A Correction Around the Corner

Recently, the market has climbed to an all new high. Yet the higher the market goes, the less investors seem to care. One of the main reasons for this is that only about 20 companies of the S & P 500 reached 52 week highs in the market; the lowest number in a year. Furthermore, the benchmark US 10 year note saw a drop in yield of 2.44% last week, which is the lowest in 12 months. So, why is the market at an all time high? How can the market justify this growth? It's the Federal Stimulus along with the government holding down interest rates.

The Federal Stimulus, which exceeds $4 trillion since 2008, continues monthly at $35 billion. This is a huge unnatural catalyst for the market. Granted, the Federal Stimulus has proven successful; however, it is only a short term solution with negative long term effects. The Federal Stimulus can only push the market so far through monetary injections before drastic volatility follows. Investors are well aware of this. Over the last 6 years the market has been quite the roller coaster. Only now we are at the highest point of the roller coaster with nowhere to go but down. In a phone interview with Bloomberg, Hayes Miller, head of multi-asset allocation for Baring Asset Management Inc, said “Breadth is suggesting that the market is stopping. This is not a good starting point for buying equities at this price.” This suggests a correction is around the corner. Citi Group CFO John Gerspach said last week that trading revenue could fall as much as 25% in the second quarter, and JPMorgan Chase & Co. estimated a 20% drop. The question is will the cycle of stimulus continue like it has over the last few years? The evidence seems to point that way. If the market does take a 25% drop, how much Quantitive Easement will the Fed pump into the market to offset the correction? How much will that add to our Federal Deficit, and how much longer can Wall Street ride on the coat tails of Uncle Sam?

Volatility is a trend that we will see for the next several years. Fortunately today, investors have been able to recoup losses over the last decade thanks to Uncle Sam's efforts. However, with a growing Federal Deficit and extreme deflation, volatility will continue. With the market at its highest level in history, there couldn't be a better time to redirect your portfolio to financial guarantees. Now is the perfect time to use the Federal Stimulus to your advantage before it may be to late. Differentiated strategies must be explored to keep financial goals for your portfolio on track. So how do you navigate through a choppy market to achieve retirement goals? You simply trade away the down side of the market with a moderate return, known as annual reset. Annual reset is a concept that requires financial institutions to match deposits into fixed assets on a dollar for dollar basis, as opposed to leveraging assets with ratios as high as 20:1, which cannot bypass volatility. Annual reset will ensure that you can never go backwards on the growth of your portfolio. Truth be told, this strategy has outperformed the market since 2000. Investors and retirees alike are repositioning leveraged assets to products offering annual reset for several benefits, including both lifetime income and exempting themselves from any volatility in the future.

Without financial concepts that use annual reset, how can you ensure your financial goals are met? What many fail to realize is how disastrous a market downturn really is. Let's take a closer look at this. Let's assume for simplistic purposes that the market takes a 50% downturn. If that downturn was followed by an immediate 50% upturn, you are still down 25%. An easier way to see this is to start 4 quarters and take 2 away (50% loss). A 50% gain of $0.50 is $0.75, putting you a quarter short of where you started. So respectively, any loss must be followed by a much higher gain in order to get you back to even. The question is, how many downsides can you endure before you are unable to pull your portfolio above water, let alone achieve your financial goals. Annual reset bypasses this negative event and allows you to only move forward.

With unnatural solutions like the Federal Stimulus, the market will continue to have extreme highs and lows contrary to what the natural numbers represent. A sure way to navigate through these extremes is to trade away all future volatility with moderate upsides. This will ensure that unforeseen events brought on by a struggling economy will not disrupt your personal financial goals.

Total Protection Within a Stimulus Enviornment

Who would’ve thought the DOW Jones could creep above the 14,000 mark? Does this mean that we’re out of the woods and that our economic woes are behind us? Not likely. The numbers never lie, and across the board, several economic indicators are pointing to the contrary. Numbers on unemployment, gross domestic product, and housing, seem to reflect what constitutes a struggling economy, which is not typical of a 14,000 mark. Yet here we are.

Market optimism is stemming from austerity measures or financial bailouts, which can be argued as presenting an illusion of a healthy economy. Currently, Quantitative Easement III (QEIII) allows the Federal Government to pump $35 billion per month into bonds and mortgage backed securities indefinitely, until the unemployment falls below 6.5%, which is something that is easily several years away from happening. Year to date, since 2008, we have spent well over $4 trillion dollars in federal stimulus. This massive amount of federal spending has been necessary in order to battle the greatest volatility has encountered since the Great Depression. Unfortunately, the only weapon available to battle the challenging market conditions is the Federal Reserve’s printing press. Personally, I feel investors have become complacent in regards to the Federal Stimulus being a status quo to the market; a temporary solution at best. However, the last five years have shown us that this is an unlikely trend.

Throughout our global economy, it is no secret that austerity policies totaling several trillion dollars, has been the saving grace to a global meltdown. The numerous bailout measures, courtesy of the central bank, are the only things keeping the Euro from collapsing. Not surprisingly, there are even more drastic measures (other than government printing presses) being put into place, that contradict every known law of economic prosperity. For example, within the last couple of years, Spain instantaneously “erased” billions of dollars of debt obligations off their balance sheet. This was possible through collateralized debt swaps aimed at bettering their market conditions. Domestically, Freddie [Mac] and Fannie [Mae] still continue to struggle with the housing sector even with continuous support from Quantitative Easement III, and our GDP doesn’t even come close to supporting this recent surge in the market. Does this sound like a financial environment worthy of a 14,000 mark? The writing is on the wall. We are in a financial environment where the rules are literally set in opposition. Whether you are for or against austerity measures is insignificant. This is the reality and it is here to stay. The question is how do you protect against an unrealistic complacency in a struggling economy?

One way to protect your money from anticipated volatility is through a concept known as annual reset. Annual reset is a closely regulated concept that has protected hundreds of billions of dollars from volatility since 2001. This is the only financial concept around that can avoid volatility while locking in a portion of the market upside, year in and year out. Annual reset was first launched in the latter part of the 1990s, and has since evolved into a preferred way of business for some of the top financial institutions nationwide. Investors are warming to this concept after seeing some financial products averaging, and exceeding, a 6% [average] rate of return since 2001. One vehicle that has achieved this rate of return while providing total market protection is an indexed universal life (IUL) insurance policy. These over-funded life insurance contracts come equipped with favorable conditions with respect to cash accumulation. This, paired with annual reset, provides a perfect remedy to an unpredictable economy. Furthermore, if properly structured, IUL can include both tax-deferred growth, as well as tax advantaged withdrawals exempt from federal income taxes.

We know that the Federal Reserve has promised to intervene with aggressive austerity measures in order to avoid another financial collapse. What the final toll will be remains to be seen. I am in the opinion that the more we spend, the more we are obligated to repay. Once again, over the last five years, we have printed over $4 trillion dollars just to offset a financial collapse. This amount is over one-third of what the total US deficit was prior to 2008. I see the federal stimulus continuing for several years to come, which will increase this number substantially. Of course, this will not be without consequence. Today, our highest federal tax bracket is at 35%, which is well below the average marginal tax rate of 63% since 1913. An IUL policy can help protect against the threat of rising income taxes by allowing an investor to withdraw funds in the form of a loan against the cash value, exempting a taxable event on the policy’s gains for life. The loan (principle and interest) only becomes payable upon the death of the insured, with taxes then being paid through the cash value and accelerated death benefit of the policy. This strategy gives the investor piece of mind by ensuring that their quality of life will not be hampered by rising federal income taxes.

It is no secret that austerity measures used today are for short-term solutions only aimed at offsetting another financial collapse. Although the market topping the 14,000 mark on the Dow Jones is quite impressive, the past five years have shown us that this rally is not likely to last. The only way to protect your money with a moderate return exempt from all volatility is through vehicles such as IUL that uses annual reset to bypass all future market downturns. Without putting measures in place to protect your long-term retirement or financial goals, your end result could easily prove to be more unpredictable than our bailout ridden global economy.