April 2013 DC Beacon Edition by The Beacon Newspapers

Say you saw it in the Beacon | Law & Money

WA S H I N G T O N B E A C O N — A P R I L 2 0 1 3

Stocks From page 30 Third, earnings forecasts are often too high. They come from financial analysts who study companies and advise on stocks to buy. In the past 15 years, their annual earnings forecasts were an average 10 percent too high, according to FactSet. Last year, they got closer: They overestimated by 4 percent.

Stocks are reasonably priced Investors like to use a gauge called priceearnings ratios in deciding whether to buy or sell. Low P/E ratios signal that stocks are cheap relative to a company’s earnings; high ones signal they are expensive. Right now P/E’s are neither low nor high, suggesting stocks are reasonably priced. To calculate a P/E, you divide the price of a stock by its annual earnings per share. A company that earns $4 a share and has a $60 stock has a P/E of 15. Most investors calculate P/E’s two ways: based on estimates of earnings the next 12 months and on earnings the past 12. Stocks in the S&P 500 are at 13.7 times estimated earnings per share in 2013. That is close to the average estimated P/E ratio of 14.2 over the past 10 years, according to FactSet. The P/E based on past earnings paints a similar picture. The S&P 500 trades now at 17.6 times earnings per share in 2012, basically the same as the 17.5 average since World War II, according to S&P Dow Jones Indices, which oversees the index. Again, a caveat. Another way to calculate P/E’s, called a “cyclically adjusted” ratio, suggests stocks are not such a decent deal. Its champion is economist Robert Shiller of Yale University who warned about the dotcom and housing bubbles. Shiller thinks it’s misleading to look at just one year, because earnings can surge

or drop with the economic cycle. To smooth such distortions, he looks at annual earnings per share averaged over the prior 10 years. The cyclically adjusted ratio is 23 times. Since the end of World War II, it’s ranged between 6.6 and 44.2, and the average is 18.3. That suggests stocks are expensive, though perhaps not wildly so. No matter which P/E you choose, it’s important to think of it as a rough guide at best. Stocks can trade above or below their average P/E’s for years.

Optimistic investors A new love of stocks could prove a powerful force pushing prices up. In fact, it can push them up even if earnings don’t increase. That’s what happened in the five years through 1986. Earnings fell 2 percent, but the S&P 500 almost doubled as small investors who had soured on stocks throughout the 1970s returned to the market. The multiple — shorthand for the price-earnings ratio — rose from eight to nearly 17. Market watchers refer to this as “multiple expansion.” Will it happen again? As stocks have surged over the past four years, individual investors have been selling, which is nearly unprecedented in a bull market. But they may be having second thoughts. In January, they put nearly $20 billion more into U.S. stock mutual funds than they took out, according to the Investment Company Institute, a trade group for funds. Some financial analysts say we are at the start of a “Great Rotation.” That would mean investors shifting money into stocks from bonds. If that happens, stocks could soar. It’s too soon to say if the buying will continue.

Low interest rates Interest rates are near record lows.

Thieves Market Antiques & Estate Sales My father, Henry Cohen, started Thieves Market Antiques in 1952. Today, more than 60 years after we opened our doors, we are still a family business dedicated to providing every client personal attention and professional expertise. We realize that many of our loyal customers in Washington, Maryland, and Virginia are now beginning to downsize; or, are settling the estates of family and friends. This can be a challenging and emotional task. For 60 years, Thieves Market has been in the business of purchasing estates and organizing in-home estate sales. In recent years, Thieves Market has worked with Corinne Savage of CENTURY 21 New Millennium, the #1 CENTURY 21 firm in the world, to offer staging and real estate services to clients preparing their homes for sale. Together, Thieves Market and Corinne Savage can make settling an estate, downsizing, or transitioning to a new situation a less stressful experience. Thank you for making Thieves Market a part of your life for the past 60 years. We appreciate your business and look forward to serving you in the future.

That’s good for stocks because it lowers borrowing costs for companies and makes bonds, which compete with stocks for investor money, less appealing. If you want to kill a stock rally, then hike interest rates. That’s what happened in the runup to Black Monday, Oct. 19, 1987. In August that year, the yield on the 30-year Treasury bond rose above 10 percent. Investors thought, “If I could make 10 percent each year for 30 years in bonds, why keep my money in stocks?” So they sold and stocks drifted lower. Then Black Monday struck. The Dow plunged 508 points, or nearly 23 percent — its largest fall in a single day.

Today, the yield on the 30-year Treasury bond is 3.2 percent. The yield on the 10year Treasury note is 2.05 percent, less than half its 20-year average of 4.7 percent. It could be years before rates even return to that average level. Of course, interest rates could jump on fears of higher inflation. But inflation has been 1.6 percent the past year, below the Federal Reserve’s 2 percent target. What’s more, the Fed has promised to keep the benchmark rate it controls near zero until unemployment falls to 6.5 percent. Unemployment today is 7.7 percent. — AP

PAUL F. RIEKHOF ATTORNEY AT LAW

Estate Planning & Administration JOSEPH, GREENWALD & LAAKE, P.A. 111 Rockville Pike Suite 975 Rockville, MD 20850

135 W. Dares Beach Rd Suite 209A Prince Frederick, MD 20678

6404 Ivy Lane Suite 400 Greenbelt, MD 20770

Listed in Washington SmartCEO’s “Legal Elite” Complete estate plans to avoid probate, save taxes, and assure distribution according to your wishes. t 3FDFJWF FREE information on Estate Planning. t 4DIFEVMF B FREE 30-minute consultation to discuss your personal plan in our offices or your home.

240-399-7899 Positioning Your Financial Plan For These Uncertain Economic and Financial Times If you are not sure how much risk you are really taking with your investments or if you simply want to seek peace of mind with better control of your future, then a simple, noobligation 3 step review can assure that your decisions and planning are right for you and your particular situation. This is NOT a seminar event. This offer entitles you to privately go through our 3 Step Review, and as a special thank you upon completion of your portfolio analysis you will receive a complimentary $100 gift card.

During this session, we’ll help you learn: • The 3 biggest misconceptions that your CPA, attorney and financial advisor may be missing that could be costing you thousands per year!!! • Ways to potentially reduce or eliminate Social Security taxes, IRA taxation and income taxes. • How you may dramatically increase your interest earnings-while safeguarding your investments from risk. • Learn how wealthy high-income investors shelter income and assets from higher tax rates and risk going forward.

Don’t start another year without being proactive with retirement and tax planning that may help you find money falling through the cracks in your current plan. This special offer is limited to first-time responders. They are designed for those retired or close to retirement who have over $250,000 in savings and investment accounts. Married guests need to attend consultation together in order to qualify for this offer.