Brexit Update

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, QPFC.

Remember Brexit? Of course you do. Many short-term traders thought the sky was falling when British voters unexpectedly decided to opt their country out of the European Union. But the process of extricating the British economy from the complexities of European membership has been deliberate and thoughtful—on both sides.

Recently, the UK's new Brexit minister, David Davis, told reporters that the government plans to examine whether the country will continue to honor the customs agreements it has in place with European nations, or not, before it will invoke the Article 50 clause of the EU agreement. You can understand the complexity of the Brexit ministry's job (sorting through how it wants to restructure economic relations between England and the Eurozone) by the fact that the ministry currently employs 180 economists and other staff in London, and has access to 120 officials in Brussels. Don't expect them to do anything rash.

If Britain decides to opt out of some or all of the EU customs agreements, it will be free to sign new trade agreements with the U.S., China, Japan and other nations, but could face additional customs duties and tariffs from its trading partners across the English Channel.

Davis also announced that there would not be a second vote to overturn the first one, saying that those who voted 'remain' have accepted the result.



Reason to Panic?

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, QPFC.

On Friday, the S&P 500 index fell 2.4%, while the Dow Jones Industrial Average fell 2.1%. This was the first 1% sell-off since June, and the press reports are describing it as a full-blown market panic.

What's going on? Efforts to trace the reason why quick-twitch traders scattered for the hills on Friday turned up two suspects. The first was Boston Federal Reserve President Eric Rosengren, who sits at the table of Fed policy makers who decide when (and how much) to raise the Federal Funds rate. On Friday, he announced that there was a "reasonable case" for raising interest rates in the U.S. economy. According to a number of observers, traders had previously believed there was a 12% chance of a September rate hike by the Fed; now, they think there's a 24% chance that the rates will go up after the Fed's September 21-22 meeting.

If the Fed decides the economy is healthy enough to sustain another rise in interest rates—from rates that are still at historic lows—why would that be bad for stocks? Any rise in bond rates would make bond investments more attractive compared with stocks, and therefore might entice some investors to sell stocks and buy bonds. However, with dividends from the S&P 500 stocks averaging 2.09%, compared with a 1.67% yield from 10-year Treasury bonds, this might not be a money-making trade.

If the possibility of a 0.25% rise in short-term interest rates doesn't send you into a panic, maybe a pronouncement by bond guru Jeffrey Gundlach, of DoubleLine Capital Management, will make you quiver. Gundlach's exact words, which are said to have helped send Friday's markets into a tailspin, were: "Interest rates have bottomed. They may not rise in the near term as I've talked about for years (emphasis added).  But I think it's the beginning of something, and you're supposed to be defensive."

Short-term traders appear to have decided that Gundlach was telling them to retreat to the sidelines, and some have speculated that a small exodus caused automatic program trading—that is, money management algorithms that are programmed to sell stocks whenever they sense that there are others selling. After the computers had taken the market down by 1%, human investors noticed and began selling.

For seasoned investors, a 2% drop after a very long market calm simply means a return to normal volatility. This is generally good news for investors, because volatility has historically provided more upside than downside, and because these occasional downdrafts provide a chance to add to your stock holdings at bargain prices.

That doesn't, of course, mean that we know what will happen when the exchanges open back up on Monday, or whether the trend will be up or down next week or the remainder of the month. Nor do we know whether the Fed will raise rates in late September, or how THAT will affect the market.

All we can say with certainty is that there have been quite a number of temporary panics during the bull market that started in March 2009, and selling out at any of them would have been a mistake. The U.S. economy is showing no sign of collapse, job creation is stable and a rise in interest rates from near-negative levels would probably be good for long-term economic growth. Panic is seldom a good recipe for making money in the markets, and our best guess is that Friday will prove to have been no exception.



Good News About Global Warming

Written by Gerald E Gasber, CFP®, CIMA®, QPFC & Bob Veres.

Chances are you've felt a bit discouraged by the global warning reports. On the one hand, they say that our world is in for trouble unless we make significant changes in how our global economy produces the energy it needs to function. On the other, they tell us that even if we shift totally over to clean energy tomorrow (not likely), the troubling warming trend—and polar ice melts, flooding of coastal areas, and increasing droughts, hurricanes and severe winters—will continue to accelerate for the next 30-50 years. The damage has already been done.

Or has it? The ideal solution would not just reduce carbon dioxide and other greenhouse gas emissions, but remove some of what has already been pumped into the atmosphere.

There are two interesting developments along this front. First, researchers from Columbia University's Lamont-Doherty Earth Observatory in Iceland are perfecting a technique which would mix carbon dioxide captured from the smoke stacks of a power plant with water and hydrogen sulfide, and then inject the mixture into basalt rock—a substance which makes up about 70% of the Earth's crust. The result: 95% of the carbon solidifies into stone, due to a reaction between the various ingredients. In effect, carbon dioxide has been turned to stone and stored away securely—more or less forever. Currently, in Iceland, the local energy utility has been pumping 5,000 tons of carbon dioxide a year into underground rock formations.

Of course, that's a small drop in a very large bucket: currently our various industrial processes release more than 30 billion tons of carbon dioxide into the atmosphere each year. But if each power plant had its own recapture facility, that figure would come down dramatically.

Meanwhile, a company called Global Thermostat is testing a carbon capture unit in Silicon Valley that could suck carbon dioxide directly out of the air, reducing our global carbon footprint and potentially reversing greenhouse gas concentrations in the atmosphere.

The unit, which looks like a giant dehumidifier, would be attached to a power plant or factory, and be powered by the residual heat of the facility itself. Large pipes would bring the power plant's emissions into the unit, while external intakes would suck in the outside air. The carbon is captured from both sources, rendering the plants "carbon negative," reducing carbon dioxide in the nearby atmosphere—and cranking out a pure enough form of carbon to be sold at a profit for industrial uses, including plastics, manufacturing, biofertilizers, biofuels and soda pop factories.

The test unit can extract up to 10,000 tons of carbon per year, which means the world would need roughly 3 million of them to offset the current level of emissions, and many more if we want to start scrubbing the atmosphere and addressing those scary future projections. The company envisions attaching these units to power plants, and also creating farms of them in remote locations to start the long, difficult process of undoing the environmental damage of our energy economy.



Medicare Open Enrollment

Written by Gerald E Gasber, CFP®, CIMA®, QPFC.

If you're like most people, the information you receive about Medicare through the mail, from insurance agents, or talking with friends, family, and co-workers, is confusing! And the abundance of conflicting information can leave you anxious, worrying that you'll do the wrong thing like missing a key enrollment period or incurring hefty penalties.  


- A co-worker says I should wait until Open Enrollment in the fall to enroll
- A brochure I received in the mail says I HAVE to enroll in Medicare at age 65
- My neighbor says if I have health insurance through my employer, I don't need to enroll in Medicare
- A relative says I don't need to enroll in Medicare Part D if I'm not on any medications now, and that I can enroll in a Part D at any time
- My best friend says to just enroll in a cheap plan now since I'm healthy, that I can always change to a better plan during Open Enrollment

One area of confusion for many people is the various enrollment periods for Medicare. Very few people are clear on which enrollment period is for what situation, and what the implications are if you miss the relevant enrollment period.

Because Medicare Open Enrollment is approaching, we decided this would be a good time to provide you with the information you need regarding this enrollment period.

Medicare Open Enrollment occurs every year from October 15th through December 7th. The term "Open Enrollment" seems to imply that anyone can enroll in Medicare at this time. In reality, Open Enrollment is for making CHANGES to your existing Medicare coverage - primarily your Medicare Advantage Plan (or Medicare Part C plan), or your Medicare Part D prescription drug plan.

Here is what you can do:

- Switch from one Medicare Advantage plan to another Medicare Advantage plan
- Enroll in a Medicare Part D prescription drug plan
- Switch from one Medicare Part D prescription drug plan to another
- Switch from an Original Medicare supplement plan to a Medicare Advantage plan

When you do make a change in your coverage, the new plan will be effective January 1.

You can NOT change from a Medicare Advantage plan to an Original Medicare supplement plan during Open Enrollment. You can only do this from January 1st through February 14th every year. And if you've been on your Medicare Advantage plan for 12 months or longer, you MAY NOT QUALIFY for an Original Medicare supplement plan if you have health issues. This is one reason the decisions you make when you first become Medicare eligible are so important- you may not be able to make changes in the future.

Why would you want to make changes to your coverage? In most cases people change their plans due to an increase in the premium of their current plan, or an increase in the copay amounts. You may also want to change from one Advantage plan to another because the network of providers has changed and the group of doctors you are currently seeing has dropped out of your plan's network. This also applies to Medicare Part D plans- the copays may go up for your medications, or perhaps you are on new medications which are very expensive on your current plan; or the pharmacy you like is no longer in the plan's network.

To make a change in your Medicare coverage you simply enroll in the Medicare Advantage plan or Part D Prescription plan you want, and you will automatically be dropped from your current plan.

So who should you listen to? Our firm has retained the services of an expert who specializes in this area of planning. Eileen Hamm has the experience and knowledge to provide you with the advice, guidance, and recommendations that will get you through the confusing world of Medicare. Since she does not sell any Medicare products, her advice is objective with no underlying pressure to "sell you." We pay her firm a retainer fee, as a value-added benefit to you for being our client so there's NO charge to you. If you'd like to take advantage of this service, contact us and we'll make an introduction.


Regs to the Money Market Fund's Rescue?

Written by Gerald E Gasber, CFP®, CIMA®, QPFC & Bob Veres.

The world of money market funds changed forever back in 2008, when an investment vehicle called the Reserve Primary Fund loaded up on loan obligations backed by Lehman Brothers. Lehman famously went under, and the fund "broke the buck," meaning that when Lehman was unable to pay back its loans, the value of a share of the Reserve Primary Fund dipped under $1.

This was the first time many investors realized that money market funds were not risk-free. Many panicked, causing a run on other money market instruments, and overall the event added another unhappy twist to the financial crisis.

Fast forward to the near future: October 14, 2016, the date when new protective regulations implemented by the Securities and Exchange Commission will go into effect. Yes, the government wheels creak along slowly.

What regulations? The new regulations make a distinction between institutional and retail money market funds. Prime and municipal/tax-exempt money market funds whose investors are institutions are required to move from a fixed $1.00 share price to a floating share price/NAV (net asset value).

U.S. government money market funds will be permitted to retain the stable $1.00 per share NAV and may be offered to retail investors or institutional investors. In order to be considered a government fund, a portfolio is required to invest at least 99.5% of its total assets in cash, government securities, and/or repurchase agreements that are collateralized solely by government securities or cash.

All retail money market funds will also maintain a stable $1.00 share price. In order to be considered a retail fund, the fund must have policies and procedures reasonably designed to limit beneficial ownership to natural persons (for example, accounts associated with social security numbers), including individual beneficiaries of certain trusts and participants in certain tax-deferred accounts, such as defined contribution plans.

Liquidity Fees and Redemption Gates

The SEC's amendments also include new rules about liquidity fees and gates (temporary suspension of redemptions) allowing a fund's board of directors to directly address runs on a fund. If deemed appropriate by the fund's board, fees and gates could be imposed on funds whose portfolios fail to meet certain liquidity thresholds.

• If a fund's weekly liquid assets fall below 10% of total assets, nongovernment funds are required to impose a 1% liquidity fee, unless the board determines that it would not be in the fund's best interest or that a higher (up to 2%) or lower fee is more appropriate.
• If a fund's weekly liquid assets fall below 30% of its total assets, the board may impose a liquidity fee of up to 2%. Additionally, the board may suspend redemptions for up to 10 business days in a 90-day period.

The bottom line is that retail investors will still be able to put $1 into a money market fund and expect to get $1 back out again when they sell shares—with, perhaps, a tiny bit more confidence a few months from now.