Alpha Financial Addresses Charlotte Downtown Rotary

Cecily Durrett introduced the speakers, John Gugle and Jim McGehee of Alpha Financial Advisors. John is a Certified Financial Planner and Jim is also a Certified Financial Planner and holds several other certifications in financial and investment management. Alpha Financial Advisers is a private, fee-only financial planning and investment management firm in Charlotte.

Working as a “tag-team,” Jim started with some thoughts on the current environment for investors. The access to information on the internet and the 24 hour a day business TV programs has somewhat leveled the field for private investors relative to the professional investor. The success of high-profile investors such as Warren Buffet and George Soros has not been in their ability to pick stocks, but in their ability to see the big picture and to see trends that will affect investments in the future. To be a successful investor in the long-term, you must be cognizant of the impact of government actions.

John then jumped in and said that over recent history, the 125 days leading up to a mid-term election have produced mixed results—six times the market was up and six times it was down; however, in the 125 days after the last twelve mid-term election where in every case the market was up. This is because the markets hate uncertainty and after an election, the uncertainty is reduced. For 2006-2008, personal finances will be affected by a number of political facts and trends:

• President Bush is going into his last two years in office with no heir-apparent. He has lost political capital in Congress in addition to being a “lame duck.”
• The Democrats may gain seats in the 2006 elections.
• Only one time since Republican Rutherford B. Hayes succeeded Republican Ulysses S. Grant in 1877, has the party of a sitting two-term President retained the presidency in the next election—that was when George H. W. Bush succeeded Ronald Reagan in 1989. Thus, it may be likely that the Democrats will win the presidency in 2008.
• Taxes are too high but Congress will not control spending so taxes are likely to go up.
• State and local taxes will continue to go up as programs are shifted from the federal budget to state and local governments. Infrastructure needs will have to be funded.
• The economy is going to face pressures in 2006, including higher inflation, interest rate increases by the Fed, declining home sales, increased cost of materials, and increased cost of oil.
• The next recession is likely to be demand driven as consumer spending declines due to reduced discretionary income.
• We are facing a loss of control of our own economy—for the first time, more corporate dividends are being paid to foreign investors than to domestic shareholders.
• Debt service is consuming a major part of disposable income.
• Savings is down.
• Foreclosures are up 68%.
• As increasing numbers of Americans are retiring, it is of concern that income of $25,700 or more puts one in the top 25% of income for those over 65 and that the retirement saving of the average American only totals $25,000.
• As a debtor nation, we have little control over much investment capital—if foreign nations started dumping our debt, our interest rates could skyrocket.

Jim then jumped back in for some prescriptions: keep investments well diversified, watch for investments that will still do well, maintain good cash reserves, and get good tax advice.

In questions and answers, Jim and John said that the housing sector would go down, inflation protection securities should be considered, and commodities (particularly construction materials) will likely go up. International diversification of portfolios should be increased. An increase in the tax on gasoline would increase gas taxes, reducing demand for gasoline and reducing the price of oil. Investments in alternative fuels might be considered. The liability for unfunded government pensions is enormous and the federal government should follow the lead of industry and move to defined contribution rather than defined benefit plans. Much of the federal budget is devoted to debt service and spending must be curtailed, programs must be cut or eliminated, and debt and interest must be reduced. It was interesting to note later in the day that a number of investors, having not been privy to today’s program, went on a stock buying spree that raised the Dow by 195 points for a 1.8% gain, the NASDAQ by 2.0%, and S&P 500 by 1.7%--all on news that the Fed may be near the end of its rate-tightening campaign.