Leonesmoneymonitormonthly's Blog

By Edward Leone Jr. DMD MBA RFC

Contact Information:

leonee@vzw.blackberry.net  

   All readers should now be aware that the IRS has announced delays in the processing of 2010 tax returns and the associated refunds due to computer network adjustments required as a result of some retroactive tax changes enacted by Congress affecting 2010 filling for those who itemize deductions on schedule A.

     We also observe the price movements at the gas pump. Commodity prices are on the rise in general. This may be an indicator of future inflation trends. Although it is reported that OPEC still has excess capacity, the halt imposed by government on off shore drilling and other potential U. S. oil resource domestic development will hinder growth of global oil supplies in the face of increasing demand. The only logical direction for oil prices is up and as a result, higher prices for just about every product and service which involves petroleum in its fabrication, performance or delivery.

     Another area in which costs have continued to accelerate is college education. The expected rate of increase continues at between 7% and 8% per year.  Average nation wide annual expense for tuition, fees and room and board are pegged at $16,000 for in state public schools, $28,000 for out-of-state public schools and $37,000 for private schools. The elite category of private schools can run up to $50,000 according to Financial Advisor Magazine. Families with children planning to attend college need to become familiar with the variety of education savings plans available and how the plan chosen will help meet their needs at the earliest possible opportunity. The 529 plans seem to be most popular at this time, but there are other opportunities with the Education IRA (Coverdell), Uniform Gift to Minors trusts and the cash build up in some insurance products. The landscape for financial aid is also changing with direct Federal Government involvement in administration and funding of some programs and efforts by some universities to engage in direct lending to students.  Identifying the appropriate educational institution can also be a challenging task for families. Professional help is available for those who feel the need.

     I read an interesting article written by Robert Laura on FA magazine.com. It appears that there is a significant increase among those in the retired population who are alcoholic or use drugs. The incidence of depression is also increasing. This tells me that a financial plan is not enough for many clients. It is also essential that individuals develop a life plan for retirement that includes  development of interests and activities which stimulate the individual in a meaningful way. How many of us have observed an early retiree who parks him or her self in front of the TV all day doing nothing productive and passes on in just a few years while so many others remain engaged and live long and productive lives? One issue that still surprises me in discussions with those considering retirement is a lack of consideration of the effects of inflation on their continuing life style costs. If you plan to spend $80,000 per year in life style costs and you are currently 65 years old, you are likely to experience the following increases in financial need over time:

Annual Inflation—1%  age 75—$88,400

                                              age 85—$97,600

Annual Inflation—3%  age—$107,500

                                              age 85—$144,500

Annual Inflation—5% age 75—$130,300

                                              age 85—$212,300

When those planning retirement are exposed to this information, many people are forced to reconsider their strategy. Many who are retired or planning to retire soon and have engaged fixed income investments such as cash and cash equivalents are suffering through some low yield years. Bank savings accounts are paying about .2% while money market funds are yielding .04%. CDs are yielding somewhat better, but you have to go out a few years to get close to a 3% return. It is likely that many of us will keep our day jobs a little longer than anticipated.

     Credit is more difficult to obtain in our current environment. There are many factors to consider when seeking credit. The consumer debt-to-income ration is one of them. Dividing total consumer debt (don’t include mortgage or rent payments) by total net income will get you there. Lenders are looking at 15% as acceptable, 20% could mean trouble. A credit score in the middle 700s is desirable. Variables above these bench marks will lead to higher interest rates upon borrowing.

     I am sorry to deliver such negative news in this blog, but we all need to have a realistic prospective on what is happening in our economic environment. Just one additional note of interest, Bloomberg tells us that in 2010 89.1% of the e-mails which showed up in our in boxes were spam.

For the Record:

DOW               11,823.7

NASDAQ        2686.89

S&P500        1276.34

Suggested Reading:

“The Wall Street MBA” by Ruben Avani

By Edward Leone Jr. DMD MBA RFC

Contact Information:

leonee@vzw.blackberry.net

     This blog represents one year of effort to inform and entertain the reader regarding a variety of financial issues. I hope the 12 posted blogs have initiated some serious thinking about your financial future along with creating a more critical view of the US and global economy from your prospective.

     It is appropriate, since we have just entered a new year, that I prognosticate on the potential for economic health in 2011. I have no crystal ball, but will give it a try based on my constant reading from a variety of sources on this subject along with my understanding of the forces which make the economy move.  It is likely that we are moving into a sustained but slow-paced recovery.  A key force in advancing the recovery will be consumer spending, It has crawled along at 2 to 3 % over this past year. Higher employment levels in 2011 should charge this element in economic growth.  Inflation is likely to be modest between 1 and 2.5%. It is accelerating commodity prices which will be a key driver of inflation in the US partly due to the relatively weak status of the dollar against other international currencies. Fortunately, global commerce is mostly conducted in dollars. With continued advances in emerging economies, demand for US exports should continue to expand. This will stimulate job growth in the areas of heavy equipment, technology and a variety of other service areas which are in demand globally. The US Congress needs to adopt fiscal policy which will bring capital back into the US economy instead of continuing the policies which have kept capital parked overseas through the previous decade in order to further the effort toward improving domestic job growth. Potential head winds to continued economic growth in the US come in the forms of still unknown outcomes for the economic calamity occurring in Europe, possibly higher interest rates, actions taken by the Chinese and Indian governments regarding high inflation in their economies along with potential economic slow downs and the unknowns regarding geopolitical issues around the globe. The Federal Reserve has come under significant criticism over its activities aimed at growing the economy. I think the Fed is doing what it needs to do in order to avoid a repeat of the Great Depression by continuing its trend toward increasing liquidity in the money supply. This action also avoids the very experience which the Japanese government continues to perpetuate over the last 10 years with a tight monetary policy. The down side of the Fed activity is increased inflation in the future and a continued weak dollar on international markets. If the US Congress had taken appropriate fiscal policy initiatives over the last three years, we probably would have never heard about QE2. The US Congress also needs to take responsiblity for many obviously failed initiatives over an extended period of years which created the environment leading to the economic and credit collapse in our country and correct them.  Along with the already mentioned necessary fiscal policy adjustments, changes to the operations of government involvement in the mortgage market along with enforcement of financial regulations regarding credit ratings and derivative markets are essential. Our government must understand that adopting strategies which grow the economy will increase government revenue sources. Government cannot continue to grow as a portion of GDP while crowding out the private sector and have prolonged economic successes.

     Regarding equity and bond markets, I believe that equity markets will continue to rise at a slow but respectable pace. It appears that many investors are happy to take the low yields offered by Treasuries and investment grade corporate bonds at this time due to their terrible experience of 2008 with stocks. This attitude is likely to change as the population begins to gain further confidence in the economy and recognizes the potential accelerated income streams offered in equity markets. Where are the best values in which to place your equity investments? Seek the guidance of a highly qualified Chartered Financial Analyst to help with those decisions. Bond prices will clearly take a hit as interest rates go up. Considerations for maturity and duration are key elements in building a bond portfolio which meets your income needs over the long-term.  

     I must admit that the housing market has me scratching my head. I do not know what to think. The situation is bleak with the continued trend toward foreclosures. I believe that the paper chase involved in the stall of many foreclosures in 2010 is just going to prolong the agony. The inventory of housing available for purchase is at about an eleven month supply according to CNN Money. The number of new housing starts, according to the same source, is at a 50 year low.  On the positive side, with the grand supply of available housing, pricing is down. That fact along with what are very modest mortgage rates at present, make buying a home much easier and affordable for those who can qualify for a mortgage. If employment increases, these factors could very well shrink the over-supply of available housing more rapidly.

     Looking back at 2010, we cannot ignore the potential effects which two pieces of legislation passed by the US Congress are likely to have on the lives of all Americans. I am referring to Health Care Reform and Tax legislation. The impact of Health Care reform legislation began in September of 2010 with mandates in place requiring that there be no life time maximum benefit limits placed on health insurance coverage, there be no underwriting criteria for preexisting conditions and dependents may be covered under a family plan up to the age of 26 years. We are already seeing the effects of these mandates in the form of elevating insurance premiums. If you are a small business owner, look for the following changes in you benefit package strategies as a result of  this legislation:

1. including the cost of health insurance on the employees’ W-2

2. a cap on FSA contributions at $2500 with no index for inflation

3. increased penalties for distributions from HSAs before the age of 59 for other than health related expenses

4. the ability to establish a Simple FSA for your employees

5. requirement to report all consumption of products and services over the amount of $600 on a 1099

6. the potential for  tax credits on the costs you bear for providing health insurance coverage to employees.

There are also tax increases aimed at higher income earners to support Medicare. This legislation is not all good and not all bad depending on your interpretation. The fact of the matter is that the rules are changing when it comes to consumption of health care services. We all need to learn the rules and make input to the US Congress on what adjustments are necessary.

     The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 is a true piece of compromise legislation. There is a little something for many interest groups in the law. The key factor which it accomplishes is the continuation of marginal income tax rates at their current level for another two years. What after that–who knows? It also expands the federal deficit due to the many subsidies and credits contained in it. Congress needs to adopt an attitude which motivates it to act in the best interest of the entire country rather that taking steps to cater to special interests in their districts or financial support universe.  

     Given the fact that most of us will be filing our income tax returns in the next few months, I thought I would list the contents of a great article found in Kiplinger  December 2010 written by Joy Taylor on “IRS Audit Red Flags”. To avoid an audit of you tax return avoid the following:

1. failure to report taxable income

2. claiming the home-buyer credit improperly

3. claiming large charitable deductions

4. taking the home office deduction

5. poor documentation of business meals and travel

6. claiming 100% business use of a vehicle

7. claiming hobby loss

8. poor records for cash based businesses

9. failure to report a foreign bank account

10. engaging in currency transactions

11. math errors

12. takeing larger than average deductions.

     Well, a HAPPY NEW YEAR  to all!!

For the Record:

DOWJIA             11,577.51

NASDAQ             2,652.87

S%P 500             1,257.64

Suggested Reading:

“Leading Quietly” by Joseph L. Badaracco Jr.