The last couple of years have been tumultuous, the economy taking its toll, and the majority of Americans are looking forward to moving on and putting the recession behind them. 2010 is off to a better start, yet we have suffered a few dips in the past couple of months that have been reminiscent of the depths that we are all looking to forget. It is important to remember that the dips are just that, small divots in the road of recovery, according to those in the seat of knowledge.

Federal Reserve Chairman Ben Bernanke has been quoted as saying, “The economy … appears to be on track to continue to expand through this year and next,” music to many ears. Bernanke has also said that the European debt crisis will have only a “modest” effect on the US economy.

People and businesses have increased spending and the Federal Reserve System has committed to keep interest rates low. The economy is improving. While recovery remains modest and many are anxious to recover at full speed, it is important to remember that slow and steady wins the race.

The risk in bonds – Is there a bubble? Let’s look at the definition of a bubble and see if the current environment fits. Investopedia, which is great website for financial terms, defines a bubble as: expansion followed by a contraction;(yes there has been a large expansion in the bond market); a surge in prices, often more than warranted by the fundamentals (bonds are very expensive right now); at the end of a bubble, resources are moved again, causing prices to deflate (the most likely scenario). This is not a recommendation for those who are properly allocated between stock/bonds to their time horizon to sell off all your bond holdings. This is to make you aware of what is coming and why. 

The risk in bonds Inflows into bond type investments have been setting records. Monies are coming from money markets and stocks. The massive inflows into bonds are not evidence of a well reasoned investment policy decision, but, rather, more of a knee jerk reaction to the economic cycle.

Trim Tabs Research (an independent market research firm) says that for the calendar year 2009—investors liquidated, on net, $35 billion out of equities and they invested, on net, $421 billion in bonds.  Therefore, in 2009, stocks went up dramatically and investors are sold out of stocks and bought heavily into bonds. On February 8^th, 2010, Marilyn Cohen, president of fixed-income money manager Envision Capital, stated an opinion in Forbes Magazine, “It’s simply astonishing. There is a lot of unsophisticated money in bonds now, and I’m not sure investors understand how miserable things can get when the low interest party ends.” Indeed, they have no idea.

Or as we say at our office, friends don’t let friends go from bubble to bubble and therefore permanently wipe out long term wealth.  During our generation we’ve witnessed the tech bubble followed by the real estate bubble and now, unfortunately, the same money will once again buy high and sell low in bonds. Moreover, the presence of a lot of unsophisticated money in any asset class will result in panic selling when that asset class begins its price decline. This always has the effect of magnifying a decline even beyond that which the fundamentals warrant.

You may be asking yourself what will make bonds decline in price.  Answer: inflation and rising interest rates.

Inflation – because the inflows into the bond market happened during a low inflation environment, when inflation goes higher, those bonds will have less value and therefore be priced lower.

The Federal Reserve directly manipulates only the short-term interest rate however, long rates tend to follow short rates. The federal funds rate is currently at zero.  We can’t go lower than zero; we can only go one direction – up.  Again, bonds purchased in a low interest rate environment will have less value when interest rates go up and therefore the price will decline.

What does this mean for the bond market over the next 6 months to a year? All markets try to look forward by typically 6 to 9 months. The Federal Reserve is also forward looking to identify signals of when the economy is heating up. The bond market will be looking for a change in language from the Federal Reserve about easing their accommodative policy towards interest rates.  The signal that rates will start to move up will occur when a change in language from the Fed is heard. Indeed, starting from zero, on the federal funds rate where else could rates go?

There is a cause and effect relationship between interest rates and bond prices.  The cause is rising rates—and the effect is falling bond prices – therefore, it is not even a question of “if” it is a question of “when.” What many investors don’t know is that bonds can go down in price. This really hasn’t happened since the last large Fed tightening of 1993 – 1994, when they took the Federal funds rate from 3% to 6% in less than two years.

For those of you who are properly allocated between cash, stocks and bonds, this will not have a disastrous outcome.  When properly allocated we are not over exposed to parts of the market that are up or down.  We can ride through market movements because the allocation will take advantage of what is up while not being overly exposed to what it down.

We would like to remind you there is no such thing as no risk it’s just which risk. Having a plan and sticking to it has much more upside potential with less risk than following the herd from bubble to bubble.

No matter where you are on your investment journey we are here to help you construct a plan.

Custom Financial Design is located at 4647 North 32^nd Street, Suite B210, Phoenix AZ 85018                          602- 952-5588 or www.cfdaz.com

Rebecca Kennell, CERTIFED FINANICAL PLANNER™ is a Registered Representative and Investment Adviser Representative  with/and offers Securities and Advisory Services through Commonwealth Financial Network ®,Member FINRA, SIPC, a Registered Investment Adviser.

This communication is strictly intended for individuals residing in the states of AL,AZ,CA,DE,IL,NC,OK,PA,TX,VA.  No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services.

Is your portfolio ready for the New Normal? It had better be…read on

There is much discussion today about the New Normal brought on by the economic turmoil of the last year and a half.  “The world is traveling on a bumpy road to a new destination – or what PIMCO has labeled the new normal. The notion of a new normal is increasingly resonating in policy circles and among market practitioners.”  As stated by Dr. El-Erian CEO and co-CIO of PIMCO

The New Normal will most likely include higher inflation (although at this point we are still more concerned about de-inflation). However, the shear amount of liquidity and cash infusion from the Federal government has the potential for leaving us with a “hang over” from this recovery party called inflation.

Higher taxes:  Regardless of your political views there have been policies in place for years that will force the hand of whoever is in the White House.  Between high deficits, lower tax revenue, and increased spending on social safety nets it is hard to see how we can grow the economy fast enough to generate higher tax revenues that will pay down the deficit and pay for the government obligations without increasing the taxation levels.

Higher unemployment lagging for a long period of time is a good possibility.  Today’s employers are getting a tremendous high rate of output per employee.  Technology is moving so fast many jobs will just not be necessary.  So as companies start to bring back workers some just won’t be needed.  Especially for those workers who have not kept up with their industry and its technological changes.

 Our country’s current higher savings rate is a double edged sword.  Yes, it makes for more responsible citizen who will be less likely to over spend but it also affects unemployment.  Dollars sitting in savings accounts are not buying goods and services therefore not driving down unemployment known as the paradox of thrift.

The shifts that have created a New Normal are not necessarily destructive to your portfolio.  Rather it is a time to thoughtfully look at your portfolio, make adjustments to position yourself and take advantage of the many tools available to be in the right place for the New Normal.

If you would like guidance on this journey please contact us. Custom Financial Design is located at 4647 North 32^nd Street, Suite B210, Phoenix AZ 85018 602- 952-5588 or www.cfdaz.com

Rebecca Kennell, CERTIFED FINANICAL PLANNER™ is a Registered Representative and Investment Adviser Representative  with/and offers Securities and Advisory Services through Commonwealth Financial Network ®,Member FINRA, SIPC, a Registered Investment Adviser.

This communication is strictly intended for individuals residing in the states of AL,AZ,CA,DE,IL,NC,OK,PA,TX,VA.  No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services.

Too Far Too Fast? No we are not talking about politics or social media we are talking about the stock market.

Have we gone too far too fast? This seems to be a common investor question. This question concerns the market increase from the lows of March ‘09 to the end of the year which moved up roughly 65%. The 65% increase is not so much irrational exuberance as it is the result of unrealistic gloom from last March. That market was reflecting unreasonable valuations that had many blue chip companies trading below liquidation value. It may feel like to far too fast that way but we shouldn’t invest on our feelings; rather, we invest because we want to accomplish our long term goals of retirement, freedom, and security. In historical context we have not gone too far too fast. We are in the 10th month of a bull market and the S&P 500 index is up 65%. Historically the average bull market has lasted 68 months and has gone up 176%. So rest assured there is still plenty of time to get in. The beginning returns of a bull market typically see the largest increases just moving back to more fair value pricings. If you are waiting for a big pull back to invest, when do you invest? What if the pullback never materializes? The stock market both here and abroad will take breathers now and then but no one knows where and when with exact precision. The best way to ensure participation is to stay invested and the best time to put money in the market is when you have it available. We readily acknowledge there are risks to growth. We are in uncharted territory which puts policy makers in the undesirable position of experimenting. This means there are opportunities for mistakes. But the 14 trillion dollar US economy is just too big to kill even with a variety of policy mistakes. If the economy grows at a conservative rate of 4%, enough health should be provided to the system to start driving down the last part of the recovery which is unemployment. So what is the answer to the question have we gone too far too fast? For politics it depends on which side of the aisle you sit on. For social media it depends on your age For the stock market the answer is no we have not gone too far too fast.

For regulatory purposes, we cannot post or respond to comments or e-mails through this site,This communication is strictly intended for individuals residing in the states of AL,AZ,CA,DE,IL,NC,OK,PA,TX,VA. No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services.

Rebecca Kennell is a Registered Representative and Investment Adviser Representative with/and offers Securities and Advisory Services through Commonwealth Financial Network ®, Member FINRA, SIPC, a Registered Investment Adviser. Custom Financial Design is located at 4647 North 32nd Street, Suite B210, Phoenix AZ 85018 (602) 952-5588

Boat loads of cash: The chart below shows U.S. corporate borrowing as a percentage of GDP and cash balance as a percentage of income. Corporate borrowing is at historic lows and cash is at historic highs. Given the stark difference to the frantic reminders of the overleveraged government, banking system and the consumer, one would think we are on two different planets.

The overleveraged story is constantly in the news and due to the fact that bad news makes good copy, the cash rich group is hardly ever mentioned.  The last time corporate borrowing was this low Paula Abdul had a hit in the top ten and the time before that Nat King Cole had a top hit.

Although the government has managed its budget like an out of control shopaholic, U.S. Corporations have done a stellar job of managing their finances with near historic discipline.  American corporations are as flush with cash and as flexible as they have been in nearly 60 years.  One could be a bear on U.S. corporate stocks if that is what you are determined to do but to bet the farm against equities, one would have to conclude that the cash available will not find any better opportunities than the current return on cash (which is below 1%).    One would have to conclude that the same smart managers who accomplished this disciplined amazing horde of cash can’t find anything smart to do with it.

However, if you do believe they are smart enough to find opportunities with this much cash they can do pretty much anything they want.  They can acquire opportunities for cash, buy back their own stock, or raise dividends; they are already practicing the latter two.  To bet against this opportunity seems like a long shot to this Advisor.

For regulatory purposes, we cannot post or respond to comments or e-mails through this site,

This communication is strictly intended for individuals residing in the states of AL,AZ,CA,DE,IL,NC,OK,PA,TX,VA.  No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services.

Rebecca Kennell is a Registered Representative and Investment Adviser Representative with/and offers Securities and Advisory Services through Commonwealth Financial Network ®,

Member FINRA, SIPC, a Registered Investment Adviser.  Custom Financial Design is located at 4647 North 32^nd Street, Suite B210, Phoenix AZ 85018 (602) 952-5588