A look at how one can greatly affect the other.

April 23, 2013
 

Is the bond bull history?Bond titan Bill Gross called an end to the 30-year bull market in fixed income back in 2010, and he has repeated his opinion since. Legendary investor Jim Rogers predicted an end to the bond bull in 2009, and he still sees it happening. This belief is starting to become popular – the Federal Reserve keeps easing and more and more investors are leaving Treasuries for equities.^1,2,3
 

If the long bull market in bonds has ended, the final phase was certainly impressive. During the four-year stretch after the collapse of Lehman Brothers, $900 billion flowed into bond funds and $410 billion left equities.²
 

Assuming the economy continues to improve and an appetite for risk stays strong, what will happen to bond investors when inflation and interest rates inevitably rise and bond market values fall?
 

Conditions hint at an oncoming bond bear market.When interest rates rise again, how many bond owners are going to hang on to their 10-year or 30-year Treasuries until maturity? Who will want a 1.5% or 2.5% return for a decade? Looking at composite bond rates over at Yahoo’s Bonds Center, even longer-term corporate bonds offered only a 3.5%-4.3% return in late March.⁴
 

What do you end up with when you sell a bond before its maturity?The market value. If the federal funds rate rises 3%, a longer-term Treasury might lose as much as a third of its market value as a consequence. It wasn’t that long ago – June 12, 2007, to be exact – when the yield on the 10-year note settled up at 5.26%.⁵
 

This risk aside, what if you want or need to stay in bonds? Some bond market analysts believe now might be a time to utilize short-term bonds. What’s the trade-off in that move? Well, you are accepting lower interest rates in exchange for a potentially smaller drop in the market value of these securities if rates rise. If you are after higher rates of return from short-duration bonds, you may have to look to bonds that are investment-grade but without AAA or AA ratings.
 

If you see interest rates rising sooner rather than later, utilizing short maturities could position you to get your principal back in the short term. That could give you cash which you could reinvest in response to climbing interest rates. If you think bond owners are in for some pain in the coming years, you could limit yourself to small positions in bonds.
 

The Treasury needs revenue and senses the plight of certain bond owners, and in response, it has plans to roll out floating-rate notes by 2014. A floater backed by the full faith and credit of the U.S. government would have real appeal – its yield could be adjusted per movements in a base interest rate (yet to be selected by the Treasury), and you could hold onto it for a while instead of getting in and out of various short-term debt instruments and incurring the related transaction costs.⁶
 

Appetite for risk may displace anxiety faster than we think.In this bull market, why would people put their money into an investment offering a 1.5% return for 10 years? Portfolio diversification aside, a major reason is fear – the fear of volatility and a global downturn in stocks. That fear prompts many investors to play “not to lose” - but should interest rates rise significantly in the next few years, owners of long-term bonds might find themselves losing out in terms of their portfolio’s potential.
 

What should you do? We will continue to monitor this situation and discuss the options with you in our meetings.  If you don’t have a meeting with us in the next 6 months, either call or send us an email if you have any questions.
 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

 http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

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. Please note - investing involves risk, and past performance is no guarantee of future results. 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. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - www.bloomberg.com/news/2010-10-27/fed-easing-likely-to-mark-end-of-30-year-bull-market-for-bonds-gross-says.html [10/27/10]

2 - online.wsj.com/article/SB10000872396390443884104577645470279806022.html [9/15/12]

3 - www.bloomberg.com/news/2013-02-07/u-s-30-year-bond-losses-pass-5-as-fed-price-gauge-rises.html [2/7/13]

4 - finance.yahoo.com/bonds/composite_bond_rates [3/27/13]

5 - www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2007 [2/6/13]

6 - online.wsj.com/article/SB10001424127887324590904578287802587652738.html [2/6/13]



 

March 28, 2013

 

On October 9, 2007, the Dow hit 14,164 and then proceeded to drop precipitously for all of 2008 and into early 2009. In March of 2009 the Dow began its long recovery and just this month (March 2013) topped its previous high from 2007. As if the trauma caused by the market decline was not enough, we have also seen housing prices tumble during the same period. The Federal Reserve has done everything possible to stimulate the economy (and the stock market) by inflating its own balance sheet to the tune of more than 1 Trillion dollars per year of purchases of Treasuries and mortgages, about 3 Trillion so far. At the same time they have kept interest rates at almost zero. If the economy is struggling and the market is doing reasonably well, why the “Disconnect”? Let’s look at some of the issues:

 

ECONOMY:
 

·Slow GDP growth

·Barely improving employment numbers

·Barely improving housing prices

·Federal reserve is keeping interest rates close to zero for the foreseeable future

·Uncertain tax and fiscal policy

·Dysfunctional Congress

·Sequestration

·Enormous debt and deficits with little or no attempt to curtail spending

MARKETS AND RELATED ISSUES:
 

·Corporations are making profits

·Corporations are holding very large cash positions

·The stock market is “fairly valued” (as measured by P/E ratios)

·The Dow has reached a new high

·Eurocrisis has not gone away, e.g., Cyprus is the latest country in trouble

PEOPLE:
 

·Loss of confidence in Congress and the government

·Fear of another major decline like 2008, but also fear of missing out on a rising market, i.e., IS THE TRAIN LEAVING THE STATION WITHOUT ME?

 

WHAT SHOULD WE DO NOW?REMEMBER THE BUCKETS!

 

Let’s remember that no one can predict the market’s performance in the short run, i.e., 1 to 3 years. If you are more than 3 to 5 years away from retirement, then you can keep a long term perspective and keep the majority of your funds in what we call Bucket 3, or a long term bucket which could be mostly equities. For those of you in retirement or within a few years of retirement, we believe in the BUCKET strategy. Let’s review:

 

BUCKET 1:Keep enough money to provide 3 to 4 years of income in very safe investments and expect a yield of less than 2%.

 

BUCKET 2:This will not be touched before 4 or 5 years and can be invested in Intermediate type investments. Expect a return of no more than 2 to 4%.

 

BUCKET 3:This will not be touched before year 8 and can be invested in longer term/market related investments. The goal here would be an average annual return of 6%+. Realize that these investments are subject to market risk. There could even be losses in some years, but the money will not be touched for 7 or 8 years. Even the 2008 market losses were recovered in 6 years.

 

So for those of you who are worried about the train leaving the station AND you don’t want to miss a rising market, remember that your Bucket 3 funds are invested and will capture the market gains.

 

OUR FIRM’S STRATEGY IS:
 

·ASSET ALLOCATION, INCLUDING ALTERNATIVE ASSET CLASSES AND STRATEGIES

·USE OF THE BUCKETS TO HELP YOU REACH YOUR GOALS

·MAKING SURE THAT YOUR ANNUAL WITHDRAWALS DO NOT EXCEED 4% TO 5% OF PRINCIPAL
 

Let’s keep a Long Term Perspective! If you have any questions, or would like to revisit your asset allocation and investment strategy prior to our next meeting, please give us a call.

 

Happy Easter!

 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

March 25, 2013

 

In 2008, the Federal Reserve famously purchased a lot of subprime bank loans that have been described, in the banking industry, as "toxic waste"--in an effort to clean up the balance sheets of large lending institutions. Since then, the Fed has been an active buyer of Treasury securities and, in its latest (and ongoing) QE3 program, become the single largest buyer of mortgage securities issued by Fannie Mae and Freddie Mac, working hard to drive down their coupon rates.

 

These dramatic gestures are supposed to help revive the American economy, but what are they costing our nation's reserve bank? The Reuters news service looked at last year's audited results and reports a surprise: the Fed's increasingly complex balance sheet generated $88.9 billion in profits last year. That's far more than the most profitable U.S. companies, like number one Exxon Mobil ($41 billion); number two Chevron ($27 billion), #3 Apple ($26 billion) or Microsoft ($23 billion).

 

Under Chairman Ben Bernanke, the Fed has gotten in the habit of earning a profit on its operations. In 2011, 2010 and 2009, it took in $77.4 billion, $81.74 billion and $53.42 billion in profits, respectively.

 

Where does this money go? Does the Fed pay out this largesse to its executives in the form of bonuses, like Goldman Sachs? Fortunately not. The Fed sent $88.4 billion to the U.S. Treasury last year, and gave taxpayers back a comparable percentage of its profits in previous years. The interesting truth is that the most profitable entity in the American economy is run like a nonprofit on behalf of our government.


They say it's Spring, but we're not so sure yet. Let's hope for warmer days ahead!

 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.
 

Sources:

http://www.huffingtonpost.com/2012/03/21/federal-reserve-profit-2011_n_1369354.html

http://www.huffingtonpost.com/2013/03/15/federal-reserve-record-profit_n_2884366.html?utm_hp_ref=business

 March 22, 2013
 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Sources:

www.bobveres.com

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/03/18/everything-you-need-to-know-about-the-cyprus-bailout-in-one-faq-2/

http://blogs.terrapinn.com/total-trading/2013/03/18/cyprus-bailout/?pk_campaign=Blog_Newsletter_total-trading&pk_kwd=2013-03-19&elq=c50aa7457d3a4f8a847dc84e000763e7&elqCampaignId=2766&pk_campaign=Blog_Newsletter_total-trading&pk_kwd=2013-03-19&elq=c50aa7457d3a4f8a847dc84e000763e7&elqCampaignId=2766

http://www.guardian.co.uk/world/2013/mar/19/cyprus-rejects-eurozone-bailout-savings-tax
 

Where and how soon might the cuts be made?

March 5, 2013

 

As there was no last-minute agreement between Congress and the White House to postpone federal budget cuts scheduled to take effect March 1, the ax now falls. Unless a bipartisan effort somehow undoes them, assorted federal government agencies will have their budgets reduced by $85 billion between now and October 1, as the initial step in a planned $1.2 trillion deficit trimming over the next ten years. (The belt-tightening could have been more severe: without January’s fiscal cliff deal, it would have been $109 billion.)^1,2

 

What gets cut? Broadly speaking, defense programs will take a 13% hit and other federal programs will have budgets decreased by 9%. (This is according to the projection of the White House Budget Office.)²

 

Government contractors may be among the first to feel the pinch – especially defense contractors, and by extension their vendors. The White House projects the Army, Navy and Air Force having to slash a total of $34 billion this spring and summer, resulting in layoffs or furloughs for 450,000-500,000 workers. USA TODAY forecasts that four states – Virginia, Maryland, Texas and Alabama –will each see between 20,000-35,000 jobs lost as a direct result.³

 

Some think that the punch to the labor market might end up being double or triple that. A George Mason University analyst recently commented to the New York Times that as many as 1.4 million private sector jobs could be lost when the effects of the sequestration are fully felt, with a third of them coming at small companies.^3,4

 

This potential wave of unemployment wouldn’t just be traced back to military cuts: the Obama administration has mentioned TSA agents being furloughed every tenth workday, FAA air-traffic controllers and Bureau of Prisons employees working fewer hours, and job cuts or reduced workweeks affecting the FBI, INS, FDA, NPS, VA and FHA. State programs linked to federal dollars (such as unemployment benefits, Section 8 housing assistance, foster care programs, Head Start and school breakfast programs, and Meals on Wheels and job retraining programs for seniors) could also soon see cutbacks. Cuts for many of these programs would begin in April.^1,2,5

 

What doesn’t get cut? While myriad government agencies will face reduced budgets, the cutbacks will not reduce Medicare, Social Security or Veterans Affairs benefits, Supplemental Security Income, Medicaid payments, Pell grants or food stamps. Medicare Part D subsidies won’t be cut either.⁶

 

That doesn’t mean Medicare or Social Security recipients will be totally shielded from the impact of the sequestration. Some SSA offices might be closed certain days of the month or even for weeks or months – and the lines and waits at those offices could get longer. Medicare payments to doctors are slated to be reduced 2%.⁶

 

Is there an undo button? Sort of. Congress might find it later this month, or in April. A short-term fix could be arranged, just like what happened at the start of the year when the fiscal cliff bill was passed: taxes could be raised here, pork could be trimmed there, and a little more time could be bought ... time that could be used to improbably craft the “grand bargain” President Obama spoke of in 2012, or to give federal agencies a greater say in what gets cut.

 

After a few weeks of sequestration, public frustration might become more audible. Or, it might not be: last month, a Pew Research Center poll found that 40% of Americans saw merit in the March 1 cuts, with 70% of respondents saying deficit reduction should be a top federal priority.⁷

 

As always, we will continue to monitor this issue and will keep you posted on any developments.

 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600
 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

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. Please note - investing involves risk, and past performance is no guarantee of future results. 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. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
 

Citations.

1 - www.reuters.com/article/2013/03/01/us-usa-fiscal-idUSBRE91P0W220130301 [3/1/13]

2 – abcnews.go.com/Politics/OTUS/questions-answers-sequester/story?id=18623605&singlePage=true [2/21/13]

3 – www.usatoday.com/story/news/nation/2013/02/19/army-state-by-state-sequester-details/1931051/ [2/19/13]

4 – boss.blogs.nytimes.com/2013/02/21/many-expect-budget-cuts-to-hit-small-businesses-hard-but-not-the-n-f-i-b/ [2/21/13]

5 – www.civilrights.org/census/your-community/funding.html [3/1/13]

6 – aarp.org/politics-society/government-elections/info-02-2013/how-the-sequester-could-affect-social-security-and-medicare.html [2/19/13]

7 – www.cbsnews.com/8301-250_162-57570484/poll-40-say-let-the-looming-budget-cuts-happen/ [2/21/13]

If federal budget cuts occur March 1, how might they be felt economically?

February 28, 2013

On March 1, $85 billion in federal budget cuts are supposed to take place – and it doesn’t look like they will be delayed any longer. Congress went on recess last week, so there was no concerted legislative effort to stave them off (in the manner of the fiscal cliff deal).¹
 

At this point, the cuts seem inescapable. How might they impact Main Street and Wall Street?
 

Is Main Street all that worried about the cuts? A February Pew Research Center poll found that 29% of Americans didn’t even know about the sequester, while 40% said that they should be allowed to happen. Eyeing the poll results a bit more, a big picture emerges – 70% of those polled indicated that legislation to significantly reduce the deficit should be a federal priority.²
 

Will the cuts damage the economy as deeply as some fear? In the White House Budget Office projection, defense programs will take a 13% cut, with $34 billion in belt-tightening by the Army, Navy and Air Force resulting in layoffs or furloughs for at least 450,000 people. USA TODAY research forecasts nearly 35,000 jobs being lost in Texas, and Maryland, Virginia and Alabama each suffering between 20,000-30,000 job losses.^3,4
 

In addition, the White House projects a 9% reduction in spending for other federal programs, with job cuts or furloughs anticipated for INS, FDA, TSA and FAA employees (and myriad other federal workers), reduced jobless benefits for the long-term unemployed, and layoffs of 10,000 teachers and school employees, including some with the Head Start program.^1,3
 

Less abstractly, what could this hit to growth mean for the business and housing sectors? In a February 21 New York Times article, George Mason University School of Public Policy professor Stephen Fuller estimated that 1.4 million private sector jobs might disappear in the wake of the cuts. Fuller, who testified before the House Small Business Committee on the possible effects of the sequester, thinks that small businesses could let over 700,000 employees go and absorb 34% of the job losses projected for federal contractors. He reminded the Times that suppliers and vendors to those contractors could also be hit hard.⁵
 

HUD Secretary Shaun Donovan believes the sequester would be “deeply destructive” to the real estate market. If FHA staff is reduced by 9%, that could hurt the agency’s ability to originate loans, process refis and sell foreclosed homes in its possession. (By the way, the average interest rate on a conventional home loan was 3.78% last week, according to the Mortgage Bankers Association. That’s a high unseen since August 2012.)⁶
 

Or will the cuts have less economic impact than commonly believed? Some analysts think the fear is overblown. As CNBC columnist Larry Kudlow recently pointed out, the $85 billion haircut slated for March 1 is to budget authority, not budget outlays. Actual federal budget outlays, according to the Congressional Budget Office, will only shrink by $44 billion – which is but 0.25% of GDP and 1.25% of the $3.6 trillion federal budget.⁷
 

Kudlow notes that while the sequester would trim the growth of federal spending, “it's clear that it won’t result in economic Armageddon.” He argues that the sequester might actually have positive effects, for as “the government spending share of GDP declines, so does the true tax burden on the economy. As a result, more resources are left in the free-market private sector, which will promote real growth.”⁷
 

As for the markets, opinion varies. If the cuts occur, Nomura thinks that they will be undone by Congress within weeks. A Wells Fargo analysis concludes that “in the end we are not looking for a significant cut in government spending this year.” On the other hand, Credit Suisse sees a 0.5% reduction in U.S. GDP to 1.5%, and Macroeconomic Advisors thinks the jobless rate will creep up to 7.9% by the end of 2013 – a projection matching that of many economists, who see unemployment rising 0.2-0.3% this year with payrolls slimming by about 500,000 jobs.⁸
 

March 1 could be a very big day on Wall Street. If the sequestration happens as scheduled Friday, it won’t be the only major economic news item on tap: the February jobs report, February’s ISM manufacturing index, the January consumer spending report and the final February consumer sentiment index from the University of Michigan will all be out that day. If some of these reports surprise to the upside (or downside), there is a chance that they may pull focus from the (assumed) budget cuts. Or, if the cuts occur as slated, perhaps the market will price them in more than some analysts believe.
 

If the sequester delivers a serious economic punch, it could deter the Federal Reserve from any notions of phasing out QE3 this year or tinkering with interest rates in 2014. We shall see how the drama plays out in March and the months that follow. 
 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

 http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

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. Please note - investing involves risk, and past performance is no guarantee of future results. 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. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – online.wsj.com/article/SB10001424127887324449104578314113835559092.html [2/20/13]

2 – www.cbsnews.com/8301-250_162-57570484/poll-40-say-let-the-looming-budget-cuts-happen/ [2/21/13]

3 – www.cbsnews.com/8301-250_162-57570191/will-sequestration-really-be-that-bad/ [2/20/13]

4 – www.usatoday.com/story/news/nation/2013/02/19/army-state-by-state-sequester-details/1931051/ [2/19/13]

5 – boss.blogs.nytimes.com/2013/02/21/many-expect-budget-cuts-to-hit-small-businesses-hard-but-not-the-n-f-i-b/ [2/21/13]

6 – www.cnbc.com/id/100474955 [2/20/13]

7 – www.cnbc.com/id/100476675/The_ProGrowth_Sequester [2/21/13]

8 – www.cnbc.com/id/100475956 [2/20/13]

… and for how long?
 

February 20, 2013

 

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.

 

Since it is tax season, now is the time you will be sorting and organizing your papers and documents. Do yourself a favor and organize everything now so it will be easier in the future.

 

Organization will help you, your advisors ... and even your heirs. If you’ve got a meeting scheduled with an accountant, lawyer, 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 and are filed with your tax return) and your Form 1099-Rs (which report IRA income distributions).¹ You only need to keep the most recent statements for IRAs and 401Ks.

 

In addition, for non-IRA, non-401K, i.e., personal investments, 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 statements 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 (real estate) 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. If you are an employee, you only need to keep the current year and the year-end summary pay stub.

 

Employee benefits statements. Does your company issue these to you annually or quarterly? Keep at least the most recent year-end statement on file. If you have a pension with a prior employer, request an annual statement from them.

 

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. 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. But if you are storing on your computer, be sure to have proper backup in case your hard drive or flash drive go awry!

 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

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. Please note - investing involves risk, and past performance is no guarantee of future results. 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. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
 

Citations.

1 - blog.oregonlive.com/finance/2011/05/why_you_might_want_to_save_for.html [5/21/11]

2 - ssa.gov/pubs/10081.html [10/12/12]

3 - irs.gov/Businesses/Small-Businesses-&-Self-Employed/How-long-should-I-keep-records%3F [12/31/12]
 

Interest rates on 30-year fixed mortgages are still notably low.
 

February, 11, 2013

 

Mortgage rates are still low.The earliest numbers from 2013 have remained lower than they were this time last year, leading a number of homeowners to consider (and re-consider) their options.

 

In January, interest rates on 30-year Fixed Rate Mortgages (FRM) dropped to 3.38%.This is down 0.5% from a year ago at this time. Many have already taken advantage; the Mortgage Bankers Association reported a 15.2% increase in mortgage loan applications last week, while refinancing saw a 15% bump from earlier weeks. In fact, 82% of all applications were attempts to refinance.¹

 

With interest rates down across the board, it’s easy to see why homeowners still so low: Freddie Mac is reporting 15-year FRMs are down to 2.66%, while 5/1-year ARMs and 1-year ARMs were down to 2.67%. A year ago, the rates were 3.17%, 2.82%, and 2.76%, respectively.^2,3

 

Keep your eye on the big picture. While it might seem to your advantage to take your interest rate down a few percentage points, you need to know the answers to these three questions: 1) How much will you really save per month? 2) What are the lender points and fees? 3) How long will you be living in your current home?

 

For example: Knocking off a hundred dollars or more from your monthly payment might seem like a great idea, but how long are you planning to stay in your current home? As part of your agreement, your mortgage company could add a lender point (potentially thousands of dollars) and hundreds more in fees, making a refi short-sighted if there’s a new house on your horizon.

 

On the other hand, if you’re planning on staying in your home for several years, a refinance has the potential for big savings. If you’re moving to a 15-year loan from your 30-year loan (or vice-versa) or from an Adjustable-Rate Mortgage into a Fixed-Rate, a long-term homeowner has a different scenario to consider.

 

Rates won’t stay low forever.There’s no way to tell how long the trend will continue. An April 2010 headline in the New York Timesproclaimed “Interest Rates Have Nowhere to Go but Up.” At that time, the average rate for a 30-year fixed mortgage was 5.31%. By the end of January 2012, the rate had fallen to 3.98%.^2,4

 

Where advantageous rates are concerned, what comes down usually goes up. While you do have time to get on board with these low rates, nobody knows when they might take off again.

 

Consider your next move carefully.Refinancing may be an option, but it’s always a good idea to be fully informed before making such an important financial decision. Call our office to determine your options for refinancing and the big picture on how such a move might affect your financial future.

 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600
 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.
 

1 - articles.chicagotribune.com/2013-01-17/business/chi-average-30year-mortgage-rates-hold-near-338-20130117_1_mortgage-rates-fixed-rate-mortgage-average-rate [1/23/13]

2 - freddiemac.com/pmms/index.html?year=2012 [1/23/13]

3- freddiemac.com/pmms/ [1/23/13]

Tension eases for the moment, but contention remains.

January 24, 2013

Global investors watch America anxiously. In late December, the U.S. technically reached its debt ceiling of approximately $16.4 trillion, with the federal government taking what Treasury Secretary Timothy Geithner called “extraordinary measures” to avert a default.¹

Even as House GOP leaders announced plans last week to approve a three-month increase in the federal debt limit, tension remains - and that tension could provoke a debt ceiling battle on Capitol Hill later this year reminiscent of the impasse of 2011.²

President Obama has again presented a debt ceiling hike as an essential move needed to pay America’s bills. House Republicans do not want to see a long-term increase in the debt limit without corresponding spending cuts, and some conservatives have characterized the Obama administration’s warnings as more posturing than fact.

A new plan to deal with critical fiscal deadlines. Sometime between February 15 and March 15, the federal government’s borrowing capacity will (in theory) be exhausted. March 1 now represents the start of the “sequester” – the automatic spending cuts detailed in the 2011 deficit accord. On March 27, a six-month measure passed to fund federal government operations expires.³

Last week, House Majority Leader Eric Cantor (R-VA) unveiled a plan for a three-month extension of the debt limit, which would offer Congress additional time to pass a budget. Under the plan, Senators and Representatives would work without pay if Congress failed to approve a budget within the three-month window. Any further extension of the debt ceiling window would be contingent on Democrats approving significant federal spending cuts.²

Will an extended battle be averted? Hopefully so – prolonging the debt ceiling fight into spring could do far more economic damage than that threatened by the fiscal cliff. In a recent Wall Street Journal commentary, Princeton University economist Alan Blinder envisioned a 6% GDP contraction “if the government hits the debt ceiling at full speed” in 2013, as a forced 26% cut in federal outlays would result. An outright drop off the fiscal cliff, in Blinder’s view, would have reduced U.S. growth by 4.5%.⁴

A true default could invite a harsh recession – jobless benefits could be reduced or curtailed, and Social Security checks and pay to soldiers could even be delayed. Consumer spending could decrease along with federal tax revenues.⁴

The risk of an outright default may be overblown. Addressing the media on January 14, the President seemed to hint that the government would prioritize interest payments on Treasuries over other debt obligations in a worst-case scenario. Some congressional Republicans have called for such prioritization in a crisis – that is, the Treasury simply making selective payments on what America owes first, with other debts to be addressed later. The question is: would that be enough to preclude another downgrade by the major credit ratings firms? (Beyond that question, there is an issue of legality: President Obama lacks a distinct legal authority to prioritize certain debt payments over others.)⁵

Is the White House overstating the threat? Some conservatives believe so. As Cato Institute fellow Michael D. Tanner recently noted, the federal government will owe somewhere around $38.1 billion in interest payments between February 15 and March 15. If it doesn’t pay them, it will default. Almost unpublicized, however, is the federal government’s projected receipt of $277 billion in taxes and other revenue within that same interval.⁶

That isn’t enough to fuel the $452 billion in federal spending stipulated between February 15 and March 15, but it would be enough to pay the interest on the debt and keep Medicare, Social Security and service member payments on track. About $500 billion in debt will mature between February 15 and March 15 – but the federal government routinely rolls over such debt rather than paying it off, swapping new debt for maturing debt.⁶

Multiple solutions have been suggested. In addition to the GOP proposal, some “quick fixes” for the issue have been suggested, some bordering on the sensational.

House Minority Leader Nancy Pelosi (D-CA) would like to see the President invoke the 14th Amendment to the Constitution to raise the debt limit – specifically Section 4, which reads “The validity of the public debt of the United States...shall not be questioned.” The White House has rejected that idea.⁷

Citing a clause in the Coinage Act of 1996, a Georgia lawyer named Carlos Mucha has proposed that the Treasury Secretary authorize the U.S. Mint to make a $1 trillion platinum coin which could be deposited at the Federal Reserve. Mucha claims that the Fed could credit the account of the U.S. government for that $1 trillion and solve the whole problem in one fell swoop. The Treasury has rejected the idea.⁸

The GOP proposal announced on January 18 could be a step toward a bipartisan compromise on the debt limit – which hopefully will occur before summer arrives.

What to look for? It appears that we will get a 3 month extension postponing the debt battle. However, the battle will still be fought – do any of us really believe Congress will deal with this before the 11^th hour?

We are watching carefully! Stay tuned!

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Citations.

1 – www.latimes.com/business/money/la-fi-mo-debt-limit-geithner-treasury-boehner-obama-20130114,0,5318272.story [1/13/13]

2 – www.latimes.com/news/politics/la-pn-house-leaders-debt-increase-20130118,0,4453098.story [1/18/13]

3 - www.reuters.com/article/2013/01/17/us-usa-fiscal-ryan-idUSBRE90G13520130117 [1/17/13]

4 - www.cnbc.com/id/100381526 [1/15/13]

5 - www.cnbc.com/id/100377700 [1/14/13]

6 - www.ocregister.com/opinion/debt-383518-payments-government.html [1/16/13]

7 - thehill.com/homenews/house/275663-pelosi-urges-use-of-14th-amendment-to-avoid-debt-ceiling-crisis [1/4/13]

8 - www.nytimes.com/roomfordebate/2013/01/13/proposing-the-unprecedented-to-avoid-default/platinum-coin-would-create-a-trillion-dollar-in-funds [1/13/13]

What will change (and won’t change) as a result of the new legislation.

January 3, 2013

Several tax hikes, some tax breaks. Now that the fiscal cliff deal assembled in Congress is becoming law, it is time to look at some of the tax law changes that will result. Here are the major details in the bill, which will bring significant tax hikes to some households in an effort to increase federal revenues by $600 billion over the next ten years.¹

The Bush-era tax cuts will be preserved for at least 98% of taxpayers. Individuals with incomes of $400,000 or less and households with incomes of $450,000 or less will not see their federal income tax rates rise. The EGTRRA/JGTRRA cuts have been made permanent for such earners.^2,3

The wealthiest Americans are looking at a major income tax hike. The top marginal tax rate will rise 4.6% in 2013 to 39.6%. Individuals with more than $400,000 in taxable income and couples with more than $450,000 in taxable income will be affected. This is the first major income tax increase on the highest-earning taxpayers in 20 years.^2,3,4

Now when you take that 39.6% top rate and pair it with the oncoming 3.8% Medicare surtax, what is the impact for the wealthiest taxpayers in dollar terms? It is major. The non-partisan Tax Policy Center calculates that in 2013, households with incomes between $500,000 and $1 million should see their federal income taxes rise by an average of $14,812. What about households with incomes above $1 million? The TPC projects taxes rising an average of $170,341 for these couples and families this year.³

Practically speaking, all working Americans will see taxes rise in 2013. The payroll tax holiday of the past two years officially ends with the new bill’s passage. In 2011 and 2012, employee payroll taxes were reduced by 2% as an economic stimulus – an idea that came from the White House. In 2013, the payroll tax rate returns to its old level and employees will pay 6.2% in Social Security taxes rather than 4.2%. This tax break saved a worker making $50,000 annually about $1,000 last year. Employee earnings up to $113,700 will be taxed.^3,4

Estate taxes now top out at 40%. Additionally, the individual estate tax exemption falls slightly to $5 million. Both of these changes are permanent.⁴

The AMT has been patched - permanently. Congress no longer has to arrange an annual fix for the Alternative Minimum Tax that was never indexed to inflation. This patch is retroactive to 2012, of course.⁴

The Pease provision & personal exemption phase-outs are back. As a result of the deal, 80% of itemized deductions will be eliminated in 2013 for individuals with adjusted gross incomes of more than $250,000 and couples with adjusted gross incomes of more than $300,000. That threshold is also where personal exemption phase-outs will start in 2013.⁴

Dividends will not be taxed as ordinary income. Single filers with taxable incomes of more than $35,350 and joint filers with table incomes above $70,700 will see a top dividend tax rate of 15% this year. Dividends coming to individuals making more than $400,000 and households making more than $450,000 will return to the 20% level, 5% higher than they were in 2012. Investors in the 10% and 15% tax brackets will pay no taxes on dividends.^2,4

The top capital gains tax rate is now 20%. Wealthy investors paid a 15% tax on long-term capital gains and qualified dividends in 2012. That will rise 5% this year. Single filers making more than $400,000 and joint filers making more than $450,000 will face this tax hike. Those in the 25%, 28%, 33% and 35% federal tax brackets will pay 15%, and those in the 10% and 15% brackets will face no capital gains taxes.⁴

Long-term unemployment benefits live on. They will be sustained through the end of 2013 for roughly 2 million people.²

Another “doc fix” has been made. Drastic cuts in Medicare payments to physicians will be avoided for 2013 as a result of the new legislation.²

The EITC, AOTC & Child Tax Credit will be extended through 2017. President Obama has long sought to preserve the $2,500 American Opportunity Tax Credit for college expenses, the Earned Income Tax Credit and the Child Tax Credit – and that will occur thanks to the fiscal cliff deal. The $250 deductions for teachers' classroom expenses will also be extended into 2013.⁴

50% bonus depreciation is preserved for 2013. The tax break that permits companies to accelerate depreciation schedules for major capital investments lives on for another year.⁴

The R&E tax credit & wind production tax credit are both sustained. Both federal tax breaks are available again for 2013.²

The charitable IRA rollover provision returns. You can practically hear the cheers ringing out at non-profits across the country: thanks to the fiscal cliff deal, people over age 70½ will again be permitted to make tax-free transfers from an IRA to a charity, university, or other qualified non-profit organization in 2013.⁴

The “sequester” will be delayed 2 months. The automatic federal spending cuts that were set to occur January 2 will be postponed until March while Congress tries to craft a plan to replace them.²

Be careful though! Congress has once again kicked the can down the road. They are facing a huge battle over the debt ceiling in about two months and it won’t be pretty.

What does this mean for you? We can finally do some tax planning for you and your portfolio for 2013 and the future. We will discuss this specifically when we meet with you this year.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA
 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Citations.

1 – www.npr.org/templates/story/story.php?storyId=168366341 [12/31/12]

2 – www.cnbc.com/id/100348205 [1/2/13]

3 - latino.foxnews.com/latino/politics/2013/01/02/what-fiscal-cliff-deal-means-for-american-taxes/ [1/2/12]

4 - online.wsj.com/article/SB10001424127887323820104578216092043022764.html [1/1/13]

December 18, 2012

 

One of the oddest things to come out of the Fiscal Cliff headlines is the sudden proliferation of so-called "special" dividends. According to a recent article in the Wall Street Journal and another in CBS News, 349 publicly-traded companies have already moved up the date that they are paying their dividends or are paying additional dividends to shareholders, above what they would normally pay.

 

What makes these dividends so special? Technically speaking, the owners of the shares of a publicly-traded company are, collectively, the owners of that company. You can think of "ordinary" dividends as the money that the company has decided to return to its owners from the profits of its business operations. Each year, the company's management and board of directors decides all over again how much of its profits to distribute; it can increase, decrease or maintain its dividend payout, and even pay out more than its earnings. And, of course, many companies pay no dividends at all; they reinvest their profits in their enterprise or other business activities in hopes of generating more profits and making their company (and stock) more valuable, or they buy back shares of company stock.

 

These dividends receive special tax treatment under current law; the money is taxed at a maximum 15%--0% for people who fall below the 25% income tax rate. But that special rate will expire at the end of the year, resulting in a maximum rate of 39.6%, as dividends are taxed as ordinary income, and the ordinary income rates rise. Of course, the Fiscal Cliff negotiations in Washington could result in an extension of current rates; the truth is that nobody knows, at this point, what is going to happen with next year's tax rates.

 

Special dividends are simply a company's decision to pay its shareholders before rather than after the dividend tax rates are expected to go up.

 

They fall into two categories. In one category, you have companies like Johnson Controls (a technology company) and Bon-Ton Stores (fashion apparel) that are paying their normal dividends early. Instead of paying out their dividend as scheduled in, say, January, they will pay it instead in December as a convenience to shareholders. Other companies, like Oracle, have gone a step further, and announced that they will bundle several future dividend payments into one bigger pre-December 31 payment. Oracle will pay 18 cents per share in December to replace the dividends it would have paid out over the next three quarters.

 

In the other category, you have companies like Costco, Carnival (the cruise line company) and Brown-Forman (a wine and spirits distributor) that are actually borrowing money in order to pay a big dividend before the end of the year, on the theory that they are paying future earnings to shareholders at current tax rates, rather than at higher tax rates down the road.

 

The implication of some the news reports is that this is a special opportunity, where an astute investor can buy companies that will pay out a hefty dividend. But in fact, this is almost certainly the wrong strategy. Companies that are going into debt to make dividend payments are robbing Peter to pay Paul. To make a special $7 dividend, Costco will borrow $3.5 billion, tripling its long-term debt and has already caused the Fitch rating service to downgrade the company/s bond rating.

 

In addition, the payment of a dividend results in a simultaneous drop in the stock's share price. If you buy a company that makes a 10% dividend payment, the share price of that company will drop by 10% at the same time. You come out exactly where you were before, all-in, except you have to pay taxes on that dividend payment.

 

And some of these special dividends seem to be driven more by the interests of insiders than a convenience to the outside shareholders. The board of directors of Opt-Sciences, a company that makes special coatings for glass used in cockpits, has announced a special dividend amounting to 65 cents a share, in order, the company said, "to secure for the shareholders the benefits of the soon to be expiring current dividend tax treatment." A nice gesture? It would seem so until you are told that the family of one director, Arthur Kania, controls nearly 66% of the company stock. He may be more concerned about HIS tax bill than yours.

 

Another problem with these special dividend strategies is that higher taxes are not inevitable. And even if Congress takes us over the fiscal cliff, or if part of the next Grand Bargain is to eliminate special treatment of dividends, it won't be the end of the world--or even the end of tax-efficient ways to reward shareholders. As you can see from the chart below, companies shifted strategies dramatically toward dividends precisely when the new lower tax rate was enacted back at the start of 2003. Before that, and perhaps in the future, those same companies will redirect the same money they have been paying in dividends into the repurchase of company stock, raising the value of the shares owned by their investors, or reinvesting the money, raising the value of their enterprises and thereby (again) increasing the value of their stock.

 

Both options would reward shareholders without forcing them to pay immediate taxes on the amount of the reward--a more tax-efficient strategy that some "special" dividend payers might consider before they go into debt to create a tax liability for their shareholders.

 

What should you NOTdo now?? We are following the FISCAL CLIFF situation carefully and do not believe you should buy stocks paying special dividends just because of the “Cliff”. The President and Speaker Boehner are still negotiating and we are hopeful a resolution will occur. As soon as some decisions have been made, we will be in touch with more information.

 

Until then… Enjoy this joyous time of year with your family and friends!

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.
 

http://www.forbes.com/sites/jjkinahan/2012/12/10/bonus-time-playing-the-special-dividend-trend-through-options/

http://www.fool.com/investing/general/2012/12/10/what-you-need-to-know-about-special-dividends.aspx

http://www.cbsnews.com/8301-34227_162-57558279/just-how-special-are-special-dividends/

February 17, 2012

Just a week ago the smart money in financial circles was betting on a year of tax gridlock, punctuated by a bruising battle over the extension of the payroll tax cut.
 

Then, suddenly, everything turned around. Today (Friday), a bipartisan House/Senate committee is expected to bless a new payroll tax cut extension that was negotiated without any of the bitter partisan posturing that everybody expected. The cut will reduce Social Security taxes from 6.2% of income to 4.2% for workers through December 31, and put up to $130 billion back into the pockets of lower- and middle-income workers. 
 

The same bill extends unemployment benefits from 59 weeks to anywhere from 89 to 99 weeks, depending on the unemployment level in each state, and will require the recipients of unemployment insurance payments who have not finished high school to enroll in a GED program. States could also create voluntary training programs for those seeking jobless benefits. 
 

In other provisions, doctors who treat Medicare patients would avoid seeing their payments cut. To partially offset the costs, federal workers would have to pay more into their pension plans, and $5 billion will be cut from the new health care law.
 

If you add the $100 billion that the measure will add to the deficit to the $1 trillion in government budget cuts that went into effect automatically, government expenditures will shrink by a net $900 billion this fiscal year.
 

Bigger picture, President Obama has released a new proposed budget which would, among other things, extend the Bush-era tax cuts for all but the top two brackets. The 33% and 35% marginal rates would go back to their pre-2001 levels of 36% and 39.6%. The budget proposal would also raise the long-term capital gains rate to 20% for single taxpayers with more than $200,000 a year in income, or married taxpayers filing jointly earning $250,000 per year. For these same upper-income taxpayers, the tax rate on qualified dividends would revert to ordinary income rates--up to a maximum of 39.6%. For everyone else, dividends would still be taxed at a 15% or 0% rate, depending on the tax bracket.
 

The bill would create a permanent solution to the vexing Alternative Minimum Tax, essentially replacing its complex formulae with the so-called Buffett Rule, requiring any household earning more than $1 million a year to pay at least 30% of income in federal taxes.
 

Also: instead of allowing the current estate, gift and generation-skipping transfer tax rates to expire and default back to a $1 million exemption and 55% tax rate at the end of the year, the budget proposal would take the estate tax system back to 2009 rates. That would give each spouse a $3.5 million estate tax and generation-skipping tax exemption to work under, a $1 million gift tax extension for each spouse, and a maximum 45% estate tax rate for amounts above these levels.
 

In all, the tax proposals are expected increase government receipts by an estimated $1.5 trillion over the next ten years. 
 

The budget proposal virtually ensures that Congress will take up the extremely messy, highly-partisan issue of taxes during this election year, which may actually be good news for taxpayers. Without Congressional action, estate tax and income tax rates were due to revert back, as of January 1, 2013, to rates not seen in more than a decade.  
 

If you have a lot of spare time, you can read the full text of the budget proposal here: http://www.whitehouse.gov/omb/budget/Overview, and if you're curious about historical tax rates every year going back to the very first income tax in 1913, you can find them here: http://www.taxfoundation.org/taxdata/show/151.html. What you'll find is that the only years when people earning over $1 million a year were able to pay less than a 30% federal tax rate were 1988-1989, 1925-1931, and 1913-1916.
 

What does this mean for you? If and when Congress passes a new tax bill, which will give certainty to the tax changes to 2013 and beyond, we will incorporate that into our planning sessions with you. In the meantime, we will watch this closely and continue to keep you apprised.
 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

 
Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Sources:

www.bobveres.com

http://www.politico.com/news/stories/0212/72869.html

Your MAGI or your net investment income might put you at risk.
 

December 14, 2012

 

On January 1, a new 3.8% tax on certain kinds of investment income is set to take effect. The Medicare surtax (officially termed the Unearned Income Medicare Contribution) is slated to affect single filers with adjusted gross incomes above $200,000 and most joint filers with adjusted gross incomes above $250,000.¹

 

What is the most important thing to know about the new 3.8% tax? This has been characterized as a flat tax on investment income for the wealthiest Americans, but it is a little more complex than that.

 

The 3.8% surtax will actually be levied on the lesser of two amounts: either a) your net investment income or b) your modified adjusted gross income (MAGI) in excess of either the $200,000 or $250,000 threshold. Should either a) or b) be zero, the tax won’t apply to you in 2013.^2,3

 

Adjusted gross income is easily defined: it includes wages, income from partnerships and small businesses, retirement income, and interest, dividends and capital gains. Defining net investment income under the new surtax is a bit hazier, because (as of November) the IRS has yet to issue formal guidance.^1,4

 

What kinds of net investment income could be taxed? Many tax professionals believe the 3.8% surtax will apply to short- and long-term capital gains, dividends, interest (but not interest from muni bonds), royalties, returns realized from partnerships and activities not requiring material participation, and forms of income linked to real estate: passive income from rental property, income from the sale of a principal residence above the $250,000/$500,000 exclusion, and net gains from selling a second home.¹

 

Would certain net investment income be exempt? Besides muni bond interest, the surtax is not supposed to apply to regular or Roth IRA distributions, distributions from qualified retirement plans like 401(k)s and 403(b)s, veterans’ benefits, life insurance payouts, Social Security income or annuitized income from a retirement plan. Gains from the sale of property owned in an active trade or business would also be exempt, along with Schedule C income and income from a business on which you pay self-employment tax.^1,4

 

With the surtax looming, there has been an upswing of interest in Roth IRA conversions and the acceleration of investment income into 2012. Installment sales have also become less attractive to business owners, and family businesses who are considering a sale may want to make sure sons and daughters with an ownership interest are also employees rather than sitting on the sidelines.

 

What about the 0.9% tax? This is actually a payroll tax, so it only applies to employment income (the self-employed are not exempt). Like the 3.8% tax, it will kick in above the $200,000/$250,000 levels. While employers aren’t required to withhold the tax until an employee amasses $200,000 in wages, this tax could prove nightmarish for high-earning married professionals who file jointly in 2013: the first $200,000 of their individual wages wouldn’t be subject to such withholding, but their combined earned incomes would be taxed once they exceed $250,000.^1,4

 

It isn’t too late to strategize. If your MAGI or your net investment income might put you at risk for the tax, give us a call to discuss your options for 2012 and 2013.

 

Enjoy the rest of the holiday season!

 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600
 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Citations.
Marketinglibrary.net

1 - online.wsj.com/article/SB10001424052702304830704577496580986417316.html [7/2/12]

2 – www.cliftonlarsonallen.com/inside.aspx?id=364 [2/23/12]

3 – www.fa-mag.com/component/content/article/5638.html [6/10]

The frenzy is building. Should you care?

February 10, 2012

Anticipation is high. Facebook filed an S-1 form with the Securities and Exchange Commission on February 1, taking its first big step toward going public. It aims to raise $5 billion through its upcoming Initial Public Offering (IPO). Some of the details from the S-1 form:

·        Facebook’s revenue climbed from $777 million in 2009 to $3.71 billion in 2011.

·        Its annual profits went from $229 million (2009) to $1 billion (2011).

·        Its profits grew by 65% last year alone.

·        Its top source of revenue is advertising. (12% of Facebook’s 2011 revenues came from Zynga, a social network gaming company.)

The Google IPO raised $1.9 billion.

Will this IPO live up to all the hype? It might; it might not. Let’s examine some other key tech IPOs and see how those shares have done since.

• Google. The IPO set the share price at $85. Here in early February 2012, the share price is now around $580.
• LinkedIn. On the day of the IPO, the share price climbed from $45 to a peak of $122.70 and settled at $94.25. At the start of February, LinkedIn was trading for about $72.
• Pandora. Shares were offered at $16 in June 2011; eight months later, they were trading at $13.
• Zillow. Shares were offered at $20 in July 2011 and ended at $35.77 on the day of the IPO; in early February, Zillow traded at around $30.^2,3

All in all, these numbers look pretty good, right? Sure they do, to institutional investors. Keep in mind that the little guy gets there second. It is the institutional investor - not the small investor - who gets first dibs on the stock and who frequently realizes the terrific upside. The individual investors can get in after the shares take off; sometimes they pay a price in that they have missed the first day’s upside.
 

Lessons from the dot-com (and dot-bomb) years. The 1990s may seem like ancient history, yet there are examples from the past worth noting when it comes to IPOs.
 

• University of Florida finance professor Jay Ritter has maintained a huge database on IPOs for decades. He did a study of 1,006 IPOs from 1988-1993 (these were all IPOs that raised $20 million or more) and found that the median IPO underperformed the Russell 3000 by 30% in the first three years after going public, and that 46% of the IPOs produced negative returns.
• In 1999, 555 firms went public and the median share price gain for these issues on the day of the IPO was 30%. But what if you bought after the first day? If you did, the median gain after three months averaged 0%. Additionally, almost 75% of all U.S. Internet-related IPOs from mid-1995 to 1999 traded underneath their offering price at the moment of publication.²

Should Mom & Pop dive in? As MarketWatch columnist Mark Hulbert pointed out, Facebook’s IPO will be three times as expensive as Google’s and about 40 times as expensive as the average large IPO since 1975. As Hulbert found in the wake of a chat with Professor Ritter, Facebook’s price-to-sales ratio (PSR) looks to be about 26, with 2011 revenues of $3.71 billion and a reported IPO valuation of circa $100 billion. Google’s PSR was 8.7 at the time of its IPO. ^1,3
 

Looking back, Ritter found 76 companies since 1975 with trailing 12-month sales from the date of their IPOs of $3 billion or more (in 2011 dollars), firms with more or less reliable revenue streams. Their average PSR: 1.0. AT&T Wireless was the highest of them at 8.9, and that was a 2000 IPO.³

 

So in other words, Facebook would need staggeringly high revenues (or a consistently remarkable profit margin) for its shares to behave as well as Google shares did in those first few years out of the gate.
 

Could the tech sector see a “Facebook effect”? Yes, remember the “wealth effect” of the Google IPO? Some of the “best and the brightest” in the tech sector became overnight millionaires and went off and founded their own profitable firms. That sort of thing could happen again; there are tens of thousands of start-ups now generating revenues off of Facebook’s platform, so you have a whole ecosystem of smaller firms that are anticipating the IPO as much as institutional investors.⁴
 

Caution might be in order for those awaiting Facebook’s IPO. Individual investors have swung for the fences many times in situations like this, only to strike out.  
 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

 

Citations.

www.marketinglibrary.net

1 –www.cbsnews.com/8301-500395_162-57369966/facebook-files-to-go-public-plans-to-raise-$5b/ [2/1/12]

2 – cbsnews.com/8301-505123_162-57369940/why-facebooks-ipo-shouldnt-excite-you/ [2/2/12]

3 - www.marketwatch.com/story/facebooks-ipo-will-be-way-overvalued-2012-02-01 [2/1/12]

4 - www.mercurynews.com/business/ci_19881493 [2/2/12]

What could play out in the near future?
 

November 16, 2012

 

Will 2013 be as severe as some economists think? The fiscal cliff is getting closer and closer. How will Congress respond?

 

In the worst-case scenario, Congress argues and deadlocks. Tax hikes and roughly $109 billion in federal spending cuts take a bite out of GDP and another recession becomes a possibility.¹

 

There are other possibilities, however. The fiscal cliff may yet be averted, or at least we might back away from its edge. One of several scenarios might come to pass.

 

Scenario A: Congress buys time. Many analysts think this is exactly what will happen. Congress is in a lame-duck session. The option for legislators to “pass the buck” may prove tantalizing. So we could see a short-term, stopgap deal with the idea that the next session of Congress will tackle the problem later in 2013. The debt ceiling could be raised, and a “down payment” might be made on longer-term liabilities.¹

 

Scenario B: Congress can’t make a deal. This may not be so improbable; if you remember the “super committee” assigned to craft a deficit reduction plan in 2011, you will also remember that it didn’t accomplish the set task. In fact, we are facing the fiscal cliff because of that committee’s failure.²

 

The “fiscal cliff” already amounts to Plan B. When Congress and the White House reached an accord to raise the debt ceiling back in August 2011, $1 trillion in federal spending cuts were greenlighted and Congress was told to find $1.2 trillion more to slash. As that didn’t happen, $1.2 trillion in automatic cuts are set to begin next year. So Congress would actually be following federal law if it did nothing to respond to the issue.²

 

Doing nothing seems unsuitable, but there is the risk that history could repeat itself. Election outcomes may alter political assumptions and interfere with consensus. If it looks like we will go over the cliff in the waning days of 2012, there is a strong possibility that the incoming 113th Congress could vote quickly to reinstate select spending levels and tax breaks. That might mute some of the clamor from global financial markets.³

 

Scenario C: Middle ground is reached. Some degree of compromise occurs that leaves no one particularly satisfied. Certain short-term provisions are phased out, such as the payroll tax holiday, the recent increases for small business expensing, and assorted tax credits and tax breaks for education. The Bush-era tax cuts are preserved (at least temporarily) for the middle class, but rates rise for those making $1 million or more per year. The clock turns back to 2009 with regard to estate taxes. The rich face higher taxes on capital gains and dividends. Perhaps some defense cuts are postponed.

 

Scenario D: The “Grand Bargain.” Congress and the White House boldly arrive at a something more than an incrementally enacted deficit reduction plan. They reach a “grand bargain,” a deal designed to cut the deficit by $4 trillion by the mid-2020s, after historic, long-range compromises are made to reach stability on assorted tax and spending issues. With a lame-duck Congress, this may be a longshot.¹

 

Scenario E: The “Down Payment.” Legislators could always tear a page from another playbook in trying to solve this problem. The Bipartisan Policy Center, for example, thinks a “grand bargain,” or anything approximating a real deal on the fiscal cliff, is unlikely given the short interval between the election and 2013. It recommends a “down payment” of deficit cuts that could be approved by a fast-tracked simple majority vote. If Congress didn’t take further steps to cut the deficit next year, then certain tax breaks would disappear and cuts would hit social welfare programs (excepting Social Security).²

 

What do we think will really happen? We outlined five scenarios, but we believe that we will (most likely) go “off the cliff” for a short time. So Scenario C, in our opinion, will occur, but not until we have a new Congress in January. We do not believe a dysfunctional, lame-duck Congress will be able to agree on anything before falling off the cliff. But we do hope the “sweet talk” and “rhetoric” coming from Congress actually has meaning, and turns into a compromise before year-end. That would be a wonderful Christmas present.

 

Happy Thanksgiving!

 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.
 

Citations.

Marketinglibrary.net

1 - articles.marketwatch.com/2012-10-25/economy/34719282_1_fiscal-cliff-tax-cuts-defense-cuts [10/25/12]

2 – thehill.com/blogs/on-the-money/budget/262893-bipartisan-policy-center-floats-fiscal-cliff-solution [10/12/12]

3 - www.salon.com/2012/11/01/a_look_at_3_scenarios_as_the_fiscal_cliff_looms/singleton/ [11/1/12]
 

November 12, 2012

 

WARNING: The following is tedious and is intended to be apolitical. If you take the time to go through it, you will see that there is still hope for our economy and country.

 

One of the most interesting aspects of every presidential election is the inevitable post-election trauma suffered by the roughly 50% of Americans who supported the unsuccessful candidate. Those of us with long memories will recall Americans vowing they would leave the country after George W. Bush won the disputed 2000 election, and again four years later. Judging by President Bush's extremely low profile during the 2012 presidential election campaign, his eight years in office were not considered an unqualified success, even by his own party. Yet the country has survived, and one can predict with confidence that it will weather any political issues (and policies) that arise during a second Obama presidency.

 

In fact, if the citizens whose candidates won can come down from their highs, and those whose candidates lost can shake off the depression, they would notice that the country's economic system has been remarkably resilient despite the dysfunctional political process that virtually everybody, on both sides of the spectrum, rightly deplore. Despite the selloff the days after the recent election, the American stock market has actually delivered better performance under Democratic than Republican presidents--for no visible economic reason. (The accompanying chart shows the evidence pre-Obama.)

 

The biggest economic problems that America faces today have actually accrued slowly, gradually, and under the stewardship of multiple presidents from both parties. There is some evidence that the U.S. electorate doesn't yet understand the high cost of avoidance, of political one-liners offered by candidates from both parties that have trivialized very real long-term problems or suggested that they can be solved quickly if the right person is elected.

 

Fortunately, it is possible to understand the nature of these bigger-picture, bigger-than-a-sound-bite problems--and the solutions. You just have to put up with a lot of charts, actually 63 of them. If you don’t want to endure the slideshow, read through the narrative below.

 

The charts can be found here: http://www.businessinsider.com/politics-economics-facts-charts-2012-6# courtesy of Business Insider.

 

What you see first is a long, relatively smooth avenue of growth in the U.S. economy since 1947, punctuated by a significant drop in 2008 and a recovery to the former highs since then. A second chart shows real per capita income--the amount of money, inflation-adjusted, that the average worker takes home, and here we see a bigger drop for a longer period of time. Perhaps the most remarkable chart shows essentially the same thing for corporations: you see a very steep drop in corporate profits after tax from 2008 through 2010. But then, unlike the worker income, corporate profits zoom back up again, surpassing record highs. What is most remarkable is that most of the rise in corporate profits--literally much more than half--has been recorded in the last 11 years. Before that, corporate profit growth was slow and steady. In the past decade, it has been very uneven and spectacularly fast. The next chart shows that companies are making more profit per dollar of sales than ever before.

 

The next set of graphs is about jobs, and you see a big drop in civilian employment as a percentage of the total population during the recession, which bottomed out in 2010 and continues to scrape along at roughly 58%--well below the late 1990s high of 64%. But if you look at the chart as a whole, those high employment rates were a historical anomaly. The current total employment-population ratio is actually higher than it was at any time from 1940 to 1976, and is well above levels in the early 1980s. In the following chart, we see that wages as a percent of the economy have reached an all-time low (roughly 44%). Companies are sharing less of their revenue with employees than ever before.

 

What about debt and spending levels? You already know that total debt in our economy is at an all-time high, although it has leveled off since 2008. In subsequent charts, this is broken down into household debt, corporate debt, state and local debt, and federal government debt. All of them have risen dramatically over the past 30 years; the lines practically jump off the page. So, of course, you look for where to cut. A chart looks first at the number of state and local workers, and finds that they now represent about the same percentage of total U.S. employees as there have been for the last 40 years. The next chart--the 39th in the series, shows that, despite what you may have heard about a ballooning Washington bureaucracy, the total number of federal government employees has held steady for nearly 50 years, and is actually below levels in the late 1960s. Looked at another way, federal government workers now make up a smaller percentage of the total workforce than at any time since the 1940s.

 

The federal debt problem is not complicated: charts show that spending has gone up as federal tax revenue (due to the recession and slow recovery) has fallen dramatically. The most interesting subsequent chart shows that by far the biggest contributor to the increase--really, the reason there has been any increase at all--has been an explosion in the cost of Social Security, Medicare and Medicaid. You look at the line rising from 1960 through 2011 and it looks a bit like the slope of the Matterhorn: straight up. These programs now make up a record 16% of all American economic activity--up from roughly 4.5% in 1960. And, of course, every year sets a new record.

 

The inescapable conclusion of this economic graphic slideshow is that corporations have done very well during the four-year term of a president whom business leaders have accused of being a socialist. Individual workers have suffered under what many have called a "populist" president. Overall debt has leveled off, but somehow, the U.S. is going to have to gradually fix the out-of-balance social programs, by reducing benefits and collecting more revenue to pay for them.

 

The slide show commentary suggests that it took us 30 years to get into this mess; it may well take us 30 more to climb back out of it. Let's see; that covers the span of between four and seven future presidents, and the White House will almost certainly change hands (or parties) several times over that time period. We will need all of them, plus Congress, to recognize what you now know. And we will need all citizens, even those who were disappointed by the recent election, to continue to push for meaningful solutions rather than take their money and vote to Canada, or another country.



 

We will be in touch with you very soon about the FISCAL CLIFF!
 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600
 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

Sources:

BobVeres.com

www.BusinessInsider.com

Gauging the economic and market impact of the storm.

November 1, 2012
 

Hurricane Sandy’s fury has exacted a considerable and tragic toll. Even with the relief efforts now underway, it will be some time before things return to normal in many communities. How has Sandy impacted Main Street, Wall Street and the broader economy?
 

Repairing Main Street. How do you begin to total the damage from a storm affecting 20% of the U.S. population?¹
 

EQECAT, a risk-modeling firm, thinks it could run as much as $10-$20 billion, with $5-$10 billion reflecting insured losses. This is an important distinction, as many analysts feel a tally of $10 billion or less in covered losses could have a comparably diminished effect on the insurance industry beyond the fourth quarter. However, respected University of Maryland economist Peter Morici told MarketWatch that total losses could reach $35-45 billion (or probably more) if the superstorm ultimately proves more powerful than Hurricane Irene… exactly how Sandy was being described the morning after. That would fall well short of the economic hit from Hurricane Katrina, from which the damage totaled about $108 billion; 1992’s Hurricane Andrew was responsible for roughly $60.5 billion of destruction. Federal government officials say they have about $3.6 billion ready to pay for relief efforts.^1,2,7
 

If there is any good side to this, it is that the collective response to Sandy’s destruction may amount to an economic stimulus. MarketWatch notes that as much as $20 billion could be spent over the next 12 to 24 months on new construction, remodeling and renovation, which could further invigorate the construction industry, indirectly aid the job market, and bring about increased consumer spending.^1,2
 

Resuming trading on Wall Street.The New York Stock Exchange’s reopened Wednesday morning after a rare two-day closing due to bad weather. NYSE Euronext tested a backup plan Tuesday morning, a plan B that would have permitted trading in case things weren’t up to speed by Halloween. In this scenario, NYSE Arca would become the primary market for New York-listed stocks – we’re talking about the NYSE’s electronic market that could operate even if its trading floor or headquarters were closed for the day.³ The last time the NY stock markets were closed for two days due to weather was in March of 1888 for the great blizzard of 1888.
 

What about earnings and the October jobs report?Many corporations are delaying the release of third-quarter earnings reports. Hertz, Spirit, and Waste Management will now report quarterly results on Wednesday; Pfizer, Pitney-Bowes, Ralph Lauren, Sirius XM, and TripAdvisor will follow suit Thursday; McGraw-Hill and Thomson Reuters will now report Q3 earnings on Friday. Time Warner Cable will announce Q3 results on November 5, and Office Depot is delaying issuing its Q3 results until November 6.⁴
 

“Our intention is that Friday will be business as usual,” Labor Department public affairs specialist Jennifer Kaplan told CBS News regarding the release of October’s employment report. While noting that the severity of the storm might hinder some of the report’s final calculations, Labor Department officials are hopeful that the report can be released as scheduled November 2 (at 8:30am EST).⁵
 

Fuel prices.U.S. natural gas consumption could be greatly tempered this week, and prices may move significantly. New Jersey, Pennsylvania and Delaware are home to five of the most important gasoline refineries on the east coast, but analysts feel they could rebound decently from any storm-related problems. While RBOB gas futures rose Monday as traders assumed some disruption in supplies, it appeared the bigger blip might be demand, with commuting and trucking patterns potentially thrown out of whack for days.⁶
 

As to whether drivers might see a violent spike in gas prices, the Oil Price Information Service’s Tom Kloza dismisses the notion: “My hunch is we’ll get a wobble higher in the next couple of days, and then resume [heading] lower.”⁶
 

After the stress of this superstorm, we can only hope that its economic effect will not be as severe as some anticipated. Stay safe and our thoughts go out to those who have suffered damage and losses due to the hurricane. Please call us if we can help in any way.
 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Citations.

www.marketinglibrary.net

1 - online.wsj.com/article/SB10001424052970204840504578086290411855054.html [10/29/12]

2 - marketwatch.com/story/big-storms-rarely-dent-economy-for-long-2012-10-29 [10/29/12]

3 – www.businessweek.com/news/2012-10-29/u-dot-s-dot-stock-trading-canceled-as-new-york-girds-for-storm [10/30/12]

4 – www.cnbc.com/id/49596291 [10/29/12]

5 – www.cbsnews.com/8301-505123_162-57542196/will-hurricane-sandy-delay-the-jobs-report/ [10/29/12]

6 – www.cnbc.com/id/49596291 [10/29/12]

7 - http://www.reuters.com/article/2012/10/30/us-storm-sandy-insurance-idUSBRE89T0WT20121030[10/30/12]
 

A summary of what you need to know.

Note: This applies to anyone on Medicare currently

October 24, 2012

 

Medicare Open Enrollment has arrived. The open enrollment period begins October 15 and ends December 7, 2012. This is not only a period where you may enroll for the program, but also switch providers for your comprehensive health and drug coverage.¹

 

Some key dates to remember. This fall and winter, there are three periods in which Medicare beneficiaries can either enroll or disenroll in forms of coverage:

 

* Now through December 7: Open enrollment period. This is when you can elect to leave Original Medicare (Parts A and B) for a Medicare Advantage Plan (Part C) and change your prescription drug coverage (Part D). You can also elect to get out of a Part C plan and go back to Parts A and B during this period.

 

* December 8: Annual enrollment period begins for 5-star plans. As you probably know, Part C and Part D plans are assigned ratings. Beginning December 8, 2012 and ending November 30, 2013, a window opens for you to enroll in a 5-star Part C or Part D plan. You can do this once per 365 days. How do you find the 5-star plans? Visit www.medicare.gov/find-a-plan.

 

* January 1-February 14: Disenrollment period. If you join a Part C plan in late 2012 and want to reverse that decision, you can disenroll from that Medicare Advantage plan in this window of time and go back to Original Medicare with a stand-alone Prescription Drug Plan (Part D).^2,3

 

What should you look for in a Part C or Part D plan? Be sure to take a look at a few key factors.

* While premiums matter, overall plan expenses ultimately matter most; scrutinize the copays, the co-insurance and the yearly deductibles as well. Attractively low premiums might not tell you the whole story about the value of a Medicare Advantage plan.

 

* How inclusive is the plan network? Assuming the plan has one, does it include the hospitals you would choose and the physicians that now treat you?

 

* Regarding Part D, how wide-ranging is the prescription drug coverage? Look at the list of approved drugs (the formulary). If the drugs you want or need aren’t listed, you are probably going to have to open your wallet to pay for them. The frustrating thing about formularies is how they change; drugs on this year’s list may not always be on next year’s list.

 

* Every fall, Medicare plans mail out Annual Notice of Change (ANOC) letters to their plan members. Use this notice to determine if your current plan is still right for you and your medical care needs. If you didn’t receive such a letter in September, contact your plan.⁴

 

Premiums are rising. A report from Avalere Health, a prominent healthcare advisory company, advises that some Medicare prescription drug plans will see premiums rise by as much as 23%. The report goes on to state that the jump can be attributed not to the Affordable Care Act, but market dynamics. Regardless of the reason, this turn of events underlines the wisdom in taking the opportunity to review your Medicare plans during the open enrollment period; a better rate could give you a lot more room to move, in terms of your day-to-day finances.⁵

 

As you can see, there is nothing simple about Medicare. We hope this sheds some light on the topic. As always, call with any questions or concerns.

 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

1 – http://health.usnews.com/health-news/news/articles/2012/10/12/medicare-open-enrollment-starts-monday [10/12/12]

2 – http://www.freep.com/article/20121014/FEATURES08/310140046/Medicare-changes-What-you-need-to-know-this-year [10/14/12]

3 - http://www.q1medicare.com/PartD-Important-Dates-To-RememberPartD.php [4/3/12]

4 - http://www.medicare.gov/help-and-resources/mail-about-medicare/plan-annual-notice-of-change.html [10/12/12]

5 - http://www.chicagotribune.com/business/breaking/chi-medicare-drug-premiums-set-to-jump-in-2013-20120925,0,796177.story [9/15/12]
 

What does history show – and should we value it?

October 4, 2012
 

As an investor, you know that past performance is no guarantee of future success. Expanding that truth, history has no bearing on the future of Wall Street.
 

That said, stock market historians have repeatedly analyzed market behavior in presidential election years, and what stocks do when different parties hold the reins of power in Washington. They have noticed some interesting patterns through the years which may or may not prove true for 2012.
 

The Dow hasn’t done that well when the presidency has changed hands. A new research report from MFS Investment Management details the history of the blue chips in presidential election years from 1900-2008. It notes that the DJIA has on average lost 4.4% in election years in which the incumbent party in the White House loses. On the other hand, in years when the status quo was maintained, the Dow gained an average of 15.1%. Of course, much of these yearly gains and losses could also be chalked up to macroeconomic factors having nothing to do with a presidential race.¹
 

Overall, election years have been good for the blue chips. On average, the Dow has advanced 7.6% in the 28 election years since 1900. When Republicans have won a presidential election, the average annual gain of the index has been 10.3%. When Democrats have won the White House, the average annual gain has been 3.9%.¹
 

Do stocks respond if a particular party has control of Congress? Many House and Senate seats will be decided in November as well, and so MFS also looked for any history of effect on the S&P 500 when a single party had or lacked a majority in Congress from 1961-2010.
 

In that period, MFS notes that when the White House and Congress were controlled by the same party, the S&P annually returned 12.1% on average. In years with a Democratic President and a Republican-controlled Congress, it returned an average of +21.3%. In years when a Republican President contended with a Democrat-controlled Congress, the annual return of the index averaged +4.5%. In years in which Congress was split – regardless of who was President – the S&P went 7.1%+ on average.¹
 

Could the Dow actually help determine who wins the White House? James Stack, president of InvesTech Research, chooses to look at this through the other end of the telescope. In his view, the performance of the Dow between Labor Day and Election Day exerts a powerful influence on who wins in November.
 

Stack notes that in 25 of the 28 presidential elections held since 1900, the incumbent party in the White House either a) lost the presidency when the Dow retreated within that time frame or b) retained the White House when the Dow advanced between Labor Day and Election Day. Of course, other factors may have been considerably more influential in these elections, such as a given president’s approval rating and the unemployment rate.²
 

Bulls have run in many fourth quarters of election years. As the Stock Trader’s Almanac cites, the S&P 500 advanced in the last seven months of 15 out of the 18 election years from 1952-2008.³
 

How much weight does history ultimately hold? Perhaps not much. It is intriguing, and some analysts would instruct you to pay more attention to it rather than less. Historical “norms” are easily upended, however. Take 2008, the election year that brought us a bear market disaster. The year 2000 also brought an S&P 500 loss. While a presidential election undoubtedly affects Wall Street every four years, it is just one of many factors in determining a year’s market performance.¹ And of course, this is the first time we have had to deal with the “so-called” fiscal cliff.
 

Enjoy this wonderful weather and stay tuned. Only 1 month to Election Day!
 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Citations.

1 – https://www.mfs.com/wps/FileServerServlet?articleId=templatedata/internet/file/data/sales_tools/mfse_elect_sfl&servletCommand=default [9/12]

2 – www.usatoday.com/money/markets/story/2012/09/18/will-dows-gyrations-determine-race-for-white-house/57797628/1 [9/18/12]

3 – www.usatoday.com/money/perfi/columnist/krantz/story/2011-12-11/stocks-during-presidential-election-years/51770758/1 [12/9/11]

September 28, 2012

 

On September 13, Federal Reserve Chairman Ben Bernanke announced that the Fed would undertake a new program to stimulate the U.S. economy--and the move was immediately dubbed "QE3" by pundits and columnists. But what, exactly, is it, and how is QE3 likely to affect you and the rest of us?


 

"QE," as you probably know, stands for "quantitative easing," a term which refers to a surprisingly simple tool that any government's central bank can use to put new money into its economy. In most cases, the central bank buys government bonds and puts them on its balance sheet. A more complicated example is the Federal Reserve Board's response to the 2008 global economic meltdown, which is now called QE1. Before Congress had finished squabbling over the political ramifications of putting out the fire, the Fed purchased $600 billion of toxic mortgage-backed securities (pools of home loans) whose values had gone into free-fall on the balance sheets of large lending institutions. When that didn't completely stabilize the banking system, the Fed subsequently bought roughly $500 billion more bank debt off of troubled banks' balance sheets and became an active purchaser of short-term Treasury obligations.


 

This accomplished three things at once. First, it took a lot of toxic securities off the books of large banks and prevented them from collapsing--averting what most economists at the time thought would be a prelude to disaster. Also, when the Fed became an aggressive new bidder in the Treasury auctions, it created more demand for short-term Treasuries, lowering the interest rate that the government had to pay on its burgeoning debt while the government decided how else to shock the economy back to health.


 

Finally, the transactions amounted to printing money, since the Fed could simply buy the securities based on the full faith and credit of the U.S. government. In all, $2 trillion of new money entered the U.S. economy, and the hope was that this would result in more lending, more buying and a quick exit to the recession.


 

QE2 started in November of 2010, when the Fed purchased another $600 billion of Treasury securities. Once again, new money entered the economy and the U.S. government's borrowing costs were driven down to near zero levels. Perhaps more importantly, this initiative also caused the value of the dollar to drop, making U.S. exports cheaper, stimulating export activity and counteracting efforts by Japan and other countries to artificially make their own exports more attractive on the global market.


 

Later, starting in late 2011 and continuing through the end of this year, the Fed extended QE2 with something that has been described as "Operation Twist," which was basically an effort to reduce longer-term interest rates. Under Operation Twist, the Fed has been selling $700 billion worth of its short-term Treasuries and is using that money to bid on longer-term government bonds. Once gain, the central bank has increased demand for bonds, driving down longer-term rates and reducing the government's longer-term borrowing costs.


 

So what, exactly, is QE3, and why is everybody so excited about it? In its third round of stimulus, the Fed has pledged to buy $40 billion worth of mortgage-backed securities a month--or, to put it another way, to inject $40 billion a month into the pool of money that banks can lend to homeowners, so they can either buy new homes or refinance the homes they already own.


 

This is not a trivial sum; it amounts to fully 10% of the value of new mortgage activity in the U.S. economy. And it very precisely targets one area of the American economy that has shown little sign of recovery since the 2008 downturn. Total U.S. mortgage originations in the U.S. have fallen from $600 billion a month in the relative boom times of 2007 down to $370 billion currently. That translates into a lot of homes not being purchased.


 

If QE3 works as expected, the additional money will drive down mortgage rates, which would make homes more affordable. That should attract new buyers of homes and stimulate the moribund construction industry. Greater demand for newly-constructed homes could move the job market needle by creating work for all the professions that rely on home construction and housing, including realtors, contractors, architects, attorneys, appraisers, plumbers, roofers, carpenters, producers of lumber, sheetrock and concrete.


 

At the same time, QE3 will put a little extra money in the pockets of people who refinance their current mortgages at lower rates. If they spend some of that money, then that, too, will help spur additional economic activity.


 

How is it working so far? Interestingly, mortgage rates have hardly budged since the first QE3 money began filtering into the marketplace. Economists believe that 30-year rate fixed-rate mortgages will eventually come down from 3.55% to somewhere around 3.25%, and 15-year fixed-rate mortgages could drop from 2.85% to 2.75%. But that hasn't happened yet, in part because banks haven't relaxed their tight lending standards, in part because many banks currently have so many refinancing applications on their desks that they can't process any more.


 

As a result, the pernicious initial effect has been to give cheaper money to banks without lowering mortgage rates. Instead of lending more money at lower rates, banks are simply taking a larger spread on the loans they do make. That's why you sometimes hear that QE3 has been a government welfare program to large, solvent lending institutions.


 

The biggest impact, so far, has been on stock prices. As the Fed buys mortgage pools, QE3 is driving down the returns that investors can get on Ginnie Mae and Fannie Mae mortgage-backed bonds. These had been among the most attractive fixed-income vehicles in a marketplace starved for yield, delivering higher-than-historical average spreads over Treasuries of comparable maturity. As those investments deliver lower yields, stocks, especially those of dividend-paying companies, become relatively more attractive.


 

The last and perhaps most effective stimulative effect is psychological. Unlike the QEs of the past, the Fed has put no time or dollar limits on QE3. The formal announcement of the program promised that it would continue until the Fed has decided that there is "substantial improvement" in economic growth and the unemployment rate. These are not exactly precise terms, and of course commentators have been trying to parse out exactly what "substantial improvement" means. In real terms, however, it appears that the Fed has lost patience with corporations hoarding cash rather than investing in their own (and the economy's) growth, and banks that have been sitting on all the cheap QE money that is available to borrow and re-lend at a profit to homeowners and corporate borrowers. If these companies stay on the sidelines and refuse to participate in the economic growth that the Fed is determined to engineer, then they'll be left behind and forced to answer to their shareholders.


 

How much growth are we talking about? In the report that accompanied the announcement, nine out of the twelve Fed districts reported modest or moderate economic growth. Before QE3, the Fed's projections for GDP growth in 2012 was somewhere in the 1.7-2% range, which is clearly below long-term averages. The Fed had projected 2.5-3% GDP growth for 2013 and 3.0-3.8% for 2014--again without taking QE3 into account.


 

If the housing market and construction industry can be lifted off the ground, one would have to assume that those numbers will go up. Estimates vary, but the U.S. economy needs to reach 3% annual GDP growth before hiring levels absorb new job market applicants and start to reabsorb the people who lost their jobs in the downturn. The Fed seems to have decided that reviving the construction industry is the most focused possible way to bring about the growth that economists would expect America to achieve by 2014 without the benefit of a stimulus.


 

One more thing: how much does QE3 add to the national debt? Zero. For the money it created, the Fed owns interest-bearing mortgage-backed securities and pools of mortgage debt, which can be sold at any time, and it earns a return on the money it magically created in the meantime.


 

What does this mean for you?

QE3 could mean another chance to refinance for those with mortgages. And maybe, just maybe the stock market will get another boost from this. Keep an eye on mortgage rates. We will be watching the markets.


 

As usual call us with any questions. Enjoy Autumn!

 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600
 

It isn’t too early to think about next year.
 

September 25, 2012

 

We are now in plain view of the “fiscal cliff”. After the election,Congress may or may not end up keeping income and estate tax rates at their recent levels. Next year may bring some notable financial developments, and it isn’t too soon for households to think about them.

 

You may want to prioritize tax reduction.If the Bush-era tax cuts sunset, everyonewill see higher taxes. The federal income tax brackets (10%, 15%, 25%, 28%, 33%, 35%) that we have known for the last nine years would be replaced by five higher ones (15%, 28%, 31%, 36%, 39.6%) come 2013.¹

 

High earners may want to watch their incomes.If your earned income for 2013 tops $200,000 - or exceeds $250,000, in the case of a couple – you may face two Medicare surtaxes. While the Medicare payroll tax on earnedincomes above these levels is set to rise to 2.35% from the current 1.45%, the second surtax may prove to be the real annoyance: there is scheduled to be a 3.8% charge on net investment income for individuals and couples whose modified adjusted gross incomes surpass these levels.^1,2

 

Some fine points about this second surtax must be mentioned. It would actually be levied on the lesser of two amounts – either your net investment income or excess MAGI above the $200,000/$250,000 levels. Most investment income derived from material participation in a business activity would be exempt from the 3.8% surtax, along with tax-exempt interest income, tax-exempt gains realized from selling your home, retirement plan distributions and income that would already be subject to self-employed Social Security tax.²

 

The bottom line is that a bonus, an IRA distribution, or a sizable capital gain may push your earned income above these thresholds – and it will be wise to consider the impact that would have.

 

You may have less take-home pay next year. Social Security taxes for paycheck employees are slated to return to the 6.2% level in 2013. They’ve been at 4.2% since the start of 2011. If you earn $75,000 during 2013, you will take home about $1,500 less of it than you would have in 2012. If you earn $50,000, we’re talking $1,000 less.³

 

Any 2013 Social Security COLA may be minor. In 2012, the cost of living adjustment to Social Security benefits was 3.6%. Before that, Social Security recipients went three years without a COLA. As inflation is mild, whatever COLA is announced this fall in tandem with Medicare premium changes may not amount to much.¹

 

Next year, medical expense deductions may shrink.If you are thinking about delaying a procedure or surgery until 2013, remember that the itemized deduction threshold for unreimbursed medical expenses is set to increase from 7.5% to 10% of adjusted gross income in 2013. Even if that happens, however, the threshold will remain at 7.5% through 2016 for taxpayers age 65 and older.¹

 

You may be able to find a better Medicare Advantage plan for 2013.The Affordable Care Act has altered the landscape for these plans (and their prescription drug coverage). Using Medicare’s Plan Finder (click on the “Find health & drug plans” link at Medicare.gov), you may discover similar or better coverage at lower premiums. The enrollment period for 2013 coverage runs from October 15 to December 7.¹

 

Those without work may find a safety net gone.Extended jobless benefits may disappear for the long-term unemployed at the start of 2013. Will Congress extend them once again? Possibly – but that isn’t a given.

 

The estate & gift tax exemptions may shrink significantly.The (unified) lifetime federal gift and estate tax exemption is currently set at $5.12 million – and it will drop to $1 million in 2013 if Congress stands pat. Federal gift tax and estate tax rates are also slated to max out at 55% in 2013, as opposed to 35% in 2012. Right now, an unused portion of a $5.12 million lifetime exemption is portable to a surviving spouse; in 2013, that portability is supposed to disappear.⁴

 

Many analysts and economists think that Congress will eventually abide by President Obama’s wishes and take things back to 2009 instead of 2001 – that is, a $3.5 million estate tax exemption, a $1 million lifetime gift tax exemption, and a 45% maximum estate and gift tax rate.⁴

 

Prepare for year-end drama ... and for 2013.The last two months of 2012 will surely bring political theatre to Capitol Hill. As it unfolds, you may want to look ahead to next year and consider the impact that these potential changes could have on your financial life.

 

We will be watching carefully especially as we approach the elections.

Happy Fall!

 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600
 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Citations.

www.marketinglibrary.net

1 – money.usnews.com/money/blogs/the-best-life/2012/08/29/get-ready-for-5-key-money-changes-in-2013 [8/29/12]

2 – www.cliftonlarsonallen.com/inside.aspx?id=364 [2/23/12]

3 – money.cnn.com/2012/05/29/news/economy/payroll-tax-cut/index.htmx [5/29/12]

4 – www.smartmoney.com/taxes/income/preparing-for-taxmageddon-1337724496427/ [5/23/12]
 

August 30, 2012

 

Traders and people who try to predict the short-term future of the markets--that is, most market participants--pay a lot of attention to the Federal Reserve Board, trying to read between the lines of the opaque comments in the Federal Open Market Committee minutes whether the Fed plans to stimulate the economy with the goal of giving stock prices a temporary boost. So you can imagine their excitement last week when they read something as non-opaque as this:"Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery."

 

Okay, maybe that wasn't exactly 'plain' English, but it's about as clear as the Fed gets to saying that if the economy doesn't get busy and start recovering at a faster pace, we're going to get some stimulus come September.

 

The first surprising thing about this is that jobs growth was surprisingly strong in July--163,000 new jobs were created in a month when many people are on vacation. Meanwhile, the National Association of Realtors reported that sales of previously-owned homes jumped 2.3% in July, 10.4% over the pace seen in July 2011.

 

The second surprise is that it seems like the Fed has already done just about everything it CAN do to encourage economic growth. A quick check shows that if interest rates get much lower, we believe banks will be paying you to borrow from them. The government is already experiencing this happy state. In a Treasury auction around this time last year, the government's Inflation-Protected Securities sold at an aggregate negative interest rate--meaning that borrowers were paying their Uncle Sam for the privilege of lending him their money.

 

In fact, there are several possibilities. One is for the Fed to cut the interest it pays to banks who are parking their excess reserves, to encourage a lot of lazy money to get off the couch and get itself lent out to households and businesses. The Fed could also engage in a third round of Quantitative Easing. Under QE3, the Central Bank would invest its own money in longer-term Treasury Bonds, forcing down long-term interest rates.

 

But this might actually be an example of a more effective stimulus: hot air. That is, the Fed can depart dramatically from its normal circumlocutions and include, in its minutes, a direct statement about how serious it is about boosting economic growth. That gets traders and short-term opportunists excited. With such easy-to-read tea leaves in front of them, they call in trades, buy stocks, boost the market, generate a bit more optimism in the corporate sector--and the economy gets a quick jolt without the Fed having to reach into its pocket. It hasn't worked so far, but Fed Chairman Ben Bernanke will make a widely anticipated speech on Friday--his second shot at creating a hot air stimulus for the U.S. economy.

 

Have a nice holiday weekend!

 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Sources:

Bob Veres, Inside Information

http://www.ft.com/intl/cms/s/461e7df4-ec7c-11e1-8e4a-00144feab49a,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F461e7df4-ec7c-11e1-8e4a-00144feab49a.html&_i_referer=#axzz24mdmHpeR

http://www.ft.com/intl/cms/s/0/99804836-ec60-11e1-81f4-00144feab49a.html#axzz24mdmHpeR

http://www.bloomberg.com/news/2011-08-09/u-s-10-year-tips-yields-go-negative-for-first-time-after-fed-rate-promise.html

 

August 22, 2012

 

You may have been scratching your head at the ongoing (so-called) "Libor Scandal." What, exactly, did those banks do that was so awful? One answer is: they lowered your interest rates on everything from credit card debt to student loans.

 

Come again?

 

"Libor" is an acronym that stands for "London Interbank Offered Rate," which is calculated each day by the British Banker's Association in London. Every morning, representatives of the BBA ask large banks to estimate the rate at which they believe other banks would lend them money over various time periods--ranging from overnight to 12 months. The BBA collects all the estimates, throws out the highest and lowest figures, averages the remaining numbers and publishes the result every day at 11:30 AM London time--denominated in ten currencies, including the U.S. dollar.

 

Libor is then used by lenders around the world to reset their rates for a variety of variable-rate loans. When their teaser rates run out, many U.S. adjustable-rate mortgages (ARMs) are priced at somewhere between 1.5% to 3% over the one-year Libor rate. Some of the credit cards in your wallet or purse charge, on all unpaid balances, 20% (or more) above whatever the Libor figure happens to be. Commercial and student loans are routinely set and adjusted based on Libor figures.

 

Rigging this important interest rate benchmark was shockingly easy. The scandal, which has already caused Barclays PLC CEO Robert Diamond, Jr. to resign in disgrace, came about when regulators discovered that bank executives made a habit of lying about these numbers to the BBA representatives--and even discussed their phony numbers with executives at rival banks in email messages. As a result, since 2008, large and sometimes questionably-solvent banks have been estimating that they are far more creditworthy than they knew they actually were. By submitting low estimates of their borrowing costs, they artificially and systematically drove down the published Libor rate.

 

A total of 17 large financial institutions, including five companies with significant brokerage and sales operations in the U.S. (UBS, Citigroup, Credit Suisse, Bank of America and JP Morgan), plus Barclays Bank and Germany's Deutsche Bank, are under investigation by regulators in the U.S. and Europe. Barclays has already paid $340 million in fines.

 

As it turns out, even a cursory check of the rates that banks were actually borrowing on the credit swap market would have turned up the discrepancies. After the scandal broke, Fortune magazine pulled up these figures, and reported that Citigroup might have been the most persistent offender in the group. The magazine compared each bank's Libor submissions with other measures of their borrowing costs, looking for the biggest gaps (and, therefore, the biggest lies). Citibank's differential consistently led the pack.

 

Rigging Libor gave brokerage traders a crafty advantage over their customers. At Barclays, traders made big bets on derivatives whose value depended on Libor; knowing how those rates would incrementally shift up or down was remarkably lucrative--at the expense, of course, of investors who didn't have this advantage.

 

What are the implications of all this for the average Joe on the street? If your mortgage happens to be an adjustable-rate loan tied to the Libor index, brace yourself. Your rates may have been artificially low since 2008, and could jump as the BBA starts to get more realistic estimates. The aforementioned student loans and interest on credit cards could also bump up a bit.

 

Beyond that, you can thank the deceptive brokerage firms and banks for lowering interest rates and saving you a few dollars, even if you know that you were the last thing on their minds when they whispered deflated estimates into the phone.

 

But perhaps the biggest takeaway is that we have once again discovered that some of our largest financial institutions have gotten in the comfortable habit of lying. Indeed, in an op-ed piece in London's daily The Telegraph, an insider from one of Britain's biggest lenders, speaking for his colleagues around the world, said that this manipulation and deception--telling quasi-regulatory bodies that the bank could borrow at 2% when in reality the right number was more like 5-6%--was a routine part of doing business.

 

Not only was the deception an open secret, the large banks themselves, he said, would refuse to lend to their customers based on the phony Libor rates they were providing. Why? Because they knew the numbers were phony.

 

Bottom line for investors: For once the shenanigans by the big investment banks did not hurt the little guy. However, I don’t think the fines imposed will be enough to dissuade the “big” guys from playing their games in the future. We will continue to be on the alert.

 

Enjoy the rest of your summer!

 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Sources:

BobVeres, Inside Information

http://www.institutionalinvestor.com/Article/3063818/What-the-Libor-Scandal-Really-Means.html?LS=EMS688545

http://www.huffingtonpost.com/2012/07/11/libor-rate-scandal_n_1664737.html?utm_hp_ref=libor-scandal#slide=1212057

http://www.independent.com/news/2012/aug/04/libor-global-interest-rate-benchmark/

http://www.huffingtonpost.com/mark-gongloff/libor-scandal-citigroup_b_1689853.html

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9368430/Libor-scandal-How-I-manipulated-the-bank-borrowing-rate.html

A lighter note

By now, you've seen the final medal count at the London Olympics, and no doubt felt a stirring of national pride. American athletes took home 104 total gold, silver and bronze medals, comfortably ahead of China (87), Russia (82), Great Britain (65), Germany (44), Japan (38), Australia (35), France (34), South Korea (28) and Italy (28).

 

Does that mean that we Americans--so often accused of being a nation of couch potatoes--are the most athletic people in the world? Total medal count is one way to measure, but it may not be the best. Another measurement would take into account the relative number of medals compared to a country's total population: Olympic medals per capita, or (to avoid many decimal places) the number of medals each nation took home per million people in its population.

 

Medals per million give us a very different ranking. By this measure, citizens of the Caribbean island of Granada are by far the most athletic, with 9.5 Olympic medals per million citizens, followed by the Jamaicans (4.4 per million), the citizens of Trinidad and Tobago (3.0), New Zealanders (2.9) and Bahamians (2.8). The Cubans rank number 16, bolstering the hypothesis that the Caribbean islands, taken together, have the world's most athletic populations.

 

By this measure, you have to go all the way down to number 48 to find the United States (0.33 medals per million citizens), and China is somewhere near the bottom (0.065 medals per million people).

 

However, this medals per million ranking is a bit misleading. A country with a very low population has a huge advantage in this sort of list if it can manage to get one or two athletes on the podium. With a total of 105,000 citizens (roughly the same as Billings, Montana or Round Rock, Texas), Granada needed to earn just one medal to claim the top spot on the list: Kirani James's gold medal in the men's 400 meter dash. Montenegro, which has just 620,029 citizens (about as many as Seattle, Washington) finished eighth in medals per million purely on the strength of its silver medalist women's team handball squad.

 

If the United States (population 314 million) had somehow managed to win all 934 medals given out at these Olympic Games, it would have brought home 2.974 medals per million citizens, which would have ranked no higher than 5th on this table. If China (population 1.35 billion) had swept the medal count, the best it could have done was .693 medals per million people, fewer on this list than Slovakia (4 medals, including one silver by women's trap shooter Zuzana Stefecekova), but comfortably ahead of Gabon (one silver medal carried home by heavyweight Taekwondo competitor Anthony Obame).

 

A fairer ranking, reproduced here, would eliminate all countries that have a total population below one million, including leaders Granada, the Bahamas, Montenegro (1 medal, 1.6 per million) and Cyprus (one medal, 1.2 per million), and countries which earned fewer than three medals--this last cut being made on the theory that one or two individuals might not be representative of the population as a whole. Estonia (2 medals, 1.5 per million), Qatar (2 medals, 1.2 per million), Bahrain (1 medal, 0.81 per million), Latvia (2 medals, 0.96 medals per million), Gabon (1 medal, 0.64 per million), Moldova (2 medals, 0.56 per million) and Puerto Rico (2 medals, 0.54 per million) thus drop out of the upper echelon of our rankings, simply because they didn't win enough medals to qualify for our (somewhat arbitrary) list. This criteria also eliminates Greece, Portugal, Taiwan, Malaysia, and Singapore from the list of leaders.

 

In this paired-down ranking, you find that some nations at the top are specialists in one or two events. Jamaica leads the way with its dominant performance by the insanely fast Usain Bolt and a host of other speedsters who dominated the men's and women's sprint competitions. Trinidad and Tobago, which won four medals in the sprints, finished second in this ranking. New Zealand, third on the list, was also somewhat of a specialist; its competitors won two sailing medals and a Canoe/Kayak gold, plus three cycling medals and a silver in the women's shot put. Mongolia's Olympic team was mainly good at fighting; its athletes took home two boxing medals, medaled twice in judo and took home a bronze in women's wrestling.

 

Overall medal champ United States lands 35th on this revised list, with a per capita medal count roughly one-thirteenth of Jamaica's. By this count, America finished a notch ahead of Japan, but appears to be less athletic, per person, than Spain, Russia, France, Germany, South Korea and host Great Britain, which finished a very respectable 16th in medals per capita. China, the runner-up in the overall medal count, came in 49th.

 

Is there something in this sporting calculation for economists to pore over? When you turn to the bottom of the list, you notice some interesting trends. When measured on a per capita medal basis, India finished dead last among nations that won at least one medal; overall, the world's second-most-populous nation (1.2 billion people) brought home just six medals (including silvers in men's freestyle wrestling and the men's rapid-fire pistol competition). That comes to 0.005 medals per million people. Not far ahead was the world's fourth most populous nation, Indonesia (238 million), which brought home just two medals (a silver and a bronze in men's weightlifting), giving it 0.008 medals per million citizens. One could argue, however, that several of the world's 20 most populous countries should receive lower rankings. Pakistan (180 million), Nigeria (167 million), Bangladesh (153 million), the Philippines (92 million), Vietnam (88 million) and Egypt (82 million) all failed to bring home a single medal from the London competition.

 

A closer look suggests a reason why. Training for the Olympic trap shooting competition, or the kayaking finals, or sprints, hurdles or the 400 meter freestyle swimming events is fundamentally a leisure activity, which requires a lot of free time, elaborate training facilities, and perhaps also the promise of endorsement deals for those who stand on the Olympic podium. Countries that rank near the bottom of the global rankings in per capita income (using statistics contained in the CIA World Fact book) tended to perform far less well, per capita, than their more prosperous peers. Like Liberia (tied with the Democratic Republic of the Congo for the bottom ranking at #194), they were less likely to have citizens who can afford to spend years in a weight room or take a decade off work to fully master Greco-Roman wrestling moves.

 

China, at number 95, sits at roughly the midpoint of these prosperity rankings, and the bottom third can be defined as anything below 130th. Of the 115 nations that earned no medal at all, 68 fall in this lower 33% range of global prosperity, and all but a handful are deep in the bottom half.

 

Among the most prosperous 33% of nations, only six failed to medal: Luxembourg (3rd highest per capita income in the world), United Arab Emirates (8th), Austria (12th), Israel (30th), Slovenia (35th), and Chile (59th).

 

Meanwhile, among the 47 nations that earned more medals, per capita, than the U.S., only seven (Mongolia at 130, Georgia at 119, Armenia at 118, Moldova at 136 and the Ukraine at 108) report below-global-average per capita income. A few others, like Jamaica (94) and Cuba (89) are on the bubble. It's possible that these are truly, all things considered, the most athletic nations in the world.

 

As the Olympics and the summer draw to a close, we will keep our eye on the markets and the elections.
 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.
 

Sources:

Bob Veres, Inside Information
 

July 26, 2012
 

At the start of next year (2013), America's entire tax regime is set to change, as the Bush-era tax rates shift back to their previous (higher) levels, and preferential (lower) rates on capital gains and dividends phase out. The estate tax rates will go up and the exclusion amounts will go down. Congress may intercede between now and then, but in an election year, any meaningful compromise is far from certain.

 

This has created an unusual level of uncertainty among financial advisors and planners. However, the recent Supreme Court ruling on the 2010 Patient Protection Affordable Care Act (sometimes colloquially referred to as "Obamacare") has taken one uncertainty off the table. We now know that a new tax will have to be planned for as of January 1. As a way of shoring up the shaky finances of our Medicare Trust Fund, the budget reconciliation bill that was passed in conjunction with the health care reform bill will impose a 3.8% "Medicare Contribution" tax starting in tax year 2013.

 

What does that mean to you? For 97% of all households--individuals whose current taxable income falls below $200,000, or couples with a joint income below $250,000--the tax is irrelevant; it only applies to persons above those income thresholds. (Technically, the actual number would be a modified adjusted gross income.)

 

For example, suppose a husband and wife completed their tax forms, and found that they had adjusted gross income of $400,000 in 2013. The first number that the 3.8% tax might be applied to is $150,000 ($400,000 - $250,000). Moving to the second test, let's suppose that they earned interest income amounting to $40,000, and had sold some stocks for a capital gains profit of another $40,000. But they had also sold some stocks at a loss, amounting to $15,000. Their net investment income comes to $65,000. That's obviously lower than $150,000, so that is the amount on which the couple pays the Medicare Contribution tax. Their MC tax comes to $2,470.

 

Suppose the couple only earned $265,000 in that same year. They would pay taxes on $15,000 ($265,000 - $250,000), rather than on the investment income.

 

You might have read that this tax will be imposed on the gains from the sale of your house, but that may NOT be true. If your income is above the threshold limit, you and your spouse would still have to make a profit of more than $500,000 ($250,000 for singles) on the sale of your house before the tax becomes applicable.
 

The investment calculation does NOT include payouts from a regular or Roth IRA, 401(k) plan, Social Security or veterans' benefits, or any income from a business on which you are paying self-employment tax. It also doesn't apply to the appreciation of your stocks or mutual funds until or unless they're sold and gains are taken. However, IRA and qualified plan distributions DO raise your modified adjusted gross income, and this, of course, can put you over the threshold.

 

What should you do now? Normally we recommend deferring income into next year, and accelerating expenses into the current year, when possible. For 2012, because of the new taxes that will go into effect in 2012, and the possibility of Long Term Capital Gains taxes increasing to 20% from 15%, we recommend the following:
 

1. Accelerate income into 2012 wherever possible,

2. Sell stocks and mutual funds on which you have gains in 2012

3. Defer deductions and losses until 2013

4. Consider converting IRA assets into Roth IRA assets in 2012.

 

Distributions from the Roth IRA never show up in any of these 3.8% calculations, and the money paid up-front in taxes lowers the taxable income amounts in the future. As a potential bonus, the tax rates in 2012 might be lower than they would be if all the tax rates jump on January 1.

 

Still, it is important to remember that taxes are only one component of your total investment picture. A strategy that simply tries to lower your payments to Uncle Sam may not be the best one for your personal needs, or for building retirement income.

 

If you have any questions about your individual situation, please give us a call. Enjoy the rest of the summer and stay cool!

 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Sources:

Bob Veres, Inside Information

http://www.realtor.org/small_business_health_coverage.nsf/Pages/health_ref_faq_med_tax?OpenDocument

http://dailycapitalist.com/2012/06/29/obamacare-bill-one-more-tax-thing/

http://www.snopes.com/politics/taxes/realestate.asp

http://www.weisslerlawgroup.com/NewslettersforClients/Current-Planning-to-Avoid-the-Future.shtml

 What happens in the wake of the Supreme Court’s decision?

July 3, 2012
 

The mandate stands. By a 5-4 vote, the Supreme Court has upheld the core of the 2010 Affordable Care Act. The law’s most controversial provision will stand – the mandate requiring every American citizen to buy individual health insurance coverage.¹

 

The court made a key distinction, interpreting that mandate not as a directive but as a tax. “The federal government does not have the power to order people to buy health insurance," Chief Justice John G. Roberts, Jr. wrote in the majority opinion. "The federal government does have the power to impose a tax on those without health insurance."¹

 

The ruling carries profound implications for individuals, businesses and households.

Every American has to have health insurance by 2014 or pay a tax. If you are already insured, this isn’t a dilemma – but if you are self-employed or work at a company with fewer than 50 employees that doesn’t provide health insurance coverage, securing health coverage will be your individual responsibility.²

 

If you fail to buy health insurance in 2014, you will pay a penalty - $95 or 1% of your income, whichever is higher. In 2015, the penalty rises to $325 or 2% of your income.²

 

Larger companies must comply or face fines. Any business with more than 50 full-time employees must provide health insurance coverage to its workforce in 2014. If a business fails to do this, it will be fined if just one of its employees buys insurance on a state exchange (see below) or goes to the federal government for a health care tax credit.²

 

The fines will start at $40,000 and jump $2,000 for each additional worker older than 50 – and if the plan doesn’t cover 60% or more of health care expenses and cost an employee no more than 9.5% of his or her family’s salary, the per-employee penalty rises to $3,000.²

 

Federal government statistics indicate that only about 200,000 of the nation’s 6 million small businesses will face this obligation. Health care rebates (from insurance companies that spent too much on administrative overhead) and health care tax credits (which averaged $2,700 per business in 2011) may help.²

 

Business owners who pay for employee health coverage could see a reduction in premiums – theoretically, at least.

 

A “Cadillac tax” is coming. In 2018, insurers of employer-sponsored plans (or firms that self-insure their own plans) are looking at an excise tax if plan costs exceed $10,200 for individual coverage and $27,500 for family coverage. These limits are higher for plans covering employees in high-risk occupations and retirees. The idea is to encourage these businesses to select less expensive plans, with the byproduct possibly being higher taxable wages for workers (and added revenue for the federal government). Mercer polled businesses with more than 500 employees in 2011 and found that about 60% felt they would face this new tax.⁴

 

The Medicare surtax is on the horizon. In 2013, individuals earning more than $200,000 a year and married couples earning more than $250,000 a year are facing a new 3.8% surtax on at least a percentage of their capital gains and dividends as well as 0.9% more tax on their earned incomes above those dollar levels.⁴

 

The threshold for medical deductions is poised to rise. This year, you can deduct medical expenses when they surpass 7.5% of your adjusted gross income. In 2013, the threshold will be 10% - but this increase will be waived for Americans 65 and older during tax years 2013-2016.⁴

 

The new FSA and HSA rules stand. Next year, employees may contribute no more than $2,500 to a Flexible Spending Account. The 2011 provision levying a 20% penalty for the misuse of funds from a Heath Spending Account will remain in place.⁴

Insurance exchanges are set to appear in 2014. Individuals, solopreneurs and businesses can start shopping for cheaper coverage via their state’s exchanges. (A dozen states are already at work creating them.) Individuals can qualify for tax credits if their annual individual income ranges between 100%-400% of the poverty line (in 2012, the ceiling would be $44,680). Via these exchanges, families with annual household incomes up to nearly $90,000 will be able to buy insurance at prices subsidized according to income level. Firms with up to 100 workers may turn to Small Business Health Options Programs.^2,3


 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Citations.

1 – www.latimes.com/news/politics/la-pn-justice-roberts-leads-supreme-court-support-of-healthcare-law-20120628,0,3606595.story [6/28/12]

2 – money.cnn.com/2012/06/28/smallbusiness/supreme-court-health-reform/index.htm [6/28/12]

3 - www.cnbc.com/id/47996639 [6/28/12]

4 - money.cnn.com/2012/06/28/pf/taxes/health_reform_new_taxes/index.htm [6/28/12]
 

2013 isn’t far off, yet both sides of Congress could end up far apart.
 

June 10, 2012

 

Recently, you may have heard about the “looming fiscal cliff”, the “coming fiscal cliff” and so forth. What exactly is it?

 

Briefly stated, the “fiscal cliff” is a potential $7 trillion dilemma facing Congress this fall – a Congress not known for ready cooperation. If America goes over it, our economy could stumble.¹

 

Will Congress act before 2013?Federal Reserve Chairman Ben Bernanke introduced the phrase, referring to an economic downfall he fears will result from a potential 2013 combination of federal budget cuts, the expiration of the Bush-era tax cuts, the end of the payroll tax holiday and extended jobless benefits and other recent stimulus measures. Bernanke told Congress that together, these changes could send the U.S. over a “fiscal cliff” and into another recession.²

 

How bad might the potential downturn be?Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, thinks the U.S. could see a recession “immediately”. Moody’s economist Mark Zandi thinks it could shave 3% off America’s inflation-adjusted GDP next year (read: zero growth).¹

 

The hope is that Congress will come together and help the economy avoid the cliff. It won’t be easy. Remember the big fight over the debt ceiling in Congress? Imagine it expanded to other issues, its magnitude amplified to a new level.

 

What happens after the election? It will likely be November before Congress really starts to knuckle down and address this dilemma. Legislators have some options:

 

*They could punt again.The punt wouldn’t be as embarrassing as the one chosen by the ill-fated “super committee” that couldn’t agree how to reduce the deficit in 2011. It would be more like a handoff: the outgoing Congress could simply extend certain tax cuts or stimulus measures and leave the big and painful decisions for the new Congress. Many journalists and analysts believe that this is exactly what will happen in Washington.Some think a credit downgrade could result.^2,3

 

*They could extend the Bush-era tax cuts again.If any political change in November is momentous, the stage could be set for another EGTRRA/JGTRRA (tax acts) extension and the planned cuts to defense spending and other key programs might be undone. That would certainly boost the morale of Wall Street and the taxpayer. The consequence? The nation could really pay for it later. Extending the Bush-era cuts would cost the federal government anywhere from $5.35 trillion to over $7 trillion over the next decade, the Congressional Budget Office believes.^1,3

 

*They could do nothing.Even if the waning days of the 112th Congress aren’t as fractious as feared, some analysts think that lawmakers will likely let the Bush-era tax cuts, the 2% payroll tax cut and long-term unemployment benefits sunset, as the need for revenue on Capitol Hill has simply become too great.²

 

What can the Fed do? In Ben Bernanke’s assessment: basically nothing. In fact, that is more or less what he told Congress this spring: “If no action were to be taken, the size of the fiscal cliff is such that there's, I think, absolutely no chance that the Federal Reserve ... could or would have any ability whatsoever to offset ... that effect on the economy.”³

 

What could happen economically before we get to the edge?A June report from analysts at Bank of America expressed some fears: “As the cliff approaches, we expect first firms and then households to start postponing decisions, weakening the economy in advance of the cliff. When you are approaching a cliff, in a deep fog of uncertainty, you slow down.” This spring, Bernanke reminded Congress that “the brinkmanship last summer over the debt limit had very significant adverse effects for financial markets and for our economy” and “knocked down consumer confidence quite noticeably.” He urged lawmakers not to “push us to the 12th hour.”²

 

Expect a pitched battle on Capitol Hill.Alan Simpson, who for many years served Wyoming in the Senate, recently told CNNMoney that this lame-duck session of Congress could wrap up with seven weeks of “chaos”. Yes, just seven weeks; if lawmakers wait to tackle this in earnest after the election, that is all the time they will have to consider what could be some of the most pivotal political decisions they will ever make.³

 

Some political theatre seems to be ahead – a drama with an uncertain ending, with the near-term fate of economy parked at the edge of a cliff.

 

What does this mean for you?

Uncertainty is never good for the markets. Thus we believe it is better to be cautious and “play defense” at this time. We will stay on top of these issues and keep you apprised of any developments. As always, please call if you have any questions or concerns about your portfolio or the current state of the economy.

 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Citations.

www.marketinglibrary.net

1 - money.cnn.com/2012/04/30/news/economy/fiscal_cliff/index.htm [4/30/12]

2 – articles.latimes.com/2012/jun/07/business/la-fi-bernanke-economy-20120608 [6/7/12]

3 – money.cnn.com/2012/05/16/news/economy/fiscal-cliff/index.htm[5/25/12]
 

May 21, 2012
 

The nation of Greece has a current population of 11.3 million people, which is just slightly fewer than the number of people who reside in the state of Ohio--roughly .165% of the global population. Its economy (measured by GDP) is roughly .478% of the world's total, falling somewhere on the global list behind Colombia, Iran, the United Arab Emirates, and one rung ahead of Malaysia.
 

Yet for some reason, we are not receiving daily reports about the economic situation in Columbia, the United Arab Emirates, or, really, any other country on a daily basis. What happens at the teller windows of banks in Singapore, Turkey or Sweden are not widely reported in the global press, and they do not drive the performance of U.S. stocks on a daily basis.
 

So you would be justified in wondering why global stocks have been falling on news that (as reported virtually everywhere you look) Greek citizens took 1.2 billion euros out of their banking system during a two-day period, at times causing those banks to run out of cash on hand before noon. And, of course, the answer is that we are all spooked when somebody panics in our midst. The lines at Greek teller windows have scared (this is a complex economic term) the bejeebers out of investors who imagine that the Greek banks are insolvent.
 

Actually, the opposite is true; Greek banks are about to regain access to loans from the European Central Bank, which has already lent 100 billion euros under its European liquidity operations. Meanwhile, according to Capital Economics (based in Toronto, London and Singapore), Greece's central bank has a program in place called Emergency Liquidity Assistance (ELA) which functions much like America's Federal Reserve system. The Greek parliament has approved ELA of up to 90 billion euros, and the troubled Greek banks apparently have plenty of collateral left to gain such funds.
 

Compared to all this, 1.2 billion euros should not be too much of a shock to the system--even if people continue drawing out their savings. But that raises an interesting question. If the bank solvency is guaranteed, and we are not looking at a run-on-the-bank scenario, why would citizens be pulling out their money?
 

The answer is actually pretty simple, but you won't read about it anywhere in the press--at least, not yet. Suppose you are a Greek citizen, and you believe there is at least a possibility that Greece will suddenly decide that the demands for austerity cannot be met, and take the step that economists say makes the most sense: to drop out of the common European currency, perhaps over the Summer, perhaps later. They will close their banks for a couple of days, and begin to print drachmas once again, and suddenly everything in the country will be priced in drachmas. 
 

You have probably read that this is considered a worst-case scenario, but in fact it may be the best option for a country whose citizens are in open revolt over the prospect of spending the next 20 years paying back their northern European creditors. The country would reclaim control over its monetary system, allow its new currency to drop like a stone, pay back all those various central bank loans with much cheaper money, and as a bonus, allow the cost of its exports to be half what they were before, compared with euro-denominated goods and services. 
 

If you, here in the U.S., have read about this easy way out of the economic mess, then you can bet that ordinary Greek citizens are following the situation a heck of a lot more closely. And it's a fair bet that the first thing that would have caught their eye is that part about drachmas dropping like a stone in value. A recent report by Capital Economics provides a best guess that the drachma would fall to about 50% of the value of the euro. 
 

The best course of action suddenly becomes obvious. Greek citizens who see this coming have the choice of potentially losing half their purchasing power relative to the rest of the continent (and the world), or take their money out of the bank before any surprise announcement and, after the dust has settled, use the euros that they stashed in their mattresses to buy twice as many drachmas as they would otherwise have had. 
 

In other words, this is not, as widely reported, a run-on-the-bank scenario. It might be an indication that sentiment on the streets of Greece has swung toward leaving the Eurozone--which means they might know a lot more than the reporters and economists whose reports you may be reading. If Greece walks, and takes its .478% of the world's economy out of the Eurozone, one imagines that somehow the Eurozone--and the rest of us--will survive. Perhaps then we won't be reading about .165% of the world's population 100% of the time.
 

What this means for you: If Greece and/or some of its neighbors withdraw from the EU the repercussions will be felt by the European banks and ultimately by some of the U.S. Banks. We will continue to monitor the situation closely to determine is any modifications need to be made to your portfolios.   We believe the European situation will continue to evolve over the next few weeks and months.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

 http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Sources:

www.bobveres.comInside Information
Global GDP figures: http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29

Large investment banks and brokerage firms are in the news again, with word that J.P. Morgan Chase suffered a $2 billion loss while trading for its own investment portfolio. If you're inclined to be amused by such things, word had apparently leaked out weeks before the losses were spotted that a mysterious individual dubbed "The London Whale"--who we now know is Bruno Michel Iksil--was taking strangely large positions in credit default swaps linked to corporate bonds. Other traders reported the unusual market activities to the Wall Street Journal, and four days after the article was published, on April 14, J.P. Morgan executives stepped in and stopped the trading activity.
 

The story prompted some to speculate that the firm's crack risk management department stayed diligently on top of the firm's speculative trading activities by carefully reading the newspaper.
 

But the lesson that was lost, amid the calls for new regulation and pronouncements that banks were too big to fail and too reliant on bailouts, is that once again a large brokerage firm was making huge bets and also advising customers on their investments. When a large institution trades into and out of the markets for its own profit, it sets up the most basic conflict of interest in its dealings with the investors who are receiving the advice of its brokers. If the firm made the mistake of investing in a dog stock that isn't likely to go up in value, or if the research department determines that a certain company whose stock the firm owns is about to report unfavorable news or deteriorating financials, then the brokers are told that what the company wants to unload is a wonderful "investment opportunity" for their customers. 
 

Some resist acting on these blatant attacks on their customers, but--as evidenced by the actual volume of trading for the brokerage community's own accounts--many do not. 
 

Fortunately, registered investment advisors with the Securities and Exchange Commission--unlike brokerage firms--are strictly prohibited from these kinds of conflicts, and we embrace that position. It genuinely would not occur to most financial planning professionals to bet against clients or try to sell you something that we wanted to get rid of in our own portfolio, not because the regulators might find out, but because it is visibly the wrong way to serve the public and the community. In fact, firms like ours do not trade securities in and out of our own portfolios.
 

When the 2008 meltdown swept through the financial world, former Federal Reserve Chairman Paul Volker proposed that brokerage firms and lending institutions be banned from trading in their own accounts, and the so-called "Volker Rule" bounced around Congress for a full year. Industry lobbyists finally convinced our elected representatives that it was a very bad idea to force brokers to stop speculating in exotic securities and simply give good investment advice to their customers, or to require banks to lend their money to businesses and consumers instead of making wild bets with it. What we didn't realize then, what J.P. Morgan's London Whale may have taught us, is that the consumer protections proposed in the Volker Rule might also be a great way to keep these large organizations solvent.
 

The following will link you to a Wall Street Journal article explaining who “The London Whale” is: http://www.ritholtz.com/blog/2012/05/understanding-j-p-morgans-loss-and-why-more-might-be-coming/?utm_source=dlvr.it&utm_medium=twitter

It is apparent that the big investment banks are still “too big to fail” and need further regulation by the government such as the Volker Rule. Although we are not a proponent of excessive government regulation, until and unless the big investment banks are broken up, the government is going to have to keep a careful watch.
 

As always, please call our office if you wish to discuss any topics of our newsletters or if you have questions about your portfolio. 
 

NOTE: For those of you who have a Genworth/JP Morgan mutual fund account, this story has no bearing whatsoever on your account or the management of your fund. If you have any questions regarding this, please call our office.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Sources:

www.bobveres.com Inside Information
 

May 4, 2012
 

There will be a presidential election Sunday in France. The outcome could threaten the strict austerity measures favored by Germany (the Eurozone check writer). The following is a quick summary of what is going on currently in the Eurozone.

 

1.      Eurozone

·        Germany’s Angela Merkel has been the architect of the austerity measure imposed on troubled Eurozone countries.

 

·        All might be a moot point if Nicolas Sarkozy holds onto power in France, but a win by his socialist opponent, Francois Hollande, would amplify a growing rift.

 

o   Front-runner Hollande is demanding that leaders forsake budget-cutting fervor in favor of pro-growth policies

 

o   The ECB’s Mario Draghi has called for a “growth compact.”

 

o   Strict austerity without credible pro-growth reforms has exacerbated economic conditions in Europe. Think Greece.

 

o   Protests are rising in Spain as the population suffers under the weight of 24% unemployment.

 

·        It almost sounds as if Hollande were mirroring policies implemented in the U.S., with its emphasis on spending, payroll tax cuts, and lip service to deficit reduction.

 

·        But will bond-market vigilantes trump the politicians, sending yields higher and rattling credit markets?

 

·        Spain, Italy, Greece and others rely on investors’ willingness to refinance debt. Or the ECB long-term refinancing operations that pumped €1 trillion into the banking system.
 

2.      European Central Bank: Steady as she goes

·        Keeps its key rate at 1% - no surprise.

 

·        Didn’t’ discuss the possibility of a rate cut – somewhat surprising, given Eurozone weakness.

 

·        The door is still open, but no near-term stimulus on the horizon; sees a slow recovery.
 

3.      Why should U.S. investors care about the drama in Europe?

·        Your timeline needs to go back only to last year – recall the volatility and seemingly endless triple-digit moves in the Dow.
 

4.      A peek ahead

·        European elections

 

o   It’s not just France! Greece holds elections on Sunday, and outgoing Prime Minister Lucas Papademos is urging his successors to maintain the austerity course.

 

o   Socialist Francois Hollande appears set to take the helm in France.

 

o   His victory is probably priced into the markets, but his anti-austerity, pro-growth platform is sure to add a new wrinkle to an already complex situation.

 

o   An Ifop poll shows a slight narrowing in Sarkozy’s deficit, but Hollande still holds an eight percentage-point lead (WSJ).
 

5.      Longer term: The “fiscal cliff” in 2013 will increasingly get attention

·        The fiscal cliff:

 

o   Expiration of the Bush tax cuts,

 

o   Scheduled budget cuts,

 

o   The end of the partial payroll tax holiday,

 

o   The expirations of extended jobless benefits all create additional uncertainty for the markets.

 

·        The cliff threatens to create a drag on economic growth that a muscle-bound Fed would have trouble offsetting.

 

·        Likely scenario: we won’t see a resolution until after the election, but a grand bargain that establishes fiscal sanity is at least a year away.

 

We will continue to monitor this situation as it develops to see what impact it may have on your portfolio.

 

Happy Spring!

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

March 23, 2012

Most of us have heard way too much about the finances of a relatively small member of the global economy: Greece, and its debt crisis. Recently one economist described the Greek debt default as "the slowest-moving train wreck in history."
 

But now, the constant parade of headlines may be over. On Friday, March 9, holders of more than 83% of Greece's government bonds have agreed to exchange their nearly-worthless holdings for new bonds. In effect, they have forgiven 74% of the bonds' value--wiping out roughly $138 billion off of Greece's debt burden--a number that could rise as a series of "collective action clauses" force the remaining 25% to go along with the deal. The swap agreement also opens the door for the other European finance ministers to approve a $173 billion bailout package for the ailing Greek economy. 
 

Of course, even with the debt forgiveness and bailout package, Greece is far from out of the woods. An article published by the British Broadcasting Corp. (BBC) reports that the country still plans dramatic government spending cuts, which is deepening an already-severe recession that saw a 7.5% reduction in Greece's GDP in the final three months of 2011. But the risk that Greece's problems will metastasize into a global financial meltdown seems to be greatly diminished.
 

One of the most interesting, and unreported, aspects to the crisis was the underlying fear that that European banks were secretly holding massive levels of credit default swap exposure on their books, many of them specifically written to insure losses on Greek bonds. Derivatives contracts similar to these, written on collateralized home mortgage bonds, were so prevalent in the 2008 market meltdown that, when counterparties started making claims, it brought the global financial community to its knees. For inexplicable reasons, banks and financial institutions are not required to report their exposure to these contracts, so until Friday, nobody knew which lender might be on the hook for more than their institution was worth.
 

When the International Swaps and Derivatives Association, after a brief conference, decided to classify the deal as a "credit event," European regulatory authorities held their breath. When the Moody's rating agency declared that, by its definitions, Greece had defaulted, it cemented a contract-holder's claim to be repaid in full. (Standard & Poor's followed suit a day later.) But when the claims were presented, it became apparent that the derivatives payouts could be as low as $3.2 billion, a tiny fraction of the losses that banks incurred on their Greek bonds.

This is perhaps the last sound you'll hear about Greece and its reckless borrowing binge.
 

What does this mean for you? For now it appears that we can more or less ignore the Greek problems as they could possibly impact our markets.   However, this does not mean that the rest of the EUROZONE issues have gone away. There are still many problems that haven’t been dealt with.   We will continue to monitor all of these issues and how they might impact your portfolio and finances.
 

As usual, please contact us with any questions you may have.
 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Sources: 

www.bobveres.com

http://www.bbc.co.uk/news/business-17308804

http://www.washingtonpost.com/business/markets/asian-stock-markets-rise-as-chinas-inflation-eases-greek-debt-deal-nears-completion/2012/03/08/gIQAN0BH0R_story.html

http://www.cnbc.com/id/46702123

March 15, 2012

In professional circles, we often talk about a "client-first" attitude, which is shorthand for giving your clients the same quality of financial advice as you would give your mother. It's a useful shorthand way to navigate through a financial world that is still beset by incentive payments, expensive rewards for sales production, under-the-table or soft dollar incentives and a host of other ways that product vendors try to buy their way into your portfolios. 
 

"Client-first" simply means that the client's financial success and well-being comes before all other considerations. It's what you would expect from a doctor or other professional, and many of us believe that you have a right to expect the same level of care from your financial advisor.
 

Unfortunately, there are some professional advisors out there who think this is all a bunch of baloney. Some Wall Street firms and sales organizations are very good at hiding the real agenda behind their advice, and do a masterful job of hiding the profits they skim off the top when you take their recommendations. This is why it was so startling when, in a New York Times opinion piece, Goldman Sachs executive director Greg Smith essentially pulled the curtains back and showed how he thinks Wall Street really works. 
 

Smith declared that he was resigning from the venerable brokerage firm--perhaps Wall Street's most highly-respected organization--because, in his view, its culture is all about putting the client's interests last. "To put the problem in the simplest terms," he writes, "the interests of the client continue to be sidelined in the way the firm operates and thinks about making money."
 

Pulling the curtain aside a bit further, he said that the criteria for promotion and success was not "leadership" or "doing the right thing." Instead, he said, "if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence."
 

How do you make money for the firm? Smith outlined three ways. A Goldman broker or executive can rise in the ranks by "persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit." (Just what you want to buy for your retirement portfolio, right? Or, alternatively, "get your clients--some of whom are sophisticated, and some of whom aren't--to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned," said Smith, "but I don't like selling my clients a product that is wrong for them."
 

Pulling the curtain back still farther, Smith said that "It makes me ill how callously people talk about ripping their clients off. Over the last 12 months, I have seen five different managing directors refer to their own clients as 'muppets,' sometimes over internal e-mail... Will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client's goals? Absolutely. Every day, in fact."
 

He said that the most common question he gets from junior analysts about derivative investments is: "How much money did we make off the client?" He wonders what the effect will be on that junior analyst who sits in the meeting rooms hearing senior executives talk about "muppets," "ripping eyeballs out," and "getting paid."
 

You can read Mr. Smith's comments in their entirety here: http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?_r=2&hp, where you will also see a nice illustration of vultures at feast. He predicts that companies--and people--who care only about making money will not be able to keep the trust of their customers. 
 

But is this true? Chances are, most people reading this eye-opening article will be hearing about these things for the first time, and may not believe it's true about THEIR broker. Millions of people routinely trust their brokers and the big firms that buy Super Bowl advertisements, never seeing this messy view on the other side of the curtain, unknowingly chipping in their retirement.
 

You find yourself wondering: who's going to tell those "muppets"--your hard-working friends and neighbors--that their broker is quietly, invisibly, cleverly putting their interests last?
 

What does this mean for you?Our firm as a Registered Investment Advisor, and we as CFP^®practitioners are bound as fiduciaries. In other words, our recommendations have to be made with only one concern: is this the best thing I (the professional) can do for you (the client), given what I know about who you are and what you want and need? This means “clientfirst” at all times. Hopefully, this information will shed some additional light on how we differ from the large, institutional brokerage firms. 
 

Please call at any time if you have any questions on this or other newsletters.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Sources:

www.bobveres.com

 President Obama’s envisioned tax reforms could hurt wealthy retirees.

March 6, 2012

On Capitol Hill, a rough consensus is starting to emerge: a feeling that the corporate tax rate should be reduced to help U.S. firms stay globally competitive. At the same time, President Obama’s 2013 federal budget proposes a massive tax hike on corporate dividends, a change that could harshly impact the individual investor. 

 

What if the corporate tax rate fell by 7%? President Obama wants to reduce the current 35% corporate tax rate to 28%. (Three of his possible Republican rivals in the fall 2012 election would like to take it even lower: Mitt Romney proposes capping corporate tax at 25%, Rick Santorum at 17.5% and Newt Gingrich at 12.5%.)¹ 

 

That’s not the only change the President would like to see. In addition, he has proposed: 

·        A minimum tax rate on foreign earnings (the specifics of which would be left up to Congress)

·        An expanded Research & Development tax break to cap the effective tax rate for U.S. manufacturers at 25% compared to the present 32%

• A hiring incentive tax credit for businesses whose payrolls expand in 2012
   
• An extension of the current bonus depreciation extension on capital equipment through 2012^1,2
   

How would the government make up for lost revenue? It would nix certain loopholes, such as deductions on interest on corporate debt and longstanding tax breaks for oil and gas companies. Treasury Secretary Timothy Geithner claims that this corporate tax reform would actually generate $250 billion more for the federal government than under present tax laws. Detractors claim that the reforms would overtly favor manufacturers and discourage oil and gas production. They also point out that at a time when the federal government is crying for revenue, lowering the corporate tax rate by 7% is a weird move; after all, some savvy corporations may pay no taxes at all.^1,3 

 

However, the 2013 federal budget proposal does detail some other methods for boosting tax revenue. One idea in particular is raising eyebrows among investors – particularly retired investors.
 

Should dividends be taxed as ordinary income? Would you like to see your stock dividends taxed at 39.6% instead of the current 15%? If you are an individual making more than $200,000 or a couple making more than $250,000 a year, that would be the reality you face in 2013 if the currently proposed federal budget passes.^4,5
 

Actually, your dividends would be hit even harder if you find yourself in the top tax bracket. Factor in the 2013 budget's envisioned phase-outs of deductions and exemptions, and the rate climbs to 41%; add the 3.8% “millionaire tax” levied to pay for health care reforms and you get to 44.8%. Toss in any state and local taxes, and the picture looks even gloomier.^4,5
 

It is no secret that older Americans own proportionately greater amounts of dividend-paying stocks than younger Americans. This population includes the most economically successful retirees, who do not want to see dividends taxed as they were in the 1990s. If this condition of the 2013 federal budget makes it through Congress unscathed, these households may be looking at major shifts in their tax and investment strategies.
 

What does this mean for you? We will be watching the proposed tax changes to see which, if any, become law.  If and when then do, we will advise you regarding any changes needed in your portfolio.
 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA
 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.
 

Citations.

www.marketinglibrarby.net

1 - articles.latimes.com/2012/feb/22/business/la-fi-obama-corporate-tax-20120223 [2/22/12]

2 - www.kansascity.com/2012/02/13/3426281/obamas-proposed-tax-hikes-at-odds.html [2/13/12]

3 - www.chicagotribune.com/business/ct-biz-0226-outside-opinion-corporate-tax-rate-20120226,0,990984.story [2/26/12]

4 - news.yahoo.com/seniors-surreptitious-victims-obamas-corporate-dividends-tax-hike-231300879.html [2/24/12]

5 - money.msn.com/tax-tips/post.aspx?post=4bb02697-fe82-4c9a-ad0f-a164f50ce7c8 [2/17/12]

January 13, 2012

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 yield. 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 than 2%.
 

The discounts on the Greek bonds 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.  This 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.
 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA


Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Sources:

www.bobveres.com

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

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 that 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 homeownership 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.

How does this affect you?  Anytime that Congress reduces the funds going into the Social Security trust fund, it affects the long term health of the Social Security system. Another major question is how will Congress see fit to reinstate the tax in either 2011, or 2012? They keep calling it a tax increase when it would just be a revocation of the “payroll tax holiday”. 

This is a major problem either way.

Let’s try to enjoy our blessings and ignore Washington for a few days.

Merry Christmas & Happy Holidays!

Sincerely,

Edward J. Kohlhepp, CFP^®,ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Sources: 

www.bobveres.com

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/

Could it? Should it? The Capitol Hill debate continues.

December 16, 2011

There is hope yet that this big tax break will return in 2012. While a pair of bills designed to extend the payroll tax holiday stalled in the Senate on December 1, a bipartisan effort could take place to save the tax cut that amounts to roughly $900 a year for the average U.S. household. It may not be taken for granted as much as the annual AMT patch, but it seems unlikely any Congress would want to be remembered for ending such a big tax break for Main Street in such a tepid economy.¹

The big question: how to pay for it. Democratic leaders see a simple way to keep the payroll tax holiday going: they want a new tax on Americans who earn more than $1 million. Republicans didn’t exactly get behind that bill. They countered with their own version, which in the words of Senate Minority Leader Mitch McConnell (R-KY) would “institute a three-year pay freeze on federal civilian employees including members of Congress [and] reduce the federal workforce gradually by 10%.” That bill also went down to defeat.¹

A follow-up question: should we keep paying for it? In 2011, the federal government reduced Social Security taxes by 2% on employee incomes of up to $108,600. The current payroll tax break is being subsidized by the Treasury. Is it wise to lower Social Security taxes when involuntary federal budget cuts loom in 2013 and credit rating agencies are monitoring our level of fiscal responsibility?²

Some Democrats want to reduce the payroll tax down to 3.1% for workers and businesses in 2012 (companies would pay only 3.1% in Social Security taxes on their first $5 million in payrolls). Sen. Sherrod Brown (D-OH) has a bill that would take that $5 million limit to $12.5 million for businesses that expanded their workforces. ²

The payroll tax holiday might turn out to be about as “temporary” as the Bush-era tax cuts, still alive 11½ years after passage (and not dead yet). The key to making the present 4.2% Social Security tax rate permanent? Finding a new and “permanent” method to pay for it that doesn’t risk siphoning dollars away from the Social Security Trust Fund.

What does this mean for you? If you are still working – a payroll tax cut that may continue. However, if this Social Security tax cut continues it will jeopardize the long term efficacy of the Social Security system.

If you are retired, there will be no immediate impact. However, every time the Social Security tax is cut for current wage earners, it jeopardizes the long term health of the Social Security system – a concern for all of us.

Once again, the payroll tax cut seems to be a short term fix for a shaky economy which “kicks the can” further down the road in terms of fixing the system. 

This is not a pleasant note during this Christmas season, but we want to keep you abreast of the important financial news. So in the meantime, let’s focus on the joys of the holiday season…

Merry Christmas and Happy Holidays!

Edward J. Kohlhepp, Jr., CFP^®, MBA

P.S. As we prepared to send this out, there was word that Congress may pass a “2 month” extension to the payroll tax cut. Since approval on the full bill is doubtful, this would allow them to leave on Christmas recess. We can see where their priorities are.

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Citations.

www.marketinglibrary.net

1 - www.npr.org/2011/12/02/143052779/gop-leaders-lawmakers-at-odds-on-payroll-tax-cut [12/2/11]  

2 - www.cleveland.com/open/index.ssf/2011/12/will_your_payroll_tax_holiday.html [12/1/11] 

December 13, 2011

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.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

www.bobveres.com

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

December 2, 2011

This e-newsletter is a bit long, but I think you will find it interesting.

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 (such as Merrill Lynch, JP Morgan, etc.) 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 Co-operation 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 (the brokers) 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.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Sources:

www.bobveres.com

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

What might this mean for the economy & the markets?

November 28, 2011

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.(Notice that this is after the November 2012 elections). 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 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 (last 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% off 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.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

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]

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

November 22, 2011

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.  In the meantime, let’s all remember to be thankful for our blessings. We wish you all a wonderful, safe, happy Thanksgiving! 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

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]          

   

November 21, 2011

Please note – the story below is one which we received in an email from a client. The numbers are not exact but they paint a pretty realistic picture of the U.S. Debt Problem. The Congress and Super Committee of 12 are trying to come up with budget cuts amounting to $1.2 trillion over 10 years. Their deadline is November 23^rd.

Most people find millions, billions and trillions difficult to comprehend.  Politicians are no exception.

The figures shown in ‘The U.S. Debt Problem Explained,’ reduced to a pretend household size, are alarming.  The conversion is, of course, arbitrary and very broad-brush.  Nevertheless the scaled-down figures give a much more comprehensive idea of the problems facing the U.S.

The U.S. Debt Problem Explained!
 

Here is why S&P downgraded the US credit rating:

·         US Tax revenue:   $2,170,000,000,000 (trillion)

·         Fed budget:   $3,820,000,000,000 (trillion)

·         Deficit & New debt:   $1,650,000,000,000 (trillion)

·         National debt:   $14,271,000,000,000 (trillion) – before this year

·         Recent budget cut:   $38,500,000,000 (billion)

·         Proposed budget cuts by the Super Committee over 10 years:   $1,200,000,000 (trillion)

Now let’s remove 8 zeros and pretend it’s a household budget:

·         Annual family income:  $21,700

·         Money the family spent:  $38,200

·         New debt on the credit card:  $16,500

·         Outstanding balance on the credit card:  $142,710

·         Total budget cuts:  $385

·         Proposed budget cuts over 10 years:  $12,000 total

As you saw in the numbers above, a $1.2 trillion cut over 1 year would not prevent the debt from increasing. Over 10 years that only amounts to $120 billion per year!! How unreasonable! And it appears they won’t even be able to agree on that.

Let’s hope for a miracle.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Source: Anonymous

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

November 2, 2011

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 booming 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.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.