Strategies
Fed Says Slight Rise In Interest Rates Is Sign QE Stimulus Is Working
Thursday, February 28, 2013 07:14

Tags: economic indicators | Economic Outlook | economy

Fed chairman Ben Bernanke testified to the House Financial Services Committee on Wednesday that interest rates have increased slightly as a sign that the economy is recovering.
 
He said it is a sign that the Fed’s stimulus program is working and that improvements in the auto and housing industries are further proof. The Fed chief testifies to Congress on a semi-annual basis.

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US durable goods orders excluding transportation gear rose the most in over a year and existing home sales rose more than expected.
 
This sent the stock market to another five year high, the second in as many days, on greater optimism about the economy.
 
The S&P 500 index also achieved a five-year high on February 19 on an improved consumer spending report.
 
Bernanke said the Fed would soon conduct a review of its exit strategy from its current bond-purchasing program.
 
The existing strategy calls for selling assets and raising benchmark interest rates. Another option would be to hold the securities a bit longer until they mature.

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Junk Bond Issuers Join Crowd Warning Of Interest Rate Risk On Bonds
Thursday, February 28, 2013 07:11

Tags: client education | Economic Outlook | markets

Now, even junk bond issuers are warning that prices on the bonds will drop when interest rates rise.

 
They say their job is to properly structure deals for companies that can fulfill the obligations on their debt and perform well. Interest rate risk is out of their hands.

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Underwriting fees for junk bonds are almost three times the fees for higher grade debt.
 
Simultaneously, banks are warning that when the Fed’s bond-buying spree dries up, prices will likely retreat.
 
Banks have underwritten over $89.6 billion worth of debt this year, 36% more than by this point in 2012.
 
Last year was a record one for junk-bond issuance, resulting in $433 billion in sales. Junk mutual funds and ETFs saw inflows of $33 billion, 55% more than in 2011.
 
Investors hungry for income in an historically low interest rate environment drove the push into junk bonds.
 
The risks in junk bonds in a recovering economic environment are less from companies’ inability to pay than in the fact that a three-year cycle in historically low interest rates must at some
point reverse itself.
 
This is no less true of credit-worthy bonds but the hit to principal values will be faster and larger to lesser credits than they will likely be to highly rated bonds.
 
This time, the market is healthier, say analysts. Most new issues are from companies capturing lower interest rates through refinancings.
 
Many analysts are recommending short maturities in anticipation that long-term interest rates will begin to rise before the Fed starts raising rates.
 
The long end of the curve could get out of control and could happen sooner than many expect.

 

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Normal Client Attrition Is A Fact Of Life But How Do You Handle Actions By Your Firm That Drives Them Away?
Thursday, February 28, 2013 07:02

Tags: Advisor businesses | business strategy | client retention

Client attrition happens. It just does. People move away, pass away, or move their accounts to family members or close friends who have become advisors, or move because of a divorce.
 
Most advisors accept this and realize they have to constantly be filling the pipeline to counter the small amount of shrinkage that naturally occurs in their books.
 
But when advisors lose clients because of an action by their firms, it’s quite another thing. Anger.
 
That’s the word for it.

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Headhunter Danny Sarch meets with advisors all over the country and hears horror stories about cross-selling and about managers who just don’t seem to care.
 
Many firms today have separate divisions that may offer credit services, mortgate-loan origination, or trust services.
 
They encourage—sometimes push—advisors to make these opportunities available to their clients.
 
Theoretically, it’s not a bad idea. Not offering such services could mean leaving a lot of money on the table.
 
But when the client has a bad experience in these other service areas, it reflects primarily on the advisor, not the firm.
 
The old days had their own horror stories. Firms would have designated days that advisors were supposed to show a specific new offering to their clients.
 
If the new product went down in value after it hit the market, it was not inconceivable to hear a manager say, ‘what do you care?’
 
Then there’s always the possibility that a competing firm will offer a better credit or mortgage rate or package and make taking advantage of that better rate conditional upon the client
moving his or her entire account.
 
Sarch says these are the times when advisors call him. How does your firm stack up in the consistency of its service offerings?
 
Even if you are part of a large RIA, do the ancillary services provided by your firm match the client experience you pride yourself in offering? At what point would you consider moving to another firm based on client experience?

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Risk Averse Clients May Find Comfort In Four Dividend-Paying Stocks That Have Been Steady For Decades
Thursday, February 28, 2013 06:58

Tags: client satisfaction | investment strategies | markets

With analysts predicting greater volatility in March because of spending cuts due to hit March 1 and the resurrected uncertainty in Europe, investors may find a bit of peace in four tried-and-true dividend-paying stocks.
 
The companies have paid consistent dividends for decades and may be exactly what some clients are looking for—a boring investment they don’t have to worry about.

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Investors take comfort in a cash dividend that has been consistently been paid out. Either the company has the money or it doesn’t.
 
Dupont, Coca-Cola, Sherwin Williams, and Archer Daniels Midland are the four magic names.
 
Dupont has paid a dividend each quarter since 1904.
 
Coke has paid dividends for 51 years straight and has raised its dividend every year since 1963.
 
Sherwin Williams began paying dividends in 1885 and has increased its dividend for 35 of the years since.
 
Archer Daniels was founded in 1923 and has paid a dividend every quarter since 1932.
 
They may not have a lot of sizzle but slow and steady can be pretty attractive in the midst of a rough-and-tumble economic recovery, volatile political uncertainty, and continued fallout from the global sovereign debt crisis.

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Durable Goods Orders Fall But Show Underlying Strength Excluding Defense And Aircraft
Thursday, February 28, 2013 06:55

Tags: economic indicators | Economic Outlook | economy

Durable goods orders fell primarily on the sharpest decline in over a decade in Pentagon orders for long-lasting manufactured products.
 
Overall orders fell to 5.2% in January to a seasonally adjusted $216.98 billion. Defense spending dropped 69.5% and demand for civilian aircraft fell 34%, all part of a routine order slowdown following a 3.7% increase in orders in December.

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The report from the Commerce Department did show underlying strength outside of the defense and aircraft categories.
 
So-called non-defense capital goods orders excluding aircraft rose 6.3%, the best increase in over a year that is also reflective of increased business confidence.
 
New orders for machinery rose 13.5%, the largest increase since May 2010. The decline in defense capital goods orders was the largest since July 2000.
 
Spending for defense doubled in December 2012 in preparation of the steep cuts that were to occur as part of the fiscal cliff. As a last minute agreement was reached to avoid the worst tax hikes, defense cuts were postponed until March 1.
 
The significant drop in civilian aircraft was due to long-term planning in the industry instead of fears over the Boeing Dreamliner, which has had problems with lithium-ion batteries.
 
The Dreamliner’s issues did have an effect on Boeing. The company received only two orders for aircraft in January compared to 183 in December and 164 so far in February.

 

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