Wednesday, September 30, 2009

Nuclear Toys

EQUITY MARKETS TOOK a break this last week. By the numbers, for the week ended Friday, September 25, 2009, the Dow Jones Industrial Average closed at 9665, off 155 points, or 1.6%. The Standard & Poor’s 500 closed at 1044, off 24 points, or 2.2%, and the NASDAQ Composite closed at 2090, off 42 points, or 2%.

The Fed’s Open Market Committee held interest rates steady, and suggested that the economy is slowly improving. Sales of existing homes dropped 2.7% in August, while new home sales increased 0.7%. New home inventory stands at 7.3 months, down from a high of 12.4 months in January. Realtors continue to work for renewal of the home purchase credit, which applies to homes purchased by November 30, 2009.

Dell has announced plans to buy Perot Systems for $3.9 billion, in a move to compete with HP. A123 Systems, the government subsidized maker of lithium-ion batteries, went public last week, with its shares jumping 40% on its first trading day. This is good news for investment bankers and those with founders stock, a little less so for those who purchased at opening.

In other economic news, the index of leading indicators rose 0.6% in August, the fifth consecutive monthly gain. Durable goods orders fell 2.4% in August.

In 2010, the income limitations for Roth conversions go away. Many professionals will suggest converting your IRA balances to a Roth beginning in 2010, and paying income taxes. Our advice to clients will be to wait for a couple of years, to determine if Congress is going to do away with the tax deferral features of many types of plans, including IRAs. No reason to pay the tax now, if in fact Congress does away with the tax free benefits of Roth IRA distributions.

Kao-ling, or China Clay, known in the U.S. as kaolin, a clay mineral, is found in great quantities in four places around the world – China, Brazil, Australia, and Middle Georgia. It is found to a lesser degree in the UK, France, Germany, India, and several other places. It has many uses, and is one of the key components of porcelain.

Several counties in east central Georgia had a strong grip on kaolin mining and processing beginning in the first half of the 20th century, as kaolin’s industrial uses were developed. During the 80’s, commercially viable deposits were found in the mountains of Brazil, providing competition for the Georgians. While kaolin has long been used in China to make China and porcelain products, it has remained commercially unviable in China due to political considerations.

Mahmoud Ahmadinejad, president of Iran, is on a mission from Allah to destroy the infidels, starting with Israel and the U.S., expecting this to usher in the coming of the 12th Imam. Acquisition of nuclear capabilities will speed up this process, as far as he is concerned.

We expect Iran to announce viable nuclear toys by the end of 2010. It wouldn’t surprise us to see Israel attack Iran when this happens, as like all of us, they have a distinct interest in self-preservation. The price of oil, and most likely other natural resources, should jump when this happens, as large deposits of the world’s oil reserves become unavailable due to political turmoil.

The European Union, United Nations, and many in our own State Department dismiss these scenarios, confident that we can have conversation with Ahmadinejad that will cause him to stand down. Many thought the same thing of Hitler 70 years ago. Either there is a distinct lack of understanding of history, or those with decision making authority don’t understand that ultimately, the terrorist’s issues with Israel go back to Isaac and Ishmael. I suspect it’s the latter, as stories of Isaac and Ishmael don’t fit neatly with the worldview of many.

Quote of the week:

“If you want to feel rich, just count the things you have that money can’t buy.”

One Man With Courage

ONCE AGAIN, EQUITY INDICES continued their journey up the wall of worry. By the numbers, for the week ended Friday, September 18, 2009, the Dow Jones Industrial Average closed at 9820, up 215 points, or 2.2%. The Standard & Poor’s 500 closed at 1068, up 26 points, or 2.5%, and the NASDAQ Composite closed at 2132, up 52 points, or 2.5%.

Worry over the relationship between stock prices and underlying business fundamentals continues. With so much variability in how numbers can be reported, it’s often difficult to come to meaningful conclusions. Adherence to a discipline, while continuing to study, back test, try, fail, and adjust, seems to be the best approach to doing well. This applies to arenas outside the financial markets as well.

Mark Hulbert, in a recent column, looked at bond funds versus stock funds during 2009. Mark said that bond newsletters are more bullish now than they have been since early 2001. Over the last six months, bond funds have had net inflows of $214 billion, and equity funds have had net inflows of $10.5 billion, according to TrimTabs Investment Research. This bond inflow is twice as much new money as went into bond funds over the previous four years combined.

This is interesting insight into investor behaviour, as the major equity indices are up about 50% from their March 2009 lows. Keep in mind though, that this 50% increase is roughly 20% of the market highs in October 2007.

Fed Chair Bernanke said his numbers say the recession has ended. It is true that employment is a lagging indicator. Retail sales were up 2.7% in August, the biggest monthly increase in three years. Auto incentives, gas prices, and school shopping are credited with helping to spur sales.

Since the U.S. has put tariffs on Chinese tires, China is preparing to levy tariffs on U.S. chickens. There must be some good one-liners in this story somewhere.

In economic news, the Producer Price Index was up 1.7% in August, and CPI was up 0.4%, both larger than expected. Business inventories were down 0.1% in July, the eleventh consecutive monthly decrease, which means someone will need to start making something soon. Industrial production was up 0.8% in August, the first increase since December 2007. New home construction was up 1.5% in August, which is a move in the right direction.

Boston Consulting Group recently predicted that worldwide wealth wouldn’t return to 2007 levels until 2013. They also found the number of millionaires down 18%. According to David Kelly, chief economist at JP Morgan, the stock market, on average, moves 0.81% daily. During the fourth quarter of 2008, average daily volatility was 3.7%.

Many investors over the last two years have been reassessing how and whether they work with financial advisors. What is unclear to many investors is the business relationship between themselves, the advisor, and the advisor’s employer.
Many financial advisors today work for large brokerage or insurance firms. As an agent for and representative of these firms, their first responsibility is to move the products of the firm for whom they work.

The determining criteria for whether consumers should buy a particular product from an agent or rep is called “suitability”. If, based on the information the rep collects from the consumer, the product is suitable, then the consumer can buy, and the rep can sell, the investment or insurance product. The relationship remains, for the most part, a customer/sales person relationship, and in every case of which I’m aware, these reps cannot serve as fiduciaries.

Consumers’ ability to receive from this rep or agent unbiased financial counsel is completely dependent on the rep. For many reps and agents, the lure of substantial commissions makes it easy to rationalize recommendations that serve them first and consumers second. The good news is that there are solid, independent reps in the marketplace that do serve their clients well.

A much smaller group of advisors serve as fiduciaries. These advisors, and their firms, are regulated by the SEC and individual states, though under a different Act of Congress than registered reps. Those firms and individuals who serve as fiduciaries have sworn to always place the client’s interest ahead of their own, and they accept no commissions on the sale of products. All revenue at these firms comes from clients.

Culturally and structurally, fee-only fiduciary firms look more like other professional service firms, such as law, accounting, and engineering, than they do product sales organizations. We have found that the only way to provide completely unbiased, objective, independent advice and counsel is to be a fee-only firm that serves our clients as fiduciaries.

Quote of the week:

“One man with courage makes a majority.”
President Andrew Jackson

Wednesday, September 16, 2009

Corp vs Personal Tax Rates

EQUITY INDICES CONTINUED their advance, as all three major indices were up. By the numbers, for the week ended Friday, September 11, 2009, the Dow Jones Industrial Average closed at 9605, up 164 points, or 1.7%. The Standard & Poor’s 500 closed at 1042, up 26 points, or 2.6%, and the NASDAQ closed at 2080, up 62 points, or 3.1%.

Commentators of every stripe have offered opinions about the direction of, and long and short term outlook for, the stock market. Gary Shilling is still calling for an S&P 500 of 600 by year-end. Others are suggesting the S&P 500 will end the year north of 1200.

Mark Sunshine recently suggested that the five major Wall Street firms needed to have the S&P 500 close up 10% for the year. Mark said solid returns for 09 were one way these firms could encourage trillions of dollars from the sidelines to return to the market. Much of their profitability depends on trading commissions from these currently dormant dollars, so they have a vested interest in stock prices going up.

Sir John Templeton, when asked by a reporter for his observations about the market, simply said “The market goes up, and the market goes down”.

In a recent speech before a joint session of Congress, President Obama endorsed a government run insurance plan. Steve Jobs has returned to Apple, starting with an appearance at a product event. GM is selling a majority interest in its European Opel and Vauxhall operations. Cadbury is in play, with Kraft in the hunt to make the purchase.

FedEx said first quarter profit will exceed guidance, thanks to better than anticipated international volume, lower fuel bills, and cost containment. FedEx CFO Alan Graf said demand deterioration has slowed, and that earnings for the quarter should be $0.58, compared to expectations of $0.43.

According to the Bureau of Labor Statistics (BLS), about 15 million people are out of work, with 5 million having been unemployed for six months or more. Employment opportunities abound in government services, education, and energy, though location matters. The current geographic hotspot is Washington DC, not that this is news. The federales expect to add 273,000 jobs in the next three years. Other cities that have a good openings-to-seekers ratio include Jacksonville, Salt Lake and New York City, Boston, Austin, and Oklahoma City. This according to Bao Ong, writing for Marketwatch.

Congress is hard at work, looking for new and creative ways to pick your pocket. One tax detail expected to pass – we will no longer be able to use flex spending and other such accounts to pay for over the counter medicines. Thankfully, the IRS has lost a Tax Court battle that attacked transfers of interests in one-person LLC’s. The IRS has chosen to delay imposing a seven-year recovery period for investment in ethanol plants, allowing investors to use a five-year recovery for any property placed in service before the ruling.

If you are a business owner, you would do well to watch the maximum income tax rates. It is very likely that the personal federal income tax rate will soon be close to 40%, plus a variety of surtaxes for high income earners. With the current corporate tax rate at 35%, it may make sense to use a regular corporation for business purposes. This is especially true if tax considerations play a major role in determining corporate structure.

The IRS is looking for informants to help identify those who are getting the health insurance subsidy and shouldn’t be. The IRS is also tapping state and local real estate transfer records to identify those who don’t pay gift taxes, but should be. This brings to mind images of brown shirts and black vans. Wouldn’t a national sales tax be simpler? Good grief.

States are using Facebook and MySpace to identify tax evaders. The IRS will most likely join in if the states are successful. If you are bored with downloading music onto your iPod, you can switch to tax updates, offered by the IRS.

It seems to me that at the end of the day, perhaps the biggest need is for each of us to maintain consistency and faithfulness. We can apply this to our thinking, our business and personal activities, and our relationships. Uncertainty is all around us, though often hidden when times appear to be especially good. Commitment to a cause, a person, a reason for being, that supersedes the circumstances of life, and our own needs, may allow us to have an impact, and make a difference, far beyond the span of our lives.

Quote of the week:

“When you were born, you cried, and the word rejoiced. Live your life in such a way that when you die, the world cries, and you rejoice.”

Tuesday, September 8, 2009

Thomas Jefferson

OVER THE LAST THREE weeks, since our last commentary, the major equity indices have moved up slightly. By the numbers, for the week ended Friday, September 4, 2009, the Dow Jones Industrial Average closed at 9441, up 120 points, or 1.3%. The Standard & Poor’s 500 closed at 1016, up 12 points, or 1.2%, and the NASDAQ closed at 2018, up 33 points, or 1.7%.

The Shanghai stock market continued its volatility, with daily swings of 5% to 7%. Non-farm payrolls fell by 216,000, bringing the official unemployment rate to 9.7%, a 26 year high. The Federal Reserve is confident that the steep economic downturn is over, but they have no idea what the future looks like. At least they admit it.

The European Central Bank kept interest rates at 1%. ECB president Jean-Claude Trichet says the worst is over, but sees only a “very gradual recovery”. Retail sales were off 2% in August. Discounters Costco and BJ’s posted sales increases, Gap and Banana Republic fared worse than expected, while Old Navy posted a sales increase. Aeropostale recorded a 9% sales increase, and Abercrombie saw a 29% sales decline, according to recent reports at Marketwatch.

Walt Disney is buying Marvel Entertainment, and EBay is selling Skype. According to reports, the Pension Benefit Guaranty Corporation, or PBGC, is running a $33.5 billion deficit. This should worry taxpayers more than retirees.

Digging into the employment report, there were 63,000 jobs lost in the manufacturing sector. April 2006 was the last month that there was a job increase in manufacturing. Education and healthcare added 52,000 jobs in August, which is no surprise, given that these two industries are funded primarily through taxes. Non-farm productivity jumped 6.6%, while unit labor costs dropped by 5.9%.

In his Saturday radio address, President Obama suggested four new initiatives that he hoped would improve savings. First was automatic enrollment in employer sponsored retirement plans. This means it would take action on the part of the employee not to participate. Second was the ability to receive tax refunds in the form of savings bonds, sort of like the scrip issued by mining companies in years past. Third was the ability for employers, with employee consent, to contribute unused vacation and overtime pay to retirement accounts. The fourth was the government’s printing of a guide to job changes and retirement plans. Steps one through three may be good ideas, unless Washington nationalizes the country’s retirement plan system.

According to the FDIC, as of the second quarter of 2009, the number of banks on the “problem list” stood at 400, compared to less than 100 during the first quarter of 2008, according to Bob LeClair’s newsletter. Boeing is now promising to fly the 787 before the end of 2009, with initial deliveries by the end of 2010.

On the tax front, 401(k) plan fiduciaries aren’t liable for losses on employer’s stock. This ruling came in district court, in the Lingis vs Motorola case, according to Kiplinger’s Tax Letter. Michigan employers can expect a 2009 FUTA rate of 1.1%, compared to 0.8% in most other states. Indiana and South Carolina will most likely see FUTA rate increases in 2010. According to a New Jersey District Court, settlements of job bias cases are taxable, even to the extent of being hit with payroll taxes.

Firms have until October 15 to elect to carry back a 2008 net operating loss for five years instead of two. This break applies only to those companies with $15 million or less in revenue.

If you tapped a home equity line for business use, then borrowed against it again for personal use, such that the total exceeded $100,000, your interest deduction would generally be capped. According to a Private Letter Ruling by the IRS, you can claim the business portion as a business loan instead of mortgage debt, and deduct the interest as business interest. This could allow the personal debt interest to be fully deductible. You make this election by attaching a statement to your tax return.

If you’ve read this far, I’d be interested in your input. From either personal experience, or from watching others, share with me what it takes to bounce back from defeat. What did you do? What was your mindset? Did you do certain things, read certain books, change the scenery, take a sabbatical, change careers or businesses? These stories are fascinating in a good way, as they display the strength and resiliency of the human spirit. I’ll not reference these stories without your express permission. Thanks for sharing.

Quotes of the week:

“The natural progression of things is for liberty to yield, and government to gain ground.”

“To compel a man to furnish funds for the propagation of ideas he disbelieves and abhors is sinful and tyrannical.”

“What country can preserve its liberties if its rulers are not warned from time to time that their people preserve the spirit of resistance?”
Thomas Jefferson