The Uncertain Future of the Estate Tax

Although it isn’t a pleasant subject, estate taxation will probably begin to seep into media coverage.  Why?  Because currently it is set to disappear entirely in 2010 only to return in 2011 with a 55% rate on the portion of estates over $1 million.  

In 2009 the value of an inheritance shielded from taxation is $3.5 million with the excess taxed at a 45% rate. This is the next to last year of President George W. Bush’s 10-year $1.35 trillion across-the-board tax cut effecting estate taxation.  

Politically speaking, President Obama has proposed permanently locking in the exclusion of $3.5 million and the current tax rate of 45%.  Congressional Republicans favor a full repeal.  The central players on estate tax policy are currently preoccupied with the health care debate: Senate Finance Chairman Max Baucus (D, Mont.) and House Ways and Means Chairman Charles B. Rangel (D, N.Y.).  So, you can imagine that many different scenarios could play out. 

Given all the issues facing our lawmakers and demanding their time, I would suspect the simplest route would be to fall back on a one year extension of the current rate and exemption.  Then, it could be more adequately addressed next year.   

Although I personally favor repeal, I’m reminded of the quote from Mark Bloomfield, president of the American Council for Capital Formation, “Those people who believe repeal of the estate tax will happen are probably more delirious than Ralph Nader thinking he could be president of the United States.”    

Michael E. Bruder, CFP®, CTFA

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Risky Business

The wild 700-point, daily market swings certainly gave us all a nasty lesson in market risk. Let’s take a closer look at risk because market risk is not the only risk involved in investing.

There are two main categories of risk: systematic and unsystematic. Think of systematic risk as non diversifiable or risk that is inherent in the system. Investors cannot control which direction interest rates will go. The value of the dollar will most likely be different ten years from now, but who knows what that value will be? Systematic risk encompasses market fluctuations from all the unknowns in the system as a whole.

Unsystematic risk, however, is unique to a particular investment. For example, the future of the company who makes the hottest trendy item might be more uncertain than the company who makes peanut butter. You can reduce this type of risk by having a well-diversified portfolio.

Keep in mind that there are risks in not being invested, such as opportunity cost and purchasing power risk. Opportunity cost is the cost of missing a positive return because a person was not invested in a rising market. Purchasing power risk occurs when an investor’s lower-returning asset class does not keep pace with inflation. For example, money market interest rates are now near zero, yet the price of everything else continues to rise.

Each of us has a different risk tolerance. As you evaluate yours, please consider your financial goals. Do you plan to retire soon? Are you already retired? Do you have children who will be entering college soon? Do you want to start your own business?

If your risk tolerance and financial goals have changed, please talk with your advisor.

Cristy Freeman, AAMS
Senior Operations Associate

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Gold as an Investment

We are frequently asked about gold as an investment. Sir Isaac Newton set the gold price in 1717 and it remained the same for two hundred years. The gold standard was lifted in the 1970’s and the price has fluctuated since then. The price was $40.62 in 1971 and it rose to $615 in 1980. The return from 1980 to 1990 was -4.6% (1990 price was $383.51). The return from 1990 to 2000 was -3.12% ($383.51 to $279.11). The period from 2000 – 2008 was good for gold with a return of 15.2% ($279.11 – $871.96).

Large company stocks (from Ibbotson) had a return of 9.62% from 1926 – 2008; small company stocks returned 11.67%; and long term government bonds returned 5.7%. Gold returns for the same time period returned 4.67%. Don’t forget those returns do not factor in the average inflation rate of 3%. If you bought gold in 2000, you would have out-performed stocks as the last decade has been dismal for stocks. Gold is currently at a very high price of $1,006 today, so if you are thinking of buying gold, you just might be buying high. Another drawback to investing in gold is that it is considered a collectible and is not granted favorable capital gains treatment.

Barbara Gray, CFP®
Partner

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Reporting Qualified Charitable Distributions (QCD’s)

Clients will be relieved to know that this option, first effective in 2005, has been extended for 2009.   It was designed to allow an IRA owner to take all or part of their required minimum distribution (RMD) as a distribution payable to a qualified charity and not be included in the account owner’s income.  Recall, RMDs have been suspended for 2009.

Some of the QCD requirements are: the IRA owner must be at least 70 ½ at the time of the transfer; it must be a direct transfer to the charity; it is capped at $100,000 per account owner per year; there is no charitable deduction, and the charitable substantiation rules apply. 

I’m sure a lot of you have heard about the QCD.  However, most are confused as to who reports it and how.  Make no mistake; reporting is the taxpayers’ responsibility!   On your Form 1040 tax return line 15 refers to IRA distributions.  On 15a, list the amount for the QCD.   Since line 15b refers to the amount of an IRA distribution that will be taxed, you would enter -0-.    If you want you can also add the words “qualified charitable distribution” or “QCD”. 

Hopefully, this brings some clarity to the reporting procedure!

Michael E. Bruder, CFP®, CTFA

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Things Seem to be Getting Less Bad…

Stocks are up today after comments from Federal Reserve chairman Bernanke that the economy is on the verge of recovery.  We believe that the recession has either ended, or is in the process of ending, although the official date will likely not be known until sometime in 2010.  By the time the end date is officially proclaimed, the recession will be long over, although there are some that believe there is still a risk of a “double-dip” or that a second recession may occur.

 There are a number of factors that contribute to our optimism:

 –Existing home sales reported today were better than expected at +7.2%;

 –The four-week moving average of unemployment claims has been declining from the peak in early April;

 –Investor cash levels, although down from their record high in March (at the recent market bottom), are still equivalent to about 40% of the value of the entire U.S. stock market.  Even a small percentage of this cash entering the market would be a significant positive for stock prices;

 –The level of housing starts is below that needed to absorb the formation of new households, and the level of auto manufacturing is currently below scrappage levels, indicating future improvement in these industries;

However, there is still negative news.  The delinquency rate on home mortgages was reported at 9.2% for the second quarter, 4.3% of which were already in the process of foreclosure. About half of these foreclosures were “prime” borrowers. While future inflation is a risk due to the extraordinary recent fiscal and monetary stimulus measures, we do not see an immediate threat given the current unemployment rate of over 9%.

While the economy is not without its challenges, fear indicators such as the CBOE VIX index (of implied volatility in options contracts) and TED spread (difference between U.S. Treasury bills and interbank interest rates) have returned to more normal levels similar to those before the failure of Lehman Brothers.  We have seen a significant improvement in the overall mood, both in the media and among people we talk to. 

With the stock market up over 50% from the recent bottom on March 9, many are wondering whether the current rally can continue and for how long.  It is important to remember that the S&P 500 index is still 35% below the peak reached in October 2007, which coincidentally is about the peak reached in March 2000.  The current decade is on pace to be one of only three 10-year periods in modern history with negative stock market returns.  Because this decade has been so terrible for investors, we believe that better times lie ahead and that stock market returns will revert upward toward their historical average of 9-10% annually.  Nobody knows for sure when this might happen.  While it is possible that we may retest the recent lows, the improvement in the mood and slowly improving economic news makes us believe that there is significantly more upside than downside from here.

Bill Hansen, CFA

August 21, 2009

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This Time, It’s Personal

Not too long ago, we were reviewing the retail segment of the Consumer Services sector (which happens to be one of my favorite sectors to research – so much more interesting than Industrial Materials. Ball bearings? Kill me now.) We were discussing the relative merits of Target versus Wal-Mart, always a lively debate. After a careful dissection of each company’s fundamentals, financial strength, and growth prospects, the committee voted to sell Target and move the proceeds into Wal-Mart, as the latter looks like the better investment. And I, in my role as impartial provider of research, wholeheartedly agree with that decision.

However, as a consumer and Target devotee I find it difficult to reconcile this with my personal feelings. I avoid Wal-Mart like the plague. To be fair, Wal-Mart does provide a plethora of goods and services for a low price, something that everyone needs when times are tough (and even when they aren’t). I just don’t like the idea of buying tires and grapes at the same store.

My point (and I do have one) is that it can sometimes be difficult to put personal ideas/prejudices/feelings aside when evaluating investments. At what point do you let those biases influence your portfolio? It all depends on how strongly you feel about them, in my opinion. Take the Target/Wal-Mart example. As an investor, do I really feel so strongly about my shopping experience that I would eschew buying WMT stock in favor of TGT, regardless of the fact that WMT clearly looks more attractive? Definitely not. I have no problem (in my mind) being a shareholder of one and a customer of another, hypocritical as that might seem. I might draw the line at buying the stock of a tobacco company, though, even though the fundamentals look fabulous. Of course, I am invested in several different mutual funds, any of which may own stock in tobacco companies, and I have to admit I have not checked into that, nor do I care to as long as the funds are performing well. I realize that’s completely illogical, but as I am a human and not a Vulcan, I’m allowed to be illogical.

Some investors, on the other hand, feel more strongly than I do about their individual stocks AND their mutual fund holdings, which leads us into the realm of Socially Responsible Investing, a topic to be more fully addressed in a future blog (I can’t use up all my topics at once, you know). At the moment, I’ve got to run to Target to buy 3 things I need and about 20 that I don’t.

 

Sarah DerGarabedian

Research and Trading Associate

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A letter from Bart Boyer, Chairman and CEO

The longest and most severe recession since the Great Depression is coming to an end! GDP for the second quarter was -1% compared to a brutal -6.4% in the first quarter. That momentum should carry the economy into positive numbers the third (current) quarter. That would follow our chief economist, Jim Smith, predicting the recession ended May 15. We won’t know the exact date of the end for months, but it looks over to us. Also, many economists are joining Dr. Smith and are predicting 2-4% positive growth for the third quarter, a normal +3% or so year in 2010 and better yet in 2011!

As we anticipated, the $7 trillion on the sidelines in short term fixed income investments is beginning to flow into the market. A modest move of 5-10% of these balances would have a significant upwards impact on stock prices. Already the S&P is up more than 50% from the March 6 intraday low of 666.79.

We are thrilled that the vast majority of our clients avoided the fear trap and have participated nicely during the recovery. Nothing goes straight up, there will be profit taking corrections for certain, but we believe there is much more to come on the upside.

Over the last 100 years there have been three terrible decades for the economy and stock markets, the 1930’s, 1970’s and the current decade. Unless this year is better than +38.4% (very unlikely), this decade will go down as the worst ever – even worse than the 1930’s. Terrible decades have historically always been followed by well above average outperforming decades (plural). After the 1930’s, the next three decades were outstanding. After the 1970’s we had the 80’s and 90’s, two of the best decades ever, with each having six years of +18% or better returns. We believe it is a high probability that the next 20-30 years will be above average, even with one in every three or four years negative.

Thanks again for your patience and the opportunity to be of assistance. We’ve all just suffered the worst decade in stock market history and are well positioned for better times ahead.

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Unemployment Rate Falls

The big economic news today is that the unemployment rate unexpectedly fell. The rate dropped to 9.4% of the labor force, versus last month’s 9.5%. While any rate in this range is considered high, a move in the downward direction is a very good thing. This is particularly true when that drop is unexpected. In response, the stock market has surged today.

Because the unemployment rate is a lagging economic indicator, one would expect this rate to continue to climb even after the general economy improves. On average, the unemployment rate peaks 4.7 months after the end of a recession. This rate may continue to climb after a brief dip. However, the rate dropping for the first time since April of 2008 is one signal that the recession has ended, or will end in the near future. Good news!

Harli L. Palme, CFP®
Financial Advisor

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Giving Continues at Parsec

The Parsec Prize for the second quarter 2009 was recently awarded to Big Brothers, Big Sisters of Western North Carolina. The organization has been serving Western North Carolina since 1982 and provides services to eight counties.

Parsec also made donations to the Boys Home of the South, Community Foundation of Western North Carolina, Asheville Community Theater, Caring for Children, and Special Olympics of North Carolina.

As mentioned in a previous newsletter article, Parsec matches a portion of employee donations. Last quarter, our employees supported a variety of non-profit organizations such as the Susan G. Komen Breast Cancer Foundation, the American Red Cross, Western North Carolina Rescue Mission, Helpmate, and Cystic Fibrosis Foundation.

Unfortunately, charities are finding that their organizations’ needs are greater than the available funds. Maintaining our community outreach is important now more than ever. We encourage everyone to support charities whenever they can, through financial contributions and/or volunteer work.

Cristy Freeman, AAMS
Senior Operations Associate

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Stock Certificates

Decades ago it was the norm to issue a stock certificate to account holders which represented their stock purchase. When you sold shares you had to send your stock certificate to your broker, signed on the back indicating the shares were sold, and then the broker would send them off to the transfer agent. Whole departments were in charge of handling stock certificates. Those people lost their jobs when the practice was eventually changed to the Direct Registration System where your shares were registered in your name and were issued, transferred and sold electronically without using a paper stock certificate. This method, still used today, is safer and certainly more efficient. There is usually a fee to get a stock certificate today.

From time to time old stock certificates are found in safe deposit boxes or clients remember they have them “somewhere.” You can recover lost certificates, albeit with a bit of paperwork. If the company is still in business you can just sign the back of the certificate and send it to your broker to be deposited into your account. If the account holder is deceased, more paperwork is required to deposit the shares in an account. Oftentimes we find that the company no longer exists. Some historical stock certificates become collectables, but not many. In the case of a stock split, you may find that you have 100 shares in the form of a certificate and another 100 shares in book entry.

If you have stock certificates, a good plan would be to deposit them in your brokerage account.

Barbara Gray, CFP®
Partner

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