Sound Financial Planning Inc. Client Update Blog

PACIFIC NORTHWEST ECONOMIC UP-DATE

2012-02-08T09:05:00.000-08:00

Tammy recently attended a Financial Planning conference in Seattle and wanted to share with you some thoughts from a well known Pacific Northwest economist, Michael Parks.

Globally

Parks stated that globally the main apparent risks are Europe and China. The Eurozone with its high debt, low growth, giant public sectors, early retirement, and untaxed informal sectors is struggling. This is disconcerting since European banks are larger than US Banks. Banks and governments - too big to fail - are inter-dependent and both at risk. He was concerned about the 2 bank failures of Belgium Bank and MF Global. He said that Greece is just a side show, and that Italy, but also Spain and France, share the center ring. He also said that the European Union is very connected to emerging markets which can go from boom to bust. The problems in Europe pose three contagion risks for the US: Merchandise trade, Banking, and the Stock market.

China is the second largest economy and next to India and Brazil it has had good growth rates. However, Parks said that China's growth slowed to 8.8% in the 4th quarter of 2011. This was mainly due to slow exporting to rich economies such as ours. China's debt is accumulating quickly with its boom of investment into its own infrastructure, namely the real estate sector. Sound Familiar? Here is an interesting article about China's Ghost Towns. http://www.economywatch.com/economy-business-and-finance-news/Chinas-Ghost-Town-Overdevelopment-in-the-Real-Estate-Market/22-08.html

United States

We all know about the dysfunction in Washington, D.C., but Parks said that it is inhibiting the necessary structural reforms. He believes that our country needs to work on its infrastructure while interest rates are low. He says that monetary policy is constrained as interest rates are zero bound. Bernanke has limited options for stimulus. The forecast for US economic growth for 2012 is an improvement from 2011 according to data from the Bureau of Economic Analysis. As I write this, the Dow sees its highest close since 2008 because of positive jobs data.

Washington State

Parks said that the Boeing-IAM agreement is great news. The Labor peace plus a bulging order book should provide high levels of employment in this sector. He said the weakness of the dollar is good with our close proximity to Pacific Asia although the US and Canadian dollar are about par. Parks reminded us about the feeble recovery we have seen so far in housing which is the sector that usually leads the economy out of a recession.

All in all, Parks feels that even though there are some wildcards still being played out globally, the United States is seeing some recovery and making the tough climb up in the typical business cycle, albeit more slowly this time than in decades before. It all comes down to human behavior which is unpredictable and yet we all know how much our country loves to prosper. Parks believes we will continue to see a strive towards prosperity in our country, whether bad or good.

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial St., Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

ARE PEOPLE REALLY RETIRING LATER?

2012-02-06T08:58:00.001-08:00

A noted economist disputes that generalization.

True or false? You may have heard this claim before (or something like it): “Many Americans are being forced to retire later because their savings and investments took a hit in the Great Recession.”

Recently, a big-name economist disputed that belief. In a commentary for Bloomberg, former White House budget director Peter Orszag wrote that some of the statistics don’t seem to back up this conventional wisdom, but perhaps it all depends on which statistics you cite.

A fact that can’t be ignored. In mid-January, a widely reprinted Washington Post article mentioned that since the start of the recession, the population of U.S. workers older than 55 has increased by 12% to 3.1million.1

Examining this Labor Department finding, the Post feature referenced longevity and the loss of traditional pension plans as contributing factors. It presented stories of older workers who didn’t think they could easily retire, and quoted respected commentators such as Alicia Munell, director of the Center for Retirement Research at Boston College, who remarked that “some of these people are just clinging by their fingernails to jobs.”1

But is there more to the story? It turns out that Americans were trending toward staying in the workforce longer even before the recession. In 1994, Orszag notes, 43% of Americans aged 60-64 were working; in 2006, it was 51%. Nearly half of 62-year-olds went and claimed Social Security benefits in 1994, but 12 years later, less than 40% of 62-year-olds followed suit.2

Orszag mentions another factor that may have kept older employees working during the recession: declining home equity. Put that alongside diminished IRA and 401(k) balances, and there was every reason to stay on the job these last few years.

However, just because older Americans wanted to keep working didn’t mean that they could.

In the 2011 edition of its respected Retirement Confidence Survey, the Employee Benefit Research Institute found that 45% of retirees ended their careers earlier than they wanted to, in many cases due to layoffs and health issues.3

The Post article noted that the jobless rate for workers older than 55 was just 3.2% in December 2007 when the downturn began. In December 2011, it was up to 6.2%.1

The percentage of employed Americans aged 60-64, which had steadily risen during the 1990s and early 2000s, has remained at roughly 51% for the past five years.2

That brings us to Orszag’s central point: “The bottom line is that people’s retirement decisions aren’t always entirely voluntary.”2

How about your retirement decision? Do you think you will retire when you want to retire? Are you prepared for retirement financially? A new year is a good time for a new look at the state of your finances and your retirement readiness. With astute planning, you might be able to retire sooner than you think.

Citations.
1 – www.usatoday.com/USCP/PNI/NEWS/2012-01-17-PNI0117biz-older-workersART_ST_U.htm [1/11/12]
2 – mobile.bloomberg.com/news/2012-01-18/look-at-jobs-before-leap-on-older-retirement-commentary-by-peter-orszag [1/18/12]
3 - www.ebri.org/pdf/briefspdf/EBRI_03-2011_No355_RCS-2011.pdf [3/15/11]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

FIDUCIARY DELAYS

2012-02-01T09:27:00.001-08:00

If we were to craft a commercial for the slippery concept of "fiduciary standards," perhaps we should look to these fine examples of refined marketing excellence: http://www.metacafe.com/watch/2221825/best_of_5_worst_local_tv_holiday_commercials_ever/.

Chances are you missed the announcement, buried on page C7 of the January 24, 2012 issue of the Wall Street Journal, but it caused a stir in the financial planning world. The Securities and Exchange Commission has put off implementing a key part of the Dodd-Frank Act: creating a fiduciary standard for all who give investment advice, whether they be brokers or SEC-registered registered investment advisors.

Anybody who saw Fabrice "Fabulous Fab" Tourre boast about his prowess selling complex toxic securities to his unsuspecting customers, or watched Goldman Sachs CEO Lloyd Blankfein testifying uncomfortably to Congress that his firm had no duty whatsoever to protect the interests of his customers in these transactions, quickly realized that Wall Street is not totally about creating vast wealth for the people who receive brokerage advice. This was further underscored when Smith Barney traders chortled in their internal e-mails that betting against some of the toxic mortgage pools they had sold their customers was "the best short ever."

Dodd-Frank was supposed to change all that, by asking the SEC to require that brokers who made investment recommendations be held to a fiduciary standard "at least as stringent" as the standard that investment advisors are held to. Under heavy lobbying pressure from Wall Street, the SEC has dragged its feet on this issue so effectively you might think it was wearing shoes made of cement. And for most investors, this stalled effort at reform has sailed totally under the radar.

What does it mean to act as a fiduciary? The fiduciary concept is actually pretty simple, and can be found in the very first written legal code, the Code of Hammurabi (roughly 1770 BC) and in Cicero's orations during the Roman Republic around 50 BC. In the ancient world, a trader would take his caravan (or sailing ship) to some distant land to trade Mesopotamian clay pots or bronze artifacts for furs, tin or copper. Since the trader would be gone for months or sometimes years, somebody had to make basic business and financial decisions on that person's behalf while he was on the road. And it was important that this person make decisions that were in the trader's interest, not his own. When somebody came to offer the merchant a great business opportunity, he wouldn't want somebody who would jump in and buy it for his own profit instead, or buy it and then sell it back to the merchant's account at a fat markup.

As Cicero put it:
“…in cases where we ourselves cannot be present, the vicarious faith of friends is substituted; and he who impairs that confidence, attacks the common bulwark of all men, and as far as another depends on him, disturbs the bonds of society.”
(Oration for Sextus Roscius of America; Cicero 106 – 43 BC)

So the basic idea of a fiduciary is a simple standard of behavior. You are watching out for and protecting the interests of someone who has given you their trust. You are making decisions and recommendations that will benefit that other person. You would, under this simple standard, have to avoid triumphantly selling at a markup the same securities that your colleagues are confidently betting will blow up and leave your customers with frightening losses--while generating outsized gains that will flow into the Wall Street bonus pool. With this in mind, it becomes a lot easier to see why Wall Street has lobbied so hard to stall being held to this standard.

You might start to hear the next round of arguments about this part of Dodd-Frank either prior to or after the general election. The Wall Street lobbyists and trade organization have argued that instead of being prohibited from acting on conflicts of interest and engaging in self-dealing, brokers should be allowed to "disclose" them to their customers. The lobbyists on the side of consumers and fiduciary advisors think it's possible that the SEC will bow to Wall Street's heavyhanded lobbying tactics, and create a new, watered-down version of the ancient fiduciary concept. By this time next year, it is possible that representatives of Merrill Lynch, Smith Barney or UBS will be able to behave like Fabulous Fab and still hold themselves out as fiduciaries, so long as their brokerage agreement says somewhere on page 14 that they might be working harder to generate profits for their brokerage employer than looking out for the interests of the person who receives their advice. Cicero and the Mesopotamian trader would have seen through this ruse in a heartbeat. Today's regulators are a lot easier to fool, and not always totally focused on protecting consumers. (Just ask Bernie Madoff.)

SEC-registered Registered Investment Advisors have been living under a fiduciary standard--the one referenced in Dodd-Frank--since 1940. It's true; you don't see RIA firms routinely handing out seven-figure bonuses to their brokers and sales agents. But many advisors who live under this business model make a good, honest living--and, most importantly, they don't have to squirm uncomfortably when somebody asks them to explain their recommendations.

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

RATES AND POLITICS

2012-01-30T09:58:00.000-08:00

If you're curious abut the political implications of the Romney tax returns, this cartoon pretty much says it all: http://news.yahoo.com/comics/mike-luckovich-slideshow/. Or, for many Americans, this: http://news.yahoo.com/comics/pat-oliphant-slideshow/.

The recent release of Republican presidential candidate Willard "Mitt" Romney's 2010 and 2011 tax records--all 500 pages of them--has generated a lot of buzz among financial types and mainstream voters. Indeed, people who work with financial planners might be wondering: "why the heck can't my advisor get my federal taxes down to a 14% rate? Couldn't I be parking money in Bermuda (page 52 of the 2011 return) Switzerland (position sold in 2010 after the Swiss bank UBS came under federal investigation for facilitating tax fraud) and the Cayman Islands (called "various countries" on the return) if my advisor were just a little more creative?"

You can see the estimated 2011 return for yourself here: http://mittromney.com/learn/mitt/tax-return/2011/wmr-adr-return, although the home address and the Social Security numbers for Willard M. and Ann D. Romney have been blacked out. What you DO see is a little over $4 million in taxable interest, a little over $3 million in dividends, $10.7 million in capital gains, $2.8 million in income from rental real estate, $110,500 as a member of (the listed profession) "independent artists, writers, performers" and zero for wages or salaries. The estimated tax bill: $3,226,623--about 14% of the nearly $21 million in total income.

This percentage could go down between now and the next filing date. Page 11 of the return says that the Romneys expect to receive a foreign tax credit, which is not yet factored into the tax payment. Pages 30, 31, 32, 33, 34 and 35 note that the K-1 tax information on various partnerships (one called "Rob Rom Enterprises, LLC") is also unavailable, and the tax calculation "may change significantly when the final 2011 K-1 is received."

If you're feeling envious of the low rates, and the fact that much of it was exempt from Social Security payroll taxes, you aren't alone; according to one report, Romney's secretary paid taxes at a higher marginal rate.

There are several ways to look the situation. One is that Romney actually paid MORE than his fair share--in fact, you could argue that he paid much more.

How? The argument goes something like this: if you walked into the grocery story to buy a loaf of bread, would the cost be dependent on your income? If it was, the average American would be paying roughly $2.00 while Mr. Romney's cost would be closer to $300. If we all receive the same basic package of services from the government, and the total cost is about $6 trillion, then each of the 300 million people who live in America would owe about $20,000. Mr. Romney, by paying about $3 million a year, might be considered to be overpaying for his share of those governmental services.

Another way to look at it is that people who have more income or assets have more to protect, and therefore need those government services more than most. A progressive tax system that is capped at the top forces wealthier people to pay proportionately more, but they also get to keep a majority of what they earn. If you buy this philosophy, then the question becomes: how do you decide what is fair for everybody, the high earners as well as the low earners?

One traditional answer is that everybody should pay something. You hear a lot about low-income wage earners paying no income taxes, but in fact they are all required to pay Social Security payroll taxes, which are actually higher than income taxes for the majority of Americans. On the other end of the wealth spectrum, there are so many nuances to the tax code, so many deductions and loopholes, that it was possible for General Electric to largely escape corporate taxes. That isn't possible for individuals, ever since, in 1969, the U.S. Treasury Department disclosed that 155 high-income households had paid no income taxes. In the ensuing uproar, Congress passed the alternative minimum tax--and has been trying to fix it ever since.

There were two reasons why candidate Romney was able to escape the highest tax rate. The first is that his "job" at Bain Capital Management was to--as Warren Buffett has recently described it--"move money around." Specifically, he was investing his own and others' money into companies and then restructuring them. People on Wall Street and in Silicon Valley will tell you that this is real work, hard work, but all too often the result is to shift money from the company to the pockets of the investors. For this sort of work, the tax code applies the same tax rate as the taxes on dividends and capital gains--15% at the high end--rather than the maximum 35% rate that a corporate employee earning similar compensation would have to pay. Even somebody who sweeps the floors or answers the phone at Bain's offices, who earns more than $35,000, would pay taxes at a 25% rate.

The second--lesser--reason why candidate Romney's taxes were so low is that he voluntarily gave $2.6 million a year to his church and a total of more than $4 million in total to charities (Schedule A and page 68). One could argue that his actual financial contribution to society--to his church, to the Bush presidential library, to other charities and the federal government--was actually $7 million a year. That amount would equal roughly a 33% tax rate.

If nothing else, those voluminous tax returns, detailing offshore accounts, capital gains taxes for the same kind of work that corporate executives do and charitable donations, will create a new awareness of the implications of different candidates' positions on tax reform. The New York Times recently noted that candidate Romney's own tax reform proposals would require him to pay less than he does now, suggesting that he supports the idea that he's paying more than his fair share. The Newt Gingrich tax proposal would, if passed, essentially eliminate candidate Romney's tax burden altogether. Interestingly, Mr. Romney has labeled this "irresponsible."

One additional note: the Romney tax return checked the boxes to donate $3 for each spouse to support the Presidential Election Campaign.

Romney taxes: http://news.yahoo.com/blogs/ticket/mitt-romney-tax-returns-show-more-43-million-135129751.html

http://mittromney.com/learn/mitt/tax-return/main

http://money.cnn.com/2012/01/26/news/economy/romney_tax_returns/

http://news.yahoo.com/mitt-romney-reveals-tax-records-paid-3m-taxes-221209778--abc-news.html

NY Times: http://www.nytimes.com/2012/01/25/us/politics/romneys-tax-returns-show-21-6-million-income-in-10.html?pagewanted=2&_r=1

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

HOSTAGES IN THE DEBT NEGOTIATIONS

2012-01-12T13:34:00.000-08:00

Everybody knows that the Greek government has issued more debt than it can possibly repay, which explains why you can buy its government bonds at pennies on the dollar. Today's secondary markets are pricing Greek 10-year issues at prices that give buyers a jaw-dropping 35% yearly coupon return. By comparison, comparable Treasury securities issued by the U.S. government (which are NOT expected to default) are yielding less than 2%. Germany recently issued bonds at rates even lower.

The discounts have the certainty of default priced into them, and, indeed, the Bloomberg news organization reports that the Greek government has been quietly asking its creditors to accept a 60% reduction in interest payments--which would still keep rates around the 14% level. Meanwhile, the German and French governments have persuaded European banks to exchange their Greek bonds for new securities with longer maturities and lower coupon rates.

The effort to put the Greek debt crisis safely behind us has recently hit a snag, under circumstances that might interest the Occupy Wall Street crowd. According to the New York Times, a small group of hedge funds have been aggressively buying up Greek debt at pennies on the dollar, and now are refusing to negotiate any kind of a haircut. They're betting that the European governments will eventually have to pay them the full face value of the bonds they bought at huge discounts--giving them big windfall profits at a time when everybody else is accepting losses for the sake of long-term Euro stability.

It may work. If Greece is forced to break off negotiations, formally default and unilaterally impose the 60% haircut, that default legally becomes a so-called "credit event." A credit event would trigger the payment provisions of untold numbers of derivative contracts, which are basically private insurance policies called credit default swaps. The issuers of those contracts--chiefly those same European banks--would suddenly have to pay face value for the Greek bonds that everybody else is buying at a discount. But only if there is a credit event.

Nobody outside the European Central Bank knows exactly how many of these derivatives are held by European lending institutions, but it is clear from the nature of the negotiations that all parties are carefully avoiding this trigger event. The hedge funds, by demanding either full payment or a credit event, seem to have figured out a way to hold the entire European banking system hostage to their demands for outsized profits.

The story offers a rare view inside the negotiating rooms where the European sovereign debt crisis is being managed, and suggests that responsible parties are, behind the scenes, working to resolve the European Sovereign debt crisis without a lot of the fanfare you see in breathless headlines. As the bank negotiations move forward, the "crisis" might not be as dire as the headlines make it out to be. There is even a chance that the hedge funds' greedy stand could backfire. The ECB is now inserting what are called "collective actions clauses" in their agreements with banks, which would let the lenders impose the concessions they had to make on all bondholders if a majority of holders agree to it. The hedge funds would either have to acquire a majority of Greek debt or lose their leverage--and most of their hoped-for windfall.

Greek bond rates: http://www.bloomberg.com/quote/GGGB10YR:IND/chart

Proposed haircut on Greek debt: http://blogs.wsj.com/eurocrisis/2012/01/09/2012-kicks-off-in-a-bad-way-for-euro/

Hedge fund blackmail: http://www.businessweek.com/news/2012-01-11/hedge-funds-trying-to-profit-from-greece-as-banks-face-losses.html

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

GETTING OFF ON THE RIGHT FOOT IN 2012

2012-01-10T08:09:00.001-08:00

GETTING OFF ON THE RIGHT FOOT IN 2012

A look at some financial changes & the opportunities they may present.

Every year brings some financial change, so here are some relevant changes relating to investment, tax and estate planning for 2012.

Retirement plans. 401(k), 403(b) and 457 plan annual contribution limits rise slightly to $17,000, and you can contribute an additional $5,500 to these accounts if you are 50 or older this year. IRA contribution levels are unchanged from 2011: the ceiling is $5,000, $6,000 if you will be 50 or older in 2012.1

As you strive to contribute as much as you comfortably can to these accounts this year, you will probably notice some changes with the retirement plan at your workplace. In 2012, retirement plan sponsors (i.e., employers) will have to note all of the fees and expenses linked to the funds in the plan to plan participants. So if you have a 401(k) or 403(b), you may notice some differences in the disclosures on your statements and you will probably notice more information coming your way about fees. There is also a push in Washington, D.C. to have financial companies provide lifetime income illustrations on retirement plan account statements, projections of your expected monthly benefit at retirement age.2

Income taxes. Wealthy Americans are set to face greater income tax burdens in 2013, so 2012 may be the last year to take advantage of certain factors. For example, the top tax bracket in 2013 is slated to be at 39.6% instead of the current 35%. This year, capital gains and dividends will be taxed at 15% or less for everyone, 0% for those in the 10% and 15% tax brackets. In 2013, the qualified capital gains tax rate is scheduled to rise to 20% and qualified dividends will be taxed as ordinary income. So taking a little more income in 2012 could be smart.3

In 2013, the wealthiest Americans are supposed to be hit with new Medicare taxes: a new 3.8% levy on unearned income (such as capital gains, income from real estate, dividends and interest) and a new 0.9% tax or earned income. So next year, the truly wealthy could effectively face in the neighborhood of 45% federal taxes.3

Additionally, the IRS is planning to limit itemized deductions for upper-income taxpayers in 2013. A phase-out will also apply for the personal exemption deduction.3

Estate & gift taxes. At the end of 2012, some very nice estate tax breaks could sunset. Barring action by Congress, 2013 could see a 20% leap in the federal estate tax rate from 35% to 55%. The individual estate tax exclusion (currently $5.12 million) is scheduled to be reduced to $1 million.3

As we have unified gift and estate tax rates, those numbers and percentages also apply to gift taxes. That is, from 2012 to 2013 top federal gift tax rate is set to go from 35% to 55% and the lifetime gift tax exemption amount is scheduled to fall $4,120,000 per individual to $1 million. The annual gift tax exemption is $13,000 per recipient in 2012; there is an exemption limit for qualifying educational and medical payments. If you want to gift relatives or friends, you may want to avoid procrastinating for another very good reason: when you make such a gift early in a year, the recipient will gain both the principal and any appreciation tied to the gifted asset in that year.3,4

Speaking of gifts, we said goodbye to charitable IRA gifts in 2011. The IRA charitable rollover, a boon to non-profits and a handy tax deduction option for taxpayers older than age 70½, was not extended into 2012, not even temporarily as a sweetener to the payroll tax extension bill. There is hope it will be back. Two bills have been introduced in Congress with that goal, one sponsored by Sen. Olympia Snowe (R-ME) and Sen. Charles Schumer (D-NY) and another by Rep. Wally Herger (R-CA) and Rep. Earl Blumenauer (D-OR). The proposed legislation would let IRA owners start making charitable IRA gifts at age 59½ and remove the $100,000 limit on the rollovers.5

The limits on the generation-skipping transfer tax could change, too: assuming the Bush-era tax cuts do sunset, the GSTT rate would jump from 35% this year to 55% in 2013, with the GSTT exemption falling from $5,120,000 per person this year to roughly $1.3 million per person next year.3

So given all these changes, it might be wise to meet with the financial professional you know and trust early in 2012 as you strive to start the year off on the right foot. You have until April 17 to file your federal return, but you can plan now.

Citations.
1 - www.irs.gov/retirement/article/0,,id=96461,00.html [10/20/11]
2 - www.marketwatch.com/story/retirement-plan-changes-coming-in-2012-2011-12-29 [12/29/11]
3 - www.sbnonline.com/2012/01/how-to-approach-tax-and-estate-planning-opportunities-for-2012/?full=1 [1/3/12]
4 - advisorone.com/2012/01/06/10-tax-tips-for-advisors-in-2012 [1/6/12]
5 - www.northjersey.com/news/business/business_opinion/136217658_Payroll_tax_cut_benefits_charities.html [12/25/11]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

2011-12-28T12:42:00.000-08:00

PAYROLL TAX CUT EXTENDED TWO MONTHS

Paychecks won’t shrink; long-term jobless benefits will continue.

A last-minute gift to 160 million Americans. On December 23, Congress approved a 2-month extension of the payroll tax holiday that President Obama quickly signed into law. So we will not see shrunken paychecks come January. The new law also extends long-term unemployment benefits through February 29 and authorizes a 2-month reprieve on pay cuts to doctors by Medicare.1

• Prior to 2011, wage-earners were paying 6.2% in Social Security taxes. If Congress agrees to lengthen the payroll tax holiday across 2012, workers will merely pay 4.2% on the first $110,100 of wages next year.
• The latest extension in jobless benefits means that about 1.8 million Americans out of the workforce will keep getting unemployment checks averaging about $296 per week.
• Medicare payments to physicians will not diminish by 27% come January.1

The stopgap measure is both a relief and a prelude to much more debate. In total, the new legislation is projected to cost the federal government about $33 billion.1

Who will pay for these extensions? The direct answer: Fannie Mae and Freddie Mac. The indirect answer: American homeowners and homebuyers.

Title IV of the new law (“Mortgage Fees and Premiums”) notes that Fannie and Freddie will be boosting guarantee fees on new loans next year. If the payroll tax holiday is approved for all of 2012, anyone who buys or refinances next year will end up giving back about 20% of the approximately $1,000 tax break.2

Instead of collecting from borrowers directly with a fee hike, the twin GSEs will increase fees for banks and other lending institutions starting in January. The Congressional Budget Office projects that this will raise $35.7 billion across 2012-2021, with the revenue going to the Treasury rather than to Fannie and Freddie.2

Comparatively speaking, this means that mortgage costs will be about $17 a month higher for someone purchasing a $200,000 home next year.2

What about that pipeline? Yes, the proposed 1,700-mile Keystone oil pipeline that would run from Alberta to the Gulf of Mexico. House Republicans had wanted it as a sweetener to the bill, contending that it would create tens of thousands of jobs.

The newly passed legislation requires President Obama to either approve or kill the controversial project by March 1. The State Department says it can’t manage a required environmental review by March 1 and therefore won’t be able to recommend the project; citing White House sources, the New York Times says the President will abide by the State Department’s guidance. However, that doesn’t prohibit TransCanada (the company behind the pipeline) or any other energy company from introducing a similar idea.3

The new agreement is effectively a postponement. When Congress returns to Capitol Hill next month, the debate over the yearlong extension of the payroll tax reduction should intensify. There will be three points of contention:

• How to pay for the full-year extension. Democrats wanted a new tax on millionaires, while House Republicans preferred a federal pay freeze. The projected cost of the yearlong payroll tax cut is $112 billion.
• Rethinking long-term jobless benefits. House Republicans have talked about ending benefits at 59 weeks, something Democrats do not favor.
• Consideration for the health of the Social Security trust fund. If Americans do end up paying 2% less in Social Security taxes for all of 2012, how does the trust fund make up the slack? Some legislators want the Treasury to take care of the shortfall; others worry that the payroll tax will be permanently set at the current level and open the door to reduced Social Security benefits in the future.4,5

Payroll taxes are reduced through February; in terms of the drama surrounding his issue, it’s only an intermission.

Citations.
1 - money.cnn.com/2011/12/23/news/economy/payroll_tax_cut_deal/ [12/23/11]
2 - blogs.ajc.com/jamie-dupree-washington-insider/2011/12/18/paying-for-the-payroll-tax-cut-extension/ [12/18/11]
3 - www.nytimes.com/2011/12/24/us/provision-may-halt-keystone-pipeline-but-oil-is-still-likely-to-flow.html [12/23/11]
4 - www.kansascity.com/2011/12/23/3335510/congress-approves-payroll-tax.html [12/23/11]
5 - montoyaregistry.com/Financial-Market.aspx?financial-market=tax-loss-harvesting&category=31 [12/23/11]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

WRANGLING OVER THE PHANTOM STIMULUS

2011-12-22T08:44:00.000-08:00

The headlines are screaming again, this time about the Capitol Hill controversy over payroll tax cuts. And, as usual, there is more to the story than what you're reading.

First the good news. Earlier reports said that a stalemate on the tax cut would shut down the government, but before the Senate went home for the holidays, it passed a separate bill that finances the government through next September.

Better news: by all reports, Republicans and Democrats were--and are--in general agreement that there should be some kind of stimulus to the still-recovering economy, and the biggest, least-stimulated sector is consumer spending. The Republicans argued for more tax relief for the wealthiest Americans, and want to reduce pollution controls and force the President to approve the proposed Keystone XL pipeline, which would deliver oil from tar sands in Alberta, Canada to refineries in Texas. Meanwhile, the Democrats wanted a broad-based stimulus measure that would put spending money in the hands of more mainstream American consumers. And they supported environmentalist opposition to the pipeline and the pollution proposals.

Naturally, the two sides couldn't agree on a compromise, so the Senate, by an overwhelming majority, kicked the can down the road for two months by agreeing to continue the reduction in Social Security taxes from 6.2% to 4.2% until Congress could get back in session early next year.

It seems clear that the Senators expected their colleagues in the House of Representatives to follow this simple solution. But nothing is simple in this partisan political atmosphere, and the House (for now, at least) has rejected the measure.

There are several interesting complexities here that should have gotten more attention. One of them is the problems that this wrangling has created for employers, who will have to scramble at the last minute to change their payroll systems to reflect either the 6.2% rate or the 4.2% rate. Which will it be? Who knows? All anybody knows for sure is that the withholding amount will need to be correct starting January 1, and the National Payroll Reporting Consortium has already said that, as a result of the brinkmanship, there is now not enough notice to accommodate any changes that quickly.

Of course, if and when the whole issue is taken up at the end of the proposed two-month extension, companies would face exactly the same dilemma. Chalk this up to a Congress that is oblivious to the consequences of its actions on the business community--especially small businesses.

Behind the scenes, there are other dramas. One involves the very complicated way that the Social Security tax reduction is structured. Reducing the payroll tax would obviously reduce the flow of money into the Social Security trust fund, which is famously experiencing solvency troubles of its own. Neither side wanted to be seen as making the entitlement mess any worse, so the stopgap bill would have had the U.S. Treasury pick up the payments--a sideways accounting move has no real substance. The bill also prevents doctors who accept Medicare payments from receiving a 27% reduction in reimbursement payments, which would weaken the financial stability of another entitlement program, so the Treasury will pay that out of its pocket as well.

But the surprising thing here is that this is actually a revenue-neutral piece of legislation. The Treasury coffers would be replenished through a side door that nobody seems to have noticed. Title IV, entitled "Mortgage Fees and Premiums," would have raised the amount that Fannie Mae and Freddie Mac--the organizations that back a majority of home loans in the U.S.--would collect in mortgage fees after January 2012. In all, the raised mortgage fees--which would increase the cost of home ownership at a time when the housing market is staggering--would pay for the two month extension of the payroll tax cut (estimated at $20 billion) plus two months of additional jobless benefits for 2.5 million out-of-work Americans (an estimated $8.4 billion) and two months of added Medicare reimbursements to doctors (an estimated $6.6 billion).

Can we call this a stimulus, when money comes out of the pockets of home buyers and put in the pockets of payroll workers, the unemployed and doctors? Since the bill seems to be stuck in partisan wrangling, maybe the question is moot anyway.

Sources:

Payroll tax issues, and Treasury funding of Social Security:
http://www.nytimes.com/2011/12/20/us/politics/house-set-to-vote-down-payroll-tax-cut-extension.html?pagewanted=all

Fannie and Freddie: http://blogs.ajc.com/jamie-dupree-washington-insider/2011/12/18/paying-for-the-payroll-tax-cut-extension/

Pipeline and pollution aspects of the legislation: http://www.msnbc.msn.com/id/45707185/ns/politics/t/senate-oks-payroll-tax-cut-extension-house-gop-irked/

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

BUDGETING FOR RETIREMENT

2011-12-20T09:12:00.000-08:00

It only makes sense – yet many retirees live without one.

You won’t be able to withdraw an unlimited amount of money in retirement. So a retirement budget is a necessity. Some retirees forego one, only to regret it later.

Run the numbers before you retire. Often people need about 70-80% of their end salaries in retirement, but this can vary. So years before you leave work, sit down for an hour or so (perhaps with the financial professional you know and trust) and take a look at your probable monthly expenses. Online calculators can help.1

The closer you get to your retirement date, the more exact you will need to be about your income needs. You first want to look for changing expenses: housing costs that might decrease or increase, health care costs, certain taxes, travel expenses and so on. Next, look at your probable income sources: Social Security (the longer you wait, the more income you can potentially receive), your assorted IRAs and 401(k)s, your portfolio, possibly a reverse mortgage or even a pension or buyout package.

While selling your home might leave you with more money for retirement, there are less dramatic ways to increase your retirement funds. You could realize a little more money through tax savings and tax-efficient withdrawals from retirement savings accounts, through reducing your investment fees, and getting your phone, internet and TV services from one provider.

If you have just retired or are about to, you will enter 2012 with some financial breaks. Social Security benefits will increase by 3.6% next year, Medicare Part B premiums will only rise $3.50 instead of the $10 that Medicare projected, and the Part B deductible will be $22 cheaper in 2012 ($140).2

Budget-wreckers to avoid. There are a few factors that can cause you to stray from a retirement budget. You can’t do much about some of them (sudden health crises, for example), but you can try to mitigate others.

• Supporting your kids, grandkids or relatives with gifts or loans.
• Withdrawing more than your portfolio can easily return.
• Dragging big debts into retirement that will nibble at your savings.

Budget well & live wisely. These are times of low interest rates and modest Wall Street gains. Given those factors, creating a retirement budget makes a lot of sense. A budget – and the discipline to stick with it – may make a financial difference.

Citations.
1 - www.smartmoney.com/retirement/planning/how-to-set-a-retirement-budget-1304908718392/ [5/12/11]
2 - online.wsj.com/article/SB10001424052970203716204577015673565194532.html [11/6/11]

Sincerely,
William T. Morrissey, CFP®
Sound Financial Planning Inc.

wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commerical St., Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA

TIMING OUT OF GAINS

2011-12-13T15:44:00.000-08:00

Let's say you're looking at a stock market that has lost 81% over the past 2.7 years during a time of severe economic contraction. The headlines are not encouraging: the country is mired in depression, and so, too, is the rest of the world. Are you feeling bullish, or is this a great time to unload your stocks and stop the bleeding?

If you decided to unload, then you would have missed at least some of the dramatic market increases that started in 1937--4.7 years of annualized 32.1% gains, for a total gain of 266%.

Okay, suppose the market has dropped a total of 63% over a torturous 13.6 year period, and Business Week magazine has just proclaimed "The Death of Equities." Buy? Sell?

Again, the correct answer would have been "buy." After 1982, the S&P 500 gained a remarkable 666% over the next 18 years.

The accompanying chart (click on link below), created by Doug Short for the Advisor Perspective services, shows a number of market ups (blue) and downs (red) since 1871, and the thing you notice is that virtually every major market move, up or down, was unexpected. The bull markets came as a surprise, and the bear markets came at times when the markets seemed to be on a long-term roll. (The scale here is logarithmic, which means that if the chart were expressed in absolute terms, the long-term rise would look much steeper.)

In truth, the decision that faced most investors in 1921 (market down 69% over the previous 15 years) or 1949 (market down 54% over the previous 12 years) was not whether to make some kind of dramatic move into stocks. The decision, made daily as the newspaper carried discouraging news over and over again, was whether to stay invested in stocks and eventually reap the gains (396% and 413% respectively) that nobody could have predicted in advance.

The most important long-term statistic to come out of this analysis may be the dramatically different size of the gains and losses. Taken together, the various bulls since the market trough in 1877 brought investors gains of 2,075%--an average of a 415% gain per bull market. The bear markets, in aggregate, cost investors 329%--an average downturn of 65%.

Nobody knows when the markets are going to suddenly take off after a bearish period, and the longer and deeper and more discouraging the downturn gets, the less likely the next bull market seems. But history suggests that patient investors get more return during market upturns than they lose when the markets drop. Long-term, trying to outsmart the market and sidestep losses would have led to missing even bigger gains.

Source: http://www.advisorperspectives.com/dshort/updates/Secular-Bull-and-Bear-Markets.php

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

TWO DIRECTIONS

2011-12-12T15:50:00.000-08:00

No doubt you've read about the European Union summit meeting in Brussels this past week, which was billed, in advance, as the negotiation that would finally deliver a final solution to Europe's debt crisis. You will probably not be surprised to hear that the outcome fell short of expectations.

In all, 23 of the 27 European nations agreed to follow the lead of France and Germany. They drafted a resolution to impose more central control over national budgets, and enforce future spending and budget discipline across the 17 countries that use the euro as their currency. The summit, in other words, focused on preventing the next debt crisis rather than finding ways to meet the current one head-on.

Even future discipline may be too much to expect. One of the holdouts to the resolution was a major player: Great Britain, whose stiff opposition to mandatory budget guidelines (and giving up control to an outside agency) means that the other governments will have to enforce their agreement as an "understanding" between governments rather than through the full authority of a treaty. (The other non-signatories--Sweden, the Czech Republic and Hungary--want to consult their legislative bodies before signing on for more austerity.)

In separate analyses, the Economist magazine and economist Cliff Wachtel tell us that there was no progress on addressing the immediate threat of default of Greek, Italian and Spanish bonds, which has become more pressing as their rates soar on the open market. On Thursday, Germany rejected proposals to strengthen the European Central Bank's bailout fund, and the ECB's central banker later announced that he had no plans to lower bond rates or buy government bonds outright.

The Wall Street Journal reported that currency traders were not impressed by this outcome. They boosted the euro's value a bit on Friday to essentially where it was last week. Credit analysts at Moody's and Standard & Poors were apparently even less impressed. Moody's issued downgrades on the solvency of three major French banks. S&P put several European nations on a downgrade watch; look for France to be the next major nation to suffer the indignity of a ratings drop.

Bond defaults are one worry in Europe; the other is recession. Economists at investment bank UBS announced, during the summit meeting, that they expect the 17-nation Eurozone's aggregate economic growth to fall into negative territory (-0.7%) next year. Without stimulus, with declining economic activity, European nations will have to make do with lower tax revenues, further calling into question their ability to pay the debt they already owe. The threat of default causes investors to demand ever-higher bond rates, raising borrowing costs and making default more likely.

Interestingly, you find the opposite dynamic in the U.S., where economic growth was a modest but positive 2% for the third quarter, fueled by gains in retail sales, manufacturing and housing. This is good news, an improvement over the 1.3% growth in the second quarter. The U.S. unemployment rate, which topped 10% in 2009, has quietly fallen back to 8.6%. But the U.S. Federal Reserve Board wants better news; on Tuesday, the Fed is expected to announce a strong commitment to keeping the federal funds rate near zero, and may soon undertake a third round of buying U.S. bonds as a way to encourage the housing and labor markets. Europe and the U.S. may be moving in opposite directions, in part because of opposite measures from their respective central banks.

Sources:

Wall Street Journal article: http://online.wsj.com/article/SB10001424052970203413304577088752248526164.html

The Economist: http://www.economist.com/blogs/charlemagne/2011/12/britain-and-eu-summit

Wachtel: http://seekingalpha.com/article/313050-prior-week-eu-summit-fails-yet-markets-rally-here-s-why

2% growth: http://www.bloomberg.com/news/2011-11-22/economy-in-u-s-expands-less-than-estimated-as-companies-cut-inventories.html

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

OCCUPY THE BIG PICTURE

2011-12-01T15:20:00.000-08:00

If you look hard enough, you can find a lot of silliness in the Occupy Wall Street movement. This is unfortunate because, somewhere behind the tents and weird finger communications and alleged drug use, there's a real story to be told. And the story seems to be bigger than the media can get its arms around.

For example? Financial insiders and those of us in the financial planning profession have watched the brokerage industry fight furiously--and successfully--against having to register their brokers with the Securities and Exchange Commission as registered investment advisors. Why? Because that would require the registered brokers to give advice that puts the interests of their customers ahead of their own and also (quel horreur!) ahead of the companies that employ them.

Perhaps more to the point, those of us in the financial profession have to live with the fact that the major Wall Street firms are rarely held accountable for crimes and other actions that would be severely punished if you or I committed them.

Such as? Consider the recent settlement of an enforcement case that goes back to the 2008 market meltdown. The Wall Street Journal reported that U.S. District Court Judge Jed S. Rakoff is questioning how diligently the U.S. Securities and Exchange Commission enforced securities law when it investigated Citigroup (parent company of brokerage giant Smith Barney) regarding its sale of some of those infamous toxic mortgage-based debt instruments. Smith Barney brokers were selling the subprime mortgage instruments to their customers as highly-rated, safe bond instruments at the same time that the company's traders were betting heavily that the same packaged bonds would spiral down the toilet. In internal e-mails, one chortling trader described betting against the investments the company was selling, at a commission, to its customers as "The best short ever!!"

This once-in-a-lifetime short bet, combined with selling the dog investments in the first place, resulted in what the SEC estimated to be $160 million in fees and trading profits to Citigroup's bottom line.

The SEC's proposed fine, questioned by the judge: $95 million.

It gets worse. In the SEC's boilerplate language when it settles with major Wall Street firms, Citigroup and Smith Barney were allowed to neither admit nor deny the charges that they would be paying fines to settle. Judge Rakoff questioned whether there wasn't "an overriding public interest in determining whether the SEC's charges are true." Indeed.

Our regulators' very careful, very gentle admonishment of Wall Street's nastiest crimes has become such a routine part of our professional landscape that most of us in the financial services business have lost sight of how outrageous it really is. To put this in perspective, suppose you decided to go out and steal a neighbor's flat-screen TV set. If you were caught, would the justice system require you to pay back a portion of the cost of it, never have to admit guilt, and promise to watch yourself more carefully in the future?

Might people in all walks of life behave differently if they knew that the routine consequences of their crimes would be so lenient?

While the financial press is reporting on Wall Street crimes gone unpunished, the consumer press is groping to figure out how the rise of enormous, greedy financial gatekeepers is impacting the American economy as a whole. No doubt you've read accounts of how the large investment banks took hundreds of billions of dollars in taxpayer bailout money and then refused to lend money back into the American economy as it was teetering on the brink. But Time Magazine recently took a deeper look, in a cover article that concludes that America is no longer the world's leader in upward mobility--the land of opportunity--that it once was.

The magazine rightly calls America the "original meritocracy," where people were never supposed to be prisoners of the circumstances of their birth. Hard work defined the destiny of Americans. Those who were diligent were able to move out of poverty.

But then the magazine cites research by the Pew Charitable Trust's Economic Mobility Project, the Brookings Institute and the Organization for Economic Cooperation and Development, all of whom found that today it is harder for a person in America to move up out of his/her current economic status than it is in (I hope you're sitting down) Europe. Today, 42% of American men with fathers in the bottom fifth of the earning curve remain there--and you know that at least SOME of them were hard-workers. Only a quarter of comparable men in Denmark and Sweden, and only 30% of men in Great Britain do. France and Germany ranked higher on the opportunity scale than today's America. Sweden and Finland ranked much higher.

How did this happen? The magazine found that the financial sector in America now takes up about 8% of the American economy--a historic high--and this has been correlated with a stall in American entrepreneurship. Meanwhile, the people who run America's companies today earn more than 400 times as much as their lowest-paid worker, while the comparable number in Europe is around 40. Oddly, perhaps coincidentally, Europe's gap between CEO and lowest paid worker is almost exactly where it was in this country when America was still being called the Land of Opportunity.

To round out the Occupy Wall Street picture, some researchers are actually starting to question whether the economy needs the banking sector, and what for. In what may be the most accessible report on this wonkish debate, London School of Economics Professor Wouter den Haan notes that when the U.S. economy was emerging as the world's leader, in the decades after World War II, the large investment banks generated about 1.5% of the total profits in the economy. Today, that figure is around 15%--ten times as much.

When the profits were at 1.5%, bankers circulated money efficiently around the business landscape in the form of loans that were carefully researched. That, clearly, provided an enormous net value to society. But the professor wonders whether it is equally valuable when those firms began to extract "huge fees from the rest of the economy to construct opaque securities that were so complex that only a few understood how risky they were." If the prices had accurately reflected the true value of the products, he says, then those fees would have been negative, "since many such products were not beneficial to the buyer or to society as a whole."

The article doesn't consider the economic value that is created for society when a brokerage firm makes its profits betting against the toxic securities it created and sold to its customers.

Very little of these various issues are understood specifically by the people who are squabbling with police over whether they can pitch their tents in parks near the largest financial offices. The Occupy Wall Street crowd is acting on nothing more than a strong instinct that something is terribly wrong in America, and that the large banks are somehow at the center of the problem. The press can only seem to get its arms around little individual pieces of a very big picture.

But that picture, if we can see it clearly, is troubling. The American Dream is at stake. So, too, is the fairness of our legal system. What Wall Street fears more than anything else is a debate that asks whether much of what goes on in the largest investment banks--perhaps as much as 90% of it, based on current statistics--is doing our country and our economy more harm than good. Even more, it fears the idea that its hired representatives should have to give advice that primarily benefits their customers--which would immediately put an end to both the lucrative sales of creative new toxic securities and the revenue streams that would come from betting against them.

If we can start that debate in earnest, maybe the tents can come down. Or, at least, the people living in them could tell the reporters who cover them exactly what it is they're protesting.

Rakoff and the SEC: http://blogs.wsj.com/law/2011/10/28/sec-may-have-to-get-admissions/

http://www.cbsnews.com/8301-501369_162-20126566/ny-judge-challenges-$285m-citigroup-settlement/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CBSNewsTravelGuru+%28Travel+Guru%3A+CBSNews.com%29

Time magazine article: http://www.time.com/time/magazine/article/0,9171,2098586,00.html

Wouter den Haan blog: http://pragcap.com/why-do-we-need-a-financial-sector

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

THE SUPER COMMITTEE'S EPIC FAIL

2011-11-28T15:57:00.000-08:00

What might this mean for the economy & the markets?

Congress punts on third down. Unable to reach consensus, the Congressional super committee of 12 offered America a disappointing result Monday. Panel co-chairs Rep. Jeb Hensarling (R-TX) and Sen. Patty Murray (D-WA) announced that "it will not be possible to make any bipartisan agreement available to the public before the committee's deadline" on November 23, throwing in the towel with two days to go.1

The big divide was over the Bush-era tax cuts. While Sen. John Kerry (D-MA) reminded the public and his fellow legislators that "we are not a tax-cutting committee, we're a deficit-reduction committee," there was stiff opposition to rolling back the EGTRRA and JGTRRA cuts of the 2000s. The super committee paired some strange bedfellows among Capitol Hill legislators, so this head-butting was not unexpected.2

What happens now? As the super committee failed to create a plan to trim $1.2 trillion or more from the federal deficit, that sets things up for an automatic $1.2 trillion in cuts effective over a 10-year stretch beginning January 2, 2013. According to the Budget Control Act passed in summer 2011, that $1.2 trillion will be slashed almost 50/50 from the defense budget and government services programs. Social Security and Medicaid payments, military pay and veteran's benefits will be exempt from cuts; current Medicare recipients will not be directly affected. This default deficit reduction could mean as much as a 9.3% cut to some federal programs, by the estimate of the left-leaning Center for Budget and Policy Priorities.3,4

This is what the super committee's apparent failure means politically. Economically, it could result in pain for American investors given the probable impact on our credit rating, stock market, tax laws and economic growth.

Is another downgrade ahead? Standard and Poor's cut the U.S. credit rating a notch to 'AA+' on July 14, and it warned that another cut to 'AA' was possible by mid-2013 without decisive federal action on the issue. After the super committee conceded defeat on November 21, S&P, Fitch's and Moody's stood pat regarding a possible downgrade.5,6

What might be in store for the market? In a November 21 note to investors, Goldman Sachs equity strategist David Kostin warned that the S&P 500 could potentially correct to 1100 as a result of this gaffe. Other analysts are less gloomy; some feel that the market may have priced this one in and will at least maintain some momentum barring a second downgrade (Monday's selloff certainly could have been worse).7

What does this mean tax-wise? The Bush-era tax cuts are set to expire at the end of 2012 as part of the involuntary deficit reduction now set to occur. There could be other possible tax consequences as a result of the super committee's failure. Unless Congress unexpectedly passes the President's American Jobs Act, the payroll tax holiday will go away in 2012 (worth about $935 to the average worker, which some legislators wanted to make permanent). RBC Capital Markets analysts warn that taking the payroll tax back to 6.2% could shave 1% of U.S. GDP next year. For businesses, the current "bonus" depreciation write-offs for new capital equipment and the R&E tax credit could also become casualties. Additionally, when you do a broad cut to federal programs, you are impacting payments from Washington to state programs; state taxes could rise to compensate for that lost money.4,8

How about Medicare, the SSA & jobless benefits? While Medicare recipients won't be bitten by the default deficit reduction, payments to Medicare providers could be shrunk by 2%. Long-term unemployment insurance would also dry up for 2.1 million Americans by February, according to the Department of Labor's forecast; JPMorgan Chase economists think that development alone might hurt U.S. GDP by 0.75%.4,8

The Social Security Administration is in line for budget cuts as a result of the super committee's indecision, along with Head Start and federal job training programs. A Congressional Budget Office analysis shows that the Pentagon would face the largest cut in 2013 (10%). Federal agriculture, environmental and education programs would face cuts of approximately 8% starting in that year.4,9

Could congress "undo" this? President Obama is emphatic that there will be no rewind on this one. While there could be a move in Congress to try and nullify or alter the automatic budget cuts, the President has said he will not support such a bill.

There had to be deficit reduction at some point, and the legislators of the super committee faced a Herculean task to come up with a plan that satisfied their many constituencies. However, it will be difficult to convince economists and investors that doing nothing is better than doing something; this unpalatable easy out may leave many in the lurch.

Citations

1 -www.cnbc.com/id/45391077 [11/21/11]

2 - www.foxnews.com/politics/2011/11/20/blame-game-erupts-as-hope-for-deficit-deal-fades/ [10/20/11]

3 - blogs.abcnews.com/politicalpunch/2011/07/debt-ceiling-framework-where-they-landed.html [7/31/11]

4 - www.usnews.com/news/articles/2011/11/21/so-the-super-committee-failed-how-will-that-affect-you [11/21/11]

5 - bloomberg.com/news/2011-08-06/u-s-credit-rating-cut-by-s-p-for-first-time-on-deficit-reduction-accord.html [8/5/11]

6 - blogs.wsj.com/marketbeat/2011/11/21/sp-super-failure-wont-affect-us-credit-rating/?mod=google_news_blog [11/21/11]

7 - www.cnbc.com/id/45355898 [11/21/11]

8 - www.csmonitor.com/Business/Latest-News-Wires/2011/11/21/Super-committee-fails [11/21/11]

9 - www.foxnews.com/politics/2011/11/21/clock-ticks-down-to-super-committee-failure/ [11/21/11]

Sincerely,
William T. Morrissey, CFP®
Sound Financial Planning Inc.

wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commerical St., Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

UNCERTAINTY OVER ITALY

2011-11-17T07:09:00.000-08:00

Bond yields climb dangerously high. It looks like the EU may forego a bailout.

The Eurozone has another mess on its hands. On November 9, the yield on Italy's 10-year bond soared to 7.46% - an interest rate clearly unthinkable in the long run, a danger signal EU leaders had to address immediately.1

Bond yields above 7% have served as a kind of litmus test for the European Union. When 10-year yields topped 7% in Portugal and Ireland, those countries got bailouts, but a bailout for Italy is unlikely. Quite simply, Italy is too big to be rescued; it appears the nation will just have to save itself.

"Financial assistance is not in the cards." So said one Eurozone official (who preferred to remain anonymous) to Reuters; that official said that Italy would not even get a preventive credit line from the EU.1

Italy dwarfs Greece in economic magnitude. The Dallas-Fort Worth metroplex contributes about as much to the world economy as Greece does. In contrast, Italy is the third-largest economy in the Eurozone and the eighth-largest economy in the world. It is now carrying somewhere between $2.2-2.6 trillion in debt, making its debt ratio 110-130% of its 2010 GDP.1,2,3

Here's why a bailout seems off the table. Italy's sovereign debt is about €1.7 trillion; three times that of Spain, and almost six times that of Greece. Across the next three years, it will have to come up with roughly €650-700 billion to avoid default (so estimates a forecast from Capital Economics). Even with its future increase, the European Financial Stability Fund would be drawn down alarmingly by a bailout of that size. Since Italy is hardly the only EU nation still in trouble, the EFSF would probably be loath to commit to such a mammoth rescue. The three major players funding the EFSF are Germany, France and Italy.2,4

Guess what EU nation is one of the world's key government bond markets. That's right: Italy. Its 10-year note rates rose above 7% on fear that it won't be able to repay what it owes on government debt. Are the higher yields going to be attractive to foreign investors? Hardly, given that Moody's and other credit rating agencies have given Italy downgrades.2

Name the EU member economy to which U.S. banks are most exposed. Again, the answer is Italy. According to Barclays Capital, that exposure amounted to about $269 billion in total claims as of July. European banks are six times as exposed to Italy ($998.7 billion) as they are to Greece ($162.4 billion).5

A call for a core Eurozone. Not surprisingly, French president Nicolas Sarkozy and German chancellor Angela Merkel have visions of an altered EU. On November 8, Sarkozy spoke of a two-tier Europe. It would feature a smaller and more financially integrated core Eurozone comprised of the most economically influential nations on the continent, with the bulk of the EU as a confederation of less economically influential countries with less say in policymaking.6

The weeks ahead are crucial. With the debt issues in Italy escalating, the European (and global) economy is looking at another major challenge. Can the European Central Bank buy up a whole bunch of Italian paper? If so, what concessions will Italy have to make? How contagious will this crisis prove, and how will it impact America?

Pronounced volatility may be the norm for the next few weeks or months on Wall Street. It is a good time to take a look at where and how you are invested, and a time to review your diversification and your outlook.

Citations.
1 - www.cnbc.com/id/45225893 [11/9/11]
2 - www.guardian.co.uk/business/2011/nov/09/italys-debt-crisis-ten-reasons-to-be-fearful [11/9/11]
2 - www.guardian.co.uk/business/2011/nov/09/italys-debt-crisis-ten-reasons-to-be-fearful [11/9/11]
3 - www.npr.org/templates/story/story.php?storyId=142158007 [11/9/11]
4 - www.npr.org/blogs/money/2011/11/09/142169733/why-italy-is-so-scary [11/9/11]
5 - www.nytimes.com/2011/07/12/business/global/italy-evolves-into-eus-next-weak-link.html [7/11/11]
6 -www.reuters.com/article/2011/11/09/us-eurozone-future-sarkozy-idUSTRE7A85VV20111109 [11/9/11]

YOUR ANNUAL FINANCIAL TO-DO LIST

2011-11-10T08:47:00.000-08:00

Things you can do before and for the New Year.

The end of the year is a good time to review your personal finances. What are your financial, business or life priorities for 2012? Try to specify the goals you want to accomplish. Think about the consistent investing, saving or budgeting methods you could use to realize them. Also, consider these year-end moves.

Think about adjusting or timing your income and tax deductions. If you earn a lot of money and have the option of postponing a portion of the taxable income you will make in 2011 until 2012, this decision can bring you some tax savings. You might also consider accelerating payment of deductible expenses if you are close to the line on itemized deductions – another way to potentially save some bucks.

Think about putting more in your 401(k) or 403(b). In 2011, you can contribute up to $16,500 per year to these accounts with a $5,500 catch-up contribution also allowed if you are age 50 or older. Has your 2011 contribution reached the annual limit? There is still time to put more into your employer-sponsored retirement plan.1

The IRS has announced 2012 contribution limits for 401(k) and 403(b) accounts, most 457 plans and the federal government’s Thrift Savings Plan (TSP). The annual contribution limit for each of these retirement plans will be $17,000 next year; the catch-up contribution again maxes out at $5,500.1

On a related note, SIMPLE IRA contribution limits won’t change next year. Up to $11,500 can be contributed to a SIMPLE IRA in 2012, $14,000 if you are 50 or older.2

Can you max out your IRA contribution at the start of 2012? If you can do it, do it early - the sooner you make your contribution, the more interest those assets will earn. (If you haven’t yet made your 2011 IRA contribution, you can still do so through April 17, 2012.)

The IRS has decided that IRA contribution limits won’t increase next year. In 2012 you will be able to contribute up to $5,000 to a Roth or traditional IRA if you are age 49 or younger, and up to $6,000 if you are age 50 and older (though your MAGI may affect how much you can put into a Roth IRA).3

The IRS has also boosted the income limits for a tax deduction for traditional IRA contributions. If you participate in a workplace retirement plan in 2012, the MAGI phase-out ranges will be $58,000-68,000 for singles and heads of households and $92,000-112,000 for couples. (In 2011, those phase-out ranges are set $2,000 lower.) If you own an IRA, you aren’t covered by a workplace retirement plan and you are married and filing jointly, the 2012 phase-out range is $173,000-183,000 based on a couple’s combined MAGI, hiked by $4,000 from 2011.3

Should you go Roth between now and the end of 2012? While you can no longer divide the income from a Roth IRA conversion across two years of federal tax returns, converting a traditional IRA into a Roth before 2013 may make sense for another reason: federal taxes might be higher in 2013. Congress extended the Bush-era tax cuts through the end of 2012; that sunset may not be delayed any further.4

Some MAGI phase-out limits affect Roth IRA contributions. These phase-out limits have been adjusted north for 2012. Next year, phase-outs will kick in at $173,000 for joint filers and $110,000 for single filers. (The 2011 phase-outs respectively kick in at $169,000 and $107,000.) Should your MAGI prevent you from contributing to a Roth IRA at all, you still have a chance to contribute to a traditional IRA in 2012 and then roll those IRA assets over into a Roth.3,5

Consult a tax or financial professional before you make any IRA moves. You will want see how it may affect your overall financial picture. The tax consequences of a Roth conversion can get sticky if you own multiple traditional IRAs.

If you are retired and older than 70½, don’t forget an RMD. Retirees over age 70½ must take Required Minimum Distributions from traditional IRAs and 401(k)s by December 31, 2012. Remember that the IRS penalty for failing to take an RMD equals 50% of the RMD amount.6

If you have turned or will turn 70½ in 2011, you can postpone your first IRA RMD until April 1, 2012. The downside of that is that you will have to take two IRA RMDs next year, both taxable events – you will have to make your 2011 tax year withdrawal by April 1, 2012 and your 2012 tax year withdrawal by December 31, 2012.6

Plan your RMDs wisely. If you do so, you may end up limiting or avoiding possible taxes on your Social Security income. Some Social Security recipients don’t know about the “provisional income” rule – if your modified AGI plus 50% of your Social Security benefits surpasses a certain level, then a portion of your Social Security benefits become taxable. For tax year 2011, Social Security benefits start to be taxed at provisional income levels of $32,000 for joint filers and $25,000 for single filers.7

Consider the tax impact of any 2011 transactions. Did you sell any real property this year – or do you plan to before the year ends? Did you start a business? Are you thinking about exercising a stock option? Could any large commissions or bonuses come your way before the end of the year? Did you sell an investment that was held outside of a tax-deferred account? Any of these moves might have a big impact on your taxes.

You may wish to make a charitable gift before New Year’s Day. Make a charitable contribution this year and you can claim the deduction on your 2011 return.

You could make December the “13th month”. Can you make a January mortgage payment in December, or make a lump sum payment on your mortgage balance? If you have a fixed-rate mortgage, a lump sum payment can reduce the home loan amount and the total interest paid on the loan by that much more. In a sense, paying down a debt is almost like getting a risk-free return.

Are you marrying next year, or do you know someone who is? The top of 2012 is a good time to review (and possibly change) beneficiaries to your 401(k) or 403(b) account, your IRA, your insurance policy and other assets. You may want to change beneficiaries in your will. It is also wise to take a look at your insurance coverage. If your last name is changing, you will need a new Social Security card. Lastly, assess your debts and the merits of your existing financial plans.

Are you returning from active duty? If so, go ahead and check the status of your credit, and the state of any tax and legal proceedings that might have been preempted by your orders. Review the status of your employee health insurance, and revoke any power of attorney you may have granted to another person.

Lastly, have you reviewed your withholding status? It may be time for a withholding adjustment if...

• You tend to pay a great deal of income tax annually.
• You tend to get a big refund each year from the IRS.
• You recently married or divorced.
• A family member recently passed away.
• You have a new job that pays you much more than your old one.
• You opened up your own business or started freelancing.

Don’t delay – get it done. Talk with a qualified financial or tax professional today, so you can focus on being healthy and wealthy in the New Year.

Citations.
1 www.irs.gov/newsroom/article/0,,id=248482,00.html [10/20/11]
2 www.irs.gov/retirement/participant/article/0,,id=211345,00.html [10/20/11]
3 money.usnews.com/money/blogs/planning-to-retire/2011/10/21/401k-and-ira-changes-coming-in-2012 [10/21/11]
4 www.post-gazette.com/pg/11032/1121982-28.stm [2/1/11]
5 www.irs.gov/retirement/participant/article/0,,id=202518,00.html [11/1/10]
6 www.montoyaregistry.com/Financial-Market.aspx?financial-market=required-ira-distributions&category=1 [9/15/11]
7 www.dentbaker.com/LinkClick.aspx?fileticket=5gZQwSHvjwQ%3d&tabid=36 [9/6/11]

MONTHLY ECONOMIC UPDATE

2011-11-08T11:33:00.000-08:00

MONTHLY QUOTE
“The family you come from isn’t as important as the family you’re going to have.”
– Ring Lardner

MONTHLY TIP
Do you need several credit cards? Maybe not, especially if you don’t use some of them. Unused credit cards can negatively affect you if you apply for a mortgage or personal loan as lenders look at your “available credit” (used and unused) to decide if you are overextended.

MONTHLY RIDDLE
I went into the woods and got it. I sat down to seek it. I brought it home with me because I couldn't find it. What is it?
Last month’s riddle: I'm dressed in a golden jacket. I take it off abruptly, accompanied by a loud noise. When I do, I become larger but weigh less. What am I?
Last month’s answer:
A kernel of corn.

November 2011

THE MONTH IN BRIEF
In October 2011, stocks had their best month in nearly 20 years. The S&P 500 climbed 10.77% as optimism returned; investors were relieved that Eurozone nations were progressing toward a solution to avert a Greek default. However, the month ended with a political curveball that threatened to sabotage the whole effort. At home, consumer confidence and mortgage rates were at generational lows while consumer spending, auto sales and new home sales held up. Occupy Wall Street gained the world’s attention, as the hazily defined movement may have inspired its first tangible financial change.1

DOMESTIC ECONOMIC HEALTH
In the month of October, the most reassuring stateside economic indicator was a quarterly one. The initial estimate of 3Q GDP was a 2.5% rise: precisely what economists were forecasting and exactly what was needed to silence arguments that we were on the cusp of a double-dip recession.2
Consumers had become pessimists, but they were still spending enough money to move the economy along. They weren’t happy: the month’s final University of Michigan consumer sentiment survey came in at 60.9, better than the preceding month’s 59.4 but still very low. The Conference Board’s October poll fell to an abysmal 39.8. Yet personal spending had improved by 0.6% in September, even as incomes only rose 0.1% in that month.3,4
At both the mall and the factory, there were still signs of vitality. The latest purchasing manager indexes from the Institute for Supply Management showed mild sector expansion: 50.8 in October for the manufacturing index, 53.0 in September for the service sector index. Retail sales zoomed north 1.1% in September, according to the Commerce Department. U.S. auto sales posted a 7.5% monthly gain in October. Overall durable goods orders retreated 0.8% in September, yet there was a 1.7% gain in hard good orders ex-transportation.5,6,7,8,9
Moderate inflation was also alive and well; the federal government’s Consumer Price Index showed annualized inflation reaching 3.9% in September; annualized core CPI was unchanged from the August reading of 2.0%. The CPI posted a 0.3% monthly gain for September while the Producer Price Index went up 0.8% after a flat August.10
The jobless rate didn’t move for the third straight month; in September, it remained at 9.1%. On Capitol Hill, President Obama’s American Jobs Act stalled in the Senate and there were indications that the “super committee” of 12 legislators assigned to craft a deficit reduction plan wasn’t making much progress. President Obama used an executive order to speed up implementation of rules intended to ease the debt burden from college loans, and another to broaden the qualifying criteria for HARP, the federal government’s underutilized mortgage relief program. The Occupy Wall Street protest spread to other cities; while some of the protesters seemed naïve and poorly informed about the relationship of Main Street to Wall Street, they may have hit one of their targets. Late last month, Bank of America announced it was dropping its proposed $5 monthly fee on debit card use; other lenders considering debit card usage fees publicly reconsidered them.11,12

GLOBAL ECONOMIC HEALTH
Things were looking so much better in Europe, until one politician made a truly scary announcement on Halloween. Greek prime minister George Paparandou stunned the European Union with his intent to make the latest austerity cuts for Greece contingent on a public vote. On November 2, German Chancellor Angela
Merkel and French President Nicolas Sarkozy gave Paparandou an ultimatum: no more money from the EU or the IMF unless Greek voters approve the cuts. One day later, Paparandou scuttled the referendum and faces a potentially grim political future. In late October, key bankers and insurers within the Eurozone agreed to a 50% writedown on their Greek debt holdings; additionally, European finance ministers unveiled a plan to boost bank capital ratios to 9% or better by June and increase the size of the Eurozone bailout fund fourfold.13,14,15,35
So what was going on in Asian economies? Some inflation readings were lower than analysts expected: 4.4% for Indonesia; 4.2% for Thailand; 3.9% for South Korea. India’s PMI improved 1.6% in October to 52.0 and its exports surged 36% in the month. On the downside, Taiwan’s latest GDP reading was lower than anticipated, and so was China’s official PMI, which approached a three-year low last month.16

WORLD MARKETS
Looking at Morningstar’s figures for global indexes (calculated in USD terms), we see some impressive one-month rebounds from September. England’s FTSE 100 went +8.11% and the French CAC 40 +8.75%, but that paled in comparison to the German DAX at +11.62% and Hong Kong’s Hang Seng at +12.50%. Other nice performances: India’s Sensex, +7.60%; Australia’s All Ordinaries, +7.13%; the TSX Composite of Canada, +5.40%; the Shanghai Composite of China, +4.62%; Japan’s Nikkei 225, +3.31%. The MSCI World Index rose 10.26% last month while the MSCI Emerging Market Index gained 13.08%.17,18

COMMODITIES MARKETS
Metals rebounded in October, as follows: gold, +6.3%; silver, +14.2%; copper, +15.0%; platinum, +5.5%; palladium, +6.0%. Gold ended up +21.3% YTD when October concluded. Oil rose $13.99 on the month, settling at $93.19 a barrel on Halloween. The real yield of the 10-year note (already down to 0.17% on September 30) diminished to 0.08% by October 31. The U.S. Dollar Index retreated 3.03% last month.19,20,21,22,23

REAL ESTATE
There was some good news: the Census Bureau reported housing starts up by a whopping 15.0% for September, and it said new home sales improved by 5.7% in that month. The August edition of the S&P/Case-Shiller Home Price Index posted an overall advance for the third month in a row (0.2%), with prices rising in 10 of 20 metro areas and the year-over-year price decline shrinking to just 3.8%.24,25,26
On the downside, the National Association of Realtors said existing home sales fell 3.0% for September, leaving sales on pace for a 2012 total of 4.91 million; this was be precisely the same amount of residential resales as 2010, that year being the worst on record for the category since 1997. NAR also said that pending home sales slipped 4.6% in September (economists polled by Bloomberg had forecast a 0.4% gain). 27,28
Mortgage rates went up in October. Freddie Mac’s October 27 Primary Mortgage Market Survey showed the average rate on the 30-year FRM at 4.10%, up from the bedrock-low 4.01% on September 29. Other average interest rates moved as follows during that interval: 5/1-year ARMs, from 3.02% to 3.08%; 1-year ARMs, from 2.83% to 2.90%; 15-year FRMs, from 3.28% to 3.38%.29

LOOKING BACK…LOOKING FORWARD
This sterling market month started and ended with sour notes: the Dow’s worst trading days of October were October 1 and Halloween. Those notes aside, October was positively amazing for the blue chips. In percentage terms, the DJIA had its finest month since October 2002 (and that was with a 2.26% fall on Halloween). All 30 components advanced; the last month in which that happened was September 2010. Also worth noting: the NASDAQ had its best month since September 2010.

Here was the tale of the tape at the end of October. 1
% CHANGE
Y-T-D
1-MO CHG
1-YR CHG
10-YR AVG
DJIA
+3.26
+9.54
+7.46
+3.17
NASDAQ
+1.19
+11.14
+7.17
+5.88
S&P 500
-0.35
+10.77
+5.82
+1.83
REAL YIELD
10/31 RATE
1 YR AGO
5 YRS AGO
10 YRS AGO
10 YR TIPS
0.08%
0.49%
2.34%
3.50%

Sources: online.wsj.com, bigcharts.com, treasury.gov - 10/31/111,30,31,32,33
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.

This is the time of year many investors look forward to; November often marks the start of the traditional fall-winter “sweet spot” for the market. According to the Stock Trader’s Almanac, the S&P 500 has advanced in 57% of Novembers since 1928, with an average gain of 0.78%. Not only that, November has been the second-best month of the year for the S&P 500 since 1950. However, the yet-unresolved situation in Europe is hanging over the market like a cloud; Europe is the market mover now and for the near future. The current Greek government may or may not survive a seemingly inevitable confidence vote; Greek PM George Papandreou’s recent backtrack on a bailout referendum only adds to the uncertainty. So November proceeds with a caution flag for investors; in the best-case scenario, EU pressure on the Papandreou government and a calming of internal Greek political strife lowers that flag.34, 35

UPCOMING ECONOMIC RELEASES: The rest of November offers the following news items: the October ISM service sector index (11/3), the October unemployment report (11/4), September’s wholesale inventories (11/9), the initial University of Michigan November consumer sentiment survey (11/11), the October PPI, October retail sales and September business inventories (11/15), October’s CPI and industrial output (11/16), October housing starts and building permits (11/17), the Conference Board’s October Leading Economic Indicators index (11/18), October existing home sales (11/21), the latest FOMC minutes and the BEA’s second estimate of 3Q growth (11/22), the October consumer spending and durable goods orders reports and the final University of Michigan October consumer sentiment survey (11/23), October new home sales (11/28), the September Case-Shiller home price index and the Conference Board’s November consumer confidence snapshot (11/29), and finally the October pending home sales report and a new Beige Book from the Federal Reserve (11/30).
.
Citations.
1 - blogs.wsj.com/marketbeat/2011/10/31/data-points-u-s-markets-60/ [10/31/11]
2 - abcnews.go.com/Business/gdp-grew-25-percent-boosted-consumer-spending-double/story?id=14821833 [10/27/11]
3 – www.foxbusiness.com/markets/2011/10/28/consumer-spending-rises-weak-incomes-worry/ [10/28/11]
4 - www.npr.org/blogs/thetwo-way/2011/10/25/141683694/consumer-confidence-back-down-to-recession-level [10/25/11]
5 - www.ism.ws/ISMReport/MfgROB.cfm [11/1/11]
6 – www.ism.ws/ISMReport/NonMfgROB.cfm [10/5/11]
7 - www.latimes.com/business/la-fi-economy-retail-20111014,0,1716584.story?track=rss [10/14/11]
8 - online.wsj.com/article/
SB10001424052970204528204577011691060440660.html [11/1/11]
9 - www.forbes.com/2011/10/26/durable-goods-order-rise-extransportation-mortgage-apps-rise-marketnewsvideo.html [10/26/11]
10 - www.nytimes.com/2011/10/20/business/economy/us-consumer-inflation-subdued-housing-starts-up.html [10/19/11]
11 – www.marketwatch.com/story/september-data-show-improvement-in-jobs-market-2011-10-07 [10/7/11]
12 - bottomline.msnbc.msn.com/_news/2011/11/01/8583136-after-debit-card-battle-beware-of-more-bank-fees [11/1/11]
13 - www.reuters.com/article/2011/10/31/us-greece-referendum-analysts-idUSTRE79U7GO20111031 [10/31/11]
14 - www.marketwatch.com/story/greek-bondholders-to-take-50-haircut-2011-10-26 [10/27/11]
15 - www.guardian.co.uk/world/2011/nov/02/greece-ultimatum-austerity-forego-eu?intcmp=239 [11/2/11]
17 - news.morningstar.com/index/indexreturn.html [11/1/11]
18 -mscibarra.com/products/indices/international_equity_indices/gimi/
stdindex/performance.html [10/31/11]
19 - www.bullionpricestoday.com/bullion-prices-rally-in-october-2011/ [10/31/11]
20 - www.marketwatch.com/gold-futures-drop-as-us-dollar-surges-2011-10-31 [10/31/11]
21 - online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_curr_dtabnk&symb=DXY [11/2/11]
22 - blogs.wsj.com/marketbeat/2011/10/31/data-points-energy-metals-528/ [10/31/11]
23 – www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2011 [11/1/11]
24 – www.thestreet.com/story/11283665/1/raise-the-roof-housing-starts-up-15-in-september.html [10/20/11]
25 - marketwatch.com/story/new-us-home-sales-rise-as-prices-tumble-2011-10-26 [10/26/11]
26 - articles.latimes.com/2011/oct/25/business/la-fi-home-prices-20111026 [10/25/11]
27 - ajc.com/business/sales-of-previously-occupied-1206303.html [10/20/11]
28 - bloomberg.com/news/2011-10-27/pending-sales-of-u-s-existing-homes-unexpectedly-falls-4-6-on-demand-ebb.html [10/27/11]
29 - freddiemac.com/pmms/ [11/2/11]
30 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=11%2F1%2F10&x=0&y=0 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=11%2F1F2%2F10&x=10&y=18 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=11%2F1%2F10&x=0&y=0 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F31%2F01&x=0&y=0 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F31%2F01&x=0&y=0 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F31%2F01&x=0&y=0 [11/2/11]
32 - www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [11/2/11]
33 - www.treasurydirect.gov/instit/annceresult/
press/preanre/2001/ofm71101.pdf [7/11/01]
34 - www.cnbc.com/id/45082000 [11/2/11]
35 - www.nytimes.com/2011/11/04/world/europe/greek-leaders-split-on-euro-referendum.html [11/3/11]

The Latest on Social Security

2011-11-08T11:29:00.000-08:00

Benefits increase for 2012. Ideas for reform are numerous.

Social Security gets its first COLA since 2009. As moderate inflation has made a comeback, the federal government has decided to boost Social Security benefits by 3.6% for 2012. This means an average increase of $39 per month for 55 million Social Security recipients ($467 for all of 2012). Also, more than 8 million Americans who get Supplemental Security Income will get $18 more per month ($216 for 2012).1

There are two things to note in the fine print.

· A COLA increase in Social Security means that Medicare premiums can also increase. Much of the 2012 COLA adjustment could effectively be eaten up this way, as Medicare premiums are automatically deducted from Social Security checks. (2012 Medicare Part B premiums should be announced before the end of October.)1,2

· Businesses should note that the Social Security wage base will rise to $110,100 for 2012. Currently, the federal government levies payroll tax on the first $106,800 of income; next year, that ceiling rises by $3,300. This means about 10 million more high-earning Americans will be subject to the payroll tax, which could vary anywhere from 3.1% to 6.2% in 2012 depending on legislative action (or inaction).1,2

Will the "super committee" of 12 make cuts to the program? It's uncertain; the deadline for the long-term budget reform plan from Congress falls on November 23, and the bipartisan and Joint Select Committee on Deficit Reduction (a.k.a. the "supercommittee") has been meeting more or less in secret, with AARP and other lobbyists pressuring them not to cut Social Security and Medicare.5

How might Social Security address its long-term shortfall? Proposals abound, from simple fixes to radical reforms.

· President Obama's fiscal commission has suggested raising the FICA cap. In this proposal, the payroll tax cap would gradually increase between now and 2050 so that 90% of wages earned in America would be subject to Social Security tax by the middle of the century. (This is how it used to be.) Under this plan, the taxable maximum would be $190,000 by 2020.2

· Rep. Paul Ryan (R-WI), Chair of the House Budget Committee, has authored the GOP's "Path to Prosperity" plan, the so-called "Ryan roadmap" that would encourage workers under age 55 to direct some of their payroll taxes into personal retirement accounts. Rep. Ryan's proposal would also index initial Social Security benefits for most retirees to price growth instead of average wage growth and set the age for Social Security eligibility at 67.3,4,5

· The conservative Heritage Foundation suggests a 5-year strategy in its Saving the American Dream proposal, which calls a reduction in Social Security benefits for the richest 9% of retirees, a $10,000 tax exemption for all who work past the federal retirement age, and the near-term elimination of taxation of Social Security income.6

· Republican presidential candidate Herman Cain has proposed replacing Social Security with the "Chilean model". In the early 1980s, Chile's government ended its retirement entitlement program and put retirement planning solely in the hands of individuals, who maintain personal retirement investment accounts and set their own contribution levels and retirement dates. Investor's Business Daily notes that on average, the program has yielded better than 9.2% compounded annual returns over 30 years.7

· Twelve fixes were suggested in a 2010 report issued by the U.S. Senate Special Committee on Aging, among them:

o A 3% cut in benefits

o Taking the payroll tax to 7.3%

o Hiking the full retirement age to 68 or older

o Increasing the Social Security averaging period that determines SSI

o Reducing the typical yearly COLA by 1% or .5%

o Reducing spousal benefits

o Investing some of Social Security's trust funds in equities

o Directing some estate tax revenues into Social Security's trust fund

Perhaps a fix lies somewhere within these proposals; unmodified or altered, alone or in combination.

How much retirement income do you have these days? With Social Security's future still a question mark, you may be thinking about where your retirement income will come from in the years ahead. A chat with the financial professional you know and trust may be worthwhile before 2012 arrives.

Citations.

1 - businessweek.com/ap/financialnews/D9QFGU602.htm [10/19/11]

2 - money.cnn.com/2011/10/19/pf/taxes/social_security_tax/ [10/19/11]

3 - montoyaregistry.com/Financial-Market.aspx?financial-market=will-you-have-an-adequate-retirement-cash-flow&category=3 [10/21/11]

4 - articles.cnn.com/2011-09-26/politics/politics_gop-paul-ryan_1_ryan-plan-paul-ryan-government-spending/3?_s=PM:POLITICS [9/26/11]

5 - cbpp.org/cms/index.cfm?fa=view&id=3308 [10/21/10]

6 - savingthedream.org/how-it-affects-you/retirees/ [10/21/11]

7 - investors.com/NewsAndAnalysis/Article/586464/201109291833/Cains-Chilean-Model.htm [10/12/11]

OBAMA’S NEW DEBT RELIEF INITIATIVES

2011-11-03T09:31:00.000-07:00

Will they make a difference for homeowners and those with student loans?

President Obama has just announced two initiatives to try and ease debt burdens for Americans – moves that some view as election-minded appeals to the younger and middle-class voters that backed him wholeheartedly in 2008. With the American Jobs Act having stalled in the Senate, it isn’t surprising that these changes are coming through executive branch measures rather than proposed legislation.

When put into play, will these two ideas have a meaningful economic impact? Let’s take a closer look at them.

Could an executive order prompt a mortgage refi boom? If your home is underwater, the Obama administration is trying to offer you a better life raft. It is modifying HARP (the Home Affordable Refinance Program) to make more homeowners eligible for refinancing of mortgages backed by Fannie Mae and Freddie Mac.

So far, less than 900,000 homeowners have been able to refi via HARP; the Obama administration envisioned that the program would assist more than 4 million. HARP only worked for homeowners whose residences were less than 25% underwater, so the hardest-hit borrowers were ineligible. Factor in subpar credit scores and the fear that home values would only fall further, and you see why Housing Secretary Shaun Donovan concedes that HARP has “not reached the scale we had hoped.” 1

The retuned HARP relies on simple criteria. The revision to HARP could be a boon to underwater homeowners in California, Florida, Arizona and Nevada – not coincidentally, some key states for President Obama in the 2012 election. In the new version, it won’t matter how much value your home has lost. Lenders will be primarily concerned with two criteria:

• You will have to have a source of regular income.
• You will have to be current on your home loan. If you have missed one mortgage payment in the last 6 months or more than one in the past year, you will be ineligible. (If you have refinanced in the past 2½ years, you are also ineligible.)2

Secretary Donovan projects that a borrower able to refinance a home loan at 4% from a previous 5% or 6% interest rate could save as much as $2,500 a year. About 1 million homeowners could potentially benefit from the program – still, that’s less than a tenth of the 11 million who are underwater right now according to CoreLogic.1,3

There is one major hitch. No mortgage lender will be required to participate in the program; participation is completely voluntary. Again, the opportunity is only available if your home loan is guaranteed by Fannie Mae or Freddie Mac. Fannie and Freddie will come out with the full details on November 15 and the revised version of HARP is scheduled to be ready to roll on December 1.1

A “Pay as You Earn” plan for student loans. By the time Barack and Michelle Obama had both graduated from law school, they collectively had around $120,000 in college debts; their student loan payments exceeded their mortgage payments. Having “been there”, the President is using an executive order to accelerate the implementation of changes to reduce student loan payments and consolidate such loans. These changes were originally planned for 2014; they will now take effect at the start of 2012.5

Under the “Pay as You Earn” initiative, monthly student loan payments would be capped at 10% of a borrower’s discretionary income for 1.6 million Americans, instead of the current 15%. This could potentially means savings of hundreds of dollars per month. (If you wonder if you might qualify for this income-based repayment option, you may visit studentaid.gov/ibr to find out.)6

Additionally, up to 6 million borrowers will be allowed to merge debt stemming from government-issued and privately-issued student loans, resulting in one monthly payment. The interest rate on that payment could be up to 0.5% lower. The Obama administration says that for someone with two loans totaling $37,500 in debt, this consolidation could bring about nearly $1,000 in interest savings.6

The White House says that these changes could make life easier for up to 8 million taxpayers. However, there are currently more than 36 million taxpayers burdened by outstanding college loans.6

President Obama needs to retain the loyalty of younger voters in 2012 and win back the middle class. These initiatives may have major or minor impact, yet they will be appreciated.

Citations.
1 - nj.com/news/index.ssf/2011/10/obamas_new_mortgage_refinance.html [10/25/11]
2 - csmonitor.com/Commentary/the-monitors-view/2011/1024/Moral-blind-spots-in-Obama-mortgage-refinancing-scheme [10/24/11]
3 - investmentnews.com/article/20111026/FREE/111029954 [10/26/11]
4 - montoyaregistry.com/Financial-Market.aspx?financial-market=Six-steps-to-get-out-of-debt&category=29 [10/26/11]
5 - blogs.ajc.com/get-schooled-blog/2011/10/26/president-obama-announces-changes-to-federal-student-loan-repayments [10/26/11]
6 - dailyfinance.com/2011/10/26/obamas-new-student-loan-plan-will-it-let-you-pay-less/ [10/26/11]

Has Wall Street Learned from 2008?

2011-10-25T08:34:00.000-07:00

Some market bears think very little has changed. They could be right.

Memories of 2008 are still fresh: The credit crisis; the collapse of Lehman Brothers and Washington Mutual; the federal takeover of Fannie and Freddie; the market downturn. There’s little doubt Wall Street would like to erase it all from its conscience, and maybe it has.

Part of the anger of the Occupy Wall Street movement comes from the perception that nothing has changed. While the Dodd-Frank Act (designed to make the financial system more accountable and transparent) is now taking effect, the Volcker Rule (intended to stop banks from trading for their own accounts) may be watered down or put off. Beyond that, the U.S. economic recovery from the Great Recession has sputtered and made people question the recent bullish sentiment.

Stocks have rebounded strongly since 2009, but there are still many factors to worry about; this may lead to a little contrarian thinking.

This bull market may be a diversion from a secular bear market. For most of 2011, the S&P 500 has been above 1,200 (a great rebound from the March 2009 low of 676). What was behind that? The short answer: a weak dollar. We haven’t exactly had a boom economy in that timeframe.1,2

Some analysts look at Wall Street right now and see a rerun of the 1970s, when you had momentous rallies masking a bear market that went from 1967-82. In addition, researchers at the Federal Reserve Bank of San Francisco are concerned about the possibility of a generational sell off; a potential market “headwind” for 10 or 20 years stemming from greying Baby Boomers getting out of stocks as they get closer to retirement, countered only partly by overseas investment.3,4

What has changed on Wall Street since 2008? Perhaps not much. The general perception that the CEOs of the big investment banks and mortgage companies whose thoughtlessness contributed to the Great Recession met with no real consequence seems to be taking hold, as evidenced by the Occupy Wall Street movement.

By the way, remember the furor directed at risky derivatives trading? In September 2011, the Comptroller of the Currency had recorded an 11% year-over-year increase in derivatives investment in the banking industry. Banks now hold almost $250 trillion of the contracts.5

A truly severe punishment of Wall Street would come at a dear price for Washington. Some of the biggest names from Wall Street (and the real estate sector) have also been major lobbyists and campaign contributors. According to the nonpartisan Center for Responsive Politics, the National Association of Realtors has contributed more than $40 million to federal-level political campaigns since 1989; Goldman Sachs has contributed almost $36 million since then, and Citigroup nearly $29 million. The financial, insurance and real estate industries have collectively spent over $4.6 billion in lobbying efforts since 1998.6,7

What is happening with the recovery? Not much. While unemployment is above 9%, underemployment is the real story – in September, 16.5% of Americans worked less than 40 hours a week. No wonder homes sit on the market and consumer spending increases mostly in response to rising food and energy prices. Wages even retreated 0.2% in September and incomes fell 0.1% - the first monthly decrease in income since October 2009. Assorted 2012 forecasts see slow or slowing growth in various European and Asian nations.8,9

Is there a bright side for Wall Street? Actually, there could be. The European Union is making decisive moves to address its debt crisis. Indicators still show that our economy is growing, not contracting; September was the best month for U.S. retail sales since March. Many analysts think that the Dodd-Frank regulations will discernibly impact the Wall Street mindset. Lastly, the strength and duration of seemingly every major bull market has been questioned by the bears; history may record that a secular bull market began in 2009, after all.10

Only time will tell. Over time, the stock market has faced some great challenges – and risen to meet them again and again. This time around, the hope is that Wall Street’s behavior (and behavioral assumptions) won’t sabotage the rally.

Citations.
1 - money.cnn.com/data/markets/sandp/ [10/13/11]
2 - moneywatch.bnet.com/economic-news/blog/financial-decoder/jill-on-money-stock-anniversary-mortgages-cash/5308/ [10/8/11]
3 - montoyaregistry.com/Financial-Market.aspx?financial-market=the-financial-security-rulebook-5-crucial-steps&category=3 [10/13/11]
4 - money.msn.com/retirement-investment/latest.aspx?post=9bb7f5b7-8c8a-4723-a543-7930cb51e2af [8/23/11]
5 - dealbook.nytimes.com/2011/09/23/banks-increase-holdings-in-derivatives/ [9/23/11]
6 - opensecrets.org/orgs/list.php?order=A [10/13/11]
7 - opensecrets.org/lobby/top.php?indexType=c [10/13/11]
8 - articles.latimes.com/2011/oct/08/business/la-fi-jobs-report-20111008 [10/8/11]
9 - businessweek.com/news/2011-09-30/u-s-economy-consumer-spending-cooled-in-august-as-wages-fell.html [9/30/11]
10 - latimes.com/business/la-fi-economy-retail-20111014,0,1716584.story?track=rss [10/14/11]

Another Recession? Don't Believe It

2011-10-18T09:25:00.000-07:00

Key indicators point to an economy (slowly) on the mend.

This year, assorted economists and journalists have contended that the U.S. is on the edge of a new recession. Yet recent indicators hint that the economy is doing a bit better than some analysts think.

U.S. retail sales were up 1.1% in September. This is the kind of monthly number that you might expect during a typical recession recovery, and it surpassed the +0.7% consensus forecast of economists polled by Bloomberg News. Additionally, the Commerce Department revised August retail spending (formerly flat) to +0.3%. The year-over-year numbers in the September report really impress: we see annual gains of 7.9% for overall retail sales, 10.1% for online retailers, 6.9% for the restaurant and nightlife component, 7.6% for clothing shops and 6.5% for home and garden stores.1,2,3

As Credit Suisse economist Jonathan Basile told CNBC.com, “The fear of recession recedes when you see a retail sales report like this.” Basile said he was revising Credit Suisse’s 3Q 2011 GDP forecast for the U.S. north from +2.5% to +2.9%.4

GDP did improve in the second quarter. Real GDP was +0.4% in the first quarter of 2011, but the third and final real GDP estimate for the second quarter from the Bureau of Economic Analysis was +1.3%.5

“As of today, the recovery is still underway,” Berkshire Hathaway CEO Warren Buffett commented at an October 4 Fortune Magazine conference. “Our railroad carried 200,000 carloads last week,” he said, referring to the Burlington Northern Santa Fe company. “That’s the highest total in three years. And that’s stuff moving around the country, supplying merchants and doing all kinds of things.”6

Other signs of growth & stability can be seen. Here in October 2011, many corporations appear to be in better shape: U.S. non-financial firms have $15 trillion of potentially liquid cash or investments on hand compared to $13.7 trillion a year ago. American residential investment spending is up by $9 billion since a low-water mark last spring; existing home sales rose 7.7% in August and the backlog of homes for sale fell to an 8.5-month supply from the previous 9.5-month inventory. The Institute for Supply Management’s twin purchasing manager indexes still show ongoing sector expansion; the service sector has grown for 22 months.7,8,9

The continued vitality in consumer spending and other encouraging factors points to a recovery. It may seem unimpressive or frustrating, but it doesn’t indicate a recession.

Citations.
1 - sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/10/14/bloomberg_articlesLT22VK6JTSEL.DTL [10/14/11]
2 - census.gov/retail/marts/www/marts_current.pdf [10/14/11]
3 - montoyaregistry.com/Financial-Market.aspx?financial-market=money-and-happiness&category=29 [10/7/11]
4 - cnbc.com/id/44906873 [9/30/11]
5 - bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm [9/29/11]
6 - businessweek.com/news/2011-10-07/rail-cargo-starts-to-peak-as-buffett-sees-no-recession-freight.html [10/7/11]
7 - washingtonpost.com/business/economy/the-simple-math-of-recession/2011/10/12/gIQAszvWiL_print.html [10/12/11]
8 - realtor.org/press_room/news_releases/2011/09/ehs_aug [9/21/11]
9 - ism.ws/ISMReport/NonMfgROB.cfm [10/5/11]

STOCKS IN THE FOURTH QUARTER

2011-10-11T08:06:00.000-07:00

Can the last quarter of 2011 live up to historical averages?

Is a rally ahead? You may have heard that stocks tend to do well in the fourth quarter. History affirms that perception: while past performance is no guarantee of future results, the last quarter of the year has historically been the best quarter of the year for U.S. equities. As data from Bespoke Investment Group notes:

• The S&P 500 has averaged a +2.44% performance in fourth quarters since 1928.
• In the last 20 years, it has averaged +4.57% in fourth quarters.
• In the last 30 years, it has advanced in 24 of 30 fourth quarters with an average price return of better than 7%.1

Will the Street put its anxieties aside? Right now, you have a lot of uncertainty. Many analysts see a stock market unimpressed by tepid domestic growth and waiting fearfully for the other shoe to drop (meaning Greece).They see more pain ahead for U.S. investors. On the other hand, there is also talk of when a point of capitulation might be reached, i.e., is Wall Street simply ready to rally even in the face of the debt troubles in Europe and the slow recovery here.

You could argue that certain Wall Street psychologies (and tensions) aid 4Q rallies. After all, the pay of money managers relates to performance and there is renewed pressure on them to come through as the end of a year looms.

Could new optimism surface? Perhaps it is surfacing now. As the third quarter wrapped up, Reuters polled 350 stock market analysts worldwide. Their consensus forecast was that 18 of 19 major world stock indices would either advance or suffer insignificant losses in the fourth quarter (Taiwan’s TAIEX was the lone exception in the forecast).2

They also felt that two indices would achieve 2011 gains: South Korea’s Kospi, and the Dow Jones Industrial Average. They think the Dow will end 2011 up about 2%. The Dow was at -5.74% YTD at the closing bell on September 30.3,4

On a particularly bullish note, Bloomberg surveyed 12 Wall Street strategists in early October and found them collectively forecasting the greatest 4Q rally in 13 years. They think that the S&P 500 will rise 15% this quarter, which would mean a push to 1,300 by New Year’s Day.5

Stocks certainly are cheap. Bloomberg data also indicated that when the S&P nearly closed at bear market levels in early October, it was down to 12x reported earnings; valuations were lower than they had been at any point since 2009. At the end of September, the MSCI World Index was trading at just above 10x its 12-month forward earnings, well under its average of 14.3x earnings since 2001.2,5

Some analysts are optimistic about the coming quarters. Indeed, the 350 analysts surveyed by Reuters are envisioning some impressive bull runs. They think Russia’s RTSI will advance 32% between now and mid-2012; they feel Brazil’s Bovespa will rise approximately as much in the next three quarters. If you follow emerging markets, forecasts like these may not surprise you much. However, they also see double-digit advances for the Dow, Nikkei 225, All Ordinaries, CAC 40 and DAX by mid-2012.2

Historically, stocks have had impressive resilience. Here are two other encouraging statistics in the wake of the Dow and S&P’s double-digit third quarter drops:

• The Dow had 14 quarterly losses of 10% or more in the period from 1962-2009. In 79% of the ensuing quarters, the Dow pulled off a quarterly gain.
• The S&P suffered 11 quarterly losses of 10% or more during a stretch from 1981-2009. In 80% of the following quarters, it posted a quarterly gain.6

Another 4Q rally depends on many variables, but if Greece avoids default and 3Q earnings don’t disappoint, we might see a better end to 2011 than the bears anticipate.

Citations.1 - moneywatch.bnet.com/investing/blog/investment-insights/stocks-ready-for-fourth-quarter-rally/2833/ [10/3/11]
2 - reuters.com/article/2011/09/29/us-markets-stocks-poll-idUSTRE78S4EK20110929 [9/29/11]
3 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [10/7/11]
4 - cnbc.com/id/44729786 [9/30/11]
5 - bloomberg.com/news/2011-10-07/stock-index-futures-in-u-s-rally-after-employment-growth-beats-forecasts.html [10/7/11]
6 - cnbc.com/id/44677114/Third_Quarter_Pain_Fourth_Quarter_Gain [9/29/11]

How Does Greece Impact Me?

2011-10-06T12:16:00.000-07:00

Is it all negative, or are there opportunities to consider because of the crisis?

Many economists think a Greek default is inevitable. As we enter 4Q 2011, Greece has a debt-to-GDP ratio of about 160% (and that percentage is rising). While Greece accounts for less than 3% of Eurozone GDP, ripples from a Greek default could strain the European banking sector and global financial markets.1,7

Struggling for the best worst-case scenario. Greece is redoing its financial system, but it is still facing one of five potential (and painful) outcomes.

Greece renegotiates its debts & forces its lenders into write-offs. Many Greek banks are nationalized; Greece endures a long recession.
Greece can't renegotiate its debts. It sinks into a multi-year depression exacerbated by additional austerity measures.
Greece rejects further austerity cuts recommended by the EU. A standoff with the International Monetary Fund and European Central Bank results; the ECB and IMF blink and continue bailout payments to Greece; Italy and Spain see the way Greece made the ECB and IMF cave in and later wrestle the ECB and IMF into submission in the same way; Germany gets frustrated with all this and ditches the euro.
Greece rejects more austerity cuts & the EU stops bailout payments. Civil unrest jeopardizes the country. Its banks close; its public services halt. The CIA has advised that a coup may occur in Greece in such a scenario.
Greece lapses into a banking/cash flow crisis & leaves the euro.This is the "doomsday" scenario. Assume #4 occurs with Greece also electing to go back to the drachma. That could mean a run on Greek banks, and then Spanish and Italian banks. A return to the drachma could mean frozen borrowing for Italy and Spain and possibly lead to insolvency for major banks in Europe. Picture 17 nations trying to agree on and quickly implement an EU version of TARP. Havoc could result for stocks and the global economy.2

This all sounds very gloomy, but prospects may emerge from the gloom.

A(nother) golden opportunity? In the event Greece defaults, the search for safe havens could mean a quick flight to gold. If a Greek bailout succeeds, there may still be fiscal instability among EU members, and presumably an easy monetary policy fostering loose credit. If Greece defaults, then you could see big drops in the spot prices of currencies plus some competitive devaluation. All of this could make gold look very, very good.

On the other hand, if true systemic risk hits global markets, investment banks and hedge funds might need capital fast - and gold is easily liquidated. So a gold selloff could also possibly occur if the situation becomes dire.

What about Treasuries & the dollar? Treasuries remain popular, and demand for them could jump after a Greek default. What other choices do central banks have if they want to shop around for a stable, readily available, reasonably liquid investment? The euro is hardly a rival to the greenback right now.

How about emerging markets? Here is another option. The BRICs and some of the other emerging-market nations have managed to ride out the recent volatility fairly well - there has been some "decoupling", if you will.8 No one is saying these markets would be immune from a continental banking crisis or a flight from stocks, but you have to concede that emerging markets have the capability for independent behavior.

Would it still be worthwhile to own blue chips? Keep in mind that the Dow did not fall to 4,000 after the Lehman Bros. and Washington Mutual failures and the initial rejection of TARP by Congress. Stocks did pull out of that plunge, and spectacularly so; bargains abounded, for that matter. So it might certainly be worthwhile to hold onto stocks in the coming months, especially as some European governments have hinted at possible capital injections for banks if the need arises. On September 13, German chancellor Angela Merkel noted that the EU would not let Greece fall into "uncontrolled insolvency" and reports surfaced of China getting ready to purchase Greek debt. Treasury Secretary Timothy Geithner even got involved in the search for solutions in mid-September.3

Europe's biggest private lenders may be deemed "too big to fail" by the EU and ECB, and if unwinding of any financial institutions is needed, the authorities should do everything within their reach to try and make it gradual.

It could be that Wall Street has already priced in a Greek default and will just wince, not stumble, at its confirmation - assuming the news arrives with more inevitability than frenzy.

The biggest fear of all: contagion. Italy and Spain may be "too big to fail" in the eyes of the EU and IMF, but they also face big debt problems. Standard & Poor's cut Italy's credit rating to 'A' in September; Moody's Investors Service is weighing downgrades for Italy and Spain before November.4,5

How diversified are you? These debt issues in Europe may linger for years.With the market so volatile, don't forget the wisdom of having a diversely allocated portfolio.

Citations.

1 - business.financialpost.com/2011/09/21/preparations-for-greek-default-gathering-steam/ [9/21/11]

2 - bbc.co.uk/news/business-14977728 [9/21/11]

3 - thestreet.com/story/11246102/1/stock-futures-sept-13.html [9/13/11]

4 - nytimes.com/2010/01/29/business/global/29bailout.html [1/29/10]

5 - businessweek.com/news/2011-09-20/italy-credit

Obama's New Tax Proposals and the "Buffet Rule"

2011-10-06T12:14:00.000-07:00

How tax rates might change for the wealthy under the new plan.

On September 19, President Obama laid out a plan to slash $4.4 trillion from the federal deficit by fiscal year 2021 - a plan featuring $1.6 trillion in tax increases for upper-income Americans and corporations.

· The Bush-era income tax cuts would expire in 2013 for high-income households (the highest tax brackets would presumably reset to 36% and 39.6%).

· The federal estate tax would return to 2009 levels in 2013 (a 45% rate with a $3.5 million exemption).

· Tax deductions would presently be reduced for individuals making $200,000 or more annually and households making $250,000 annually.

· The LIFO accounting method for business inventories would be invalid starting in 2013.

· The lower-of-cost-or-market-inventory accounting method for deductions on unsold goods would also be jettisoned.

· Investment partnerships would face higher taxes in future years.

· Deductions and credits for oil and gas activities would be removed.

· Tax rules for U.S. taxpayers subject to foreign taxes would be revised.1,2,3,4

A poll shows broad public approval. President Obama had mentioned tax hikes to pay for his recently unveiled $447 billion American Jobs Act. By linking taxes on the wealthy to job creation, Obama appealed not only to his progressive base but also to the broad middle class.

A September 20 Gallup survey showed 66% of Americans in favor of raising taxes for individuals making $200,000 or more annually and families making $250,000 annually. Additionally, 70% of respondents liked the idea of getting rid of certain corporate tax breaks.5

Will there be a tax floor for millionaires? President Obama referenced creating a "Buffett rule" in a nod to Warren Buffett's August 14 New York Times op-ed piece, in which Buffett mentioned that his 2010 federal tax bill amounted to only 17.4% of his taxable income and that Capitol Hill legislators seemed "compelled" to protect multimillionaires "as if we were spotted owls or some other endangered species." Buffett and Obama both think that the rich should pay proportionately greater federal taxes.6

But do they already? According to the non-partisan Tax Policy Center, they do. The TPC says the average U.S. millionaire pays 20.1% of his/her total income back to the IRS in income and payroll taxes, compared to 16.0% for the average American. While many millionaires generate income from sources besides wages and make the most of charitable gifting strategies, it seems many are being taxed proportionately.7

Where would the floor be? While the President views the proposed "Buffett rule" as a key starting point for tax reform, few details have emerged about it. On September 19, Treasury Secretary Timothy Geithner remarked that "we're not going to give the Congress a detailed proposal for how to meet that specific principle now because there's lots of different ways to do that."7

Daniel Indiviglio, a business writer for The Atlantic, recently spent a column exploring the hypothetical tax impact of a "Buffett rule". He ran some numbers using 2009 IRS data (the most recent available) on adjusted gross incomes. He found that if the government had instituted a 35% minimum tax for all Americans who earned more than $1 million in 2009, an additional $37 billion in revenue would have been generated - certainly handy, but not exactly a big dent in what was a $1.5 trillion shortfall. Raise the floor to the pre-EGTRRA 39.6% and the number climbs to $66 billion. Even if millionaires had been hit with a 75% marginal tax rate in 2009, the additional 2009 revenue would have amounted to less than 20% of the 2009 deficit. (Effective tax rates for these millionaires might have been a lot lower - after all, the S&P 500 gained 24% in 2009.)8

The "Buffett rule" could be modified ... or abridged ... or forgotten. While many Americans would like to see millionaires pay equivalent or greater income tax than the middle class, putting such a rule into play would be tricky.

Many middle-class families can take advantage of a bundle of deductions and exemptions which can lower their effective tax rate. Then you have the possibility of a multimillionaire receiving 100% of his or her income from long-term capital gains or dividends (15% current rate) or tax-exempt interest. Figuring a minimum tax rate for millionaires becomes harder when you consider these factors; in fact, Tax Policy Center senior fellow Roberton Williams told Bloomberg that it might require a federal definition of "income".9

The Obama-appointed National Commission on Fiscal Responsibility and Reform has proposed dropping the preferential capital gains tax rates as an element of a broad tax code revamp that would also reduce marginal tax rates. Bloomberg notes that "several bipartisan groups" including the NCFRR support this notion - and it might be the closest thing to a "Buffett rule" that emerges from the great tax and deficit discussion of 2011.

Citations.

1 - usatoday.com/news/washington/story/2011-09-19/Obama-deficit-reduction-plan/50470916/1 [9/19/11]

2 - forbes.com/2010/07/22/expiring-bush-cuts-affect-personal-finance-taxes.html [7/22/10]

3 - montoyaregistry.com/Financial-Market.aspx?financial-market=what-is-tax-efficiency-and-why-does-it-matter&category=31 [9/19/11]

4 - blogs.reuters.com/reuters-money/2010/10/04/estate-tax-uncertainty-planning-for-2011/ [10/4/10]

5 - usnews.com/opinion/blogs/robert-schlesinger/2011/09/20/poll-most-americans-support-obama-deficit-plan-to-tax-rich [9/20/11]

6 - nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html [8/14/11]

7 - money.cnn.com/2011/09/20/news/economy/buffett_rule_milllonaires/index.htm [9/20/11]

8 - theatlantic.com/business/archive/2011/09/chart-of-the-day-buffett-rule-wouldnt-bring-in-much-revenue/245404/ [9/20/11]

9 - bloomberg.com/news/2011-09-19/-millionaire-tax-seen-easier-said-than-done.html [9/19/11]

What's the Worst That Could Happen?

2011-10-06T12:09:00.000-07:00

If you've been paying close attention, you might have noticed that the U.S. and global investment markets have been bouncing around unpredictably from one day to the next, and every time there is a major move, you hear analysts mumbling something about the debt crisis in Europe. On the up days, they talk about light at the end of the tunnel. On the down days, they talk about the possible collapse of the Euro as a currency, or the breakup of the Eurozone.

The assumption seems to be that if Europe were to devolve back into multiple currencies, there would be dire consequences for the global economy--and your stock portfolio. Or, if the various bailout measures work, people seem to assume that the world will enjoy economic sunshine.

On September 29, the German parliament will vote on whether to authorize a major bailout, and Austria and the Netherlands expected to vote on similar proposals soon thereafter. We can expect more volatility in the next week or so, as pundits, economists and day traders speculate on which way the political winds are blowing.

But how important are these votes, really? What if the gloomiest predictions are right? What if Germany decides to leave the Greeks to their fate, and Greece were forced to secede from the Euro and start printing drachmas all over again? What if Ireland took back control of its own currency? Or (what seems to be the scariest scenario) if Italy were to drop out of the Euro to get its fiscal house in order?

A recent analysis by Stratfor Global Intelligence points out something that many people (especially investors) seem to have forgotten: that Europe's individual countries were the world's leading economic powers for centuries without the convenience of a common currency, and often while they were engaged in fierce wars with each other. Since World War II, before the advent of the Euro, the various citizens of Europe created a local free-trade zone. But even they adopted common guidelines for managing fiscal policy, and voted to create a common currency, they never gave up their local languages, customs or pride in their individual nationalities.

The Stratfor article points out the obvious: that Germany and Greece are still different countries in different places with different value systems and interests. The idea of sacrificing for each other was always a dubious concept, especially the idea of sacrificing in order to hang onto a mutual currency that nearly 50% of both populations never wanted in the first place.

If Greece--or any other nation--were to secede from the Euro, it might actually relieve the pressure that the world is experiencing now. Greece would be able to print more Drachmas, inflate its currency a bit, and make its foreign debt less onerous. Of course, this would function like a stealth tax on its citizens--their income would be worth less--so the pain would be shared among the European banks holding Greek bonds and the citizens who fiercely oppose paying higher taxes in order to pay off foreign creditors. This might be a more workable solution that either an outright default or German citizens reaching deep into their own pockets.

In fact, the Stratfor analysis suggests that this breakup might be inevitable anyway. "Does Greece or Portugal really want to give Germany a blank check to export what it wants, or would they prefer managed trade under their control?" it asks plausibly. "Play this forward past the euro crisis, and the foundations of a unified Europe become questionable."

Stratfor's conclusion is that Europe will remain an enormously prosperous place under either scenario--bailout or not. Does anybody seriously disagree with that? And yet isn't that what the pundits and others are ultimately calling into question?

If the worst case were to play out, if Germany votes not to fund a bailout and several PIIGs decide to opt out of the Euro, what then? If our worst fears are realized and the consequences are not nearly as bad as everyone seemed to imagine, you might see a lot of investors returning to the market to buy the stocks they unloaded when they thought the world was going to end.

Sources:
Germany's vote: http://money.cnn.com/2011/09/08/markets/europe_debt_crisis_/index.htm

Europe's potential breakup: http://www.stratfor.com/weekly/20110912-crisis-europe-and-european-nationalism

Gloom, Doom and the Hidden Rays of Hope

2011-10-04T13:28:00.000-07:00

By any reasonable measure, the past three months have been among the gloomiest fiscal quarters on record for the investment markets. The debt ceiling debate, constant dithering in Europe over whether or not Eurozone members should be allowed to default on their sovereign debt, partisan bickering, the downgrade of U.S. government debt, continued unemployment and a general unsettled feeling about the economic recovery have all combined to put investors in a pessimistic mood. When people are pessimistic about the future, they sell--as they did, steadily and persistently, through what will be remembered as the gloomy summer of 2011.

It is hard to remember now that in the first quarter, just a few months ago, the markets were flirting with a full recovery from the 2008 debacle, or that before this quarter started the markets were in positive territory overall for 2011.

The Wilshire 5000 index, which most closely reflects the total U.S. stock inventory, dropped a remarkable 12.85% of its total value for the quarter. This wiped out the gains of the previous two quarters; the index is now down 7.54% for the year. The comparable Russell 3000 index fell 15.28% in the three months ending September 30, ending the quarter down 9.90% for the year.

The Wilshire U.S. Large-Cap index fell 12.03% during the third quarter, and is now down 6.76% for the first three quarters of 2011. The Russell 1000 large cap index was down 14.68% for the third quarter; taking it to a negative 9.25% return for the first three quarters of the year. The more widely-followed S&P 500 index of the largest companies domiciled in the U.S. was down 13.87% for the quarter, giving it a loss of 8.68% so far this year.

The Wilshire U.S. Mid-Cap index dropped 18.93% over the third quarter, and is now down 11.15% for the year. The comparable Russell Midcap index fell 18.90%, putting it down 12.34% so far this year.

The Wilshire U.S. Small-Cap index plunged 19.34% over the three months ending September 30, and holds a 13.46% loss for the year. The Russell 2000 small cap index fell 21.87% in the third quarter, placing it down 17.02% for the year.

The technology-heavy Nasdaq Composite index retreated 12.91% in the three month period ending September 30, and is now down 8.95% for the year.

Internationally, the results were much the same--only more so. The EAFE index, which represents large cap stocks across the developed world, plunged 19.60% for the quarter, and is down 17.18% for the year. Europe as a whole was down 23.00% for the quarter; the Far East dropped 9.64%, and the EAFE emerging markets index of developing nations fell 22.88%.

Even the assets that are supposed to zig when the stock market zags were down comparably for the quarter. The Wilshire REIT index of real estate investment trusts was down 12.10% for the third quarter; moving it down 2.54% for the year. Commodities told the same story: energy stocks, including petroleum producers, were down 12.99% for the quarter, industrial metals fell 22.46%, and even gold, which finished the quarter up 7.82%, experienced a drop of 11.43% in September.

Just when you thought that yields on government bonds couldn't go any lower, they did: bonds of up to 1-year maturity are essentially paying zero interest, while five-year Treasuries are paying 1% a year, and 10-year Treasury issues lock you in at 2.125% a year.

It is usually more difficult to read the minds of the investing public than the cable financial programs and financial press makes it appear; the headlines one day will say that stocks fell after the Fed issued a warning about the economy, and the next day we will learn that stocks rose because the Fed was so worried about the economy that it might lower interest rates.

However, this summer there was a certain clarity about the cause of the malaise; the S&P 500 was routed to the tune of a 2.2% one-day loss on August 2, right after Congress finally agreed to a messy compromise on the debt ceiling. It was clear that many people were questioning whether our lawmakers have a clear grasp of the financial and economic challenges facing a nation that is still climbing out of the worst recession since the second world war. When they look overseas, they see that European governments are, if possible, even less functional in their approach to repairing the global economy. On August 4, the S&P 500 fell 4.3%; it fell 5.6% on August 6 and another 4.4% on August 8--and those four days represented nearly all of the damage for the quarter.

September, of course, was worse, and the handwriting was on the wall when the S&P 500 experienced its worst first week start in its five-decade history. (Yes, that includes the Fall of 2008.) A brief five-day rally gave us a 4% bump in value, but the end of the month was dismal, with a 2.9% drop on September 21, followed by a 3.2% fall the next trading day. Altogether, the index was down 6% for the month.

Is gloom and doom the real story about the economy, or is it a reflection of unfounded fear? The NumberNomics economic web site notes that the U.S. GDP (the broadest measure of economic activity) actually grew 2.3% for the past three months, a much faster growth rate that the anemic first quarter (0.4%) and only slightly-more-promising second quarter (1.3%). Do those numbers look like they are moving the economy toward a double-dip recession, as many investors seem to fear?

Another fear is that the Eurozone will collapse under the weight of Greek debt. But there is good news on that front as well; the German parliament voted on September 29 to support the expansion of the European Financial Stability Facility by a surprising 315-85 margin. Germany is the 10th--and most important--of the Eurozone members to ratify the bailout agreement

Meanwhile, supply shortages of oil have eased from the start of the year, causing oil prices to drop. Consumers have paid down enormous amounts of debt over the past three years, bringing them in line with where the consumer debt burden has been for the past 30 years. Corporate profits and cash levels remain at record high levels, and there are signs that the unemployment problem is starting to ease--although it will be years before we seen unemployment fall to levels seen in the early part of this century.

With all this good news hiding behind headlines about U.S. and European sovereign debt levels, it is hard to predict that the markets will rally decisively. But it is also difficult to bet against a sudden shift in sentiment, especially since there have been so many in the past few years. The wisest heads in the investment game tend to see the optimistic side of the situation when the markets are most gloomy, and see the dark clouds gathering when everyone else is enjoying a strong runup in stocks.

Despite what you hear on the cable financial news channels, nobody really knows how long stocks will remain on sale or how long it will take for the global economy to finally sort itself out. We DO know, from past experience, that eventually the economy recovers from even the most severe shocks, and (again, eventually) the markets return to health. History tells us that a recovery is inevitable, and it seems to be visibly underway somewhere behind the hubbub of the negative press, partisan bickering and occasional market panics.

When investors figure that out, there will be another bull run and (this we can predict with confidence), people in that happy time will forget all over again that stocks can go down as well as up. That's when you'll hear our lonely voices talking about the downside risks.

SOURCES:

GDP estimates, inflation and corporate profits: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Wilshire index data: http://www.wilshire.com/Indexes/calculator/

Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp

S%P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--

Nasdaq index data: http://quicktake.morningstar.com/Index/IndexCharts.aspx?Symbol=COMP

International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html

Commodities index data: http://www.standardandpoors.com/indices/sp-gsci/en/us/?indexId=spgscirg--usd----sp------

Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

Numbernomics.com: http://www.numbernomics.com/nomicsnotes/

German bailout vote: http://www.bbc.co.uk/news/world-europe-15107538

A Question of Coverage

2011-09-30T07:38:00.000-07:00

According to the latest census, there are now just under 39.5 million persons age 65 and over in the United States, and another 10.7 million age 60-64. Yet according to an insurance data-gathering organization called LIMRA, only about seven million of those have long-term care insurance coverage.

As you probably know, long-term care--or LTC as it is known to professionals--is any insurance coverage that pays for the costs of a stay in a nursing home or for someone to provide care and assistance in your home if you (or a parent, or loved one) should ever become unable to care for yourself. It has been estimated that roughly two-thirds of all 65-year-olds will, at some point in their lives, need this kind of care. About half are expected to require more than 90 days of skilled nursing care. The odds are one in ten that a person will be in need of care for three years, and another ten percent will need care for five years or longer.

For the unlucky minority, the costs can be significant. One state-by-state database shows that the average nursing home cost across the nation is $71,000 a year, or $195 a day, but these costs vary dramatically depending on the actual facility you're looking at, from just under $50,000 up to (gulp) $200,000 annually.

The AARP estimates that some two-thirds of all of today's nursing home residents pay for their care with money from Medicaid, the national health insurance program for persons with low incomes. There is, in fact, a thriving cottage industry in the legal community offering tips on how to impoverish an elderly loved one in order to qualify for government assistance. The problem is that many facilities limit the number of beds they offer to Medicaid recipients, which means that the genuinely impoverished--and those who have maneuvered themselves into impoverishment--may not be able to get the best care.

Another government program is on the way, although some are already questioning its long-term solvency. The recently-passed health care law created something called the Community Living Assistance Services and Supports program, otherwise known as CLASS. CLASS will be available through employers. It will collect monthly premiums, and after five years, participating employees will be covered and receive benefits if they need care, whether they're in their 20s recovering from a snowboarding accident or in their 90s dealing with Parkinson's disease.

However, recent reports in the Washington Post and the New York Times suggest that the program, which is due to open either late next year or in 2013, may not actually be solvent unless younger people sign up for what has generally been regarded as middle-age (or later) insurance. The Center for Retirement Research at Boston College has estimated that if fewer than one percent of participants in the CLASS plan are under age 40, then the program would need to charge $312 a month to make the program actuarially sound. At that price, it might be hard to get people to sign up.

If the government is worried about funding long-term care expenses, than you probably should be too. But how would you know whether to self-insure or buy coverage?

As it happens, an article in a recent issue of Financial Planning magazine offers a rough way to weigh the costs against the potential benefits. The article assumed that there is a 20% chance of needing one year of care, and a 10% chance that you'll spend three years or more in a nursing home or in your own home under the care of a skilled nurse. You could either buy a policy at age 55 with premiums of $3,400 a year or roll the roulette wheel and take the risk of incurring long-term care costs of $57,000 a year in current dollars. The analysis assumes that you (or a loved one) will live to age 85, and the care costs will tend to occur late in life.

Bringing all the various costs back to present-day dollars, the analysis says that you have a 60% percent chance of never needing to make a claim and, therefore, losing all your premiums--a present value cost of $60,000. You have a 20% chance that you'll stay in a facility for just one year, which means that if you bought the insurance, you would still come out behind about $12,000, on a present value basis.

You have an additional 10% chance of staying in a nursing facility for three years, in which case your insurance purchase would result in an $85,000 savings--again in present value dollars. And if you are among the one in ten who requires five years of care, then your insurance purchase would result in a $183,000 gain.

There is one additional factor to this equation. If you self-insure long-term care costs, that money would typically be set aside in safe fixed income investments which currently (you may have already noticed this) offer little return. If you buy insurance, that money could be redeployed into a more broadly-diversified investment portfolio, where the returns (no guarantee, of course) are expected to be higher, based on historical numbers.

And, depending on your preferences, there may be one more factor to consider. LTC insurance is sometimes referred to as "nursing home avoidance" insurance, because unlike Medicaid, LTC policies will typically cover some or all of the costs for home care, allowing you to sleep in your own bed during your period of convalescence. CLASS is also projected to pay for home care, but the first benefits won't be given out until 2017 at the earliest.

Like all insurance, this is a premium you would pay and hope it never results in a claim. Many will achieve that happy result. But millions of others are someday going to wish they hadn't rolled the dice on one of the costliest potential consequences of getting older. More people should at least be talking about whether they want coverage--either for themselves, or for their parents, or both.

Sources:

LTC popularity and need analysis: http://www.financial-planning.com/fp_issues/2011_9/is-long-term-care-insurance-worth-it-2674824-1.html

Census figures: http://en.wikipedia.org/wiki/Demographics_of_the_United_States

http://www.censusscope.org/us/chart_age.html

AARP: http://assets.aarp.org/external_sites/caregiving/options/nursing_home_costs.html

Nursing home costs by state: http://www.prepsmart.com/long-term-care-costsbystate.html

Explanation of CLASS: http://newoldage.blogs.nytimes.com/2010/03/24/a-new-long-term-care-insurance-program/

http://www.nytimes.com/2011/04/30/your-money/health-insurance/30money.html?pagewanted=all

http://www.washingtonpost.com/politics/ap-exclusive-warnings-ignored-on-new-long-term-care-programs-bankruptcy-risks/2011/09/14/gIQA7yDPSK_story.html

ASSESSING THE AMERICAN JOBS ACT

2011-09-13T10:42:00.000-07:00

Will Congress pass it? What difference could it potentially make?

On September 8, President Obama announced a new plan to improve the economy – the $447 billion American Jobs Act, a sequel of sorts to his past economic stimulus proposals. His announced goal: job creation without new taxation.

While the President took some sharp jabs at Republicans in his speech to Congress (“I know that some of you have sworn oaths to never raise any taxes on anyone for as long as you live”), early indications are that the bill will have noticeable bipartisan support.1

What’s in this bill? The AJA would try to boost the economy through seven different tactics – extensions and expansions of tax breaks, and infusions of federal dollars.

1. The current payroll tax holiday would be extended through the end of 2012.
2. The payroll tax would fall to 3.1% - not only for workers, but also for businesses with payrolls of $5 million or less.
3. Companies could get a tax credit as large as $4,000 for hiring the long-term unemployed (people who have been out of work for at least 6 months).
4. Long-term jobless benefits would again be extended.
5. $80 billion of federal money would be assigned to new infrastructure projects (highways, bridges and schools).
6. Businesses could expense 100% of their investments in 2012, just as they have been able to do in 2011.
7. Additional federal money would be given to struggling state and local governments to help them avoid layoffs of first responders and teachers.2,3

How could this all be funded without new taxes? President Obama claims the effort can be paid for as a byproduct of his plan to reduce the federal deficit (a plan he will discuss in greater detail in a September 19 speech).1,4

The bill isn’t set in stone yet. The AJA goes to the House for a vote this week, and though the House Republican leadership likes the essence of the plan, it may seek major alterations.

In a jointly authored statement issued on September 9, House Speaker John Boehner (R-OH), House Majority Leader Eric Cantor (R-VA), Majority Whip Kevin McCarthy (R-CA) and Conference Chairman Jeb Hensarling (R-TX) said the plan “merits consideration”, but they also hoped that the President’s ideas were not offered “as an all-or-nothing proposition, but rather in anticipation that the Congress may also have equally as effective proposals to offer for consideration.”4

Indeed, Republicans have had an alternative plan in the works for a while - the so-called Plan for America’s Job Creators - which centers on tax reduction, decreased non-defense discretionary spending and less costly industry regulations to stimulate private-sector job growth. There isn’t much support for it among Democrats.

What do economists think the AJA could accomplish? Some think the economy would get some short-term relief if it became law. Others see an upcoming object lesson in failed Keynesian economics.

• Moody’s Analytics chief economist Mark Zandi is big on the bill – he believes it could add 2% to GDP, cut 1% off the jobless rate, and create 1.9 million jobs in an economy “on the edge of recession”.
• University of Pennsylvania Wharton School of Business professor Susan Wachter thinks the payroll tax reductions alone could generate 1 million jobs and expand the economy by 1%.
• At Pimco, Mohamed El-Erian calls it a “credible program that is focused on the right structural areas.”
• Unicredit’s Harm Bandholz thinks the AJA could “add up to 2 percentage points to growth in the coming year.”
• “Bottom line: not a lot of bang for the buck here,” states Tom Porcelli of RBC Capital Markets, who feels that the economic impact of the infrastructure investments will likely be “fairly modest … the red tape and politics involved in allocating these funds makes the implementation a long and drawn-out process.”
• The Heritage Foundation’s J.D. Foster sees “a bunch of retread policy ideas that two years after they were first tried managed to create an arithmetic novelty – exactly zero job growth in August. In total, the President is calling for more new spending on proven policies that are proven failures.”5,6

As the economy is in such a low gear, you may see Democrats and Republicans support the bill with newfound unity or at least tolerance. While America can’t reach across the Atlantic and fix the Eurozone crisis hampering world stocks, this envisioned stimulus could help our economy make some small strides.

Citations.
1 - advisorone.com/2011/09/09/obama-chides-congress-as-he-urges-passage-of-jobs [9/9/11]
2 - montoyaregistry.com/Financial-Market.aspx?financial-market=maxxing-out-your-ira&category=1 [9/9/11]
3 - money.msn.com/business-news/article.aspx?feed=AP&date=20110909&id=14243169 [9/9/11]
4 - latimes.com/news/politics/la-pn-house-jobs-plan-20110909,0,2297315.story [9/9/11]
5 - usatoday.com/money/economy/story/2011-09-09/obama-jobs-plan-economists/50336434/1 [9/9/11]
6 - blogs.wsj.com/economics/2011/09/09/more-economists-react-gauging-impact-of-obama-jobs-proposal/ [9/9/11]
6 - blogs.wsj.com/economics/2011/09/09/more-economists-react-gauging-impact-of-obama-jobs-proposal/ [9/9/11]

A Prime Time To Refinance

2011-09-08T10:57:00.001-07:00

On August 18, rates on 15-year FRMs were averaging 3.36%. Freddie Mac reported the lowest interest rates in at least 50 years in its August 18 Primary Mortgage Market Survey. In fact, it noted record lows across the board. Rates on conventional 30-year home loans were averaging 4.15% on August 18. (The last time 30-year mortgage rates were this minimal was during a stretch in 1950-51 when FHA-backed 30-year FRMs averaged 4.08%.) Average interest rates for 5/1-year ARMs and 1-year ARMs were respectively at 3.08% and 2.86% in the August 18 survey.1,2

You can chalk these new lows up to skidding Treasury yields. In fact, the yield on the 10-year note actually dipped below 2% for a moment on August 18.3

Those able to refinance are seizing the moment. The Mortgage Bankers Association reported that refi applications rose by 30% in the week ending August 5 to the highest level seen so far in 2011.4

If you can do it, keep your long-term goals in mind. Years ago, a refi came down to one factor: if you could knock a couple of percentage points off your interest rate, you did it. Today, it’s a bit more complex. There are three aspects to consider: a) how much you can save per month, b) lender points and fees, and c) how long you intend to live in your home.

Let’s say a refi frees up $150 for you each month. Sounds great, right? It isn’t so great if the mortgage company tacks on a point up front (think $1,500-5,000, depending on the amount of your loan) and a few hundred dollars in fees. If you’re only going to stay in that home for a few more years, that refi is hardly worth it.

If you plan to live in your home for many years, then it’s a different story; you may be poised for substantial savings. This is a simple example, of course. If you are moving from a 30-year loan to a 15-year loan or vice versa, or if you are among those getting out of “ARMs way” and refinancing into a fixed-rate mortgage, you’ve got more variables to think about.

How long will rates stay this low? It is truly hard to say; recent history has illustrated that. On April 10, 2010, a New York Times headline blared: “Interest Rates Have Nowhere to Go but Up”. At that time, the average rate for a 30-year fixed mortgage was 5.31%. Look where it is now.5

Could rates go even lower? If 10-year Treasury yields were to fall even further, that could happen. While the Federal Reserve wants to refrain from QE3, it could again print money and buy Treasuries to cheapen the dollar and help the stock market.

However, the Consumer Price Index rose 0.5% in July – the biggest increase since March - with annualized inflation running at 3.6%. The Fed’s informal inflation target is 2%, so a gap like that would seem to preclude a QE3.

Of course, the Fed has pledged to keep near-zero interest rates in place into 2013 on the expectation that inflation will decline – half of the 0.5% jump in the July CPI could be traced to the rise in retail gasoline prices.6

Through the years, bond investors have often gauged interest rates on conventional home loans by adding about 1.7% to the current percentage yield of the 10-year note. On August 17, Dow Jones Newswires polled bond dealers to get a consensus forecast for the 10-year Treasury yield; they expect yields to end 2011 at 2.5%. Some fund managers and strategists feel that benchmark Treasury yields could end the year under 2.0%. These forecasts imply rates on 30-year FRMs of anywhere from 3.6-4.2% by around New Year’s Eve.7

Interest rates will move north at some point, so a window of opportunity beckons – and no one really knows how long it will stay open.

Think before you make a move. Before you get out that pen and sign anything, talk about your options for refinancing with a qualified mortgage specialist, and talk to your financial consultant to see how your choice to refinance relates to your overall financial situation.

Citations
1 - freddiemac.com/pmms/ [8/18/11]
2 - kentucky.com/2011/08/18/1850034/mortgage-rates-fall-to-lowest.html [8/18/11]
3 - bloomberg.com/news/2011-08-18/u-s-mortgage-rates-fall-to-lowest-in-at-least-50-years-freddie-mac-says.html [8/18/11]
4 - usatoday.com/money/economy/housing/2011-08-11-mortgage-rates-low_n.htm [8/11/11]
5 - nytimes.com/2010/04/11/business/economy/11rates.html [4/11/10]
6 - online.wsj.com/article/SB10001424053111903639404576516054025747710.html [8/18/11]
7 - online.wsj.com/article/BT-CO-20110818-715221.html [8/18/11]

TWO NEW IDEAS, ONE INVOLVING A TWIST

2011-08-30T11:36:00.000-07:00

The government still has some options to stimulate the economy.

What can Washington do now to help consumers, housing and stocks? Options remain. The Obama administration and the Federal Reserve are reportedly considering two interesting tactics: one first employed 50 years ago, and another that could bloom into a multi-faceted effort to aid homeowners under pressure.

Is a great mass refinancing coming? The August 24 edition of the New York Times mentioned that the White House was mulling over three different proposals to aid the housing market.

• One plan would let homeowners with government-backed home loans refinance those mortgages at today’s 4% interest rates. The potential economic stimulus could be profound: Columbia University professor Christopher Mayer, who first suggested the idea to the Obama administration, thinks it could save homeowners $75 billion in interest a year. While that would be great for Main Street (and personal spending), it might rile the regulator supervising Fannie Mae and Freddie Mac and mortgage bond investors. Banks could applaud this program, which could start without Congressional approval and without drawing down the $45.6 billion in Troubled Asset Relief funds earmarked for aiding homeowners. (Those billions could be redirected for deficit reduction.)
• A second proposal would change criteria for the federal refinancing programs already up and running so that more mortgageholders could become eligible for help.
• A third plan (actually the most developed of the three) would help troubled homeowners rent out their residences to avoid foreclosure. Houses owned by Fannie and Freddie could be converted to rentals or put to other uses. This plan may prove very attractive to investment firms, especially if the federal government lends them money to promote their involvement.1,2

Could the Fed try a new variation on Operation Twist? In early 1961, we were facing a recession. Soon after taking office, President Kennedy convinced the Federal Reserve to sell short-term Treasuries and invest the proceeds into longer-term bonds. This program – known as Operation Twist – was kind of like a small-scale ancestor of QE2. It lengthened the average maturity of the Fed’s holding of Treasuries and it was fairly successful; it had an impact roughly akin to a 1% cut in the federal funds rate.3,4

Operation Twist had two objectives:

• To bump up the yields on shorter-term Treasuries, thereby making them more attractive to overseas investors while aiding the dollar.
• To reduce long-term Treasury yields and stimulate longer-term investments.

Operation Twist was also a weapon against cross-currency arbitrage. The U.S. was on the gold standard then; billions in gold were leaving our shores. Foreign investors were converting dollars to gold and using the gold to purchase higher-yielding assets in Europe.

Today, the playing field has changed – yet a sequel to Operation Twist could potentially increase appetite for risk. If an effort like this manages to reduce yields on “safe” assets, insurance companies, pension funds and other institutional investors could be convinced to put their money elsewhere (i.e., equities).

Lower long-term interest rates could also reduce the cost of capital for companies and encourage borrowing on Main Street: mortgages, auto financing and other consumer loans would be less expensive. JPMorgan economists think that a new Operation Twist could possibly lower mortgage interest rates by .1%. (This projection assumes the Fed passively buys $20 billion in long-term Treasuries per month.)3

Of course, the stock market would prefer to see a full-blown QE3 rather than the comeback of Operation Twist. Yet with GDP so anemic and the stock market and housing sectors both needing boosts, any idea with merit is welcome – and these proposals may go from drawing board to reality this fall.

Citations.
1 - nytimes.com/2011/08/25/business/economy/us-may-back-mortgage-refinancing-for-millions.html [8/25/11]
2 - foxnews.com/politics/2011/08/25/obama-administration-weighs-mortgage-refinance-plan/ [8/25/11]
3 – money.msn.com/investing/can-the-fed-chief-calm-our-fears-mirhaydari.aspx?page=2 [8/24/11]
4 - foxbusiness.com/markets/2011/08/10/is-fed-reserve-operation-twist-20-around-corner/ [8/10/11]
5 - montoyaregistry.com/Financial-Market.aspx?financial-market=wealth-planning-using-the-stretch-ira-strategy&category=4 [8/28/11]

European Debt

2011-08-22T16:55:00.000-07:00

Cruising Toward Resolution

Does it ever feel like this: (http://news.yahoo.com/comics/pat-oliphant-slideshow/#crsl=%252Fphotos%252Fpat-oliphant-slideshow%252F20110817-po110817-gif-photo-060208364.html ) to be a stock market investor these days?

Two weeks ago, the markets were rocked by the Standard & Poors ratings downgrade of longer-term U.S. Treasury securities. This past week, it was problems with European debt.

It's not immediately obvious, even for financial professionals, why U.S. stocks should suffer because Greece or Italy have trouble paying their debt obligations. But in a recent posting, Mohamed El-Erian, who serves as co-CEO of the world's largest bond management company, made an interesting analogy that helps to make the situation a bit clearer.

His analogy suggests that we think of the European Central Bank as a Coast Guard cutter in the Mediterranean, and it gets a warning that a relatively small cruise ship called Greece is in trouble. The ship passed through a significant storm called 2008, and now, through poor planning, has run out of food and fuel and is in danger of sinking. True to its mission, the Coast Guard cutter sets out to tow the battered ship back to shore.

But then the rescue shop receives another message. A somewhat larger cruise ship is also in trouble, as a result of the same storm. Another call comes in, another ship is foundering. And then one of the larger vessels, called Italy, announces that it is in trouble as well.

What to do? Nobody prepared for the possibility that more than one ship would be in danger at once, much less four or five. The Coast Guard vessel can think of only one thing to do; it radios the two largest cruise ships in the Mediterranean, called Germany and France, and asks them to participate in the rescue operation, by cutting short their trips, sharing the food and fuel that was set aside for their passengers, and basically rescue the cruise ship business before too many future passengers become disenchanted and cancel their tickets.

The captain and the cruise ship lines (the leaders of France and Germany) are willing to help out, but the passengers are extremely restless. Why should their trip be sacrificed? Why should the food they paid for be shared with the passengers of less stable or thrifty cruise lines? The captains of the France and Germany cruise ships are afraid their passengers will mutiny if they execute a rescue, and afraid of the consequences if there is no rescue and one of the smaller cruise ships goes down with passengers and crew.

The world, of course, is watching. The overwhelming hope is that the larger ships will come and save the day. The fear is that they may not. Meanwhile, El-Erian says, the crew of the struggling rescue vessel is struggling with a once-unthinkable decision: should throw somebody overboard to lighten the vessel and save the rest of the passengers?

This, El-Erian says, is the European Central Bank's situation today. And if we have learned anything since 2008, it is that in such a highly-connected global economy, if one major entity is allowed to go under the waves (think Lehman Brothers), the entire global system will be negatively affected. Hence, investors sell stocks in fear of another 4th quarter of 2008.

How likely is that? El-Erian points out that there are three possible endgames to the European Sovereign debt crisis. One is a disorderly breakup of the eurozone, which would mean temporary economic chaos. This could happen if the countries with the most debt problems--Greece, Ireland, Portugal, Iceland, Spain and Italy--fail to address their fiscal balance sheets due to pressure from their voters. To return to the cruise ship analogy, the people aboard the vessel named Greece believed that they paid for an appropriate ticket, and now the captain is telling them that they will have to sacrifice their vacation and pay back the Coast Guard and the other cruise ships. The response, for some, has been rioting.

A second possibility is a tighter fiscal union among the European countries, which basically means that Germany (and, to a lesser extent, France) reaches into its pocket and bails out the debtor nations to the south. In return, Germany gets more control over over the economic governance of the other members of the European Union. The slogan of this approach: never again will we float unsafe vessels.

And the third? Several economists, El-Erian says, have floated the idea that two or three "peripheral economies" (Greece and Italy) would take a sabbatical from the euro. They would go back to their own currencies, which would allow them to devalue immediately, making their exports more competitive and their debt less costly. Instead of imposing an unpopular new tax on the population, the countries would impose a stealth tax in the firm of higher inflation. Meanwhile, the euro becomes stronger. The motto: fix your own vessels, and then come back to see us when you're finished.

As one of these scenarios plays out, it might become obvious that many American and European stocks are currently being affected more by anxiety and uncertainty than by any direct connection with the Euro's woes. A report recently noted that Apple Computer was worth more than all 32 of Europe's largest banks. If chaos reigns across the Atlantic, there could be a flood of capital looking for a safe, liquid home in the U.S. stock market.

　
Source:

http://www.project-syndicate.org/commentary/elerian8/English

http://www.cultofmac.com/apple-was-worth-more-than-all-the-banks-in-europe-earlier-today/109642

2011-08-11T13:00:00.000-07:00

A Q&A About Our Market Confusion

Here's an amusing graphic that sums up, perhaps in exaggerated form, how some people view the mathematics behind the recent U.S. Treasury bond debt downgrade:

Normally, the very last thing we would want to do is call your attention to daily market movements, because all of the worst investment decisions are made with a short-term focus. But I want you to be aware that we are following, very closely, the market events and their impact on your investment portfolio and ability to fund future goals.

As you no doubt heard in the media echo chamber, the U.S. markets recovered in dramatic fashion on Tuesday after the Monday free-fall. By the end of the trading day, the S&P 500 index was up 4.74%, and the technology-heavy Nasdaq index was up 5.29%. This helps to offset the roughly 16% drop over the past 11 trading days.

What does this mean? Here are some good questions that you may be asking yourself, and the best answers we can provide at the moment.

What was different about Tuesday (when the market was dramatically up) from Monday (when the market was dramatically down)?

Very little from the standpoint of fundamentals. The economy is no stronger or weaker from one day to the next, corporate profits didn't make any radical adjustments, and the underlying worth of the business enterprises and debt obligations that you own have been pretty much the same throughout these Summer doldrums.

The main difference can be found in investor emotion, which is not predictable by any measure that we've been able to find. The Federal Reserve Board gave the optimists something to cheer about when it announced that it would maintain low rates--which tend to stimulate the economy by encouraging banks to lend and companies to borrow (and build factories, and hire workers)--through mid-2013. That means that even though the federal government's expenditures won't be stimulating the economy during this time of highly-partisan belt-tightening negotiations, at least higher interest rates won't slam the economy into recession.

What about the ratings downgrade? Won't that hurt the economy and the markets?

Over the last couple of days, economists and veteran market watchers have been mocking the Standard & Poors rating agency. The kindest things they are saying is that the other rating agencies--Moodys and Fitch--have continued to give U.S. Treasury debt their highest safety ratings. Warren Buffet recently came out with a statement that U.S. government debt is the safest on the planet, and should be given a AAAA rating (which doesn't exist), rather than a downgrade.

Those who are less kind are pointing out that the downgrade came from the same Standard & Poors that rated boatloads of subprime debt as 'AAA', fueling the fire that resulted in the 2008 financial crisis. During that same period, it raised the credit rating of Bear Stearns an astounding 5 notches to AA- in March of 2008--the same month that the brokerage firm declared bankruptcy. Lehman Brothers, as a company, held an S&P rating of 'A' the week they went under, and the rating agency reaffirmed its 'AAA' rating on some of the company's securities just three days before it filed for bankruptcy and basically defaulted on everything. It made similar mistakes with Merrill Lynch and Morgan Stanley (rated A and A+ respectively the week they had to be bailed out), and completely missed the problems with the Republic of Iceland.

Meanwhile, despite the downgrade, the prices of Treasury securities surged for the second straight day, sending the 10-year yield to an all-time low of 2.03% before it settled at 2.19%. Sophisticated investors around the world seem not to be worried that the U.S. will default on its debts.

Is this a good time to sell? Or to buy?

Some economists are saying that the market was oversold on Monday--which means that stocks, in general, were selling at a discount to their true value. But we aren't as confident that we know the true value of stocks in an uncertain economy, and it seems clear that emotions are ruling the recent market moves. It is possible that the emotions will take the markets further down, and it seems equally possible that the optimism we saw on Tuesday will continue.

It is worth remembering that in the first half of last year the market experienced a 17% decline (which was greater than the current downturn), and yet finished the year ahead by double-digits.

What should I do about these uncertain markets?

For now, we recommend that you not make any dramatic moves. Your account statements are reflecting the recent drop in market value, but this is a "paper loss" only. If you were to sell right now, you would be locking in a real loss. As we have discussed in the past, investing is a long-term process, and generally full of unpredictability and surprises. If you look back three years ago, the Dow had dropped to around 6,000. At the end of the day Monday, it was still around 11,000--almost double the low of a few years ago. Think back to all the scary headlines about double-dip recessions, sovereign debt crises in Europe, unemployment and all the rest, and you realize that the headlines were telling you to sell when it was much more profitable to hang on.

Is this time different?

Probably not. 　The world will come to its senses and hopefully we will be in a better place. 　However, we never know what is really going to happen, and I have found by planning for the things I can control - sharing time and love with friends and family, and living life fully from a place of love and joy, makes my world a better place while waiting for the rest of the world to get it together.

　
Sources:

Market rise and Treasury surge:
http://finance.yahoo.com/blogs/daily-ticker/dow-jumps-430-points-stealth-fed-ease-202736590.html

The Debt Ceiling

2011-05-16T12:34:00.000-07:00

THE DEBT CEILING

Many Americans don’t want it to be raised.
Could our economy hold up if it isn’t?

Congress must think (and act) fast. In the middle of May, the national debt limit of $14.3 trillion will be reached. This means the federal government must increase the debt ceiling sufficiently to cover U.S. obligations through the end of 2012. It will undoubtedly happen, but not before a loud round of partisan politics is finished.1

What does the public think? In April, a CBS News poll showed that 63% of Americans opposed raising the debt ceiling. Polls often ask simple yes-or-no questions, and the respondents may not have understood the consequences here. If the debt ceiling isn’t raised, America will end up defaulting.2

What would default mean? Picture something like the Wall Street downturn of 2008-2009 happening again … but in a broader context.

As Treasury Secretary Timothy Geithner explained succinctly in a letter to Senate Majority Leader Harry Reid (D-NV), a default would mean that “the Treasury would be prevented by law from borrowing in order to pay obligations the Nation is legally required to pay, an event that has no precedent in American history.” A default would limit, halt or impact Social Security and unemployment benefits, veterans’ benefits, federal worker salaries and payments to members of the armed forces.3

These aren’t the only calamities that would happen. America sells Treasuries to finance its federal government operations, and other nations and investors have bought them with absolute confidence – we haven’t defaulted since 1933. A default would elevate borrowing costs across the board. It would act like a tax. You would see higher interest rates, with implicit damage to equity prices and home values. The ripple from this could hurt retirement savings, consumer spending and investment.4

Moreover, a default would shatter the conviction other nations have in our political framework. It might be decades before we could count on cheap debt again.

GOP’s memo to Obama: no higher debt limit unless we cut trillions. The President is adamant about raising the debt ceiling. On May 9, Speaker of the House John Boehner (R-OH) said it could only happen if “significant” cuts to the federal budget could be made: “We’re not talking about billions here. We should be talking about cuts in trillions if we’re serious about addressing America’s fiscal problems.”1

The GOP leadership does not want to see emergency tax increases. Addressing the Economic Club of New York, Boehner said that “raising taxes is off the table” because “it will have a devastating impact on our economy.” On May 7, Senate Minority Leader John Kyl (R-AZ) requested that revisions to the tax code to address the deficit be kept “totally off the table” as such moves would only amount to backhanded tax hikes.5

“We do not have a revenue problem; we have a spending problem,” Boehner noted. “Let’s address the spending problem.”5

How would privatizing Medicare help? House Budget Committee Chairman Paul D. Ryan (R-WI) claims that his controversial plan to privatize Medicare by 2022 would save the federal government $5.8 trillion over the next ten years. Ryan’s proposed voucher system would assign $8,000 annually to a typical 65-year-old for purposes of buying a private health plan. (The voucher amount would vary per person, with richer and/or healthier seniors getting less.)6

The non-partisan Congressional Budget Office disagrees and says out-of-pocket medical costs would double for seniors through Ryan’s plan. The CBO estimates that with this voucher system, the typical 65-year-old would pay about $12,510 out-of-pocket each year for medical care above the $8,000 of “premium support” provided. In contrast, it says that under the current Medicare structure, the same 65-year-old would pay $6,150 out-of-pocket in 2022 (providing Medicare payments to doctors are not greatly reduced).6

How long before this impasse gives way to agreement? It could take days, it could take weeks. “I am guarded in my optimism,” House Majority Leader Eric Cantor (R-VA) remarked on Bloomberg Television this week. Secretary Geithner claims that the federal government could use “extraordinary measures” to keep borrowing money into the beginning of August. Noting that there was “no hard date” to hike the debt limit, Boehner said that “allowing America to default would be irresponsible. But it would be more irresponsible to raise the debt ceiling without simultaneously taking dramatic steps to reduce spending and reform the budget process.”

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.

Citations.
1 - advisorone.com/article/boehner-demands-obama-cut-spending-get-debt-limit-deal [5/10/11]
2 - mercurynews.com/breaking-news/ci_18041062 [5/11/11]
3 - economix.blogs.nytimes.com/2011/01/04/fearing-another-u-s-debt-default/ [4/1/11]
4 - treasury.gov/connect/blog/Pages/letter.aspx [1/6/11]
5 - businessweek.com/news/2011-05-10/republicans-rule-out-tax-increases-in-debate-over-debt-cap.html [5/10/11]
5 - businessweek.com/news/2011-05-10/republicans-rule-out-tax-increases-in-debate-over-debt-cap.html [5/10/11]
6 - articles.latimes.com/print/2011/apr/07/nation/la-na-gop-budget-20110408 [4/7/11]
7 - montoyaregistry.com/Financial-Market.aspx?financial-market=common-financial-mistakes-and-how-to-avoid-them&category=29 [5/12/11]

The Unexpected Recovery

2011-03-21T10:28:00.000-07:00

Did you know that the Internet can now read minds? Here's the proof: Reading Your Mind.

Last week, the world celebrated an unusual two-year anniversary: 24 months from the low point in the global markets, the point of maximum pain and panic following the 2008 economic meltdown and so-called Great Recession.

On March 9, 2009, the S&P 500 had fallen to its low of 676, which is about where it had been in October of 1996--13 years before. Since then, the S&P index has gone up about 95%, bringing it within 15% of its record high in 2007. The Russell 2000 index, which tracks small cap stocks, has gone up 140% in the same period, and the MSCI Emerging Markets Index is up 122%.

If you look back at the economic forecasts and market reports in March two years ago, you don't find, anywhere, a prediction that the markets would recover as they have. There was even some doubt whether the U.S. economy would survive intact, and the most common prediction was deflation, continued recession and more downside in the stock markets.

In retrospect, this most frightening time was the ideal time to shove all the chips on the table and bet everything on a stock market recover--but who had the intestinal fortitude for that? After the losses that virtually all investors had sustained, no matter where they had deployed their assets, few had the stomach, or the heart, to bet on a robust recovery. This is a terrific lesson in the value of disciplined investing; the consensus and our own gut feelings are often wrong and inevitably point us in the opposite direction from where the returns are going to come from next. In the past, every long-term upturn has been greater than the losses sustained in the prior bear market. We don't know how this one will end, but it seems to be following the same seemingly unlikely, but not unusual, course.

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

The Tsunami's Global Impact

2011-03-16T12:02:00.000-07:00

We're all hearing about the tragedy in Japan, with horrific photos and video footage of the aftermath of the earthquake and 10-meter Tsunami. The humanitarian disaster, with thousands dead and tens of thousand homeless, will continue to capture the world's attention. If you can bear to look, here's some remarkable Japanese TV footage of the tsunami roaring into the Japanese coastline: Tsunami Footage

But what impact will the disaster have on the global economy and investment portfolios? Japanese stocks fell 6.2% on Monday after a 1.72% drop on Friday. While significant, this decline is actually less than the 7.5% decline that followed the 1995 Kobe earthquake. London's Guardian newspaper reported that the Bank of Japan injected 21.8 trillion yen ($266.9 billion) into the Japanese economy, as a measure to limit the financial devastation wreaked by the crisis.

The hardest-hit Japanese stock is likely to be Tokyo Electric Power Company, which has had to close power plants and is fighting core meltdowns in three nuclear facilities. Toyota, which is now the world's largest car maker, has announced that it will close 12 assembly plants across the country until at least Wednesday night, causing $72 million a day in losses.

The disaster also had a counterintuitive impact on global oil prices, crude prices actually fell 3% on Friday and slid further on Monday as analysts expected lower demand in the short-term from the world's third-largest oil consumer. Longer-term, prices could be pushed up. Japan typically receives about a third of its energy from nuclear power, but its power capacity fell by more than one-fifth as 11 reactors went off-line. Japan may be bidding against the world for oil supplies, since oil and gas are the most plausible energy replacements to its nuclear generators. Of course the additional demand comes as Libyan oil fields have come off-line.

How the disaster will affect other countries is uncertain. U.S. shares fell 1%, and European shares dropped 1.5% on Monday, but the U.S. News & World Report web site quoted several international economists who believe that the damage is unlikely to spread, and who expect the high-savings Japanese to rebuild quickly and efficiently. The Japanese do hold about 10% of U.S. government debt, so if the Japanese decide to repatriate funds to pay for a massive cleanup and rebuilding effort, it could raise government bond rates.

The U.S. News & World Report analysis further speculated that the Japanese auto industry may have to temporarily curtail shipments of the Toyota Yaris, Scion xD and xB, Honda CR-V, Accord and Fit and Acura TSX and RL. Dealer networks normally carry a 30-day supply of autos, so the shortage won't become immediately apparent; a bigger issue is whether Japanese auto makers will be able to find replacements for the parts suppliers whose factories were destroyed, and whether U.S.-made models will suffer from a shortage of parts shipped from Japan.

Sources:

Guardian articles: Article 1

Article 2

U.S. News & World Report: US News

SHOULD YOU PAY OFF YOUR HOME BEFORE YOU RETIRE?

2011-03-02T10:51:00.000-08:00

Before you make any extra mortgage payments, consider some factors.

Should you own your home free and clear before you retire? At first glance, the answer would seem to be “absolutely, if at all possible.” Retiring with less debt … isn’t that a good thing? Why not make a few extra mortgage payments to get the job done?

In reality, things are not so cut and dried. There is a fundamental opportunity cost to consider. If you decide to put more money toward your mortgage, what could that money potentially do for you if you were to direct it elsewhere?

In a nutshell, the question is: should you pay down low-interest debt, or should you invest the money into a tax-advantaged account that could potentially bring you a strong return?

Relatively speaking, home loans are cheap debt. Compare the interest rate on your mortgage to the one on your credit card. Should you focus your attention on a debt with 6% interest or a debt with 15% interest?

You can usually deduct mortgage interest, so if your home loan carries a 6% interest rate, your after-tax borrowing rate could end up being 5% or lower.

If history is any barometer, your home’s value may increase over time and inflation will effectively reduce the real amount of your mortgage over time.

A Chicago Fed study called mortgage prepayments “the wrong choice”. In 2006, the Federal Reserve Bank of Chicago presented a white paper from three of its economists titled “The Tradeoff between Mortgage Prepayments and Tax-Deferred Retirement Savings”. The study observed that 16% of American households with conventional 30-year home loans were making “discretionary prepayments” on their mortgages each year – that is, payments beyond their regular mortgage obligations. The authors concluded that almost 40% of these borrowers were "making the wrong choice." The white paper argued that the same households could get a mean benefit of 11-17¢ more per dollar by reallocating the money used for those extra mortgage payments into a tax-deferred retirement account.1

Other possibilities for the money. Let’s talk taxes. You save taxes on each dollar you direct into IRAs, 401(k)s and other tax-deferred investment vehicles. Those invested dollars have the chance for tax-free growth. If you are like a lot of people, you may enter a lower tax bracket in retirement, so your taxable income and federal tax rate could be lower when you withdraw the money out of that account.

Another potential benefit of directing more funds toward your 401(k): If the company you work for provides an employer match, then you may be able to collect more of what is often dubbed “free money”.

Let’s turn from tax-deferred retirement investing altogether and consider insurance and college planning. Many families are underinsured and the money for extra mortgage payments could optionally be directed toward long term care insurance or disability coverage. If you’ve only recently started to build a college fund, putting the assets into that fund may be preferable.

Let’s also remember that money you keep outside the mortgage is money that is easier to access.

What if you owe more than your house is worth? Prepaying an underwater mortgage may seem like folly to you – or maybe you really love the house and are in it for the long run. Even so, you could reallocate money that could be used for the home loan toward an emergency fund, or insurance, or some account with the potential for tax-deferred growth – when all the factors are weighed, it might look like the better move.

Think it over. It really comes down to what you believe. If you are bearish, then you may lean toward paying off your mortgage before you retire. There is no doubt about it - when you pay off debt you owe, you effectively get an instant return on your money for every dollar. If you are tantalizingly close to paying off your house, then you may just want to go ahead and do it because you love being free and clear.

On the other hand, model scenarios may tell you another story. After the numbers are run, you may want to direct the money to other financial priorities and opportunities, especially if you tend to be bullish and think the market will perform along the lines of its long-term historical averages.

No one path is right for everyone. If you’re unsure which direction may be most beneficial to you, speak with a qualified Financial Professional.

William Morrissey may be reached at 360-336-6527 or wtmorrissey@soundfinancialplanning.net

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations.
1 chicagofed.org/digital_assets/publications/working_papers/2006/wp2006_05.pdf [8/06]
2 montoyaregistry.com/Financial-Market.aspx?financial-market=will-you-have-an-adequate-retirement-cash-flow&category=3 [2/27/11]

White House Plans to Wind Down Fannie and Freddie

2011-02-14T12:59:00.000-08:00

WHITE HOUSE PLANS TO WIND DOWN FANNIE AND FREDDIE

Congress will consider three suggestions.

A fundamental reform for the housing market. For two-and-a-half years, economists and housing industry analysts have wondered what would happen with Fannie Mae and Freddie Mac. On February 11, they got an answer: the Obama administration announced plans to shut down both of the troubled mortgage giants by 2018 or sooner. 1

As he met with the press, Treasury Secretary Timothy Geithner cited the “very broad consensus” that the government should play “a much smaller role” in the housing market. Capitol Hill Republicans would agree, pointing to the $154 billion price tag for the 2008 bailout of both firms. (That is the Treasury’s estimate.) 2,3

The choices on the table. The Obama administration’s white paper offers three proposals to Congress, with the hope of legislation emerging by 2014. 1,2,4,5

• Option 1. The government walks away from the mortgage market except for the FHA, VHA and a few other programs designed to help low-income and moderate-income homebuyers.
• Option 2. The government offers a kind of downside protection. In addition to backing home loans via the entities mentioned in Option 1, it would also provide “reinsurance” to guarantee private mortgages in the event of a real estate downturn and/or recession. But the guarantee would only apply in a crisis.
• Option 3. A variation of Option 2 that would provide a “reinsurance” backstop for a range of mortgage investments already guaranteed by private insurers. The “reinsurance” would take effect if a private insurer couldn't pay (i.e., if its shareholders were wiped out).

The timeline. The Obama administration may be long gone by the time all this plays out, but here is the three-stage conception of how it will wind down both agencies. 2,6

• Stage 1. Between now and 2014, the government gradually reduces its subsidy for the housing market. The conforming loan limit for Fannie and Freddie – now $729,000 in some metro areas – is scheduled to shrink to $625,000 in October. In addition, Fannie and Freddie would start to require 10% down for all loans and fees would rise for the government guarantee.
• Stage 2. Starting around 2013-2014, the federal government will “accelerate the pace of transition” (in Geithner’s words) to a mortgage market based in private capital with government intervention occurring only as needed.
• Stage 3. This stage depends on Congress. The idea is that by the middle of this decade, legislation emerges spelling out Option 1, Option 2 or Option 3 above in detail and a new law is passed.

The big picture. By the end of this decade, it could be considerably harder to buy a home. If the government gets out of the mortgage market (or at least drastically reduces its role), a major influx of private capital needs to flow into the housing system to replace the federal subsidy, with the following possible effects:

• A 30-year fixed rate mortgage could become significantly more expensive. How much more expensive? In early February, Credit Suisse projected that interest rates on a basic 30-year FRM could rise by up to 2% if Fannie and Freddie disappeared.7
• If the Option 1 scenario occurs, you could see considerably fewer FRMs and more ARMs. In fact, you would likely see fewer fixed-rate mortgages if Options 2 or 3 were chosen by Congress.
• Big banks could grab a bigger chunk of the mortgage market.
• Higher mortgage rates could negatively impact home sales - and in turn, home prices.

We’ll have to wait and see how this all plays out, all while hoping it won’t lead to a decline in home ownership.

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations
1 – money.cnn.com/2011/02/11/news/companies/fannie_mae_freddie_mac_white_house_proposal/ [2/11/11]
2 – usatoday.com/money/economy/housing/2010-10-21-fannie-mae-freddie-mac-bailout_N.htm [10/22/10]
3 - cnbc.com/id/41529671 [2/11/11]
4 –blogs.abcnews.com/george/2011/02/the-end-of-fannie-mae-and-freddie-mac.html [2/11/11]
5 –nytimes.com/2011/02/12/business/12housing.html [2/11/11]
6 –finance.fortune.cnn.com/2011/02/11/fannie-mae-the-long-goodbye/ [2/11/11]
7 – cnbc.com/id/41533702 [2/11/11]
8 – http://montoyaregistry.com/Financial-Market.aspx?financial-market=the-financial-security-rulebook-5-crucial-steps&category=3 [2/13/11]

27 Things You Should Know About the 2011 Tax Laws

2011-02-03T10:42:00.000-08:00

2011 is here and there is much to report. Congress has restored the estate tax, cut the payroll tax and retained and/or restored a variety of tax breaks.

Here’s a look at some recent developments in federal tax law – not just the changes for 2011-2012, but also the decisions (some quite recent) that may impact your 2010 return. This is by no means a tax planning guide, just an update on what has changed and what hasn’t.

Before we get started, some news about filing your 2010 federal return:

• Due to a lag in IRS processing systems, you will need to wait until at least mid-February to file your return if you are going to claim …

o itemized deductions on Schedule A
o the Higher Education Tuition & Fees deduction
o the Educator Expense deduction

• This year, the federal income tax deadline is April 18. That’s because April 15 is a holiday in the District of Columbia (Emancipation Day).
• Correspondingly, all taxpayers who file for an extension this year will have until October 17 to file their 2010 returns. 1

Here’s a look at the numerous revisions, alterations and restorations to federal tax law affecting tax years 2010, 2011 and 2012.

1 The federal income tax brackets remain at 10%, 15%, 25%, 28%, 33% and 35% for 2011-2012.

The ordinary taxable income brackets for TY 2011 are set as follows, reflecting minor COLAs:

• Single Taxpayers:
o 10% bracket has a ceiling of $8,500
o 15% bracket starts @ $8,501
o 25% bracket starts @ $34,501
o 28% bracket starts @ $83,601
o 33% bracket starts @ $174,401
o 35% bracket starts @ $379,151

• Married Filing Separately:
o 10% bracket has a ceiling of $8,500
o 15% bracket starts @ $8,501
o 25% bracket starts @ $34,501
o 28% bracket starts @ $69,676
o 33% bracket starts @ $106,151
o 35% bracket starts @ $189,576

• Head of Household:
o 10% bracket has a ceiling of $12,150
o 15% bracket starts @ $12,151
o 25% bracket starts @ $46,251
o 28% bracket starts @ $119,401
o 33% bracket starts @ $193,351
o 35% bracket starts @ $379,151

• Married Filing Jointly or Qualifying Widow/Widower:
o 10% bracket has a ceiling of $17,000
o 15% bracket starts @ $17,001
o 25% bracket starts @ $69,001
o 28% bracket starts @ $139,351
o 33% bracket starts @ $212,301
o 35% bracket starts @ $379,1512

2 The payroll tax paid by employees and the self-employed has been reduced by 2.0% in 2011.

This means many Americans will effectively get a 2% raise this year. The reduced withholding could mean as much as $2,136 in savings, as earnings up to $106,800 are subject to payroll tax. No phase-outs apply, and if taxpayers are married, both spouses can get the individual deduction. 3,4

Two related notes:
• The partial credit for payroll taxes paid by employers is gone this year.5
• As a result of this payroll tax holiday, the Making Work Pay credit is gone for 2011. However, many taxpayers can still claim the Making Work Pay credit for 2010 ($400 for individual taxpayers, up to $800 for taxpayers married filing jointly, income phase-outs applicable). 6

3 The estate tax is back for 2011- 2012.

For this year and next, the federal estate tax is set at 35% with a $5 million individual exemption.4 Please note that:
• The $5 million individual exemption is portable. This means that an executor may elect to transfer an unused $5 million individual estate tax exemption (upon the death of one spouse) to the surviving spouse. So with this new portability, a married couple could potentially transfer up to $10 million of assets without incurring federal estate tax.7
• In 2011, an executor of an estate for a decedent who died in 2010 may choose between two options in administering said estate. That executor can elect to
o Subject the estate to the 2011 federal rules (35% estate tax, $5 million estate exemption, stepped-up basis for appreciated assets per IRC rule 1014).
o Subject the estate to the 2010 federal rules (0% estate tax and the $1.3 million modified carryover basis for appreciated assets in the estate, which becomes $3 million for assets passing to a surviving spouse). 8

4 The estate tax, the gift tax and the generation-skipping tax (GST) have all been reunified for 2011-2012.

They all have top rates of 35% with $5 million individual exemptions. The individual estate and gift tax exemptions are portable between married couples; the GST exemption is not. The GST has been restored for 2011; it was 0% in 2010. 4,8

The annual gift tax exclusion remains at $13,000 per donor in 2011. A single taxpayer may gift up to $13,000 to an unlimited number of individuals. The lifetime exclusion (see above) is $5 million. 4

In addition to the annual exclusion, an unlimited gift tax exclusion is allowed for amounts paid on behalf of a donee directly to an educational organization for tuition. Likewise, amounts paid directly to health care providers also qualify for the unlimited gift tax exclusion. 9

5 Tax rates on capital gains and dividends haven’t been hiked.
In 2011 and 2012, the long-term capital gains rate is

• 0% for taxpayers in the 10% and 15% brackets.
• 15% for everyone else.4

6 Traditional IRA owners who go Roth this year can’t defer income resulting from the conversion into subsequent tax years.

In 2010, you had that option; this year, you don’t. If you went Roth in 2010, you have until October 17, 2011 to choose whether you wish to divide the income from the conversion between your 2011 and 2012 federal returns. 4

7 High earners won’t be bitten by “stealth income taxes” during 2011-2012.

The Pease and PEP limitations – repealed for 2010 – are now on holiday through 2012. A quick explanation if you’ve never heard of them: the Pease provision cancels out up to 80% of the amount of a taxpayer's itemized deductions if his or her AGI exceeds a certain level. In other words, you can deduct the full amount of your itemized deductions in 2011. The PEP (personal exemption phase-out) whittles away at the personal exemption benefit for taxpayers who reach certain AGI levels. 4,10

8 The charitable IRA rollover is back – at least for 2011.

In federal tax law, this is known as a Qualified Charitable Distribution – a tax-free donation of IRA proceeds to a qualifying charity or nonprofit. Given the generous $5 million individual estate tax exemption now in place, there may be less impetus to make such gifts – but nonprofits are just glad the opportunity is back.

To be tax-free, the donor must be 70½ or older and the donation has to take the form of a direct transfer (a rollover) from your IRA trustee to the qualifying charity, nonprofit foundation or nonprofit organization. (You can also make a tax-free donation of IRA proceeds to a fund held by a community foundation, but not a donor-advised fund.) You cannot claim a charitable tax deduction from this move. 11

Will this opportunity stick around after 2011? We don’t know. It is set to sunset at the end of the year.

• The Tax Relief Act of 2010 gives donors who make such Qualified Charitable Distributions before through January 31, 2011 the option to have them treated as QCDs on their 2010 federal tax returns. 11

9 The Small Business Jobs Act of 2010 extended some tax breaks and put some tax changes into play for small companies in 2011.

The SBJA was passed into law during September 2010, and its recently enacted laws will affect both 2011 and 2010 federal returns.

• Full business expensing is permitted for 2011, just as it was in 2010. The IRC Section 179 expense deduction limits of 2010 remain in effect this year. A small business can write off 100% of the expense of qualifying equipment or computer software made in 2011 with a $500,000 limit. The capital expenditures can be on new or used equipment. Your company has to be profitable in order for you to take full advantage of the write-off, and you can’t take complete advantage of it if you have spent more than $2 million on qualifying capital in the given tax year. 12,13

• 100% exclusion possible on gains from small business stock. If you bought such stock after September 27, 2010, any gain may qualify for a 100% exclusion under IRC § 1202.). 13

• The bonus first-year depreciation has been extended. If your company purchases new tangible or intangible property in 2011 (which includes buildings, machinery and equipment, vehicles, furniture, software and even patents and copyrights), your company can claim 100% of its cost as long as your business uses the property before 2012. This 100% depreciation also applies for tangible or intangible property bought after September 8, 2010. You can also claim 50% depreciation on purchases of this kind made from January 1 - September 7, 2010 as long as the tangible or intangible property is put into service prior to 2013. (Real property is not eligible for this tax break.) 12,13

• The deduction for start-up expenses has doubled. The Small Business Jobs Act of 2010 raised it to $10,000 for 2010 and subsequent tax years. Phase-outs on this deduction now kick in at $60,000 worth of startup expenditures (previously, it was $50,000). 13

• Some businesses may be able to claim a major health care tax credit. Does your business have 25 or fewer full-time employees? Are you paying most of them less than $50,000 annually? Do you pick up the tab for 50% or more of their health insurance premiums? If so, you may be able to deduct up to 35% of the money you spend on those premiums in tax years 2010-2013. To get the full 35% credit, you must have 10 or fewer full-time employees with annual wages averaging $25,000 or less. Above that, phase-outs apply. The tax break is unavailable if you have more than 25 full-time employees or if you pay your full-time employees average wages of more than $50,000. 12,13

• The carryback period for eligible small business credits under IRC § 38 was extended from 1 year to 5 years. This was put into effect for the 2010 tax year. Such credits may be used to offset both regular tax liability and AMT liability. 13

• The depreciation deduction has increased for business-owned vehicles. The SBJA increased the maximum deduction for a passenger automobile first placed in service in 2010 to $3,060. The maximum deduction for a truck or van first placed in service in 2010 increased to $3,160. Remember that the car or truck has to be totally used for business purposes to take full advantage of the deduction. 14

• In 2011, the holding period for S corporations is reduced by 2 years. The SBJA cut the holding period from 7 years to 5 years for 2011. So if your C corp elected to convert to an S corp as recently as 2006, it can sell appreciated assets this year without paying the built-in corporate level tax. This provision only applies in TY 2011. 15

10 Employers must begin reporting employee health care benefits on Form W-2 in either 2011 or 2012.

This is an effect of the Affordable Care Act. For informational purposes, employers are now required to report the value of the health insurance coverage they offer to employees on W-2s. The IRS is offering employers a one-year grace period, however: it has deferred the reporting requirement for TY 2011, so this year it is optional. Reporting the value of the health care coverage to the IRS will not affect the taxable income of your employees. 16

11 Landlords must abide by new IRS reporting requirements.

Prior to 2011, only full-time property managers and some lessors had to file 1099 forms with the IRS as a consequence of doing business. The Small Business Jobs Act of 2010 changed that.

Anyone who receives rental income in 2011 has to file a Form 1099 for all payments of $600 or more made to service providers – handymen, plumbers, carpenters, landscapers, electricians, any individual or company providing a service linked to your residential or commercial rental property. You don’t need to file 1099 forms for purchases of goods for your rental property, only services. Only aggregate annual payments of $600 or more for services have to be reported.

Unless Congress intervenes, such reporting will be demanded of all businesses, self-employed individuals and independent contractors come 2012. 17

12 The first-time homebuyer credit is gone.

It expired at the end of September 2010. You can take advantage of the credit on your 2010 federal return if you closed escrow on a home before October 1, 2010 and had a binding contract in place prior to May 1, 2010. 13

13 The personal exemption and standard deduction amounts have (barely) increased.

For 2011, the personal exemption amount increases by $50 to an even $3,700. Standard deductions are as follows for 2011:

• Single Taxpayers: $5,800
• Married Filing Separately: $5,800
• Head of Household: $8,500
• Married Filing Jointly or Qualifying Widow/Widower: $11,6002

14 The AMT has again been patched.

As part of the Tax Relief Act of 2010, the Alternative Minimum Tax exemptions were increased to these levels for 2011:

• Single Taxpayers and Heads of Household: $47,450
• Married Filing Separately: $36,225
• Married Filing Jointly or Qualifying Widow/Widower: $72,45018

15 The self-employed may be able to use the self-employed health insurance deduction to reduce their SECA taxes in 2010.

This was a mid-year tax law change that happened as a result of the SBJA. For TY 2010, self-employed business owners may deduct the cost of health insurance for themselves and their family members as a business expense when calculating self-employment tax. (You can do this on Schedule SE, Line 3.) Prior to 2010, the self-employed could only deduct health insurance costs for income tax purposes (on Form 1040, Line 29). A worksheet on all this accompanies IRS Form 1040. The health coverage must be arranged under the umbrella of your business, and you must not be eligible to participate in an employer-sponsored health plan. 18

16 If you have a Flexible Spending Account, you can no longer use your FSA funds to pay for most over-the-counter medicines.

Insulin is a notable exception to this new rule. You can still use your FSA money for non-prescription medical or medically related items like crutches, wigs, contact lens solution and other items detailed within IRS Publication 502. 4

17 Investment brokers have to provide the IRS with cost-basis reporting in 2011 when it comes to the sale of certain assets.

They must report the original purchase price of stocks, REIT shares and foreign securities to the IRS in 2011 when these assets are sold. In 2012, they will have to follow new rules for cost-basis reporting for mutual funds, bonds, options and many ETFs. 4

18 If you own more than $50,000 in foreign financial assets, you may be subject to a new IRS reporting requirement.

You may have to meet additional reporting and disclosure requirements in 2011 in addition to filing an FBAR (Report of Foreign Bank and Financial Accounts). This new reporting requirement may impact hedge fund investors who previously didn’t have to file FBARs. Consult your tax advisor. 4

19 The state and local sales tax deduction option is back for 2011 (and you can also claim it on your 2010 return).

Do you live where there are no local or state income taxes? Once again, you have the choice of taking a deduction for state sales taxes instead of the state income tax deduction for 2011 (and 2010). 18

20 The $250 classroom supplies deduction for teachers is back for 2011 (and may be claimed for 2010).

Are you a K-12 educator who pays for classroom expenses out-of-pocket? Then you are able to take an above-the-line deduction to offset up to $250 of such costs. 18

21 The higher education tuition and fees deduction is back for 2011 (and may be claimed for 2010).

The limit on this deduction is $4,000. (And if you’re reading this item, don’t forget about the American Opportunity Credit, a credit of up to $2,500 that can be used for the first four years of college and applied to the tuition costs and other higher education expenses.) 18,19

22 The adoption credit is larger – and it has been made refundable.

As you file your 2010 return, note that it is now $13,170 per child as opposed to $12,150 in 2009. As it is refundable, an eligible taxpayer can qualify for the credit even if he or she doesn’t owe any federal income tax. The adoption must be documented, so that means you can’t claim this credit via eFile. 18

23 The Earned Income Tax Credit eligibility limit has increased to $48,362 and the Child Tax Credit has been expanded.

The result: more middle class and working class families may qualify for these credits. The CTC is a credit of up to $1,000. Under the new laws, you can claim the CTC if a child was no older than 16 in 2010 lived at home for more than half of 2010, and is claimed as a dependent on your 2010 federal return. 19

24 If you bought a home in 2008 or 2009, you may have to repay up to 100% of any federal homebuyer credits related to the purchase on your 2010 Form 1040.

This is more likely if you bought your home during 2008. Most taxpayers will merely have to repay 1/15 of their credit in 2010. Consult your tax advisor. 20

25 Most unemployed individuals will have to report 100% of their 2010 federal jobless benefits as taxable income.

Not everyone who is unemployed realizes this. In 2009, the first $2,400 of federal unemployment insurance came to you tax-free. There was no such tax break offered for 2010. 20

26 No more real estate tax deduction for those that don’t itemize.

This is just a reminder that you can’t claim this deduction on your 2010 federal return. The additional standard deduction for property taxes went away at the close of 2009. 20
27 No more sales tax deductions for buying a new car or truck.

You won’t be able to claim these tax breaks for 2010, as they faded away at the end of 2009. 20

This Special Report is an update of 2010 and 2011 tax law changes, and is not intended as a guide for the preparation of tax returns. The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by William Morrissey and Peter Montoya Inc. to recipients. No information herein was intended or written to be used by readers for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Readers are cautioned that this material may not be applicable to, or suitable for, their specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. Readers are encouraged to consult with professional advisors for advice concerning specific matters before making any decision, and William Morrissey and Peter Montoya Inc. disclaim any responsibility for positions taken by taxpayers in their individual cases or for any misunderstanding on the part of readers. William Morrissey and Peter Montoya Inc. assume no obligation to inform readers of any changes in tax laws or other factors that could affect the information contained herein.

Citations.
1 irs.gov/newsroom/article/0,,id=233910,00.html [1/4/11]
2 irs.gov/pub/irs-drop/rp-11-12.pdf [12/10]
3 bloomberg.com/news/2011-01-18/it-s-not-too-early-to-think-about-2011-taxes.html [1/18/10]
4 online.wsj.com/article/SB10001424052748703675904576063903166546250.html [1/8/11]
5 turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Return/Summary-of-Federal-Tax-Law-Changes-for-2010-2017/INF12041.html#2011 [1/19/11]
6 walletpop.com/2011/01/19/dont-forget-about-the-making-work-pay-credit/ [1/19/11]
7 naepc.org/journal/issue07a.web [12/20/10]
8 blogs.forbes.com/hanisarji/2011/01/02/new-year-different-rules-2011-estate-tax-gift-tax-gst-tax-rules/ [1/2/11]
9 turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax/INF12036.html [1/27/11]
10 taxpolicycenter.org/press/press-resources-pease.cfm [1/18/11]
11 ctphilanthropy.org/s_ccp/bin.asp?CID=14889&DID=45124&DOC=FILE.PDF [12/17/10]
12 money.cnn.com/2011/01/17/smallbusiness/small_business_new_tax_credits/ [1/17/11]
13 journalofaccountancy.com/Web/20113750.htm [1/14/11]
14 irs.gov/formspubs/article/0,,id=177054,00.html [10/14/10]
15 s-corp.org/2010/09/28/president-signs-big-relief/ [9/28/10]
16 irs.gov/newsroom/article/0,,id=220809,00.html [1/14/11]
17 realtor.org/wps/wcm/connect/f9c47a804427e7068bf5eb34cafa6d66/government_affairs_issue_brief_rep_rules_1099rev.pdf [1/18/11]
18 irs.gov/newsroom/article/0,,id=233927,00.html [1/4/11]
19 bloomberg.com/news/2011-01-18/children-can-mean-extra-tax-deductions-and-credits.html [1/18/11]
20 smartmoney.com/personal-finance/taxes/whats-new-on-the-2010-form-1040-1295384880669/ [1/20/11]
21 montoyaregistry.com/Financial-Market.aspx?financial-market=finding-a-tax-preparer&category=31 [1/28/11]

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

The Greatest Con Game of Them All

2011-01-27T10:22:00.000-08:00

If you want to see a very funny video on how Economics works under a variety of conditions, click this link: Economic Conditions

There's another, less amusing video making the rounds these days which warns of all kinds of terrible economic catastrophes in a very reasonable-sounding voice, offered as a "public service" by an investment research firm that you had previously never heard of. The video narrator predicts that the very foundation of America will shake, bringing our way of life to a grinding halt. This tour of the future includes riots in the streets, arrests on an unprecedented scale, martial law, soaring prices of basic commodities, banks closing, credit cards not working, a collapse of our monetary system. The author purports to be the only analyst in the world who is paying close attention to the national debt, and uses the most basic scare tactics to induce people to... purchase his newsletter service.

What makes this particular video interesting is that its narrator, Porter Stansberry, has been in trouble with the U.S. Securities and Exchange Commission as far back as 1993 (Porter Stansberry), and he has been labeled a "stock hypester" in discussion forums among investors (Discussion Forum).

But this is only the most obvious example of a scam that is perpetrated by countless tips and toutsters--and even some of the economists that you see on reputable financial channels. It's a variation on an old game played by tipsters at the race track. They would scurry around to different prosperous-looking individuals in the stands, and whisper in their ears a hot tip that a certain horse would win, say, the third race. If that horse lost, that was the last these people would see of the tipster. But if it did happen to win, the tipster would be back, now with a "track record" (this is the origin of the term), to ask for money in exchange for more "sure winners."

In the economic world, this game is played by people who make a living out of predicting bear markets and economic disasters. In the financial services world, we refer to them as "permabears;" that is, people who are always bearish, always warning about a market collapse, no matter how bright the economic sun might be shining. Perhaps the most famous of these is Howard Ruff, whose "Ruff Times" newsletter advised its subscribers during the 1980s and early 1990s to avoid stocks, buy Swiss francs and Kruegerrands, guns, ammunition, dried food, bottled water and a place in the woods where all of this could be defended from the starving millions who, unprepared, would be fleeing the immanent economic collapse. Ruff's followers missed perhaps the best decade of stock returns that the world will ever see again.

How, exactly, does this game work? It's best described by a saying that goes around the investment community: "A stopped clock is always right twice a day." The tipster or economist makes dire predictions all the time, year-in, year-out, and, of course, most of the time the predictions turn out to have been way off-base. The key is to be persistent in your gloom, until you finally arrive at something like the 2008 market meltdown, when the permabears all hit the jackpot. Almost anything they said that sounded remotely dire came true, and suddenly they were geniuses, although no more than you would have been if, every morning, you yawned, stretched, looked at the sun rising in the sky and muttered dire public prophecies of catastrophe.

Now that these permabears have a "track record" of predicting the 2008 meltdown, you can expect to hear a lot more from more of them, telling you that since they predicted that the markets would go haywire and banks would collapse, you should buy their exclusive advice and avoid the next series of terrible events that they see right around the corner. Of course, every meltdown in history has been followed by an even-more-robust recovery, so the "services" of these permabears will likely cost you not only the price of their newsletter subscription, but also the missed years of positive return and economic recovery.

But never fear; you can count on their consistency, and eventually, at some unpredictable time after the markets have passed by their hapless subscribers, they'll be right again, and soon thereafter be sending out more viral videos in hopes of luring in new business and, for their next round of subscribers, destroying all faith in the system's ability to heal itself.

What a wonderful way to make a living.

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

IRA Changes for 2011

2011-01-24T09:38:00.000-08:00

Little details you need to know about.

What’s new? Every year brings changes in tax law, and some of these revisions always seem to affect IRAs. Here is a look at some of the new wrinkles for 2011.

You can’t defer income resulting from a Roth IRA conversion in 2011. If you converted a traditional IRA to a Roth IRA in 2010, you could opt to divide the income resulting from the conversion between your 2011 and 2012 federal tax returns. (If you did go Roth in 2010, you have until October 17, 2011 to choose this income deferral option.) You don’t have this choice in 2011 - the income can’t be deferred to a future tax year. 1

The IRA charitable rollover is back. In 2011, IRA owners aged 70½ or older can again donate IRA proceeds to charity tax-free. The Tax Relief Act of 2010 brought back the opportunity, at least for this year. 2

A charitable IRA rollover lets an IRA owner gift up to a total of $100,000 in IRA assets to one or more qualified charities or non-profit organizations. The distribution has to go directly from the IRA custodian to the charity. You don’t get a tax deduction for the move, but you could use this qualified charitable distribution to fulfill some or all of your 2010 RMD. 2

The Tax Relief Act also gives IRA owners until January 31, 2011 to make 2010 charitable IRA donations. So you could transfer up to $100,000 from your IRA to a charity in January and have it retroactively count as a 2010 distribution, then transfer another donation of up to $100,000 to the charity later this year. 3

Here’s the irritating asterisk on all this: if you took your 2010 RMD assuming that you couldn’t make a charitable IRA donation in 2010, there is no do-over available. You can’t put back your 2010 RMD into your IRA and redirect those assets toward charity. The IRS issued a statement on January 5 citing existing language in IRS Publication 590, explaining that “required minimum distributions (RMD) from an IRA received by a taxpayer cannot be rolled over to an IRA.” 4

You have three extra days to make your 2010 IRA contribution. The District of Columbia observes Emancipation Day on April 15, so the deadline for your 2010 IRA contribution is April 18, 2011.5,6 (Remember to tell your IRA custodian that you are making a contribution for the 2010 tax year.)

You may have a chance to go Roth with your 401(k) or 403(b) in 2011. As a result of the Small Business Jobs Act of 2010, some employer-sponsored retirement plans are now allowing in-plan Roth conversions, i.e., the chance to “convert” a percentage of the pre-tax dollars you have saved to after-tax dollars without the necessity of a rollover to a Roth IRA. However, there are criteria to meet.

• Your employer’s retirement plan document has to permit after-tax Roth contributions.
• You must be older than 59½, or you have to have assets in a 401(k) or 403(b) account at a past employer that could potentially be rolled over to your current employer’s plan. 7,8

Roth IRA phase-outs have been set higher for 2011. While anyone can convert a traditional IRA to a Roth IRA, not everyone can contribute to a Roth IRA because of MAGI limits. For 2011, those phase-out limits have increased by $2,000 for joint and single filers. The phase-out range for joint filers and qualifying widows this year is $169,000-179,000. For single filers, it is $107,000-122,000. 6

Traditional IRA deduction phase-outs are also higher for 2011. If you own an IRA and participate in an employer-sponsored retirement plan, your IRA contributions may or may not be deductible, depending on your MAGI. In 2011, the MAGI phase-out ranges are bumped up slightly to $90,000-110,000 for joint filers and qualifying widows and $56,000-66,000 for single filers and heads of households. 6

One thing that hasn’t changed… With minimal inflation for 2010, there was no COLA to send the annual IRA contribution limit higher. You may contribute up to $5,000 to your IRA in 2011, $6,000 if you are 50 or older. If you have more than one IRA, your total 2011 IRA contributions to your IRAs cannot exceed the above limits. 9

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations
1 – online.wsj.com/article/SB10001424052748703675904576063903166546250.html [1/8/11]
2 – online.wsj.com/article/SB10001424052748703395904576025610771041244.html [12/18/10]
3 - blogs.forbes.com/ashleaebeling/2011/01/06/taxwise-giving-from-your-ira-the-january-do-over/ [1/6/11]
4 – online.wsj.com/article/SB10001424052748703730704576065931348238132.html [1/7/11]
5 – irs.gov/newsroom/article/0,,id=233910,00.html [1/14/11]
6 – irs.gov/publications/p17/ch17.html#en_US_2010_publink1000252730 [1/14/11]
7 - bankrate.com/financing/retirement/converting-to-a-roth-401k/ [11/4/10]
8 - sibson.com/publications-and-resources/compliance-alert/archives/?id=1534 [10/27/10]
9 - irs.gov/retirement/article/0,,id=202510,00.html [11/1/10]
10 - montoyaregistry.com/Financial-Market.aspx?financial-market=required-ira-distributions&category=1 [1/16/11]

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

WHEN WILL JOBS AND HOUSING IMPROVE?

2011-01-19T12:20:00.000-08:00

What factors need to be in place for this to happen?

What will it take for the housing market and employment to really improve? It really boils down to the two greatest economic factors of all: supply and demand.

What needs to happen in the labor market? Ideally, a swift rise in consumer demand for goods and services in 2011 spurs businesses to hire, with no need for another costly federal stimulus. About 125,000 people enter the U.S. labor force every month, so job creation needs to hit that level just to tread water in terms of employment–to-population ratio. Data from the Brookings Institution shows that 280,000 new positions emerged monthly at the peak of job creation in the 2000s. Back in 1994, the economy was creating an average of 321,000 new jobs a month.1

As 2010 drew to a close, our economy wasn’t anywhere near that. According to the Labor Department, 71,000 new non-farm jobs were created in November and 103,000 new non-farm jobs in December. Last month, the government said that private payrolls grew by 113,000 (297,000 according to payroll services provider ADP). Yet the December report also indicated a 1.3 million month-over-month rise in the population of discouraged workers who had simply stopped seeking jobs.2

On December 7, Federal Reserve chairman Ben Bernanke told the Senate Budget Committee that while we were seeing a “self-sustaining” economic recovery, the jobless rate would likely remain elevated through 2015 or 2016.3

Perhaps 2011 could be better than we expect. A Manpower Inc. survey of employers in December found that 73% foresaw no change in the pace of hiring at their firms for the first quarter of 2011. However, the survey did find that seasonally adjusted (read: net) hiring was projected to rise from 5% in the past quarter to 9% in 1Q 2011.4 That represents a significant jump in net hiring and suggests either the perception or reality of rising demand in some industries.

The Bureau of Economic Analysis recently reported a 3.4% year-over-year rise in disposable personal incomes for 3Q 2010, which would seem to promote a consumer spending increase. Federal Reserve data showed consumer credit card debt ticking back up by 0.6% in September and 1.7% in October after months of decreases; this is another potential sign of a rebound in consumer spending and consumer confidence.5

What needs to happen in real estate? Well, two key factors do seem to be in place to encourage a rebound. Interest rates on 30-year conventional home loans are still below 5%; compare that with 9.4% as recently as the early part of 1989. The Standard & Poor’s/Case-Shiller Home Price Index tells us that existing home prices dropped 29.6% between July 2006 and October 2010, and some analysts see them falling further.6,7 But two cold, hard facts remain in the way of a recovery.

• You can’t buy a home if you don’t have a job. Unemployment and its cousin underemployment represent the biggest drag on the real estate market - thwarting purchases, reducing demand, and hastening delinquencies and foreclosures.

• You can’t readily sell your home if it is “underwater”. The latest CoreLogic Inc. data shows that 22.5% of U.S. homeowners owe more than their residences are worth.7

During 2009-2010, any sense of momentum or recovery seemed a product of government intervention. The homebuyer tax credit led to a spike in sales, then a reversal. Turning from the month-to-month “weather” of the real estate market to year-over-year numbers, you would think things couldn’t get any worse: according to the latest figures (November), existing home sales were down 27.9% year-over-year and new home sales down 21.2% from 12 months before.8

However, some of the “weather” bears studying; things did get sunnier during 2010 in some respects. Mortgage rates didn’t rocket north when the Fed ended its campaign to buy mortgage-backed securities last March. (The European debt crisis had an effect.) Existing home sales rose by 5.6% in November, and the rate of new home purchases also improved by 5.5%. Pending home sales, as tracked by the National Association of Realtors, were up a record 10.4% in October and up another 3.5% for November.8,9

Ideally, 2011 brings some kind of sweet spot for the residential real estate sector where job creation ramps up while mortgage rates remain historically low for a few months. That could contribute nicely toward a recovery in the sector in 2012.

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations.
1 brookings.edu/opinions/2010/0806_employment_looney_greenstone.aspx [8/6/10]
2 money.usnews.com/money/careers/articles/2011/01/07/jobless-rate-falls-but-american-employment-remains-bleak.html [1/7/11]
3 cnbc.com/id/40962516 [1/7/11]
4 theatlantic.com/business/archive/2010/12/hiring-will-rise-in-2011-but-will-it-be-enough/67617/ [12/7/10]
5 csmonitor.com/USA/Society/2010/1220/Consumer-spending-is-up-Are-Americans-enjoying-a-post-recession-holiday [12/20/10]
6 latimes.com/business/realestate/la-fi-housing-recovery5c.eps-20110102,0,1869511.graphic [1/2/11]
7 online.wsj.com/article/SB10001424052970203731004576045811887540604.html [1/3/11]
8 usatoday.com/money/economy/housing/2010-12-23-housing23_ST_N.htm [12/23/10]
9 thestreet.com/story/10957404/pending-home-sales-rebound-35-in-november.html [12/30/10]
10 montoyaregistry.com/Financial-Market.aspx?financial-market=who-needs-wealth-management-services&category=4 [1/9/11]

2010: THE FINANCIAL YEAR IN REVIEW

2011-01-19T12:07:00.000-08:00

QUOTE OF THE YEAR
“To climb steep hills requires slow pace at first.”
– William Shakespeare

THE YEAR IN BRIEF
2010 was a very nice year on Wall Street. At the closing bell on December 31, the Dow Jones Industrial Average was sitting just eight points beneath a two-year high recorded two days earlier. The S&P 500 finished up 12.78% for the year and the Dow, NASDAQ and S&P all posted double-digit yearly gains. The Dow finished 2010 at 11,577.51, the NASDAQ at 2652.87 and the S&P at 1257.64.1

The economy grew, but instead of a V-shaped recovery we saw a shallow U-shaped one. The Fed didn’t touch the benchmark interest rate all year; it did embark on another round of monetary easing. The unemployment rate stayed consistently above 9%. On Capitol Hill, you had the passage of health care reforms and the Dodd-Frank Act, the surprisingly easy extension of the Bush-era tax cuts, and a resolution to the estate tax question. The real estate sector stumbled along; mortgage rates fell remarkably before rising a bit at the end of the year. Consumer spending increased, though not impressively; inflation was barely on the radar. The bull market in commodities continued. Foreign economies struggled with problems much greater than ours.

DOMESTIC ECONOMIC HEALTH
The American economy comes down to the consumer, and the good news is that consumer spending increased in nine out of the 11 months on record for 2010 (it was flat in April and June). As for inflation, it was almost nil: the Consumer Price Index gained just 1.1% from November 2009 to November 2010, and core CPI rose but 0.8% in that span.2,3,4,5

The Conference Board’s consumer confidence survey moved from 50.6 (December 2009) to 54.1 (December 2010). The Reuters/University of Michigan survey moved from 72.5 to 74.5 across that span, with a 9.4% improvement in consumer expectations. America’s jobless rate did show some improvement: it was 10.0% in December 2009 and still at 9.8% in November, but down to 9.4% for December.6,7,8

Let’s look at the growth in the service and manufacturing sectors through the lens of the Institute for Supply Management. Its November manufacturing report indicated the 16th straight month of growth in the sector, with employment trending positive for 12 months and production expanding for the past 18 months. The November service sector report indicated the 11th straight month of expansion and the 15th straight month of growth when it came to new orders. Census Bureau data showed durable goods orders up 14.3% from year-ago levels in October (and without seasonal adjustment, the year-over-year rise was 10.4% from November 2009 to November 2010.)9,10,11

In the nation’s capital, the Republicans gained control of the House in the mid-term elections and President Obama seemed eminently agreeable to their demands by year’s end. In March, landmark health care reforms were passed to fulfill the President’s mandate of bringing health insurance coverage to (virtually) every American, though the public option that would have made the federal government a competitor in the health insurance industry was defeated. In July, the Dodd-Frank Act was passed bringing new regulations to the financial industry. Besides trying to prevent a repeat of TARP, it green-lighted the creation of a new watchdog agency to help protect and educate consumers, opened up derivatives trading to the public eye, and set the FDIC insurance limit permanently at $250,000.12,13

The fall brought a new round of bond-buying from the Federal Reserve - QE2, as it came to be called in the media. The Fed committed to buying $600 billion worth of Treasuries through June 2011 and announced plans to buy up to $900 billion in debt by the end of next September. In December, the President struck an accord with Republicans resulting in swift passage of new tax laws: the EGTRRA and JGTRRA cuts were preserved for another two years, employee payroll taxes were cut by 2% for 2011, and the estate tax resumed for 2011 at 35% with a $5 million exemption.14,15

GLOBAL ECONOMIC HEALTH
It was a harsh year for the euro and for the European Union. Central banks and governments faced payback for years of loose lending and nonchalant spending. Greece was the first EU member to crack, getting a €110 billion bailout from the EU and the International Monetary Fund in May. In November, Ireland got a ₤72 billion EU/IMF bailout, and Portugal and Spain remain on the EU watch list. (At one point last year, the bank bailout guarantees amounted to about 25% of the EU’s GDP.) In May, French prime minister Nicolas Sarkozy warned that his country would ditch the euro if Germany’s chancellor, Angela Merkel, didn’t agree to create an EU bailout fund. She did, and a €440 billion fund is now in place for any future rescues.16

In the third quarter of 2010, China became the #2 economy in the world, right behind the United States; Japan fell into third place. China’s manufacturers saw their collective profits rise 49.5% across the first 11 months of 2010. The nation’s central bank twice raised interest rates during the year. Japan couldn’t shake its deflation – in November, its core consumer price index went negative for an astonishing 21st consecutive month – but its industrial output rose in November for the first time in six months. India’s remarkable economic engine showed little if any sign of slowing down – the IMF projected India would end 2010 with a +9.7% GDP and forecast 8.4% growth in 2011.17,18,19,20

WORLD MARKETS
Looking at the consequential stock markets around the world, we see some great 2010 performances. At the top we find Argentina’s MERVAL, +51.8% for the year. Finishing second, we have Indonesia’s Jakarta Composite, +46.2% for the year. Rounding out the top five, we have Thailand’s SET (+40.6%), the PSE Composite in the Philippines (+37.6%) and Chile’s IPSA (also +37.6%). Several other benchmarks outpaced the S&P 500 last year: Pakistan’s KSE 100 (+28.1%), South Korea’s KOSPI (+21.9%), Mexico’s IPC (+20.0%), India’s Sensex (+17.4%), Germany’s DAX (+16.1%) and Canada’s TSX Composite (+14.4%). Other gains: Singapore’s Straits Times Index, +10.1%; Taiwan’s TAIEX, +9.6%; Great Britain’s FTSE 100, +9.0%; Hong Kong’s Hang Seng, +5.3%; Brazil’s Bovespa, just 1.0%.21

Some benchmarks went negative: Australia’s All Ordinaries index (-2.6%), Japan’s Nikkei 225 (-3.0%), Ireland’s ISEQ (-3.0%), France’s CAC-40 (-3.3%), China’s Shanghai Composite (-14.4%), and finally two indices you would expect to finish at or near the bottom for 2010: Spain’s IBEX (-17.4%) and Greece’s ASE (-35.6%). How did the MSCI World Index and Emerging Markets Index fare in 2010? In U.S. dollar terms, the World Index gained 9.55% and the Emerging Markets Index posted a 16.36% return.21,22

COMMODITIES MARKETS
The bull market continued. Palladium was the best-performing marquee commodity of 2010, gaining an astonishing 97.3%. Other metals also posted great yearly gains: gold rose 29.8% to close 2010 at $1421.10 per ounce, silver gained 83.8% to $30.91 a troy ounce, and copper prices rose 33.4% to $4.4395 a pound for December. Platinum futures advanced 21.5% last year.23

How did energy and crop futures do? Well, oil climbed 15.2% for the year, with prices cresting at $91.51 on December 6 and finishing the year at $91.38. Natural gas was the “blown tire” of the commodities sector, with futures dropping 20.9% for 2010. Corn gained 51.8%, wheat 46.7% and soybeans gained 34.1%, spurred by a drought affecting Russia. Coffee futures were up 76.9% for the year, and sugar futures gained 19.2 across 2010. The Dow Jones-UBS Commodity Index followed its 19.0% 2009 gain with a 16.8% advance for 2010.23

The U.S. Dollar Index gained 1.41% for 2010 and the real yield of the 10-year note went from 1.48% on December 31, 2009 to 1.00% a year later (a 32.4% decline).24,25

REAL ESTATE
This is an annual review, so let’s talk about the numbers that really matter when it comes to the housing market: the year-over-year change in home sales and home sale prices. The latest available data we have, of course, comes from November 2010 – so let’s reference those figures. In November, existing home sales were down 27.9% from a year ago, though the median sale price improved by 0.4% in that time. New home sales were down 21.2% from 12 months ago, with a median sale price of $213,000 – a year-to-year retreat of 2.0% from $217,400 in November 2009.26,27,28

Has the housing market hit bottom? Will we have to wait until sometime in 2011 … or 2012 … to see a bona fide recovery? As the biggest drag on the real estate market is actually unemployment, and as unemployment will continue at high levels for the foreseeable future, the near future of the sector does not look too bright.

Mortgage rates moved downward for most of 2010; new record lows seemed to be set every week during the summer and fall. Rates were on the upswing in December, at least in the short term. When Freddie Mac assessed matters on December 30, they noted the following year-to-year movement: average rates on conventional 30-year FRMs had moved down to 4.86% from 5.14%; rates on 15-year FRMs were averaging 4.20%, down from 4.54%; average rates on the 5-year ARM were at 3.77%, down from 4.44% a year prior; average rates on the 1-year ARM had descended to 3.26% from 4.33%.29

LOOKING BACK … LOOKING FORWARD
It is hard to forecast the future; just ask the experts. At the start of 2010, some analysts were predicting growth of more than 3% for the U.S. economy (didn’t quite happen), an unnerving double dip in housing prices after the end of the homebuyer tax credit (this only happened to a minor degree), and a jobless rate well over 10% (it stayed below 10% from January-November). Some voices worried about deflation; that hasn’t happened either. And Harry Dent – the author of The Roaring 2000s who famously predicted the Dow would hit 40,000 during the last decade – forecast a severe bear market beginning in 2010 (as you can see below, that hasn’t happened at all).8,30

% CHANGE 2010 2009 5-YR AVG 10-YR AVG

DJIA +11.02 +18.82 +1.60 +0.73

NASDAQ +16.91 +43.89 +4.06 +0.74

S&P 500 +12.78 +23.45 -0.15 -0.47

REAL YIELD 12/31 RATE 1 YR AGO 5 YRS AGO 10 YRS AGO
10 YR TIPS 1.00% 1.48% 2.06% 4.03%

Source: cnbc.com, bigcharts.com, ustreas.gov, bls.gov - 12/31/101,35,31,32
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.

The fact is, we don’t know what 2011 will bring. There seems to be less talk of a double-dip recession in the air; the tax deal forged in Washington certainly eased the minds of the affluent (lenient estate tax, Bush-era cuts preserved) and the middle class (2% payroll tax reduction). Are we going to see a greatly improved real estate market in 2011? How about a big reduction in the jobless rate or a big jump in GDP? It doesn’t seem likely. The economy and the stock market have some momentum going; if the geopolitical climate remains relatively placid and indicators continue to pleasantly surprise, 2011 could be a better year for Wall Street and Main Street than 2010.

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

Structural Fallacies

2011-01-06T14:48:00.000-08:00

Structural Fallacies

Suddenly, the U.S. jobs picture is in the economic news, and for once the news is actually pretty good. I think it helps, from time to time, to be reminded that not everybody is highly-qualified for the job market, as this video subtly suggests:

You Tube Video Link

And if you're curious about what job interviews looked like in a simpler age, this might prove educational:

You Tube Video Link

The good news? Payroll services provider ADP said Wednesday that private employers added a net total of 297,000 new jobs last month, the most in the ten years that ADP has tracked the data. Meanwhile, forecasters seem to be scrambling to raise their job gains forecasts after the Labor Department's encouraging report on a decline in applications for unemployment benefits.

On Friday, the U.S. Labor Department is expected to make headlines, reporting that the unemployment rate has fallen to 9.7%

Even so, you're likely to hear pessimistic views about job growth and unemployment; indeed, in the January 3 issue of The New Yorker, James Surowiecki says that some economists are warning that there is a long-term mismatch between the jobs that are available and the skills that workers are bringing to the job market. If people don't have the skills to work in the fields where the jobs are (so the argument goes), unemployment will continue to plague our economy. (You can find the article here: New Yorker Article.)

There are two problems with that argument, Surowiecki notes. If we were indeed suffering from "structural unemployment," then companies would be having trouble filling their skilled vacancies, have to pay their existing workers more and work them longer hours to make up for the shortage of people they can't hire. As it happens, the opposite seems to be true. Payrolls have been slashed across manufacturing, retail, wholesale, transportation and information technology sectors. The percentage of small businesses with "hard to fill" job vacancies is near a 25-year low, Surowiecki reports, and people who are lucky enough to have jobs haven't seen their work hours go up in the last year.

The second problem is that this exact same "structural unemployment" argument has been made before, and it has not always been a perfect forecaster of what happens in the future. During the 1981-82 recession, prominent economists warned that structural issues would permanently raise unemployment levels, but by 1984 unemployment was back to where it had been before the recession hit. In a 1964 survey of economists, more than half reported that structural unemployment played a significant role in limiting the number of jobs. Three years later, unemployment was below 4%. During the Great Depression, President Roosevelt thought unemployment might be stuck at a permanently high level.

The point: recessions are crises of confidence, and this lack of confidence leads us to believe that this time it's finally different, and we are in a hole we cannot possibly climb out of. If the historical evidence is to be believed (and it always seems to be a better indicator than the panic of the moment), then the jobs report on Friday will be something to celebrate, a sign that things are getting a little better, that the sun is starting to peek through the clouds, and this long hangover from the Great Recession won't go on forever.

Job reports data: Jobs Report Data Link

New Yorker analysis: New Yorker Analysis Link

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

The Bush-Era Tax Cuts Live On

2010-12-21T08:02:00.000-08:00

THE BUSH-ERA TAX CUTS LIVE ON

With the President’s signature, most of them will remain in place through 2012.

A holiday gift for taxpayers? After a 277-148 passage in the House and an 81-19 approval in the Senate, President Obama signed the 2010 Tax Relief Act into law on December 17, extending the Bush-era tax cuts.1 Here is the impact of the new legislation:

Current federal income tax rates are preserved for everyone. The federal income tax brackets will remain at 10%, 15%, 25%, 28%, 33% and 35% for 2011 and 2012.2

Unemployment insurance extends for 13 more months. This is retroactive, so the federal extension of long-term jobless benefits applies from December 2010 through December 2011.2

A payroll tax holiday occurs in 2011. The payroll taxes that employees pay will drop from 6.2% to 4.2% next year. (There will be no payroll tax cut for employers in 2011, only employees.) As envisioned, this will result in a savings of about $1,000 next year for a wage earner bringing home $50,000. This replaces the Making Work Pay credit.3,4,5

Estate taxes will be milder than at any time in the past 80 years. For 2011, the federal estate tax drops to 35%. The estate tax exemption rises all the way to $5 million. President Obama had earlier characterized these parameters as too generous, but he and Congressional Democrats ultimately accepted them.2

Tax breaks for middle-class and working-class families won’t sunset. As a result of the new law, the child credit, the child and dependent-care credit, the EITC, and a $2,500 tax credit for higher education expenses will all be around in 2011.5,6

No marriage penalty. The new law wards off the comeback of the marriage penalty so that married couples may take a more generous standard deduction.6

Taxes on capital gains and dividends top out at 15%. Passage of the 2010 Tax Relief Act means rates will top out at 15% through 2012.7

Businesses may expense 100% of their investments in 2011. In fact, qualified investments made after September 8, 2010 and before January 1, 2012 are eligible for this bonus depreciation. In addition, 50% expensing will be available for qualified property placed in service during 2012, and so-called “long-lived” property and transportation property may be eligible for 100% expensing if it goes into service prior to 2013.7

The tax break for IRA gifts to charity returns. The IRA charitable rollover, as it was informally called, was much beloved by non-profits and IRA owners, but it went away in 2010. In basic terms, it allowed someone 70½ or older donate up to $100,000 in IRA assets annually to one or more qualified charities. This opportunity is back for 2011 – and the especially good news is that Congress included a special rule in the new tax bill allowing IRA gifts made in January 2011 to count for 2010.8

An AMT patch, of course. Congress decided it might as well take care of that. It passed an AMT (Alternative Minimum Tax) fix as part of the 2010 Tax Relief Act, thereby exempting about 20 million middle-income households from a potential $3,900 average leap in federal income taxes.6

What’s the price tag of all this short-term tax relief? It is sizable. The federal deficit is projected to increase by about $858 billion over the next two years as a consequence.5

Citations.
1 - edition.cnn.com/2010/POLITICS/12/17/tax.deal/ [12/17/10]
2 - online.wsj.com/article/
SB10001424052748703296604576005430598327972.html [12/7/10]
3 – npr.org/2010/12/10/131969824/some-worry-payroll-tax-cut-threatens-social-security [12/10/10]
4 – businessweek.com/news/2010-12-10/u-s-tax-vote-may-be-too-late-to-cut-payroll-levy.html [12/10/10]
5 –startribune.com/politics/112046564.html? [12/16/10]
6 –businessweek.com/ap/financialnews/D9K5IEN81.htm [12/17/10]
7 –tax.cchgroup.com/downloads/files/pdfs/legislation/bush-taxcuts.pdf [12/16/10]
8 – online.wsj.com/article/
SB10001424052748703395904576025610771041244.html [12/17/10]
9 – montoyaregistry.com/Financial-Market.aspx?financial-market=roth-ira-rules-and-regulations&category=1 [12/18/10]

What Could A Payroll Tax Cut Mean For Social Security

2010-12-14T09:12:00.000-08:00

Would it send the wrong signal at the wrong time?

A claim too good to be true? If the recent agreement on taxes forged between President Obama and Congressional Republicans becomes law, payroll taxes would be lowered by 2.0% in 2011. According to the Joint Committee on Taxation, that would cost the federal government $111.7 billion. The White House claims this drop in tax revenue would have no impact on Social Security’s solvency.1,2

In response, some legislators and analysts are raising their voices, worried that the proposed payroll tax holiday could be a harbinger of unpleasant things to come for America’s retirement program.

How could you pull this off without hurting Social Security? Good question. As Social Security (and Medicare) rely on payroll levies for a great deal of revenue, chopping those taxes down from 6.2% to 4.2% in 2011 would seem to be ruinous.3

The federal government’s answer to that question: reimburse the loss to the Social Security Trust Funds using general revenue. That idea worries Social Security advocates, and it also begs a question.

The “what if” some analysts fear. What if the planned payroll tax cut becomes permanent? It could happen, especially with Republicans in control of the Senate. The EGTRRA cuts were conceived as temporary cuts, and they are starting to seem more permanent with each passing year.

Last week, Sen. Mike Johanns (R-NE), Sen. Bob Corker (R-TN) and Rep. Ted Deutsch (D-FL) all told NPR that they felt Republicans would try to make the payroll tax reduction permanent during 2011. Deutsch warned that a move to fund Social Security with general revenue will hearten "those who [want] to move away from our longstanding, successful Social Security program to privatization and to benefit cuts. It will enable them to make those arguments in a way that they've never been able to make them before."3

Nancy Altman, co-chair of the advocacy group Social Security Works, thinks a lasting cut in payroll levies could end up making Social Security’s shortfall twice as large as it is now. She warned NPR that with the probable extension of EGTRRA and JGTRRA, “we see now that it's very hard once a tax cut is in place to repeal it,” and told USA TODAY that “it's unfathomable that this is going to last only one year.”3,4

P.S.: the 2011 tax break might be less prevalent than assumed. The federal government says a 2% payroll tax cut could provide tax breaks as large as $2,000 in 2011 for American workers. But as Bloomberg Businessweek reported on December 10, any Congressional vote might happen too late for some employers to act. Last year, the IRS notified payroll departments about 2010 tax tables on November 20. We are well past that date.2,3

Incidentally, the envisioned payroll tax cut is for workers only, not businesses. The payroll tax would stay at 6.2% for employers in 2011.2

Citations
1 – online.wsj.com/article/
SB10001424052748703296604576005430598327972.html [12/7/10]
2 – businessweek.com/news/2010-12-10/u-s-tax-vote-may-be-too-late-to-cut-payroll-levy.html [12/10/10]
3 – npr.org/2010/12/10/131969824/some-worry-payroll-tax-cut-threatens-social-security [12/10/10]
4 – content.usatoday.com/communities/theoval/post/2010/12/social-security-backers-blast-obamas-payroll-tax-cut/1 [12/10/10]

REAL Debt Reform

2010-12-06T12:01:00.000-08:00

If you want to watch something alarming, look at the U.S. Debt Clock (http://www.usdebtclock.org/), which calculates, second-by-second, America's rising debt (approaching $14 trillion), federal spending (nearly $3.5 trillion a year) and budget deficit (roughly $1.3 trillion). Second-by-second the numbers increase, and you can also watch (more slowly) the inexorable rise in the average debt per U.S. citizen--currently more than $44,000, perhaps more by the time you read this and check for yourself.

The Debt Clock also lists the largest budget items and THEIR growth, and you can quickly see that they are not where most of the politicians have focused their attention and public statements. While incoming Congressional leaders talk about ending earmarks and cutting foreign aid, the back-breaking line items on the federal budget are Medicare/Medicaid, Social Security, Defense and war expenditures. At the bottom of the Debt Clock screen are some truly frightening statistics: add up all the future unfunded liabilities for Social Security, the federal prescription drug program and Medicare liability, and you get a future cost of $111.5 trillion. That's a little over $1 million per taxpayer.

Like any debtor who gets in over his head, the U.S. Congress faces painful choices. They can either make very difficult decisions now--and possibly alienate voters--or kick the can further down the road and leave a bankrupt country or crushing debt for our children or grandchildren to pay. The problem is great enough that a coalition of the very rich, including Bill Gates and Warren Buffet, are doing something unheard of: they are publicly arguing that Congress should end the tax cuts for them and others of the wealthiest Americans.

Is there a way to get both political parties talking about the hard choices? On December 1, a bipartisan National Commission on Fiscal Responsibility and Reform, made up of 18 prominent Republican and Democratic leaders, released "The Moment of Truth," a set of recommendations that would, if enacted, achieve a $4 trillion reduction in government debt. The group includes the chairmen and ranking members of the Senate and House Budget committees, the chairman of the Senate Finance Committee, a former White House budget director and a vice chairman of the Federal reserve board. To achieve their deficit reduction goals, the commissioners put everything on the table--Social Security, Medicare, tax rates, government spending, even the elimination of popular tax deductions.

You can read the full 49-page report here: http://www.cbsnews.com/8301-503544_162-20024235-503544.html. The report lists, on page 10, some of the considerations that went into the decisions, which you may or may not agree with: "We all have a patriotic duty to make America better off tomorrow than it is today;" "Don't disrupt the fragile economic recovery;" "Cut spending we cannot afford--no exceptions;" "Demand productivity and effectiveness from Washington;" "Don't make promises we can't keep;" "Keep America sound over the long run."

The plan would cut government discretionary spending and impose spending caps, including annual limits on war spending, impose 15% reductions in Congressional and White House budgets, a three-year freeze on annual Congressional pay raises, and eliminate all Congressional earmarks (9,000 in FY 2010, costing close to $16 billion).

The commission also recommends lowering tax rates and eliminating many deductions. There are actually several alternatives in the final proposal (pages 25-27), depending on which deductions are eliminated. One possible plan is to bring us down to three tax brackets of 12%, 22% and 28%--replacing five brackets ranging from 15% to 39.6% that is due to take effect in 2011. Corporations would pay at a flat rate somewhere between 23% and 28%, and lose most of their special subsidies and tax loopholes.

To get there, the Commission proposes that Congress eliminate all itemized deductions (everybody would take the standard deduction) and replace today's mortgage interest deduction with a 12% tax credit for mortgage loans up to $500,000. Capital gains and dividends would be taxed at ordinary income rates (rather than the preferential rates under current law) and the dreaded AMT would be eliminated altogether.

More controversially, charitable donations, which are currently deductible for itemizers, would only qualify for a 12% tax credit, and only then to the extent that the gift exceeded 2% of a taxpayer's adjusted gross income. The Commission also proposed replacing the current melange of retirement plans (Roths, IRAs, 401(k)s, 403(b)s, defined benefit plans etc.) with one type of tax-favored retirement account for everybody; the maximum tax-preferred contribution would be $20,000 or 20% of income, whichever is lower.

The commission proposes to raise the age at which you could receive full Social Security benefits by indexing it to life expectancy. The Normal Retirement Age, which reaches 67 in 2027, would go up to age 68 by the year 2050, and 69 by 2075. The Early Retirement Ages, when people could opt for lower annual benefits, would go up to age 63 by 2050 and 64 by 2075. The taxable maximum wage cap on Social Security taxes, currently $106,800, would grow more rapidly than it has in the past, reaching $190,000 in 2020, versus roughly $168,000 under current law.

Finally, the current federal gas tax would be increased by 15 cents per gallon, a figure which is still significantly lower than most European countries. Among a variety of Medicare reforms, the Medicare physician payment formula would be changed to reward quality of care and outcomes, rather than the quantity of visits or procedures. And the government's civilian workforce would gradually be cut by ten percent.

If 14 of the 18 members of the Commission had voted to endorse the recommendations, then the full report would have been sent to Congress for a vote. As it is, only 11 endorsed their own recommendations.

Endorsing: Senate Majority Whip Richard Durbin (D-IL); Senate Budget Committee Chairman Kent Conrad (D-ND); House Budget Committee Chairman John Spratt (D-SC); former Federal Reserve Board vice chairwoman Alice Rivlin, Republican Senators Tom Coburn (OK); Mike Crapo (ID) and Judd Gregg (NH), plus Ann Fudge of Young & Rubicam, and Dave Cote of Honeywell International. Co-chairs Erskine Bowles (former Clinton White House Chief of Staff) and former Republican Senator Alan Simpson also voted for the proposal.

Opposed: Senate Finance Committee chair Max Baucus (D-MT); Rep. Xavier Beccera (D-CA); Rep. Jan Schakowski (D-IL); Rep. Dave Camp (R-MI); Rep. Paul Ryan (R-WI), Rep Jeb Hensarling (R-TX) and Andy Stern of the Service Employees International Union.

Nevertheless, even the dissenting members of the Committee believe it will change the debate in Washington, and focus Congressional attention on the hard choices rather than the easy sound bites. Let's hope so for the sake of our children and grandchildren.

Sources

Market News: http://imarketnews.com/?q=node/23235

Associated Press: http://www.kansascity.com/2010/12/01/2491715/deficit-reduction-committee-issues.html#ixzz16yaiKLmB

Wall Street Journal: http://online.wsj.com/article/SB10001424052748704594804575648503541856136.html

Tax us more: http://abcnews.go.com/ThisWeek/billionaires-buffett-gates-tax-us/story?id=12259003

Votes pro and con: http://www.miamiherald.com/2010/12/03/1955486/debt-commission-majority-endorses.html

You, Too, Can Balance the Federal Budget

2010-11-29T07:31:00.000-08:00

Want to have a little mindless fun? Try balancing the federal budget in ten minutes or less.

Believe it or not, you can actually do this on an interactive web site created by the New York Times. (You can find it here: http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html) There are two graphics at the top of the page: one is the projected shortfall in 2015 (a scary $418 billion), and the other is a more long-term (and scarier) deficit in 2030 ($1.345 trillion).

To reduce those numbers, you make hard choices. You can cut foreign aid in half, eliminate all farm subsidies, cut the pay of civilian federal workers by 5 percent, reduce the federal workforce by 10 percent, reduce the military to pre-Iraq War size and reduce troops in Asia and Europe, reduce the number of troops in Iran and Afghanistan to 30,000 by 2013 (or make more modest cuts), raise the Social Security retirement age (there are two options), modify estate taxes, reduce or eliminate the Bush tax cuts, or impose a national sales tax and/or carbon tax.

And more. With each box you check (each cut you make or tax you raise), you see how much progress you're making on the overall budget deficit in 2015 and 2030. The choices are not easy ones, and you quickly discover that the "fixes" most often debated on both sides of the aisle in Congress won't make much of a dent.

Unfortunately, there isn't a button on the web site that you can push to make these deficit reduction provisions actually happen in the real world. But having an easy, interactive tool like this will undoubtedly help raise awareness, among the people who don't deal with these budget numbers on a daily basis, about the kind of measures that will have to be taken if we don't want to leave our children and grandchildren with a ton of federal debt to pay off. You'll probably remember this little game next time you hear a politician talking tough about eliminating debt in Washington.

Federal Money Supply

2010-11-22T07:50:00.000-08:00

A warning shot

You may have heard recent controversy over the U.S. Federal Reserve Board buying Treasury bonds--$600 billion in all--and wondered what all the fuss was about. You may even have wondered why one branch of the government is buying bonds from another one.

The headlines say that this is a "stimulus" measure, which basically puts more money into the U.S. economy without costing the taxpayers anything. This is true, up to a point; buying Treasury securities means the central bank is essentially creating new money. Other analysts say that creating new money is inflationary, which also tends to be true. However, the Stratfor Global Intelligence service has pointed out that creating $600 billion over eight months is not dramatically more than the Fed's normal actions in managing the money supply, and with $8 trillion in circulation (the M2 money supply figure, which does not include CDs and institutional money market fund balances), dollars are not going to suddenly become dramatically more plentiful. And in a $14.3 trillion economy, the stimulus is not likely to turbo-charge the next round of employment figures. It probably won't even show up in GDP.

So what gives? Looking at the global economic picture, right before the G20 economic summit, Stratfor notes that export nations like Japan and Germany have linked their recovery hopes to selling more to U.S. consumers. The more they sell, the more they drive up the difference between U.S. imports and exports--or, in economic terms, widening the current account deficit and diverting money from our economy into theirs. To do this most effectively, they need their currency to be weaker than the dollar so that their manufactured items look like a bargain. Stratfor notes that Japan has been openly intervening in currency markets to drive down the yen. Germany, meanwhile, doesn't have to: it has benefited from a weakened euro--the result of well-publicized debt problems in Greece, Spain, Portugal and most recently Ireland. An article in the November 5 issue of the Wall Street Journal says that not only Japan, but also Brazil and South Korea have taken actions to depress their currencies against the dollar.

Seen in this light, the Fed's action can be seen as a warning to the other nations that the U.S. is capable of protecting its currency and export industries from these raids on its economy. The $600 billion purchase probably won't affect the value of the dollar, but they show that the Fed is well aware of the actions of the other countries. As U.S. representatives negotiate to stop currency manipulation at the G20 summit, the rest of the world knows that if there is no agreement, the U.S. is capable of fighting back. Sure enough, The Wall Street Journal quoted finance ministers and economists from Brazil, France, South Korea and Germany, all criticizing the purchase and calling for a cease fire in the currency wars.

Should we worry about inflation as these negotiations drag on? At a time when the worst-case economic scenario is deflation, a few small nudges in the inflation rate might not be the worst thing to befall the U.S. economy; today's rate is well below the 2% target informally set by the Fed. Should we worry about a falling dollar? If you're traveling abroad, or buying a foreign car, then you might have to pay a bit more if the dollar weakens against the currency of the nation you're traveling to or where the car was made. But foreign stocks, bonds and mutual funds are always a little more valuable--in dollar terms--whenever the dollar declines in value, so your international holdings could get a small boost in return.

But the most likely scenario is that the Fed's demonstration will keep everybody at the negotiating table. And you'll continue to hear the conventional interpretation: that this is all about stimulus back home--which, to the extent that it keeps other countries from raiding our economy, it is.

Sources:

Stratfor analysis: http://www.stratfor.com/memberships/175231/geopolitical_diary/20101103_washingtons_warning_shot_currency_front

U.S. money supply: http://en.wikipedia.org/wiki/Money_supply

Size of the U.S. economy: http://en.wikipedia.org/wiki/Economy_of_the_United_States

Wall Street Journal articles about the Fed's repurchase: http://online.wsj.com/article/SB10001424052748704353504575596203544367856.html

and: http://online.wsj.com/article/SB10001424052748704327704575614853274246916.html?mod=WSJ_article_MoreIn_Economy

Your Annual Financial To-Do List

2010-11-19T12:24:00.000-08:00

Things you can do before and for the New Year.

The end of the year is a good time to review your personal finances. What are your financial, business or life priorities for 2011? Try to specify the goals you want to accomplish. Think about the consistent investing, saving or budgeting methods you could use to realize them. Also, consider these year-end moves.

Think about adjusting or timing your income and tax deductions. If you earn a lot of money and have the option of postponing a portion of the taxable income you will make in 2010 until 2011, this decision may bring you some tax savings. You might also consider accelerating payment of deductible expenses if you are close to the line on itemized deductions – another way to potentially save some bucks.

Think about putting more in your 401(k) or 403(b). You can contribute up to $16,500 to these accounts in 2010, with a $5,500 catch-up contribution also allowed if you are age 50 or older. Has your 2010 contribution approached the annual limit? There is still time to put more into your employer-sponsored retirement plan.1

Can you max out your IRA contribution at the start of 2011? If you can do it, do it early - the sooner you make your contribution, the more interest those assets will earn. And if you haven’t made your 2010 IRA contribution yet, you can still do so through April 15, 2011.1

The 2011 contribution limits on traditional and Roth IRAs are unchanged from 2010. You can contribute $5,000 to your IRA next year if you are age 49 and below, $6,000 if you are age 50 and above.2

Consider a Roth IRA conversion before 2010 ends. Now anyone may convert a traditional IRA to a Roth IRA; there are no longer any income limits in the way. If you pull off a Roth conversion before 2010 ends, you can choose to divide the taxes on the conversion between your 2011 and 2012 federal returns. This nice opportunity won’t be available if you make a Roth conversion in 2011.1

There are still MAGI phase-out limits for contributing to Roth IRAs. For 2010, those limits kick in at $167,000 for joint filers and $105,000 for single filers. If your MAGI will exceed those limits, you still have a chance to contribute to a traditional IRA in 2010 and immediately roll it over to a Roth.3

Consult a tax or financial professional before you make any IRA moves. You will want see how it may affect your overall financial picture. The tax consequences of a Roth conversion can get sticky if you own multiple traditional IRAs.

If you are retired and older than 70½, don’t forget the 2010 RMD. As your IRA custodian has undoubtedly reminded you, the one-year suspension of Required Minimum Distributions has been lifted. Retirees over age 70½ must take RMDs from traditional IRAs - and 401(k)s - by December 31. Remember that the IRS penalty for failing to take an RMD equals 50% of the RMD amount.1,4

If you have turned or will turn 70½ at some point in 2010, you can choose to postpone your first IRA RMD until April 1, 2011. The downside of that is that you have to take two IRA RMDs next year – you have to make your 2010 tax year withdrawal by April 1, and your 2011 tax year withdrawal by December 31.1

Keep an eye on what happens with income, capital gains & estate taxes. We’re all watching and waiting here to see what Congress will do.

If Congress doesn’t extend the current law, the tax rates on long-term capital gains will go from 0% to 10% next year for those in the 10% and 15% tax brackets. Taxpayers in higher brackets will see their capital gains tax rates rise 5% in 2011 to 20%. In addition, dividends are scheduled to be taxed at marginal income rates of 39.6%. As it stands now, time is running out to take advantage of the current capital gains tax break.5

Income taxes are poised to return to pre-EGTRRA levels in 2011, with the lowest bracket set at 15% and the highest bracket set at 39.6%. (The so-called “marriage penalty” would also come back.) No one in Congress wants this on their legacy, so some kind of extension of the Bush-era tax cuts will almost certainly be worked out. We will have to wait and see if Congress extends the cuts for all or simply for the middle class.6

Estate taxes will undoubtedly return in 2011. Hopefully, Congress will prevent them from returning at the 2001 levels (a puny $1 million exemption and a 55% top tax rate).6

You may wish to make a charitable gift before New Year’s Day. If you make a charitable contribution this year, you can claim the deduction on your 2010 return.

You could make December the “13th month”. Can you make a January mortgage payment in December, or make a lump sum payment on your mortgage balance? If you have a fixed-rate mortgage, a lump sum payment can reduce the home loan amount and the total interest paid on the loan by that much more. In a sense, paying down a debt is almost like getting a risk-free return.

Are you marrying next year, or do you know someone who is? The top of 2011 is a good time to review (and possibly change) beneficiaries to your 401(k) or 403(b) account, your IRA, your insurance policy and other assets. You may want to change beneficiaries in your will. It is also wise to take a look at your insurance coverage. If your last name is changing, you will need a new Social Security card. Lastly, assess your debts and the merits of your existing financial plans.

Are you returning from active duty? If so, go ahead and check the status of your credit, and the state of any tax and legal proceedings that might have been preempted by your orders. Review the status of your employee health insurance, and revoke any power of attorney you may have granted to another person.

Don’t delay – get it done. Talk with a qualified financial or tax professional today, so you can focus on being healthy and wealthy in the New Year.

Could QE2 Lead to Bubbles?

2010-11-16T11:00:00.000-08:00

Why some analysts are worried about the Fed’s latest monetary easing effort.

Is the glass half full? The Federal Reserve has committed to buying $600 billion worth of Treasury bonds between now and June, and it wants to purchase up to $900 billion in debt by the end of September 2011.1 This second round of quantitative easing has been dubbed QE2. In a nutshell, the effort would pour cash into the banking system to promote lending and inflation, and it has the potential to help stocks, the housing market and consumer spending.

Or is it half empty? Some economists are worried about the impact of this tactic. They fear it may create a stock bubble – an inflated equities market motivated by speculation and low interest rates instead of earnings. Likewise, some see a commodities bubble that could burst dramatically in the years ahead.

QE2 has already earned some prominent detractors. Bond market guru Bill Gross just called it “a Ponzi scheme” that will end the 30-year bull market in bonds (an event he has actually forecast for some time). Jim Rogers, the Quantum Fund co-founder who astutely called the worldwide bull market in commodities in 1999, recently labeled QE2 “petrol on the fire” of the commodities market and told an Oxford University audience that Fed chair Ben Bernanke “does not understand economics … all he understands is printing money.”2,3

Will more investors turn to stocks? The Fed’s bond-buying program implies lower long-term interest rates, lower bond yields and a weaker dollar. In an environment with lower bond yields, investors are predisposed to enter other asset classes such as real estate and stocks. If the stock and housing markets improve, that will certainly aid consumer confidence which, in turn, should aid consumer spending.

On Main Street, there are two speed bumps on the way to that rosy domestic outcome: a lack of customers and/or demand (especially in the housing market) and unemployment. The Fed’s strategy may have a tough time getting around those economic obstacles.

Why are other nations growing testy? QE2 could invite a trade war. A weak greenback means a big advantage for U.S. exports. Our products will be cheaper in other nations thanks to the increase in the money supply holding down the value of the dollar. Correspondingly, imported goods will cost us more and we will buy less of them. That’s terrible news for nations such as China, Germany, Russia, Japan, France, Great Britain and Hong Kong – all of whom are counting on exports to aid in their economic recoveries.

If U.S. interest rates are too low for too long, investors may try the emerging markets and/or the commodities markets seeking higher returns. So the commodities markets and the emerging markets could get even hotter.

If that happens, it would imply higher prices for oil, crops and raw materials in the United States, which would hamper our economy. Of course, many analysts think the commodities markets will keep advancing with or without influences like QE2 – the ongoing condition is simply too much demand and not enough supply.

Is this the “Hail Mary” play? With interest rates so low and one round of bond-buying already in the history books, the Fed doesn’t have many options left to jump-start the economy. Here’s hoping its latest move gives the recovery more traction.

Citations
1 – money.cnn.com/2010/11/03/news/economy/fed_decision/index.htm [11/3/10]
2 - blogs.wsj.com/marketbeat/2010/10/27/pimcos-bill-gross-qe2-is-a-ponzi-scheme/ [10/27/10]
3 - bloomberg.com/news/2010-11-04/bernanke-doesn-t-understand-economics-investor-jim-rogers-tells-oxford.html [11/4/10]

Assessing the Mid-Term Elections

2010-11-09T11:23:00.000-08:00

GOP picks up 60 seats in the House, 6 in the Senate. The 2010 midterm elections are over and frustration has prompted change on Capitol Hill. Republicans will control the House with at least 239 seats; Democrats will retain a narrow majority in the Senate with at least 51 seats.1

Here comes gridlock. “We’re determined to stop the agenda Americans have rejected and to turn the ship around,” Senate Minority Leader Mitch McConnell (R-KY) told the press after the election.2 So will President Obama’s health care reforms be rolled back? Will federal spending be severely reduced?

Through 2012, you may not see much change at all. With Republicans controlling the House, Democrats controlling the Senate and President Obama’s veto pen at the ready, you can expect plenty of legislative stalemates.

Could gridlock benefit the markets? It could be bullish for stocks. With a conservative majority in the House, Wall Street could breathe a collective sigh of relief over the next two years, feeling less regulatory pressure and seeing fewer threats and a more business-friendly environment.

On the other hand, history suggests otherwise. Standard & Poor’s database reveals that since 1900, the S&P 500 has gained an average of just 2.0% in years featuring a split Congress. Since World War II, the average gain in such circumstances has been 3.5%.3 Here’s hoping past performance is no indicator of future results.

What can the lame-duck Congress accomplish? Republicans don’t become the majority party in the House until January … so what will happen with the Bush-era tax cuts and the estate tax?

A compromise could be in the works on the estate tax. Neither party wants to see estate taxes reset to 2001 levels. With death taxes poised to top out at 55% next year, both parties may emerge from the limbo of 2010 and reach a consensus. A CNN report suggests the maximum estate tax rate will be set somewhere between 35-45% for 2011, with the federal exemption ranging anywhere from $3.5-$5 million.4

Both parties want to preserve the Bush-era income tax cuts. Analysts now think Congress may act to extend the EGTRRA/JGTRRA tax cuts through at least 2011.4 Will they be extended for all Americans, as Republicans want? Or just to households with incomes of less than $250,000, as Democrats want?

Two (lame duck) Democrats have proposed extending these tax cuts for all but the really rich. Senate Banking Chairman Chris Dodd (D-CT) would like them extended for households making less than $500,000; Sen. Blanche Lincoln (D-NE) has proposed setting the break at $1 million. In September, 31 House Democrats wrote a letter to their party’s leaders urging the extension of the cuts for all Americans.5

Other matters to tackle. Currently, the unemployed can qualify for up to 99 weeks of federal unemployment benefits. The Tier V unemployment extension is set to expire at the start of December, and if it does, about 2 million Americans will lose that cushion. Additionally, the Medicare reimbursement rate for doctors will be reduced by 21% if Congress doesn’t apply its usual annual “doc fix” by the end of November, and the Alternative Minimum Tax needs its annual patch.4

It is possible that one broad year-end tax bill could address all of the above issues.

What if the economy needs another stimulus? Given the mid-term election results, it is pretty clear that Federal Reserve will have to “ride to the rescue” instead of Congress. The GOP wants to block any new spending that adds to the federal deficit, so any initiative President Obama might propose to pump up the housing market or job market will likely be small-scale. It is hard to imagine another federal stimulus package making it through Congress between now and 2012, though a tax-cutting move might stand a chance.

Obama appeals to the business world. One last item of interest: in the wake of the “shellacking” his party took this week, President Obama spoke of mending fences with America’s business community. He now says he wants to undo Section 9006 of the health care reform law – the section that would require all businesses to issue 1099 tax forms notifying the IRS of purchases exceeding $600 starting in 2012.6

Citations
1 – latimes.com/news/politics/election/la-election-results-map,0,4890426.htmlstory [11/3/10]
2 – marketwatch.com/story/republicans-to-challenge-obama-after-victory-2010-11-03 [11/3/10]
3 – marketwatch.com/story/gridlock-is-no-good-for-stocks-2010-11-02 [11/2/10]
4 – money.cnn.com/2010/11/01/news/economy/lameduck_agenda/ [11/1/10]
5 - money.cnn.com/2010/10/13/news/economy/bush_tax_cuts_possible_compromise/index.htm [10/13/10]
6 - money.cnn.com/2010/11/03/news/economy/Obama_business/index.htm [11/3/10]

The Information Risk Premium: Danger and Opportunity

2010-11-01T11:42:00.000-07:00

When you step back and look at the investment landscape, it is sometimes helpful to ask yourself if anything really IS different this time; to try to determine what has changed.

The usual answers point to recent return gyrations: the tech bubble's spectacular burst ten years ago, the near-death experience of global capitalism in 2008-2009. But the truth is, we've seen all this before in one form or another. Ask your grandparents; the 1929 crash and Great Depression were far more painful to far more people than anything we've experienced in recent years.

Michael Aronstein, who manages a mutual fund called the Marketfield Fund, offers an interestingly different take on what is fundamentally different today. In a one-hour speech at the NAPFA Practice Management & Investments Conference in San Diego on September 22, he connected two dots that most of us are aware of intuitively, but may not have consciously considered. He said that the primary challenge for investment advisors, financial planners and money managers today, which is different from the challenges you faced in the past, is the sheer amount of attention that individual investors are now able to pay to the ups and downs in their portfolios.

"In the last 15 years," he said, "we have moved from an era where people who were not in the business would check stock quotes, if at all, in the morning when they got their newspaper. Sometimes, you would listen to a radio program on your way home from work, and it might tell you what the Dow Jones Industrial Average closed at."

Compare that with today, when it's possible to have a running ticker at the bottom of your computer screen, or a portrait of your investment portfolio continuously updating its various components and arriving at new values every 15 minutes. At the same time, news, information and even fundamental analysis might be flowing into your brain through various sources. "Regarding the economy and its various indicators, there are probably ten thousand data points that we could be looking at in real time," Aronstein continued. "Combine that with hundreds and hundreds of opinions being thrown around as important every day, and it is a formula for driving everybody insane--and I think that really is what is happening to the investing public."

Put in its simplest terms, we are being driven to an unbalanced mental state by the sheer amount of information and opinions that are piling into our awareness at increasing speed, and nobody has a vested interest in telling us that paying attention is highly unlikely to improve our investing lives. In fact, to the extent that we feel panic, fear or a concern that we're missing out on some opportunity, all this information may well be sabotaging the average person's returns.

Panic is a particularly dangerous emotion to investment portfolios, and there is some evidence that more of it is being artificially manufactured by the media than ever before. Aronstein pointed out that it has become a pretty good business to give out doomsday information and frighten investors, and a lot of people have become pretty good at it. "It is rare to spend a day watching CNBC or any of the other financial reality programs," he said, "and not hear somebody come out with the most disastrous, frightening, extreme forecast about what is going on in the world and in peoples' portfolios."

That, in itself, helps us get a better handle on this new era of investing. Aronstein said that risk assets like stocks, which tend to be liquid and priced every second, become increasingly unattractive in an environment where there is a negative or confusing spin on their every movement. Who wants to own something which increasingly gives you heartburn and insomnia? As people sell out of the investments in order to avoid this confusion/heartburn factor, risk assets become more attractively priced than their fundamentals would justify. This could raise their future returns the same way value stocks enjoy return advantages over sexier growth companies: they are less attractive to the average investor.

Instead, investors might become more interested in investments which aren't traded every day--such as real estate and certain types of hedge funds. Because there is no way to watch them change in value in real time, the market commentators aren't talking about them or offering doomsday scenarios before the commercial break. Look for these products to proliferate, not necessarily because anybody believes less-liquid products offer better returns, but because they reduce stress.

It would be easy to say that market reality shows represent a scourge on the investing world. Of course they are unhelpful. Of course the moment-by-moment market movements and most of the data and opinions are of less than zero value to your financial health.

But the important thing here is for all of us to recognize that a new risk factor has emerged in the investment marketplace. This emerging "information risk premium" suggests that if you can tolerate (or ignore) the uncertainty and doomsday commentaries while others cannot, you might be able to get better returns for your ultimate retirement.

How Healthy is the US Dollar?

2010-10-26T08:37:00.000-07:00

The strong dollar policy is long gone, but the greenback isn’t in peril just yet.

A favorite doomsday scenario. Have you heard about the forthcoming collapse of the dollar? Well, if you turn on your computer, your radio and even your TV, you just may. With the Federal Reserve poised to increase the money supply, the commentary on this topic is heating up again.

The scenario has variations, but the basic outline goes like this: An unexpected political or economic event leaves the dollar so weak that all confidence in it is gone. Foreign nations sell Treasuries in a panic and the Fed becomes the buyer of last resort. Traders and individual investors dump dollars for whatever they can get. Interest rates leap. Next stop: hyperinflation. America’s economy suddenly resembles that of Zimbabwe in 2007 or Germany in 1922.

So is there any validity to this scenario? Could the dollar collapse?

Let’s just say that the odds are very long. While the Federal Reserve will likely ramp up quantitative easing in the near future, it is highly unlikely that the dollar will suddenly become too cheap.

Why it is unlikely to happen. Foreign countries don’t want the dollar to collapse. Fundamentally, that is because some of the world’s biggest manufacturing economies rely on a great customer for their exports – the United States of America.

China and Japan currently hold 41% of America’s debt.1 In the worthless dollar scenario, they are the key dominoes that fall. But what incentive do China and Japan have to sell dollars? Their economies are tied to U.S. consumer spending. Selling dollars would not benefit them – it would drive up the prices of their exports to America, it would wreck the economy of their best customer, and it would harm their own economies in turn.

The dollar is also the world’s reserve currency; it has been so since the U.S. abandoned the gold standard during the Nixon administration. While the central banks of China and Russia have argued that it should be supplanted or replaced, no challenger has knocked it off its pedestal. In spring 2010, the International Monetary Fund concluded that the dollar still accounted for 61.5% of global foreign exchange reserves, with the euro coming in a very distant second at 27.2%.2

In a way, the dollar has “collapsed” – and America is still standing. The dollar is much weaker today than it was in the 1990s, or even in the early 2000s. Its value has gradually declined and may decline further despite recent surges. In mid-October, the U.S. Dollar Index had slipped about 7% since August, and was approaching an all-time low set back in April 2008.3

America’s debt was less than $3 trillion in 1990; it has doubled since, and the federal Office of Management and Budget thinks it will hit $15 trillion by 2015.1 The federal government would certainly rather pay those debts back using a declining dollar.

Of course, analysts also talked about the pound collapsing and the euro collapsing earlier this year. All this talk – and expectations about what the Fed will do – sent many investors toward the precious metals market, where gold and silver futures hit new highs.

A little word about diversification. When you hear commentators talking about the oncoming collapse of the dollar, take it with a grain of salt. This much is true so far: a dollar decline has occurred, and the dollar could weaken further. So it might be worthwhile to consider diversifying your portfolio as a cautionary move.

Citations
1 – azcentral.com/news/articles/2010/09/19/20100919debt-of-us-grows-with-debate.html [9/19/10]
2 – businessweek.com/news/2010-06-30/dollar-share-of-global-reserves-declines-imf-says.html [6/30/10]
3 – bloomberg.com/news/2010-10-19/geithner-weak-dollar-policy-seen-as-path-to-recovery-in-contest-with-brics.html [10/19/10]

Mid-Term Elections & Stocks

2010-10-19T09:32:00.000-07:00

Historically, these events tend to help equities.

You may have heard that stocks tend to rally in fall and winter. That has often been the case. In fact, the S&P 500 and the Dow have gained repeatedly after the elections occurring in the third year of a first-term presidency.

These elections seem to elate Wall Street. While past performance is no indication of future success, consider this: Wall Street has witnessed rallies after every mid-term election since 1942.1

The Leuthold Group, a Minneapolis-based investment research firm, has determined that the S&P 500 has gained an average of 18.3% in the 200 days following such elections. Widening the window of time, Goldman Sachs finds that the S&P has averaged an 18.1% advance during the 12 months following each of the 15 mid-term elections since 1950. (The gain averages 11.0% when control of Congress changes hands.)1,2

Consider another intriguing statistic regarding mid-term election years: in the five instances since 1942 when an incumbent first-term president was a Democrat, the S&P 500 has gained an average of 21.3% for the year.3

The Dow may get a tailwind from the “third-year effect”. Since 1945, the third year of a presidential election cycle has tended to be very positive for the Dow. As MarketWatch columnist Mark Hulbert noted recently, the DJIA has averaged +24.7% in such 12-month periods (usually measured in fiscal years, i.e., 4Q-1Q-2Q-3Q) since the end of World War II. In fact, the Dow’s average returns in other fiscal years of a presidential term have been puny in comparison: +4.0% in year one, +1.9% in year two and +3.3% in year four.4

Last month, Standard & Poor’s chief investment strategist Sam Stovall told the Wall Street Journal that the DJIA has risen an average of 17.1% in calendar years following mid-term elections since 1945, with less than 10% of these years seeing selloffs.5

Will 2010 follow the historical pattern? Excellent question – after all, no one is clairvoyant. This year, stocks have not followed the longstanding trends. Stocks typically do badly in September, yet September 2010 actually turned the market around. When it comes to November, let’s hope history repeats.

These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information. www.montoyaregistry.com www.petermontoya.com

Citations.
1 - kiplinger.com/columns/value/archive/how-elections-affect-the-stock-market.
html [10/12/10]
2 - foxbusiness.com/markets/2010/10/05/gridlock-looming-wall-street-
stands-gain/ [10/5/10]
3 - cnbc.com/id/38538007/Midterm_Elections_Produce_Pain_Then_Gain
_For_Stocks [9/27/10]
4 - marketwatch.com/story/mid-term-elections-impact-on-stocks-
2010-10-04 [10/4/10]
5 - online.wsj.com/article/
SB10001424052748704062804575510482714106168.html [9/25/10]

SPEND LESS NOW, LIVE IT UP LATER

2010-10-13T08:26:00.000-07:00

A little “delayed gratification” may help you retire more comfortably.

Baby boomers are known for wanting more out of life – and for living life on their own terms. They also get a bad rap as a generation weaned on instant gratification – wanting it all now, wanting to have it both ways.

It is neither wise nor truthful to paint a generation with a broad brush. What we do know in 2010 is that more Americans than ever are poised to retire. In fact, 10,000 Americans will turn 65 each day during the next 18 years.1 Will their retirements match their expectations?

Are boomers in for a collective shock? Many boomers are used to affluence and expect creature comforts in retirement. Yet many may not understand how much money retirement will require. A 2010 study from the non-profit Employee Benefit Research Institute estimates that about half of “early” boomers (those aged 56-62) will face a retirement shortfall – someday, they will have inadequate income to pay medical costs and core retirement expenses. EBRI also estimates that 43.7% of “late” boomers (those aged 46-55) are likely to exhaust their retirement savings as well.2

Investing aside, what about the way we spend? EBRI research director Jack VanDerhei told TheStreet.com that beyond federal policy decisions, “[what is] even more important is to identify which of those households still have time to modify their behavior to achieve retirement security, and how they need to proceed." 2

What is a need and what is a luxury? Now here is where it gets interesting. In a new survey of more than 1,000 boomers conducted by MainStay Investments, more than half the respondents identified “pet care” and “an internet connection” and “shopping for birthdays and special occasions” as basic needs. Almost half checked off “weekend getaways” and “professional hair cutting/coloring” as basic needs. Perhaps the definition of a “basic need” is expanding. Or perhaps we have gotten so used to these perks that we can’t imagine living without them (and not spending money on them).3

Boomers are necessarily growing more pragmatic. The MainStay survey results hint at a shift in their financial outlook. The survey found that 76% of boomers were willing to work longer and save more in pursuit of more retirement comfort.3

Additionally, 40% of those surveyed said they will have to delay retirement in order to afford their desired lifestyle – and 47% said they would be willing to live in a smaller house to have more of the above luxuries/needs. A whopping 84% of respondents indicated they would be willing to allocate a portion of their assets so that they might have consistent lifelong income. However, just 52% of them were in contact with a financial consultant.3

We can learn from our elders. Look at the sacrifices made by the “greatest generation”. World War II demanded so much from Americans, not only in the theatres of combat but at home. For several years, new cars weren’t manufactured, travel was discouraged, and food, clothing and gasoline were rationed. The entire economy was rearranged, and more than 40 million Americans had to start paying federal income tax.4

This generation certainly understood delayed gratification. Yet with all that economic and political upheaval, its members collectively enjoyed the most comfortable retirement in American history (and perhaps the history of the world).

Will we pay for today’s lifestyle tomorrow? Financially, that is a risk we face. Many of us have not saved enough for retirement, and the financial markets have been especially volatile of late. So it only figures that spending less and saving more today could help us out tomorrow. Who knows - if some extra effort is put in now, we may end up with enough money to “live it up” later.

Citations
1 – sacbee.com/2010/08/29/2990176/baby-boomers-signal-shift-in-what.html [8/29/10]
2 - thestreet.com/story/10806795/even-wealthy-face-retirement-shortfall.html l7/15/10]
3 - freeerisa.com/news/fe_daily.aspx?StoryId={66D70228-CEFE-4782-9058-F2F2DAB68DD1} [8/5/10]
4 – nationalww2museum.org/education/for-students/america-goes-to-war.html [10/1/10]

The State of the Economy

2010-10-05T11:08:00.000-07:00

The question on the mind of many investors has to be: where is the U.S. and world economy headed? Are we moving toward a double-dip recession, or is the economy in the early stages of a long-term recovery?

At a recent industry conference in San Diego, financial advisors heard a keynote presentation by economist Todd Buchholz, former White House director of economic policy and, before that, economics professor at Harvard University. His presentation was extremely candid, describing the 2008-2009 economic meltdown as "the most tumultuous economic times any of us have ever been through," later noting that it was a period when the Beardstown Ladies investment club outperformed the leading brokerage house investment divisions, when Mattel, the company that makes little hot wheels cars, has more market value than General Motors, which manufactures real ones.

But haven't we emerged from complex economic times in the past without this lingering uncertainty about where things are going? Buchholz said that if you aren't sure what's going on, you aren't alone. Economists are discovering that their economic models have grown increasingly out of touch with the realities of the marketplace. One big reason is that the world has changed dramatically. "When the Berlin Wall was pulled to the ground, millions of workers who had been trapped on the other side were suddenly free to compete against you, me, somebody writing software in San Diego or assembling textiles in North Carolina," Buchholz told the audience. "When you add in India and China, you have billions of new workers in the global workforce, which pushes down labor rates and inflationary forces here at home."

Today, the American worker is caught between two negative forces. It's hard to negotiate for higher wages when more than a billion workers are competing for his/her job. At the same time, newly-industrializing nations like India and China are clamoring for commodities, which raises the world price of everyday items like gasoline, cotton, cement, metals, food and whatever is made from those things.

So where do we stand today? Buchholz applauded the fact that the Federal Reserve Board has taken interest rates to zero and (as he put it) "stomped on the money supply accelerator." He doesn't expect this to lead to high inflation down the road because wages will be kept low by global competition for jobs, and because the new money is actually offsetting the 2008-2009 destruction of value in the real estate markets and the private sector. Unlike some economists, Buchholz believes the fact that housing inventories and home starts are going down is a good thing, because it means that home prices will be primed to rise again.

Jobs? Buchholz conceded that the job market is brutal right now, but he thinks this is normal at this stage of a downturn. "Whenever you have a recession, companies fire people and cut costs," he said. "When business picks up again, as it has in the U.S., they don't immediately call them back. Instead, they say, hey, Bill, can you stay an extra hour? Or: hey, Joe, come in a bit early tomorrow morning?" Recent rises in temporary worker hiring and overtime may be a precursor to hiring back full-time employees.

The bottom line? Buchholz doesn't expect to see a double-dip recession. "Consumers are showing more resilience and more composure than most professional economists anticipated," he said. "This is not a rip-roaring recovery, by any means. But earnings are better than expected, corporate cash on hand is greater than expected. Instead of a recovery that would grow the economy at 4-5% a year, we could see 2-3% growth for a while."

Is there a danger to this cautiously positive vision? Buchholz said that what worries him most is a backlash against capitalism in the U.S. Congress, which might impose trade barriers to protect U.S. industries. "There were three terrible policy mistakes that the government made which caused the Great Depression," he told the group. Two of them are unlikely to be repeated: the Federal Reserve allowed the money supply to collapse by 30%--the opposite of what the Fed is doing today--and Congress raised taxes dramatically across the board. But the third mistake was passing significant tariffs, triggering retaliation from other companies--and suddenly world trade fell by 40%. "I am very concerned today about trade tensions brewing around the world," said Buchholz, "even among friendly countries with the U.S."

At the end, Buchholz said that the most pressing issue, in his mind, is getting our educational system back into the global top tier. He said that increasingly, wealth is measured by the application of education and intelligence, and the world is catching up to the U.S. "Whoever harnesses intelligence most," he told the group, "will prosper most in the 21st century."

Darkness Before Dawn?

2010-09-21T08:27:00.001-07:00

If you're feeling a bit gloomy about the economy and the markets, you have a lot of company these days. Despite U.S. stocks getting off to a positive start in the scary month of September, the news seems to be all about the possibility of a double-dip recession. One economist, David Rosenberg of Gluskin Sheff, has suggested that the recession never ended despite positive economic growth in the first half of 2010. Meanwhile, the put-call ratio, which compares the number of put and call options being bought and sold in the market, stands at an unusually bearish 1.28, according to the investment web site EquityClock.com. That means many more professional investors are betting against a market rise than for one.

All of this gloominess is leading investors to search for alternatives to corporate stocks--including gold and cash equivalents like CDs and Treasury bills. One online blog is titled "Nine Adult Entertainment Stocks to Weather the Recession;" it recommends Playboy and several providers of "mature entertainment" in hotel rooms.

There's only one problem with following the herd down this gloomy path, or stuffing your portfolio with gold and smut. In the past, people have been least optimistic about stocks and the economy right before the economy recovered and the markets produced higher-than-average returns. Business Week published its famous cover article entitled "The Death of Equities" in August of 1979, after the stock market had sustained serious losses and the long-term health of the U.S. economy was in doubt. The article noted a massive flight of investors from the market--right before one of the longest and most powerful bull runs the market has ever seen, which would take the S&P 500 index from just over 95 in 1979 to more than 1469 over the next 21 years.

And that gloomy put-call ratio? According to the investment encyclopedia Investopedia: "Many traders will consider a large ratio a sign of a buying opportunity."

If you want an extreme view of gloom and doom, then consider this quote from Time Magazine: "In a normal rebound, Americans would be witnessing a flurry of hiring, new investment and lending, and buoyant growth. But the U.S. economy remains almost comatose a full year and a half after the recession officially ended. Unemployment is still high; real wages are declining... The current slump already ranks as the longest period of sustained weakness since the Great Depression."

Sounds pretty awful, right? Except that this is a quote from Time's September 28, 1992 issue, talking about the gloomy prospects for the economy coming out of the 1990-91 recession. It reflected the mood of economists and the country at large--and, with the generous benefit of hindsight, we now know that this severe downer of an article was followed by a 16 year economic boom in the U.S. economy, without a single down year until 2008. The S&P 500 ended calendar 1992 at just over 435, and climbed, with more ups than downs, to just over 1576 at the peak in 2007.

There are good reasons to be cautious in today's economy and investment markets. We don't know what the markets are going to do tomorrow or next year. But the good news is that everybody else doesn't too.

Rosenberg on the idea that the recession never ended: http://www.businessinsider.com/never-ending-recession-2010-8

Death of Equities article: http://www.businessweek.com/investor/content/mar2009/pi20090310_263462_page_2.htm

Time magazine quote: http://www.time.com/time/magazine/article/0,9171,976602,00.html

S&P 500 data set: http://www.econstats.com/eqty/eqea_mi_1.htm

Equity Clock: http://www.equityclock.com/2010/09/12/stock-market-outlook-for-september-13-2010/

Investopedia: http://www.investopedia.com/ask/answers/06/putcallratio.asp

Developed and Overextended

2010-09-17T08:15:00.000-07:00

Conventional wisdom says that buying Treasury bonds is the safest place to put your money, and very nearly as safe is putting your money into the sovereign (government-issued) debt of other developed nations like Japan, England, Germany, Spain and Greece.

But I'm sure the first thing that came to your mind when you saw that short list of developed nations was: wait a minute! Didn't Greek government bonds nearly default last Summer? Wasn't Spain on some kind of watch list? Isn't the U.S. deeply in hock to China? And, of course, you're right; there is growing evidence that, after bailing out their economies after living beyond their means for decades, developed nations around the world have overextended their balance sheets.

This has produced one of of those strange anomalies that you see in the investment markets from time to time: what may be the safest government bond investments around the world also happen to be some of the highest-yielding.

Much of this is laid out in a fascinating new white paper authored by Rob Arnott and Research Affiliates, Inc. in Newport Beach, CA. Entitled "Debt Be Not Proud," the paper compares the total percentage of government debt outstanding for developed and emerging nations with other measures that hint at these countries' ability to pay back what has been borrowed. The report tallied up the total debt that developed nations--Europe, Japan, the U.S., Canada, Australia etc. currently have on their books--$16.7 trillion in all--and calculated that this makes up 89.5% of the world's total. Yet these developed economies make up only 62.4% of the global economic output (what economists call GDP), and have just 19.1% of the world's population.

That's right; countries with just 19.1% of the world's population have borrowed almost 90% of the world's total sovereign debt.

The figures for the United States alone are not totally comforting, but by at least one measure, we are not out of line. The U.S. population represents 5.9% of the world's people, but our economy makes up 23.6% of the world's GDP. Our share of the total debt: 23.2%, slightly less than our share if measured in terms of economic output.

The situation is completely reversed for the smaller, less-developed countries, and yet they're paying MORE in interest to borrowers than the larger, less-solvent nations. In aggregate, the government debt of emerging markets is paying more than twice what U.S. Treasuries are offering. The International Business Times recently estimated that 10-year bonds issued by countries like Malaysia, India, Peru and Hungary are yielding an average of 6% a year, compared with 2.5% for U.S. Treasury bonds of comparable maturity. The article notes that many of these less developed countries are in better fiscal condition than the nations whose banks teetered on the edge of collapse during the credit crisis and recession.

This assessment is confirmed by the Research Affiliates white paper, which points out that total government debt issued by emerging market nations--just over $1.95 trillion--equals 10.5% of the world's total. Yet these economies include 80.9% of the world's population and their economies generate 37.6% of the world's economic output. The paper argues that their balance sheets are, by these measures at least, much stronger than the countries you normally associate with economic strength. Indeed, the report notes that China and Russia have foreign reserves larger than their respective bond debt, while Saudi Arabia, Kuwait, Qatar, the Cayman Islands, Monaco and Lichtenstein all have zero net debt. Of the 45 emerging markets that are included in various indexes, only Taiwan and Singapore have as much debt as ANY of the G-5 countries, measured relative to GDP--and by most measures, those two countries really belong on the developed side of the equation.

What does this mean for investors? Emerging market debt is probably yielding a bit more than the fundamentals would justify. But the real story may be just how overextended the developed world's balance sheets have become following the recent economic trauma. Greece and Spain may be the headlines today, but the industrial nations that don't successfully reign in their borrowing in the next ten years could become the subject of scary headlines somewhere down the road.

Research Affiliates white paper can be downloaded here: http://www.researchaffiliates.com/index.htm

Emerging markets debt vs. Treasuries: http://www.ibtimes.com/articles/62196/20100914/emerging-markets-bonds-yields.htm

2010-09-14T10:21:00.000-07:00

OBAMA’S MIDTERM TAX PROPOSALS

The President recommends what amounts to a second stimulus package.

Many Americans are frustrated with the pace of the economic recovery; many Democrats are worried that their party will lose its majority in the House and Senate. As elections loom, President Obama has offered a new platform of tax initiatives for Congress to consider and potentially approve.

Extending the Bush-era tax cuts (for the middle class). President Obama wants to extend the EGTRRA and JGTRRA cuts of the last decade – but not to what Treasury Secretary Timothy Geithner referred to as the “most fortunate 2% of Americans.” Taxpayers who earn more than $250,000 would see those tax breaks disappear in 2011, while others would still benefit from them.1

Why not extend the Bush-era tax breaks for the demographic that is probably the most economically influential? “We don’t think that’s responsible economic policy,” Geithner commented during an interview on the FOX Business Network. He felt that preserving the cuts for the highest-earning Americans would be analogous to “borrowing hundreds of billions of dollars from our children.”1

Some contend that EGTRRA and JGTRRA have had broader impact. The Tax Foundation (a non-partisan Washington D.C. think tank which often criticizes tax policy) claims that the Bush-era tax cuts have saved the median U.S. family of four about $2,200 per year.2

However, an August Gallup poll indicated that only 37% of Americans wanted to keep the 2001 and 2003 tax cuts in place for all taxpayers. A plurality (44%) wanted to end them for those earning above $250,000, and 15% wanted them gone altogether. In partisan terms, 60% of the Democrats polled favored extending the cuts for all but the wealthiest Americans; 54% of Republicans polled wanted them retained for everyone.3

Offering tax breaks for capital spending and R&D. President Obama wants to allow businesses to write off 100% of their investment costs through 2011. He also wants to bring back the research tax credit for businesses – it would be expanded and made permanent.

What would a 100% expensing credit do for the business sector? On the right, Harvard economist Greg Mankiw calls it a “good idea” yet feels “the impact will be relatively modest.” In his view, this tax break amounts to “a zero-interest loan if [companies] invest in equipment. But with interest rates near zero anyway, the value of the loan is not that great.” On the left, UC Berkeley economist (and former Labor Secretary) Robert Reich thinks that “the economy needs two whopping corporate tax cuts right now as much as someone with a serious heart condition needs Botox. The reason businesses aren’t investing in new plant and equipment has nothing to do with the cost of capital. It’s because they don’t need the additional capacity.”4

Historically, the R&D tax credit has favored larger companies with long track records in research rather than smaller firms. Since 1981, Congress has allowed the R&D credit to sunset 13 times – it expired again at the end of last year. In the Obama proposal, the most popular R&D tax credit offered to businesses would rise to 17% from 14%. Many Silicon Valley firms and biomedical firms would love any break they can get – R&D credits in India, China and Brazil are all greater than in the U.S., and France's R&D tax credit is six times more generous than ours.5

Infrastructure projects to provide added stimulus. The President also wants to devote another $50 billion to infrastructure spending on roads, railroads and airports. The money would be used to repair 150,000 miles of highways and 4,000 miles of railways, among other uses.6 Some transportation industry analysts see it as merely a drop in the bucket – but also possibly a step toward the creation of a national infrastructural fund.

What might the effect be? Moody’s Analytics chief economist Mark Zandi thinks the proposed tax breaks would be “helpful but they're not going to jump start the economy, at least not in the next six to twelve months.” Interviewed by CNN, Zandi noted that “Investment spending has picked up very nicely, that's not the problem. The problem is a lack of hiring.”7

David Rosenberg, chief economist at investment bank Gluskin Sheff, is one voice more skeptical about the business tax breaks. He notes that “We already have business spending running at its fastest rate in three decades … how ridiculous is it for the government to be targeting tax relief to the one part of the economy that needs it the least?”7

Standard & Poor’s chief economist David Wyss feels that any new government stimulus is better than none, saying that “going cold turkey” in 2010 would severely damage growth.7 The debate on Capitol Hill over these tax initiatives will likely amplify as we head into fall.

Citations
1 – foxbusiness.com/markets/2010/09/09/treasury-secretary-geithner-urges-approval-economic-tax-package/ [9/9/10]
2 – boston.com/business/personalfinance/managingyourmoney/archives/2010/09/expiring_bush_t.html [9/10/10]
3 – theatlantic.com/business/archive/2010/09/59-of-americans-want-to-mess-with-bush-tax-cuts/62779/ [9/10/10]
4 – economix.blogs.nytimes.com/2010/09/07/reactions-to-obamas-business-tax-write-off-proposals/ [9/10/10]
5 – mercurynews.com/politics-government/ci_15990903 [9/5/10]
6 – newsweek.com/blogs/the-gaggle/2010/09/08/does-obama-s-infrastructure-proposal-have-the-right-priorities.html [9/8/10]
7 – money.cnn.com/2010/09/07/news/economy/obama_proposal_react/ [9/7/10]

The Three Factors of Fear

2010-09-07T10:09:00.000-07:00

Suddenly, in the past few weeks, the markets have looked a lot scarier to a lot of nonprofessional investors. Why? The answer probably has something to do with human psychology.

An Australian company called FinaMetrica has been giving lay consumers a scientifically-designed risk profile questionnaire for the past 12 years, helping financial advisors evaluate whether their clients are natural risk-takers or the kind of people who feel more comfortable if their money is stuffed safely in their mattress. A closer look at the responses, including 2,586 individuals who took the test before and after the recent bear market, shows something surprising: people were no more risk-averse after they had been clawed by the worst bear market since the Great Depression than they had been before.

Chances are, you're less excited about taking market risk now than you were in, say, the early months of 2007, so these results seem impossible. But the FinaMetrica people offer a plausible explanation for their results. They say that there are three components to your willingness to expose yourself to the ups and downs of the market. Two of them changed after the market downturn, and one of those two has recently changed again.

The first component is what might be broadly called your bravery; your willingness to take chances. This is the part that FinaMetrica measures directly, and its results show that if you were willing to skydive or take ski jumping lessons off the 90-foot hill before the Fall of 2008, you're just as excited by the idea of putting your life at risk now. The markets don't change who you are fundamentally.

The second component is your risk capacity; that is, how much financial risk you can afford to take. The 2008-2009 bear market might have caused a lot of us to rethink how early we might be able to retire, but a reprise of it might make us wonder if we can retire at all. So we become a bit more conservative in our investment approach.

Component number three is our risk perception. If we're watching the markets go up and up and up, then we see little risk and lots of upside. This is why, during the late 1990s tech boom, even the most timid individuals were throwing money into the market like drunken sailors. When the markets deliver the opposite experience, we look at stocks and see nothing but risk.

This last piece of the risk tolerance puzzle is, today, sending out alarm bells that may be echoing deep in your own psyche. The markets have just delivered the worst market performance in the month of August since 2001--which professional investors know is a random event. But now we're in September, that very same month when Lehman Brothers went down and AIG effectively declared bankruptcy back in 2008. It also happens to be the same month that the country experienced the shock of 9/11--which, among a lot of other things, sent the global investment markets reeling. Chances are you don't remember it personally, but September is also the month when the 1929 crash occurred.

So we had a dismal August that gave back the gains that the market had created in the first seven months of the year, and we're entering that scary month that we associate with recent financial disaster. Chances are, your logical mind knows that a reprise of 2008 is unlikely, and if you've been reading the papers, you know that corporate profits have been going through the roof in the American economy. But the emotional part of your mind looks at the market and conjures up every negative statistic, and sees far more potential risk than reward, and experiences fear even as you strap on your parachute at 15,000 feet and give an enthusiastic high-five to the instructor who is looking a little nervous.

We don't know whether the month of September will bring the markets back into positive territory or not, despite a lot of long-term analysis. But if you invest based on what the markets did recently, where does that lead you? August was negative, so get out in September. September is positive, so get back in. October is down; get back out; November is up, so you get back in--and over time, whether you follow this formula for months or years, or through bear and bull markets, you end up in the market when you would have preferred to be out, and out when it was better to be in.

As professionals, we try not to let greed OR fear dictate our portfolio composition. In the long run, that gives you an edge on others who are responding without understanding what, exactly, is driving them to the sidelines whenever stocks go on sale.

Overwork and Underspend

2010-08-31T09:44:00.000-07:00

People in other countries think we Americans are a little weird in our work habits, and they may be right. The web site Expedia.com has recently conducted its ninth annual survey of international vacations, telling us how many vacation days are taken by workers of different countries. French workers get the most--38 days a year, on average, although they typically only take 36 of them. Italians receive 31 days, although, on average, they leave 6 of them on the table.
Americans? The web site reports that "throughout the eight years that the Vacation Deprivation survey has been conducted, the U.S. has long-held the dismaying distinction of being the country with the worst vacationing habits." Our workers, on average, receive 13 days of vacation time, less than any country in the developed world, including Japan (15), Australia and Canada (19 apiece), Germany (27) and Britain (26). Even so, more than a third of Americans don't take their full yearly allotment of vacation days; in 2009, the Expedia study found, we give back a total of 436 million of them.
To make matters worse, there is plenty of evidence, on the beaches, in restaurants and theme parks, that many workers are still slipping in an hour or two of productive labor on their days off, calling the office on their cell phones or earnestly consulting their blackberries. Expedia says that 24% of employed American adults do this, but this may be an undercount.
Meanwhile, 37% of employed American adults report regularly working more than 40 hours a week.
This compulsive work ethic may help explain another phenomenon that American financial planners frequently talk about at conferences: how difficult it is for some of their clients to spend their hard-earned money once they've accumulated more than they're ever likely to need.
It's not hard to find advice online and elsewhere for people who overspend and can't stay on a budget, but there seems to be no support or therapy available for a sizable number of Americans who long ago got in the habit of accumulating, and even when they've achieved the point where they no longer have to work, they still do, meanwhile living not beyond their means, but significantly--sometimes uncomfortably--under it. For some of us, stopping to enjoy what we've accumulated seems to be as hard as fully disconnecting from the office.
Is this really a problem? If your goal in life is to increase America's GDP and raise our average worker productivity statistics, then no, everything is fine. But one of the most poignant statements ever made at a financial services conference was offered by a rabbi who was asked to travel to Oklahoma City to offer grief counsel to the families of the victims of the bombing incident.
"In my line of work, I regularly sit with people in their last hour of life," he said, "and often people will tell me, with the benefit of hindsight, looking over the course of their lives, that they wish they had spent more time with their loved ones or children, or doing things that gave them pleasure. Never once, in all my years," he added, "has anybody expressed regret that they didn't spend more time at the office."

Link to the Expedia article: http://www.expedia.com/daily/promos/vacations/vacation_deprivation/default.asp .

Boringly Powerful

2010-08-31T09:42:00.000-07:00

In the financial planning world, we're all trying to get better at what we do, and so whenever we get together at conferences, we trade thoughts and ideas and insights.
One of the most informative stories you're likely to hear came from an advisor who told the audience that he hosts yearly client appreciation dinners. Lately, he's been grouping the guests according to how long they've worked with him. At one table, those who've retained his services for the past five years. Another, people he's been advising for ten years. There's a 15-year table, 20 years, 25 and, at the table in front, people who he's worked with for 30 years.
"As I looked over at the 30-year table," he said, "I saw people who, when we first started out, were not wealthy and never expected to be." Now they're worth millions and (more importantly) able to live their life on their own terms.
One woman in particular caught his eye, a school teacher who had come to him in the first year of her teaching career. She had gotten into the not-unusual habit of spending a little more than she made. She was in debt, and one of the first things they talked about was whether she could afford an expensive car that she'd talked to the local dealer about.
The advisor's advice, which she took, was to buy a much more affordable, serviceable vehicle. He worked with her to pay off the credit cards, and over the rest of her teaching career, he encouraged her put the maximum into her 403(b) plan and save ten percent of her income and managed her growing retirement portfolio. The change in lifestyle was not dramatic, but it had a huge impact on her life: the year of this particular dinner, she had accumulated enough that she could afford to retire and travel the world.
"What's interesting," the advisor told the audience, "is that when she told the other teachers that she was going to quit work, their first question was: how can you afford it? The other teachers," he continued, "were still in the habit of spending a little more than they made, living year-to-year, and couldn't afford to retire."
Looking at this one person at the 30-year table, sitting among other people with stories like hers, he was struck by the huge difference a small course correction and a little financial coaching can have on somebody's life over longer periods of time: the difference between squeaking by financially and retiring with millions.
His first insight (which made the audience laugh) was: "I don't charge nearly enough for my services."
His second was: even though he worked hard to manage the portfolio efficiently, her rate of return was just about equal to what the market offered. That, in itself, is surprisingly extraordinary; according to data compiled by the Morningstar fund tracking organization, mutual fund investors, on average seem to get about half of market returns--because people tend to buy hot funds right before they cool off, and sell out of underperforming funds right before they hit a hot streak. By staying consistent with the schoolteacher's investments, the advisor added far more value than you'll likely find in any kind of fancy investment strategy.
But the real point--the most important insight--is that the difference between a table full of millionaires and their peers who spent thirty years spinning their wheels is a boringly powerful formula: consistent savings habits, avoiding debt, and living within their means in a world that constantly tempts us to overspend. When you reduce all the spreadsheet analyses, forecasts and formulas down to their purest essence, this is what most financial planners are trying to help people achieve in their lives. For the people at some of those 20-30 year tables, the real challenge now is how to use their excess money to have fun, and who they want to leave the excess to at the end of their lives.

Morningstar evaluations: http://news.morningstar.com/articlenet/article.aspx?id=340334 ; http://www.morningstaradvisor.com/articles/article.asp?docId=18710

Which Financial Documents Should You Keep on File?

2010-08-19T08:59:00.000-07:00

What should you store in one easily accessible place?

You might be surprised how many people have financial documents scattered all over the house – on the kitchen table, underneath old newspapers, in the hall closet, in the basement. If this describes your financial “filing system”, you may have a tough time keeping tabs on your financial life.

Organization will help you, your advisors ... and even your heirs. If you’ve got a meeting scheduled with an accountant, financial consultant, mortgage lender or insurance agent, spare yourself a last-minute scavenger hunt. Take an hour or two to put things in good order. If nothing else, do it for your heirs. When you pass, they will be contending with emotions and won’t want to search through your house for this or that piece of paper.

One large file cabinet may suffice. You might prefer a few storage boxes, or stackable units sold at your local big-box retailer. Whatever you choose, here is what should go inside:

Investment statements. Organize them by type: IRA statements, 401(k) statements, mutual fund statements. The annual statements are the ones that really matter; you may decide to forego filing the quarterlies or monthlies.

When it comes to your IRA or 401(k), is it wise to retain your Form 8606s (which report nondeductible contributions to traditional IRAs), your Form 5498s (the “Fair Market Value Information” statements that your IRA custodian sends you each May), and your Form 1099-Rs (which report IRA income distributions).1

In addition, you will want to retain any record of your original investment in a fund or a stock. (This will help you determine capital gains or losses. Your annual statement will show you the dividend or capital gains distribution.)

Bank statements. If you have any fear of being audited, keep the last three years worth of them on file. You may question whether the paper trail has to be that long, but under certain circumstances (lawsuit, divorce, past debts) it may be wise to keep more than three years of statemetns on file.

Credit card statements. These are less necessary to have around than many people think, but you might want to keep any statements detailing tax-related purchases for up to seven years.

Mortgage documents, mortgage statements and HELOC statements. As a rule, keep mortgage statements for the ownership period of the property plus seven years. As for your mortgage documents, you may wish to keep them for the ownership period of the property plus ten years (though your county recorder’s office likely has copies).

Your annual Social Security benefits statement. Keep the most recent one, as it shows your earnings record from the day you started working. Please note, however: if you see an error, you will want to have your W-2 or tax return for the particular year on hand to help Social Security correct it.2

Federal and state tax returns. The IRS wants you to hang onto your returns until the period of limitations runs out – that is, the time frame in which you can claim a credit or refund. The standard IRS audit looks at your past three years of federal tax records. So you need to keep three years of federal (and state) tax records on hand, and up to seven years to be really safe. Tax records pertaining to real property or “real assets” should be kept for as long as you own the asset (and for at least seven years after you sell, exchange or liquidate it).3

Payroll statements. What if you own a business or are self-employed? Retain your payroll statements for seven years or longer, just in case the IRS comes knocking.

Employee benefits statements. Does your company issue these to you annually or quarterly? Keep at least the most recent year-end statement on file.
Insurances. Life, disability, health, auto, home … you want the policies on file, and you want policy information on hand for the life of the policy plus three years.

Medical records and health insurance. The consensus says you should keep these documents around for five years after the surgery or the end of treatment. If you think you can claim medical expenses on your federal return, keep them for seven years.

Warranties. You only need them until they expire. When they expire, toss them.

Utility bills. Do you need to keep these around for more than a month? No, you really don’t. Check last month’s statement against this month’s, then get rid of last month’s bill.

If this seems like too much paper to file, buy a sheet-fed scanner. If you want to get really sophisticated, you can buy one of these and use it to put financial records on your computer. You might want to have the hard copies on file just in case your hard drive and/or your flash drive go awry.

Citations
1 - kiplinger.com/columns/ask/archive/2004/q0206.htm [2/6/04]
2 - ssa.gov/mystatement/currentstatement.pdf [1/10]
3 - irs.gov/businesses/small/article/0,,id=98513,00.html [4/8/08]

WILL THINGS IMPROVE FOR MEDICARE AND SOCIAL SECURITY?

2010-08-12T09:19:00.000-07:00

The healthcare reforms may lead to some short-term aid.

Could Medicare soon be in better shape? Maybe. At the start of August, Medicare’s trustees reported to Congress that Medicare should remain financially in the black through 2029, a 12-year improvement over last year’s estimate.1 They credited the healthcare reforms carried out by Congress and the Obama administration, citing greater efficiency that would translate to savings for the program.

However, there is no guarantee that Medicare will get to retain those federal savings, and no certainty that the savings projected by eliminating subsidies paid to private insurers will result.

Additionally, as Concord Coalition executive director Robert Bixby told the Los Angeles Times, “You can’t spend the same money twice.”2 It would seem unwise to use Medicare savings to expand Medicare coverage.

The Medicare trustees claimed that with the projected $192 billion in cuts to Medicare Advantage plans, home health care and hospitals across the next ten years, both the 75-year shortfall for its hospital fund and projected costs of the Medicare Supplementary Insurance program will shrink. More alterations will be needed to keep Medicare running in decades to come, the August report notes.1,3

Social Security’s fortunes could be enhanced in 2019. Why 2019? In that year, a new tax is scheduled to kick in for so-called “Cadillac plans” – health insurance packages with annual premiums of $8,000 or more for individuals or $21,000 or more for families. In 2019, insurers offering these plans will have to pay a 40% federal tax for every dollar spent over the $8,000 or $21,000 cutoff.1,4

That tax is projected to give Social Security a bit of relief. In 2010, Social Security is paying out more than it is taking in – and by previous federal estimates, that wasn’t supposed to happen until 2016. According to government forecasts, it can continue using payroll taxes and interest income to cover benefits until 2024.1

The projection that Social Security’s accumulated surplus will run dry in 2037 is unchanged. After 2037 (assuming things don’t change), Social Security’s program revenues would only cover about 75% of its expenses – so payroll taxes would have to increase, or benefits would have to be scaled down.1

Until both programs receive true long-term fixes, we will all have to make do with these short-term encouragements.

Citations
1 - nytimes.com/2010/08/06/health/policy/06medicare.html [8/5/10]
2 - latimes.com/news/nationworld/nation/wire/sc-dc-0806-social-security-20100805,0,6306255.story [8/5/10]
3 - csmonitor.com/USA/Politics/2010/0322/Health-care-reform-bill-101-What-does-it-mean-for-seniors [3/22/10]
4 - slate.com/id/2232434 [10/14/09]

Thinking About Investing

2010-08-09T08:13:00.000-07:00

Have you ever felt anxious about your investment portfolio? Who hasn't? A recent presentation at one of our professional conferences pointed out that five out of every six years will produce a stock market return sequence that either triggers anxiety or smacks your portfolio so hard that you wonder why you ever trusted the markets to begin with.

This is normal. Many people simply cannot handle stock market volatility, which is why the people who DO have, historically, tended to make more, over multiple ups and downs, than the people who kept all their money stashed away in Treasury bonds.

The question is: is there better way to handle the inevitable anxiety that comes with buying stocks?

Psychologist Ken Haman, who now works at the investment firm AllianceBernstein, says that the key is to stay rational. He points to studies of the human brain which shows that all of us actually have two brains. One is the neocortex, where all of your higher thought processes take place. Below the neocortex is a primitive brain which is about as smart as an alligator, and this lower brain happens to be where all of our survival instincts are housed. Whenever you experience panic, the primitive brain immediately takes over and shuts down the neocortex--which allows you to respond instantly (rather than thoughtfully) on those many occasions when a saber-toothed tiger is running in your direction.

So when the markets have spent the past quarter giving up all the gains they generated in the first quarter, what do you do? First, talk with somebody who actually listens to you about how you're feeling. Then start to engage your neocortex. What do you imagine is going to happen in the future? Then move to: is that what you think, or how it feels?

When your neocortex is functioning again, you can look at some of the past market declines and see what happened next, or look at your financial situation and take stock of your progress toward your financial goals.

People who can handle the stock market roller coaster without getting sick seem to have an unfair advantage over everybody else in the investment world. It seems to depend on which part of your brain is in control.

WILL THE BUSH-ERA TAX CUTS BE SAVED?

2010-08-02T09:33:00.000-07:00

What might happen if they went away? The debate is gaining volume.

In July, Treasury Secretary Timothy Geithner said that very few taxpayers would be affected if the landmark tax cuts of 2001 and 2003 expired. “I do not believe it will affect growth,” he calmly commented on ABC’s This Week.1 Many legislators and observers on Wall Street and Main Street are far less calm about their potential end.

Why should they end now? The federal government undeniably needs more revenue to help shrink the deficit, and Geithner feels that letting these tax cuts go would not trigger a double-dip recession, as they affect only 2-3% of U.S. taxpayers.1 However, many Republicans and more than a few Democrats see danger here as the richest Americans are also the most influential in job creation.

Deutsche Bank says “don’t do it”. Analysts at the banking titan recently offered their opinion: letting the Bush tax cuts expire would exert a drag of anywhere from 1.1% to 1.5% on U.S. GDP.2 The analysts warn that letting the tax cuts sunset as the federal stimulus winds down could create an economic scenario in the U.S. akin to the one Japan experienced back in the 1990s.

Grassroots momentum gathering. A new website created by the conservative League of American Voters (ReviewTheTaxCuts.com) is gathering signatures in conjunction with a TV ad campaign starring ex-presidential candidate Fred Thompson. This effort comes on the heels of Rasmussen and Gallup polls showing increased concern about taxes. In a mid-July Rasmussen Reports poll, 68% of Americans surveyed said taxes had become a “very important” issue. In April, 63% of Americans surveyed by Gallup felt their taxes would rise in 2011, the largest percentage to respond this way since 1977.3

A battle this fall in Washington. Republicans on Capitol Hill ardently want the tax breaks to remain in place. Democratic leaders in the Senate are striving to introduce a bill in September that would seek to preserve the cuts for the middle class only. Most Democrats seem to favor letting the tax cuts expire for households earning more than $250,000. House Speaker Nancy Pelosi (D-CA) is among the voices contending that they didn’t aid the economy much in the first place. Closer to the White House, Secretary Geithner feels that letting the cuts expire would send a message to the world that America is serious about tackling its deficit.3

This is an election year for many members of Congress, and it wouldn’t be surprising if some seats changed hands as a result of the influence of this issue.

More voices. Former Federal Reserve vice-chairman Alan Blinder favors letting the cuts expire. “We couldn't afford them then (and knew it), and we can't afford them now (and know it),” he recently told the Washington Post. “What might be the argument for retaining the tax cuts even though the long-run budget is deeply in the red? That America needs more income inequality? Seems to me we have enough.”4

MoodysEconomy.com chief economist Mark Zandi calls for moderation. Zandi feels the 2001 and 2003 cuts “should be extended permanently for families with annual incomes of less than $250,000 and should be phased out slowly for those making more than that.”4

If the sun sets on these cuts, taxes revert to pre-2001 levels. EGTRRA gave us six tax brackets (10%, 15%, 25%, 28%, 33% and 35%). If EGTRRA went away, so would the 10% tax bracket (the lowest bracket would become 15%) and the 25%, 28%, 33% and 35% rates would be respectively bumped up to 28%, 31%, 36% and 39.6%. (Households earning more than $379,650 would pay taxes at the 39.6% rate.)5

Then we have capital gains, of course. The ceiling on capital gains tax rates would move back up to 20% if these cuts expired. Additionally, qualified dividends would again be taxed at a taxpayer’s regular rate … which could be as high as 39.6% (see above).5

The death of EGTRRA would also wipe out the child tax credit, restore the “marriage penalty” (married joint filers wouldn’t be able to take 2x the standard deduction allowed for single filers) and bring back the phase-out for the personal exemption and itemized deductions.

There is much to consider. This will, most likely, become one of the hottest issues on Capitol Hill and across the country as we get closer to November.5

Citations
1 – nytimes.com/2010/07/26/us/politics/26geithner.html [7/26/10]
2 – cnbc.com/id/38467149 [7/29/10]
3 – blogs.wsj.com/washwire/2010/07/27/tax-cut-debate-grows-louder/[7/27/10]
4 – washingtonpost.com/wp-dyn/content/article/2010/07/30/AR2010073004758.html [7/30/10]
5 - forbes.com/2010/07/22/expiring-bush-cuts-affect-personal-finance-taxes.html [7/22/10]

Paying for College While Saving for Retirement

2010-07-26T08:47:00.000-07:00

PAYING FOR COLLEGE WHILE SAVING FOR RETIREMENT

These two objectives are not mutually exclusive.

It can be done. All across America, families are meeting a mighty financial challenge – the challenge of paying college costs with retirement potentially on the horizon. How do they do it? They go about it consistently; they also get creative.

First, make sure the priorities are in the right order.
Strange as it may sound, your retirement may need to take precedence over your child’s college education.

Think about it. Your son or daughter might qualify for student loans or financial aid. By the time they are 30 or 35, they will have the earnings potential to pay those loans back. Do you see any ads out there for “retirement loans” or “retirement aid”? For most, it is much harder to earn money at age 65 than at age 35. Because of this, many choose to allow the younger generation to assume the debt.

The following are some short-term and long-term ideas you may want to consider if you have college costs on your mind:

Save for college the DCA way.
While dollar-cost averaging is a useful way to build retirement savings, its merit often goes unrecognized when it comes to saving for higher education. If you could put $40 a month even in a basic savings account with a tiny interest rate, over 10 years that is approaching $5,000. That’s nothing to sneeze at, and will certainly help out. Move the money from a checking account each month into a savings account, or …

Consider a tax-advantaged college savings plan.
Contribute to a 529 plan, which features tax-advantaged growth and tax-free withdrawals when the withdrawn funds are used to pay qualified education costs. Not all 529 plans are the same – in fact, some of them will even provide a small cash “match” or “sign-up” bonus when you start your plan. Some 529 plans are even “prepaid” – that means you may be able to secure future tuition rates at current prices, usually at in-state public colleges. Another advantage of the prepaid plans – they are often guaranteed by the state.1,2

Exploit your credit card.
No, don’t pay for college with it … well, at least not directly. Some credit cards give you a cash-back rewards option. You may as well put the rewards toward college. Some of the major banks let you do this and so do online shopping websites such as Upromise.

Keep your income as low as possible in the base income year.
That is the calendar year that starts as your child is in the middle of his or her junior year in high school. That is the year when college financial aid departments start to look at a family’s earned and received income. If you can avoid taking capital gains or a distribution from a 401(k) or 403(b) in that year, that will keep your taxable income low. Will Roth IRA conversions raise eyebrows? Yes, they will.

However, don’t stop contributing to your own retirement savings accounts, and feel free to pay off consumer debts with the money from your savings and checking accounts – the assets in these accounts aren’t used in financial aid formulas.1

Let the college know if your financial situation has changed.
Has the value of your home fallen? Is your business netting you far less than it once did? Financial aid departments should be willing to review these developments and may be able to adjust aid for your student accordingly.

Make it a family affair.
In some cultures, it is common for all members of a family to pitch in on the down payment or mortgage payments for a home. Consider this strategy as your family saves for college. Close friends and family members may be willing (or even excited) to make ongoing contributions to a college savings plan for your child, and/or an annual “birthday” contribution. They may find giving such a gift to be much more meaningful and fulfilling than a mere toy or item of clothing.

In short, hunting for every scholarship or alumni connection you can and finding a great school at a reasonable price – that’s important. But it may be just as useful (if not more) to be both creative and consistent as you save for college. While it has always been a challenge, by putting some thought into it, most families and students can find ways to respond.

Citations
1 – articles.moneycentral.msn.com/CollegeAndFamily/CutCollegeCosts/financial-aid-101-how-to-get-more-cash.aspx [7/16/10]
2 - money.usnews.com/money/blogs/On-Retirement/2010/07/23/how-to-pay-for-college-without-sacrificing-your-retirement [7/23/10]

Chronicle of the Quarter

2010-07-23T11:05:00.000-07:00

Anybody looking at the zig-zag course of the stock market can see that the more closely you look, the more you miss what is actually happening. Daily price movements jump around in what appears to be a totally random pattern; up one day, down the next--and it's only when you step back and look at the year or multiple years can you see whether actual money is being made or lost.

But even knowing these things, it's hard not to look at the daily drama of price movements, and listen to the analysts explain how events in Turkey or Sri Lanka are causing investors to feel bullish or bearish. This quarter, I decided to immerse myself in the white noise and see of there are any conclusions one might plausibly draw from the bouncings of the tape. In retrospect, it was a boring three months that managed to give back a little more than the gains of the first quarter. But seem from the perspective of daily price movements, the past three months was a wild ride, full of drama and excitement.

Beginning: Things are looking good; yesterday, the Dow reached its highest point in a year and a half, and last year's 4th quarter showed a 5.6% jump in U.S. GDP. The S&P 500 is up around 1,169.43, following almost a two month rally from rally from 1,056 in early February. Those January Jitters seem to be behind us now; I'm optimistic that the next three months are going to add something to my net worth.

April 1-15: I was right to be optimistic; the Dow is up over 11,000, on (finally!) some good news on the jobs front and encouraging news about housing. And Apple is launching this thing called the iPad, which commentators say is juicing the markets, for some reason... Something called the regional manufacturing index was up 20.2 in April, which sounds bullish. Still plenty of time between now and midnight to start filling out my tax forms...

April 16-30: Maybe I spoke too soon; the rest of the month has been a bumpy ride to nowhere, down Friday, up Tuesday, flat Wednesday and Thursday, up Friday and Monday, down the rest of the week. Consumer sentiment is down. Darn consumers! Also worries that Greece may default on its debt. Darn Greeks! The government is looking into a criminal investigation of Goldman Sachs, which is also apparently spooking the market. Darn government! Yet despite all those annoyingly gloomy consumers and spendthrift Greeks, the markets are still about where they were on the 15th. Maybe the bad news is finally over.

May 1-7: What the hell was that!? Omigod... Omigod... The S&P 500 fell, like, 9% in an HOUR!?! That's the kind of performance you'd expect from something Goldman sold its customers and then shorted for its own profits. Is Goldman behind this somehow? Why isn't the government investigating those bastards? Okay, let's see, calm down. How bad can it get? If I project that hourly return out over the eight years until retirement--Omigod! The portfolio drops below zero sometime late tomorrow afternoon, and the next day I have a negative compounding net worth in, like, total free-fall, and that's 300 trading days a year times eight hourly scary free-fall drops times eight years--oh... Remember to keep breathing... At this rate, I'm going to be something like a hundred billion dollars in the red by the time I retire. And so will everybody else! I wonder who we'll have to write that check to...?

May 10-May 12: What a silly goose I was! Selling my entire portfolio might not have been the best decision of my life, now that the markets seem to have stabilized. The very day I jumped to the sidelines, I watched the biggest one-day gain in more than a year, up 404 points on the Dow, followed by a small decline and then another nice bounce. Sadder but wiser, I get my money back in the market before it can go up too much more without me.

May 13-May 20: Did I say go up? The Dow is back down under 11,000, apparently because the Euro is falling compared with the dollar. I thought a strong dollar was a GOOD thing, but apparently not... Also Germany banned short selling, which spooked American investors. Why? Now the markets are below where they were at the worst of that flash crash thing. Darn Germans! They're just killing my net worth.

May 21-June 7: What the hell? Friday: Market up, financials are healthy. Did the government stop investigating Goldman? Monday: market down because we're all apparently still worried about Greece. I'M not worried about Greece; why is everybody else? I'm just thinking out loud here, but maybe Greece could sell that Acropolis thing to the Germans or Chinese, and if that doesn't pay off the European banks, there's always Rhodes or Crete or something. Tuesday: a lot of see-sawing, but down again. Wednesday, down again on improving economic news, the Dow is down below 10,000 and am I the only investor in the world who thinks that improving economic news is supposed to be GOOD for stocks? The analysts are saying that it didn't improve ENOUGH, or as much as expected, or something. Thursday, back up, which means maybe people realized good economic news is good after all. Also China came to the rescue and said it wasn't going to dump its European bonds on the market. Apparently that Acropolis deal isn't panning out... Friday: another down day, this time with something about Spain defaulting on ITS debts. Whose next? Portugal? Italy? Monday: the Dow is down 1.1% because, get this, BP's "top kill" thing didn't stop the oil flowing into the Gulf of Mexico. Does that affect IBM's business prospects? Or General Electric's? Is Alcoa or Merck less profitable or viable because "top kill" didn't save the shrimp fishermen? Tuesday: up slightly. Wednesday: the Dow is below 10,000. Now we're worried about HUNGARY'S economy. Thursday: A tiny bit of sunshine. Friday: bad. Monday: Awful. Dow at 9,800. Time to get back out?

June 8-June 18: I guess I might have been hyperventilating a little bit the last two weeks; thank goodness the market has finally started that rally that I was expecting way back at the start of April. Has it really been that long? Time moves VERY slowly when you watch the tape every day, but now, at least, I can rest easy. Last Thursday, a bunch of economic reports came in, telling us that the economy is growing--and I'm glad to say that for once the market agreed with me that this was GOOD news. Tuesday was up, Wednesday was down apparently because Ben Bernanke waxed optimistic about the economy (and why is that a bad thing?), Thursday was up nicely and Friday saw an uptick in consumer sentiment. If anybody ever asks me about MY sentiment, I'm going to tell them I'm optimistic as hell even if I'm in a suicidal depression; that number seems to be inexplicably crucial to the health of my portfolio. Friday was down because of Greece, and Monday saw nice gains, including shares of BP. Go figure! Wednesday: flat, thanks to something about Spain not needing a bailout. Thursday: up, thanks to Spain selling some kind of bond issue without incident. Friday: up slightly. For the week: up 2.2%. Why can't every week be like that?

June 19-June 30: Maybe I should just shoot myself. Monday wasn't so bad, but then came down days on Tuesday, Wednesday, Thursday and Friday, as the Federal Reserve downgraded its economic outlook because of all that stuff going on in Europe. Darn Europe! Darn Federal Reserve! Monday was down too, and on Tuesday, the markets hit their lowest level for the year. The Dow is under 10,000, about where it was last November. Why? Get this: China's economic growth is slowing down. Am I the only person who thinks that less economic growth in China could mean more for US? That is how it works, isn't it? Omigod, last day of the quarter; I can't look, except that I have CNBC on all day, and it's just like the month; up and down and finally, in the last couple of hours, down 1.01%.

What an awful week! But it seems like every time I give up hope, the markets bounce back, like a sucker punch in reverse. Maybe I should be giving up hope sooner! Like, right now I'm thinking maybe I should shoot myself and end all this misery. Right after I answer the phone. Hello? Yes. Yes. I'm too busy right now to answer any polling quest--what? What did you say? My sentiment? I'm giddy! Ecstatic! Overjoyed! Yes, I know it's hard to hear the excitement in the tone of my voice, but trust me: optimism is flowing out of every pore in my body! On a scale of 1-100? At least a 104! No, make that 110. Whatever it takes to offset those depressed people you usually call. Yes. You're welcome. Call back any time. I'll be here tomorrow. Yes. Okay. Goodbye.

I can hardly wait to see how THAT plays out in the markets tomorrow morning.

FINANCIAL REFORM ROLLS OUT

2010-07-21T11:07:00.000-07:00

Much is hazy about the Dodd-Frank bill, even though it has passed.

Will the goals of the reform bill really be met?

On July 15, the Dodd-Frank Wall Street Reform and Consumer Protection Act passed 60-39 in the Senate. Next week, President Obama is expected to sign it into law.1

"Because of this reform, the American people will never again be asked to foot the bill for Wall Street's mistakes," the President said in mid-July. "There will be no more taxpayer-funded bailouts, period."

Will his words prove true? Some doubt it, while the bill's adherents think this is a great and necessary step to prevent another Wall Street crisis.

However, the step is still being taken - it remains to be seen how the reforms passed will be implemented, and some may be implemented to a lesser degree than intended. (And there is nothing about Fannie Mae or Freddie Mac in the 2,300 pages of legislation.)

Goal 1: No replay of TARP.

In brief, the bill gives federal regulators added power to ward off possible bank collapses. In the near future, these regulators could make too-big-to-fail determinations, set bank capital ratios and ceilings on financial industry CEO compensation, and rule on the types of proprietary investments allowable for banks. The idea is keep financial giants from turning into houses of cards. However, conservatives warn that too much regulation could prompt U.S. financial firms to conduct increasing amounts of business in nations with less-regulated financial markets.2

One of the most vocal opponents of the bill was

House Minority Leader John A. Boehner (R-OH), who likened the legislation to "killing an ant with a nuclear weapon." Boehner thinks that the bill "institutionalizes" the too-big-to-fail notion.1 Other conservatives agree and think that the federal government might keep the bailout option around for big banks when it should be throwing it away.

Goal 2: Consumer education and protection.

The bill creates a Consumer Financial Protection Agency within the Federal Reserve - a new bureau to watch over mortgage lenders, credit card companies and consumer banking practices. The idea is to prevent things like "liar loans" and specious fees. Detractors think the CFPA and its regulations will actually bear a negative byproduct - they think businesses and individuals will have a tougher time getting credit. How big a reach will the CFPA have? How much autonomy will it have? That hasn't been defined.

Goal 3: Transparent derivatives trading.

Most of the trading in the derivatives market happens out of the public eye. No more, according to this reform bill: it will take place on public exchanges, the better to pinpoint systemic risks. Almost everyone applauds this measure.2

Goal 4: Identifying bubbles.

No just stock or commodity bubbles, but also real estate bubbles and bubbles in any economic sector.A new agency, the Financial Stability Oversight Council, will seek to find them. No one knows its regulatory scope yet.2

Goal 5: Double-checking credit ratings.

Why did Wall Street fall in love with derivatives? Didn't the credit ratings agencies warn banks about the peril of such investments? Allegedly not. So an Office of Credit Ratings will be created as part of the Securities & Exchange Commission. The OCR will monitor the big Wall Street credit ratings firms and watch out for possible conflicts of interest affecting ratings.3

Interesting minutiae.

When President Obama signs off on the Dodd-Frank bill, it will kill the Office of Thrift Supervision - that's the office that was supposed to prevent bank collapses. As we can tell by the failure of Washington Mutual and IndyMac, the "supervision" may not have been all that focused. The Office of the Comptroller of the Currency will pick up its duties. (The Dodd-Frank bill also has a nice wrinkle for former IndyMac accountholders: it boosts the FDIC coverage on those accounts to $250,000, retroactive to before IndyMac went bust.)1

Another consequence of the Dodd-Frank bill: all TARP payments will end immediately. And don't look for a new futures market in the offing based on Hollywood box office receipts - the big movie studios wanted to try and make that a reality, but the reform bill won't allow it.1

Citations

1 - latimes.com/business/la-fi-financial-reform-20100716,0,2303004.story [7/16/10]

2 - articles.moneycentral.msn.com/Investing/Extra/what-financial-reform-does-and-does-not-do.aspx [7/15/10]

3 -abcnews.go.com/Business/financial-reform-bill-means-big-consumers/story?id=11012343 [6/25/10]

FINANCIAL REFORM: THE TABLE IS SET

2010-07-01T11:03:00.000-07:00

Next month, President Obama will likely sign a bill into law ordering changes in the ways banks, credit card issuers and mortgage lenders interface with consumers. Here are the key features of the financial reform agreement that the Senate and House of Representatives came to on June 24, with a vote pending.

#1: The Bureau of Consumer Financial Protection. This new consumer agency answering to the Federal Reserve would supervise mortgages, credit cards, student loans and the banks, credit unions and private lenders that issue them. Institutions holding less than $10 million in assets wouldn't be regulated by the BCFP - but they would have to follow its rules. The BCFP would aim to make these products easier to comprehend for consumers and crack down on any possible deceptive practices.1,2

#2: See your credit score for free. If you are turned down for a mortgage or a loan, the new reforms would give you the power to see the credit score supplied to your lender. Right now, you can request three free credit reports each year but you can't see your actual score.1,2

#3: Tougher rules for mortgage lenders. These rules should have come into play years ago, of course, but better late than never. Mortgage lenders would need to verify the assets and income of borrowers, thwarting any surreptitious comeback for "liar loans". Loan officers and mortgage brokers would not be able to receive bonuses for guiding you into this or that loan. Borrowers with ARMs and other types of complex home loans could not be hit with prepayment penalties should they want or need to pay off a mortgage before the end of its term.1,2

#4: Retail minimums for the use of credit cards. Score one for retailers, who don't want to see people make $2 credit card purchases when the swipe fee alone cancels out the revenue. Under the new legislation, stores could set minimums for credit card use. The minimum transaction level could be as high as $10 if a store chooses; the Federal Reserve could raise that $10 limit on the minimum with time.1,2

Alternately, stores could offer consumers discounts if they pay for items with cash or debit cards. (They wouldn't be able to vary the discounts for different debit cards.)2

Additionally, the proposed reforms could allow colleges and universities and the U.S. government to set maximums for credit card transactions.2

#5: Brokers could be held to a fiduciary standard. Under the new reforms, the Securities and Exchange Commission now has the chance to hold brokers to the same fiduciary standard common to financial advisers - that is, investment brokers would have to put a client's best interest first and not simply recommend a "suitable" investment to a client. That new standard may or may not come into play, however; the SEC is undertaking a six-month study to see if such a rule would amount to regulatory overlap or not.3

#6: The "Volcker Rule" would be put into play. This is the rule that would prevent banks from trading with their own money. It would kick in with small concessions. While the reforms would halt most proprietary trading by banks, some limited investment would be permitted - they could provide up to 3% of a fund's equity, and invest up to 3% of Tier 1 capital in hedge or private equity funds.4

The big banks got another key concession from Congress: they don't have to get rid of their swaps-trading desks (some legislators had contended that this decision would drive such trading to foreign markets). They can still be involved in foreign-exchange and interest-rate swaps dealing.5

#7: An Office of Credit Ratings would appear. It would oversee the actions of Moody's, Standard and Poor's and other big names, and one of its objectives would be to flag potential conflicts of interest that could influence ratings judgements.1

#8: The SEC would no longer regulate equity-indexed annuities. The promotion and sale of these annuity contracts has generated much flak in recent years. Interestingly, they would be overseen by state insurance regulators if the reform bill passes, and treated strictly as insurance products.2

Now, what about Fannie Mae and Freddie Mac? Good question. Nothing made it into the final reform bill to address that dilemma. Some analysts expect another bill will emerge in 2011 to propose their restructuring or elimination.5

Citations

1 -abcnews.go.com/Business/financial-reform-bill-means-big-consumers/story?id=11012343 [6/25/10]
2 - cnbc.com/id/37921188 [6/25/10]
3 - nytimes.com/2010/06/26/your-money/26money.html?pagewanted=2 [6/26/10]
4 - businessweek.com/news/2010-06-25/banks-dodged-a-bullet-as-congress-dilutes-rules.html [6/25/10]
5 - cnbc.com/id/37927853 [6/25/10]
6 - reuters.com/article/idUSTRE65O1BK20100625 [6/25/10]