Leonesmoneymonitormonthly's Blog

    By Edward Leone Jr. DMD MBA RFC

    Contact Information:  leonee@vzw.blackberry.net

 As the US Congress goes back into session, there are many issues left for this lame duck Congress to discuss.  Among them getting much attention is the continuation of current tax rates (know as the Bush tax cuts). I get very upset when I read that continuing this tax rate or that tax rate at its current level will cost x number of dollars in lost revenue over the next ten years. How can anyone estimate the revenue gain when the tax rate is adjusted up given the propensity for the population to change revenue and expense patterns to avoid additional tax burdens? It is my opinion that tax rates are still too high and not distributed over a broad enough scope of the population and business to make them workable in an economic recovery. The other part of the formula which is recognized but not adequately discussed is government spending. In the year 2000, federal spending was a touch over 20% of GDP. Today it is rapidly approaching 24% of GDP. The gap in revenue which hovers around 20% of GDP is funded through borrowing and monetization. Borrowing is just the creation of a future tax and monetization is the incremental addition of  more currency to the existing pool which creates another hidden tax know as inflation. We are also engaged in a strategy which keeps lowering the value of the dollar against other international currencies to make our exports cheaper. This trend is raising our energy costs dramatically since we import so much oil. Other countries are engaged in the same type of strategy. Where will this insanity end? Who will have the courage to face these issues and develop sensible solutions? Are we as a society ready to come to grips with these issues and do what is necessary to rebuild our economic stature to the benefit or our population and the global population? We must as a society, decide what businesses it is that we want our government to conduct. We must also examine the unintended consequences of programs which have been in existence for extended periods without good sound economic principles as a foundation rather that the political motive foundation which runs most of them and make appropriate adjustments or eliminate them. These are very challenging times. Unless the global economy grows, our slice of the pie is not likely to grow substantially. Unless government stops expanding its section of our piece of the economic pie crowding out private economic interests, we will fail to remain a leading global economic influence. Kiplinger has done a projection for the growth rate of several economies in 2011 as follows:

US   3%   Euro Zone   1.3%   China   9%   Japan   1%   UK   1.9%   Brazil   4.6%   Russia  4%  Canada    2.5%   India     8.3%   So. Korea    3.9%   Mexico     3.6%

     On a potentially positive note for business, the very burdensome 1099 requirements instituted with the passage of health care reform legislation may be repealed with the passage of the safe food bill. Why can’t congress stick with legislative content reflective of a bills title?

     The fix for Social Security will be a challenge for many citizens to navigate.  According to the Employee Benefit Research Institute, employees participation in retirement plans at the work place fell to 39.6% in 2009. This is the lowest participation since 1993.  Payroll tax revenues are also down due to high unemployment rates. The number of employers offering plans has decreased by about 10% over the last 10 years and surplus Social Security funds over and above what has been needed to meet the program’s obligations have been borrowed instead of invested. With a fix, benefits are likely to decrease, taxes will increase due to the need to replenish funds borrowed from the program, individual retirement savings being down will create a short fall in income  for many retired persons and the return on fixed income investments is so meager that interest income is severely compromised while market risk is likely to increase.  Look also for increases in payroll taxes as a part of any fix. I must apologize for so much negativity, but we need to begin some discussion on this matter and several others.  We may in the future, be better off with a private system which does not pump money into inefficient and politically driven government hands, but instead takes that 12%+ of employee compensation contributed by the employer and the employee to be invested in a personal account owned by the employee.  Please share your thoughts.

     Regarding another government imposed issue, health care reform, according to Hewitt Associates consulting firm, the average cost for group health care plans will increase by 8.8% between 2010 and 2011. The employees’ share of premium costs along with deductibles and coinsurance costs will go up as a result of the trend toward cost shifting.

     In the spirit of trying to be helpful, I read a great article on Investopedia written by Steven Merkel CFP ChFC. He talks about many commonly over looked to do items in estate planning which are simple for an individual to accomplish given the time and the dedication. These steps make estate transfer much easier for family upon the passing of the individual:

1. perform a physical item inventory

2. perform a non-physical item inventory

3. prepare a credit card and debt list

4. get these lists to your designated estate administrator

5. review IRA and other retirement accounts

6. review and up date life insurance and annuity contracts

7. make TOD (transfer on death) designations

8. up date your will and other estate planning documents

Pretty good advice for everyone!!

For the Record:

DJIA                   11,092.00

NASDAQ               2,534.56

S&P 500               1,189.40

Suggested Reading:    “Invest Like the Best” by James O’ Shaughnessy

By Edward Leone Jr. DMD MBA RFC

Contact Information  leonee@vzw.blackberry.net

We are very much interested in learning election results and what those results may mean for our economic future. The vote count will be available early in the month, but it is likely to be a little time before we have some idea of what steps may be taken to advance the improvement of our US economy.

I spent some time in the October blog discussing issues involving the Chinese economy. Let’s take a little time to examine another emerging economy. India is expecting a growth rate of 8.5% of GDP for 2010.  Last year the Indian Central Bank embraced a strategy of  lose money. The liquidity approach has certainly improved economic conditions since the 2009 growth rate was 6.5% of GDP.  The result has been a serious dose of inflation. The whole sale price index in this country is up 10.5% June to June and has not yet abated. Other challenges to a growing economy in India have to do with the competition for water between the steel industry and agricultural interest. India with its large population, is challenged to feed the masses and must maintain an adequate agribusiness. This requires large amounts of water. The steel industry in India, which is gaining prominence globally due to the vast stores of iron ore as a natural resource in India also requires a great committment from the water supply. How does India balance these interests and continue economic growth?

In our own back yard, there has been significant debate over whether or not we have turned the corner in our own economic health. The major signs to look out for according to the Financial Edge by investopedia are as follows:

• Employment–The statistics come in many forms here. The rate of unemployment (not very accurate due to the way it is measured to included only those seeking work), non-farm payroll (gives perhaps a better sense of company hiring practices) and the ASA Staffing Index (much less know, it measures activity in the temporary staffing industry) are statistics to watch.
• Consumer Spending–In an economic recovery, demand is a part of the formula that creates the need for greater production and therefore more hiring by fabricators.
• Business Indicators–Such indicators as the Purchasing Managers’ Index (surveys the amount of new order experience) and inventory levels demonstrate the need for new fabrication.
• Bank Lending–Growth and new expansion require a source of credit.
• Shipping Activity–Economic activity has much to do with the movement of goods across the country and globally.

These factors represent some trends to watch in making  judgements on where the economy is headed and when and where to invest.

While on the subject of investing, there are several factors which financial planners can help you identify in making investment decisions which many individuals fail to consider. Once again, the Financial Edge provides an excellent list of factors:

• Risk–This is a very complex subject in that many people perceive and define risk in several ways. Along with that, there are a variety of different forms that risk may take depending on the investment vehicle under consideration. A full examination of risk factors is essential before engaging an investment. There is NO 100% safe risk free investment which will perform under any and all market conditions and for all individual needs and circumstances.
• Fees–The type and size of fees definitely effects net return on investment and should receive detailed consideration.
• Power of Compounding–This is the key element in asset growth when the discipline of reinvesting returns is engaged.
• Taxes–Taxes will reduce the net return on investment. Consideration of the type of investment vehicle and how the investment should be held (tax deferred environment or taxable environment) are considerations in protecting investment returns.
• Market Factors–We cannot control the business cycle, but need to identify the phase in the business cycle during which we chose to invest since this issue may guide us in the type of investment chosen.
• Diversification–This long-standing investment discipline is helpful in designing a portfolio which meets the investors risk tolerance levels under a variety of market conditions while also lending to the meeting of investor expectations over the longer time horizon.

As we draw closer to the end of the 2010 tax year, there are many IRS and ERISA rules which individuals and small business owners must consider in being effective tax filers.

• The wage cap on Social Security payroll tax withholding is $106,800.
• Salary deferral for qualified retirement savings plans in 2010 are limited at–401k (elective deferral) $16,500; 403b (tax deferred annuities) $16,500; 457b (deferred compensation) $16,500; over age 50 catch up $5,500; Simple plans $11,500.

The above retirement savings limits are important in that many are not close to the potential for retirement savings in a tax deferred environment. The center for Retirement Research at Boston College says there is an income gap of $6.6trillion for the retired population. This will certainly create another societal challenge for us as the future unfolds.

For the Recrod:

DJIA 11,193.60

NASDQ  2,529.59

S&P 500  1,193.22

Suggested Reading: “Guide to High Performance Investing” by Wesley F. Mann