The ongoing Greek debt crisis is entering another phase.  Greece is now in the process of trying to renegotiate around $130 billion of its debt with private creditors.  These private creditors are banks and other investment firms.  The Greek government and other euro zone finance ministers are trying to get these private creditors to swap their existing Greek government bonds for new ones.  The new ones will have only half the face value of the old bonds and have a much longer maturity.  Also, Greece says that it can only afford to pay an interest rate of 3.5% on the new bonds.  The private creditors are obviously not happy with having to take a 50% haircut in the value of their Greek bonds.  They have stated that they must receive an interest rate of at least 4% if they agree to take such a loss on the bonds they hold.

The success of the Greek debt restructuring is likely to have significant repercussions in the euro zone area. If the private creditors who hold the existing bonds are not treated somewhat well, they and others will be very reluctant to purchase any bonds in the future.  On the other hand, Greece could very well have to default on its debt if they are unable to get their creditors to accept these new terms. Furthermore, the bondholders of other countries in the euro zone area will be watching intently as this saga plays out.  The risk of a Greek default is still real and would likely create a great deal of turmoil in the euro zone area.

The European Central Bank, the ECB, is obviously following these negotiations closely.  Also, the ECB has channeled hundreds of billions of Euros to the region’s banks through a new program offering three-year loans at cheap interest rates.  Banks are able to borrow at 1% and use this money to invest in government debt at much higher interest rates.  This has increased liquidity in the banking system and brought down the cost of borrowing for many euro zone governments.

This is perhaps the most critical period of the Greek debt crisis and is being watched closely by investors.  The odds seem to favor a debt restructuring that will, although not completely satisfying to either side, enable Greece to avoid defaulting on its debt and allow private creditors to salvage some value on their investments.  Hopefully, this coupled with the stimulus from the European Central Bank, will allow the euro zone area to embark on a path to better financial health.

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Written by Barbara Heller, Associate Financial Planner

The rising costs of college make the task of saving for children’s education a daunting task. Many parents become overwhelmed with the worry that small amounts of savings won’t come close to being enough for future expenses. While these are valid concerns, the old advice of saving early and taking advantage of compounding still holds true (no matter how small the savings may be). Just take a look at the numbers:

• Saving $100 per month and earning 8% average return over 18 years: $48,009

• Saving $200 per month and earning 8% average return over 9 years: $31,486

In addition to shouldering some of the savings burden themselves, parents should also consider getting creative. One way to do this is by having a discussion with family members about helping save for the child’s education.

1. Ask for 529 contributions in lieu of gifts (at least while the kids are young enough not to know the difference). For example, for my nephews’ birthdays and Christmas (ages 4 and 2), I give them a small gift but the majority of their gift is a check to their respective 529 plans (education accounts). They have so many toys already so I feel good knowing that I am helping contribute to their future education (rather than their overflowing toy boxes).

2. Encourage family members to use online savings websites such as www.upromise.com and www.babymint.com to earn money for college while doing their regular shopping. (See previous blog article titled “Shop…and Save for College!” http://www.claytonfsiblog.com/shop-for-college/)

3. Recruit your kids to help save for their own college. Once the kids are old enough to understand some basics about money, start talking to them about the importance of college and also about the costs. Brainstorm with them about ways they can help with future college costs:

• Have them save a portion of their allowance for college

• Help them research possible scholarships online and look at the requirements. What things could they start doing now to increase their chances for scholarships in the future?

The main goal is to start saving early and make this process as low stress as possible. By recruiting family members to help with the task it can relieve some pressure but also make it a group affair that can be fun. Also, remember to celebrate your results. Recognize the effort your child and family members have put in to help and show your appreciation for those efforts.

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Written by Randy Clayton

Last month my younger brother died at the age of 54. It was not totally unexpected because he had a long list of health and lifestyle issues that would shorten even Superman’s life.  Still, I figured he’d at least make it to age 60. As the only sibling within a 600 mile radius, a portion of the funeral arrangements fell on yours truly. Fortunately for me, the cost of cremation was divided with my brother and sisters because my deceased brother was indigent.

My father died in 1992. He was cremated and his ashes were put into a niche in a cremation wall at a local cemetery (near the duck pond). Cost of cremation in 1992 was approximately $750. Five years later my mother died, and her ashes were put into the same niche as my father. The cost of cremation in 1997 was approximately $1,200.  Now let’s fast forward to December 2011: The cremation costs for my brother were approximately $2,800. Total costs actually exceeded $2,800 because of the cost of the obituary, death certificates, and Celebration of Life party, which were all in addition to the cremation expenses. For a more apples-to-apples comparison, the same niche in the wall that I mentioned earlier has now risen to $1,900.  Over the last 20 years, these expenses have risen faster than inflation for many reasons. That is not the issue I intend to discuss here. Today, I want to tackle a question I often hear from clients: “Should I pre-pay for funeral arrangements to lock in the expense and prevent future cost increases?”

Learn More…

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Written by Elizabeth Young, Associate Financial Planner

Here we are in January 2012 already. This can only mean one thing: It is time to make New Year’s Resolutions! Alas, by March I’ll likely be muttering and sputtering about how I resolve not to make resolutions ever again, but for the time being, I’m going to give it my best shot. While I intend to continue this year with my never-ending resolution to trim some measurable amount from my waistline, I also want to do some “trimming” of a different sort in 2012. My resolution is to trim the fat not only from my waistline, but from my budget! My ultimate goal: Increase savings.

So, my husband politely reminded me during a recent shopping trip that money does not grow on trees. You’d think he would realize that a financial planner knows where money comes from, but alas, he continues to remind me of this fact from time to time.  I don’t consider myself a spendthrift but with the flurry of the holiday season I will admit that I’ve been a little less than thrifty with my spending habits as of late. My guess is after reviewing a couple months worth of bank statements, I’m likely to find issues in the categories of eating out and entertainment; these would be the typical “problem areas” for many people. Admittedly, I also enjoy spending on my children; probably a little more than I should from time to time.

Don’t get me wrong here; I have no intention of living and dying by a budget day in and day out for the next 365-ish days of the year. That would most certainly be unrealistic for me and I’m trying to set myself up to succeed here! My real goal is to get a better handle on exactly how much I’m spending and where it’s going. With this information in hand, I hope to be more budget-conscious when contemplating purchases.

Maybe after creating a plan of action for trimming my budget, I should start on the details of how I intend to trim my waistline! Good luck on achieving your resolutions in 2012! Best wishes to you and yours in the New Year!

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Written by J.D. Kaad, Portfolio Analyst

At the time I write this, the S&P 500 is down -1.69% year-to-date. By the end of this year, or even this week, a drastic change in either direction is not only possible, but likely. The only consistency the equity markets have shown us have come from its inconsistency and one cannot help but be curious as to what is driving the markets. 

The answer is plain and simple: Fear. Instead of financial fundamentals or technical trends, events abroad have been driving prices. Market fear or volatility is measured by the Chicago Board of Options Exchange Market Volatility Index or VIX for short. The chart was developed in 1993 by Prof. Robert E. Whaley and provides an estimate of the implied volatility of the S&P 500 over the next 30 days. This volatility is apparent in both anticipated increases and decreases in the S&P 500.  In practice, this tool provides us a window with which to anticipate market sentiment and motion.

When applied to the events in Europe, which has been the prime motivator for two years of market movement, you can see that with each defining event the VIX spiked. The first of these moments came in January 2010 when Greece’s budget deficit is revised upward to 12.7% from 3.7%, signaling that Greece’s ability to combat their own issues was limited. Another came 4 months later when the first bailout for Greece was passed by the EU amid criticism that it was insufficient to combat Greece’s issues. Each of these VIX spikes was drastic and immediately felt on the S&P 500, although these episodes of volatility were dwarfed by the events of 2008.

The collapse of Lehman Brothers started a volatility explosion which events in Europe have barely halved. That is to say during the worst periods of the 2008 U.S. Financial Crisis the volatility index foresaw a 25% move in the S&P 500 within a 30 day period, whereas Europe only created volatility meriting slightly more than a 10% movement. It is only in the duration of the crisis that Europe has exceeded our own influence on the S&P 500. The 2008 Financial Crisis lasted only six months, which then lead into the rally of 2009. The seemingly endless debate of the European Union has been a drag on domestic markets going on two years with each new failure resulting in elevated market risk.

The current elevated VIX is reflected with the skittish S&P 500, although with improving news from Europe, market volatility is starting to recede. These periods of a return to normalcy have been associated with market rallies and could represent a bullish open for 2012. Although there is little doubt that until the European Union comes to an accord as to their future, market volatility will remain a concern.

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