KFA Blog

August 24th Market Update

In spite of largely unchanged market fundamentals, extreme volatility gripped the market this morning and is likely to persist this week.  The DOW Jones saw an overall drop of 1,000 points within 10 minutes this morning.  This morning appeared to be a market going mad, but NOT a US economy going bad.  

Here is a snapshot of the time sequence that led to the DOW's market drop.  

The first trades to drive down prices were automated trades induced by software algorithms, followed by trades to meet margin call requirements caused by lower prices.  After this, we saw periods of selling as well as people buying in to find a good deal.  

Stepping back to see what fundamentally changed in the course of the first ten minutes today we find nothing.  There were zero new reports regarding the state of our economy.  We have been concerned with the economic state of China which is why we have been selling positions over the past couple of months and are holding an unusually large cash position.  We are watching closely to see if opportunities to buy present themselves or whether we continue to hold cash with our cautious stance.  We will be watching to see how overseas markets perform overnight.  Over the next several days we will be watching for signs of fundamental changes that may chart the course for the remainder of the year.

We will be listening to economic data reported later this week such as GDP estimates, pending and new home sales, and durable goods orders to name a few.  Uncertainty still remains around a Fed rate hike as they have not set a date, saying it is data dependent.  Although a large decline in stock prices alone does not mean the Fed will halt their plans to begin increasing rates.

We still hold a long term view for our current holdings and do not want to make irrational daily moves to lose sight of your long term goals.  

As always, we appreciate your confidence and support in us.  Please feel free to call should you have questions.  

 

Your team at Kabarec Financial Advisors, Ltd.

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Education Expenses

 

School is right around the corner and some of the questions we often receive involve tax benefits regarding education expenses and personal budgeting discussions to have with your child. Sending your child off to college can be an expensive ordeal and we are here to help you save every penny possible. A misconception in regards to education expenses is that every expense is 100% tax deductible. Expenses are limited to the IRS guidelines for what classifies as “qualified”. http://www.irs.gov/Individuals/Qualified-Ed-Expenses  Items required for enrollment are tax deductible such as textbooks, supplies, and equipment but costs associated with room and board, insurance, and transportation are non-deductible.

According to College Board, the average cost of a four-year public university is currently $42,544 and $107,416 for private colleges. Over the previous decade, costs have risen by about 40% and one would expect costs to continue to rise. Savings options were highlighted in KFA’s last newsletter and we are always here to assist you in helping your child reach their fullest potential. If your child is considering majoring in education, social work, or criminal justice you may want to consider a loan instead of dipping into your hard earned savings. Oftentimes, generously backed federal student loan repayment programs pay 100% of a graduate’s student loan debt if they work in a needed capacity over a set number of years. Even after graduation some cities and states offer monetary incentives to come work there because those skills are necessary for their community. This essentially means that college could cost nothing depending on certain local and federal guidelines pertaining to after graduation employment. Careful research and financial planning is necessary to deem if this is the right route for you and we are always here to assist you.

At the end of the day, college is more than just academia. Your child is learning how to live on their own and helping them establish a budget is critical for financial success post-graduation. Help your child understand the importance of knowing where their money is going. Reward them for demonstrating financial responsibility and always encourage them to stay on track. The earlier you teach your student to budget, the better. If you need any tips for teaching your child about financial planning, would like to start saving for college expenses, or have any questions feel free to contact any member of the Kabarec team. We hope you enjoy the school year and remember a better tomorrow starts by saving today.

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Education Funding Options

 

Planning for college is imperative to financial success. Through savings, you can ensure that your child's future education options are not limited by financial considerations, you can avoid the stress of student debt, and open up options for special programs such as studying abroad. At Kabarec, we can help you and your child achieve their dreams.  Your dreams of higher education for your child can become a reality through sound financial planning.

There are several investment vehicles that can be used to attain your education goals. 529 plans, Uniform Transfers to Minors Acts (UTMAs) and even ROTH IRAs can help you save for college. 529 plans are popular options for parents because earnings grow tax free when the money is taken out to pay for college. Distributions taken out for anything but college can result in hefty tax penalties, erasing the tax free growth benefit of a 529 plan. This becomes important when thinking about potential scholarships your child may receive.

Unlike a 529 plan, distributions from a UTMA can be used for any purpose. If your child decides to join the military, earns generous scholarships, or doesn’t attend college at all an UTMA may be the best option. The biggest downside of an UTMA are potential taxes your child may face alongside issues surrounding ownership.  The earnings are taxed at your child’s tax rate, but over a certain amount are taxed at the parent’s tax rate.  In Illinois, your student or nonstudent acquires full ownership of the UTMA account at age 21. This means they can spend your investment in whichever fashion they see fit, they could buy books for college or buy a new car stereo depending on their desires.

Roth IRAs and 529 plans allow parents or grandparents to totally control their investment distributions. Unlike 529 plans, Roth IRAs can be used for college expenses and retirement income. For most people, the biggest downside of using a Roth is that only contributions can be withdrawn tax free. Those with high incomes may be excluded from participating in a Roth IRA.  You must have earned income to contribute and there are annual contribution limits.  Although Roth IRAs are much more flexible than 529 plans and offer a greater array of investment options, not everyone can participate.

Deciding which investment vehicle works best for your child is a case-specific task that we can assist you with at Kabarec. Weighing all of your options and deciding which one works best for your family is essential to your child’s success in college. At Kabarec, we offer comprehensive financial planning so that when your daughter or son turns 18 you have nothing to worry about. A better tomorrow starts today. 

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Protecting Yourself through Estate Planning

By:  Heather G. Walser, Lavelle Law, Ltd.

You’ve no doubt heard how important it is to have an estate plan including a will, living trust, and other related documents in place.  A common misconception about estate planning, however, is that its only purpose is to distribute your assets to your surviving family and friends when you die.  While taking care of your loved ones after your death is one of the goals of an estate plan, a comprehensive plan should also take care of you.  In fact, a well-drafted estate plan anticipates not just your death, but your incapacity as well.

Today, the likelihood of becoming incapacitated has increased dramatically.  In fact, statistically speaking, at age 30, you are almost twice as likely to become injured or incapacitated as you are to die.  This risk of incapacity grows with age – nearly doubling by the time you reach the age of 50.  Today in the United States, 40.3 million Americans are age 65 and older – an estimated 13% of the population, according to the U.S. Census Bureau.  Indeed, the fastest growing segment of the population of the United States is people over the age of 65, and the risk of incapacity increases substantially with age. The U.S. Bureau of the Census estimates that as many as 47% of individuals over the age of 85 will develop Alzheimer’s disease, which ultimately results in incapacity.  In light of these statistics, it is more important than ever to ensure that you – and your assets – will be appropriately managed in the event that you become incapacitated.

The State of Illinois recognizes two specific documents to plan for incapacity:  (1) the Power of Attorney for Property, and (2) the Power of Attorney for Health Care.  In a Power of Attorney for Property (“POAP”), you name an agent to manage your financial matters, keeping your best interests in mind, while you are incapacitated.  The agent under the POAP can handle virtually any financial matter you would be able to handle yourself if you were not incapacitated, including paying your bills, managing your accounts, and even dealing with government or other agencies concerning benefits you receive. Similarly, a Power of Attorney for Health Care (“POAH”) names an agent to make decisions concerning your health care while you are incapacitated, including decisions concerning life support and other life-sustaining measures.  The agent under the POAH is also empowered to make anatomical gifts and provide for the disposition of your remains upon your death.

In addition to the POAP and POAH, you can also protect yourself by creating and funding a revocable or “living” trust.  Generally speaking, a trust is a legal entity that you establish during your lifetime to accomplish a particular tax or estate planning objective.  The purpose of a living trust is to manage your property both during life and after death.  During life, you act as trustee and manage the revocable trust for your own benefit.  Assets in the trust can be spent, sold, traded, loaned and used as collateral just as they would if you owned them in your individual capacity.  Once you are unable to act as trustee, whether due to incapacity or death, the successor trustee named in the trust instrument steps in to manage the assets in the trust, allowing for a seamless transition and no interruption in the management of trust assets.  

In the event that you become incapacitated without a trust, POAP, or POAH in place, it can be very difficult for your loved ones to manage your affairs – particularly in the case of your finances.  In order to manage your affairs, your loved ones could be forced to seek guardianship over you.  Obtaining guardianship requires court proceedings that can be complex, lengthy, and costly, and the court may even name a guardian that you would not choose.   To avoid this result, you can take simple steps today to protect yourself in the future by preparing valid Powers of Attorney for Health Care and Property.  If you haven’t already done so, contact an attorney today to ensure you are prepared for what may happen tomorrow.

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2nd Quarter 2015 Market Commentary

 

Trouble Abroad, Strong Dollar, China    

In spite of global uneasiness, the overall US economy continues to chug along. Economic conditions in China have worsened, Greece continues to disappoint, and Puerto Rico faces collapse. Greece and other irresponsible southern European countries continue to act as thorn in the side of the EU’s largest economies in Germany, the UK, and the Netherlands. European leaders have worked tirelessly to limit a Greek contagion effect that would infect Europe with sluggish growth.

The US economy has a thorn of its own, the territory of Puerto Rico faces a $72 billion debt that Puerto Rico’s governor has admitted cannot be paid. Much of that debt is held in the US, over 20% of bond funds own Puerto Rican bonds which have been downgraded to junk status. In effect, Puerto Rico is America’s Greece. Although Greece and Puerto Rico don’t hinder European and American growth, there are much larger problems.

The same man in China that sells you eggs is giving you stock tips. The Chinese middle class has been coerced from every direction to buy into China’s closed market. Two-thirds of Chinese investors have not finished high school and are trading on margin. Trading on borrowed money has artificially pumped the Chinese market to new highs. This is an attempt by China to build their own market to meet their own consumption and to strengthen their middle class.

The Chinese dragon was able to take flight and lead the world in growth for much of the past decade based on a manipulated and devalued currency that made exporting easy. China’s miracle years have played out and the government cannot control the reality of economic gravity. Furthermore, China is running out of money to artificially stimulate its economy. The country’s corporate and local government debt totals an extraordinary 280% of GDP, the Chinese market has been growing twice as fast as its economy for more than a decade. We are keeping a close eye on the 2nd largest economy in the world and have made adjustments to offset risks.

Despite trouble abroad, American corporations are enjoying large cash balances and balance sheets are positive. Corporate earnings are looking positive in 2015 and the S&P 500 is nearing an all-time high. We anticipate earnings will continue to look good in the following weeks. There has been speculation that China will call US debt in order to cover its own debt, we do not expect that to be the case. China will not call US debt because they need the US to continue to feed their production and exports, the US may serve as China’s lifeline in the future.

As the dollar continues to strengthen, imports will rise and inflation will be held in check.  A stronger dollar and US economy will continue to boost exports internationally which will lead to a healthier global economy. This seems to be a good time to travel, you will find that your dollar is going farther internationally and airlines are saving money on lower fuel costs – leading to better deals and more weekend getaways. Oil prices are forecasted to keep dropping and consumers will find extra money in their pockets leaving more extra cash for discretionary spending.

What does all of this mean for your portfolio? There have been some adjustments made in the past few weeks and days to account for changing economic climates abroad. As need be, we will continue to make minor adjustments to put you in reach of your financial goals. Our confidence in the US economy remains strong and our investments reflect that.

We are looking to add positions in consumer discretionary funds and we are also looking at alternative investments for risk management purposes. These new investments will be funded from positions previously held in volatile international markets. In order to serve you best, we are always researching domestic holdings, other regions, and other countries that are growing and on the rebound.

As always, should you have any questions regarding your portfolio or a life changing event, please feel free to contact any member of the KFA Team.

Your Friends,

Kabarec Financial Advisors, Ltd.

 
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