Stocks are cheap, but investors are fearful

March 1, 2009

By most measures, stocks are now cheap enough to justify a legitimate market rally that could easily develop into a multiyear bull run, according to some market watchers.

The main sticking point, however, seems to boil down to a lack of confidence tied largely to spreading uncertainty over government intervention and economic-stimulus efforts.

"I think the ultimate lows in the stock market will be this year, but from a practical standpoint, you need to see some stabilization in the economy," said Gary Flam, managing director and head of equities at Los Angeles-based Bel Air Investment Advisors LLC, which has $6 billion in assets. "The big-picture issue right now is that just as a few years ago, people thought the good times would go on forever, right now, people think the bad times will go on forever."

Based on current conservative estimates that the aggregate earnings of the companies making up the Standard & Poor's 500 stock index will be $50 for 2009, the benchmark's forward price-to-earnings ratio is 15.

This matches the historical average P/E going all the way back to 1926.

But even at such a low, it is difficult for some money managers to characterize stocks as being on sale.

"Right now the market really doesn't even care about valuation, because it is looking for fundamentals and stabilization from a policymaking point of view," said David Chalupnick, head of equities at Minneapolis-based FAF Advisors Inc., which has $106 billion in assets.

MARKET TROUGH

Using the cyclically adjusted price-earnings ratio, a measure that smoothes out economic ups and downs by taking profits over the previous 10 years into account, the benchmark's P/E comes in at 13.5 - significantly below its historical average of 16.3, dating back to 1881. Over the past 60 years, a market trough has typically happened when the P/E has fallen to somewhere around 14 using that valuation model, according to Craig Columbus, president of Advanced Equities Asset Management in Scottsdale, Ariz.

"Right now we're getting into a range where the markets look near a bottom," he said. "But we know that the markets can stay overvalued or undervalued for a long time, so it depends if you want to look at the glass as half full or half empty, because you can get to either place."

The half-empty argument can be made by applying the stock market's 1932 bottom during The Great Depression when the S&P's trailing P/E dipped to 7.

If you apply that 7 P/E to the current market, it would suggest a market bottom of around 400, representing a 47% decline from where the S&P is currently trading.

"That's not the scenario I think is most likely," Mr. Columbus said. "I think the markets are starting to look more reasonable, and if you strip out financials there are some fairly healthy corporate balance sheets, but right now there's a lack of consistent policymaking and that's why sentiment is still ruling the market."

Part of the muted attitude toward stock market valuations might also be related to the fact that 2008 exposed the financial services industry's propensity for underestimating risks, according to Craig Callahan, president of Icon Advisers Inc. in Greenwood Village, Colo.

"To us, last year was a learning opportunity, and we've changed the way we quantify risk," he said. "We start now by considering the requirements to bondholders and then add a premium for equity risk."

Icon, which manages $2.5 billion, calculates the value of about 2,000 domestic stocks, discounting earnings projections back to present value.

The valuation strategy, which is similar to a dividend discount model, calculates the current stock market at 31% below fair value.

This is the most undervalued Mr. Callahan has seen the market since March 2003, when the markets were concerned over fallout from the pending Iraq war.

Mr. Callahan said if gross domestic product data turns positive, as some analysts anticipate, in the third quarter of this year, then the stock market, which typically leads the economy by four to six months, is already at or near a bottom.

POSITIVE GDP

"Some people are acting as if there's no end to this thing," he said. "But by the second half of this year we'll return to positive GDP."

Based on that analysis, Mr. Callahan said he expects sectors such as technology and consumer discretionary, which have been punished in the downturn, to lead the market on the way up.

Stock valuations also get a boost when compared to less risky alternatives, namely a 2.7% yield on 10-year Treasury bills.

"That bodes well for the value of stocks, and it shows why you can't look at valuations in a vacuum," said John Buckingham, chief investment officer at Al Frank Asset Management Inc. in Laguna Beach, Calif.

Mr. Buckingham, whose firm manages $350 million, translates the S&P's 15 P/E into a 6% yield.

He also factors in the high end of earnings estimates at $63, which translates to a P/E of 12 and an 8% yield.

"There are so many undervalued stocks out there right now that we've had to implement an additional matrix to weed out companies," he said "But right now fear is still ruling the roost, and some of it is very valid."

This is orignally from Morningstar.  For those of you who are clients of mine, you know that I hate mutual funds for many reasons.  Sometimes they'r the only choice we have but this is another reason for buyer-beware:

 

Watch Out for Funds Hit by Layoffs

by Ryan Leggio | 02-24-09 This article originally appeared in Morningstar FundInvestor, an award-winning newsletter that presents investment strategies and tracks 500 funds. Widespread market declines usually mean at least one thing for investment-management firms: layoffs. But these cuts don't come at a good time and are not a positive development for shareholders--just as the market starts to provide compelling buying opportunities, the people running mutual funds are being let go or reorganized. When assets under management and profits decline, it is understandable for firms to cut back staff in order to remain profitable. In past downturns, though, the most vulnerable areas were in sales and back office staff, which don't affect shareholders as much. This time, however, the market downturn is happening alongside a lengthening recessionary environment, and we are seeing many professional staff cuts as well, which include research analysts and portfolio managers. If the stresses from dramatic market declines aren't enough, some firms have seen such dramatic reductions in assets that layoffs were widespread. AllianceBernstein saw its assets under management decrease by approximately $30 billion, or 6.2%, in November alone. The firm's research staff, which AllianceBernstein had steadily built up over the last few years, has been reduced by an estimated 8% to 10% to around 151 equity and 62 fixed-income analysts. The layoffs coincide with the retirement of CEO Lewis Sanders after a 40-year career at the firm. Sanders took over as CEO in early 2003 and guided the firm through a series of market-timing charges later that year. Neither of these developments strikes us as positive for AllianceBernstein fund owners. MFS Investment Management of Boston is also grappling with layoffs. The firm recently laid off 90 people, some of whom were investment-management professionals. MFS executive Robert Manning doesn't believe that the consolidation of noncore products will affect shareholders and doesn't anticipate any further cuts in the investment staff. We are not as confident as Manning on either count. Other Boston firms are in the same boat. Boston Company Asset Management laid off 90 people, nearly 30% of its staff, because of last year's stock market plunge. The company said that its assets under management fell 47% over the past year. The investment group, part of the Bank of New York Mellon Corp., manages the Dreyfus mutual funds. Fidelity Investments and State Street have announced numerous layoffs over the past few months. Even when managers are not being directly laid off, some are being essentially laid off by Mr. Market. That is, a number of managers nearing retirement age are deciding to call it quits as the stresses of a new bear market outweigh the benefits of a few more years of employment. Most troubling is that we have seen a few seasoned managers leave at the same time that their funds are struggling. At RS, longtime manager John Wallace retired from RS MidCap Opportunities RSMOX, leaving big shoes to fill for the remaining managers. Meanwhile, Stephen Lampe retired from Delaware Trend DELTX after being with the firm since 1998. These are just a few of the many examples we have seen in the last few months. These departures were not announced as layoffs, but we wonder if the timing would have been different if we were in a roaring bull market. It is unlikely that layoff activity has peaked. Markets retested their November lows in January, and billions of dollars keep flowing in low-return money markets, keeping the pressure on firms. It seems that more large firms are cutting professional staff this time around compared with the last bear market. These continued cuts could hurt a fund's ability to rebound when the market finally does rally.Ryan Leggio is a mutual fund analyst with Morningstar.

Sorry it's been so long since my last post.  My goal is to have something up here weekly to help you, but the holidays & New Year have been busier than I could have ever imagined.  This story clearly explains that beneficiary forms MUST be correct.  They will always trump any other document, court ruling, etc.  Enjoy...

Kennedy v. Plan Administrator for

DuPont Savings and Investment Plan,

(No. 07-636, Decided January 26, 2009)

In a court battle that has been ongoing since 2001, Kari Kennedy lost a $402,000 inheritance because the beneficiary form did not name her as the beneficiary, even though that is what her father wanted. The United States Supreme Court UNANIMOUSLY ruled that the ex-spouse receives the retirement plan money because she was named on the beneficiary form - even though she waived her rights to that money in a divorce decree.

The high court ruled that a company plan must pay the beneficiary named on the beneficiary form, even in light of contradictory signed agreements. The Supreme Court ruling is the law of the land and there are no more appeals on this. The beneficiary form controls who inherits the money and all of the Justices agree.

Facts of the Case

William Kennedy died in 2001, three years after he retired from E.I. DuPont de Nemours & Company. He had worked 34 years for the company where he contributed to the company plan (a Savings and Investment Plan - an ERISA qualified plan). He married Liv Kennedy in 1971 and in 1974 he signed a beneficiary form naming her as the beneficiary of the SIP. There was no contingent beneficiary named on this form. William and Liv divorced in 1994. Under the divorce decree, Liv waived her rights to any benefits under his retirement plans. He wanted this plan balance of $402,000 to go to his daughter, Kari Kennedy, but he never changed the beneficiary form on this plan. He did change it on another plan, but not on this one. After William's death, Kari, as the executrix of his estate, asked DuPont to distribute the balance in the SIP to William's estate since Liv had waived her rights to this money and there was no named beneficiary on the plan.

DuPont, going by the terms of the SIP and the beneficiary form on file, instead paid the proceeds out to Liv, disregarding the waiver in the divorce decree. Liv Kennedy died in 2007, but that did not change the result.

The Court Proceedings

The estate then sued DuPont and the plan administrator for the funds. They made the claim that the divorce decree was a waiver of the SIP benefits and that it was a violation of ERISA rules to distribute the funds to Liv. The District Court agreed with the estate. DuPont appealed this decision. The Fifth Circuit Court reversed the District Court decision saying the waiver was not valid since it was not a QDRO (qualified domestic relations order). Supreme Court Justice Souter stated that the case was heard in order to decide who is entitled to the inheritance where the divorce decree is "inconsistent with the plan documents."

The Supreme Court Decision

The justices unanimously ruled that the daughter gets nothing. They reached the same decision as the Fifth Circuit Court, only their decision is based on compliance with the written plan agreement rather than on the waiver issue. This is a major distinction. The Supreme Court said you have to look at the terms of the plan and pay out the death distribution accordingly. The person named on the beneficiary form gets the money.

From the Court:

"Under the terms of the SIP Liv was William's designated beneficiary. The plan provided an easy way for William to change the designation, but for whatever reason he did not. The plan provided a way to disclaim an interest in the SIP account, but Liv did not purport to follow it. The plan administrator therefore did exactly what §1104(a)(1)(D) required: ‘the documents control, and those name (the ex-wife).'"

The DuPont SIP plan allows a beneficiary to disclaim plan benefits (not all plans will accept a disclaimer). Liv could have disclaimed the SIP plan within nine months of William's death and the assets would have gone to his estate since there was no contingent beneficiary. This would have effectively corrected the situation. But, she did not do this. In footnote 10 of the case, the Court did leave open the option that after the funds were distributed to the exspouse, there could be a case against her to recover the funds based on her prior contractual agreement (the divorce decree). In part, the footnote states that "the consensual terms of a prior contractual agreement may prevent the named beneficiary from retaining those proceeds." Once the funds were distributed from the plan, they were "no longer entitled to ERISA protection." But that is another story for another day. The bottom line is that the ex-wife gets the money because she was named on the plan beneficiary form.

Hot off the presses...from the IRS:

 

Table 1: Pension Plan Limits
	2009	2008
Maximum annual benefit under a defined-benefit plan	$195,000	$185,000
Maximum annual contribution for defined-contribution plans	$49,000	$46,000
Annual compensation limit used for determining retirement plan contributions	$245,000	$230,000
Maximum annual contribution to 401(k), 403(b), and 457 plans	$16,500	$15,500
Catch-up contribution for individual age 50 or older	$5,500	$5,000
Maximum annual SIMPLE employee deferral	$11,500	$10,500
SEP minimum compensation	$550	$500
Income of key employee in top-heavy plan	$160,000	$150,000
Definition of highly compensated employee	$110,000	$105,000
Maximum annual IRA contribution	N/A	$5,000
Catch-up IRA contribution	N/A	$1,000

 

Table 2: Social Security Benefits
	2009	2008
Maximum benefit for worker retiring at full retirement age (FRA)	$2,323	$2,185
Maximum taxable earnings	$106,800	$102,000
Retirement earnings test exempt amounts if under FRA. $1 in benefits withheld for every $2 in earnings over the limit.	$14,160/year $1,180/month	$13,560/year $1,130/month
Retirement earnings test exempt amounts in year individual reaches FRA (applies only in months prior to attaining FRA). $1 in benefits withheld for every $3 in earnings above the limit.	$37,680/year $3,140/month	$36,120/year $3,010/month

 

Table 3: 2008 Part B Premiums for High-Income Beneficiaries
MAGI range for beneficiaries who file an individual tax return	MAGI range for beneficiaries who file a joint return	Part B premium
$82,000 or less	$164,000 or less	$96.40
$82,000-$102,000	$164,000-$204,000	$122.20
$102,000-$153,000	$204,000-$306,000	$160.90
$153,000-$205,000	$306,000-$410,000	$199.70
More than $205,000	More than $410,000	$238.40

 

Table 4: 2009 Part B Premiums for High-Income Beneficiaries
MAGI range for beneficiaries who file an individual tax return	MAGI range for beneficiaries who file a joint return	Part B premium
$85,000 or less	$170,000 or less	$96.40
$85,000-$107,000	$170,000-$214,000	$134.90
$107,000-$160,000	$214,000-$320,000	$192.70
$160,000-$213,000	$320,000-$426,000	$250.50
More than $213,000	More than $426,000	$308.30

This is a recent article from Morningstar.  I think it gives us all some good advice on how to keep a good focus through these turbulent times.

1. The market is inherently volatile, and there is no telling when the volatility is going to stop (or where the bottom is). Only invest money that you will not need for a couple of years.

2. We are in a recession--one that is going to be more severe and protracted than average. However, that does not mean the end of the world. Our country has lived through many recessions before, and we will live through this one, too.

3. The intrinsic value of a stock is the value of the discounted cash flow the underlying business will generate in coming years. The cash flows of our companies are not anywhere close to as volatile as stocks have been recently.

4. While our companies are dealing with the recession and we are likely to see a material contraction in earnings in the coming quarters, this does not mean that the companies are in permanent decline. The market likes to extrapolate recent short-term trends, but those extrapolations lead to wrong conclusions in periods like this.

5. All the evidence I have points to the fact that very many stocks are ridiculously cheap, assuming we are not headed toward Great Depression Part Two. (An assumption I'm willing to make, given the massive and global government stimulus being applied.) As I've said before, valuation ratios in the modern stock market have never been this low without high inflation, and inflation is the last of our concerns at this moment.
by Paul Larson | 11-25-08

Paul Larson is an equities strategist with Morningstar.

The Financial Crisis, From A-Z
Tunku Varadarajan 11.10.08, 12:00 AM ET

The editors at Forbes.com--not, on the whole, a pedantic bunch--made a decision a little while back to swap the phrase "Wall Street Crisis" for another, spookier one: "Global Financial Crisis." While this taxonomical adjustment is important--reflecting, as it does, the borderless nature of the financial contagion--the underlying cast of causes and characters remains unchanged. Here, I offer an alphabetic sampling, by no means exhaustive. Apologies to anyone who feels unfairly left out.

A is for America, the big swinging Richard whose dysfunction started it all. Think also of accountability (lack of); AIG (which has cost the U.S. $140 billion, and counting--who knew insurance could be so exciting!); assets (what assets?), and Adam Smith, who's slapping us about the face--with his invisible hand.

B boasts Ben Bernanke, known, lovingly, as "Helicopter Ben," who's clearly no Greenspan, um ... Volcker, um ... Morgan. And isn't it swell that he's an expert on the Great Depression and its causes? Bear Sterns was the big, fat canary in the coal-mine, whose death-trill was the first note of a symphony known as the bailout. B is also for balance sheet and belt-tightening.

C is for Credit Default Swaps, defined for me by a Wall Street watcher as: Risk whatever you want, and we insure it; risk too much, taxpayers insure it. And there are those CDOs (pronounced "seedy owes") that were all the rage at Citigroup, one of many tarnished poster children of capitalism, a philosophy that's taken a hefty write-down. (Congress certainly doesn't believe in it.) And then there's Christopher Cox, whose finger was never going to be big enough for the dike, poor bloke.

D is Depression: Yes, we're in one, and it's going global. The trouble is we've already used "Great" in 1929. So we need a new superlative. D is also for debt; and for deregulation: Some say we had too little of it, others that we had too much. (This analytical Pushme-Pullyu bodes ill for a swift recovery.)

E is for excess (of, for example, executive pay and easy money).

F has a rich hand: Fannie & Freddie (that avuncular couple down the street with their children's bodies in the basement), and Fuld (Richard, Last of the Lehmans). Let's not forget flippers, the Fed, and frozen credit; or FDR and fear: The only thing we have to fear is fear itself ... Yikes, isn't that exactly what's happening? (F is also for Fair Value Accounting, a genie that all the banks once clamored for, but now wish they could stuff back in the bottle.)

G is for Greenspan, godfather of this crisis, whose legacy sleeps with the fishes; and Goldman Sachs, coming to an ATM near you. G is also for greed, simple and unadorned.

H is for home equity, a quaint notion from the 1990s (cf. housing bubble), and haircut (a cold-blooded euphemism for household calamity). H is also for hearings (expect a lot of those).

I is for Iceland, on which Britain exacted its revenge, some 1,300 years after the Viking raids; and inflation, the next crisis ... or will that be deflation? Of course, there's your IRA ... but let's change the subject. I is also for innovation, the life-blood of the American economic miracle. Will it survive the coming age of regulatory overreach?

J is for Jamie Dimon, jolly good fellow, whose JP Morgan held back--and missed the mess.

K is for Kashkari (Neel), the bald young hero brought in by Paulson to fish us out of the deep end; oh ... and it's also for Keynes (John Maynard), who is enjoying a comeback to match anything that the Rolling Stones could ever pull off. (Watch, as Washington's fever swamps are drained of neo-cons and then restocked with neo-Keynsians.)

L is for leverage (a means of maximizing your losses), liar loans, Lehman (pronounced "lemon")--and the losses/liabilities that unite them all. L is also for liquidity puts (don't ask me what that means, Robert Rubin didn't know, either); and layoffs.

M is for where it all started: the mortgage (which, aptly, means death-pledge). Like the dog, it comes in a variety of breeds, "sub-prime" being a cross between a pit bull and a chihuahua. And let's not forget marking-to-market, a hyper-purist tool that contributed to the downward spiral; moral hazard (moral what?); Main Street (the rest of us dopes); and, my favorite, macroprudence (a sadly neglected word--and concept, come to that).

N is the no-short rule. Why didn't someone tell the SEC there's no shortcut?

O is for Obama, the most important political outcome of the Global Financial Crisis. The question is, will Obamanomics only make things worse?

P is for Paulson: Is he Moses, or Don Quixote? At least he isn't John Snow. And for that small mercy we give thanks.

Q is for quants, who forgot that, every so often, past performance is no indicator of anything at all.

R is for Roubini (Nouriel), the professor at NYU's Stern Business School and Forbes.com columnist, who foresaw it all. Not for nothing is he known as Doctor Doom. In person, he's a rather cheerful chap. And why shouldn't he be? There's no tonic more invigorating than one's being right.

S is for securitization, the process by which one passes off cat food as caviar. This is how mortgage debt was repackaged and sold. Be suspicious--very suspicious--of that stuff on the plate before you.

T is for TARP, which is what all of Wall Street is hiding under. This writer finds the acronym (for Troubled Assets Relief Program) reassuring: it's proof that someone in Treasury has a sense of fun, even when dealing with toxic securities.

U is for unemployment. And also for underwater (almost every hedge fund, mutual fund and 401(k)).

V is for a new vocabulary, which we've had to acquire in a blazing hurry, to fathom our way through this failure. Try these for size: CRA, Alt-A, ABCP, SPV. And that's just the ones in English. (What's Icelandic for CDO?)

W is for Wall Street, which will never be the same again--until the next boom, when idiocy will once more stake its claim to excess.

X is for xenophobia. Let's blame the Chinese ... Wait, can we really do that?

Y is for yelling "fire!" in a crowded theater, what Jim Cramer was accused of doing when he went on NBC's Today Show and told people to pull their money from the stock market. (His response: There is a fire!)

Z is for ZWD, the symbol for the Zimbabwe dollar. If you thought the greenback had problems ... try getting a mortgage in Harare.

Tunku Varadarajan, a professor at the Stern Business School at NYU and research fellow at Stanford's Hoover Institution, is Opinions editor at Forbes.com, where he writes a weekly column. (For this week's column he'd like to offer a grateful tip of the hat to the following: Sudhakar Balachandran, Dan Bigman, Jerry Bowyer, Reuven Brenner, Philip Delves Broughton, Thomas Cooley, Charles Dubow, Andy Kessler, Annabel Levy, David Levy, Paul Maidment, Partha Mohanram, Thomas Peacock, Roy Smith, Marti Subrahmanyam, Hugh H. Shull Jr., Hugh H. Shull III and Vijay Vaitheeswaran.)

What a week it has been.  The markets seemed to be elated that Obama was getting elected on Tuesday, but gave back all that enthusiasm and more on Wednesday & Thursday.  Thankfully we got back 250 points today.

Here are some thoughts I have and have heard about various things we might expect going forward.

First of all, Obama's team of economic advisers is a who's who of smart & important folks: Warren Buffet, William Donaldson (former SEC chairman). Roger Ferguson (CEO TIAA-CREF), Anne Mulcahy (CEO Xerox), Richard Parsons (Chairman Time Warner), Robert Reich (former Labor sec), Robert Rubin (chairman Citigroup & former Treasury sec), Eric Schmidt (CEO Google), Roel Campos (former SEC commissioner), David Bonior (former MI congressman), William Daley (former Commerce sec), Jennifer Granholm (MI gov), Penny Pritz (CEO Hyatt), Larry Summers (former Harvard pres & former Treasury sec), Laura Tyson (Professor Univ of CA & former chairman of Pres Clinton's Council of Economic Advisers), Antonio Villaraigosa (former LA mayor), and Paul Volker (former Fed chairman).

I am extremely encouraged by a very diverse group of advisers to work with Obama to try & get us through some very trying times as quickly as possible.

Now the biggest question that most people have is about possible tax increases.  I'd like to share some thoughts & information on this:

Many people say that Congress can't raise taxes in a recession.  In the last 30 years, there have been 5 major tax increases.  3 of them were during a recession & a 4th was during a period of flat growth, so I think we can forget this whole Congress can't raise taxes in a recession.  They have before & they will again.

One of the first taxes that will need to be addressed is the estate tax issue.  In 2010 there will be no estate tax.  Based on an estimate I heard the other day, this would cost the Gov't about 38 billion.  My guess is that Obama and/or Congress (Keep in mind, Obama will be the President, but Congress controls the taxes) will either implement a one-year patch (like they do every year with the AMT) with a 2.5-3MM exemption & a 45% tax rate, or Obama will present a major tax bill covering a variety of tax issues by next summer.

3 of the 4 previous Presidents have proposed their tax bills (pardon the pun) within the first 8 months of office.  The honeymoon doesn't last long, so they have to act quick. If a big tax bill does not get passed next summer, then I would expect an estate tax/AMT one year patch to be passed late next year.

Other tax issues: with the 2001 EGTRRA tax laws expiring soon, taxes will automatically go up in several areas:

Income Tax: The 10% tax bracket disappears & will start at 15%, the 25% becomes 28%, 28% becomes 31%, 33% becomes 36%, & the 35% becomes 39.6%.  Obama said he wants to help the lower class.  He'll need to do something because the lower bracket tax payers will have a 50% increase going from 10% to 15%.

Child Tax Credit: Currently $1000, will drop down to $500 in 2011.

Capital Gains Taxes: Currently 0% or 15%.  Will go to 10% or 20%.  This one is interesting.  I heard that taxes collected from capital gains actually went up even though people were paying a lower rate. This actually makes sense as more people made investments as the tax rates went down.  Sounds a little like Reganomics trickle-down.

Dividends: The party will really be over here.  Currently 0% or 15%.  In 2011 will be taxed as ordinary income (see above...remember the income tax rates go up in 2011.  An average family with both spouses working could have the dividend tax double).

Retirement Plan Contributions Deductibility: There has been talk during all the campaigning of taking away the deduction and replacing it with a tax credit of 25% of your contribution.  Based on expected tax brackets and rates, this will help those making less than $65,000 and not be as beneficial for those making more than $65,000.  Obviously this falls well below Obama's threshold of $250,000 in terms of who pays more or less.  I'll be interested to see if anything happens with this & how Obama will reconcile this with his campaign promise of $250,000 as a threshold for taxes.

Now a real interesting fact I heard the other day is that Obama will inherit a deficit of about 1TT dollars for next year. I saw today that Republicans are committed to working with him and the Democrats on spending cuts, but not higher taxes.  The Fed can only print so much money before it becomes worthless, so many things will have to give because we're broke.

One area that has been mentioned as possible savings would be from the withdraw of US Troops from Iraq.  It may be a while before we see some savings here as Obama has said we need to increase troop levels in Afghanistan and the military has a lot of stuff that has, or is breaking down from years of use and abuse (war is an ugly thing in many areas...all that sand is hard on engines, guns, electronics, etc).  They will need to spend the next several years replacing all the stuff that was used in the war to keep our military ready for whatever the next war will be.

Back to taxes (please pardon if this sounds like I'm rambling...there's so much stuff that willl change & even more that could change.  I want to make sure you have a good idea of all this stuff).  There has been discussion that if a tax package gets passed next summer, that it would be retro-active to Jan 1, 2009.  Now the last time the government passed a retroactive tax bill, they gave us all 3 years to pay that extra tax we weren't expecting.  Here however is a funny thing.  The IRS neglected to reprogram their computers & ended up mailed back the extra taxes people were paying.  Sorry though, they did correct the error & made you send back that money.

Whatever happens, & I'm sure something will happen next year, I hope and pray that Obama will listen to his team of advisers.  It looks like a pretty good brain trust to me.  With Congress's approval rating in the teens, they'll need to do something effective, or face being booted out of office in 2010. I admire Obama's soberness of the challenges we all face & appreciate his optimism that we can make a change for the better.  Kind of reminds me of the positive aura that Regan brought to DC back in 1980.

Best of luck to all of us.  May the Lord bless each and everyone of us to have the courage to continue forward in our search for better times.

It's been a few weeks since my last post.  My apologies.  Between getting my clients their 3rd quarter reports and the market's insane volatility, it's kept me a little busy.

For the past 12 months, the DJIA (Dow Jones Industrial Average) is down 31%, but it's up 20% from the low is set on Oct 10th.  Is the worst behind us?  I hope so, but there is no crystal ball.  The important thing to remember is to keep a long term focus and make decisions based on logic, not fear or reaction.

So what do I need to be thinking about going forward?  Well, for all of you with mutual funds held in taxable accounts (non-retirement accounts), you may be in for a shock on the capital gains payments your funds may make sometime in December.

For those of you who had to endure a 20% drop or more of your mutual funds in 2000, you may also have taken a second hit the next spring when you had to pay the taxes on the capital gains distributions.

How does this happen?  Well, back in 2000, many funds had significant gains from the 90's.  When the market started falling and people started pulling out of their mutual funds, the funds had to sell those appreciated stocks to generate the cash needed to pay for the redemptions.  By law, the funds then pass those capital gains onto the shareholders.  By reviewing the asset flows in and out of mutual funds this year (this information is reported monthly).

So what are we talking about here?  Well, this is going to be a general estimate, so your taxes may be higher or lower, however based on various research that I've read, I think that a 10% capital gains distribution is not out of the question.

So I'm down 30% from market loses & I'm going to loose another 3-5% in taxes???  Well, depending on your tax bracket and your mutual funds, yes.  It could be better, but it could also be worse.

So what do I do?  Having been in the business for over 15 years now, I've meet a lot of advisers and companies that take no thought at all on the tax ramifications of their recommendations.  I try when possible to begin with the end in mind.  At some point and time, you're going to sell an investment.  Often it can be done in a way to minimize the taxes you'll pay, leaving more money in your pocket.

So how do I do this?  Well, that's where working with a good advisor comes into play.  I met with some new clients over the weekend, and as we were having a discussion of various tax issues, I remember the wife making the comment that it's impossible for the average person to understand all this stuff and will probably over pay their taxes.  I agree with her on this.  I remember many years ago reading a Wall Street Journal article where they estimated the average person over-pays their taxes by 14-17% a year.  I also shared with them that in just the past 10 years there have been 4 major revisions to the tax code, and if the 2001 tax changes are allowed to expire (and most likely they will) we'll have another major change in 2 years.  Most people however think that unless they are worth millions of dollars, they don't need and can't afford a financial planner.  Often times, as I work with people, the savings I can find for them will more than cover the fees I charge.

If you feel that your financial adviser is not giving you the help you want in reducing your tax liabilities, give me a call to see if they way I do things may be right for you.

Dow Worst Week Ever:
- The Dow had its worst week ever in terms of points as well as percent drops, losing 1874 points or down 18.15%.
-The second biggest weekly percentage drop was the week ending July 21, 1933 when the Dow closed down -15.55% for the week
-The third biggest weekly drop for the Dow on a percentage basis was the week ending Friday, 9/21/01 after 9/11 when the Dow fell 14.26% for the week
*There has never been a point drop in a week of greater than 1,600 points back to the Dow's inception in 1896
-The Dow is now down 40.67% off its market peak on October 9, 2007 of 14,164.53
On Friday, the Dow swung 1,018.77 points from high to low for the first time in its history
In market cap, the Dow lost $26.7B in market cap on Friday, and a two-day loss of $263.7B in market cap

S&P 500 2nd Worst Week Ever: 
The S&P ended the week down 200.01 points and -18.19% for the week making it the second worst drop ever (data back to 1928):
-The biggest percent drop for the S&P was the week ending July 21, 1933 when the S&P dropped 18.57%
-The third biggest percent drop was the week ending May 17, 1940 when the S&P fell -15.39%
4th Biggest S&P drop was September 16, 1932 when the S&P fell -13.49%
-The S&P is now down almost 42.27% from its peak of 1565.15 on October 9, 2007

NASDAQ 4th Worst Week Ever: 
The NASDAQ Composite is down 297.88 points and -15.30% for the week (Data back to 1971) -The NASDAQ closed slightly positive for the day on Friday
-The worst drop for the NASDAQ was the week ending April 14, 2000 when it dropped 25.31%
-The second worst drop was the week ending October 23, 1987 when the NASDAQ fell 19.17%
-The third worst drop was the week ending September 21, 2001 when the NASDAQ fell -16.06%
-The NASDAQ is now down almost 41.44% from its peak of 2859.12 hit on October 31, 2007

The VIX hit a high of 76.94 on Friday, hitting levels not seen since October, 1987

U.S Major Index Performance Since Last Friday & Year-to-Date
	Last	Change	Today's % Change	1 Week % Change	YTD % Change
Dow	8451.19	-128.00	-1.49%	-18.15%	-36.29%
NASDAQ	1649.51	4.39	0.27%	-15.30%	-37.81%
S&P 500	899.23	-10.69	-1.17%	-18.19%	-38.76%
Russell 2000	522.47	23.27	4.66%	-15.65%	-31.80%
CBOE VIX	69.09	5.17	8.09%	53.06%	207.07%

Source: CNBC.com

One year ago the market hit an all-time high.  One year later we're down 40%.

Should I sell everything and wait till the markets recover?

ABSOLUTELY NO!!!  That would be selling low, and if you waited until the markets recovered, you'd be buying high.  Please follow this link to read a great article on CNBC.com:

http://www.cnbc.com/id/27100099/