Hill's Personal Finance

Capital Investment Council November Outlook

by Hal Eddins, Managing Director, Capital Investment Council

For several reasons, I always look forward to Thanksgiving:
 
1. We are given the chance to give thanks for our many blessings
2. We get to spend time with family and friends
3. Thursday is a day off
4. Last but not least: over the last 30 years, the equity markets are up 88% of the time the week of Thanksgiving.  In fact, Thanksgiving week may be the most bullish week of the year.  As we eat turkey and watch the Detroit Lions, the European markets will still be trading, and the German Xetra Dax index has never closed negative on Thanksgiving Day.  Keep all this in mind as we enjoy our well earned rest next week. 
After a rough start to the year, it’s a relief to reach what is historically, the strongest part of the year.  It would be nice to return after the Thanksgiving break and find that retail sales on “black Friday” were stronger than expected. I believe that the fear of rising interest rates will not put an end to November’s market rally.  Rates are still so intrinsically cheap, that they could rise for quite some time before having a negative effect on economic growth. 
What other factors could drive markets higher?  After the Dow’s brief drop to 9600 in late October, the markets could well be back on track to make new highs into the end of the year.  Why?  The lack of negative earnings warnings and a general lack of sellers could possibly keep prices aloft. 
 
Believe it or not, one reason for higher prices could be the government.  While the economy has been hard hit over the last two years, governments around the world have responded with the largest peace time stimulus package ever seen.  Interest rates remain near zero and at some point, the economy could see a positive impact from that. 
 
 
    Another period where we saw such a massive stimulus was October of 1998, and the Federal Reserve dropped rates three times in quick succession.  This in turn laid the groundwork for the Nasdaq bubble that peaked in March, 2000.  The thread continued with the Nasdaq’s implosion in late 2000 as this led to hefty rate cuts in late 2001/early 2002.  This set of cuts likely helped push the real estate frenzy into “bubble territory” which was a major cause of the economy’s current woes.
 
  To summarize, when the Dow’s rallied 3800 points off of the March 6 bottom, it was just reacting the way that it “should”.  Some of the economy’s current liquidity is piling into the overseas markets and driving up prices.  The Dow Jones Shanghai Index has rallied from a low of 192.57 last November 24 to a current price of 394.  In fact, Chinese officials complained to President Obama just last week of this problem.  In my opinion, if history is a guide, an improving economy coupled with a large stimulus package is not likely to lead to single digit equity returns.  Many people who cashed in their stocks are finding that out now-the hard way.
 
Many consumers are still feeling the blues and it’s not hard to see why.  Companies have not yet begun to rehire and until employment picks up, it’s unlikely that the public’s mood will lift.  However, last month’s data from the Institute of Supply Management was better than expected at a plus 55 reading.  Any reading over 50 indicates expansion and in the past this type of mid 50’s readings can lead to higher job growth.  Overall, it’s a signpost that could be pointing to better times ahead.
 
 
    What if our current rally is as good as it gets?  Let’s revisit the ISM data I mentioned above.  Again, with history as a guide, the market could see more upside.  Remember that anything over 50 shows expansion and the ISM dropped as low as 32.9 back in late December.  Even going back to October’s data, we see a reading of 52.9: a jaw dropper in this environment.  Is this already priced in the markets?
 
Currently, the market is up 20.75% for the year (since the bottom of the ISM cycle).  The average gain for the S&P 500 over a trough to top ISM cycle is 33%.  On that basis, the S&P 500 has room to add another almost 60% to its current gain, and we would be right in line with the historical averages.  Also, historically, over 1/3rd of the market’s gains came AFTER the ISM pierced 50 so we have that going for us as well.
 
Finally, we had a World Series that engaged the average American sports fan.  In a rematch of the 1950 World Series, the Yankees were finally able to get some results out of their $218 million payroll.  The Wall Street Journal took a look at what has changed in the 59 years between the two Series.  In our current age of instant access, I found it comical that the New York Telephone Company would provide you with live updates every 15 seconds.  One of the biggest shockers was the increase in ticket prices.  A box seat in 1950 cost only $8.75 versus $325 for a non-premium seat in 2009.  The big earner back in 1950 was the Yankee Clipper, Joe Dimaggio who brought home $100,000.  His current day counterpart is the infamous Alex Rodriguez.  A-rod collects in just 27 hours what it took Joltin’ Joe a year to earn.  Finally, the winner’s bonus in 1950 was $5737 per player against the current rate of $351,504 per head. I hope everyone enjoys a nice Thanksgiving.

Should Something Replace the 401(K)?

Do Americans need a new way to save for retirement?

 

In fall 2009, TIME Magazine raised eyebrows with a cover article called “Why It’s Time to Retire the 401(k)”. Author Stephen Gandel, the magazine’s senior economic writer, argued that 401(k)s, 403(b)s and IRAs had proven themselves “a lousy idea, a financial flop.”

Citing data from the Society of Professional Asset-Managers and Record Keepers, Gandel noted that in 2009, the average 401(k) had a balance of $45,519. Moreover, 46% of all 401(k) accounts had balances of under $10,000. However, he failed to mention that the average 401(k) account has been held for less than a decade.^1,2

A 401(k) plan simply takes too long to succeed, Gandel argued, and is too susceptible to market forces; in a market downturn, he said, it is unfair that the most hurt are the most invested.

What might the alternative be? A New York Times editorial called for a radical move, contending that “the only way to avoid wide variations in [401(k)] outcomes would be to develop a savings plan in which the government shared the risk - say, by providing a guarantee that returns would not fall below a certain level.” The editorial called for shifting the retirement savings “risk that is currently borne by individuals onto corporations and the government.”³

Obviously, not everyone is going to agree with that. But arguments for something similar are gaining momentum. A group of retirement plan administrators calling themselves the ERISA Industry Committee is pitching an idea called the New Benefit Platform for Life Security, which sounds like kind of a super-IRA with some characteristics of an annuity.

In this concept, your employer would have nothing to do with your retirement plan (unless it wanted to match your contribution to it as a perk). Instead, you would set up your own portable retirement plan with a retirement plan administrator of your choice in the free market. Your “NBP” wouldn’t have contribution limits, and you could set it up like a traditional pension to produce a lifelong retirement stream upon retirement. It certainly sounds great – except for one drawback. Who knows if the company acting as your retirement plan administrator would be around 20, 30 or 50 years from now?⁴

Other voices are proposing retirement insurance, possibly even from the federal government. Prof. Teresa Ghilarducci, an economist at The New School in New York City, has offered the idea of directing 5% of the wages of all working Americans into a mass retirement fund, which would pay out 26% of your end salary annually for the remainder of your life. (A little social security to complement Social Security, so to speak.) A Harvard professor would like to set up Social Security so that we would get 20% more than our final pay in SSI.¹ At this juncture and with this federal deficit, who knows if these are anything other than pipe dreams.

The 401(k) is still a vital retirement savings vehicle. In fact, many financial advisors feel it is the most useful retirement savings vehicle available to most Americans. The problem is that many 401(k), 403(b)s and IRAs are underutilized – people invest too little, or too infrequently, or withdraw what they’ve saved and invested too often.

Reaction to market whiplash, or a prelude to real revision? Of course, had the stock market not suffered so badly in late 2008 and early 2009, people might not be talking about this at all. Whether history proves the 401(k) a great idea or not, the thing for pre-retirees (and journalists) to remember is that there is no one retirement savings or retirement planning “answer”. A 401(k) is simply one of the “clubs in the bag” that you can carry as you stay “on course” for retirement – ideally, a component of a diversified retirement savings strategy.

 

Citations.

¹ time.com/time/business/article/0,8599,1929119-1,00.html [10/9/09]

² investmentnews.com/apps/pbcs.dll/article?AID=/20091025/REG/310259979/1031/RETIREMENT [10/25/09]

³ nytimes.com/2009/08/24/opinion/24mon1.html?_r=1 [8/24/09]

⁴ moneywatch.bnet.com/retirement-planning/blog/financial-independence/retire-the-401k-replace-it-with-this/558/ [10/15/09]

 

Best & Worse Indices for the week ending November 19, 2009

The best performing indices for the week were:

• Dow Jones US Platinum & Precious Metals (17.24%)
• Dow Jones US Mobile Telecommunications (11.35%)
• Dow Jones Wilshire Real estate Operations (6.28%)

The worse performing indices were:

• Dow Jones greece Stock Index (-7.79%)
• Dow Jones Turkey Titans 20 Index (-6.61%)
• Bank of New York Greece ADR Index (-6.61%)

Indices in a buying position are :

• Dow Jones Wilshire US Small Cap Valuable
• Russell 3000 Value Index
• Russell 1000 Value Index

YEAR-END FINANCIAL MOVES TO THINK ABOUT

Before 2009 ends, some things you might want to consider.

 

Fall is the time to consider some year-end financial moves – little and not-so-little things you might do to plan to improve your financial position.

You could put more in your 401(k) before they play “Auld Lang Syne”. As you only get one chance to save for retirement and an annual deadline to make retirement plan contributions, you could increase your final retirement plan deferrals of 2009 to the maximum allowed by your plan, assuming your finances permit you to do so. Contributions to traditional IRAs and 401(k)s are usually made with pre-tax dollars and thereby could help you reduce your tax bill.¹

If you haven’t contributed to your IRA or Roth IRA for 2009, you have until April 15, 2010 to make that move. You can contribute up to $5,000 to an IRA (or spread up to $5,000 of contributions across multiple IRAs) for tax year 2009; those over age 50 may contribute up to $6,000 to their IRAs for 2009.² If your modified adjusted gross income (MAGI) is into six figures, this may reduce or even prohibit Roth IRA contributions depending on your filing status.

You could try to harvest some losses. You might want to sell some losers to offset some winners (not every security was a winner this year) and counterbalance capital gains. Keep in mind that if you are in the 10% or 15% federal income tax bracket for 2009, you won’t have to pay capital gains tax – that break extends into the 2010 tax year as well. If you want to sell, sell carefully – you don’t want to generate so much income that you creep into a higher tax bracket.³

You could try to pick up some tax credits. Are you thinking about buying a home? The up-to-$8,000 first-time homebuyer credit has been extended to the end of April and complemented by its new variant, the up-to-$6,500 credit for move-up buyers. Remember, the phase-out limits on that credit just rose – they are now $125,000 for single filers, and $225,000 for joint filers. The home has to have a price tag of $800,000 or less and it must be your primary residence. A first-time homebuyer is defined as someone who hasn’t owned a home within the past three years; a move-up buyer is defined as a buyer who has lived in the same primary residence for a stretch of five consecutive years or longer.⁴

How about some energy credits? If you make your principal residence more energy-efficient or purchase solar hot water heaters, geothermal heat pumps, wind turbines or other qualifying alternative energy equipment to heat or cool your home, you can qualify for a tax credit for up to 30% of the cost of the improvements. There is a maximum tax credit limit to $1,500 for improvements put in service in 2009.⁵

Do you have sons or daughters in college? The Hope Credit has become the American Opportunity Tax Credit, a credit of up to $2,500 toward qualifying college expenses. Phase-outs kick in at $80,000 MAGI for single filers, $160,000 MAGI for joint filers.⁶ Additionally, you could contribute a little more to a 529 plan before the year ends.

Prepay some deductible expenses. If you are pretty sure you will be in the same tax bracket or a lower one in 2010, think about making a thirteenth payment on your home loan in 2009 to boost your mortgage interest deduction, or prepaying your property taxes if your financial situation lets you do so.

Spend that FSA money. Do you have a Flexible Savings Account for your healthcare expenses? Think about getting some new glasses or braces, or find some way to use that money – money you might lose after December 31, unless your employer allows you the extended-access option to your 2009 FSA funds (in which case you’ll still have to use them by March 15 of next year).⁷

Sit down with your financial advisor for a portfolio review. See how (well) you’ve done this year. Think about next year, and what you might do as the economic recovery progresses. Discuss some of the different aspects of your financial situation. If you want a better understanding of where you are at financially, this is the chance to gain it.

Citations.

¹ foxbusiness.com/story/personal-finance/retirement-advice-ages/ [12/26/08]

² irs.gov/retirement/article/0,,id=202510,00.html [11/10/09]

³ usatoday.com/money/perfi/taxes/2007-06-15-mym-capital-gains_N.htm    [6/15/07]

⁴ money.cnn.com/2009/11/05/news/economy/Extending_unemployment_benefits/index.htm?postversion=2009110612 [11/5/09]

⁵ irs.gov/newsroom/article/0,,id=206875,00.html [11/13/09]

⁶ irs.gov/newsroom/article/0,,id=205674,00.html [11/6/09]

⁷ bankrate.com/finance/money-guides/use-fsa-money-so-you-don-t-lose-it-1.aspx [2008]

EXTENDED HOMEBUYER CREDITS & JOBLESS BENEFITS

New federal actions aid the real estate sector and the unemployed.

After unanimous passage in the Senate and a 403-12 passage in the House of Representatives, President Obama signed H.R. 3548 into law on November 6. The bill extends and expands a key tax credit for homebuyers while also offering more help for those out of work.^1,2

The $8,000 credit for “first-time” homebuyers continues. This tax break is now extended until May 1, 2010. If you have never owned a home or haven’t owned a home in the previous three years, you are considered a “first-time” buyer and therefore eligible for the credit (it is a credit of up to $8,000, by the way). You must sign your purchase agreement before May 1, 2010 and close the transaction before July 1, 2010 to qualify for this tax break.³

The $6,500 tax break for move-up buyers. Okay, maybe you aren’t a “first-time” buyer. You may still qualify for this new real estate credit. Have you lived in your current home for more than five consecutive years? You may be eligible for a credit of up to $6,500 if you move out of that home and buy another. Again, you have to sign your purchase agreement before May 1 and close before July 1 to get the tax break.³

Worth noting: BusinessWeek.com contacted Sen. Chris Dodd’s office (the Connecticut lawmaker chairs the Senate Banking Committee) and received word that move-up buyers can qualify for this $6,500 credit even if they have signed a purchase contract prior to November 6, provided the purchase closes before July 1.⁴

Does everyone qualify for these credits? Not quite. They phase out for individuals with adjusted gross incomes of more than $125,000 a year and couples with AGI of more than $225,000 a year. (The old phase-outs respectively kicked in at $75,000 and $150,000. These higher phase-outs mean that the credit can now help an additional segment of the housing market.)⁵

You can’t buy a vacation home and claim one of these credits – they only apply to principal residences. In fact, the home you buy has to have a sale price of $800,000 or lower.⁵

What will this do for the economy? “Every economist will tell you we have to steady the housing market before the economy will turn around,” Sen. Dodd expressed on November 5. “We can't afford to let this tax credit expire now.” Respected Moodys.com economist Mark Zandi agrees, saying that “from a macroeconomic perspective, nothing is more important than stabilizing housing values.” Zandi thinks that the $8,000 credit has led to 400,000 additional home sales in 2009. On the other hand, Dean Baker, the co-director of the Center for Economic and Policy and Research, questions why the extension is necessary: “For the most part, you're just giving people money for something they would have done otherwise.” The Joint Committee on Taxation estimates that extending these credits into 2010 will cost $10.8 billion across the next decade.^5,6

An extension of unemployment benefits. H.R. 3548 – sponsored by Rep. James McDermott (D-WA) – additionally extends state jobless benefits by up to 20 weeks. This will happen as a result of another extension – an extension of the federal unemployment tax on employers until June 30, 2011.⁵

If you are one of nearly two million Americans whose jobless benefits are set to run out at the end of 2009, this extension will help you. Your benefits will last at least another 14 weeks into the new year – in fact, they will last for another 20 weeks if you live in a state where the unemployment rate exceeds 8.5%. Have your unemployment checks already stopped? You may reapply for benefits.⁵

A chance for companies to convert losses into cash. What? Really? Yes. There is one provision of the new legislation that many have overlooked: it widens the window of time on the net-operating loss carryback. It lets all businesses apply losses from either 2009 or 2008 to any five years prior to 2008. So business owners, by virtue of the new legislation, have the potential for an IRS refund on the taxes they paid for the five years prior to 2008. There are two asterisks here. One, refunds for taxes in the fifth year of the carry back shrink by 50%. Two, any business that received TARP funds can’t take advantage of this tax break.⁷ 

 

Citations.

¹ google.com/hostednews/ap/article/ALeqM5hZg_pvAKDYQV-RYmrmcBrJTaJ5CAD9BQ71981 [11/6/09]

² latimes.com/business/la-fi-tax-credit6-2009nov06,0,2604220.story [11/6/09]

³ boston.com/business/articles/2009/11/06/first_time_home_buyer_credit_jobless_benefits_both_extended/ [11/6/09]

⁴ businessweek.com/the_thread/hotproperty/archives/2009/11/who_qualifies_f.html [11/6/09]

⁵ money.cnn.com/2009/11/05/news/economy/Extending_unemployment_benefits/index.htm?postversion=2009110612 [11/6/09]

⁶ latimes.com/business/la-fi-tax-credit5-2009nov05,0,1817786.story [11/5/09]

⁷ money.cnn.com/2009/11/05/news/economy/tax_breaks_for_business/index.htm?postversion=2009110611 [11/5/09]

 

Best & Worse Indices for the week ending 11/13/09

The best performing indices for the week ending November 13, 2009 were:

• Dow Jones Islamic Market World Emerging Markets Travel & Leisure Index (12.43%)
• Dow Jones US Tire Index (9.71%)
• Dow Jones US Travel & Tourism (9.38%)

The worse performing indices were:

• B2B Internet Holders Index (-2.13%)
• Dow Jones Greece Stock Index (-4.88%)
• Bank of New York (-5.37%)

Indices in a buying position are:

• Dow Jones US Full Line Insurance
• Russell 1000 Index
• Dow Jones US Mortgage Finance Index

ARE YOU PREPARED TO PAY FOR LONG TERM CARE?

In the coming years, many Americans will face the challenge.

70% of people currently over age 65 will require some long term care someday. That is the estimate of the U.S. Administration on Aging, a division of the U.S. Department of Health & Human Services.¹ Will Medicare or private health insurance pay for it? The short answer is “no”.

In the decades ahead, baby boomers will reach their seventies, eighties and nineties. With aging parents of their own, some are learning how much long term care really costs. Some are still unaware.

How many of us are financially prepared for the possibility? Here are a couple of “averages” to consider from MetLife’s 2009 survey of LTC costs. The average annual cost of nursing home care is now $79,935 or $219 per day. That’s up 3.3% from 2008. The average nursing home stay is about 2.5 years, which means you would need roughly $200,000 to pay those bills.²

Can you imagine paying it out of pocket? Taking out a reverse mortgage to do it? Using Medicaid because you have nothing left? No one wants these financial circumstances. The clear answer is long term care insurance coverage.

How expensive is LTC coverage? Annually, it typically costs about as much as a cheap used car. MarketWatch cited an example from the MetLife survey: in 2009, a 52-year-old federal employee could pay $1,524 annually for an LTC policy with a $200-per-day benefit for three years and a maximum lifetime benefit of about $200,000.²

Does $1,500 or $1,800 or $2,100 annually (just to throw out a few numbers) sound expensive? These premiums are certainly inexpensive compared to the staggering bills you may face if the need for LTC enters your life. Yes, there is a chance that you may never need LTC coverage. However, with advances in medicine and healthcare, we may live much longer than we anticipate before we leave this world. Factor in diseases such as Alzheimer’s and Parkinson’s and other gradually disabling disorders, consider the population wave of baby boomers maturing, and you see why this coverage makes so much sense for so many.  

Partnerships to make paying for it easier. Many states have created partnership programs to encourage people to buy LTC coverage. Essentially, these plans provide dollar-for-dollar asset protection when you buy an LTC policy. So for every dollar the policy pays out in benefits, you get an equal dollar amount in asset protection under a state’s Medicaid spend-down regulations.

 

For example, let’s look at Ohio. Let’s presume a couple have a $100,000 LTC policy. If they use up the whole $100,000 to pay for LTC, they would have to spend down their assets to $2,250 to qualify for state Medicaid benefits. But … if they exhaust a $100,000 partnership policy, they can potentially qualify for Medicaid coverage and still retain $101,500 of their assets.³ State governments are increasingly offering to partner with LTC policyholders with inflation-adjusted policies.

A new option (and a nice tax break). There are now whole life insurance policies and annuities structured to provide either a long-term care benefit or a death benefit – and thanks to the Pension Protection Act, starting on 1/1/10 the interest deducted to pay premiums and benefits from tax-qualified LTC coverage will no longer be taxed. (This applies to combination whole life/LTC policy plans and combination annuity/LTC policy plans; premiums for traditional LTC insurance policies will still be paid with after-tax dollars. So with these new combination whole life/LTC and annuity/LTC policies, you will now have tax-free premiums and tax-free benefits.)⁴

59% of Americans are wrong when it comes to long term care. AARP conducted a survey in 2006 and found that 59% of respondents believed Medicare would pay for extended nursing home care. Another 52% incorrectly thought that Medicare would cover assisted living costs. In 2009, AARP found that 44% of Americans were “not very prepared” or “not at all prepared” to bear sudden long term care expenses.

 

I urge you to join the ranks of the prepared. November is Long Term Care Awareness Month – a good time to look at ways to plan for long term care needs. Now is the time to confer with an insurance advisor or financial advisor to learn more about your options.

 

Citations.

¹ naifa.org/newsevents/releases/200810212_LTCMonth.cfm [10/21/09]

² blogs.marketwatch.com/retirement/2009/10/27/long-term-care-insurance-is-it-worth-the-bet/ [10/21/09]

³ ltc4me.ohio.gov/faq.aspx [8/08]

⁴ seniormarketadvisor.com/r/smaMag/d/contentFocus/?adcID=c52394c846a85ab7538a370dfea5a92f [10/16/08]

⁵ aarp.org/research/ppi/ltc/Other/articles/the_costs_of_long-term_care__public_perceptions_versus_reality_in_2006_--_aarp_fact_sheet.html [12/13/06]

⁶ assets.aarp.org/rgcenter/il/bulletin_ltc_09.pdf [4/09]