Are You Still In the Stock Market?

Is your money under your mattress, or buried in the back yard, after losing money, or losing faith, in the stock market? Have you simply “gone to cash”?

First was the bursting of the “tech bubble”, and the resulting stock market debacle, that spanned much of 2000 – 2002. From peak to trough that cost investors an average of about 40% of their portfolios. Then after waiting over five years to recover, the financial meltdown of 2008 cost investors as much as 55% of their hard-earned investments over six horrific months from October 2008 to March 2009. Amazingly, the market has recovered almost all of those losses as the Dow Jones Industrial Average sits a scant 7% below the all time high. And yet how many of you have participated in those gains? How many threw their hands up in despair and quit the market for good? Or did the “flash crash” drive you out? Maybe something else like the recent LIBOR scandal?

If you’re out, what are you doing to save and invest for your future needs? Current research suggests that many individual investors, average Americans like yourself, gave up in fear (or disgust) and are sitting on the sidelines with their money in the bank, earning next to nothing. If you’re one of those people, you’re potentially endangering your entire financial future. Fear and avoidance is not a plan. It’s time to speak with a trusted advisor and implement a plan that can put you back on track to achieve your financial objectives.

Pending Taxastrophe

Notwithstanding the chance that anything can change between now and January 1, we are facing a devastating barrage of tax increases next year. We face the expiration of the 2001 and 2003 tax cuts, the alternative minimum tax (AMT) patch, numerous tax extenders and various economic stimulus programs. If our elected officials do nothing between now and the end of the year, which is unfortunately quite likely, this taxastrophe could send our already weak economy right back into recession. Here are just a few of the problem areas:

  1. The five income tax brackets will move from 10% through 35% to 15% through 39.6%.
  2. The child tax credit will be lowered from $1,000 per child to $500.
  3. Education credits: Hope scholarship credits will be reduced or phased out. Contribution limits to the Education IRA will be reduced. Income levels for the phaseout of student loan interest deductions will be cut in half.
  4. High income taxpayers will see the return of the phaseout of certain itemized deductions.
  5. High income taxpayers will also be subject to the personal exemption phaseout.
  6. Thanks to dramatically reduced exemptions, tens of millions of additional taxpayers could be subject to the AMT.
  7. The estate tax will revert from $5.12 million with a top rate of 35% to $1 million with a top rate of 55%.
  8. The capital gains tax will rise from 15% to 20%. All dividends will rise to marginal tax rates from 15%. In addition, taxpayers with an AGI over $250,000 will be subject to an additional 3.8% tax on all investment income.
  9. Flexible Spending Accounts (FSA) will be less flexible and less helpful.
  10. Various tax extenders and economic stimulus programs will all expire.

What does all this mean to you and me? According to the nonpartisan Tax Foundation, a family of four with parents earning $75,000 each would pay $4,500 more in taxes and see their payroll tax increase by $3,000. To check out your own situation, you can visit

It’s impossible to sugarcoat how bad this is. If nothing is done, our government will be vacuuming ever more money out of our pockets. That in turn will mean less we have to spend on other goods and services, which will mean our economy will likely contract into a recession.

Thanks to Phillips Hinch, August 2012 edition of the Journal of Financial Planning.

Revisiting My 2012 Fearless Forecasts

These were the predictions that I made in the January 19 edition of my monthly newsletter, “News and Views”. All in all, they aren’t too bad after seven months. And you’ll notice that I predicted the Giants would beat the Patriots in the Super Bowl. Got that one dead right.

  1. I think the broad markets will be up in 2012. Put me down for a 10% gain for the Dow Jones Industrial Average, which will finish the year around 13,440. As usual, it won’t be a straight line to get there; there will likely be three or four corrections of at least 5% and up to as much as 15%. But investors who hold tight will be rewarded.
  2. Clearly the Fed will leave short term rates unchanged for the entire year; they’ve already declared as much. I also believe that there will be no new “quantitative easing” plans as the economy improves organically. I think the yield on the 10-year Treasury will stay in a range of 1.75% – 2.50% and the 30-year bond will hold at roughly 1.00% higher than the 10-year. Short rates will likely continue to hover around zero.
  3. Forecasting the direction of the dollar is tough because as bad as things here have been, economies around the world are much worse. So much depends on what happens in the ECU and what happens domestically as our elected officials debate tax policy. Therefore I’m going to forecast, like last year, that the dollar index will trade in a relatively narrow range for most of the year at 75-85.  
  4. The price of West Texas Crude is no longer simply a factor of supply and demand. It also trades on the health of the global economy, sentiment and the relative value of the dollar. That being said, I think the price of WTIC will stay for much of the year between $90 – $110, with outer boundaries of $80 and $120, unless there is a strike on Iran, at which time oil prices could briefly spike to $150.  
  5. The price of gold has moved higher in each of the last 11 years and I’m confident it will do so again this year. My upside target is about $2,000 per ounce while the downside is about $1,450. The primary trading range will probably be something like $1,600 – $1,850. I think the price of silver could test $50 per ounce again while it’s downside is probably around $26.  
  6. The housing market will continue to suffer in 2012. Average prices will remain depressed thanks to foreclosures and short sales. Even historically low rates won’t move this market as only consumes with pristine credit looking to buy conforming homes will be offered mortgages. The jumbo market remains effectively closed.  
  7. I think the average rate of GDP growth over the next four quarters will be around 2.5%, which is better than 2011.  
  8. Jobs will continue to be one the most important domestic stories of the year. The unemployment rate will likely top out around 8.7% to 10.2% before falling, at best, to around 9% by the end of the year. 9.5% might be the best we get. The U-6 measure for unemployment, a more accurate gauge of the true unemployment situation, will likely remain in the 16%-17% range.  
  9. I believe President Obama will defeat Mitt Romney in a relatively close election as a divided GOP is unable to coalesce behind Romney. The Tea Party is marginalized and the Senate remains in Republican control. Fiscal austerity, job creation and tax policy are the main debate points. The electorate forces Obama away from class warfare and back to the middle (ok, that’s my wishful thinking).  
  10. There will be a military strike on Iran by some nation. There will be more unrest in Russia as the population rises against Putin. There will be more violent weather this year, continuing the carnage from 2011. Europe will continue to push their fiscal problems into the future, offering palliative band aid solutions rather than applying the tourniquet. And the Giants will surprise everyone and beat the Patriots again in the Super Bowl (ok, more wishful thinking).

Taxes on Performance

Did you know that our US athletes can earn prize money for winning Olympic medals? $25,00 for a gold, $15,000 for a silver and $10,000 for a bronze. Good for them; they certainly deserve it. It wouldn’t bother me at all if they earned 10x that amount for the years (or decades) of sacrifice and hard work that they put in to become the best in the world at what they do. Most of us cannot comprehend what it takes to attain that level of excellence.

Now we find out that this income is subject to taxation like any other form of income. And why shouldn’t it be? Any money I make is taxed, as is any money that you make. Why shouldn’t the prize money Michael Phelps makes be taxes as well? Apparently, Sen. Marco Rubio, R-Fla., doesn’t agree. In a blatant attempt to gain national attention by pandering to the anti-tax crowd, Rubio introduced a bill yesterday in the Senate that would exempt U.S. Olympic medal winners from paying federal taxes on their medals and prize money earned in the Olympics. Rubio gushed that “Athletes representing our nation overseas in the Olympics shouldn’t have to worry about an extra tax bill waiting for them back home.”

Give me a break!! It’s not an “extra” tax bill. It’s a tax on earned income; the same tax paid by all of us. This is just another example of our moronic elected officials showboating for the cameras instead of worrying about the important issues we elected them to solve. Let’s hope this bill fails quickly and quietly and they go back to working on something important, like the federal deficit or the tax code.