It has been a tumultuous few weeks around the globe, and our thoughts are with all those affected. Several clients have raised questions about what the economic impact of events might be, and the first column below examines the potential impact of events in the Middle East and Japan.

In the Financial Planning Tip, I discuss the experience Jennifer and I have had in going without cable – and more recently traditional phone service. One thing that I can tell you is that not having the constant chatter of cable news in the background has certainly helped our stress levels. Finally, in the client question of the month, we consider capital gains, and more specifically what you can expect from reporting by custodians like TD Ameritrade in coming years.

As always, we welcome your feedback and if you think friends or family would appreciate this newsletter, please feel free to use the link below to forward it on to them.

Best regards,

Micah Porter, CFA, CFP®


The Economic Impact of Recent Global Events

Micah Porter, CFA, CFP®

Although the U.S. economy has shown signs of further strength over the last few weeks, world events have eclipsed happenings here at home. From the political unrest in the Mideast to the earthquake and subsequent tsunami in Japan, there has been no shortage of tumult. The human impact has been stark and our thoughts are with those suffering. Yet we’d be remiss if we didn’t consider the economic impact of all that is going on.

If we look to Japan, the most recent comparable event was the 1995 earthquake in Kobe. The estimated cost of rebuilding was more than $110 billion, and the country was able to absorb that cost with no noticeable impact to longer- term economic growth. This is in line with history, which has shown that countries do recover from disaster, and the actual rebuilding itself can prove stimulative to the economy. There will undoubtedly be short-term shortages in some industries as plants come back online, but in general, the most heavily impacted provinces were those that were least industrialized.

Indirect impacts may well prove a greater concern with this disaster. Japan is already heavily indebted, so funding the rebuilding will increase strain on an already overburdened budget. This could lead to higher interest rates in Japan and elsewhere. Furthermore, economic output will be impacted in the short to medium term as rebuilding is completed, and this decrease provides a headwind in the ongoing global economic recovery.

The economic impact of events in the Middle East is certainly easier to interpret – it’s all about the supply of oil. If there’s any question that ongoing production will be endangered, prices will increase and what is spent on oil and gas can’t be spent elsewhere. Furthermore, persistently high energy prices can stoke inflation. If we look to countries in the Mideast in turmoil, Libya appears to be by far in the most precarious position. However, Libya produces about 2% of the world’s oil. By far the largest producer is Saudi Arabia, and because of that, what’s occurring in Bahrain bears close watching.

Bahrain has long had close ties with Saudi Arabia, and like Saudi, there is a significant Shia population governed by Sunni leaders. While the unrest in Bahrain does not appear to have been driven by sectarian concerns, clearly the Saudis felt concerned enough to militarily intervene. While there haven’t been any clear signs that the unrest could spread to Saudi Arabia, were that to happen oil prices would undoubtedly be impacted.

As counterbalance to possible inflation, higher interest rates and slower growth from international events, the U.S. economic data continues to show an economy on the mend. Recent manufacturing data and unemployment data have pointed towards further improvement, although there is a long way to go before unemployment reaches a normal level. Given all of the above, we continue to think that a conservative portfolio position is warranted although that may change in coming weeks.


Financial Planning Tip – Cutting the Cord

Micah Porter, CFA, CFP®

The easiest way to save money is to stop spending on those things you won’t miss, so you can free up cash for other things. A little over a year ago, after another night of scanning a few hundred channels and finding nothing to watch, Jennifer and I decided that we’d had it with cable. There were only a couple of shows we watched, and increasingly those shows were available on the Internet. They might not be available the same night they were broadcast, but that didn’t strike us as a problem.

We stream movies from Netflix, and most of our TV shows are available on either Hulu or Netflix. We can also download shows and movies on a pay-per-view basis from iTunes. Live sports is hard to find on-line, but that’s slowly changing as both the NBA and MLB have begun offering online subscriptions to watch games live.

We’ve also gotten rid of traditional phone service and we use a service called Ooma that allows us to use our Internet connection instead. It provides two lines along with advanced functionality that has been surprisingly effective at blocking telemarketers. The total cost for Ooma is about $12 per month, and although my past experience with online phone service has been spotty, I’ve got no complaints at this time. If we lose power, we’ll lose phone service, but we’ve set Ooma up to route to the cell phone if the network goes down.

The key to all of the above is having a high bandwidth and a reliable Internet connection. If you live in the city or suburbs, you might be in luck. While it’s hard to know how fast is fast enough, you might try streaming shows from Hulu and Netflix, or test out Ooma or another VoIP service before fully cutting the cord. If, after a few months you find the connection is fast and reliable enough to operate without glitches, you’ll likely find cutting the cord as pain-free as we’ve found it to be.


Client Question of the Month – Brokerage Reporting on Basis
Micah Porter, CFA, CFP®

Why Doesn’t TD Ameritrade report basis of investment sold in taxable accounts?

Given that we’re well into tax season, you’re probably all too familiar with the information your accountant needs to complete your taxes. For taxable accounts, most of the time a 1099 is needed to report taxable income and dividends, along with reporting sales made in the account. However, the 1099s issued by TD Ameritrade don’t indicate cost basis – or what you initially paid for the security – and TD doesn’t issue a separate report showing taxable gains and losses.

There are a couple of different reasons for this, including the complexity of tracking basis, and the fact that historically for holdings transferring in basis wasn’t available. We do track basis and we issue a report as part of the year-end package that you can take to your accountant.

However, moving forward TD – and all other brokers – will be required by recently passed legislation to track basis as well. Tracking will be phased in over the next 2 years, and will cover securities purchased on or after the phase in dates. You’ll still need our reports for securities purchased prior to those dates, but for new purchases you’ll have two sources to reference if you need to determine your basis.