Wednesday, August 19, 2009

Healthcare & Taxes

FOR THE FIRST TIME IN five weeks, the major indices took a break. By the numbers, for the week ended Friday, August 14, 2009, the Dow Jones Industrial Average closed at 9321, down 49 points, or 0.5%. The Standard & Poor’s 500 closed at 1004, down 6 points, or 0.6%, and the NASDAQ Composite closed at 1985, down 15 points, or 0.7%.

The Open Market Committee of the Federal Reserve decided to make no changes to interest rates this last week. The Fed did say it would slow its purchases of long term treasuries, and allow the purchase program to expire in October. The Chinese markets have backed off some over concern about tightening credit.

Both Germany and France reported GDP growth in the second quarter. Overall, Eurozone GDP contraction was 0.1% during the second quarter, compared to an expected contraction of 0.4%.

Nestle reported a 3% drop in first half profit, missed its sales forecast, and withdrew its annual revenue target. Kraft forecast a 4% growth in revenue for the year and raised its profit target, while Unilever reported a 4.1% growth in second quarter sales.

CIT is now effectively under government control, apparently needing permission for something as basic as going to lunch. The International Energy Agency hiked its 2009 and 2010 consumption forecast, citing growing demand in Asia, and in particular China. In spite of this, demand is expected to be about 3% lower in 2009 than in 2008.

GM said its new Chevy Volt should get 230 MPG in the city. Sounds like one of those cars you put on instead of get in. The solar energy industry is now awash in modules and cells, bringing the price of products and installation services down. This shift in supply and demand has happened in part because Spain, which accounted for 50% of all solar installations worldwide last year, cut its solar subsidy.

If you are a commercial or residential tenant, this may be a good time to negotiate a new lease. Landlords seem to be amenable to working with you, as they prefer some cash flow to no cash flow. Speaking of which, cash flow beats assets every day of the week. Have you ever tried to pay for groceries with the title to your home, or pay your electric bill with the title to your car?

The administration may be getting the message – Americans don’t want federales controlling delivery of healthcare. Stay tuned for more on this very emotional issue.

On the tax front, according to Kiplinger’s Tax Letter, the IRS has ruled, in a PLR, that all gain realized on metals ETFs is taxed as ordinary income. For IRAs, a different interpretation, as long as the IRA is held by an independent trustee. This means you can own metals ETFs in your IRA without running afoul of the collectibles rules. As a refresher, IRAs can own just about anything except life insurance, shares of Sub-S corporation stock, and collectibles. If you are a client of CAG, your IRA is held by an independent trustee.

In other tax news, open-air parking structures must be depreciated over 39 years. An Appeals Court has upheld the three year statue of limitations on the IRS’ ability to go after misstated returns. Timber owners who enroll in the federal Forest Health Protection Program can get cost sharing payments that cover up to 75% of the cost of implementing a pest control plan.

In a PLR, the IRS let a couple with several rental properties have time to elect to treat them as a single entity, helping them avoid passive loss rules. This in the case of real estate professionals, who are those who work at least 750 hours a year in the real estate business, and are materially involved as landlord, broker, or developer.

UBS values its business in the US to the extent that it is rolling over for the IRS. As many as 150 families may face charges.

The top 1% of all tax filers paid 40.4% of all federal income taxes in 2007, up from about 29% 20 years ago. These taxpayers reported just 22.8% of all income. The highest 5% paid 60.6% of all federal income taxes, while reporting 37.4% of all AGI. The bottom 50% of all filers paid just 2.9% of the total income tax bill. Just more evidence that the wealthy don’t pay enough in taxes.

According to Russ Alan Prince, in his book “The Influence of Affluence”, Steve Bell of Seattle had a solid business as a subcontractor, building out dentist’s offices. That is, until the general contractor was arrested for cocaine distribution. Steve was left with more than $100,000 in debt to a vendors and subcontractors. His attorney recommended bankruptcy. Instead, Steve went to his creditors, promised to pay them all, and went to work. Six years later, all debts are paid, and Steve has a thriving kitchen and bath remodeling business, complete with showroom.

Quote of the week:

“Every adversity, every failure, every heartache, carries with it the seed of an equal or greater benefit.”
Napoleon Hill

Wednesday, August 12, 2009

Ogilvy's Creativity

ONCE AGAIN, THE MAJOR EQUITY indices closed up. By the numbers, for the week ended Friday, August 7, 2009, the Dow Jones Industrial Average closed at 9370, up 199 points, or 2.2%. The Standard & Poor’s 500 closed at 1010, up 23 points, or 2.3%, and the NASDAQ Composite closed at 2000, up 22 points, or 1.4%.

Both the NASDAQ Composite and the S&P 500 broke new technical barriers, closing above 2000 and 1000 respectively. You can find a variety of opinions as to what that means. On the employment front, July job losses retreated, reaching their lowest level since August 2008, bringing the official unemployment rate to 9.4%.

Retailers had a tough July, with sales down pretty much across the board. Auto dealers enjoyed a robust month, thanks to the CARS program, with Ford reporting its first sales increase in two years. Mark Muller, of Max Motors in Butler, Missouri had to withdraw his offer of a free AK47 with each new car purchase. He ran out of cars.

Google CEO Eric Schmidt is leaving Apple’s board. The Institute for Supply Management indices for July for manufacturing and service sectors were still below fifty, though they have been increasing.

It’s been ten years since the passing of David Ogilvy, recognized as one of the premier creative minds of the 20th century. His thinking was behind such notable campaigns as Dove soap being marketed as 25% cleansing cream. His advice for building and running a business included:

§ Remember the old Scottish motto: “Be happy while you’re living, for you are a long time dead”.
§ If you have to reduce company payroll, do so only after you have cut your own compensation, and that of your other officers.
§ Define your corporate culture and principles in writing. Don’t delegate this to a committee. There are no statues to committees.
§ Stop cutting the quality of your products in search of bigger margins. The consumer always notices – and punishes you.
§ Never spend money on advertising which does not sell.
§ Bear in mind that the consumer is not a moron. She is your wife. Do not insult her intelligence.

Ken Cage of Philadelphia is having a banner year. His firm, International Recovery and Remarketing, repossesses planes, boats, and RV’s. According to Ken, the company’s 500 repos in 2008 were triple the previous two years combined. His company is set to double the 2008 number this year. Most owners don’t contest his presence, as they are aware of the situation. Of course, Ken and his team must find the asset without tipping off the owner, as many owners would hide the plane or boat.

Quote of the week:

“Some see private enterprise as a predatory target to be shot, others as a cow to be milked, but few are those who see it as a sturdy horse pulling the wagon.”
Winston Churchill

Thursday, August 6, 2009


ONCE AGAIN, THE EQUITY MARKETS added gains. By the numbers, for the week ended Friday, July 31, 2009, the Dow Jones Industrial Average closed at 9171, up 78 points, or 0.9%. The Standard & Poor’s 500 closed at 987, up 18 points, or 0.8%, and the NASDAQ Composite closed at 1978, up 13 points, or 0.6%.

Microsoft and Yahoo have agreed to join forces to take on Google, which should make for an interesting fight over market share. The major oil companies reported lower earnings, with year over year demand down, and supplies at nineteen year highs. U.S. home prices rose in May for the first time in three years. Alcatel-Lucent reported a second quarter profit, it’s first since the companies joined forces in 2006.

On the tax front, its more of the same, with Congress toying with surtaxes. Several proposals are being offered, with a three tiered approach being favored by the House. Under this Robin Hood scheme, singles and joint filers with AGI’s above the $280K/$350K mark would pay an extra 1%, filers with AGI’s above $400K/$500K would pay an extra 1.5%, and filers with AGI’s above $800K/$1 million would pay an extra 5.4%. By the way, Robin Hood was a common criminal.

For those of you in California who have been issued IOU’s instead of tax refunds or payment for services – good news. Interest on the IOU’s is tax free, according to the IRS. These IOU’s are treated as muni’s for tax purposes.

According to Kiplinger’s Tax Letter, random audits of S corporations have been profitable for the IRS. Areas of noncompliance targeted for future scrutiny include travel costs, meals and entertainment, car and truck expenses, and taking profits as dividends instead of salary, among others. The war on capitalism continues. Once again,

The IRS can seize health savings accounts for back taxes. In a private letter ruling, the agency says the IRS has power to attach these assets. Even worse, these distributions will be subject to income tax, and a tax penalty. Next up, the little black van.

Millions of words have been spoken and written about the administration’s proposed national health care plan. In lieu of opinion, let’s look at what is actually proposed under the plan. Based on several analyses of the plan which we have read, here are some highlights.

According to Dr. David Janda, the healthcare plan is based on rationing and denying care. A National Health Care Board will oversee the plan. The plan mandates the creation of Federal Coordinating Council For Comparative Effectiveness Research. One of this Council’s goals will be to “slow the development of new medications and technologies in order to reduce costs”.

Doctors and hospitals will be overseen by The National Coordinator For Health Information and Technology. This coordinator, or its employees, will “monitor treatments being delivered to make sure doctors and hospitals are strictly following government guidelines that are deemed appropriate”. “Doctors and hospitals not adhering to guidelines will face penalties.” According to those in Congress, penalties could include large six figure fines and imprisonment.

According to Section 102 of the plan, “Protecting the Choice to Keep Current Coverage”, it will be illegal to maintain private insurance when someone changes jobs, retires, or at similar life events. According to Section 1233, “Advanced Care Planning”, Americans over age 65 will be required to go to mandated counseling, the goal of which is to help end life sooner.

QALYs, or Quality Adjusted Life Years, have been discussed in medical journals and circles for decades. America’s Affordable Health Choices Act of 2009, the national healthcare plan, would adopt QALYs as a standard by which to gauge whether someone is deserving of treatment. In effect, reducing life to a quantitative analysis. If you can make an economic contribution, and your treatment won’t unduly burden the system, you get treatment. If you no longer make an economic contribution, or the cost of your treatment outweighs your potential economic benefit, your needs and treatment are ignored or denied – put on the back burner. To make a very gruesome comparison, isn’t that what Hitler did, with a very sadistic racist twist?

If you would like supporting documentation for these comments, or a link to the entire 1018 page document, you are welcome to email us, and we will forward it to you.

It was a pleasure to watch 59 year old Tom Watson make a run for the British Open title. When 30 year olds win, we stand in awe. Tom inspires us, gives us confidence that we too, though our body creaks from time to time, can still charge the hill.

Quote of the week:

“All that is necessary for evil to triumph is for good men to do nothing.”
Edmund Burke