Weekly Economic Commentary

What’s Missing?

Economics and central bank policy will most likely play second fiddle to the ongoing debt ceiling debate in the United States, the fiscal woes in Europe, and the heart of the second quarter earnings reporting season for S&P 500 companies. Housing data (homebuilder sentiment, housing starts, building permits, existing and pending home sales) will dominate the week, but the key report of the week may very well be the July reading of the Philadelphia Fed manufacturing index. Overseas, data on June consumer spending in Japan and July manufacturing in China will draw the most attention from market participants. It is a relatively quiet week for the Federal Reserve, with only a few speakers on the docket. Meanwhile the central banks in Brazil, Canada, India and South Africa meet this week, with only Brazil poised to raise rates. Indeed, many overseas central banks may now be much closer to the end of their tightening cycles than they were in the early part of 2011.

The Great Recession ended over two years ago and yet, economic growth remains sluggish, the labor market is still moribund, and consumer confidence has barely budged since June of 2009. So what’s missing? The answer of course, is in the question: The recovery is missing growth, and jobs and confidence, but why? The section below briefly examines how we got here (i.e. two years into the recovery) and what makes this recovery “different” from prior economic recoveries. Our answers may surprise you.

In testimony to Congress last week (July 11 – 15), Federal Reserve Chairman Ben Bernanke noted that although the economy was growing, and expected to continue to grow in the coming quarters, headwinds to growth were prevalent. The headwinds noted by Bernanke included the following:

·         Slow growth in consumer spending, even after accounting for the effects of higher food and energy prices

·         The continuing depressed condition of the housing sector

·         Still-limited access to credit for some households and small businesses

·         Fiscal tightening at all levels of government.

In prior public appearances over the past few months, Bernanke, in addition to mentioning temporary factors—the earthquake and Tsunami in Japan and its impact on the global supply chains, severe weather and higher energy prices—has cited “weakness in the financial sector” and “balance sheet and deleveraging issues” as longer-term issues that may be impacting the recovery.

While consumers have “hung in there” as we expected at the beginning of 2011 (see 2011 Outlook publication), the slow labor market and ongoing repair of consumer balance sheets (i.e. consumers are paying down debt and saving, along with doing a little spending) has clearly limited the consumers’ influence on the recovery. Through the first seven quarters of the recovery (the second quarter of 2009 through the first quarter of 2011), consumer spending’s contribution to overall real domestic product (GDP) growth has been 11 percentage points, which sounds great considering that consumer spending accounts for two-thirds of GDP. But the consumer’s contribution to GDP growth in this recovery pales when compared to the recoveries following the mild 1990 – 91 and 2001 recessions, and is not even in the same league with the performance of the consumer following the severe 1973 – 75 and 1981 – 82 recessions.

Contribution to GDP Growth Over the First Seven Quarters of Recovery

(In Percentage Points of GDP Growth)

                             Recovery             Recovery            Recovery              Recovery             Recovery

                             From Great           From 2001           From 1990-91       From 1981-82       From 1973-75

                             Recession            Recession           Recession            Recession            Recession

Consumer              11.0                        13.3                        15.4                        24.7                        18.9

Spending

Housing                 -0.3                         3.0                          3.0                          7.3                          6.2

State & Local        -1.5                          0.8                          1.4                          2.2                          0.2

Government

Spending

Source: Haver 07/18/11

On average, during the first seven quarters of the economic recovery following the two mild recessions (1990 – 91 and 2001), consumer spending contributed around 14 percentage points to growth. In the similar period following the severe recessions (1973 – 75 and 1981 – 82), consumer spending contributed around 22 percentage points to growth. Tepid real income growth which, in turn, is a result of tepid job growth, takes most of the blame here during the current recovery, along with the aforementioned balance sheet repair. Looking ahead, the consumer-related headwinds are likely to persist, keeping a lid on spending and consumer confidence. Our forecast remains that the consumer will continue to “hang in there” but will not be the driver of economic growth it was during similar stages of prior recoveries.

Turning now to housing, over the first seven quarters of the current recovery, housing has been a net drag on overall GDP growth, marking the first time in the post-WWII era that housing has not made a contribution to overall economic growth this far into a recovery. On average, during the economic recoveries following mild recessions, housing contributed three percentage points to GDP growth, and that figure is closer to seven percentage points in recoveries from severe recessions. As one might expect, the weakness in housing in this recovery has had a major impact on employment in the construction industry.

Construction employment has declined at a 3.7% annualized pace since June 2009, while in the recoveries from the severe recessions in the 70s and 80s, construction employment at this point in the cycle had increased by 4.0%. Looking ahead, housing is likely to continue to bounce along the bottom, not getting any worse, but not getting any better either.

A large overhang of unsold existing homes—officially around four million, but there are another two million or so existing homes in the so-called “shadow inventory” (bank-owned houses mired in the foreclosure pipeline) —continues to be the largest impediment to an improved housing market, although tighter lending standards (relative to the 2002 – 2006 boom years) and a tepid labor market are also helping to restrain housing. On the plus side, housing affordability (the ability of a family with the median income to afford the payment on the median priced house) is at an all-time high, and banks are becoming more willing to lend in this sector. There is a ton of housing-related data due out this week for June and July that the market will continue to monitor to assess the health of this small, but important segment of the economy.

Since WWII, state and local government spending and employment has been a reliable source of economic growth at virtually all points in the business cycle. But as noted last week by Fed Chairman Bernanke (and often by LPL Financial Research in recent months) state and local governments have been an unprecedented impediment to growth and employment in this recovery.

For the first time since WWII, state and local government spending has not added to growth over the first seven quarters of an economic recovery. In fact, state and local government spending has subtracted one and a half percentage points from growth over the past two years, and state and local government employment has contracted at a 1.5% annualized rate over that time. In contrast, state and local government spending has added around one full percentage point to growth over the first seven quarters of the prior four economic recoveries, while adding jobs at a 1.5% annualized rate. Looking ahead, the best case would be that state and local government’s contribution to GDP growth stabilizes, and that the job losses seen in the sector continue at the current pace (around 15,000 to 20,000 per month) for the foreseeable future, as states and municipalities of all sizes continue to struggle with too much spending and not enough revenue.

Of course, the lack of contribution from state and local government and housing, along with the historically low contribution from the consumer at this stage of the recovery, has left the heaving lifting to the export sector, inventory accumulation, business spending and, of course, federal government spending. Three of the four of the drivers of growth thus far in the recovery—business capital spending, exports, and inventory accumulation—appear likely to continue, while federal government spending will likely fade as budget cuts at the federal level loom on the horizon.

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IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

Stock investing involves risk including loss of principal.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is notan affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #746685 (Exp. 07/12)

Weekly Economic Commentary

A Confidence Game

Data on inflation, the consumer, and the manufacturing sector in the United States all will compete for attention this week with the latest round of debt ceiling talks in Washington, the Chinese economic data for June, and the start of the Q2 2011 earnings reporting season for most S&P 500 companies. The Federal Reserve (Fed) will also join the mix this week, as they release the minutes of the June 21 – 22 Federal Open Market Committee (FOMC) meeting and Fed Chairman Ben Bernanke will deliver his semiannual Monetary Policy testimony to Congress. More concerns over the fiscal health of Europe (the latest flare-up involves Italy) will also be on the market’s radar this week, as will central bank meetings in Japan, Indonesia, South Korea, Thailand and Chile. Finally, last week’s disappointingly weak June jobs report is likely to continue to reverberate through the market, as participants continue to wait for the long awaited “bounce” in economic data, after an economically difficult second quarter, impacted by weather, natural disasters at home, and, of course, the Japanese earthquake.

Bernanke on the Hot Seat in Congress This Week

In years past, a Fed chairman appearance before the House Financial Services Committee to deliver the Congressionally-mandated semiannual monetary policy testimony (formerly known as the Humphrey Hawkins testimony) would be met with a great deal of anticipation and hype from the market, and especially the financial media. This year, however, the approach of current Fed Chairman Ben Bernanke’s testimony has not generated as much buzz. The reason may be that while in years past the Humphrey Hawkins testimony was one of the only opportunities anyone outside the Fed had a chance to ask the Fed Chairman a question, or to allow the Fed Chairman to elaborate on various issues. These days, the Fed is more transparent than ever. In just the past two and a half years, Bernanke has appeared on the CBS news magazine 60 Minutes twice, held several “town hall” meetings, held a limited access press conference (where questions were submitted in advance) and, more recently, has conducted two full-scale press conferences, where reporters can ask Bernanke whatever they want.

Still, in the wake of the weak June jobs report, and in the midst of the debt ceiling debate, Bernanke’s comments will be closely watched by market participants. It is quite likely that Fed Chairman Bernanke will be grilled by Congress on the economy, and especially the labor market, and what, if anything, the Fed can do to create more jobs. Bernanke’s response is likely to be similar to the responses given in his recent press conferences (April 27 and June 22), in which he described the economy as frustratingly slow and uneven. In addition, members of Congress are likely to question Bernanke about the ongoing debt ceiling debate. In response, Bernanke is likely to gently remind the members of the House Financial Services committee (who are essentially his boss) that it is Congress’ jobs to balance the budget, while it is the Fed’s job to run monetary policy.

In recent public appearances, Bernanke has suggested that the budget negotiations focus on the long term, and that it would be very desirable to take “strong action” to lower the budget deficit over the long term. However, Bernanke has also made it clear that “it would be best not to have sudden and sharp fiscal consolidation in the very near term” as it does not do much for the long-run budget situation and is "just a negative for growth”. Finally, Bernanke is likely to be asked under what conditions the Fed would consider doing more to help the economy, i.e. more quantitative easing (QE3).

When asked about the possibility of QE3 at his last press conference on June 22, Bernanke downplayed the idea, noting that the risk of deflation had waned and that economic activity had picked up since the summer of 2010 when the Fed first hinted at QE2. He did leave the door open slightly saying that the Fed would “continue to monitor’ economic activity and “act as needed.” Our view here remains that the hurdle for the Fed to embark on QE3 remains very high.

June Jobs Report Jolts Markets

The June jobs report was a major disappointment to markets, and to those market participants (including ourselves) that had been saying that the economic “soft spot” had ended and that the economy would reaccelerate back to a slightly more robust growth path in the second half of the year. Even after seeing the report, we maintain the view that the private sector economy can create between 200,000 and 250,000 jobs per month in the next few years, which would be enough to push the unemployment rate down slightly, and keep the consumer “hanging in there” as a support to modest growth in the economy. Our forecast for the United States economy and the labor market in particular, continues to be below the consensus, although the consensus has moved down considerably since the beginning of 2011.

The June nonfarm payroll jobs report (which is actually two reports in one) revealed that the private sector economy created just 57,000 jobs in June, the fewest in any month since June 2010. Making matters worse, the job count in the prior two months was revised downward by 44,000. Over the past two months (May and June 2011) the economy added an average of just 65,000 jobs per month, after adding close to 225,000 per month in the early part of 2011. The data that generates the monthly job count is based on a survey of 140,000 businesses across the United States.

The unemployment rate, which is calculated using data culled by surveying 60,000 households about their employment status, rose 0.1% to 9.2% in June, the highest reading since December 2010. The sample sizes of both the establishment survey (140,000 businesses) and household survey (60,000 households) are extraordinarily large sample sizes for a national survey. For perspective, national polling on presidential elections only uses around 1,000 respondents.

Other than sizeable gains in retail, transportation and leisure, and hospitality employment in June, there were few bright spots in the June employment report. State and local government payrolls fell by another 25,000 and have now dropped in ten of the last eleven months. Since August 2008, state and local government employment (which at just over 19 million, accounts for around 15% of all employment in the United States) has decreased by 577,000, as states, counties, cities and towns across the country struggle in the aftermath of the Great Recession.

Despite the disappointment in June, conditions are favorable for job creation in the months ahead, although significant obstacles to hiring remain, especially in the small business community. Banks are lending again, and terms of these loans are getting more favorable, although they are not yet back to pre-2007 levels. Business capital spending is booming, corporate profits are approaching all-time record levels, and companies have plenty of cash. Near record-low market interest rates have allowed many larger corporations to reduce costs even more by refinancing existing debt. In addition, overseas growth (50% of U.S. exports go to fast-growing emerging markets) is still running at more than three times growth in the United States, even as China continues to slow its economy.

In our view, the biggest impediment to hiring may be confidence. Businesses must have confidence that the now two-year old recovery is firmly in place before committing to expanding their workforce. In addition, businesses need to be confident that our leaders in Washington and at the state and local level will tackle the debt and deficit problems, while fostering a hiring- friendly regulatory environment. On the flip side, in order to lend to businesses confidently, banks need to have certainty around their regulatory backdrop, while at the same time having confidence that the economy is strong enough to support lending.

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IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #744964 (Exp. 07/12)

Weekly Economic Commentary

A Look at Double-Dip Risks in the Economy

As the second quarter of 2011 draws to a close, financial market participants are once again asking the question: are we headed for a double-dip recession? This week’s busy economic calendar in the United States is likely to leave investors wanting more, but they will have to wait until next week (July 4 – 8) for news on the debt limit and the employment situation in June.

Even as the economic expansion in the United States (which began when the Great Recession ended in June 2009) reaches its second birthday this week, market participants are once again posing the question: is the U.S. (and global) economy headed for a double-dip? Our view remains that the U.S. economy remains in a soft spot that may show signs of ending in another few weeks, and that the economy will reaccelerate back to a modest pace of growth in the second half of 2011. Lower gasoline and consumer energy prices, a rebound in auto production, a return to more “normal” weather across the United States and the onset of rebuilding in Japan are the likely catalysts for the pickup in growth.

Risks to growth remain, however, and we will continue to track them closely. Although very few, if any, of the traditional harbingers of recession are present. These include, but are not limited to:

·         The Fed raising interest rates to slow growth or restrain inflation

·         An inverted yield curve, where short-term lending rates are higher than long-term rates

·         A freeze up of intra-bank lending

·         Widespread imbalances in the economy (i.e. too much lending, overbuilding or overspending in one segment of the economy, widespread asset bubbles)

·         A spike in consumer energy prices

·         High and rising inflation

·         High and rising consumer interest rates (mortgages, cars and trucks, credit cards, etc.)

·         Sluggish money supply growth

The potential exists for some of these to begin to materialize in the coming weeks, and that might cause us to revisit our view. However, our base case remains that the economy will reaccelerate and post solid, but not spectacular growth in the second half of the year. This growth will likely be accompanied by moderate inflation and a modest decline in the unemployment rate.

Near term, some of the key risks to our economic outlook include the following:

·         The latest flare-up of the European fiscal saga

·         The ongoing debt ceiling debate in the United States

·         The end of QE2 (the second round of quantitative easing)

·         The second quarter earnings reporting (and more importantly, earnings guidance season) for corporate America

These risks stand as potential threats to the recovery. The Greek parliament votes this week on a package of spending cuts and tax increases needed to ensure that Greece gets the next round of aid from the Eurozone and the International Monetary Fund (IMF). If Greece fails to enact the necessary cuts to spending and increases to revenues, the interbank lending market which is crucial to the global economy may begin dry up, and that would raise the odds of a return to recession. Similarly, if the ongoing negotiations in Washington over the state of the U.S. federal budget fail to produce an agreement in the next few weeks that would at least extend the nation’s debt ceiling beyond August 2, interest rates may rise in the United States, which could lead to higher consumer interest rates and lower consumer confidence and spending.

We have discussed the end of QE2 at length in this publication. Our view is that markets are likely to take the end of QE2 in stride, but if they do not, there is a risk that rates could rise sharply, which could put downward pressure on bank lending to both businesses and consumers, and threaten the recovery. Finally, earnings season is just a few weeks away, and thus far corporations have been relatively sanguine about the outlook for the economy and profits over the second half of 2011. If company managements begin to pull in the reins on spending and hiring, it may lead to a sharp slowdown in the economy, and even a return to recession in the second half of the year. Business spending, and in particular business spending on hiring new workers, remains a key driver of the health of the economy in the second half of 2011.

Always Leave Them Wanting More

Although this week’s economic calendar in the United States is chock full of data for May and June, investors are likely to be looking for more as the week draws to a close ahead of the long holiday weekend in the United States. Why? The discussions on the debt ceiling may linger into the weekend of July 2 – 3 and the key June jobs report is not due out until Friday, July 8. Until then, the health of the consumer and the manufacturing sectors are likely to dominate this week’s reports. We continue to expect that business spending, which helped to lead the economy out of recession in 2009 (thanks to booming exports and booming emerging markets) will continue to outpace consumer spending this year.

On the consumer side, reports on personal income and personal spending for May kick off the week and it concludes with the nation’s vehicle manufacturers reporting their sales for June. In between, the University of Michigan will report its latest data point on consumer sentiment for June. In recent months, consumers have been buffeted by sharply higher gasoline prices, poor weather and most recently, a sluggish labor market (in May). But some relief for the consumer may be in the pipeline. Gasoline prices have declined sharply (by nearly 18%) in the past eight weeks, and some of the recent weakness in hiring may be temporary. Still, the consumer is weighed down by a sluggish housing and labor market, and although consumer debt burdens have improved, they too are keeping consumers on the sidelines. We continue to expect the consumer to merely “hang in there” over the remainder of 2011.

Over on the manufacturing side, the earthquake in Japan, the slowdown in Europe, rate hike-induced slowdowns in emerging market nations in the first half of 2011 and severe weather in the United States have led to a deceleration in manufacturing. This slowdown is fairly typical for this point in the business cycle, but when the sector that led the economy out of the recession in the first place slows, it is certain to attract the attention of market participants and the financial media. This week’s reports on the manufacturing sector for June — Richmond Fed, Dallas Fed, Milwaukee Area Purchasing Managers, Chicago Area Purchasing Managers, and the key Institute for Supply Management (ISM) report on manufacturing — are likely to continue the theme of deceleration. The question is: how much further (and faster) will the manufacturing sector decelerate and when will the deceleration end? The answers could be found in this week’s reports, but more likely, the reports for July (released in mid-July through early August) may provide the ultimate answer on the debate over the manufacturing sector, and the overall economy.

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IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

Stock investing involves risk including loss of principal.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #741562 (Exp. 06/12)

Charitable Giving

Charitable giving can play an important role in many estate plans. Philanthropy cannot only give you great personal satisfaction, it can also give you a current income tax deduction, let you avoid capital gains tax, and reduce the amount of taxes your estate may owe when you die. There are many ways to give to charity. You can make gifts during your lifetime or at your death. You can make gifts outright or use a trust. You can name a charity as a beneficiary in your will, or designate a charity as a beneficiary of your retirement plan or life insurance policy. Or, if your gift is substantial, you can establish a private foundation, community foundation, or donor-advised fund.

Making outright gifts

An outright gift is one that benefits the charity immediately and exclusively. With an outright gift you get an immediate income and gift tax deduction.

Tip: Make sure the charity is a qualified charity according to the IRS. Get a written receipt or keep a bank record for any cash donations, and get a written receipt for any property other than money.

Will or trust bequests and beneficiary designations

These gifts are made by including a provision in your will or trust document, or by using a beneficiary designation form. The charity receives the gift at your death, at which time your estate can take the income and estate tax deductions.

Charitable trusts

Another way for you to make charitable gifts is to create a charitable trust. You can name the charity as the sole beneficiary, or you can name a non-charitable beneficiary as well, splitting the beneficial interest (this is referred to as making a partial charitable gift). The most common types of trusts used to make partial gifts to charity are the charitable lead trust and the charitable remainder trust.

Charitable lead trust

A charitable lead trust pays income to a charity for a certain period of years, and then the trust principal passes back to you, your family members, or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest. A charitable lead trust can be an excellent estate planning vehicle if you own assets that you expect will substantially appreciate in value. If created properly, a charitable lead trust allows you to keep an asset in

the family and still enjoy some tax benefits.

Example: John, who often donates to charity, creates and funds a $2 million charitable lead trust. The trust provides for fixed annual payments of $100,000 (or 5% of the initial $2 million value) to ABC Charity for 20 years. At the end of the 20-year period, the entire trust principal will go outright to John's children. Using IRS tables, the charity's lead interest is valued at $1,267,630, and the remainder interest is valued at $732,370. Assuming the trust assets appreciate in value, John's children will receive any amount in excess of the remainder interest ($732,370) unreduced by estate taxes.

Charitable remainder trust

A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to you, your family members, or other heirs for a period of years, then the principal goes to your favorite charity. A charitable remainder trust can be beneficial because it provides you with a stream of current income--a desirable feature if there won't be enough income from other sources.

Example: Jane, an 80-year-old widow, creates and funds a charitable remainder trust with real estate currently valued at $1 million, and with a cost basis of $250,000. The trust provides that fixed quarterly payments be paid to her for 20 years. At the end of that period, the entire trust principal will go outright to her husband's alma mater. Using IRS tables and assuming a 4.8% AFR, Jane receives $50,000 each year, avoids capital gains tax on $750,000, and receives an immediate income tax charitable deduction of $354,903, which can be carried forward for five years. Further, Jane has removed $1 million, plus any future appreciation, from her gross estate.

Private family foundation

A private family foundation is a separate legal entity that can endure for many generations after your death. You create the foundation, then transfer assets to the foundation, which in turn makes grants to public charities. You and your descendants have complete control over which charities receive grants. But, unless you can contribute enough capital to generate funds for grants, the costs and complexities of a private foundation may not be worth it.

Tip: One rule of thumb is that you should be able to donate enough assets to generate at least $25,000 a year for grants.

Community foundation

If you want your dollars to be spent on improving the quality of life in a particular community, consider giving to a community foundation. Similar to a private foundation, a community foundation accepts donations from many sources, and is overseen by individuals familiar with the community's particular needs, and professionals skilled at running a charitable organization.

Donor-advised fund

Similar in some respects to a private foundation, a donor-advised fund offers an easier way for you to make a significant gift to charity over a long period of time. A donor-advised fund actually refers to an account that is held within a charitable organization. The charitable organization is a separate legal entity, but your account is not--it is merely a component of the charitable organization that holds the account. Once you transfer assets to the account, the charitable organization becomes the legal owner of the assets and has ultimate control over them. You can only advise--not direct--the charitable organization on how your contributions will be distributed to other charities.

Prepared by Forefield Inc. Copyright 2011

Annuities Get An Image Makeover

In January, 2010, the Obama administration’s Middle Class Task Force, headed by vice-president Joe Biden, released its preliminary ‘Fact Sheet’ which contained the following excerpt :

“The Administration is…Promoting the availability of annuities and other forms of guaranteed lifetime income, which transform savings into guaranteed future income, reducing the risks that retirees will outlive their savings or that their retirees’ living standards will be eroded by investment losses or inflation.”

With that one sentence, the annuity industry received an image makeover the likes of which could hardly have been dreamed of beforehand. So often derided in the media and among consumer advocates as being an instrument of evil, annuities (and particularly variable annuities) have long-suffered an image as expensive, complex and unnecessary products whose main purpose was to put money in the pockets of the unscrupulous agents who sold them.

So how is it that the newly elected Obama administration, seemingly the most progressive administration in decades, came to extol the virtues of the annuity contract and the potential income guarantees available in them? The key to understanding this paradigm shift is in the ripple effects of the so-called ‘Great Recession’ on the retirement savings of millions of American workers.

For many years now, employers large and small have been moving away from the large scale defined benefit pension plans of old and towards the defined contribution plans we have now become so accustomed to. Chances are that if you are under the age of 50 and work for anyone other than a government agency or possibly a large publicly-traded company that has been in existence for more than 50 years, you have never even considered the concept of a defined benefit pension as part of your retirement savings. The difference between a defined benefit plan and a defined contribution plan essentially boils down to who assumes the risk of the assets running out before the retiree has finished spending them (passed away). An employer who provides a defined benefit pension agrees to pay a set amount of income (usually based on some combination of years of service, life expectancy, average compensation or assets contributed to the plan) to the retiree for life. Thus, they are taking on the risk that the assets set aside for this purpose will last long enough to cover those payments. In most cases, the pension plan will need to invest the assets in the plan in order to at least keep up with inflation or grow over time. Obviously this can expose the plan and the employer to a substantial risk in the event of a major downturn in the markets in which the assets are invested.

The defined contribution plan on the other hand exposes only the retiree (or pre-retiree) to the risk of market downturns which is why the corporate world has moved to this model over the years. It also illustrates why so many workers now find themselves in a precarious position following the events of the past few years. As their plan accounts have fallen, workers are faced with the difficult responsibility of turning those plans into an income stream to replace their salaries in retirement which these days can last upwards of 30-40 years. Trying to determine what percentage of your pre-retirement income will be sufficient to get you through retirement is hard enough, but actually managing the investments and distributions in retirement can be daunting. Those who can afford to pay a financial planner to assist them in these tasks are at a significant advantage but even the most seasoned professional cannot completely shield workers who need growth over the long-term from the sometimes devastating effects of major market downturns in the short-term. So, if the question workers are faced with is: “how do I achieve long-term growth, while taking on minimum investment risk and eventually create an income stream that I cannot outlive in retirement?” one product with the potential for all of that is the variable annuity¹.

^[1] Annuities are long-term, tax-deferred retirement vehicles intended for retirement purposes. Guarantees for all types of annuities are based on the claims paying ability of the issuing insurance company. Annuities are not FDIC insured. Withdrawals prior to age 59 ½ are subject to 10% IRS penalty, and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal, unless the contract is held inside a Roth IRA. Policies of any annuity type should be reviewed carefully before purchasing.

Variable annuities contain both investment and insurance components. They are sold by prospectus. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than its original value.

With a variable annuity, funds are invested in underlying sub-accounts with the value of the annuity fluctuating in connection to the performance of those sub-accounts over time. Most variable annuities have optional riders² for purchase which will provide minimum income and death benefit guarantees among others. Once it is time to turn the funds into an income stream, you can annuitize the annuity, at which point you give up the ability to access the funds and the insurance company agrees to pay you a specific amount regularly (monthly, quarterly, annually) for the rest of your life, or for some other pre-determined amount of time. Through income guarantees and annuitization, clients can effectively transfer the risk of the income base going down from themselves to the insurance company. Alternatively, there are now many companies who offer withdrawal benefit riders that will guarantee that a certain percentage (such as 5 or 6%) of the value of the annuity can be taken out each year for life, while still having access to the balance of funds if needed.

² Riders are guaranteed options that are available to an annuity or life insurance contract holder. While some riders are included in a base contract, others may carry additional fees, charges, limitations and restrictions.  Please consider them carefully.

Over the years, annuities and their supporters have often been vilified and painted as the bottom-feeders of the industry. These characterizations are not totally unfounded and we have seen plenty of clients come to us after having been sold an annuity that they did not understand or may not have needed. As with most financial products, there is nothing inherently bad about the product itself, but with the way it has been sold. Too often annuities have been the wrong product at the wrong time for the wrong client, but sold nevertheless by unscrupulous brokers trying to make some fast money. However, for the right client with the right needs, they serve their purpose dutifully.

The main issues detractors tend to have with variable annuities are cost and lack of liquidity. The cost of an annuity and associated riders can run upwards of 3-4% annually which is considerably higher than the 1-2% total annual cost of investing in a typical managed ETF portfolio for example. This is something to be considered carefully for sure, but may not be as onerous as it seems at first glance.

First, many clients find the premium a worthwhile price to pay for the accompanying guarantees and transfer of risk. Second, if the confidence those guarantees inspire allow the client to stay invested for the long term where he or she might otherwise make knee-jerk or emotional decisions during volatile markets, the additional costs may well be substantially less than the damage caused by those decisions. Finally, for clients with a long-term accumulation horizon, the benefit guarantees encourage them to invest more aggressively in the underlying sub-accounts than they would be comfortable with in a regular investment account. Thus, over the long-term, the potentially higher returns which may be achieved by investing more aggressively have a good chance of balancing out the additional fees associated with the variable annuity and accompanying riders.

Many variable annuities come with surrender charges (a penalty assessed if funds are withdrawn before the end of an annuity’s multi-year surrender period), making the product fairly illiquid. Also, once a contract is annuitized (turned into an income stream), the client no longer has access to the underlying funds. For these reasons, it is always recommended that clients who are considering a variable annuity have both a long-term (10 years or more) time horizon and other more liquid assets that can be accessed if necessary. As usual, diversification is the key, and as such, a variable annuity should always be considered as just one part of a client’s overall retirement savings portfolio and never the sole vehicle.

As of the writing of this article, the S&P 500 is up almost100% from the March 2009 lows. As head cheerleader when the market was at its lows 2 years ago, and in our attempt to be the voice of reason now that it has doubled since, we would be remiss if we did not caution that, as we all know, the market cannot go up indefinitely. For some, it may make sense to take a small amount of those gains, and lock them in, using a vehicle such as a variable annuity while still allowing for potential upside going forward. This is a strategy we have seen used effectively and feel has merit for the right clients.

There has been a significant shot in the arm for the annuity industry recently, beginning with the market meltdown of late 2008 and the resulting recession, and culminating with the Obama administration’s promotion of annuities and other forms of guaranteed lifetime income products to help workers prepare for retirement. For our part, we neither viewed annuities as instruments of evil before the recession nor as the savior of worker’s retirements now that the president has endorsed them. Rather, variable annuities, like most other financial instruments, are but one tool which, when used properly and in concert with other financial tools, can help to build the foundation of a long and fulfilling retirement.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.  Diversification does not ensure against market risk.

Weekly Economic Commentary

Fed in Focus

This week’s relatively quiet economic calendar in the United States (new and existing home sales along with durable goods orders and shipments for May) will allow markets to focus on the Federal Reserve (Fed), Greece, and the fiscal debate in the United States. In many ways, what the Fed does after the second round of quantitative easing, known as QE2, ends next week will depend on the outcome of the situation in Greece (and elsewhere in peripheral Europe) and on the outcome of the fiscal debate in the United States.

The Fed’s policymaking arm, the Federal Open Market Committee (FOMC), meets to set policy this week amid a soft spot in the global economy, the end of QE2, concern over the ability of Greece to meet its upcoming debt obligations and the debate over U.S. fiscal policy. How these events unfold over the coming weeks and months may help to guide Fed policy, but unfortunately for the Fed and market participants, none of these issues are likely to be resolved anytime soon.

The Fed is expected to leave its policy rate at near zero percent, and signal that it will maintain the current size of its balance sheet for the foreseeable future, but that it will not make any new purchases of Treasury securities that could be called QE3. Fed policymakers are likely to acknowledge the recent “soft spot” in the economy, but view it as transitory in nature. While the Fed will be pleased with the recent drop in consumer energy prices (since the FOMC last met on April 27, retail gasoline prices have moved from well over $4.00 per gallon to under $3.75 per gallon as crude oil prices dropped from $113 per barrel to near $91 per barrel), the increase in bank lending to businesses, and the stability in inflation expectations. We continue to expect the Fed to take a wait-and-see attitude on monetary policy, given the weak run of economic data over the past few months. Our view this year has been that the hurdle for the Fed to end QE2 early was high, but that the hurdle for the Fed to begin another round of quantitative easing (QE3) was even higher.

At his press conference on April 27, when asked about the possibility of QE3, Bernanke said that the risks (i.e. higher inflation and unhinged inflation expectations) of doing another round of quantitative easing were not worth the rewards (a lower unemployment rate and a better labor market). In addition, several voting and non-voting members of the FOMC have publicly stated that they would not support another round of quantitative easing. Meanwhile, many members of Congress have been openly hostile to the idea of more stimulus from the Fed, and since Congress is ultimately the Fed’s “boss”, the Fed has to take that into consideration as it formulates monetary policy.

Still, several events that may trigger the Fed to consider QE3 are on the front burner as the Fed meets this week.

·         Should the soft spot in the economy spiral into something more severe or long lasting (which is not our, nor the Fed’s forecast), the Fed might consider another dose of monetary policy (in the form of more purchases of Treasuries), but the threat of a double-dip and deflation, a period of falling wages and prices, would have to be substantial. The FOMC will release its latest economic forecast this week, and while we expect the Fed to lower its growth outlook for 2011 and raise its unemployment rate forecast, we do not expect a significant enough shift to warrant action from the Fed.

·         A worsening and widening of the European fiscal crisis that leads to widespread defaults by nations in Europe that could be accompanied by a freeze-up of global credit markets would likely lead the Fed to consider another round of monetary stimulus. We expect Fed Chairman Bernanke to field a number of questions on the situation in Europe and its potential impact on the U.S. economy at this week’s press conference.

·         A sharp contraction in fiscal policy (beyond what is already expected as state and local governments shed workers and as 2009’s $787 billion fiscal stimulus package fades further) over the near term, might prompt the Fed to do another round of quantitative easing, or at least stay on hold for longer. At his press conference following the April 27, 2011 FOMC meeting, Fed Chairman Bernanke noted that if any changes to fiscal policy are focused entirely on the short-run, and then these changes might have some negative consequences for growth. In that case, he noted, the Fed would take those into account appropriately. Our view here is that the hurdle for the Fed to act based on a deal to cut the deficit over the long term is quite high.

In addition to the potential catalysts for QE3 listed above, there are a number of other events — for example a series of severe natural disasters in the United States or a terrorist attack that does widespread damages to the nation’s economic infrastructure — which may cause the Fed to consider adding more monetary policy stimulus to the economy. Our view remains that, while we expect monetary policy to remain on hold for the foreseeable future, the hurdle for the Fed to begin QE3 remains high.

----------------------------------------------------------------------

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The fast price swings in commodities and currencies will result in significant volatility in an investor's holdings.

Stock investing involves risk including loss of principal.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #739563 (Exp. 06/12)

Weekly Economic Commentary

Lowered Expectations

Fresh data on manufacturing and housing for June highlight this week’s busy economic data calendar in the United States as markets try to assess the duration and severity of the economic soft spot. Fiscal and monetary policy intersect this week as Federal Reserve (Fed) Chairman Bernanke delivers a speech on fiscal sustainability, as both chambers of Congress return to work on the debt ceiling issue. We examine households’ balance sheets two years into the equity market rebound.

In a speech to bankers last week in Atlanta, Fed Chairman Bernanke said he viewed the recent weakness in the economy as temporary. Bernanke described the economic recovery as uneven and frustrating, but disappointed those market participants looking for the Fed to embark on another round of quantitative easing to jolt the recovery to life. Bernanke's speech also suggests, however, that the Fed is in no mood to tighten policy either. The Fed’s Beige Book, a qualitative assessment of economic conditions in each of the 12 Federal Reserve districts, released last week, confirmed that view. This week’s full docket of economic data reports for May and June will test that view.

This week is a very busy week for economic data in the United States, as market participants try to assess the duration and severity of the current soft spot in the economic recovery, which turns two years old this month. While last week’s quiet economic calendar saw about half of the reports beat expectations, over the past four weeks, only 25% of economic reports in the United States beat expectations. About the same percentage of reports released over the past four weeks saw an improvement versus the prior period (i.e. the May report represented an improvement from the April reading), and only 40% of the reports saw upward revisions to the prior period’s data. Taken together, the economic data over the past four weeks has been the weakest in two years. As we head into this week, expectations are low. But are they low enough?

June data on manufacturing conditions in New York and Philadelphia highlight this week's economic data calendar, which also includes reports on May inflation (producer price index and consumer price index), retail sales, housing starts, leading indicators and industrial production. On balance, the data are likely to show that growth continued to decelerate in May versus April as a result of the earthquake in Japan, the late Easter and unusually severe weather. The consensus forecasts for the June data all suggest that the market is expecting a reacceleration in activity in June. We would agree, but that reacceleration may not become evident in the data until July.

Bernanke Joins the Budget Battle

This week, the Fed is in its unofficial “quiet period” ahead of next week’s (June 22) Federal Open Market Committee (FOMC) meeting. The FOMC, the Fed’s policymaking arm, will release a new economic forecast next week, and Fed Chairman Bernanke will hold another press conference at the conclusion of the June 22 meeting. In our view, the Fed will not materially change its stance on monetary policy at the June 22 FOMC meeting, and that the latest round of quantitative easing (QE2) will end on time at the end of June. The Fed is likely to leave the stimulus provided by QE2 in place until at least autumn of 2011, if not longer, to allow the economy to regain some of the steam it has lost over the past few months.

Bernanke is slated to speak this week on fiscal policy, a topic he addressed in-depth on June 7, and has addressed nearly every time he appears before Congress. Bernanke this week is likely to continue to prod Congress to put the United States on sounder fiscal footing. In his June 7 address, Bernanke cautioned that “a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery.” Bernanke seems to be suggesting to Congress to enact a long-term deficit reduction plan without cutting spending (or raising taxes) too much in the next few years.

Both houses of Congress are in session this week, and legislative time is running low as we approach the August 2 deadline on the debt ceiling. The good news is that the conversation in Washington has moved from whether or not to cut the deficit to how much to cut, but the bad news is that the two sides (the White House/Senate Democrats and House Republicans) remain far apart on the “hows”: How much to cut - the latest word is that a plan to cut the deficit by $2 trillion dollars over the next 10 years is in the works - and how to cut (spending cuts, tax increases, or both) remain up in the air. President Obama’s much publicized golf outing with House Speaker John Boehner this weekend (June 18 – 19) may provide the impetus for the next round of the negotiations. Our view is that Congress will act to raise the debt ceiling, but that the path toward that outcome may be a rocky one for financial markets.

Household Net Worth Up, As Rising Bond and Stock Markets Offset Housing

One of the underappreciated stories in the economy over the past several years has been the recovery in consumer net worth since the depths of the Great Recession in late 2008 and early 2009. Consumer net worth — defined as household assets (cars, houses, financial assets including stocks, bonds, mutual funds, pension assets, money market accounts, etc.) less household liabilities (mortgage debt, credit card debt, consumer loan debt) — posted another quarter-over-quarter gain in the first quarter of 2011 — the latest data available — and has now posted quarterly gains in seven of the past eight quarters dating back to early 2009.

Since hitting a five-year low at just over $49 trillion in Q1 2009, consumer net worth has increased by $9 trillion, and stands at just over $58 trillion. Despite the gain in recent years, household net worth remains nearly $8 trillion below its all-time peak, set in early 2007 before the onset of the Great Recession and the accompanying collapse in housing prices. The slow recovery in household net worth helps to explain the below-average consumer spending during the first two years of the economic recovery, a period that typically sees robust consumer spending growth.

The $9 trillion increase in consumer net worth over the past two years is a result of a 13% gain in asset prices, and a 2% drop in liabilities of households.

The gain in asset prices was driven by:

·         Equity prices, as measured by the Russell 3000 Index, rising 100%+ from their early 2009 lows.

·         Bond prices, as measured by the Barclays Capital Aggregate Bond Index, increasing 18% from their early 2009 lows.

The large gain in equity and bond prices more than offset the 2% drop in real-estate values since early 2009.

While some of the 2% drop in liabilities over the past two years was certainly involuntary (consumers walking away from mortgages, consumer loans and credit card debt), part of the big drop in household liabilities since mid-2008 ($688 billion) reflects a healthy, voluntary paring down of debt by consumers.

While the consumer net worth data is somewhat stale — the latest data available is for the first quarter of 2011 — the monthly report on consumer credit outstanding (released on June 3) can provide a fresher look at the state of consumer finances. Although consumer credit outstanding has increased in each of the past seven months (through April 2011), the ratio of consumer credit outstanding to disposable income fell again and at 20.7% in April 2011 is 60 basis points (bps) below year-ago levels (21.3%) and 370 bps below the peak of 24.4% hit in 2005.

As we note regularly in the Weekly Economic Commentary, consumer spending accounts for more than 70% of U.S. gross domestic product (GDP). Consumer finances have been vigorously debated by market participants since the onset of the financial crisis and the Great Recession. Starting in the early 1990s, consumers had been on a spending spree — accelerating spending, reducing savings, and piling up debt. However, there has been a noticeable reversal of that trend the last few years as strapped consumers have been forced to address soaring debts by reducing discretionary spending. This is best illustrated by the Financial Obligations Ratio (FOR), which the Fed uses to track how much of a household’s disposable income goes toward paying debt, including mortgage (or rent), credit card, lease, homeowners’ insurance, and property tax payments.

As of the fourth quarter of 2010 (the latest data available), the FOR was the lowest in 15 years and is below the long-term average of 17.2%. Based on the big drop in the monthly debt-to-income ratio in early 2011, the FOR likely improved further in the first quarter of 2011. Some of the reduced debt burden is the result of consumer defaults, but the drop in the FOR in recent quarters suggests that the combination of low interest rates, attractively refinanced mortgages, rising incomes (personal income in April 2011 was up 4.4% from a year ago and is at an all-time high), and less debt to service is hastening the improvement in consumers’ ability to spend. Consumers have been paying down debt, increasing their spending (at a modest rate for this point in a recovery), and saving more since late 2008.

We would expect this pattern to continue over the remainder of 2011, and into 2012, which means slower-than-normal consumer spending dampening economic growth, but not causing outright declines that would portend a double-dip recession.

-------------------------------------------------------------------------------------

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

Stock investing involves risk including loss of principal.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #737632 (Exp. 06/12)