Weekly Commentary January 29th, 2013

The Markets

They say that optimism is catching. The performance of markets across the globe last week certainly supported the idea.

During the second week of January, there was reason for optimism about the housing market as data showed that housing starts exceeded economists’ expectations and home construction appeared to be on the rebound. Last week, the National Association of Realtors disclosed that very low mortgage rates, falling unemployment, and one of the most affordable housing markets on record helped make 2011 the best year for home sales since 2007.

In addition, earnings season – the period of each quarter during which public corporations announce their quarterly earnings to the public – moved into high gear. Generally solid corporate earnings drive markets higher. This helped the Standard & Poor’s 500 Index close above 1,500 for the first time in more than five years.

Across the pond, the European Central Bank announced that banks plan to repay 137 billion Euros next week much earlier than many had expected. Markets interpreted the news as a sign that European financial systems may be on the mend. Global stock markets gained strength and the Euro reached its highest level in nearly a year against the U.S. dollar. Interest rates in Italy and Spain, some of the weaker links in the Eurozone economy in recent years, fell significantly during the week offering further evidence that investors’ optimism and appetite for risk was on the rise.

Traditional or roth retirement plan contributions? A provision of the American Taxpayer Relief Act of 2012 (ATRA) allows many people with savings in workplace retirement plans to make “in-plan Roth conversions.” They can move savings from traditional, before-tax 401(k), 403(b), or 457 plan accounts to Roth plan accounts without a distributable event (such as death, disability, or reaching age 59½) as long as the employer offers both options.

Traditional contributions

In general, traditional contributions to retirement plan accounts are made with before-tax dollars so they reduce current income. Any earnings in these accounts grow tax-deferred until assets are withdrawn. Generally, that’s at retirement. Distributions from Traditional accounts generally are taxed as ordinary income.

Roth contributions

Contributions to Roth retirement plan accounts are different. They are made with after-tax dollars so they do not reduce taxable income today. Any earnings in Roth accounts grow tax-free. Distributions from a Roth account are tax-free and penalty-free as long as the five-year participation period requirement is met and the distribution is taken for a qualified purpose, such as reaching age 59½ or becoming disabled.

How do I decide whether a conversion is right for me?

The decision about whether to convert a Traditional workplace retirement plan account to a Roth workplace retirement plan account should be based on criteria that are similar to the criteria used when deciding whether to convert a Traditional IRA to a Roth IRA. These include:

·         Tax brackets now and in the future: If you think you’ll be in a higher tax bracket during retirement than you’re in today, then a Roth conversion may make sense.

·         Assets available to pay the taxes due: When you convert from a Traditional to a Roth plan account, you will owe taxes on the assets you convert. If you have non-retirement savings available to pay these taxes, a Roth conversion may be a good choice.

·         Legacy and estate planning goals: If a Roth 401(k) account offers estate planning opportunities that suit your needs, conversion may be a good choice.

·         Income needs during retirement: If having a source of tax-free income to supplement taxable income during retirement could boost retirement income, then a Roth conversion may make sense.

Source: Investment News

It’s important to recognize a retirement plan conversion is different from an IRA conversion. Plan conversions do not allow a do-over while IRA conversions can be revoked for a certain period of time. If you have any questions about this topic, please give us a call.

 

Weekly Focus – Think About It

Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence.

--Helen Keller, the first deaf and blind person to earn a Bachelor of Arts degree

Weekly Commentary January 22nd, 2013

The Markets

Investors appeared to be as optimistic as a newly-engaged couple last week. Strong housing data, a positive labor report, temporary easing of debt ceiling pressures, and some stronger-than-expected earnings results helped the Standard & Poor’s 500 and the Dow Jones Industrials indices close at five-year highs.

Commerce Department data showed housing starts climbed by 12.1 percent in December, on an annualized basis, exceeding economists’ expectations. Home construction is expected to continue to rebound, as long as mortgage rates remain low, and experts anticipate sales of new and existing homes will show improvement this week. This continued improvement in the housing market may have contributed to a more positive investor outlook.

The possibility of a debt ceiling compromise also encouraged markets higher. Unlike down-to-the-wire fiscal cliff negotiations, which caused investors to hold back at the end of 2012, discussions of temporary debt ceiling extensions by House Republicans soothed investors’ concerns.

Several companies, including several high-profile Wall Street banks, reported strong results last week, and several companies reported earnings that beat lowered expectations. This helped drive bank, transportation, and housing indices to historic or multi-year highs. Since the Transportation sector includes many highly cyclical and economically sensitive stocks, which tend to underperform when investors anticipate recession, this was seen as positive news for the economy.

According to Barron’s, a secular bull market begins when both transportation companies and the Dow Jones Industrial Average hit new highs. The Dow Jones Transportation Average reached a new high last week, but the Industrials index remains 4 percent below its highest close which was reached back in October 2007. Are we headed for a bull market? Only time will tell.

What’s the difference between America’s deficit and its debt, and how do they relate to the debt ceiling? The terms deficit, debt, and debt ceiling are likely to be bandied about by politicians and the media frequently in coming months. It’s important for all Americans to understand these terms. 

The deficit

America’s deficit is its annual budget shortfall. Any year the government’s spending exceeds its revenue (the amount of money taken in through taxes and other means), it has a deficit. When the government spends less than it takes in, it is called a surplus. Deficits are controversial and have been for many years. Keynesian economics states deficits can be used to stimulate economies and help countries rise out of recession. Other experts argue governments should not incur deficits because the money paid in interest could be better spent elsewhere.

The debt

The national debt is the full amount the American government owes – all of its deficits and surpluses added together. If the government runs at a deficit of $10 million for five years, then its debt will be $50 million. Every year that a country runs at a deficit, its debt increases.

The debt ceiling

When a government runs at a deficit, it must borrow money to keep operating. The U.S. government generally borrows by selling securities such as Treasury bills, notes, bonds, and savings bonds. The amount it can borrow this way is limited by the debt ceiling, which was established under the Second Liberty Bond Act of 1917.

The United States hit its current debt ceiling, which is about $16.4 trillion, on December 31, 2012.  Before it can issue additional debt, Congress will need to raise the debt ceiling. This may make the debt ceiling a popular topic in political conversation during the next few months!  

 

Weekly Focus – Think About It

Compromise:  n. Such an adjustment of conflicting interests as gives each adversary the satisfaction of thinking he has got what he ought not to have, and is deprived of nothing except what was justly his due.

--Ambrose Bierce, American journalist

Weekly Commentary January 14th, 2013

The Markets

Why were investors turning to stocks? Was it the generally strong performance of stock market indices during 2012 or something else? Theories were abundant. Some speculated that the surge signaled:

• Renewed confidence in the American economy
• Relief that capital gains and dividend taxes remained constant for middle income Americans
• Faith in the ability of the American government to get things done
• Lack of attractive investment alternatives as the average yield on high-yield bonds fell below 6% for the first time ever

There also was much discussion during the week about the contradictory messages coming from the Federal Reserve. The Evan’s Rule, which was named after the head of the Chicago Federal Reserve Bank, was established late in 2012. It ties interest rate guidance to employment and inflation targets rather than calendar dates; a change many had interpreted to mean that monetary policy would remain accommodative into 2014.

Interest rates are just one tool the Fed has been using to encourage economic growth. It also has been engaging in quantitative easing (QE) which is purchasing Treasuries on the open market to inject capital into the economy and encourage growth. Last week’s Federal Open Market Committee meeting notes indicated there was discussion among Fed members about ending quantitative easing earlier than expected, possibly before 2014.

So, which is it? Will policy remain accommodative or will it start to tighten? We may not know for sure for some time. The good news, according to Barron’s, is that tightening monetary policy would not be all bad news. “The end of quantitative easing would mean that the Fed sees sustainable economic growth in the U.S. – and globally.”

Sage investment advice… Almost two decades ago, the CFA Institute published an article that included a letter from a father who was a financial professional to his daughter. His missive included some timeless and practical advice about investing. Among the thoughts he shared with his daughter were the following principles for investing:

·         A fool and his money are soon parted. Pay close attention to financial matters because investment capital is a perishable commodity when not managed properly.

·         There is no free lunch. Risk and return are interrelated. Generally, the greater the risk, the greater the potential return and vice versa.

·         Know thyself. Be honest in assessing your risk tolerance because it’s easy to underestimate the stress of a high-risk portfolio when markets move south.

·         Don’t put all your eggs in one basket. Diversification helps determine potential rates of return and manage exposure to risk. Make sure you have a well-diversified and well-allocated portfolio.

·         Take the long view. Make a plan and stay with it. Don’t let short-term market fluctuation or media-fueled frenzies cause you to panic. Investment decisions should result from a rational trade-off of risk and return. Unfortunately, those decisions often reflect fear and anxiety about current events.

·         Remember the value of common sense. Investing is not a competitive sport. It should be an effort to achieve a pre-determined financial goal within a specific risk-tolerance framework. No system works all of the time and you should not expect it to.

Sound financial advice may prove particularly important during 2013. During the fourth quarter of 2012, markets were volatile as Congress argued fiscal cliff issues. The solution – The American Taxpayer Relief Act of 2012 – resolved matters related to taxation, but left spending issues to be hammered out in the future. As a result, we may see additional volatility during the first few months of this year. If you begin to experience fear and anxiety when listening to news reports or checking market performance, just review the principles above!

 

Weekly Focus – Think About It

If you want to be successful, it's just this simple. Know what you are doing. Love what you are doing. And believe in what you are doing.

--Will Rogers, humorist and social commentator

Weekly Commentary January 7th, 2013

The Markets

Global markets celebrated the New Year on Wednesday with a rally in appreciation of the U.S. fiscal cliff agreement, now known as The American Taxpayer Relief Act of 2012 (ATRA). Many European, Asian, and American markets closed the day sharply higher. The FTSE 100 was up 2.2 percent, Hong Kong’s Hang Seng was up 2.9 percent, Brazil’s Bovespa was up 2.6 percent, and the Dow Jones Industrials Index was up 2.4 percent for the day.

While markets embraced ATRA with unabashed enthusiasm, pundits were less keen on the new law. They greeted the changes with the excitement – or lack thereof – many readers reserve for books with cliffhanger endings. That’s because ATRA failed to resolve key issues related to the fiscal cliff, including automatic spending cuts and the debt ceiling limit. As a result, Americans can soon expect new additions to the fiscal cliff series. The next, which may be called the Debt Ceiling Debacle, will undoubtedly be accompanied by considerable melodrama and bipartisan bickering. 

On Thursday, U.S. stock markets faltered after the minutes of the Federal Reserve Open Market Committee meeting were released. The Fed has promised to continue quantitative easing indefinitely; however, the minutes included considerable discussion about ending the program during 2013. That notion spooked Treasury investors and the yield on 10-year Treasuries rose to 1.9 percent.

On Friday, the unemployment report showed the jobless rate unchanged at 7.8 percent. Stock markets bounced higher as investors appeared to interpret the news as an indication the U.S. economy is not yet strong enough for the Fed to end quantitative easing. However, the news that some at the Fed thought easing should end caused gold to drop to its lowest in two weeks.

For the week, the S&P 500 was up 4.6 percent, the Dow Jones Industrials were up 3.8 percent, and the NASDAQ rose by 4.8 percent.

The Year in Review

2012 was a surprising year. Although many of the most notable events reflected ongoing economic and fiscal issues – including crises in the European Union, slowing growth in China, growing debt in the United States, government intervention in Brazil, and worries about fiscal cliff – investors remained optimistic and many global stock markets delivered rather attractive performance for the year. Here are a few of the headline events which caught our attention during 2012:

• China became an economic power, officially

All debate about when China’s economic importance would rival that of the United States was put to rest when The Economist added a section devoted entirely to China. The last time the publication introduced a new country was 1942. It was devoted to The United States.

• It’s all relative: the U.S. and global recovery

China’s growing importance did not diminish the role of the United States. U.S. economic growth may have been modest during 2012, but it was positively robust relative to that of other developed nations. In fact, the U.S. was called the sole bright spot in global economic recovery.

• Greece? Really?

Greece’s ATHEX composite index was the top-performing stock market in Europe during 2012. Despite five years of recession and record unemployment, it closed about 33 percent higher at year’s end, beating Germany’s DAX. The ATHEX remained significantly below its previous highs.

• “For Euro Crisis Relief Bang Head Here”

Bloomberg BusinessWeek’s tongue-in-cheek headline reflected ongoing frustration with events in Europe. While Europe faces complicated issues that are likely to take time to resolve, there are reasons for optimism including the region’s pursuit of a banking union.

• The Supreme Court did what?

Offering headlines that rivaled the memorable ‘Dewey Beats Truman,’ both CNN and Fox News misreported the Supreme Court’s ruling on the Affordable Care Act. The Act remains controversial.

• Like a phoenix, Bank of America rose from the ashes

After delivering the worst performance in the Dow Jones Industrial Average during 2011, Bank of America became the best performer for 2012. One of the biggest beneficiaries was Warren Buffet who stepped in when no one else would. He invested $5 billion in preferred shares and received 700 million in warrants.

• Not ready for prime time: NFL replacement officials

Early in the season, pundits tried to identify the biggest blunders made by the NFL’s temporary referees each week. It wasn’t easy. From cheap shots to reviews for teams that had no time outs to the infamous simultaneous catch call, the temporary refs made fans appreciate the real thing.

• Australian police said Apple Maps can kill you

Apple maps were called a lot of things during 2012, but accurate was not one of them. San Francisco had a French Quarter, Stratford-on-Avon disappeared, and the town of Mildura moved to the middle of Australia’s Murray Sunset National Park. Since the park has no water supply, Australian police issued a warning.

 

Weekly Focus – Think About It

Don't tell people how to do things, tell them what to do and let them surprise you with their results. 

--George S. Patton, U.S. Army general

 

Happy New Year!

Fiscal Cliff Agreement

Key Provisions of H.R. 8: American Taxpayer Relief Act of 2012

(“Fiscal Cliff Agreement”)

SUMMARY:

The 112^th Congress was recently dubbed the “Do Nothing Congress” for the minimal amount of legislation enacted during the two-year session. Two hours after going over the Fiscal Cliff at midnight on January 1, the Senate voted 89-8, and the House of Representatives voted 257-167 to pass the American Taxpayer Relief Act of 2012 to reverse some of the measures which may have had a severe negative impact upon the economy.

The Congressional Budget Office projects the legislation will add $4 trillion to the U.S. deficit over the next 10 years compared to a scenario where the Bush tax cuts had been allowed to expire.

The Senate bill also sets up what is likely to be an even more heated fight in late February when the Treasury Department must come to Congress to seek an increase in the government's borrowing limit.

 

KEY PROVISIONS:

o   Tax rates will be allowed to rise on individual incomes over $400,000 per year, and household incomes over $450,000 per year to a maximum rate of 39.6%.

o   The tax on estates would rise to a 40% maximum rate, with a permanent exemption of $5 million, indexed for inflation. 

o   Permanently sets maximum long-term capital gain and dividend tax rates at 20% for households making more than $450,000.

o   Phases out itemized deductions and personal exemptions for those making more than $250,000, $300,000 joint.

o   Permanently sets maximum long-term capital gain and dividend tax rates at 15% for households making less than $450,000.

o   The 2% temporary decrease in FICA payroll taxes relief was allowed to expire. This provision has a disproportionate impact on those making less than $113,700 (the FICA limit in 2013). This is expected to take $125 billion out of consumer income.

o   Extends the tuition tax credit and child and dependent care tax credits for five years.

o   Workers will be allowed to rollover 401k funds to a Roth IRA while still actively participating in a 401k plan. Think of it as an ‘In-Service’ distribution.

·        Pay income tax currently.

·        Not subject to Required Minimum Distributions at age 70½.

·        Future earnings are tax-free.

o   Permanent adoption of the Alternative Minimum Tax exemption amounts. Impacts 32 million Americans who may have been subjected to AMT in 2012 and indexes AMT for inflation.

o   Postpones $109 billion sequester for two months.

o   Extends unemployment insurance for two million long-term unemployed Americans.

o   Extension of the 2008 Farm Bill through the end of this fiscal year (September 30, 2013). Keeps the price of milk from potentially doubling.

o   Prevents a 27% reduction in Medicare payments to doctors and other health care providers treating patients on Medicare.

 

* We do not provide tax advice or services.  Please consult your tax advisor regarding your specific situation.