MARKET WEEK: AUGUST 29, 2011

The Markets

Shake it up, baby: As an earthquake and impending hurricane shook the East Coast, equities rattled and rolled, but for the first week since the end of July, the volatility was to the upside. The Dow once again topped the 11,000 mark as the industrials continued to be the year's most resilient domestic index. The NASDAQ saw its best week since the beginning of July, while the small-cap Russell 2000, hardest hit during the recent slump, had the week's biggest gains. The S&P is now up just over 5% from its August 8 low.

As confidence in equities revived, Treasury yields were up from the prior week's historic lows. And after nearing $1,900 an ounce, gold sold off sharply during the week, giving up nearly $150 an ounce at one point before recovering a bit on Friday.









Last Week's Headlines

Federal Reserve Chairman Ben Bernanke said fiscal policy measures, not monetary policy, are needed at this point and are not in the Fed's job description, thus putting the responsibility for stimulating economic growth in the hands of Congress and the Obama administration. Low interest rates aren't much help in fighting an ongoing housing slump whose problems appear to be more structural than previously thought, he said. Though there was no sign of a QE3, the Fed's Open Markets Committee will expand its September meeting to two days to allow fuller discussion of the Fed's options.

Second-quarter economic growth was even slower than previously estimated. The Bureau of Economic Analysis said gross domestic product (GDP), initially thought to be 1.3%, was actually 1%.

New home sales continued to languish in July, falling 0.7% from the month before. However, the Commerce Department said that though sales were up almost 7% from the previous July, they were at their lowest level since February.

New orders for durable goods leaped 4% in July, and according to the Commerce Department, were up 9.4% from last July. The figure was driven largely by autos, which began to recover from the Japanese auto-parts supply problem, and large orders for commercial aircraft.

Moody's downgraded Japan's credit rating to Aa3 from Aa2. The ratings agency said it foresees difficulty for the country in improving its debt-to-GDP ratio, which the International Monetary Fund estimates at 234% (by comparison, the IMF puts the U.S. ratio at 99% and Greece at 139%).

The Congressional Budget Office reduced slightly its estimate of the current fiscal year's federal budget deficit to $1.3 trillion, but forecast unemployment of 8% or more would continue through 2014.

Apple CEO Steve Jobs announced that the health issues that have plagued him in recent years were forcing him to step down as CEO, though he will continue as the company's chairman. Chief Operating Officer Tim Cook will take over as CEO.
Gold prices, which began falling on Monday, weren't helped by the CME Group's decision to raise margin requirements on gold contracts for the second time in a month to try to curb speculation.

Eye on the Week Ahead

Investors will be trying to gauge the economic impact of Hurricane Irene, and Friday's unemployment data, as always, will be closely watched.

Key dates and data releases: personal income/spending (8/29); FOMC minutes, consumer confidence (8/30); business productivity, U.S. manufacturing, construction spending, weekly new jobless claims (9/1); unemployment (9/2).

Data source: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. Equities data reflect price change, not total return.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

GAO Report Suggests Annuities as Retirement Income Option

The U.S. Government Accountability Office (GAO) reports that financial experts typically recommend that middle-net-worth retirees use a portion of their savings to buy an income annuity (immediate annuity) to help meet necessary retirement expenses. The report, Ensuring Income throughout Retirement Requires Difficult Choices, finds that while Social Security continues to be the primary source of fixed income in retirement, it is not enough to meet the income needs of most retirees. Also, the shift from employer-sponsored defined benefit pension plans to defined contribution plans, coupled with increasing life expectancies, is forcing retirees to assume more responsibility for managing their savings to ensure that they have sufficient income throughout retirement. An income annuity is an alternative to self-managing savings that offers retirees a steady source of income they won't outlive.


Why income annuities?
 
Generally, an income annuity, also referred to as an immediate annuity, is issued by an insurance company. It is typically purchased with a single lump sum of money (premium) paid to the issuer in exchange for payments made for life (single life income annuity), or for the joint lives of the annuity owner and his or her spouse or partner (joint and survivor income annuity). Payments generally begin no later than one year from the date the issuer receives the premium. The GAO report suggests income annuities:

• Help protect retirees against the risk of underperforming investments
• Help protect retirees against the risk of outliving their savings (longevity risk)
• Help relieve retirees of the task of managing their investments at older ages when their capacity to do so may be diminished, and
• Provide a base of guaranteed income that may serve as a dependable "cushion" for retirees who might otherwise spend too little for fear of outliving their assets (guarantees are subject to the claims-paying ability of the annuity issuer)

Why income annuities may not work
 
Income annuities aren't for everyone nor do they work in every situation. Particularly, income annuities may not be appropriate for people:

• With predictably shorter-than-normal life expectancies
• Who have limited savings, since the funds used to purchase income annuities generally are not available to cover large, unanticipated expenses
• Who are concerned about income taxes, since the income from annuities purchased with nonqualified funds is typically taxed as ordinary income, whereas some or all of the investment return on liquidated savings in stocks, bonds, or mutual funds may be taxed at lower capital gains or dividend tax rates
• Who want to provide a bequest of their assets at their death

When might an income annuity be appropriate?
 
The GAO study describes examples when an income annuity may be appropriate. In one scenario, the study suggests that a household with a total net wealth of $350,000 to $370,000, of which $170,000 to $190,000 is savings (and which does not have a defined benefit pension plan), should consider purchasing an income annuity with a portion of their savings. Retirees with defined benefit pension plans should consider an income annuity option rather than taking a lump-sum rollover to an IRA. Conversely, an income annuity may not be as useful for households with significantly greater net wealth or those households with appreciably less net wealth.


Proposals to access annuities and increase financial literacy
 
Typically, defined contribution plan sponsors do not offer account holders income annuities as an option. In response, the study makes several recommendations to promote the availability of income annuities for defined contribution plan distributions. These proposals include legislation that would require plan sponsors to offer income annuities as a choice to plan participants, or set income annuities as the default election for plan participants when accessing defined contribution plan benefits. The study also recommends options aimed at improving individuals' financial literacy, particularly concerning the risks and available choices for managing income throughout retirement.


Report recommendations
 
The report seeks to offer options to retirees on how to have an adequate income throughout retirement. Generally, the study suggests that middle-income retirees should consider delaying Social Security retirement benefits at least until full retirement age, consider working longer, draw down savings systematically and strategically (typically at an annual rate of between 3% and 6%), elect an annuity instead of a lump sum withdrawal for employer-sponsored defined benefit plans, and for retirees who don't have a defined benefit plan, purchase an income annuity with some of their savings. To view the report in its entirety, go to (www.gao.gov/new.items/d11400.pdf).

Market Week: August 22nd

MARKET WEEK: AUGUST 22, 2011

The Markets

Equities managed to erase the previous week's losses, only to see those gains vanish once again over the rest of the week on discouraging economic reports. Domestic equities saw their fourth straight week of declines. The small-cap Russell 2000 has now corrected roughly 24% since July 7 (an extended 20% decline is considered bear-market territory). Global markets also suffered; the German DAX lost almost 10% for the week, partly because of figures that showed stalling economic growth there.

Treasuries once again benefitted from all the anxiety. Yields plummeted as investor demand drove prices up. The 10-year yield saw levels not seen in decades, while the 30-year yield plummeted more than 30 basis points. The spread between short-term and long-term Treasuries narrowed as investors were willing to trade off higher yields for the reassurance of U.S. debt. Gold shot up to yet another new record, ending around $1,850.





Last Week's Headlines

Led by raw materials and consumer goods, the nation's industrial output rose 0.9% in July, according to the Federal Reserve, and estimates for May and June were revised upwards. Roughly 77.5% of the nation's industrial capacity was in use, 2.2% more than last July.

However, the Federal Reserve's survey of Philadelphia-region manufacturers during the second week in August showed a 34-point drop. The -30.7 reading is the survey's lowest level since March 2009, though firms said they expect growth over the next six months.

Consumer prices rose 0.5% in July, keeping the consumer inflation rate for the past year at 3.6%. Rebounding gas prices accounted for roughly half of the increase, according to the Bureau of Labor Statistics, while higher food prices (especially dairy and fruit) also were important. Inflation at the wholesale level rose 0.2% in July. However, excluding food and energy, the figure was 0.4%, marking the eighth straight monthly increase.

French President Nicholas Sarkozy and German Chancellor Angela Merkel agreed to establish a council to oversee economic issues affecting the eurozone. They also proposed a tax on all financial transactions and a requirement that all member countries agree to balance their budgets by next summer. However, they declined to support the concept of a eurozone bond backed collectively by the entire European Union. Meanwhile, second-quarter growth in both Germany and France was essentially flat, raising concerns about their ongoing role as the linchpins of the EU economy.

Housing starts slipped 1.5% in July, according to the Commerce Department. However, starts of multifamily buildings rose 6.3% from June and were up 66.7% from a year ago, while single-family home starts were 9.8% higher than in July 2010. Meanwhile, sales of existing homes fell 3.5%, according to the National Association of Realtors®, though sales were 21% higher than a year ago. The NAR said the large number of cancelled contracts was a major factor.

Fitch reaffirmed its AAA rating for U.S. debt. However, the ratings agency said that could change if economic recovery is weaker than expected or if the committee charged with tackling additional deficit reductions fails to reach an agreement.
Standard & Poor's is reportedly under investigation by the Justice Department for allegedly improperly rating mortgage-backed securities prior to the 2008 financial crisis.

Eye on the Week Ahead

Federal Reserve Chairman Ben Bernanke's speech Friday at this year's economic symposium in Jackson Hole, Wyoming, could be of interest; at last year's meeting, he signaled the possibility of QE2. If the initial estimate of 1.3% growth in gross domestic product is substantially revised on Friday, estimates of the potential for a renewed recession could be affected.

Key dates and data releases: new home sales (8/23); durable goods orders (8/24); second estimate of Q2 gross domestic product (8/26).


Data source: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. Equities data reflect price change, not total return.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.