Summer 2008 Quarterly Newsletter

SUMMER 2008
CJM
Wealth Advisers, Ltd.
PLANNING WITH PURPOSE
How Much Longer Will It Take?
The current downturn in the market reminds us a lot
of the 2000-2002 downturn. Day after day, we are
bombarded with negative financial news, comments,
and projections. The market recently traded below
11,000 on the Dow, and then promptly turned around
and traded up almost 400 points in the next two days.
So we have endless pessimism and lots of volatility;
sounds like we may be close to a bottom here.
Let’s try to put the current situation in some
historical perspective. Our clients had the worst
performance year in our 30 years of business in
2002, and this was followed by our best year ever in
2003. In other words, we were rewarded for being
patient, maintaining the asset allocation of stocks
and bonds, and waiting for the market to recover.
We continue to believe that the stock market will
move forward when the housing market begins to
stabilize and oil prices moderate. None of us can
predict these events, but we are not recommending
you sell your equity positions now, so the values will
recover as the market rallies. Waiting for a market
to turn around and move forward is about as much
fun as waiting for Christmas to come when you
were a kid. But waiting… patiently… is necessary.
Please call or email us with any questions or
comments.
A Tale of Perspective
Back in early June my wife and I packed up our twin
girls and we took our first “family” vacation to the
beach. After several days of sunscreen and playing in
the sand (and eating it too), we headed home to the real
world. We were about an hour from home when the
girls became hungry and rather than racing home and
hoping for the best, we pulled off in a small town and
into the local McDonald’s.
While we fed the girls, they were enjoyed looking
around the restaurant at all the new faces, the lights,
and the constant opening and closing
of the door. Trying to keep
them on task was a
challenge, but we
made slow
and steady progress. It was then I noticed an older
gentleman by himself in the booth next to us.
I heard one of the store employee’s say to the
older gentleman, “I guess you had a big anniversary
yesterday.” The elderly gentleman replied, “Yup, 64
years ago yesterday.” I noticed he was wearing a World
War II Memorial baseball cap from Bedford, Virginia.
I surmised that he was a WWII veteran and thought
nothing more of it.
We continued with lunch and eventually this
gentleman finished his lunch and returned shortly with
an ice cream cone. We were finishing up lunch at this
point and he said to us, “Those are real pretty twin girls
(continued on page 2)
CJM
Wealth Advisers, Ltd.
Q&A
Your Questions – Our Answers
What is the required minimum distribution
(RMD)?
RMDs are the minimal amount required by the
IRS that must be distributed from an IRA on an
annual basis. For traditional IRAs, distributions
must begin by age 70 ½. You can choose to delay
receipt of the first distribution until April 1 of
the year following the calendar year of turning
70 ½. Thereafter, the RMD for each year must
occur by December 31st. So if you delay the
initial distribution until April 1 then two RMDs
must be taken that year. The RMD for each year
is based on the account balance on December 31
of the preceding year divided by a life expectancy
factor. A qualified plan, i.e. a 401k plan, is not
subject to RMDs until the year you retire, even if
over the age of 70 ½. The custodian of your IRA
account is required to notify you when distributions
are required to start. If your assets are managed
by CJM, we keep track of starting dates, and the
amount that is required, and we will send you the
forms to start the withdrawals.
How do I sign up to receive my American
Funds statements, prospectuses and
semiannual reports online?
Go to “Americanfunds.com” and click on account
login (orange box). You begin by creating a personal
(continued from page 1)
you have there.” He said, “I have a set of my own, granted
they are 49 years old at this point, but they gave me 10
grandchildren and 5 great grandchildren.”. It was an
interesting conversation to say the least. Here we were in
this little town in a small restaurant talking to a complete
stranger about our families.
After lunch was over, my wife took one of the girls to
the restroom and I was left cleaning up the other one. The
man had finished his ice cream and was getting up to leave
and Alanna started to smile and wave at him. He stopped,
login (you will need to know your account number) - for
first time users, your password is the last four digits of your
social security number. Once logged in click on “services
for this account” and then click on your “personal
information” tab, and then electronic delivery preference.
Once on the electronic delivery page, you can select how
you prefer your documents to be delivered.
How do I sign up to receive Pershing LLC/
Financial Network statements online?
First, you will need to complete a netexchange
client request form. To obtain the form, you will
need to contact your financial planner or assistant
or visit “cjmltd.com – account center” and then
request the sign up form (your financial planner will
need to sign the form). Once the form is completed,
Pershing LLC/Financial Network will send you the
information to view your accounts online. To begin
receiving e-mail notifications online for your monthly
statements and confirmations the document delivery
needs to be changed. To change the document
delivery – log on to www.netxview.com <http://www.
netxview.com/> click on “account profile” and then
click on “document delivery”, and then “change”.
Once on “change”, you can select how you prefer
statements and confirmations to be delivered. After
you select the option desired, you will be asked to type
your name to agree to the terms and conditions.
smiled and waved back and said, “You’re such a cute little
thing, waving at an old man like me.”
“I was 18 years old when I jumped out of a plane
(airborne) into German occupied territory, fought at
Bastogne and Antwerp. Your children will bring you much
happiness in your life, much as mine did for me.” As he
turned to leave I couldn’t help but say “thank you” to this
total stranger.
But the more I thought about it, I wasn’t saying thank
(continued on page 5)
CJM Wealth Advisers 2
“When asked about the country’s economy, schools, health care or community spirit, Americans
tell pollsters the situation is dreadful. But when asked about their own jobs, schools, doctors
and communities, people tell pollsters the situation is good. Our impressions of ourselves and
our neighbors come from personal experience. Our impressions of the nation as a whole come
from the media and from political blather, which both exaggerate the negative. The latter has
never been thicker.”
– Gregg Easterbrook
“Life Is Good, So Why Do We Feel So Bad?”
The Wall Street Journal, June 13, 2008
Real Estate Update
By David Unterman, Keller Williams Realty
The National Association of Realtors reports that U.S.
home prices have declined on average 6.3% since May
2007. This has come from a culmination of subprime
lending gone awry, oversupply of properties, a tightening of credit for borrowers, and other reasons. However, this may not help you get an accurate assessment
for your primary or investment properties.
If your focus is Northern Virginia, the picture
depends on what neighborhood you may be in. With
schools that have received national acclaim, and one
of the best employment rates in the United States, this
area has continued to attract new workers from around
the world. This has kept demand for housing near the
historic norm. The one exception has been Prince
William County, where enforcement of laws on illegal
immigrants has been a factor in a large number of foreclosures. In this county we have seen purchasers obtain
homes for as little as 1/3 of their 2005 prices.
Where will the market be going from here, and
when will there be appreciation in prices from today’s
levels? Again, noting that this is a neighborhood-byneighborhood phenomenon, several things will need to
occur for appreciation:
• The volume of foreclosures will need to decrease,
putting supply back to historical norms.
• Salaries will need to continue to rise.
• Interest rates will need to remain at a level that provides affordability.
• Credit will need to be extended to a large pool of
buyers.
Once these conditions are met, first time buyers will be
able to reduce the supply of homes on the market. As
the lowest level priced homes are bought, it starts the
chain that allows buyers to ‘move-up’ from the homes
that they are currently in, which sparks sales across the
entire housing spectrum.
CJM Wealth Advisers 3
Mortgage Market Update
By Michael Hilton, Certified Mortgage Planning Specialist,
Home Savings & Trust Mortgage
At this time, the mid-point of 2008, we
have seen significant changes occur for
the participants in the mortgage market.
Lenders, mortgage insurers, appraisers,
and the major players who buy loans
like Fannie Mae and Freddie Mac, have
reacted to the deteriorating real estate
markets by revising guidelines to a point
where an increasing percentage of people
do not qualify for a loan.
Credit standards have been greatly
tightened, and to many, justifiably so. For
example, last year a borrower with a 620
FICO credit score would be eligible for
one of Fannie Mae’s “My Community
Mortgage” products up to 100% of the
purchase price. Today, that same borrower
would have to put 10% down and pay .75% higher in
rate than a person with 680 credit score. As of June 1
Fannie Mae established a national maximum loan to
value of 97% of the sales price / value.
The challenge that has arisen for lenders has been
that a loan with less than 20% down requires mortgage
insurance to reduce the lender’s exposure and lessen the
risk. The mortgage insurance companies have become
even more restrictive. They have established “declining” and “distressed” market categories that reduce
the maximum loan even more, to 95% and 90% loan
to value based on how much a particular metropolitan
area’s real estate values have declined. The message is
to homebuyers is - have great credit, money to invest,
and have a stable income with your debts in line.
There is good news though; the trusty old Federal Housing Administration loan (FHA) has made a
comeback, along with Veteran’s loans (VA). In high
cost areas these loans will even go higher than the conventional loan limit of $417,000. The basic FHA loan
4 CJM Wealth Advisers
requires a total investment of 3% with a minimum
down-payment of just 2.25% and allows the borrower
to receive a gift for the entire investment. The loan
works well to refinance a property that may have suffered some loss of value.
We see the interest rate environment staying in a
range from 6.5 to 7 percent, still great compared to
the early 80’s. The pressure on home values is forecasted to remain through most of 2009. Banks still
have a good way to go before the losses from foreclosures subside. The silver lining is there are excellent
home values out there for those who are prepared,
plan to hold onto their home for 5 years or more and
work with a professional lender.
Where Does Inflation Come From?
By Brian S. Wesbury – Chief Economist, First Trust
and Robert Stein, CFA – Senior Economist,
First Trust
Sometimes an answer can be found
at the extreme and today’s extreme
on the inflation front is Zimbabwe,
where prices are doubling every
month.
So why is this happening? Is it
due to rising commodity prices? Or,
rising wages?
As Milton Friedman taught, inflation
is everywhere and always a monetary
phenomenon. The only way inflation can exist, let alone
“explode,” is if a central bank or government prints
more money than an economy needs. What determines
the need for money is the increase in goods and services.
If the money supply grows faster than the growth rate
in goods and services, the value of money will decline.
Inflation is too much money chasing too few goods.
Imagine an economy with 10 apples and $10, each
apple will cost $1. If the money supply is increased to
$20, then the price of apples will increase to $2. If the
apple supply increased to 20, and the money supply
doubled to $20, then apples would still cost $1.
This is why rising oil and food prices by themselves
are not inflation. As long as the money supply does not
increase, any increase in spending on oil or food would
be offset by a decline in demand for other goods. Other
goods prices would be forced to fall; and the overall
price level (inflation) will remain unchanged.
(continued from page 2)
you for the friendly advice, I know I was saying “thank
you” for jumping out of that plane 64 years ago on D-Day.
So while we sit enjoying the summer heat, family
vacations, high gas prices, and big shopping trips to the
mall, let’s not forget that we owe a lot of the freedoms
we enjoy every single day to our veterans. So, if you see
some veterans or current military at the grocery store, at
the mall, or even at McDonald’s, say “thanks”.
5 CJM Wealth Advisers
Milton Friedman won the
Nobel Prize for explaining this
mechanism. And despite the fact
that many people want to relegate
monetarism to the ash heap of
intellectual history, it remains the
only true and correct explanation
of inflation.
What’s interesting is that
the ECB understands this, and has
institutionalized Friedman’s monetary thinking.
By law, the ECB has a “single mandate” for monetary
policy – price stability.
On the other hand, the Federal Reserve has a
“dual mandate.” Congress says the Fed must promote
“maximum employment” and “price stability.” This
dual mandate is conflicting. In fact, the more the Fed
focuses on employment and economic growth, the
higher the probability that commodity prices and
inflation will rise, the dollar will fall, and the economy
will suffer.
In fact, if all we knew about the ECB and the Fed
were that the former had a single mandate and the
latter had a dual mandate, we could easily make a
forecast for the direction of exchange rates. Think of it
in terms of football. If one team had a single mandate
from management to win, but the other team had a dual
mandate to keep it uniforms clean and win, the first
team would win a huge percentage of the time.
In other words, the longer it takes the Federal
Reserve to hike rates and tighten monetary policy, the
weaker the dollar will become and the higher inflation
will climb. We do not believe inflation will “explode” in
the US, but elevated readings in the 3% to 5% range are
clearly on tap for the next few years.
Consensus forecasts come from Bloomberg. This report was prepared by First Trust
Advisors L. P., and reflects the current opinion of the authors. It is based upon sources
and data believed to be accurate and reliable. Opinions and forward looking statements
expressed are subject to change without notice. This information does not constitute a
solicitation or an offer to buy or sell any security.
CJM News
Look Who is
Turning One!
David and his wife
Maria added a
son, Diego, to our
CJM family last
year. He seems
to be enjoying
his first birthday
celebration!!!!
Parking at CJM
The three “reserved” parking spaces
for CJM Wealth Advisers have moved
behind the building. Feel free to park in any parking spots out front, but you can also park in the “reserved” spaces in the back of the building.
First Annual CJM picnic
We held our first annual staff picnic for the staff
and family members at Lake Accotink Park. We
had a beautiful sunny day with great food and conversation and even had carousel rides for the kids.
Since 1978, CJM Wealth Advisers, Ltd. has been
working with affluent individuals, families and
business owners to address financial concerns
no matter how acute or broad they may be. With
a collective focus on helping our clients live the
life they want, we understand that financial
planning needs to be done with a purpose in
mind. Otherwise, what is the use of planning at
all? At CJM Wealth Advisers, Ltd., we believe in
planning with purpose.
What is your purpose? Is it to…
CJM
Wealth Advisers, Ltd.
…create a retirement income stream to last a lifetime?
…minimize investment risk and maximize return?
…prudently planning a legacy for your heirs?
…carefully position a business for a future sale?
We offer our clients real solutions by being
objective and approachable while delivering
excellent client service.
11320 Random Hills Road, Suite 250, Fairfax, VA 22030
Tel: (703) 425-0700 Fax: (703) 764-9530 reception@cjmltd.com.
Advisory services are offered through CJM Wealth Advisers, Ltd. Securities are offered through Financial Network Investment Corporation, member SIPC, an ING
Company. CJM Wealth Advisers, Ltd. and Financial Network Investment Corporation are not affiliated.