The Fall 2011 Brinker Barometer

The Fall 2011 Brinker Barometer was conducted online by Brinker Capital in October 2011 to gauge financial advisor confidence and sentiment regarding the economy, retirement savings, investing, and market performance. Brinker asked respondents to reflect on key issues related to the financial landscape we may see in 2011, as well as their opinions on the upcoming race for the White House.

When asked if their clients were financially better off today than in the 2008-9 periods, 64% of advisors said “yes,” yet only 32% of respondents believe that the financial markets will perform better in President Obama’s last year of office than in the previous three.

There was overwhelming consensus on the Obama Administration’s greatest accomplishment: Over 80% of advisors picked the killing of Osama bin Laden and other top Al-Qaeda operatives, followed the economic stimulus package and healthcare reform, each garnering just seven percent of advisor picks for the top accomplishment. Conversely, when asked for the Administration’ greatest disappointment, 46% of advisors noted lack of job creation, followed by inability to reduce the deficit (33%) and compromise with Congress (12%).

Turning to the 2012 presidential election, fully 56% of financial advisors said that a second term for Obama was their biggest fear, followed by continued gridlock in the next administration (32%) and a growing Tea Party influence (7%). Eighty percent of respondents said that a candidate’s religion should not be a significant factor in judging their qualification for the presidency.

When asked which candidate is most qualified to lead the US in recovery and growth, 32% of advisors picked Mitt Romney and 22% selected Herman Cain. Barack Obama rounded out the top three picks with 16%.

John Coyne’s 11/18 appearance on Fox Business News discussing the Brinker Barometer is now available on our website: www.brinkercapital.com.

The Fall 2011 Brinker Barometer had 427 Respondents
All information was compiled by Brinker Capital based on the responses received in the
Fall 2011 Brinker Barometer. This is for information purposes only.

Europe: The Epicenter of Market Woes

Stuart Quint, International Strategist at Brinker Capital, discusses Brinker’s outlook on the European debt crisis and potential implications for client portfolios.

Vistit BrinkerCapital.com for more

The Jefferson County Default

by Lyle Fitterer, CFA, Wells Capital Management

Yesterday, Jefferson County, AL declared the largest municipal bankruptcy in U.S. history, with a total of $4.15 billion in municipal debt. News stories have highlighted that the county was a victim of the financial crisis. That is only partially true. First and foremost the construction and cost overruns on a federally mandated sewer project that was too expensive for the residents. Second, the scale of the project and cost overruns were exacerbated by misguided derivatives contracts. These derivatives were sold to the county under the assumption that they could keep the large debt burden from being prohibitively expensive for residents, but unfortunately, the financial crisis worked against the county’s new derivative contracts. Finally, fraudulent dealings between a bank and the county leaders further increased costs and landed people in jail. Sewer rate hikes would not have been enough to counteract the bad decisions, illegal behavior, and jail sentences, and now bankruptcy is the result. Needless to say, this combination of extraordinary circumstances is rare.

Proposals have swirled in recent months regarding a resolution. The insurers, banks, and bondholders had agreed upon concessions to aid in restructuring the county’s debts and make strides for resolution. The State of Alabama’s legislature was unable to agree about how the state would support a problem like Jefferson County.

The bankruptcy may be new, but the default is not. The $3.8 billion in sewer debt and warrants default is already baked into the default statistics for municipals. Many bonds continue to pay interest from insurers or other guarantors. Because the market was anticipating continued distress in Jefferson County, many securities had already priced in steep declines. We’ll continue to learn more about ultimate recovery rates on the debt as proceedings develop. Recovery rates tend to be high in water/sewer finance, but we do not expect par in this case. Some bondholders stand to lose, but some stand to gain depending on their specified security provisions and purchase price.

Clients have asked if this filing will prompt further municipal bankruptcy filings nationwide. We don’t think so. Bad decisions and criminality in isolated situations in the municipal market will continue to be made in good economies and bad economies. The costs and pain of this bankruptcy will serve as a wake-up call to other leaders that they should remain proactive and ensure that their finances are in order. We believe that this is ultimately a positive development. Municipal defaults remain low. Most of the headlines continue to be the recycling of the same headline stories we have all read about for a few years now. Names like Jefferson County, AL, Harrisburg, PA, Vallejo, CA, and Central Falls, RI come to mind.

The state has set a poor precedent for bondholders at a time when many other states have supported their municipalities or given them tools to navigate through troubles. That support from the state helps to ensure that local government’s financing costs remain low and that they have easy market access. Other issuers in Alabama may see their financing costs rise because the state did not provide adequate support of the bondholder’s plan in Jefferson County.

We’ll continue to monitor the situation and keep you informed with any future material developments.

The information above has been written and provided from Wells Fargo. Brinker Capital takes no responsibility for the accuracy of the content and is meant for informational purposes only. Please visit http://blog.wellsfargo.com/advantagefunds/2011/11/the_jefferson_county_default.html for more information.

An Update on the Events Unfolding in Europe

by Stuart Quint, Senior Investment Manager and International Strategist

Ø  We are still negative on Europe in portfolios. However, relative economic strength in other parts of the world, such as the US, has provided selective investment opportunities.

Ø  Market perspective:

o   Stock market decline yesterday in context of strong rally in S&P since September.

o   With all the volatility, S&P 500 is actually close to flat in 2011 (-0.5% as of 11/9/11)

 Ø  Europe is still muddling through; however, market perceptions of the muddle have fluctuated.

o   German economic data is flashing economic stagnation and potential recession. (This country has been the strongest in Europe).

o   Politicians still muddling on expanding financial facilities or bank recapitalizations needed for convincing solution to problems.

An Update on PIGS

Ø  Italy

o   10-year bond yields rose from roughly 6% to nearly 7%

o   Political wrangling as PM Berlusconi’s coalition is unraveling at time when markets want to see convincing action on fiscal front

o   However, question of whether Berlusconi keeps promise to resign and nature of new government – leaving two possible scenarios:

§  unity government could be positive

§  early elections negative, though we believe parties involved understand the risks of doing this

o   Italy is much larger than other PIGS, but its problem are different

§  Wealthy country with strong export base that does not pay taxes

§  Dysfunctional politics and economic stagnation

§  High interest payments (government collects more revenues than it spends)

o   There is time for Italy to win back market confidence  

Ø  Greece – it took longer than expected to get new PM Papademos but there is some potential for him as a technocrat who could push through reform and get other EU nations on board.

Ø  Spain – general elections November 20 – opposition likely to win, more likely to push through spending cuts than higher taxes, which could be helpful in medium term.

An Update on the U.S.

Ø  The U.S. still shows relative economic strength, but we are still watchful of fallout from Europe.

o   DC Super committee – expectations low, but with good reason

o   Economic data – so far, modest growth, no recession yet

§  Payroll growth moderate, improving trade balance helpful.

§  Housing, government headwinds.

Signposts to turn positive on Europe

Ø  Larger European bank recap – nothing hopeful yet

Ø  Falling bond yields in Italy and Spain – unfortunately, they have risen, though near term they could pull back on any improvement in recent negative sentiment.

Click here to check out the video by Stuart that goes into more detail about the situation.

The Golden Hook

The Latin proverb, “He fishes well who uses the golden hook,” applies as much to investment advisors as it does to anglers.

A hook is an opening sentence or two that piques curiosity. “It was the best of times, it was the worst of times,” is a classic hook from A Tale of Two Cities. The reader is drawn into the story and compelled to read more.

Advisors can use hooks to capture clients’ attention and differentiate themselves from other advisors. In order to achieve these two goals, a hook must be “golden.” A hook transcends to golden status when it inspires inquiries, pushes the pitch forward, and leaves clients wanting more.

Here’s an example of a golden hook in the retirement income solution stratosphere:

“We customize withdrawal strategies to deliver a ‘paycheck’ for a specific period
while  managing cash reserves to meet long-term needs. As clients access their
cash, we replenish it based on careful evaluation of trends in the market and a
careful analysis of income and dividend-producing securities within each portfolio.
We refill cash reserves at the most opportune times, so long-term growth is not
sacrificed.”

This hook effectively creates questions in the prospect’s mind. He wants to know about the intellectual underpinnings of the cash replenishment process. He wonders how spending is monitored and what happens if actual spending exceeds projections. He compares this strategy with the reverse dollar cost averaging technique every other advisor pitched.

Most importantly, the prospect is now curious about you. You’ve said something new. There’s depth to your strategy and it touches on hot buttons. That makes you pretty interesting.

Maintain the attention you won with a few declarative statements like:

• Long-term growth doesn’t have to be sacrificed in exchange for a
  fixed income solution.
• This strategy doesn’t limit your ability to use principal.
• There isn’t a fixed rate of return with this approach. Instead, we
  tailor the cash allocation to meet your short-term expenses and long-term goals.
• We don’t leave your long-term goals to chance.

The prospect is hooked. Go ahead and reel him in.

To learn how to structure customized distribution strategies for your clients, click here.