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Issu e 22

3R D Qu ar te r 20 12


K FAdvisor



Wall of Worry vs. the Fiscal Cliff By: Mike Kabarec, CFP™, CPA/PFS As we start the third quarter, we are writing to share our views as to what we expect will transpire for the rest of 2012. In addition, we also want to offer our perspective on what happened in the first half of the year. As we evaluate the rest of this year, we are faced with continued uncertainty in the world economies. One of the major concerns is the threat of the U.S. falling back into a recession as we face falling off the “fiscal cliff”. The fiscal cliff has been written about extensively in the business press because of the implications for businesses and the U.S. consumer. Second, key provisions of the U.S. tax code including the “Bush Tax Cuts”, the payroll tax deduction, and the expiration of extended unemployment benefits are set to expire at the same time, just after the November election. This looming fiscal cliff could cause the U.S. to fall back into a recession unless steps are taken by our “dysfunctional” Congress to mitigate these actions. If no action is taken, the 2013 tax increases will certainly be a significant drag on the still weak U.S. economy. Potential Drags on the Economy • Expiration of the Bush-era tax cuts. In the table below, the 2013 column show the maximum tax rates that will go into effect if the Bush-era tax cuts expire. 2012


Ordinary Income






Capital Gains



Payroll tax (employee)



Estate and gift taxes



Estate and gift tax exemption amounts



Clockwise, from back: Kirk Hackbarth, Michelle Smalenberger, Lisa Thuer, Mike Kabarec, Linda Maher

• Expiration of the Alternative Minimum Tax Patch • Expiration of the Payroll Tax Cut • Tax Increases Begin (Obama-care) • Congressional mandated spending cuts come into effect This fiscal cliff is only a small part of our concern. The Eurozone crisis, while showing progress of stabilization, is still a day-to-day worry on the world stock and bond markets. Europe is entering a recession that will certainly have a negative impact on global growth. Last year, no one ever expected China to be a concern. But today China’s growth is slowing dramatically. Some estimates indicate that China may grow at only 3% in 2012, down from 9% in previous years. You may ask why is China’s continued growth important? It is important because of its huge consumption of raw materials, commodities, oil, and agricultural products. This will affect world-wide pricing and could cause deflation. In addition, if their economy slows, they will have less ability to buy U.S. and world debt. Lastly, the U.S. employment picture is still only showing marginal improvement. (Continued on Page 4)

Additional Service: Focal Point Approach Recently, we added an additional service to provide you an even greater value and help us serve you even better. For many years, we have managed your investment portfolio so your assets will achieve the goals you have set. Often during a review meeting you find that we not only talk about your investments but other concerns you have, such as insurance, estate planning, or taxes. So many factors affect how we invest your portfolio that knowing every detail about your financial situation allows us to provide the BEST results to you. As you see below, there are several areas your financial picture details. Often we think of each piece separately. However, as your Financial Advisor, we know it is critical for these pieces to work together!

We named this service the Focal Point Approach because YOU are our Focal Point. We want to make sure your financial details reflect your wishes and goals, and achieve them in the most effective way. What this service includes: We will work closely with you to gather all the details for your Financial Manager. We will sort through the details to find the information needed. After we have created your Financial Manager we will analyze each piece to see if there is anything that may need attention. We will provide you with a written summary of any recommendations we have to make sure you are covered should anything catastrophic happen to you or someone in your family. Each year as we review your Financial Manager if there are changes to be made, we will help you accomplish those. Whether we need to meet with your

accountant to discuss possible ways to decrease your taxes due, or perhaps you need additional insurance, or changes within your estate plan. We will work proactively with you to make sure you make the changes needed. When we know every piece of your finances we can provide you the best advice and help you to take advantage of any additional strategies you might not already be utilizing. Again, we have called this service the Focal Point Approach because you, our client, are our focal point and constantly moving around you are these financial pieces. We want to make sure we aren’t missing something that could be devastating financially to you. It is extremely important to see how all these pieces work together. You could be tearing down what you appear to be building up. Your assets could be growing, but are you protecting those with appropriate insurance? (Continued on page 3)

(Continued from page 2)

These are just a few of the things we will detail to make sure you are in the best position possible! As your Financial Advisor, we care about each piece of your finances. And we want to make sure that we are providing you with the best advice we can. As we review your financial manager with you annually for any changes to be made, you can rest assured that we will start the conversation with you. You don’t have to worry about brining in a list of things to discuss. By going through each part of your financial manager we will cover all the details that may keep you up at night. At first glance, this may not seem like such a big deal. But, let’s dive into an individual section to see the impact that can be made. Looking closely into the Estate Planning section you can see all the details that are important to keep up to date. When we are aware of the people you wish to inherit your hard-earned assets we can help ensure that is exactly who inherits them. We realize that beneficiary designations can change from time to time as well. So it is important to review each year.

We also realize that family circumstances and relationships change, which is why at every meeting we will discuss each piece of your financial picture to update any changes necessary. You can also have peace of mind knowing that we are aware of who your beneficiaries should be. We can facilitate that process with your loved ones so it is easy for them to understand during this difficult emotional time for We have seen circumstances in which we them. were not aware of who was listed as the Once we have your Financial Manager beneficiary, and after the client passed (shown on the next page) completed, we away, an ex-wife was still listed on an old will review the details with you, insurance policy. These items cannot be annually. changed once you become Another benefit of creating your financial incapacitated or pass away. manager is that we can make sure we are The way your Estate Plan is structured discussing every piece of your finances at can also affect your income and estate tax least annually. Instead of you relying on that will be due after the passing of you yourself to remember to mention any or your spouse. We can help make sure changes, we will be proactively asking your assets have the appropriate titling you if there is anything that has changed and beneficiaries shown at all times. or that you think might need changed.

You will have all your financial details and information on one piece of paper instead of needing to find a statement or policy in order to contact your insurance agent or accountant. We will list the professional advisors you work with including your insurance agent, accountant, and attorney. There are many moving parts to your finances and this will simplify the number of items you have to keep track of. You will see on the following page a sample of all the details your Financial Manager will include once completed. Please contact us if you have any further questions regarding this new service, the Focal Point Approach. By: Michelle Smalenberger

(Continued from Page 1) Despite this wall of worry, there are actually some positive factors in the U.S. and world economies. As we have referenced in previous newsletters, the U.S. corporate sector is in fairly good shape with hefty cash positions and strong balance sheets. While increasing slightly, U.S. inflation remains modest. With the current drought-like conditions around a lot of the country, agricultural product prices may increase but will be offset by lower energy costs. Interest rates will remain low as long as our economy remains weak. Consumers and corporations are taking advantage of historically low interest rates by continuing to refinance debt. A bright note is that it appears U.S. housing prices are stabilizing and affordability

is at record levels. The housing sector is now contributing to economic growth as opposed to detracting from it. The First Half of 2012 The first half of 2012 was a tale of two

quarters. The first quarter represents the strongest start for the stock market since 1998. This was driven by a “temporary� reduction of fear about Europe, as well as stronger economic data in the U.S. The second quarter gave back most of the first quarter gains driven by escalating concerns about the future of the European Currency Union accompanied by dismal data on employment, and the U.S. deficit. The slowdown in China as well as India put downward pressure on oil and other commodity prices.

The Rest of 2012 The investment committee at KFA recently held our quarterly review. The primary takeaway from the meeting was that our current cautious investment outlook should continue. Our investment approach moving forward will continue to emphasize dividend paying stocks and funds, with a focus on healthcare and energy positions; international funds (with a low emphasis on Europe); and a continued allocation to market neutral investments that give our clients’ portfolios downside protection in volatile markets. In the bond sector, we will continue to hold absolute return oriented bonds fund along with some international bonds funds and tax -free high yield bond funds for additional diversification. Thank you for your confidence and trust in our services.

Disclosure It is not the intent of this newsletter to render product, investment, legal, accounting or tax advise. No statement should be considered as a recommendation to make any financial or investment decision. Editorial content is judged on its relevance to investment decision-making. We make every attempt to objectively present a forum of news and ideas, but do not warrant the accuracy of any information contained herein. This is not an offer to sell or a solicitation to buy any security.

220 N. Smith Street Suite 220 Palatine, IL 60067 847-934-7777

3Q2012 Newsletter  

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