Condor Capital - Investment Advisor

Welcome to the September 2011 issue of Condor Monthly!

Please continue below to view the "From the Portfolio Manager" and "Financial Planning Corner" segments in this month's issue.

From the Portfolio Manager

Pessimism seems overdone

Recent negative economic data has struck fear in the markets, causing volatile swings higher and lower. With the media focusing on the negative, it is difficult to find news that is reassuring. Below is a list of some interesting facts that demonstrate that the pessimism may be overdone.

Economy

The Conference Board’s Leading Economic Indicator Index is up 6.2% year-over-year
As a percentage of GDP, the federal government was in substantially more debt after World War II than it is today (The Motley Fool)
The Fed has committed to its zero interest rate policy for 2 more years (this is an ideal environment for stocks and bonds)
Citigroup Economic Surprise Index continues to indicate some economic improvement
Although below 2%, U.S. GDP growth is positive
Slowdowns are normal and shouldn’t be viewed as a sign of impending recession

Markets

Daily Sentiment Index reached a mere 4% bullish for the S&P 500…the lowest since the March 2009 bottom at 2% (since 1987, this survey has only been below 5% 22 times, or 0.35% of the time) (Fidelity Investments)
S&P 500 is trading at an earnings yield of 8.4% and a forward P/E of 11.2 times, cheap by historical standards; long-term average is closer to 15 times
The market has priced in something far worse than a mid-summer slowdown, so if that is all we get, stocks and credit are a bargain (Fidelity Investments)
Despite average intra-year drops of 14.3%, annual returns were positive in 24 of 31 years since 1980, suggesting that the current correction is a normal occurrence. (Fidelity Investments)
$10.2 billion…amount raised in private equity funds dedicated to emerging markets in the 1^st quarter of 2011, 43% of what was raised in all of 2010. (Emerging Market Private Equity Association)
Presidential Cycle points to a strong year

Corporations

Cash balances held by S&P 500 companies reached $963 billion at the end of the first quarter, an all-time high (The Bulletin)
Analysts expect corporate profits for the S&P 500 to rise 18% in 2011 and 14% in 2012
More than 75% of companies in the S&P 500 Index have exceeded earnings estimates for the second quarter, with total income beating projections by 5.2%
U.S. companies bought $174 billion in foreign assets in 2011 (Bloomberg Businessweek)
Total foreign direct investment will hit the prerecession level later this year, and for China…another record (Kiplinger)

Consumer

Retail sales have been strong despite remaining unchanged in August. July retail sales rose 0.5% and The Johnson Redbook, which monitors retail sales trends, was up 4.7% (CNBC)
Oil prices have come down, which puts more money in the consumers’ pockets
Global wealth increased 8% in 2010 (Boston Consulting Group)
Percentage of employees reporting high financial stress dropped to 21% from 32% in 2010 and 34% in 2009 (Financial Finesse)
Average vehicle on the road today is more than 10 years old and buyers who have delayed purchases seem finally ready to open their wallets with a slew of new or updated models for 2012, plus financial incentives to clear out 2011 stock (Kiplinger)
Today’s personal savings rate is 6 times higher than it was in 2005 (The Motley Fool)
American household debt is now the lowest since the early 1990s (The Motley Fool)

Extra

“Wall Street indices have predicted nine out of the last five recessions.” –Paul Samuelson

Financial Planning Corner

Don’t Raid Retirement Accounts to Pay for College

College costs have been rising faster than the overall inflation rate for many years. Parents often have difficulty deciding how to save for both their children’s college fund and their own retirement fund. In fact, college has gotten so expensive that many parents have been withdrawing from their retirement accounts to cover the cost. While paying for a child’s college education is important, many financial advisors say that it should not come at the expense of saving for retirement. Where do you draw the line between taking from one to give to the other or even finding a proper balance that benefits both you and your children? Andrew Novick, Esq., CFP®, VP of Client Service at Condor Capital comments on this issue.

The Student Loan Corporation (Sallie Mae) recently completed a new study with the Gallup polling organization that shows 24% of parents would dip into retirement savings to help with their child’s tuition costs. Do you recommend this?

Novick: This is an alarmingly high number and also a sign that families are keeping education a high priority. As a parent, you want to have enough savings to retire comfortably, but at the same time you want to pay for your children’s college education. Saving more money in one area undoubtedly leads to saving less in the other. Once retirement savings are used for other expenses, parents are risking their own future financial security. This is especially true for older parents because there may not be enough time to build back their own savings before they retire. In most cases, a retirement account should not be used to cover non-retirement expenses.

What is the main drawback of raiding an IRA to pay for college?

Novick: Obviously, the biggest disadvantage is the loss of the funds for your own retirement. Once removed, it will probably not be possible to put the money back since the annual IRA contribution limit in 2011 is $5,000 ($6,000 for those 50 years of age or older). Despite the high cost of college, funding retirement is actually much more costly. There are several ways to approach funding college education, such as a scholarship, a student loan, or looking at a lower cost school. The ways to fund retirement are much more limited, so tapping an IRA, which is meant to fund your retirement, should be avoided.

Are there any other disadvantages to using an IRA for college?

Novick: Distributions from a Traditional IRA are generally considered taxable income and will be subject to a 10% early withdrawal penalty if the account owner is under 59½. Younger parents often feel free to tap an IRA to cover higher education expenses because the 10% penalty is waived if used for this purpose, but the distribution is still considered taxable income and is therefore not a tax-efficient approach to paying for college. Distributions from a Roth IRA have similar issues, but only the earnings portion of the distribution is taxable. Additionally, all IRA withdrawals have a negative impact on potential financial aid for the student.

What about using a 401k for college?

Novick: In a 401k situation, parents often discontinue contributions in order to increase their take home pay, which can be used to cover college expenses. Not only are they losing the current income tax benefits of making a 401k contribution and the long-term advantage of tax-deferred growth, but they may also be losing company matching contributions. Alternatively, they may look to borrow from their 401k. I generally feel that the negative features of 401k loans outweigh the positives. Loan repayment must be made through payroll deduction with after-tax dollars, but will eventually be taxed like the original pre-tax 401k balance. Loan interest is not deductible and most plans require the loan to be repaid in 60 days if you lose your job – otherwise the outstanding balance is considered a distribution and will be reported as taxable income subject to a 10% penalty if you are under 59½.

What do you advise as a more effective/appropriate college savings vehicle?

Novick: I prefer Section 529 Savings Plans, which are specifically designed for college savings. Contributions grow on a tax-deferred basis and distributions are tax-free if used for qualified post-secondary education expenses. Some states also offer state tax deductions for contributions or other benefits. While it is certainly possible for the child to receive a scholarship or other types of favorable financial aid, I urge parents to start saving for their children’s college costs early, and using a 529 plan is a great place to start.

Any concluding comments?

Novick: Saving for a child’s college and for retirement are two distinctly different events. Just like planning for retirement, parents need to plan early and start saving for their children’s college education. Ideally, you want to have a successful enough college savings program that you do not have to worry about dipping into your retirement accounts. Parents will need to make some sacrifices in order to save for college, but it is much better than tapping your retirement accounts and damaging your own financial future.