Solis Wealth Management Report – May 5, 2014

The Markets

Sometime this year, you may have the opportunity to experience an event that’s even more rare than a lunar or solar eclipse – an economic eclipse. The United States has had the world’s largest economy since we surpassed Britain back in 1872, but our economy is about to be overshadowed by China’s.

A lot of folks were anticipating an economic eclipse sometime around the end of this decade. As it turns out, the event horizon may be much, much shorter. Last week, The World Bank released its International Comparison Program (ICP) report. Every six years, in an effort to measure the real size of the world economy, the ICP surveys countries and measures their relative economic might. The ICP report was the final analysis of data collected during 2011. It found, at that time, the U.S. had the world’s biggest economy. It also established that China’s economy had grown much faster than ours between 2005 and 2011. China’s economic growth has continued to exceed that of the United States. As a result, China’s economy is expected to eclipse that of the United States during 2014. The U.S. economy will be the second largest and behind us will be India. The ICP also noted that:

·         The six largest middle-income economies (China, India, Russia, Brazil, Indonesia, and Mexico ) account for 32.3 percent of world Gross Domestic Product (GDP

·         The six largest high-income economies (United States, Japan, Germany, France, United Kingdom, and Italy ) account for 32.9 percent of world GDP

·         Asia and the Pacific, including China and India, account for 30 percent of world GDP

·         The European Union and countries in the Organization for Economic Cooperation and Development (OECD) account for 54 percent of world GDP

·         Latin America comprises 5.5 percent of world GDP (excluding Mexico, which is an OECD country, and Argentina which did not participate in the ICP survey)

Some people are unsettled by the news. Among them, apparently, are members of China’s National Bureau of Statistics (NBS). According to The Washington Post, the NBS expressed reservations about the study’s methodology and did not endorse the results as official statistics. As with solar and lunar eclipses, the event may be notable, but its effects are unclear.

Data as of 5/2/14

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

1.0%

1.8%

17.8%

11.4%

16.5%

5.4%

10-year Treasury Note (Yield Only)

2.6

NA

1.6

3.3

3.2

4.5

Gold (per ounce)

-1.5

6.6

-12.8

-6.0

7.1

12.6

DJ-UBS Commodity Index

-1.0

8.7

3.9

-7.8

3.4

-1.0

DJ Equity All REIT TR Index

1.9

12.8

0.9

9.8

21.2

10.2

S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

SO, YOU’VE HEARD U.S. COMPANIES ARE FABULOUSLY PROFITABLE and sitting on record piles of cash. It’s true. According to Moody’s Investors Service, non-financial U.S. companies had hoards of cash at the end of 2013 – about $1.64 trillion. That’s about 12 percent more than the previous year’s record-setting $1.46 trillion. Technology, healthcare/ pharmaceutical, consumer product, and energy companies held the most cash.

Why are profits at U.S. companies so high? The Economist offered several possible explanations:

1) Corporate executives favored capital and not labor in recent years. An expert cited by The Economist suggested, “…Had pay kept pace with productivity in recent years, profit margins would be around their historic average, not close to a 50-year high;” 2) When the U.S. dollar loses value, which it has, the foreign earnings of American companies get a lift; and 3) Firms have limited their capital expenditures on equipment, software, and other items. As a result, depreciation charges have fallen making companies look more profitable.

Why aren’t companies spending? It has a lot to do with overseas profits and tax rates, according to The Wall Street Journal’s MoneyBeat. It reported, “Growth in the cash stockpiles, however, came largely from operations overseas. Instead of bringing that money back to the U.S. and paying taxes as high as 35% upon repatriation, companies borrowed money in the U.S. bond market, where interest rates were historically low. The report calls that strategy ‘a form of synthetic cash repatriation.’”

The stark reality is companies are profitable, but they’re also sporting a lot of debt. During the past three years, corporate debt has risen by $3.67 for every $1 of cash growth, according to a report from Standard & Poor’s Rating Serviceswhich was cited by The Wall Street Journal. That’s okay when interest rates are low, but may not prove to be so great when interest rates in the United States move higher.

Weekly Focus – Think About It

“I never considered a difference of opinion in politics, in religion, in philosophy, as cause for withdrawing from a friend.

–Thomas Jefferson, American President

What’s happening at Solis Wealth Management?

Please enjoy this week’s commentary from ~ Greg Solis

The kids are wrapping up the last month of school.  They are officially out on May 29th and all three of them are so excited for the summer.  They’ve all had a great school year and had a lot of fun.  I feel like they are moving in the right direction.

We had a great spring break.  Easter was later this year, so I think they liked the fact that they are only back at school for a few weeks after spring break before summer vacation begins.  We took time off to spend a few days in LakeHavasu which is one of our favorite places to go as a family.  We decided not to take any friends on this trip because we wanted to use it as an opportunity to spend quality family time together.  Everybody had a great time even though the water was a little bit cold, but the weather was nice.

It’s been a very busy quarter with Jack’s golf this season.  I was able to be the assistant coach this year which ended up taking a lot more time than I expected, but I truly enjoyed spending time with Jack’s friends, the golf team, and most importantly with Jack.  His golf season has been great.  He is a freshman and ended up being one of the better players on the team.  He’s still very passionate about the game and spends every waking hour playing golf when he’s not busy with school or homework.

Nicole has also kept me busy with her co-ed soccer games and tournaments.  She played on the middle school “A” team, and I think she found it a little more challenging playing against 8th grade boys than 6th grade girls.  She did a good job holding up her own against all those boys.  She is also playing club volleyball, so we spent some of our weekends taking road trips to Anaheim for her matches.  She continues to be a great athlete and is fun to watch.

Emily is getting ready for her big dance recital coming up in June.  She’s in five different dances and has been practicing very hard; I know she’ll do a great job. She also represented her school at the regional speech meet in Temecula, and she brought home a blue ribbon.  She’s doing very good in school and loves spending time with her friends and family.

We enjoyed Easter this year.  Getting up and going to the sunrise service is always special for our family.  Monica and I had the privilege to open our home to our extended family.  We prepared beef tenderloin, ham and all the fixings for over 40 people.  Although it was a lot of work, it was great to spend time with my aunts, uncles, cousins, etc.  I love reflecting on the true meaning of Easter – Friends, Family, and Faith.  I hope all is well for you and your family.  I hope you enjoy your summer and I look forward to talking with you soon.  God bless. ~ Greg

Best regards,

Greg R. Solis, AIF®
President

78-075 Main Street
Suite 204
La Quinta, CA 92253
Office: (760) 771-3339
Fax: (760) 771-3181www.soliswealth.com
E-Mail: greg.solis@lpl.com

CA Insurance License #0795867

The Wealth Advisors of Solis Wealth Management are also Registered Representatives with and securities and advisory services are offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC

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* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.

*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

*The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results. Investing involves risk, including loss of principal.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* Stock investing involves risk including loss of principal.

* To unsubscribe from the Solis Wealth Management Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject line.

Sources:

http://www.ft.com/intl/cms/s/0/d79ffff8-cfb7-11e3-9b2b-00144feabdc0.html#axzz30hMLV0y9 (or go tohttp://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/05-05-14_Financial_Times-China_Poised_to_Pass_US-Footnote_1.pdf)

http://go.worldbank.org/MP1FBPYUJ0

http://www.worldbank.org/en/news/press-release/2014/04/29/2011-international-comparison-program-results-compare-real-size-world-economies

http://www.washingtonpost.com/business/china-rejects-sign-it-may-soon-be-no-1-economy/2014/04/30/90fca9e2-d058-11e3-a714-be7e7f142085_story.html

https://www.moodys.com/research/Moodys-US-non-financial-corporates-cash-pile-grows-led-by–PR_296106?WT.mc_id=NLTITLE_YYYYMMDD_PR_296106

http://www.economist.com/news/finance-and-economics/21588901-american-corporate-profits-seem-have-defied-gravity-margin-error (or go tohttp://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/05-05-14_The_Economist-Margin_for_Error-Footnote_6.pdf)

http://blogs.wsj.com/moneybeat/2014/04/14/companies-piled-on-the-cash-in-2013/

http://www.brainyquote.com/quotes/quotes/t/thomasjeff389008.html