Leonesmoneymonitormonthly's Blog

By Edward Leone Jr. DMD MBA RFC

Contact information:  leonee@vzw.blackberry.net

     In past blog postings, government debt has been discussed. Our government has three avenues to address this issue: default, inflation and growth. I suspect that as the future unfolds, we will see a little of all three. The seeds for future inflation have been planted. I would not be surprised to see the government default on some promised benefits to citizens and employees. As the business cycle progresses, we will experience some economic growth. The big question on the utility of these three strategies is how much and when? What do you think?

     The challenges presented to municipal and state governments in the current economic environment continue to grow since these government entities can not print currency and must balance their budgets. They must reduce services to reduce expenses and try to generate an environment which will promote economic growth within their jurisdictions. Federal Reserve data tells us that state revenues declined by $50 billion in 2008 and 2009. Revenue generation by increasing taxes has not worked very well where tried. Illinois is a good example.

     Health care reform is on the front burner right now due to activities at the US Supreme Court. The concept of the mandate that Americans buy health insurance is under judicial consideration. Another element of the legislation which the court will consider is the challenge by 26 states that the expansion of Medicaid which is a joint state-federal program is unconstitutional. The expansion of Medicaid anticipates that up to 15 million people will be added to the Medicaid program. The Federal government will pick up all costs for 5 years. After this period, the burden on state governments increases. HHS is currently dealing with the employer mandate question. How will employers be required to determine their worker’s health insurance status? Beginning in 2014, employers with more than 50 employees will be required to provide health insurance or face fines. It will be necessary to have information from employers, employees and the insurance exchanges to determine the source of coverage for each individual. I wonder if we would not be better off to see that each individual or family unit had an HSA–even if tax dollars needed to be used to subsidize funding for some portion of the population. We would certainly see savings in the number of bureaucrats that will likely be needed to administer the legislation being discussed at the Supreme Court.

     A very troubling issue regarding economic growth continues to revolve around fiscal policy. The Executive and the Congress continue to perpetuate an environment of uncertainty on this issue. Future planning by individuals and business is very much on hold due to this uncertainty. Including the tax built into Obama care, the capital-gains tax could go up to 24% from its current level of 15%. Keep in mind that money invested for capital gains has already been taxed once and capital gains are not indexed to inflation. Estate tax issues are significant with the exclusion going back down to $1 million and the estate tax going up to 45%. We have been hearing about the high level of corporate tax in the news. The US rate is the highest in the world.  There is a potential for 65 adjustments in the tax code if the Congress does nothing. It may very well be that a lame duck Congress will address these issues after the election.

     On the bright side of things, the S&P 500 index has moved up 99% from it low of 673.53 in March of 2009 and is trading at  14.1 times earnings which demonstrates good value and potential for further growth. The low-interest rates and perhaps some change in investors’ sentiment are the driving forces. We are seeing behavior finance theory at work. This journey has been a roller coaster ride. Will it sustain?

For the Record:

DOW                 13,212.04

NASDAQ            3,091.57

S&P 500             1,408.47

Suggested Reading:     “Irrational Exuberance” by Robert Shiller

Contact information:

leonee@vzw.blackberry.net

     We are being subject to substantial political rhetoric from both political parties at this time. I am sure that we are not getting the information we need on the true state of economic affairs associated with our environment. How about the facts on the federal deficit? The numbers are as follows:

2007 $161 billion  1% of GDP

2008 $459 billion  3% of GDP

2009 $1,413 billion  10% of GDP

2010 $1,293 billion  9% of GDP

2011 $1,300 billion  9% of GDP

The trend is clear and it is not very good. If we put this dynamic in a historic prospective, we learn that the deficit was 10% of GDP in the early 1860s, 15% of GDP in 1920 and 29% of GDP in 1942. These were times of military conflict just as we are experiencing at this time; however, since military conflict has been a fact of life since 2001, it is more likely that our current budget deficits are due to the poor economic climate and government reaction to it. Federal debt trends are as follows:

2008  $10 trillion

2009 $11.9 trillion

2010 $13.5 trillion

2011 $16.4 tillion

This is an unsustainable trend. Clearly there are many factors that lend to this condition. It must be clear that a lack of budget discipline is a key element along with declining federal revenues. How about unfunded federal liabilities? USA Today tells us that the number is $61.6 trillion or $528,000 per household. The majority of these liabilities rest with the Medicare program, the Medicaid program, the Social Security program and federal pension obligations. How about conditions in the banking industry?

1992   179 bank failures

2009   140 bank failures

2010   157 bank failures

Banks took a big hit after the savings and loan crisis and once again currently in the mortgage lending crisis. Sorry for the bad news, but this is our current state of affairs.

     The Federal Reserve Bank was created as a result of the 1907 depression to stop financial panics and provided emergency reserve funds for the banking system (the lender of last resort). The Fed’s mandate has expanded to include setting certain interest rates, controlling inflation, regulating banks and achieving full employment. The Fed in effect, manages the nation’s money supply. The gold standard was ended in 1933 under the Roosevelt administration when ownership of gold by citizens was banned and severed completely in 1971 under the Nixon administration. The gold standard brought about long run price stability, but also acted as a limiting factor in economic growth. The Fed is independent of the Executive and the Congress. In the 100 years prior to the existence of the Fed, we had 44 recessions and 6 depressions. In the 100 years of Fed control, we have had 22 recessions and 1 depression. There is much controversy regarding monetary  policy engaged by the Fed recently. It is clear that the Fed and the Treasury have been poor stewards of our currency. We will pay for this in the form of higher inflation in the future; however, the Fed has certainly propped up the US banking system. It may very well be that the function of the Fed should change. We also need a stable and stronger currency. I have many reservations regarding the Dodd-Frank financial reform legislation. The intent is to strengthen the banking system and reduce the chance that tax payers will be on the hook for bank system bail outs. The 5,230 pages of rules is mind-boggling. Who could possible understand all of it?  What happened to the Glass-Steagall 35 page style of legislation. It is disappointing that Dodd-Frank does not address the activities of Fannie Mae and Freddie Mac in the mortgage debt crisis. After all these GSEs along with the invention of mortgage-backed securities, poor under writing discipline on the part of lenders and government pressures on the industry to lend to unqualified borrowers contributed greatly to our financial disaster of late. The regulatory burden which this legislation is expected to impose on the banking industry (some $12 billion dollars in compliance costs) will be a burden on the banking system and its customers. The additional personnel required to administer the legislation will swell the federal ranks of regulators by an estimated 2,850 people.

     A big part of the reason that European banks are in the fix that they find themselves is the Basel rules. I suspect that not many of us have heard of these agreements, but they have been adopted by  European banks. Their content will tell you why banks have been clearly irresponsible in their lending practices in Europe. Commercial banks are required to hold an 8% capital reserve against business loans, 4% against mortgage loans, 1.6% against mortgage back securities and 0% against government debt. It is easy to understand the bias that banks will adopt since tying up capital reserves is not profitable.

     According to Forbes publishing, the next financial crisis is likely to involve student debt. Student borrowing topped $100 billion in 2010 for the first time. Total student debt exceeds $1 trillion and is larger that total credit card  debt in the US. Given the hefty unemployment situation, there is great concern that these student loans cannot be paid back. We will have to see just how this issue unfolds. The Federal government has a significant stake in this problem as it is the issuer or guarantor of most of this loan burden.

     Currently, interest rates are very low. This is not going to be a constant well into the future. As interest rates do increase, the portion of the federal budget which will have to be dedicated to servicing the US debt will be staggering. Our debt status will be with us on into an extended future time.

For the Record:

DJIA                  12,897.35

NASDQ               2,958.01

S&P500              1,361.80

Suggested Reading:

“Security Analysis” by Benjamin Graham

By Edward Leone Jr. DMD MBA RFC

Contact Information:

leonee@vzw.blackberry.net

     It appears, according to Towers Watson survey results, that U. S. workers are a little more confident of retirement possibilities as the future unfolds due to acceptance of the prospect of an extended working career, a better focus on savings and the possibility of reducing spending in retirement. Evidently, the issues of concern by many people regarding the continued cost acceleration of the social security program and the Medicare program are not a part of the decision mix here. The Medicare trust fund will be depleted by 2024. This fund is held in the form of U. S. bonds which means that the federal government will have to borrow or print money to meet the trust funding obligations given current economic conditions. After 2024, payroll taxes will cover the cost of up to 90% of the benefit structure. In the period from 2000 to 2009, medical and prescription costs including insurance premiums and deductibles have increased by 150 percent. Insurance News.net tells us that hospitals are preparing for the introduction of criteria which will measure Medicare benefit payments to them based on quality of care assessment (pay for performance). This measure created under the healthcare reform legislation will be implemented in October of 2012. What I have learned is very troubling to me since hospitals have little or no control over some of the factors which will be used to reduce benefit payments. Such factors as readmission rates and patient satisfaction over care received are not totally under the control of the hospital facility since patients being released need not demonstrate accountability for taking prescribed medications or submitting to follow-up care. A patient’s opinion on quality of care can be quit subjective. I fear that these regulations will limit access to hospital care for Medicare beneficiaries. Something will have to change. Instability of the social security program long-term is well documented. These factors along with longevity projections are causes for concern. Half of men currently 65 years of age are expected to live to age 85 and half of women at 65 are expected to live to age 88.

     These programs are certainly helping the economic status of the retired. As a result of the most recent recession, the U. S. poverty level rose to 15.1% for the general population; however, for those over the age of 65, the poverty level is 9%. Since 2007, median household income has decreased except for those over age 65. Although average wealth of households for those over the age of 65 was $170,494 in 2009 according to Pew research, it was mostly represented by home equity which is clearly under threat due to declining home values. These facts represent some of the good and some of the bad facing the elderly population. Future dynamics for retired people will create challenges for all aspects of our society–young and old.

     An issue under discussion in the media related to our current economic condition and the need to raise additional federal revenues is the level of marginal tax rates and who should pay more. One bit of information which is absent is the definition of who represents the top 25% of income earners. As it turns out, IRS tells us that if you earn $66,193 per year or more, you are in the top 25% of income earners. You are a part of the group paying 87% of all income taxes. It is also interesting to study the issue of consumption equality among class of our society. According to Andy Kessler writing in the Wall Street Journal, quality of life for rich, middle class and poor individuals is evening out as a result of relatively inexpensive technology device availability. Transportation, communication, entertainment and food preservation methods are available to many at a modest cost. Putting aside the creature comfort and prestige aspect sought by some in society while focusing on the functionality of the devices we use to make our lives better, the rich are not much better off. There will always be some in our society who are disadvantaged. We cannot and should not ignore their existence and help them.

     For those interested in planning their 2012 tax strategy, the following information will be helpful:

Marginal tax rates run from 10% to 35% depending on AGI and filing status.

Standard deduction  is set from $5,950 to $11,900 depending on filing status.

The personal exemption is $3,800.

Traditional IRA contribution is deducible up to $5,000 with a $1,000 catch up for those over 50 depending on income level.

The deductible 401k contribution is up to $17,000 with a $5,000 catch up.

The Roth IRA AGI limit is $110,000 for individual filers an $173,000 for joint filers.

The earned income limit for early retirees is $14,640

It is not too early to be thinking about this issue.

For the Record:

DOW                12,845.13

NASDAQ          2,901.99

S&P 500          1,344.33

Suggested Reading:

“Oblivious Investing” by Mike Piper

By Edward Leone Jr. DMD MBA RFC

Contact Information: leonee@vzw.blackberry.net

     So here we are at the door step of a new year. Looking back, depending on your experience, 2011 was a total disaster or an outstanding success. So many have offered predictions on the direction the economy will take in 2012, that I feel a need to add my own prospective.

     First off, I must state that 2011 was a struggle for my business interests since consumer demand was down for the 4th year in succession. It is my judgement that the factors which put us in our current situation began to have an effect much earlier that their impact was being reported. It is likely, from my prospective, that 2012 will be another year of slow growth as measured by GDP performance. We are likely to see a very slow but gradual decline in unemployment numbers . I must admit that I am very suspicious of the reporting on this number since it is calculated on a base which in my opinion, does not represent the true dynamic of what is going on in the job market. We are likely to see a continuing decline in commodity prices as a result of stagnant to declining growth in emerging economies around the world. Please accept the fact that we are a part of a global economy and can not isolate ourselves from the effects that other economies have on US GDP. Based on the chatter from the Federal Reserve, interest rates are likely to remain at low levels and inflation should also be modest since there is still much surplus capacity in the economy. The housing market it still a bit of a puzzle to me. I am hopeful that we are coming out of the trough. The US economy is likely to continue to grow as I stated, but at a slow recovery rate of between 2.5 and 3%. Keep in mind that at a GDP of $13.4 trillion, the US economy is as large at it has ever been. What has become a factor of great concern for many, is the fact that our national debt is going to exceed $16 trillion shortly. Over the years, US debt has been a strong and trusted investment around the world. Are we about to lose that status?  It is clear that we as a society, and our government as policy makers and leaders, have not learned a thing from the recent history of the Japanese experience and the current situation in the Euro Zone. It is disturbing that political leaders in the Euro Zone have not yet engaged the measures necessary to get sovereign debt under control and strengthen their central banks to deal with this crisis issue. This is likely to be a continuing cause for a turbulent global economic dynamic. It will clearly take some time for the Euro Zone issue to be resolved. Make no mistake, the US will have to make many adjustments in the business of government to get debt issues under control as will other governments around the world. What may be our saving grace in the short-term is the fact that many other economies appear to be in ever worse shape than ours.

     It is not likely that the US Congress will take long-term fiscal policy matters under consideration until after the elections are accomplished. I would be very disturbed if a lame duck Congress took action on such matters after the elections but before the installation of a newly elected Congress. We will have to wait until 2013 to see action on these issues and probably not see material effects until 2014 and 2015. So much for long-term planning if that is necessary for your personal and business economic model. I would not be at all surprised to see some short-term gimmickry come out of Washington to make the economy look better going into the election season. Predictions are just that. We will have to wait and see what really happens.

     A Wells Fargo & Co. survey recently revealed that those contemplating retirement are more focused on available retirement resources than structuring retirement to occur at a specific age. 80 is the new 65 according to Joseph Ready of Wells Fargo. The survey respondents indicate that 74% of them plan to work beyond the age of 65. 39% say it is because they need to do so while 35% say they just want to remain in the work force. It is clear that current economic conditions are reflected in this survey result. It also reveals great concern among those saving for retirement regarding selection of investment vehicles. Volatile equity markets and meager fixed income returns creat challenges to building wealth.

For The Record:

DJIA                                    12,359.92

NASDAQ                              2,674.22

S&P 500                               1,277.81

Suggeste Reading:     “Ethics and the Conduct of Business”  by John Boatright

By Edward Leone Jr. DMD MBA RFC

Contact Information:

leonee@vzw.blackberry.net

    In my November blog, I posed a variety of questions regarding the problems in the Euro Zone with Greece, Italy and Spain during the course of the G-20 meetings in France. Over the past month, we are learning that French banks are in severe trouble and Germany wants to see changes in the rules of the game before it comes to the rescue on a large-scale. The potential for breakup of the Euro Zone is a key issue here. One currency shared by multiple cultures and multiple governments creates many challenges. It appears over the last few days that central banks world-wide including the US, China, Canada and Japan are willing to lend money at reduced rates to support the Euro Zone. Clearly the rules of the game regarding social programs, sovereign debt and currency exchanges will have to change if this is to work over an extended period. The governments of Canada and Ireland have demonstrated the steps necessary to begin a turn around. The US, Japan and many european countries will have to engage in similar efforts while China needs to reduce the generation of a fictitious growth model and be an honest broker with its currency. If this does not happen, all global economies have much to lose. Russia and middle east economies also have to be a part of the solution or face a diminished market for their oil. This not going to be a free ride. US citizens and the populations of many economies around the world will face higher interest rates, higher taxes and a reduced purchasing power of their currencies.

     On the subject of oil, it is clear that economies, whether emerging or developed, thrive on low energy costs.  A global economic collapse would reduce demand and lower energy prices. If economic strength accelerates, consumption of oil products is likely to increase at a rate higher than current supply capacity. It is important in the short-term, to increase the supply of oil while longer term strategies need to identify other energy sources. It is likely to be economic forces and not political interference that will facilitate this evolution.

     I have spent considerable time in past blogs discussing health care. As we get closer to the implementation of PPACA (Obama Care), we are getting a clearer picture of how this will unfold given the disclosure of more elements of the legislation. One very misleading aspect of PPACA is the promise of free care. When government requires insurers to cover specific medical procedures, the costs are reflected in premium levels. Coverage mandates are not free! PPACA contains language which places a fee on health insurance policies. NFIB (the voice of small business) estimates that this action will raise costs to businesses by 2 to 3% and impose a cumulative cost of up to $5,000 per family by 2020. The political rhetoric defending PPACA denies the institution of death panels yet, the Preventive Service Task Force established by HHS, recommends the elimination of prostate screening for males of advanced age and mammograms for females over the age of 50. This will save on costs, likely at the expense of lives that could have been saved by screening and treatment. I have pointed out the potential for access problems to occur for Medicare patients if plan reimbursement levels are reduced. According to a November 2011 article published in Kiplinger by Susan Garland, the hospital trust fund for Medicare Part A will be exhausted by 2024. Part B and D are becoming an increasing part of the federal budget since premium levels do not cover all costs and remaining obligations come out of the general fund. As the future unfolds, it is clear that individuals will have a greater involvement in the cost of their health care. This will require a free market dynamic which is missing in the health care economy currently along with tort reform and a shift to catastrophic coverages which represent a more insurable environment instead of the first dollar coverage arrangements which represent cost sharing instead of insurable events.

     One other issue which deserves attention at this time is the potential for tax changes at the end of 2012 assuming no changes occur in fiscal policy:

1. Income taxes will go up.

2. Some deductions and credits will decrease or go away.

3. The marriage penalty will reappear.

4. Capital gains taxes will increase.

5. There will be increased application of AMT.

There are many other potential changes, but the above will affect most of us.

Be vigilant and informed.

For the Record:

DJIA                 12,020.03

NASDAQ            2,626.20

S&P 500            1,244.58

Suggested Reading:

“The Little Book of Stock Market Profits” by Mitch Zacks

By Edward Leone Jr. DMD MBA RFC

Contact Information:

leonee@vzw.blackberry.net

     In the news this week along with the usual political theater or political comedy we are receiving, the economic meetings of G 20 in Cannes France are in progress. The focus of coverage seems to be on the issue of Greek sovereign debt, but Spain and Italy are also marching at the head of the parade. At least discussions are being engaged among European leaders and the European Central Bank. Does the banking system in Germany and France require a TARP like program? Who will finance it, China? Could it be that major European banking institutions are limited in what help they can offer since they are in a weak status themselves? How does the result of these meetings influence the global economy?

     Well, what about the sovereign debt of our own United States? Barry Ferguson RFC wrote an excellent article framing the issue in the September issue of the “Register” ( the official journal of the International Association of Registered Financial Consultants). So how large is the US government debt? $14.34 trillion. In 2011, the interest paid on the debt is $385.8 billion. Who owns this debt? The public owns $9.74trillion. $4.6 trillion is intergovernmental holdings and $4.6 trillion is Treasury debt known as Government Account Series (GAS). It is important to know that almost all of this GAS debt is not marketable (in the form of government bonds which are IOUs to the government itself). 57% of this GAS represents the Social Security Trust Fund. 17% represents government employee retirement liabilities with the remainder funding other government obligations. If the government debt is capped, obligations from these funds may not be paid. It is important to realize that the assets in these accounts are government IOUs which can only be service with tax revenues, future borrowing or printing of additional currency. A local radio talk show commentator jokingly made an observation this past week. “If the President and the Congress were put in charge of the Sahara Desert, we would run out of sand in a few years.”

     While we are on the subject of federal benefits, 55 million Social Security recipients will see a 3.6% increase in the 2012 checks they receive. The ceiling for Social Security payroll tax income will go from $106,800 to $110,100. A bill passed in the House of Representatives (H.R. 674) by a vote of 405 to 16 that would mandate Social Security income be included in the calculation to determine eligibility for the new federal health insurance tax credit. The Patient Protection and Affordable Care Act of 2010 includes a provision to help people with incomes from 133% to 400% of the poverty level to by health insurance with these credits. The portion of the population which will qualify is reduced by H.R. 674.  A further concern for Medicare recipients is the government plan to reduce reimbursements to physicians by 30%. This would reduce the availability of care to many of our elderly since some physicians will opt out of the Medicare program.

     According to Bloomberg, the top community household income in the country for 2010 was th US Capital with an average of $84,523 per household compared to the national average of $50,046. Federal employees log in average compensation of $126,000. The nations political groups are prospering while so many others are struggling in this economy. There are 170,467  federal employees in DC with the unemployment rate at 6.1%. Talk about a privileged class!!

     What should those of us with money to save for retirement or other needs do to find adequate investment strategies? Knight Kiplinger tells us in his November issue of “Kiplinger’s Personal Finance” that stocks are an imperfect asset, superior only to every other investment over long periods of time.  Those of us with short-term cash needs will have to build a cash reserve to meet those needs. Knight Kiplinger targets long-term returns on equities at 8% annually into the future. Only time will tell how accurate that projection is going to be.

For the Record:

DOW                        11,983.24

NASDAQ                  2,686.15

S&P 500                 1,253.23

Suggested Reading:  “The Business Analyst’s Hand Book”  by Howard Podeswa

By Edward Leone J. DMD MBA RFC

Contact information:

leonee@vzw.blackberry.net

     And the beat goes on. We find ourselves struggling in a challenging economic environment. It is becoming clear that global factors mostly focused on the banking industry in the Euro Zone are presenting head winds to a recovery here at home.  According to the International Monetary Fund, European banks are facing major loses and are having trouble raising capital because interest rates to them are becoming very expensive. Italian banks are so desperate for capital that they are supposedly selling bonds at five times the rate they pay on savings deposits. What is the solution to this situation? Will the Euro Zone lose its unity status and stop the common currency strategy which has evolved in recent years? Is a global banking collapse in the making? Can the US financial system weather the storm? It is clear that capitalization of the global banking system will have to come from governments and private investors and that the populations of many sovereigns will have to provide for more of their individual needs so that governments can reduce expenses which are a burden to tax structures, economic viability and a contributor to serious default risk. It will take tremendous courage from statesmen around the world to get us where we need to go instead of the politics as usual solutions being generated.

     A recent Associated Press release tells us that the Social Security disability program is under great financial stress. Applications are up nearly 50% over the past decade. It appears that the increase in applications is occurring due to the poor economy. Those  who have some sort of disability but still work are losing their jobs and many in the later years of their working careers, but not yet eligible for Social Security retirement benefits, are adding to the volume. Approximately 1.3 million  people receive this benefit at an average level of $927 per month. It appears that more strict criteria will have to be applied to applicant qualification if this program is to survive.

     A very interesting website for the reader is insurancenews.net. In a recent posting, we learn that millions of people will be added to medical insurance coverage programs as a result of PPACA 2010 (Obama Care). It is stressed that trends in the medical care environment may not be accommodating to this influx of demand. Physicians’ acceptance of  new patients with insurance coverages has decreased from 93.3% in 2005 to 87.8% in 2008. Much of this change is due to declining reimbursement levels. The trends associated with government coverages in the Medicare program are also of concern. In 2005, the rate of acceptance of new Medicare patients was at 95.5% declining to 92.9% in 2008.  Patient access to care could be compromised if coverages are not adequate to cover the costs of delivering care.

     An other factor, resulting from our challenging economic environment brought out by Bloomberg, is the trend that US poverty  has climbed to a 17 year high. Forty six million people or 15.1% of the population now live in poverty as described by government criteria. Median household income has declined by 2.3 percent over the last 2 years.  We have not seen such a desperate situation for so many since 1983. The Congress and the Executive must act to generate fiscal policy changes that will lend to job growth instead of depending on temporary stimulus measures which have only targeted and short-term effect. From 1945 into the 1980s, it took approximately six months after a GDP recovery for employment to recover. In the 1990-1991 recovery, it took 15 months and in the most recent episode from 2008-2009, a 60 month period of time is anticipated. The work force will need to retrain, industry will need to grow its presence in the US with the appropriate incentives and government will have to get out of the business of creating barriers to these efforts.

     The messages in this blog are mostly negative. I am confident that things will look much more positive in the future since we cannot keep traveling our current path. I just don’t know when the turn of events will occur.

For the Record:

DJIA                  11,103.12

NASDAQ            2,479.35

S&P 500             1,155.46

Suggested Reading:

“Quantitative Investment Risk Analysis” by Ed Fishwick and Stephen Satchell

By Edward Leone JR. DMD MBA RFC

Contact Information: leonee@vzw.blackberry.net

     At my last posting for the month of August, we were waiting for the national debt strategy to be revealed. Well here we are a month later and we are still waiting for the national debt strategy to be revealed. Congress will be back in session over the next several days and the President will be telling us how we will experience a revival in the job market. What do you predict will happen?

     Bonnie Lee did a great history on the tax code for Fox Business. In case you didn’t know, our tax code exceeds 5 million words and 71,000 pages. Who can possibly assimilate all of this? Back in 1939, there was no tax withholding system. Those who paid taxes calculated their obligation and paid the bill by April 15th. The withholding system was put into place in 1942 to help pay for WWII. Today businesses spend grand amounts of money on the processing of payroll tax withholding obligations. In 1913, the maximum tax rate was 6%. As WWI peaked, the maximum rate went to 77%. Clearly, tax rates today are flatter running from 10% to a maximum of 35%. It is a fact that 47% of the population pays no income tax. That is the nature of our progressive tax system. We learn from the writing of Barry Ferguson RFC in the Register, which is a publication of the International Association of Registered Financial Consultants, that the complexity of the code affects all who pay taxes. The form 1040 is 2 pages long and has an instruction package which is 174 pages long. Individuals spend a combined 6 billion hours per year complying with the tax code and spend $384 billion doing so. The IRS employs 90,000 workers and costs $11 billion to operate. Can this process be simplified? It is evident that the bureaucracy  associated with tax collection continues to expand.

     Another bureaucracy which has grown and distorted beyond its original intent according to Steve Forbes is the IMF.  The International Monetary Fund was established at the end of WWII to provide short-term emergency loans to countries in economic difficulty. It was a natural result of the Bretton Woods agreements on the relationship between international currencies. In 1971, the US removed the dollar from the gold standard. As a result, fixed currency exchange rates slipped away. The IMF purpose in helping governments keep exchange rates steady was gone, but IMF has persisted. Many feel that its approach to dealing with international economic distresses experienced by some governments does more harm that good. We do need for a new system of currency exchange to be established.

     Many individuals with the means to do so are taking advantage of soft real estate markets in locations such as Florida, Arizona and Nevada to purchase vacation homes at reduced prices from the experience prior to 2007. Of those fortunate enough to execute these great deals, it is common to occupy the vacation home for a part of the year and rent it to others from time to time also to generate rental income which could defer ownership and maintenance costs. Tax rules regarding this strategy are quite complex and need to be clearly understood. If you rent your vacation home for 14 days or less per year, the rental income is tax-free and you can claim mortgage interest and taxes as deductions on your 1040 filing. If rental period exceeds 14 days, all rental income must be reported for tax purposes. Under certain circumstances, it may be necessary to deduct only a part of property expenses since the property may be considered both personal residence and rental property depending on rental sequence and personal use time. Consult IRS Publication 527 and your tax accountant.

     Tax considerations are obviously of concern to individuals and business. Income tax, corporate tax and capital gains tax rates along with compliance are challenges to all in this very difficult economic environment. What would you like to see change with these fiscal issues?

For the Record:

DJIA                   11,240.26

NASDAQ             2,480.33

S&P 500              1,173.97

Suggested Reading:

“Quantitatve Investment Analysis” by DeFusco, McLeavey, Pinto and Runkle

By Edward Leone Jr. DMD MBA RFC

Contact information:

leonee@vzw.blackberry.net

    The news is full of speculation on national debt remedy measures and what they may affect. I will not comment since what ever develops in Washington is not likely to be a long-term fix. The impact on bond prices and interest rates is yet to be realized.

     According to writing by Roben Farzad in the July 11th issue of Bloomberg Businessweek, the housing market is still in big trouble. We have a typical bubble dynamic happening here with a steep decline in prices and sales activity lasting 3 years now with perhaps a slight recovery coming and then an extended period of stagnation according to Doug Ramsey of the Leuthold Group, an investment firm in Minneapolis. There is an estimated 1.6 million more homes than demand will accommodate with 3 of every 10 homes on sale being sold at a loss. Home owners’ equity is down by 1/3rd since 2005 and 1/2 of what it was in 1950 according to Scott Simon of Pimco. He says that the loose lending practices of past years has caused 5 million renters to become home owners temporarily. He predicts that 6 to 7 million more foreclosures are on the horizon. This industry could certainly be a sustaining drag on economic recovery. Paul Sperry writes a great book “The Great American Bank Robbery” which gives in site into government policies which contributed to the cause of the mess in which we find ourselves with mortgage debt. He states that the Clinton Administration’s elevation of regulation associated with the Community Reinvestment Act along with aggressive HUD affordable housing goals and the utility of Fannie Mae and Freddie Mac as an implied guarantor of mortgage loans under this program contributed to a decline in under writing criteria for sub prime mortgage loans. Aggressive enforcement of CRA by the Department of Justice during this period along with the practice of securitized these loans and selling them to investors in order to reduce the risk to mortgage lenders magnified the problem and spread the negative effects of sub prime lending practices globally. I have a high level of frustration over the failure of rating agencies to see the risk in these securities and rate them properly. Investors count on these ratings in making investment decisions as it regards the required risk premium. There has clearly been a major break down in business, regulatory and financial systems contributing to this dilemma.  It is clear that the remedy will be painful for many.

For the Record:

DJIA                  12,143.24

NASDAQ            2,756.38

S&P 500            1,292.28

Suggested Reading:

“Financial Modeling” by Simon Benninga

By Edward Leone Jr. DMD MBA RFC

Contact information: leonee@vzw.blackberry.net

     There is much concern over this slow economic recovery which we are experiencing. Mc Kinsey Quarterly tells us that it will take up to 2016 to replace the 7 million jobs lost in this current recession. Through the 1940s to the 1990s it took on average, six months for employment to recover after a rebound in GDP. After the 1991 recession, it took 15 months and after the 2001 recession, it took 39 months. There are many theories and opinions on the factors which influence this dynamic. What do you think?

     It has been reported that many individuals retire early due to illness, disability and job loss. The Employee Benefits Research Institute tells us that those age 55 and older have not been dedicated savers for retirement to a great extent. 58% of that cohort have saved less that $100,000 towards retirement. How should an individual approach retirement savings?

     I suggest dividing retirement planning into 4 phases: early career, mid-career, advanced career and retirement living. Yes, during retirement, planning is still necessary. Since retirement savings is a function of deferring current consumption to a later time in life along with the observation that more and more, retirement planning is becoming the individual’s responsibility, those engaged in early career status should make the commitment to savings as early as possible in their work life. This can be accomplished by funding as aggressively as possible an IRA, 401k,  403b or other retirement program if available. The mid-career individual needs to continue to build retirement assets, but must also seek the help of a qualified financial planner to advise on tax planning, estate issues, risk mitigation and investment disciplines such as asset allocation and portfolio rebalancing. During the advanced career time frame, all of the above efforts are maintained. In addition, creating a vision of the desired retirement life style and examining associated cost is important. Reduction of debt and other liabilities along with periodic review of the financial plan to better time retirement is essential. Being organized and investigating available health care coverage, Social Security and other retirement benefits is timely. During retirement, life should be secure and comfortable, but one must constantly be vigilant for factors which may change the course of retirement living and adjust for those factors.

For the Record:

DOW                        12,582.77

NASDAQ                     2,816.03

S&P 500                      1,339.67

Suggested Reading:

“Common Stocks and Uncommon Profits” by Phillip A. Fisher