S. credit, concerns about European debt, and a wildly volatile stock market, the Reuters/University of Michigan survey consumer showed that consumer sentiment improved slightly.
Despite improved sentiment, the survey also found that consumers don’t expect things to get better any time soon.

While a week with positive market performance was welcome, the question remains: Has stability returned or is this just a shimmering illusion? Only time will tell.

Data as of 8/26/11	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	4.7%	-6.4%	12.4%	-2.5%	-2.0%	0.0%
DJ Global ex US (Foreign Stocks)	0.7	-12.5	3.5	-3.4	-2.0	4.2
10-year Treasury Note (Yield Only)	2.2	N/A	2.5	3.8	4.8	4.9
Gold (per ounce)	-3.2	26.8	44.5	29.3	23.9	20.8
DJ-UBS Commodity Index	1.3	-0.8	23.8	-6.0	-1.1	4.7
DJ Equity All REIT TR Index	3.7	0.1	14.1	1.2	-0.5	9.2

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.

America

has had four national banks since the American Revolution. There has been a lot of talk recently about the roles of central banks in countries around the world, including the Federal Reserve (the Fed) in the United States. While the Fed may be the most frequently well-known, it is actually the fourth national bank in the U.S. The first was the Bank of the United States, which was created in 1791 to help consolidate debt from the Revolutionary War. Once the bank had successfully paid down the debt, Congress did not see any further need for a national bank, and voted not to renew the bank’s charter in 1811.

In the early 1800s, state banks were issuing their own currencies. As debts from the War of 1812 mounted, many suspended payments on their currencies. By 1816, public sentiment favored a national bank that would make state banks pay, and the second Bank of the United States was set up. President Jackson objected to the bank because he believed that powerful private institutions were susceptible to corruption and hard to control. The bank’s charter was allowed to expire in 1836.

In 1863, the need to finance the Civil War led to the creation of a national banking system. Banks with national charters issued currency that was printed by the government and backed by federal bonds. By 1865, state currencies disappeared and the United States had its first uniform national currency. The banking system was plagued by panics, however, experiencing at least one per decade after the Civil War. This caused Congress to reconsider the structure of the system and the Federal Reserve Act, which created the Federal Reserve, became law in 1913. Today, the national banking system includes:

A Board of Governors, which sets reserve requirements for member banks and discount rates for district banks. It also reviews the budgets of district banks.
12 Federal Reserve district banks, which are private institutions established to serve the public interest. Originally, they issued money that could be redeemed in gold.
The Federal Open Market Committee was established in 1933, when the gold standard ended, to ensure responsible monetary policy.
The Federal Advisory Council includes a bank executive from each district. It advises the Board about the state of the industry and money supply.
The Consumer Advisory Council looks out for the interests of consumers, communities, and the finance services industry. Members are appointed by the Board.
Several thousand member banks, which may include your bank.

Weekly Focus – Think About It

A rising nation, spread over a wide and fruitful land, traversing all the seas with the rich productions of their industry, engaged in commerce with nations who feel power and forget right, advancing rapidly to destinies beyond the reach of mortal eye; when I contemplate these transcendent objects, and see the honor, the happiness, and the hopes of this beloved country committed to the issue and the auspices of this day, I shrink from the contemplation and humble myself before the magnitude of the undertaking. --Thomas Jefferson, First Inaugural Address

Best regards,

Jeff Sorensen

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Securities offered through Triad Advisors, member FINRA/SIPC. Advisory services offered through Sorensen Wealth Management (SWM). SWM not affiliated with Triad Advisors.

* This newsletter was prepared by Peak Advisor Alliance.

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

Thursday, August 25, 2011

Going to Jackson Hole, What Should I Tell The Feds?

	As you may have heard, the Federal Reserve members are meeting in Jackson Hole this week for their annual “Back to Nature” event. You may recall last year when they were at Jackson Hole, Mr. Bernanke announced the beginning of QE2, another round of government stimulus aimed at getting the economy working by buying back government issued bonds. Could QE3 be announced on Friday? No one knows for sure, but I wanted to let you know I am on my way to Jackson Hole this week and was wondering if there was any message that you want me to deliver to the Feds? I can’t promise that they will listen, but I will give it a try! Shannon and I are going to take a quick trip to see our parents who still live in Idaho and we are going to take a detour to Jackson Hole (only 2 hours from my hometown) to soak up the beauty and serenity of some beautiful country. We will be back after Labor Day. Of course the office is still open and I can always be reached if you need to talk, just call Jenna or Brittany. I wanted to give you an update as this month has been one of the most volatile and unpredictable in my 25 years in the business. There has been a tremendous amount of negativity about the economy and the markets and I wanted to share with you what we have done and what we expect going forward for the rest of the year. I do not want to be overly technical, so if you have questions please don’t hesitate to call if you would like more data. According to dshort.com, the S&P 500, suffered a 56% decline from October 2007 to March 2009. It then rallied back 101.6 % from its low point in March of 2009, 676, to approximately 1370 in May of this year. From 1370 in May to 1125 today is nearly an 18% correction. Needless to say, quite a roller coaster ride and very hard on everyone emotionally and financially. As you know we have chosen to adapt to the market and the “new norm.” We do not believe buy-hold and hope will work as well in this market as an Advance and Protect Investment Strategy. Remember, our goal is to participate in 60-80 percent of an up-trending market, and not participate in 60-80 percent of the down-trends. The first half of 2011 was profitable, but recent economic data, political events, debt issues, and unemployment rates have taken a lot of steam out of what looked like an economic recovery. This data is not looked upon favorably by the markets. In June and July, we had several issues: mutual funds, variable sub-accounts, stocks, bonds, and ETF’s break through their supporting technical data and we sold them after some nifty gains over the preceding quarters. Most of this activity was at approximately 1280 on the S&P. Our portfolios were in a more conservative posture by July’s end and in Money Market in August. We are very pleased that our systems warned us of a weakening in the markets and we took advantage. We currently hold more in cash than we have had in the last 2 years. The good news is that we are in the Protect side of our Strategy…for how long I don’t know. What I do know is that we are adapting to our environment by not being bullish or bearish, just realistic. The market is smarter than we are so we must bend and adapt to what it is giving us. I believe that we could still see more downside in the market, maybe to around 900-1000 on the S&P 500 over the next few quarters. The good news is that we have cash (Money Market) assets available to deploy and buy when the markets start to turn around…and at some point I am confident they will turn around. Behind the scenes we have seen this pattern unfold just recently, when our research and systems told us to start investing more heavily in March of 2009, and it proved to be very accurate. Those same systems are telling us today to protect assets and raise cash levels. Most importantly, we truly believe in our process and how it works. You have heard me say over and over again “process over attitude, opinion and emotion.” When trends shift, our process reports that and we immediately act. We are very pleased with the technical and fundamental data we are receiving. Currently, we hold only one position in the ETF Model-Treasuries (TIP) after selling out of Gold (GLD) earlier in the month. The Stock model is long in only three positions, and the bond, mutual fund, and variable annuities are mostly in cash. It is important to note that there can be two regrets with investing. The first is being investing while the market declines and the second being in cash when the market goes up. I believe these two regrets carry two entirely different kinds of pain and emotional toll. Watching values dwindle is much more difficult than watching short rally’s in the markets while parked in cash. Our goal again, is to participate in 60-80 percent of the up-trend and miss 60-80 percent of the downside. We know we won’t hit it perfectly, but we do believe this is better than just riding the roller-coaster with buying-holding and hoping things will change. In conclusion, what would you like to say to Mr. Bernanke and the Feds if you were able to have your voice heard? Maybe I won’t be able to deliver it for you in Jackson Hole this week, but collectively as a Nation and with one voice we may be able to make a difference and shape policy that is going to be in the best long-term interest of our Country!

	Sincerely, Jeff Sorensen Securities offered through Triad Advisors, member FINRA/SIPC. Advisory Services offered by Sorensen Wealth Management (SWM). SWM not affiliated with Triad Advisors.

Wednesday, August 24, 2011

You Have Insurance, But Do You Understand It?

Ensure that you understand your insurance.

Flooding damages a lot of homes every year, so many learn something about their insurance coverage – for better or worse. Usually the surprise comes from not having looked at the policy for years. The fact is everyone needs to review their insurance policies periodically and make changes when appropriate.

Whatever type of insurance you own or are considering, having a better understanding of the questions to ask, issues to watch out for, and options that may be available are all very important. When you need the insurance pay-out the most, you may not have it.

Life insurance is a perfect example.

“Although a rigorous financial plan will likely evaluate any current life insurance protection needs, and recommend and implement new life insurance coverages as required, the ongoing review process for existing life insurance policies often receives far less attention,” says Michael E. Kitces, CFP, CLU.

Term insurance is certainly the most straight-forward form of life insurance available. The proposition is simple: Each year you pay the cost of the life insurance and, in exchange, you receive one year of coverage.

Kitces notes that given how common it is to find term policies today that are designed to last for a certain number of years (e.g., “10-year term” or “30-year term”), understanding what happens to the policies beyond the time period is important.

· Does the coverage automatically lapse or can it be continued at a new premium schedule based on the insured’s age at that time and what are those premiums scheduled to be?

· Can the insurance company require the insured to provide new evidence of insurability (i.e., go through the underwriting process again) if coverage is continued past the guaranteed period?

· Does the policy offer an option to convert the coverage to a permanent life insurance policy without evidence of insurability?

· Does the conversion option last the entire duration of the policy or is it for a limited time period?

There are several reasons to reconsider your existing term coverage today, including lower costs due to improved health status. Term replacement is also a strong option to consider if there has been a change in the original time horizon needed for coverage. For instance, if a 45-year-old person is five years into a 20-year term policy that has limited extension or conversion options, and believes they will need coverage until age 65 rather than 60, replacing that policy with a new 20-year term policy that will last until age 65 may be more effective.

It’s important to know what decisions will or will not be needed at the “end” of a term insurance policy, so at least a plan can be in place should circumstances change. Will it ever be possible to extend the term insurance policy further? Will conversion always be an option?

Ensure that you understand your insurance.

The above material was prepared by Peak Advisor Alliance.

Securities offered through Triad Advisors, member FINRA/SIPC. Advisory Services offered by Sorensen Wealth Management (SWM). SWM not affiliated with Triad Advisors.

Monday, August 22, 2011

Weekly Market Commentary

The Markets

The financial markets are currently filled with contradictions and that’s contributing to head-scratching and risk-aversion on the part of investors.

Consider these head-scratchers:

· Mortgage rates are at a 50-year low, yet the housing market is still severely depressed.

· Ten-year Treasury yields hit a record low last week even though the government just experienced a downgrade in its credit rating and it is running trillion-dollar annual deficits.

· Gold prices hit a record high last week even though gold pays no interest and the core inflation rate is running below 2 percent.

· The value of the dollar fell to a record low against the Japanese yen last week even though Japan has been mired in a slump for 20 years and “Japanese government debt is more than double the Euro Area average and more than double the US,” according to Jim O’Neill at Goldman Sachs.

Sources: Bloomberg, MarketWatch

The situations described above suggest there are “distortions” affecting the markets that may not be explained by traditional portfolio theory.

One distortion that has clearly impacted the markets is government policy and intervention. In just the past three years, we’ve seen the $700 billion Troubled Asset Relief Program (TARP), the $787 billion American Recovery and Reinvestment Act, the Federal Reserve’s zero interest rate policy, and the Fed’s QE1 and QE2 bond purchases. All these have generated numerous market side effects.

In addition, a major argument is unfolding between politicians who believe government intervention is necessary to prevent an even worse downturn and those who believe the free market should be left to fend for itself. Some politicians are even calling for the abolishment of the Federal Reserve.

A similar situation is playing out in Europe. For more than a year, European governments have scurried from one bailout strategy to the next in order to prevent a sovereign default.

All these distortions and philosophical debates are, not surprisingly, causing confusion in the financial markets. The result -- a stagnant economy and falling stock prices.

The denouement of these interventions and political squabbles is unknown. What we do know is we continue to do all we can to help ensure your goals and objectives are met.

Data as of 8/19/11	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	-4.7%	-10.7%	4.8%	-3.9%	-2.8%	-0.4%
DJ Global ex US (Foreign Stocks)	-3.1	-13.1	0.1	-3.5	-2.3	4.3
10-year Treasury Note (Yield Only)	2.1	N/A	2.6	3.8	4.8	4.9
Gold (per ounce)	6.5	31.0	49.8	32.8	24.2	20.9
DJ-UBS Commodity Index	1.3	-2.1	20.3	-5.8	-1.5	4.5
DJ Equity All REIT TR Index	-3.1	-3.5	9.8	-0.1	-1.0	8.9

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.

DOES RISK GO UP OR DOWN as stock prices decline? The answer may surprise you.

Let’s start with a definition. For our purpose, we’ll define risk as the probability of losing money. With that shared definition, let’s look at the S&P 500 index. On October 9, 2007, it closed at an all-time record high of 1,565. On March 9, 2009, it closed at 676, which was a 12-year low, according to CNNMoney.

Now, was it riskier to own stocks when the S&P 500 was at its all-time high in 2007 or its 12-year low in 2009?

Hindsight tells you owning stocks at the all-time high was much riskier. Why? Because stock prices proceeded to fall by 57 percent over the next 17 months, while prices rose about 100 percent over the next two years from the 2009 low.

Money manager John Hussman framed it this way in a May 23 commentary, “As valuations become rich, risk increases, and as valuations become depressed, risk declines. At the same time, rich valuations imply weak long-term prospective returns, while depressed valuations imply strong long-term prospective returns.” In plain English, he’s essentially saying as stock prices go up, risk goes up, and as stock prices go down, risk goes down.

Warren Buffett was even more succinct. In an August 11 Fortune Magazine interview, he said, “The lower things go, the more I buy.”

It may go against human nature, but the lower prices go, the less risky they become and the more likely you are to experience strong long-term prospective returns, according to Hussman and Buffett.

For investors who are saving for retirement or simply trying to preserve their wealth, seeing lower stock prices is no fun. However, assuming you don’t need to sell today, what matters is what prices will be in the future when you do sell. And, with prices dropping now, it may be setting the market up for better returns down the road.