Month: December 2012

Taking a step back to view the landscape…

We have traveled almost four years into the current stock market cycle that began in March 2009, with the S&P 500 up 114% since the bottom.  That in itself is significant as historically market cycles of this magnitude are not very common, 2003 through 2007 were the most recent examples and we all have seen how that one ended.  Current chatter about going off a cliff pale in comparison to 2008.  That was ‘Cliff Diving’ gone extraordinarily wrong and I don’t know of one reasonable individual who eagerly wants a repeat of that fiasco.

The general population, after witnessing a years’ worth of synthetic sparring and self-important posturing, acknowledge that the deadline has arrived for U.S. politicians to resolve the self-created debacle which has become the “fiscal cliff”.    Spectators around the world clearly view the U.S. as impotent to address our own major difficulties while readily available to offer plenty of advice to every other country (oh the hypocrisy) on their financial burdens.   This new reality, viewed from the precipice that we stand upon  is obviously uncomfortable to many, especially the political class having to decipher the new electoral reality.  A solution will require support from both political entities, which is historically consistent; however the sting of compromise is an unprepared punch in the face for at least one specific, recent majority.  The actuality of a resolution to the tax issues before any real economic impact occurs fills their veins with an icy cold.  It is only a matter of when and how the tax policy will be changed.  The opportunity to claim victory, albeit via compromise, still exists, but the clock is rapidly ticking away.

I remain optimistic.  On balance, global growth remains dishearteningly slow and the austerity budgets that have been utilized in Europe are a prickly outlier for the United States.  Austerity hasn’t solved the structural problems and the EU banking system continues to remain fragile.  Economic data here in the U.S. continues to validate that our economy remains vulnerable and struggling.  How am I so optimistic when weak macro factors dictate a bearish outlook?  I remain so, because I continue to view the U.S. as the most robust and utmost vibrant economy in the world.  This remarkable entity, where opportunity and freedom are unmatched and unrivaled in human history, decrees a positive outlook.  It is difficult to be bearish when the landscape invites accomplishment and chance, regardless of the political discourse.  If there was serious risk aversion in the global markets, the data would be critically worse (it can still turn negative promptly).  After all the analysis is done, the markets will tell us whether I’m right or wrong; I firmly believe our economy will strengthen in the coming year, our politics will ultimately release itself and become unbound to extremists both on the left and right, and globally, the economic rationality of conscience will assume actual responsibility.  2013 represents a future opportunity, 2012 represented the (cough cough) best laid plans gone awry, in the most justifiably, wicked way.   All hail 2013, for 2012, it’s time to put a tag on the toe and close the mortician’s drawer.  It’s all but dust in the wind.

Happy Holidays and I’ll see you again next year.

(To receive my free weekly U.S. and Global stock picks , send an email to dcherry@nelson-securities.com with subscribe in the subject line)

Get it Done Before 2012 Ends

Going down to the wire is business as usual in Washington D.C.  Given that the implications of the “Fiscal Cliff” decisions will set the course for years to come; it’s important to get it correct, although some elected officials fear that the base will have them drawn and quartered because of their decisions, the Nation as a whole has priority over a few individuals.  It’s not all about taxes either; Government spending absolutely has to be addressed as well.  It’s just as important.  A large number of Americans receive benefits of one sort or another.  You’re fooling yourself if these folks won’t rise up in rage if their entitlements are ‘adjusted’.  Again, the Nation as a whole has priority over the few.  With so little factual information being stated in the media about how this can affect you and your personal economy, I’ve assembled a few points that should clear some of the fog away for you.

Don’t leave Free money on the table
With a great deal of uncertainty regarding the current economic situation, many employees have put off contributions to their retirement accounts, thinking that they will make up lost ground when the situation improves.  Unfortunately, using that reasoning could result in leaving what is virtually “free” money on the table.  If you have a 401(k) or an equivalent retirement account where your employer matches your contributions always contribute enough each year to receive your complete employer match.  Taking full advantage of an employer match is the best no-risk return you will absolutely ever find.

If you are over 70 ½…
You must take a required minimum distribution from your traditional IRA account(s) by year-end.  Not doing so could result in a 50% excise tax on the amount required, but not actually withdrawn.  If you turned 70½ during 2012, you have some flexibility. You can take your 2012 distribution by December 31st or you could delay it until April 1st of 2013.  If you decide on the latter, you still must make your 2013 distribution by December 31, 2013, resulting in two distributions during the 2013 calendar year. Every year after that, the distributions must be made by year-end.

Converting your Traditional IRA to Roth IRA?
If you are considering converting your Traditional IRA to a Roth IRA and will be paying taxes to convert, make that conversion in 2012 while you know what your tax rate will be.  With the Bush tax cuts expiring and new taxes beginning to take effect in 2013, there’s a chance it could cost you more to convert next year.

Fund your self-employment retirement accounts!
If you have self-employment income and are eligible to set up an Individual 401k plan or Roth 401k plan, those plans must be established by December 31st, even though you will have until your tax deadline in 2013 to fund the account.

Planning on giving it away?
So you may think that you can give away your money as you please, unfortunately the federal government has a tendency to look at excessive gifting as estate tax evasion.  Currently, you can gift up to $5 million ($10 million for couples) over your lifetime without incurring federal gift taxes of 35%.  The maximum you can give one person each year without tax implications is $13,000 ($26,000 for couples.)  This may well change in 2013, but for now, if you intend to make non-charitable monetary gifts, do it before the end of 2012.

Tax Deductions
If you expect to be paying higher income taxes in 2013, you might want to look at postponing paying deductible expenses to push them into next year to reduce your taxable income. There’s the risk that what is deductible in 2012 may change in 2013.

Consult your tax adviser
Before the end of the year, we should have some clarity on some of the tax changes to expect in 2013.  That makes it principally important to talk with your tax adviser and find out if you are able to minimize the tax circumstances as much as possible.

A Bold Bluff

In my office on the wall, there are many items attached and displayed in the general per functionary manner.  Upon this wall there are licenses, shingles, and commissions, slogans, pictures and calendars. But the most significant and obvious is a print of Dogs Playing Poker.  Yes, dogs playing poker.  Several dogs sitting around a table, cards, chips, drinks and cigars abound.  The caption of this print is “A Bold Bluff”, by C.M. Coolidge, circa 1903.  Aside from the history behind this painting and it’s diagnosis as an example of “working class taste” (http://en.wikipedia.org/wiki/Dogs_Playing_Poker).  The more I study this picture again today I reflect upon how much it epitomizes, to me , the situation we are witnessing today in Washington D.C.

Congress is faking it.  On both sides, committed to the end, they are faking it.  A bold bluff indeed; Like Dogs playing Poker. Those at the table are at pause with curiosity and bewilderment as they witness the call, in play.  There will be a deal, we’ve seen these ‘children’ play this game before, it shouldn’t come as any surprise, they will posture, rant, point fingers, gnash their teeth and stomp their feet.  Both sides have already realized they have played their best hands, there’s nowhere else to negotiate to and there isn’t really any time left.  The past three Decembers have begot important eleventh-hour advancements on health care in 2009; tax cut extensions in 2010 and the payroll tax holiday in 2011.  As I said earlier in the year, a Pox on both of their houses (sorry Shakespeare), I’ll temper my rant, right there, for my sanity and yours.

For the week ahead, I expect to see the U.S. markets continue to tread water despite the political theater.  The markets have priced in a deal and regardless to what the mongrels in Congress are blabbering on about, a deal is coming soon and that it will be functional.  Europe is showing a holiday rally with the German and French markets cresting at 52 week highs and the Euro sustains a six-week high.  The Greeks announced terms under which they will (somehow) be buying their debt back, and Spain officially asked for European funds to recapitalize its banking sector.

I remain optimistic.  No if’s, and’s or but’s about that.  I’m also a horrible poker player and I couldn’t win a hand even if I had expert guidance whispering in my ear on which cards to play.  I accept that and respect that I know what I know and that poker simply isn’t my game. However, as a student of History, Politics and Finance, the risks of an impasse in the talks that leads to either a deal or no deal at all are quite real.  The great divide between the parties on how to proceed isn’t real; it’s imaginary and made for TV.   The Republicans and Democrats both feel empowered by the election, that empowerment is like a cheap poker chip you buy at the mall.  It’s worthless.  They both know that the cashier (the American Public) expects a transaction and the currency that Congress wants to utilize isn’t going to be accepted anytime soon.  Congress is expected to adjourn by the 14th, and the last thing the American Public wants to wake up to on Christmas day is a massive lump of coal hanging in a stocking above the fireplace.  That would literally entail a new Christmas Day massacre for Congress and they are well aware of it.  I remain cautious, slightly uncertain but completely optimistic.