Market Week: January 29, 2013

January 28th, 2013

The Markets

Domestic equities had yet another good week (as long as they weren't Apple). The Dow was less than 2% away from its October 2007 all-time closing high of 14,164, and the S&P 500 was just under 4% away from a similar milestone. However, the Nasdaq struggled against the headwind created by Apple's post-earnings drop.

Market/Index

2012 Close

Prior Week

As of 1/25

Week Change

YTD Change

DJIA

13104.14

13649.70

13895.98

1..80%

6..04%

Nasdaq

3019.51

3134.71

3149.71

.48%

4..31%

S&P 500

1426.19

1485.98

1502.96

1..14%

5..38%

Russell 2000

849.35

892.80

905.24

1..39%

6..58%

Global Dow

1995.96

2087.80

2115.30

1..32%

5..98%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1..78%

1..87%

1..98%

11 bps

20 bps

Equities data reflect price changes, not total return.

Last Week's Headlines

·                      Global economic growth will continue to be sluggish during the coming year if the International Monetary Fund's latest forecast proves correct. The IMF's latest report sees a 3.4% global growth rate; that's better than the 3.2% expected for 2012 but slightly lower than last October's forecast. The IMF also predicts a 2% growth rate in the United States and sees Europe slipping back into a 0.2% contraction, though the report also said a European recovery could help push global growth to 4.1% in 2014.

·                      Sales of new homes fell 7.3% in December, according to the Department of Commerce, but they were still 8.8% higher than the previous December. The median price of homes sold was up 1.3% for the month and 13.9% ahead of a year ago.

·                      Despite a 1% drop in December, existing home sales were still at their second highest level in more than three years, according to the National Association of Realtors.® The median home price was up 6.3% from a year ago–the biggest year-over-year increase in seven years–and the 4.4 months' worth of unsold homes was the lowest since the spring of 2005.

·                      Exxon Mobil reclaimed its status as the company with the world's largest capitalization when Apple capped off a months-long slide by plummeting below $450 a share after its Q4 earnings report disappointed analysts.

·                      As Timothy Geithner spent his last day as Treasury Secretary, President Obama nominated Mary Jo White to head the Securities and Exchange Commission. As a U.S. attorney, White prosecuted mobster John Gotti and terrorists responsible for the 1993 World Trade Center bombing. Obama also re-nominated Richard Cordray, who has been heading the Consumer Financial Protection Bureau on an interim basis since January 2012.

·                      The Bank of Japan increased its target level of inflation to 2%; the country has been battling deflation in recent years. The Japanese central bank also will maintain its key interest rate at near zero and extend its purchases of financial assets (similar to the Federal Reserve's quantitative easing program).

Eye on the Week Ahead

Unemployment and the Fed's first meeting of the new year are on tap, and earnings reports from several key tech bellwethers could help remind investors that Apple isn't the only Nasdaq company.

Key dates and data releases: durable goods orders (1/28); home prices (1/29); FOMC announcement, initial estimate of gross domestic product for Q4 2012 (1/30); personal income/spending (1/31); unemployment/payrolls, U.S. manufacturing, construction spending (2/1).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Market Week: January 23, 2013

January 23rd, 2013

The Markets

The bulls continued to dominate 2013, encouraged by Friday's reports of a proposal that could postpone a debt ceiling confrontation for three months. A report that Apple had cut iPhone parts orders helped nibble at the Nasdaq's performance, but the tech-heavy index managed to remain positive. The other three domestic indices did even better as the Dow hit a level not seen in just over five years.

Market/Index

2012 Close

Prior Week

As of 1/18

Week Change

YTD Change

DJIA

13104.14

13488.43

13649.70

1..20%

4..16%

Nasdaq

3019.51

3125.63

3134.71

.29%

3..82%

S&P 500

1426.19

1472.05

1485.98

.95%

4..19%

Russell 2000

849.35

880.77

892.80

1..37%

5..12%

Global Dow

1995.96

2075.84

2087.80

.58%

4..60%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1..78%

1..89%

1..87%

-2 bps

9 bps

Equities data reflect price changes, not total return.

Last Week's Headlines

·                      The Fed's "beige book" report for the end of 2012 showed all 12 Federal Reserve districts reporting either modest or moderate recovery and more consumer spending. Real estate activity expanded or held steady in 11 districts, but the report said manufacturing was mixed and weak job growth continues to stand in the way of a robust economic performance.

·                      Housing starts and building permits both hit their highest annual level since the summer of 2008, according to the Commerce Department's December figures. Housing starts–most of which were for single-family housing–were almost 37% ahead of last December, while building permits (an indicator of future construction) were almost 29% higher than a year ago.

·                      Falling gas prices helped offset increases in the cost of food and shelter in December, leaving the monthly inflation rate unchanged. The Bureau of Labor Statistics said the annual consumer inflation rate for the last 12 months was 1.7%, while December's 0.2% decline in prices at the wholesale level–the third monthly decline in a row–put last year's wholesale inflation rate at 1.3%.

·                      The fiscal cliff didn't stop Americans from spending in December. According to the Commerce Department, strong car sales helped increase December retail sales by 0.5%, and they were up 4.7% from December 2011. Auto sales rose 1.8%, while furniture and home furnishings stores saw a 1.4% increase.

·                      Industrial production was up 0.3% in December. The Federal Reserve said the figure would have been higher if not for reduced production by utilities in the wake of unseasonably warm weather during the month.

Eye on the Week Ahead

Given Apple's recent swoon and influence over the Nasdaq, its earnings report on Wednesday will be closely watched. Also on tap for the holiday-shortened week are housing and manufacturing data.

Key dates and data releases: home resales (1/22); U.S. manufacturing (1/24); new home sales (1/25).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Market Week: January 14, 2013

January 14th, 2013

The Markets

Equities didn’t match the prior week’s fireworks, but they still posted gains in the new year’s second week. The S&P 500 hit a five-year high for the second week in a row. However, the Global Dow soundly beat all four domestic indices for the week, in part because of encouraging retail sales in Europe.

Market/Index

2012 Close

Prior Week

As of 1/11

Week Change

YTD Change

DJIA

13104.14

13435.21

13488.43

.40%

2..93%

Nasdaq

3019.51

3101.66

3125.63

.77%

3..51%

S&P 500

1426.19

1466.47

1472.05

.38%

3..22%

Russell 2000

849.35

879.15

880.77

.18%

3..70%

Global Dow

1995.96

2051.22

2075.84

1..20%

4..00%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1..78%

1..93%

1..89%

-4 bps

11 bps

Equities data reflect price changes, not total return.

Last Week’s Headlines

· President Obama nominated White House chief of staff Jacob Lew to replace Timothy Geithner as Secretary of the Treasury.

· Increased imports of consumer goods such as smart phones were a key factor in widening the trade deficit in November. Exports also rose, but not by as much, according to the Commerce Department. As a result, the trade deficit rose 16% to $48.7 billion.

· Ten mortgage servicers agreed to pay $8.5 billion to help resolve mortgage foreclosures that have been under review for faulty processing. The agreement, which will provide $5.2 billion in mortgage assistance and $3.3 billion in direct payments to borrowers, will bring to an end the case-by-case review of faulty foreclosures. In addition to participating in the settlement, Bank of America agreed to pay $10 billion to Fannie Mae to resolve allegations of faulty processing.

· Eurozone unemployment hit a new record of 11.8% in November as 113,000 workers lost their jobs. However, European retail sales were up for the first time since July.

· The Federal Reserve turned over to the U.S. Treasury almost $77 billion in profits from its 2012 quantitative easing efforts. The interest on Treasury bonds and mortgage-backed securities provided the Treasury’s second highest windfall from the Fed, behind only 2010’s $79 billion.

· After its deliberations were made public, insurer American International Group (AIG) decided not to join a $25 billion lawsuit filed by former CEO Maurice Greenberg and other shareholders against the U.S. Treasury. That suit claims that the terms of the Treasury’s $182 billion bailout of AIG, which has since been repaid, were too onerous.

Eye on the Week Ahead

Earnings reports, particularly those from key financial institutions, will join inflation, retail, and housing data as grist for investor decisions.

Key dates and data releases: wholesale inflation, retail sales, business inventories, Empire State manufacturing survey (1/15); consumer inflation, industrial production, Fed “beige book” report, international capital flows (1/16); housing starts, Philly Fed manufacturing survey (1/17).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

How the new tax code affects you

January 9th, 2013
How did it feel falling over the “fiscal cliff?” You probably didn’t even notice because the trip lasted all of 22 hours. The Bush tax rates expired at midnight on January 1, and the House didn’t pass H.R. 8, otherwise known as the American Taxpayer Relief Act of 2012 (ATRA), until 10 pm that night. As we’ve said many times, our politicians always wait until the last minute, but this time they outdid themselves by going past the deadline and looking good by voting to lower tax rates that had already increased. Don’t you just love the political process?
Political cynicism aside, the outcome wasn’t half bad, for a few reasons:
(1)   A deal actually got done in the nick of time, avoiding the craziness that would have ensued had the Bush tax cuts been allowed to expire.
(2)   Each side gave up a lot of ground to make the deal work. We know this because politicians and pundits on both the far left and far right are unhappy with the deal, indicating a pretty solid compromise.
(3)   Other than putting off decisions about spending cuts, they didn’t just kick the can down the road. Instead, they voted for permanent changes to the tax code rather than a law that automatically expires, creating a degree of certainty that we haven’t experienced for a number of years. As for punting on spending, this does create another looming date for everyone to fret about: March 1 (but we’ll surely make it through that crisis as well).
There never was a “fiscal cliff”
Even if the two sides hadn’t been able to agree, they could have temporarily extended the Bush tax cuts or come up with some other temporary compromise, tackling the hard questions later. There was virtually zero chance that Congress would allow tax rates to skyrocket, given the hugely negative blowback that both parties would have felt. If you can extend a cliff however far you want, then there is effectively no cliff.
I’m not saying, “I told you so” (even though I did); instead, I’m asking you to tune out the so-called “experts” who propagate silly notions like the “fiscal cliff.” For every knowledgeable journalist, there are at least five who will say anything to keep you watching their show or reading their site, even if it means stretching or completely distorting the truth and making you fearful for no good reason.
The nitty gritty—how you are affected by this
For most people, taxes will go up only modestly (about $2,000 for someone earning $100,000 per year). Couples earning more than $250,000, and especially those making more than $450,000, will see much larger increases. For example, a couple making $750,000 will pay about $15,000 more in taxes, while some of those making over $1 million could see their bill rise by $100,000 or more.
Tax brackets:
We knew that high earners were going to see their tax burden increased, and they did. But while the top tax bracket rose to 39.6% (from 35%), the threshold is higher than Obama originally wanted, at $400,000 for individuals and $450,000 for couples. The 35% tax bracket is now quite small, only applying to incomes between $388,350 and $400,000 for individuals ($388,350 to $450,000 for couples). All other tax brackets remain the same as they have been since 2003, so most Americans’ tax rates are unchanged. Remember, your tax bracket is based on your taxable income after all deductions, not adjusted gross income (AGI).
Estate taxes:
Under the new tax code, estate taxes are mostly the same as before. The estate taxand gift tax exemptions will rise from 2012’s level of $5,120,000 to $5,250,000, and will continue to increase each year with inflation. In addition, “portability” of the exemption between spouses was made permanent. The only other change is that the top estate tax rate is now 40% (up from 35%). (So much for rushing to gift $5,000,000 to your heirs before the end of 2012; I wonder how many of these wealthy people now have giver’s remorse.)
Dividends and capital gains:
Sorry high-earners (who fall into the 39.6% bracket)—your long-term capital gains and qualified dividends will now be taxed at 20% (up from 15%), which will actually total to 23.8% once you factor in the new 3.8% Medicare tax on net investment income. Otherwise, long-term capital gains and qualified dividends will be taxed at a 15% rate (0% if your income is low enough).
Social Security:
This one applies to everyone who receives a paycheck. 6.2% of wage income (up from the temporarily lowered level of 4.2%) will now go towards Social Security, up to a maximum earned income of $113,700. This will be the biggest effect of the new tax code for most Americans, as it impacts individuals at every income level.
AMT:
The AMT (alternative minimum tax) was established in 1969 to make certain that wealthy people couldn’t completely avoid taxes by using deductions. Over time, inflation made it a problem for the middle class, and Congress has had to “patch” AMT threshold levels at least 19 times. For 2012, the last patch expired in 2011, so without Congressional action, the threshold would have reverted to 1993’s level.
Fortunately, Congress has finally come up with a permanent solution (why didn’t they think of this before?). They raised the AMT exemption amount for 2012 to $50,600 for individuals and $78,750 for married couples, and the exemption will be indexed to inflation going forward. It’s about time! Now both Congress and taxpayers can stop doing the annual AMT patch dance.
Phase-out of itemized deductions and personal exemptions:
The Pease limitation for itemized deductions is back after a 12-year hiatus, but fortunately with higher thresholds. Itemized deductions are now reduced by 3% of the amount by which a taxpayer’s income exceeds an AGI threshold, which for 2013 is $250,000 for individuals and $300,000 for couples. This threshold, like AMT, will be indexed to inflation.
The personal exemption phase-out (PEP) reduces each exemption by 2% for each $2,500 of income above the Pease threshold.
As a result of the PEP and Pease limitations, high earners will see their marginal tax rates increase by about an additional 2%. The impact will be greater on those with larger families and thus more personal exemptions.
The bottom line
While we were saved from massive tax increases, rates still will go up in 2013 and the tax code has become even more complex. Tax lawyers and accountants should be happy, but some estate attorneys will see their business reduced because of the high gift and estate tax exemptions.
With the new rules, tax planning becomes even more important than in the past, and the earlier in the year you make plans, the better. While we don’t prepare tax returns at KCS, we do work with our clients to reduce their taxes as much as legally possible. If you have a tax problem, or think you might have one (and who doesn’t?), you might want to give us a call.
To me, the best thing about ATRA is that many parts of the tax code, which, since 2001, have been temporary, are now permanent. This makes longer-term planning much easier, because you can shift income and deductions between years without worrying that the rules will suddenly change. Too bad we didn’t know that in December!
But we know it now. Like death, taxes are inevitable, but both can be pushed further into the future through good planning and healthy living. And with taxes, you can permanently reduce how much you pay by using a little creativity. At KCS, we try to be creative without engaging in fantasy.
To your health and wealth,
Dr. Ken Waltzer MD, MPH, AIF®, CFA, CFP®

Market Week: January 8, 2013

January 8th, 2013

The Markets

Better late than never: Equities soared as investors wiped their collective brow when lawmakers reached a deal that averted a full-scale immediate plunge off the fiscal cliff. Despite the holiday-shortened week, the S&P gained more than 4% to hit a level not seen since 2007’s last trading day, while the Nasdaq and Russell 2000 fared even better. Meanwhile, bond prices took a hit after the Fed suggested it might start easing out of quantitative easing later in the year.

Market/Index

2012 Close

Prior Week

As of 1/4

Week Change

YTD Change

DJIA

13104.14

12938.11

13435.21

3.84%

2.53%

Nasdaq

3019.51

2960.31

3101.66

4.77%

2.72%

S&P 500

1426.19

1402.43

1466.47

4.57%

2.82%

Russell 2000

849.35

832.10

879.15

5.65%

3.51%

Global Dow

1995.96

1984.57

2051.22

3.36%

2.77%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1.78%

1.73%

1.93%

20 bps

15 bps

Equities data reflect price changes, not total return.

Last Week’s Headlines

· In the midnight hour (and beyond): A bargain on the scheduled tax increases and spending cuts scheduled to begin in 2013 was reached just hours into the new year. The American Tax Relief Act of 2012 permanently extends existing tax rates for most Americans but adds a new 39.6% rate for individuals making more than $400,000 a year ($450,000 for married couples filing jointly). Existing capital gains rates also were made permanent, except that individuals in the new 39.6% tax bracket will be subject to a maximum 20% capital gains rate. The legislation temporarily postponed implementation of spending cuts, which will doubtless be part of the debate during coming months over increasing the debt ceiling. Additional provisions affecting the alternative minimum tax, estate tax, gift tax, personal/dependency exemptions, and itemized deductions were extended permanently; other provisions were extended temporarily.

· The U.S. economy created 155,000 new jobs in December–roughly the same as its average for the last year. That put the unemployment rate at 7.8%, the same as the previous month’s rate (after the Bureau of Labor Statistics’ annual adjustment).

· U.S. manufacturing bounced back from a November contraction, reaching 50.7% on the Institute for Supply Management’s December index (any number above 50 represents growth). Meanwhile, the ISM’s gauge of the services sector showed a reading of 56.1%. That represented a substantially faster rate than the 54.7% November reading and was the 36th straight month of growth.

· Minutes of the latest Federal Open Market Committee meeting suggested that the Fed’s $85 billion a month worth of bond purchases could end as early as mid-2013, though some members favored continuing purchases through the end of the year.

Eye on the Week Ahead

In a week with minimal economic data, Alcoa’s earnings report on Tuesday will mark the unofficial start of the Q4 earnings season. The U.S. Treasury will auction 3-year, 10-year, and 30-year debt, and the Bank of England and the European Central Bank will announce interest rate decisions.

Key dates and data releases: international trade (1/11).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

2012: The Year of Fear

January 8th, 2013

2012 in Review

It’s long been said that bull markets “climb a wall of worry,” and we certainly had plenty to worry about in 2012. First we had a rekindling of the Eurozone crisis in the spring, with Spain in the spotlight this time. The summer brought a marked slowing in economic growth, most dramatically in Europe and China, but also here and in other parts of the world such as Brazil. Fall featured a massive hurricane that decimated the densely-populated Northeast. Finally, in the midst of the holiday season, we again worried that the US would fall over the “fiscal cliff,” but this suddenly became a non-event after Congress belatedly patched the tax code.
Through it all, markets zigged and zagged as they always do, although some of those zags were more dramatic than usual. In May, for example, we saw a stock market correction that was unusually brisk, with the S&P 500 falling –10.2% in a single month. A selloff in the fall, triggered by the economic slowdown and fiscal cliff jitters, was only slightly shallower at –9.1%, but it lasted a full two months from peak to trough. You may be surprised to learn, however, that 2012 was actually the least volatile year for stocks since 2006. At the same time, reactions to the volatility were more extreme than usual, perhaps owing to the screaming media that we’ve all come to know and hate.

So with so much to worry about, how well did stocks climb the worry wall last year? Quite well, thank you, as the performance of major indexes indicates:*

S&P 500 (SPY): +16.0%
NASDAQ 100 (QQQ): +18.1%
EAFE (Developed non-US, EFA): +18.8%
Emerging markets (EEM): +19.1%
MSCI All-Country World (VT): +17.1%
Best Country, Turkey: +64.2%
Worst Country, Morocco: -12.0%
Best Sector, Financials (IXG): +31.2%
Worst Sector, Utilities (JXI): +2.6%

Overall, stocks performed considerably better than average, and riskier stocks rose more than conservative companies. Note also that the US underperformed the rest of the world, the first time since 2007 that this has occurred. Periods of over- and underperformance by the US versus the rest of the world tend to last several years; perhaps 2012 marks the beginning of a streak during which non-US stocks will outperform. Also notable is the stellar performance of long-suffering financial stocks, which nearly doubled the S&P 500’s return. Perhaps the (near) dead will rise again?

Looking at other sectors of the market (real estate, bonds, etc.), here are the numbers:
US REITs (real estate investment trusts, VNQ): +17.6%
Non-US REITs (DRW): +39.3%
US Treasuries (7–10 year, IEF): +3.7%
Non-US government bonds (IGOV): +5.3%
Municipal bonds (MUB): +5.0%
US Investment grade corporate bonds (LQD): +10.2%
US high-yield bonds (JNK): +12.8%
Emerging-market bonds (EMB): +16.5%
Preferred stocks (PFF): +17.6%
Commodity futures (GSG): -0.6%
Gold (GLD): +6.6%
Hedge funds (index IQ composite): +7.0%
Money market funds (Fidelity Cash Reserves): +0.02%

“Risk” isn’t a four-letter word

Overall, 2012 was a year in which one was handsomely rewarded for taking on risk. With the exception of gold and commodities, riskier assets outperformed “safer” ones, often by a wide margin. Last year, you could have stayed in cash and earned +0.02% for the entire year in a money market fund, or you could have taken some risk with global equities and watched your money grow +17.1% (before expenses, fees and taxes, of course). Last year was thus an illustration of a basic and immutable tenet of finance: over time, higher risk assets tend to produce higher returns, so long as one is adequately diversified. (Translation: don’t be a chicken, but don’t be a pig either, and never put all your eggs in one basket!)

Remember also that taxes and inflation do matter, and they can’t be avoided (although with good planning, taxes can be reduced and inflation can be managed). The outperformance of “risky” equities vs. “safe” bonds looks even more dramatic when you include taxes and inflation. For global equities (VT), the after-tax, after-inflation return in 2012** was +11.2%, while 7–10 year US Treasuries (IEF) returned a not very exciting +0.97% (and half of this return was the result of falling interest rates). For reference, the historical average after-tax, after-inflation return for stocks is +4.5%, and for US Treasuries it is +0.4%.

What’s ahead for 2013? I think we’ll continue to see better than average returns for stocks and real estate, while bond returns will likely be below average, particularly for the “safest” ones such as US Treasuries and foreign sovereigns. In fact, I wouldn’t be surprised to see negative returns to these assets in 2013: US 7–10 year Treasuries have already fallen –1.5% last week in the face of a +4.5% surge in the S&P 500 index. So much for “safe.”

Diversification beats a crystal ball

For years I’ve been saying that market timing is a fool’s game, and I think that 2012 was a perfect illustration. Who would’ve thought that financial stocks would be the best performing sector, or that non-US REITs would be the strongest asset class? Not me, and not anyone I know.

So the key is to diversify and, if you’re an active manager, take small bets. If you win, you beat the averages by a little; if you lose, you only lag a little. Big bets can lead to big wins but also big losses: that’s fine for the speculator, but not for someone who manages other people’s money. So you’ll never see me going “all in” to a sector, country, or asset class. Instead, my portfolios are broadly diversified throughout the world, in every sector and industry, and often in many different asset classes.

Yes, it would have been nice to have half your portfolio in non-US REITs and the other half in financial stocks during 2012, but this only works in hindsight. Instead, my clients had some of each in their portfolios so they didn’t miss out on the best performers. At the same time, I didn’t load up on “safe” investments like US Treasuries and utility stocks. I’ve learned after 35 years of investing that you can’t outsmart Mr. Market, but you can learn a lot by watching how he behaves.

If you’re interested in learning how your own portfolio stacks up against Mr. Market, call or email for a free portfolio review. And for those of you who plan on retiring eventually, my free retirement analysis offer still stands. It’s a New Year and time to plan for your future.

Part 2 of this newsletter will be out tomorrow and will review the new tax law. Regardless of how well your investments perform, you’ll have more money in your pocket if you can pay less in taxes. Knowing the rules is an important first step. Getting good tax advice is the second.

Dr. Ken Waltzer MD, MPH, AIF®, CFA, CFP®
Founder and President – Kenfield Capital Strategies (KCS)

Resolutions & Taxes

January 5th, 2013

Instead of champagne toasts and party hats, Washington, DC chimed in the New Year with the same old dance of waiting until the last minute before demonstrating its near inability to work together.

Regardless, the so-called fiscal cliff, a series of economically devastating tax increases and spending cuts that were due to come on line at the start of 2013, was temporarily averted given a last-second deal between the Republican-led House of Representatives and the Democratic-led Senate. The compromise, known as the American Taxpayer Relief Act of 2012, is not the grand solution to address our nation’s surging debt issues that many had hoped for. Rather, it is more of a temporary band-aid that resolved the revenue (tax) elements of the fiscal cliff, but delayed addressing the tougher decisions surrounding spending cuts and raising the debt ceiling until February 2013. Specifically, the Act contains the following major provisions:

• Individual income taxes: The Bush tax cuts are permanently extended for individuals with taxable income less than $400,000 ($450,000 for married couples), and the alternative minimum tax patch is made permanent and indexed for inflation.
• Capital gains and dividends: There is no difference on tax rates for capital gains and dividends, although top rates will rise to 20% for individuals with taxable income greater than $400,000 ($450,000 for married couples).
• Personal exemption reductions: Reinstated were limitations on itemized deductions and personal exemptions for taxpayers with taxable incomes greater than $250,000 ($300,000 for married couples).
• Estate tax: The estate tax rate will move up to 40%, but the exemption will remain at $5 million, annually indexed for inflation (which is $5.12 million beginning January 1, 2013).
• Unemployment benefits: Extended unemployment benefits will be funded for another year.

The bottom line is that the federal income tax rate will remain the same for everyone except those individuals with taxable income greater than $400,000 ($450,000 for married couples), which is a change that will affect less than 1% of Americans. However, despite the headline that tax rates remain the same for most, the actual dollar amount of taxes paid will be moving higher for virtually every wage earner due to the elimination of the payroll tax cuts of 2011 and 2012. Payroll taxes help to fund Social Security by taxing 12.4% on wages up to $113,700 (in 2013), which was paid equally by employers and workers at 6.2% each prior to 2011. In 2011 and again in 2012, the President and Congress reduced the share paid by workers from 6.2% to 4.2%, which essentially put extra money via a tax cut in wage earners’ wallets. However, starting in 2013, the split will once again revert to 50/50 and result in higher taxes for essentially everyone. To put this in dollar terms, the Tax Policy Center estimates that households making between $100,000 and $200,000 will see an average tax increase of $1,784 in 2013. For higher income earners, the tax burden is much steeper given the combination of higher federal income tax rates, the elimination of payroll tax cuts, the limitation of personal deductions, and the higher tax rate on investment income.

In aggregate, Congressional Budget Office analysis estimates that the tax increases and small spending adjustments outlined in the American Taxpayer Relief Act of 2012 will essentially result in $230 billion less available for spending in 2013. This would result in a drag on the economy in 2013 totaling about 1.5% of gross domestic product (GDP). This growth “anchor” of 1.5% is sizable considering the anemic economic growth in the United States of approximately 2%—but, is considerably less than the 3.5% drag that an unaddressed fiscal cliff would have generated.

All eyes now shift from the cliff to the ceiling. Despite averting the steep cliff, the United States’ limit on how much debt can be issued, known as the debt ceiling—along with the sequestered spending cuts and the funding for the government—all need to be addressed by late February, which means the next fiscal battle is less than two months away. The good news is that there may finally be clarity around future tax policy, which could trigger some consumer and business spending that has been on hold during this time of uncertainty. Additionally, markets do not handle uncertainty well and hopefully having some of these items addressed will allow them to move in an upward direction in the near term. However, there remains much work to be done in the coming months to overcome the contentious policy decisions that Washington delayed addressing, instead of fixing, this past week.

At a time when Americans across this great country are committing to change through the annual rite of New Year’s resolutions, We only hope that our leaders in Washington commit to turn their characteristic procrastination into a quick resolution to the remaining cliff-related hurdles that await us in the coming months.

As always, please contact us with any questions.

Happy New Year,
Westside Investment Management LLC

Market Week: December 31, 2012

January 3rd, 2013

The Markets

Equities took their own trip over the fiscal cliff last week. The last positive day for the S&P 500 was the Thursday before Christmas, and five straight down days took the Dow back under 13,000, the Nasdaq below 3,000, and the S&P 500 perilously close to 1,400. Though all four domestic indices are in far better shape than they were on last New Year’s Eve, they also seem likely to end in negative territory for the quarter, handily outpaced–at least for Q4–by a resurgent Global Dow.

Market/Index

2011 Close

Prior Week

As of 12/28

Week Change

YTD Change

DJIA

12217.56

13190.84

12938.11

-1.92%

5..90%

Nasdaq

2605.15

3021.01

2960.31

-2.01%

13.63%

S&P 500

1257.60

1430.15

1402.43

-1.94%

11.52%

Russell 2000

740.92

847.92

832.10

-1.87%

12.31%

Global Dow

1801.60

1998.76

1984.57

-..71%

10.16%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1..89%

1..77%

1..73%

-4 bps

-16 bps

Equities data reflect price changes, not total return.

Last Week’s Headlines

· With the fiscal cliff dead ahead, last-minute negotiations seemed to produce more questions than answers. The stalemate left the country facing tax increases and spending cuts and wondering what fresh uncertainties the new year might bring.

· Orders for new durable goods orders rose 0.7% in November despite a drop in defense-related aircraft orders, according to the Census Bureau. It was the sixth increase in the last seven months, and the best news was a strong jump in new orders by businesses for capital goods, which were up 2.7% for the month.

· Home prices measured by the S&P/Case-Shiller 20-city index in October were up an average of 4.3% from a year earlier. Though 12 cities saw price declines from the month before, many of the cities showing the strongest improvement–Las Vegas, Detroit, Phoenix, San Francisco–are the ones that had been hardest hit by the housing collapse. Average home prices represented by the 20-city index are now at roughly the same levels that they were in the fall of 2003.

· Sales of new homes soared 4.4% in November. According to the Commerce Department, that’s the highest level since April 2010 and 15.3% higher than a year earlier. The $299,700 average sales price was up almost 20% from last November.

· As it did in 2011, the U.S. Treasury will have to adopt “extraordinary measures” to avoid problems once the country hits the debt ceiling on New Year’s Eve. A letter to congressional leaders from Treasury Secretary Timothy Geithner said the accounting measures are expected to extend the deadline for roughly two months.

Eye on the Week Ahead

Friday’s monthly unemployment numbers and reports on both the manufacturing and services sectors may paint the last portrait of the pre-cliff economy.

Key dates and data releases: Federal Open Market Committee minutes, U.S. manufacturing, construction spending, auto sales (1/2); unemployment/payrolls, U.S. services sector, factory orders (1/4).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.