Week of June 11, 2007

The Markets
 
Investors can be fickle.

The optimism inspired by the first quarter’s weak economic growth dissipated last week. Why did a weak economy give investors a positive outlook, you ask? As long as the economy was less than robust, an indication that inflationary pressures could subside sooner rather than later, analysts and investors felt confident that the Federal Reserve Board would leave rates unchanged or, possibly, lower rates later in the year. Lower rates could spur economic growth, which is what investors want (and isn’t that what recent news has indicated we have?). However, they could also lead to higher inflation—and inflation has been the Federal Reserve’s top concern for a while.

What caused the change in investors’ outlook? According to Barrons.com, analysts and investors have been reinterpreting recent positive economic news in light of the actions of central banks around the world. Last week, the European Central Bank raised rates, and indicated that it is ready to increase rates again to battle inflation created by a strong economy. The Bank of England and Central Bank of Australia appear to be preparing to increase rates, as well. Will the Fed increase rates? No one knows, but investor worries drove the markets lower last week.

Source: Yahoo! Finance, Barrons Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly. Three-, 5-, and 10-year returns are annualized.  Assumes dividends are not reinvested.

How much of your employer’s 401(k) matching contribution are you receiving? If you participate in your employer’s 401(k) plan, and your employer offers matching contributions, it can be a good idea to contribute enough to receive the maximum employer matching contribution each year. Matching contributions are like bonuses that you receive only if you contribute to the plan—and who doesn’t want a bonus?

Employees who contribute the IRS maximum to their plan accounts each year may not receive full employer matching contributions unless they spread their contributions out over the full year. That’s because some employers calculate matching contributions by pay period rather than considering the full amount of an employee’s contributions in any given year. As a result, if you reach the IRS limit for 401(k) contributions during August then you may not receive employer matching contributions for the September, October, November, and December pay periods.

The solution is fairly straightforward. At the beginning of each year, do some simple calculations. Divide the maximum IRS contribution amount by 12 (the number of months in the year), and then contribute that amount to your account each month. If your plan requires that you contribute a percent of earnings, just divide the amount you want to contribute by your eligible earnings. If the math sounds intimidating, give us a call. We’ll help you determine how much to contribute to receive full employer matching contributions.

Do you love corn-on-the-cob? If you haven’t noticed yet, you will soon—the cost of corn is going up. One effect of our nation’s shift to ethanol is that demand for corn is increasing. It takes one bushel of corn to make 2.7 gallons of ethanol, according to the U.S. Department of Agriculture, and ethanol producers are expected to increase their demand for corn significantly during the next decade. Higher demand usually translates into higher prices. Already, in Mexico, the price of tortillas—a staple in the Mexican diet—has tripled, creating issues for vendors, consumers, and the country’s new president. In the United States, consumers have seen chip and cereal prices increase, and more increases may be on the way.

Inflation isn’t always predictable. Prices of everyday goods will continue to increase over time. If you want your retirement to be all that you hope, it’s important to begin saving and investing early.

Weekly Focus – Which country do you think has the most paid vacation time? If you said it’s not the United States, you’re right. America is the only rich country that does not have any statutory paid holidays. However, many U.S. employers give their full-time workers at least fourteen days of paid vacation—including some holidays—according to The Economist. Japan also has a spare holiday policy, relative to other rich countries, offering just 18 days off each year.

The country whose citizens enjoy the most paid leisure time is Finland! According to The Economist, Finns get about 44 days off each year, including annual leave and public holidays. Most Europeans enjoy at least the European Union’s legal minimum of four weeks off each year.  

Best regards,

Fredrick J. Livingston, CLU, CFP

Securities offered through LPL Financial, Member NASD/SIPC

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. 

* The Nasdaq Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

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