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Volume 9, July 2015 We Interrupt Our Usual Digest Article to Deliver A Special Consumer Message: Coping with the IRS (or Any Entity) Data Breach Data thieves; they have hit us where we shop, how we receive health care benefits, and now, they have found their way into our tax returns. The recent breach reported by the Internal Revenue Service is unnerving when you consider how much personal data is included on the return of not only the tax filer, but other family members as well. Various government agencies have published information to help you guard against identity theft, as well as aid you if you fall victim to this growing crime. Direct links to these websites and comprehensive PDF documents will be available at Legacy’s web site, www.lptrust. com. This article will summarize recommendations from creditable authorities and websites on what to do (or not to do) right now if you receive a letter from the IRS (or other entity) that your data appears to have been stolen. FIRST CRITICAL FACT: The IRS (or your bank or credit card company) will not contact you by email to report a fraud alert. This data breach has already spun off additional fraud attempts of people posing as the IRS by both email and telephone. If the IRS believes your data has been compromised, they will send you a letter in the mail. Never provide information over the phone to someone who has called you no matter how professional they sound, especially if they ask you to provide confirmation of your identity. Emails suggesting you have a problem with an account are even more likely to be fraudulent—never click on a link that is imbedded in these emails. If the email worries you, find different ways to contact that company to investigate the issue. PLACE A FRAUD ALERT: Call one of the nationwide credit reporting companies, (Equifax 1‑800‑525‑6285, Experian 1‑888‑397‑3742, TransUnion 1‑800‑680‑7289) and ask for a fraud alert to be placed on your credit report. The company you call must contact the other two so they can all put fraud alerts on your files. An initial fraud alert is good for 90 days and does not prevent lenders or other third parties from accessing your credit files; but it does require them to take additional steps to verify that you have authorized the activity on your account. If they perform this extra due diligence and believe it to be credible, they still have the ability to open new lines of credit. REVIEW YOUR CREDIT REPORT: As dictated by law, everyone is entitled to review your credit report annually. Since there are three credit bureaus, you can review your report once every four months by using a different one each time. If you want to see all of them at once, go to www.annualcreditreport.com or call 1-877-322-8228. Later, there may be a small fee to do an additional review within the same year, but in cases where fraud or identity theft is a concern, fee discounts and waivers may be offered. Monitoring your credit reports may be helpful if someone tries to open new lines of credit using your information, but it doesn’t necessarily stop them from succeeding. CONSIDER PLACING A CREDIT (AKA SECURITY) FREEZE: A security freeze prohibits, with certain specific exceptions, the credit reporting agency from releasing your credit report or any information from it without your expressed authorization. Since most businesses won’t extend credit without reviewing credit history, this should stop credit from being issued to anyone but you. Once a “freeze” is in place, if you need to pursue legitimate applications for credit you can “thaw” your credit report by using a personal identification number or PIN (issued by the credit reporting agencies). Freezing your credit files has no impact whatsoever on your existing lines of credit, such as your current credit cards; you can continue to use them as you regularly would even when your credit is frozen. Freezes are free to victims of identity theft who have filed their case with a law enforcement agency, but non-victims are subject to fees when freezing and thawing their credit files. In Wisconsin, each action of placing, removing, or temporarily lifting the freeze will cost $10. It is imperative that you freeze your credit with all three bureaus in writing. You can download a PDF from our website with instructions on how to freeze your credit. IF YOU ARE A VICTIM: If you do find fraudulent activity, you need to create an Identity Theft Report. An Identity Theft Report is comprised of two documents; a filed complaint with the Federal Trade Commission (FTC) and a police report from your local police department. First, complete a fraud complaint with the FTC by going to www.ftc.gov/complaint or calling 1-877-438-4338. Following your complaint filing you will be provided with an FTC Affidavit, which you need to give to the local police in order to file a police report. Combining your FTC Affidavit and your local police report gives you an Identity Theft Report. Unfortunately, identity theft cases continue to increase as thieves find new ways to steal information that can be used in a variety of fraud schemes. Even in death we don’t appear to be protected; families have discovered multiple lines of credit being opened using their loved ones’ identity following a published obituary and death notice because too much personal information, such as the exact birth date, was included. In order to keep you more informed, we have posted additional information regarding how to protect yourself from identity theft on our website, www.lptrust.com. n For ideas and steps you can take to protect your identity from data thieves, please go to the back page of the Digest. Economic and Financial Digest Recession Rebound Reaches Six-Year Anniversary The U.S. economy reached a milestone of sorts in June when the recovery from the Great Recession hit the six-year mark. There’s been more than the usual share of bumps along the way, but the upturn always regained its footing. The last pothole was traversed in the first quarter when the terrible winter plus a West Coast port strike briefly knocked the recovery off the rails. True to form, growth resumed in the second quarter, although the rebound has been more subdued than policy makers would have liked. Even with a decent growth rate for the period of about 3 percent, which many expect, growth for the entire first half of the year would fall short of the 2.2 percent average pace over the six years since the recovery began, which itself is about half the normal growth rate seen in previous postwar upturns. Yet, the Federal Reserve is expected to raise interest rates before the year’s end, a prospect that has barely raised any alarms. True, some critics feel the central bank should wait a while longer, believing that the economy is still not strong enough to withstand higher rates. But this view is held by the minority of forecasters, both within and outside the Fed. At its latest policy meeting on June 17-18, the majority of Fed officials expected at least one rate increase this year, which would be the first hike in nearly a decade. The liftoff date remains up in the air depending on how the economy performs over the summer months. The Fed, of course, has wanted to start normalizing policy for some time, but its efforts have repeatedly been thwarted by the economy’s failure to live up to expectations. It’s possible that the central bank is once again being overly optimistic about the economy’s prospects, prompting another delay in rate hikes. Legacy Core Equity Portfolio The core equity portfolio is designed to ensure broad participation in the equity market, with less than average market volatility, while effectively producing a meaningful performance edge for our clients. We use an active valuation strategy that employs quantitative and fundamental analysis, focusing on individual stock selection in conjunction with economic sector discipline. Securities are selected through a process incorporating quantitative and fundamental analysis with the qualitative judgment of our senior investment professionals. This rigorous investment process strives to look beyond mainstream consensus opinion to construct portfolios designed to achieve your investment goals and weather varying market conditions. The chart to the right shows the sector weightings in the Core Portfolio as of June 30, 2015. Odds are, however, the economy will perform as advertised this time, allowing the long-awaited liftoff to take place later this year. Having lived with near zero interest rates for almost seven years, there’s understandably some trepidation about how the financial markets, much less the economy itself, will respond. There’s at least one group—savers—who believe that higher rates are long overdue. Getting Long in the Tooth With six years in the books, the current upturn ranks among the longest of the postwar period. On average, the eleven recoveries since World War II expired 58 months after they started. This one is entering its 74th month and still counting. To be sure, it has a ways to go before catching up to the record 1991-2001 expansion, which spanned 120 months, or the one in the 1980s that lasted 92 months. It is also well short of the 1961-69 upturn, which was fueled in its later stage by military spending related to the Vietnam War. Measured against peacetime recoveries, the current recovery is tied for third longest, just matching the 2001-2007 cycle, which it is poised to exceed. But what it boasts in length, it lacks in vigor. As noted earlier, the current recovery has progressed at a much slower pace than previous recoveries, something that sets it apart for another reason. Most previous upturns were mirror images of the recessions from which they emerged: the deeper the downturn, the stronger were the subsequent recoveries. This one, however, followed a different script, as the recession that preceded it was the deepest since the 1930s. Instead of exploding out of the starting gate, it staggered to its feet and has wobbled for most of its existence. Core Equity Portfolio Composition Consumer Descretionary – 12% Consumer Staples – 8% Materials – 4% Health Care – 16% Information Technology – 12% Utilities – 4% Industrials – 12% Energy – 4% Financials – 28% Past performance does not predict future results. Current and future results may be lower or higher than those referenced in this newsletter. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity. Investment return and principal value will fluctuate and investments may lose value. Length of Postwar Expansions Months 140 120 120 106 100 92 80 73 60 40 37 45 39 73 58 58 36 24 20 12 0 45 49 54 58 61 70 75 80 82 91 01 Avg Current Starting Date There’s no shortage of explanations as to why the current recovery departed from past cyclical patterns. Rather than debating their relative merits, it would be more useful to look at the implications this departure might have for the future. On this score, there is both good and bad news. The good news is that the very lackluster pace of the upturn increases the odds it will last longer because the usual inflationary forces that build up as a recovery matures, leading to a growth-stifling tightening of monetary policy, are being held at bay. The bad news is that the inability to break out of a slow-growth trajectory makes the recovery more vulnerable to external shocks, such as an oil price surge, the Greek debt crisis and the unfolding stock market turmoil in China. Walking a Tightrope Clearly, the Fed is coping with a delicate balancing act. It must weigh the risks of waiting too long before raising interest rates, allowing inflationary forces and other imbalances to gain traction, against the risk of acting prematurely, which could choke off the vulnerable recovery. The central bank has dealt with these risks many times in the past, both successfully and unsuccessfully. More often than not, it has waited too long and was forced to react by harshly clamping down on the monetary brakes, bringing on a recession. As a previous Fed chairman, William McChesney Martin, famously noted some 60 years ago, the most challenging task of the Federal Reserve is to know when to take away the punch bowl before the party heats up. Of course, the current party is far from overheating and the Fed has no intention of taking away the punch bowl, only lowering the fill level a bit. As Fed Chairwomen Yellen reiterated at her press conference following the latest policy meeting, the step back from easy money will be gradual, whenever it begins, and rates will remain low for some time to come. This cautious approach is in deference to the erratic and subpar performance of the economy throughout the recovery as well as its modest growth prospects over the next several years. As much as the Fed wants to avoid overstaying the course, it also needs to keep the growth engine humming and feel reasonably confident that inflation will move up towards its long-elusive 2 percent target. There are compelling reasons to increase interest rates as soon as the economy can tolerate it. For one, the Fed needs to be forward looking when making decisions, as policy changes affect the economy with a lag. Hence, any policy move has to take into account where the economy will be in six or nine months. A small step now may prevent larger more disruptive actions later on. For another, it’s important to build up a cushion of higher rates as soon as possible to give the Fed some leeway to cut rates if and when the economy stumbles again. With short-term rates at nearly zero, the Fed has no room to cut further should a recession suddenly appear. Double-Edged Sword It’s also important to remember that interest rates cut both ways, as they are a cost to borrowers as well as a reward for savers. There is no question that borrowers have benefited immensely from the low cost of funds. Not only have businesses and, to a lesser extent, households been able to borrow cheaply to finance operations and sustain consumption, they have also reduced debt burdens by refinancing copious amounts of bonds and mortgages at lower rates. The resulting balance sheet improvement, reinforced by appreciating asset values, has partially compensated for weak income gains and, hence, supported stronger consumer spending than would otherwise be the case. But seven years of low rates have also taken a toll on households who traditionally rely on interest income to sustain living standards. It’s unclear how much of an effect this has had on overall consumption, but the removal of this source of purchasing power has been dramatic. Just prior to the recession, slightly more than 11 percent of personal income came from It’s important to interest receipts. That share has fallen to just over 8 percent in remember that recent months. Not since 1964 interest rates cut has interest receipts constituted such a small proportion of both ways; they are income; back then, Regulation a cost to borrowers Q ceilings imposed strict as well as a reward limits on the interest rate financial institutions could for savers. pay on savings accounts. Not surprisingly, there is a vocal constituency that believes low interest rates penalize savers, particularly retirees. Keep in mind that this group used to have a stronger safety net to rely on to complement interest income, as most families received a steady income stream from defined benefit plans. That’s no longer the case. According to the Department of Labor, the share of households with such plans has dropped precipitously, accounting for only 30.5 percent of all retirement plan participants. That compares to a 75 percent share in 1975. A far larger share of households today has their retirement funds in defined-contribution plans, 401ks and IRAs, which generate a much more uncertain income stream. Continued next page Recession Rebound Reaches Six-Year Anniversary Continued from page three Tough Time For Savers Percent 19.0 Bubble Risk 17.0 Indeed, the prolonged period of ultra-low interest rates has raised another concern that’s on the Fed’s radar screen. To compensate for low yields, savers and investors in general have taken on more risks to generate income, channeling funds into speculative assets such as equities and high-yield bonds. Many feel that the unprecedented bull market in stocks over the past six years is largely a response to the Fed’s easy money policies. According to these critics, the longer rates are kept at rockbottom levels, the greater the odds that a stock market bubble will inflate—and eventually burst with dire consequences when the punch bowl is taken away. The Fed, of course, is not dissatisfied with rising stock prices, as the wealth boost from improved portfolios has contributed to the recovery, even as most of the gains have accrued to wealthier investors. However, Fed chair Yellen has expressed concern that some investors may be taking on too much risk, and worries about the possible financial turbulence that may occur when rates start to move up. For that reason, the Fed has gone to great lengths to prepare the markets for an eventual policy move, hoping that ongoing forward guidance of its intentions will lead to a smooth transition to higher rates. Only time will tell whether the events occurring in Greece and China will be enough to convince the Fed to postpone its plan to increase rates. 15.0 13.0 11.0 9.0 7.0 Interest Income as a % of Personal Income 5.0 3.0 89 91 93 95 97 99 01 03 05 07 09 11 13 15 Simply put, the prospect of higher interest rates should not be a cause for alarm. The financial markets might or might not overreact to the initial move, but the Fed has to do what’s best for the economy. Given the numerous false starts since the recovery got underway six years ago, there’s understandably much skepticism as to whether the modest rebound in activity following the winter slowdown will usher in a period of sustained growth that can withstand higher interest rates. But the economy has clearly broken out of the crisis environment that warranted a zero interest rate policy and it’s doubtful that a nudge up will choke off the recovery shortly after its sixth anniversary. Besides, it might give savers something to celebrate. n Avoiding Identity Theft: Ideas to Protect and Monitor Your Identity Security • Never respond to email alerts warning you of a breach; contact the entity by a phone number you research yourself if you are worried; • Monitor credit bureau reports and consider a credit freeze if you don’t need to open new lines frequently; • Shred all personal documents; • Consider credit freezes on minor children, high school graduates or college students, and recently deceased loved ones; • Never provide information over the phone unless you initiated the call and feel secure about who you are talking to; • Social security cards should be kept in a secure location and never in a purse or wallet; • Know at all times what is in your wallet by making a photo copy of your credit cards, health insurance cards and other personal items; • Checks should never include your social security number and do not write the account number of the bill payer on your checks submitted for payment; • The personal representative of an estate should notify all three credit bureaus of a death both by telephone and in writing. Additional information including printable PDF brochures is available at www.lptrust.com. Sites with helpful information: www.ftc.gov/idtheft www.identitytheft.gov • Remove labels from prescription medicine bottles before disposing; www.consumer.ftc.gov/topics/privacy-identity • Review all account statements from banks, investment companies, credit cards and health insurance monthly; www.consumer.ftc.gov/articles/0272-how-keep-your-personalinformation-secure • Take steps to make sure your computer, all files and passwords are safe from intruders or hackers; www.privacy.wi.gov To learn more about Legacy and our services, visit www.lptrust.com or call 920.967.5020. Two Neenah Center | Suite 501 | Neenah, WI 54956 | 920-967-5020 | www.lptrust.com © 2015 Legacy Private Trust Company. All rights reserved.