1. European Union officials recently announced an agreement to rescue debt-laden Greece for a second time. In addition to providing Greece with 109 billion euros in new loans and some relief from its existing debt, the plan includes measures to help prevent the crisis from infecting the other economies in the monetary union.1
    The deal reached by the 17 EU nations may help stem contagion fears, at least temporarily. It was well received — the euro rallied on the news, and stocks rose. Italian, Spanish, Portuguese, Irish, and Greek bond yields also dropped.2 However, some debt restructuring is expected to prompt rating agencies to place Greece on “selective default status,” and it is unclear how markets will react if or when that occurs.3
    Here’s what the latest rescue could mean for investors and financial markets in the eurozone and in the United States.

    What Happened Over There

    Europe’s sovereign-debt crisis began early in 2010 when the Greek government revealed that its debt levels and deficits far exceeded limits set by the EU.4 In May 2010, Greece received 110 billion euros in aid from the EU and the International Monetary Fund (IMF) under the condition that it implement austerity measures to help reduce budget deficits.5 Ireland and Portugal received similar aid after struggling under economic stress and high debts levels.6
    In recent weeks, the crisis threatened to spread to much larger European economies such as Spain and Italy, causing investors to flee the European bond market. Yields on Spanish and Italian 10-year bonds were driven to record highs, resulting in higher borrowing costs.7
    The health of European financial institutions also became a matter of concern. Many banks hold sovereign debt, so their balance sheets would most likely deteriorate if eurozone bonds were to continue losing value. Some banks could become more vulnerable to failure.8

    Key Features of the Rescue

    • Interest rates on new and existing loans from the eurozone’s bailout fund and the IMF will be reduced from 5.5% to 3.5%, and the repayment period will be increased from 7.5 years to between 15 and 30 years. These more favorable terms were also extended to Ireland’s and Portugal’s bailout loans.9
    • Private-sector creditors will contribute billions in debt savings by “voluntarily” accepting a bond exchange with lower interest rates and longer repayment periods.10
    • Europe’s bailout fund gained the authority to issue credit to countries before they lose private funding, and to purchase eurozone bonds on secondary markets. It will also have the ability to lend money to help finance bank recapitalizations, if necessary.11

    Fallout of a Greek Default

    The terms of exchanged Greek bonds will be different from what was initially promised, therefore private investors are likely to incur some losses. As a result, rating agencies will most likely downgrade Greek debt to reflect the temporary default.12 The European Central Bank (ECB) had previously said it would not take Greek bonds as collateral if the nation defaulted, which could have affected the liquidity of some eurozone banks. The ECB will continue to accept the bonds, but the EU has agreed to provide substantial bond guarantees.13
    American institutions hold billions in European bank debt, but many companies have already decreased their exposure to Europe.14Furthermore, a voluntary exchange will reportedly not trigger bond insurance payouts, which may help alleviate worries that American banks and insurance companies could assume major losses due to a Greek sovereign debt default.15
    The situation in Europe was not sudden or unforeseen, so it’s possible that U.S. financial institutions and investors may not be greatly affected by recent events.16 However, it could be many months before the world knows whether a broader European financial crisis was tactfully averted or other serious problems were merely delayed.
    Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to a specific country. This may result in greater investment price volatility. All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk.
    1, 10–11) The Wall Street Journal, July 22, 2011
    2–3, 9, 13) The Wall Street Journal, July 21, 2011
    4) CNNMoney, July 21, 2011
    5) CNNMoney, November 23, 2010
    6) The Wall Street Journal, May 5, 2011
    7) CNNMoney, July 21, 2011
    8) The New York Times, July 17, 2011
    12, 15) Associated Press, July 22, 2011
    14, 16) The New York Times, July 21, 2011
    The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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  4. With an abundance of market information literally at investors’ fingertips, the price/earnings ratios of publicly traded companies are easier than ever to find but often more difficult to interpret. In fact, knowing the P/E ratio of a single company, a basket of stocks, or the overall market may not be particularly helpful unless you are in a position to make meaningful comparisons.
    Put simply, the P/E ratio is calculated by dividing a stock’s current price per share by the company’s earnings per share over a 12-month period. It quantifies what investors may be willing to pay for one dollar of earnings. Thus, a P/E ratio of 10 means that investors would pay $10 for every $1 the company earns.
    P/E ratios may serve as a better indicator of a stock’s underlying value than the market price alone, but it’s essential for investors to understand what they represent.

    Two Ways to Express Earnings

    The trailing P/E, which is the ratio most commonly referenced, relies on the officially reported earnings per share for the previous four quarters. The forward P/E is calculated using the expected earnings over the next four quarters, which can end up differing substantially from the actual figure because it relies on analysts’ projections.

    Weighing Price vs. Value

    A relatively high P/E ratio may signal greater optimism in the stock’s growth potential. Investors expect the company’s earnings to grow more quickly and are prepared to pay more for the stock. But if future earnings disappoint, the price could fall rapidly.
    A lower P/E ratio may suggest that a company’s earnings are more stable and predictable, but investors may not be willing to pay as much for the stock. There is usually less chance that the company will surprise the market with a strong jump in earnings that could cause the stock price to rise dramatically, or a drop in earnings that could cause the stock price to fall significantly.
    By this standard, a stock that costs $10 per share with a P/E of 50 would typically be considered more “expensive” than a stock with a $50 share price and a P/E of 10. But it’s not as simple as comparing the P/E ratios of two different companies to determine which one may be a better value.

    The Benefit of Perspective

    Although it would rarely make sense to compare the P/E ratio of a tech stock to one of a utility stock, weighing the P/E ratios of two companies in the same industry may provide some insight. Furthermore, viewing one company’s P/E in light of the industry average or its own historical norms may also offer clues about the potential of a stock investment.
    The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.
    Looking closely at P/E ratios is just one of many ways to evaluate stock investments, but there are many reasons why a company’s P/E ratio may seem relatively high or low. Buy and sell decisions should typically be made with more than one factor in mind.
    The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.
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  5. Raising taxes is one of many ideas that have been proposed to help reduce mounting federal budget deficits. Yet some taxpayers are already facing the prospect of higher taxes as a result of health-reform legislation passed in 2009.
    In 2013, single filers with modified adjusted gross incomes exceeding $200,000 ($250,000 for joint filers) will be subject to a 3.8% Medicare unearned income tax on net investment income. The Medicare payroll tax will increase by 0.9% on wages exceeding these thresholds.
    If you are concerned about higher taxes in the future, it may be a good time to consider the tax advantages associated with municipal bonds and tax-exempt mutual funds.

    Investing in Infrastructure

    State and local governments sell bonds to finance public-works projects such as roads, sewers, schools, and stadiums. Because government entities have the power to raise taxes and fees to pay the interest, municipal bonds are generally considered higher-quality assets. However, they typically pay less interest than taxable debt.
    On the plus side, municipal bond income is generally exempt from federal taxes and may not trigger the Medicare tax mentioned earlier. The interest on a bond issued outside the state in which you reside could be subject to state and local taxes, and some municipal bond interest could be subject to the federal alternative minimum tax.

    Tax-Free Fund Options

    Tax-exempt mutual funds earn interest from their underlying state and local bonds, so they share the same federal income tax exemption. However, if you sell a municipal bond or tax-exempt fund at a profit, you could incur capital gains taxes.
    The tax benefits associated with these lower-yielding mutual funds may also make them more suitable for taxable accounts, as opposed to qualified retirement plans and IRAs that allow for tax-deferred growth until the assets are withdrawn. Withdrawals from tax-deferred plans prior to age 59½ may be subject to a 10% federal income tax penalty.
    The return and principal value of bonds and mutual fund shares fluctuate with changes in market conditions. When redeemed, they may be worth more or less than their original cost. Bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance.

    High Earners May Net More

    Investors in the top tax brackets may find that the lower tax-free yields from muni bonds and tax-exempt funds are worth more to them than the after-tax yield from taxable bond investments. For example, a 3% tax-free yield is equivalent to a 4.62% taxable yield for an investor in the 35% federal income tax bracket.
    Municipal bonds and tax-exempt funds can be a key component of the portfolios of investors with high incomes and/or a relatively low tolerance for risk. If you fall into these categories, you may want to learn more about tax-efficient investment opportunities that could be appropriate for your personal situation.
    Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
    The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.
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  6. Investment in exchange-traded funds (ETFs) has grown substantially since the first ETF was introduced in 1993. Total ETF assets exceeded $1 trillion in March 2011, up more than $200 million over the previous year.1


    Until recently, conservative investors may have felt left out of the ETF marketplace because the available options were largely based on stocks. That is changing. There are now 140 bond-based ETFs with assets representing about 14% of the total ETF market.2 Bond ETFs generally track major fixed-income indexes that might focus on short-term, intermediate-term, or long-term bonds. They offer some appealing opportunities for the risk-averse.

    Mutual Funds Meet Stocks

    Like mutual funds, ETFs comprise a portfolio of securities assembled by an investment company. They typically track an index, market sector, or other group of securities and offer investors flexibility in structuring their portfolios to meet specific goals and risk tolerances, as well as a level of diversification that would be cost-prohibitive if the underlying securities were purchased separately. This is especially true of bonds, which typically carry face values of $1,000. Diversification does not guarantee against loss; it is a method used to help manage investment risk.
    Unlike mutual funds, whose shares are generally bought from and sold back to the mutual fund and priced once a day at the close of business, shares of ETFs trade like stocks throughout the day. Supply and demand for the shares may cause them to trade at a premium or a discount relative to the value of the underlying shares.
    The principal value of ETFs and mutual funds will fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Bond ETFs are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect the performance of a bond ETF.
    The attraction of ETFs over mutual funds comes from their trading flexibility, generally lower expense ratios, and greater tax efficiency. Be mindful, however, that you must pay a brokerage commission to purchase ETF shares. Given the growing availability of ETFs, there may be several to choose from that could be appropriate for your risk profile.
    Exchange-traded funds and mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
    1–2) Investment Company Institute, 2011
    The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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  7. A recent survey in 136 countries suggests that spending money to help others may be a universal source of personal happiness.1 Americans seem to take this to heart, giving more than $290 billion to charity in 2010, even with the slow economy.2

    When making a substantial donation to a specific charity, you might consider trust strategies that may allow you to give generously while potentially benefiting yourself and your heirs. A good first step is to understand the basics.

    Charitable Remainder Trust (CRT)

    In a CRT, you (the grantor) can donate money, securities, property, or other assets to the trust and designate an income beneficiary — even yourself — to receive payments of a specified amount for a set period or your lifetime (or the lifetime of your surviving spouse or designated beneficiary). Payments must be made at least once a year and may be fixed or variable depending on the type of CRT you use. Upon your death (or the death of your surviving spouse or designated beneficiary), the assets in the trust go to the charity.
    Although the annual trust income is usually taxable, you may qualify for an income tax deduction based on the estimated present value of the remainder interest that will eventually go to the charity. Once assets are in the trust, the trustee may be able to sell them and reinvest the proceeds without incurring capital gains taxes.

    Charitable Lead Trust (CLT)

    Assets placed by the grantor in a CLT pay income to the designated charity until the trust ends (typically, upon the death of the grantor). The remaining assets are then returned to the grantor or the grantor’s heirs. Not only could this strategy provide an income stream to your favorite charity, but it might help reduce, or in some cases eliminate, estate and gift taxes on appreciated assets that go to your heirs.
    Both types of trusts are irrevocable, so assets cannot be removed from the trusts once they are donated. Not all charities are able to accept all possible gifts, so it would be prudent to check with your chosen organization before making a donation or establishing a charitable trust. The type of organization you select could also affect the tax benefits you receive.
    The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing trust strategies.
    1) National Bureau of Economic Research, 2010
    2) Giving USA 2011, Giving USA Foundation
    The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.
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  8. More than half of Americans have direct investments in the stock market, and it’s probably safe to say that they would like their investments to grow.1Most investors would also like to believe their investments have value.
    So what does it mean to invest in a growth mutual fund or a value mutual fund? The labels “growth” and “value” reflect different investment approaches that mutual fund managers use when making portfolio decisions.

    Two Strategies for Pursuing Results

    Growth stocks are companies that appear poised to grow. These companies generally do not pay dividends because they are more likely to reinvest profits. A growth company may be on the verge of a market breakthrough or acquisition, or may occupy a strong position in a growing industry. Generally, smaller companies have more potential to grow, but a larger company may also be a growth stock. As you might expect, growth stocks carry substantial risk.
    Value investing tries to identify companies that are undervalued by the market. Their stock prices may be lower in relation to their earnings, assets, or prospects. Established companies may be more likely to be considered value stocks than newer companies, and value stocks may pay dividends. When purchasing a value stock, the fund manager expects that the broader market may eventually recognize the value of the company, potentially causing the share price to rise. One of the risks is that a stock that is undervalued as a result of problems with the company or the industry may not be able to recover from the setback.
    Many mutual funds that focus principally on value or growth stocks commonly have the word “value” or “growth” in the names. Blend mutual funds may include both types of stocks. The return and principal value of stocks and mutual funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

    Historical Performance

    From 1981 to 2010, the average annual return for large-cap value stocks was about 2.1% higher than the average annual return for large-cap growth stocks. Yet growth stocks outperformed value stocks in 13 years of this 30 year period (see chart). Past performance is no guarantee of future results.
    This suggests that holding both growth and value funds in your portfolio may help you take advantage of a variety of market conditions. We can help you determine whether growth or value investments — or both — may be appropriate for your portfolio.
    Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
    1) Gallup, 2011
    The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2012 Emerald Connect, Inc.
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  9. The federal estate tax was repealed in 2010, then reinstated by the 2010 Tax Relief Act with new provisions for 2011 and 2012. These provisions include a higher exemption amount and a lower tax rate that could ease or eliminate the tax burden on many estates.
    Although the reinstated estate tax may not affect you now, it is scheduled to become more aggressive in 2013 and beyond, potentially affecting many families who might not be considered wealthy.

    What’s New?

    For estates left behind in 2011 and 2012, assets exceeding a $5 million exemption will be taxed at 35%, the lowest top tax rate in 70 years. A new portability provision allows surviving spouses to use the unused portion of a deceased spouse’s exemption, provided he or she makes the appropriate declaration on the estate tax return. Thus, married couples may be able to pool their exemptions to shield up to $10 million from federal estate taxes. The law also brings back the ability to “step up” the basis of assets to the fair market value on the deceased owner’s date of death.

    Options for 2010

    Estates of 2010 decedents can choose the 0% federal estate tax that was in effect that year, when the modified carryover basis rules were also in effect. (Under these rules, heirs must use the lesser of the decedent’s basis or the fair market value on the date of the owner’s death when calculating capital gains.) Alternatively, decedent estates can choose the reinstated estate tax and the new provisions. Their choice may affect capital gains taxes on some estate assets.

    What’s Next?

    Without further legislation, the federal estate tax will revert to a $1 million exemption and a top tax rate of 55% in 2013. The portability provision is also scheduled to expire after 2012. These changes could subject many more estates to the tax than under current law.
    No one can anticipate what will happen in the future, but it’s important to be aware of the temporary estate tax provisions and the potential for change in 2013. Before you take any specific action, be sure to consult with an experienced estate, legal, and/or tax professional.
    The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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  10. Because life insurance typically becomes more expensive as we age, many people may believe they can’t afford to purchase coverage later in life. However, considering that life insurance is significantly less expensive today than it was a decade ago, you might be able to purchase new coverage and pay premiums comparable to those that were available when you were 10 years younger.1

    It’s a good idea to review your life insurance situation on a regular basis. Here are some reasons why your coverage may need to evolve to keep pace with your life.

    Life Changes

    If your income and/or net worth have increased significantly since you purchased your policy, ask yourself whether your current coverage would enable your survivors to maintain their current standard of living. Major life events such as birth, marriage, death, and divorce may also affect the amount of coverage you need.

    Inflation

    Because of inflation, a policy purchased years ago may no longer offer the same level of protection. For example, a 3% inflation rate can cut the purchasing power of a death benefit in half in about 24 years, based on the Rule of 72 (72 ÷ 3 = 24 years).

    Estate Conservation

    One popular reason for owning life insurance is to provide liquid funds to help heirs pay estate taxes and any other debts. Considering that the estate tax has changed several times over the past decade, it’s a good idea to review your coverage in light of current estate tax laws and your net worth.
    As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.
    The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.
    1) USA Today, December 3, 2010
    The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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