In February, I attended the annual TD Waterhouse conference where I had the opportunity to see Caspar Weinberger speak. He is 86 years young.
Caspar served as Secretary of Defense from 1980 to l987. He gave a wonderful, insightful view of the first war with Saddam Hussein and his view on why war was needed at this time. He saw the �removal of uncertainty� as being of paramount importance. �The one thing business cannot do�, he said, �is deal with uncertainties.� Removing uncertainty meant removing the present Iraqi regime, and that, he believed, would have a �salutary effect� upon business, the nation, and its economy. It was six weeks later when the first bombs began to fall on Baghdad.
No matter what the reason for this war, one thing is certain. I stand in support of our troops. I support each and every person involved with the effort on our behalf, their families and friends, and offer prayers for the safe return of our troops.
My opinion is that once we have victory in Iraq, the market will react positively. When our troops secured targets early in the march to Baghdad, the market rallied. As we secured the Baghdad airport and a palace, the market rallied. We still have unemployment and the economy to worry about, but the greatest fear has been the loss of our troops. Lives cannot be replaced. Victory in Iraq will undoubtedly trigger a rebound in confidence that could well translate into a snapback in spending. I remain cautiously optimistic.
�Even if you�re on the right track, you�ll get run over if you just sit there. � Will Rogers
Lifetime Savings Accounts (LSAs).
President Bush�s 2004 budget has several interesting proposals.
Each year, each person could contribute $7,500 to these accounts, which could be used for any purpose you like. There would be no age or income requirements, and no restrictions on when money could be withdrawn. This is not a retirement vehicle. You can put the money in and take it out without limits or penalties. How could this benefit you? Think of putting your taxable savings, such as your emergency money fund or CD�s, in this account. The earnings would now be tax deferred and be taken out tax- free.
Various kinds of tax-advantaged accounts could be converted into an LSA. These include medical savings accounts (MSAs), Coverdell education savings accounts, 529 plans, and qualified state tuition plans. Those who chose not to convert could continue to put money into the older savings vehicles.
Retirement Savings Accounts (RSAs).
Similar to an LSA, an RSA would cap non-deductible annual contributions at $7,500 per person ($15,000 for a married couple) and permit tax-free earnings and distributions. This would be intended as a retirement vehicle, and would have penalties for withdrawals made before age 58. Think of this as a Roth IRA with a higher contribution ceiling and no income-based limits on eligibility. Indeed, existing Roth IRAs would simply become RSAs. You could also make a taxable conversion of a traditional IRA to an RSA; you wouldn�t have to convert, but you couldn�t make additional contributions to IRAs. And you could contribute to both an LSA and an RSA, with a total annual ceiling of $15,000 ($30,000 for you and your spouse).
Proposal of tax-free treatment of dividends
This issue will get a lot of debate. The current proposal is for the dividends to be 100% tax-free. I do not believe this will be the final outcome, but some tax relief would be welcomed. This is intended to eliminate the double taxation of dividends at the corporate level, and then again, at the personal shareholder level.
The proposal will be fought as another benefit for the rich, but in truth, many seniors also rely on dividends. I hope that some percentage of the dividend will become tax-free.
�Yield is back in style. History tells us that a large component of the stock market�s total return comes from dividends, but it�s usually only in bear markets that anybody cares.� Haywood Kelly
The proposals are great in the form presented but I worry over the future government tax burden if these accounts allow tax deferral on growth and tax-free income. This current war with Iraq is very costly, will continue to be, and our government will need revenue to replace the income tax it forgoes. As more companies eliminate the match to their 401k plans, the burden of retirement falls directly upon the shoulders of the individual. These additional vehicles to create increased saving are beneficial in allowing individuals to put more away for retirement, and are welcomed.
AAII
On March 22, I gave a two-hour speech for the American Association of Individual Investors at the senior center in Corona de Mar. My topic was �Survival Guide-2003 Investment Changes�. I arrived early and was able to wander the rows of the community garden, admiring the patches of vegetables and flowers. I find many investors keeping their portfolios like the garden. Some have tidy rows of growth, with signs posted as to what is planted. Others have weeds, scattered plants and have lost focus on the overall plan. We will keep your garden focused and growing according to plan.
Success is not measured by what you accomplish. The opposition you encounter, and the courage with which you maintain your struggle against the odds is how it is measured.
If your risk tolerance has changed; or if there are material changes to your life, intended time frame or purpose of the portfolio, please schedule an appointment with me. I like to stay involved with your life, goals and objectives so I can see the big picture for each client. Each portfolio is designed and adjusted based upon individual parameters.
Sandra C. Field, CSA, MBA, CFP
Happy Fourth of July!
Summer is finally here and the markets have been sizzling since March. The great rebound of the market is exactly why the thought process to �stay invested� actually works. The rebound can come so quickly, the market can rise 10% in one week. It is nice to see some recovery in the portfolios that held growth funds during the downturn. This was the best quarter of performance in four and � years! S&P 500 is up 11% and NASDAQ has gained 22%, year to date.
�Patience is a necessary ingredient of genius." �Benjamin Disraeli
Will this turn out to be the next bull market? Will this be a false bull run and only another brief rally? I do not know. We have crossed over several technical indicators that are triggering many investors to re-enter the market. Worth noting is many portfolio managers are beginning to invest the cash hoards they have accumulated. They cannot afford to be left behind their peers in performance. This is all based upon a (hopeful) positive earnings season to be released over the next few weeks. The economy still has worries, no doubt, but some indicators are starting to look positive.
I personally believe that mild inflation is more likely than deflation. Most of the economists and fixed-income managers I listen to are sharing this view. People are seeing low and declining interest rates and are interpreting slowing of inflation as deflation. No one expects inflation to become rampant, and most see a period of low inflation and low economic growth ahead. Of course, I hear and read opinions that range from depression to deflation to inflation to robust growth.
The Federal Reserve recently lowered interest rates � percent on June 25th. Yields on money market funds will be extremely low and some of the funds may have expenses greater than the rate of return being generated. If you are considering a new mortgage or a refinance, please do it now. Rates at some banks and credit unions can be lowered with a phone call and a flat fee of $250. Some banks want to rewrite the loan as a new loan and charge fees. Rates and fees are very competitive at this time. Car loans are being written for zero percent financing for five years.
"Sharing makes you bigger than you are. The more you pour out, the more life will be able to pour in." Jim Rohn
Here is a brief summary of some of the new tax law changes:
Lower Capital Gains: Capital gains taxes have come down from the 20% maximum to 15%. This will apply to capital gains paid out by mutual funds. However, because it applies to capital gains received on or after May 6, it will not include gains that were paid out in March. Now, more than ever, capital gains are more valuable than the income you receive from short-term gains. Why? Under the old tax laws, the gap between the highest income tax bracket of 38.6% and the capital gains rate of 20% was 18.6%. Now the gap has grown to 20%, the difference between the 15% capital gains rate and the 35% highest income tax rate.
Lower Dividend Taxes: Dividends paid from stocks, and by mutual funds, will now be taxed at the 15% rate rather than one�s individual tax rate. This includes virtually all dividends paid out by equity funds. It does not include dividends paid by REITs. The reason is REITs are not taxed on their income if they distribute substantially all of it to shareholders. The lower dividend tax was aimed at reducing, or eliminating the �double taxation� on dividends, first at the corporate level and then at the shareholder level. Dividends are now on a par with capital gains as a store of after-tax value, making stocks a bit more competitive with bonds than they�ve been in the past.
Lower Income Taxes: While the �income� distributions from bond funds won�t be taxed at the 15% dividend rate, our tax hit will come down because of the lower income tax rates that will be applied across the board. That said, high-yield stocks have become more competitive with bonds because their dividends will be taxed at 15% while bond interest will be taxed at rates as high as 35%. I am assuming that the mutual fund companies now have to report, and break out both the dividend income and the interest income that funds distribute each quarter, and year, given that interest income will be taxed at individuals� income-tax rates while dividend income will be taxed at the new 15% rate. This dissection of �income� will also be necessary for accurate reporting on the tax efficiency of funds, which fund companies are now required to make in their reports to shareholders. Look for more lines of information in your upcoming tax forms and more work for your CPA.
Please call or make an appointment if you wish a personal assessment of the tax law changes and how they relate to your portfolio. Each taxable portfolio is undergoing analysis and possible changes for dividend yield and lower taxable income.
Sandra C. Field, CSA, MBA, CFP
Asset Planning, Inc Comments
Fourth Quarter 2002
Every big accomplishment is a series of little accomplishments. To achieve maximum success, you must accept that progress is made one step at a time.
2003 brings new higher limits for 401k and 403b contributions. You will be allowed to contribute $12,000 this year and $3,000 is the contribution limit for your IRA. The estate tax application exclusion remains at $1,000,000.
If you have a taxable account with us, we have matched realized gains with losses for 2002 and took additional losses, where it was applicable, to offset income. The current limit to realize an additional loss is $3,000; the same limit has been in effect for thirty years. I am hoping the new Republican House and Senate will take action to increase this limit. It could be effective for 2002 and your taxes to be filed by April 15, 2003.
Success seems to be largely a matter of hanging on after others have let go.
-William Feather
Enough is enough. This coming March will be three years since the market peaked and began the infamous decline into the bear cave. The S&P has had negative returns for the last three years. 2000 was � 9.33%; 2001 was �12.15% and 2002 recorded a loss of �21.23%. The 5- year annualized return for the S&P 500 index is �0.54.
Bear markets can occur for three different reasons. First, prices of shares may simply decline as a reflection of a downturn in the economy and corporate earnings. Second, excessive valuations can collapse, as they did for many growth stocks over the past three years. Third, misguided government policies, political or major bank failures can paralyze the financial system.
The recent bear market has been more severe than the economy alone can explain. There's clearly been a correction in stock valuations. But, we haven't seen the pervasive problems in the economy that make for chronically depressed stock prices. Economic slumps almost always end within two years -- and corrections for overvalued P/Es rarely last longer than three years.
Everything seemed to point to recovery in the economy by the fourth quarter of 2002, but the fear of war with Iraq and North Korea weighed heavily on everyone�s mind. When the market fundamentals finally showed improvement, the political agenda kept the market from a sustained rally. I do believe we have been through the worst now and I look for positive returns in 2003. The first day of trading in 2003 brought a 3.5% return to the Dow, S&P and the NASDAQ exchanges. Stocks are clearly less overvalued than they were at the start of 2000. Corporate scandals and fraudulent accounting are being investigated and cleaned up. And we're doing more to stop terrorism than we were a couple of years ago. Dare I say there is recovery ahead?
The current comments from the managers at Longleaf Partners are as follows: The return on ownership significantly exceeds the return on lending for the first time in many quarters, and equity earnings �coupons� are ultimately taxed at long-term capital gains rates and grow, while bond coupons are taxed at ordinary rates and are fixed. These numbers do not necessarily signal the end of the bear market, but the deck is now stacked in favor of long-term equity investors.
You don�t get points for predicting rain. You get points for building an ark.
�Louis Gerstner, Chairman of IBM
Tidbits
Beverly passed her CFP exam in November so congratulations are in order. We have also expanded our staff to add Joanne Liu as a research analyst and a Para planner to assist with financial planning. We now have a Medallion Stamp Guarantee available in the office (free of charge) when you need to have a signature guaranteed. I was a speaker at CSULB this past quarter. It was fun to go back on campus to meet with students that have selected finance as their chosen field. You will also notice a new format to our quarterly statements that better reflect the diversification we try to achieve with each portfolio.
Looking ahead� I will be on vacation April 14 to 20, 2003. IRA and SEP contributions need to be made early so they are posted by April 10. Plan ahead for all contributions and tax filings. I will be spending the tax-filing day on a golf course with my family.
I have written my resolutions and have worked on an action plan to map out how to achieve the goals that I have set for 2003. Have you written yours yet? It is never too late to begin dreaming, setting and reaching for new goals. I have just finished my monthly review of each portfolio and made notes for changes in 2003. Interest rate changes may be ahead and holdings will be changed to stay ahead of rising rates.
Our greatest fear is not that we are inadequate, but that we are powerful beyond measure. It is our light, not our darkness, that frightens us. We ask ourselves, who am I to be brilliant, gorgeous, handsome, talented and fabulous? Actually, who are you not to be? You are a child of God; your playing small does not serve the world. There is nothing enlightened about shrinking so that other people won�t feel insecure around you. We are born to make manifest the glory of God within us. It is not just in some; it is in everyone. And, as we let our light shine, we consciously give other people permission to do the same. As we are liberated from our fear, our presence automatically liberates others. �Nelson Mandela Inaugural Speech
Happy New Year 2003!
Sandra C. Field, CSA. MBA, CFP
Worrying is like a rocking chair, it gives you something to do, but it gets you nowhere. (Glenn Turner)
At a recent conference I had the opportunity to meet the former presidential candidate Steven Forbes. I also met Nobel laureate Bill Sharpe. Sharpe invented the Sharpe Ratio, a way to evaluate the risk-reward tradeoff on a stock or fund with a single number. Sharpe invented style analysis, (value, growth) a way to use mutual funds returns to explain their behavior. Sharpe won the Nobel Prize for economics in l990 for inventing the Capital Asset Pricing Model in the early l960�s. This model explains the volatility of a stocks systematic market risk as well as a specific companies risk, and thus laid the framework for much of Modern Portfolio Theory. When I began my undergraduate degree in finance in the l970�s, I studied Bill�s work. When I finished my Masters in the l990�s, I was again studying Bill�s work. The analysis I do on an everyday level comes from Bill�s work. It was a great honor to meet this man and glean his insight on the current market conditions and the outlook for the market in 2003.
My brief tirade�
The market seems to be in a holding period right now. The general economic data released is showing favorable signs of recovery. However, the market is skittish due to terrorism at home, political unrest and corporate scandals. We seem to be waiting for the next announcement of accounting restructuring or �the next shoe to drop�. The summer doldrums are upon us.
What do Enron, World Com, Tyco International, Xerox, ImClone, Dynegy, Adelphia Communications, Merrill Lynch & Co, Global Crossing and Computer Associates International all have in common? They have had many visits by the SEC and some should have their Boards of Directors sharing a jail cell. I am disgusted by the amount of corporate fraud that has n taken place among some to the top corporate executives in the US. I think the Boards of Directors should be held accountable for this fraud and many of the executives should be charged with fraud and prosecuted to the fullest extent. I wish the SEC would investigate each company that has loans outstanding to board members in excess of $250,000. It is unbelievable that many of these companies loaned millions of dollars to their board members, then filed bankruptcy and collapsed. The president of World Com had an outstanding loan of $400 million dollars. It is disgraceful.
�One of the major reasons why people are not doing well is because they keep trying to get through the day. A more worthy challenge is to try and get from the day. We must become sensitive enough to observe and ponder what is happening around us. Let life and all of its subtle messages touch us. Often, the most extraordinary opportunities are hidden among the seemingly insignificant events of life. If we do not pay attention to these events, we can easily miss the opportunities.� Jim Rohn
The All Weather Investment Approach
Investors are like sailors on a long voyage. They should want to take that voyage on a well-engineered ship with a captain and crew who follow time-tested principles and have a disciplined decision-making process. Since the ship will not be able to dock in a safe harbor each night, it must be able to ride through the storms and high waves that come its way. The captain and crew must try to anticipate the weather and storms to the best of their ability to make sure the ship allows for a long successful voyage.
The point of investing is to put money to work today in order to get more back tomorrow. We are trying to build a sturdy ship capable of successfully sailing a long voyage with an experienced crew and a cargo that includes a mix of industries and companies all selected for their value. Of course, we can not know exactly how successful the trip will be. However, following an investment discipline day after day should help assure that the cargo will grow in value as the voyage proceeds.
The above analogy has been paraphrased from Shelby Davis, of Davis Advisors. He described the journey we are on, so perfectly, I wanted to use his example. It is a long journey that tests our patience, beliefs and ability to stay the course, with no safe landing in sight. The captain and crew we have chosen are all experienced mutual fund managers that have been through the rough seas before and will be able to guide us to a successful destination, given the time to weather it through. I, too, am tired of wearing my life jacket but am confidant that the seas will calm, so I continue to look ahead.
House Passes Permanent Estate Tax Repeal
On June 6, the House passed a bill (H.R. 2143) that would make permanent the estate tax repeal provision in last year's tax cut law. H.R. 2143 repeals the sunset provision in last year's tax cut law that would reinstate the estate tax after December 31, 2010. Making the estate tax repeal permanent is projected to cost the federal government an estimated $99 billion in lost revenue over a 10-year period. Democrats offered a substitute amendment to permanent repeal of the estate tax. The Democratic alternative sought to increase the exemption amount for individuals to $3 million and $6 million for couples by January 1, 2003, and was estimated to cost $5.3 billion over a 5-year period. This proposal, however, failed to obtain the necessary votes for final passage.
H.R. 2143 now goes to the Senate for consideration and is likely to face opposition. There is discussion among senators to combine the estate tax repeal bill with other permanent tax cut provisions such as marriage tax relief and the exclusion from federal gross income for payments made to victims of the holocaust under the Nazi regime. The debate promises to be lively.
Think ahead and look ahead. Focus on the positive and the future,
Sandra C., Field, CSA, MBA, CFP
Economists have been busy lately, revising earnings estimates and projections of growth for 2002. Gross domestic product, GDP, the broadest measure of the economy�s health, grew at an annual rate of 1.7% in the last quarter of the year. That was the best growth return of the entire year.
These latest GDP reports reinforce the view that the recession that began last March has ended and turned out to be one of the mildest recessions of record. We are starting to look at the recovery of the economy. While I would prefer a more stable, steady annual growth rate of 3%, some local economists are now predicting between 4 and 6% for the coming year. We have already seen manufacturing begin production again as inventories have been sold off.
Consumer spending, which accounts for 2/3 of all economic activity in the US, continued its pace and grew at a rate of over 6%. The consumer never stopped spending during the recession and perhaps was the reason why the downturn was mild.
My educational message today is on price-to-earnings (PE) ratios
At the top of the market two years ago, many stock commentators were saying that the PE ratios of the stocks were too high and the market should be avoided. Some are now saying that PE ratios are too high and the market should be avoided. How can they be saying the same thing when the market is at two very different levels?
The PE ratio is the price of the stock divided by the earnings of the stock. If XYZ Company is selling at 50 per share and the earnings are estimated to be $2.00 per share, the PE ratio is 25. A PE ratio of 25 is historically on the high side for economists. Now let�s assume the market is advancing and XYZ company has risen in value to $75 per share in anticipation of future growth and earnings improving. Now the PE ratio is 75/$2 =37.5 Many of the growth technology companies had PE ratios of 50 or 100 during the first quarter of 2000. If the market has corrected and the prices have fallen, how can economists again say that PE ratios are high?
When the economy began to falter, sales began to slow and companies were not projected to be earning the profits they were capable of during the previous year. Earnings of the companies were revised downward, reflecting the more realistic view of depressed sales. Lets go back to XYZ company with the share price of $50 with a revised estimate of earnings to be $1.00 per share, instead of $2.00 and now the PE ratio is 50/1= 50. Again, this may appear the PE ratio that is too high. Think about the ratios of the stocks in l930, the year after the great depression, a period in time that had the highest PE ratios. Most of the companies did not have earnings (or they were a negative number) so the stock prices divided by fractional earnings would again give very high PE ratios.
Where are we now? I believe we have a market with many stocks near their 52-week lows. I also see earnings on companies beginning to improve and analysts are beginning to revise their earnings estimates upward as sales are beginning to improve in many sectors of the economy. This means the security prices will begin to rise and earnings will also rise, thus bringing the PE ratios back in line. So, do not be confused when you hear or read that PE ratios are to high and the market is still overvalued. Most people only focus on the price of the security when making that statement forgetting those low earnings could be the culprit.
The area that concerns me is the continued unrest in the Middle East. As the hopes of peace in that area look more remote, the cost of crude oil is climbing. As the cost of oil increases, it will have a trickle down effect on transportation and fuel costs. We are already seeing higher gas prices and I hope this does not stall the recovery. The leisure sector is then impacted, as it will cost more to fly or drive to your vacation destination. The economic impact is always secondary and minor compared to the escalating loss of lives. Pray for peace.
State of California Tax Update
California still has not conformed to the new Federal tax law changes passed last fall but some progress has been made. The California Senate passed S.B. 657 that would conform state law to the 2001 Federal law. The California Senate Revenue and Taxation Committee has also approved another nearly identical conformity measure, A.B. 1122. Hopefully the two houses will be able to agree on one of the bills or some combination of the two. This has the most direct bearing on the IRA contributions for 2002 where Federal law permits $3000 and California allows $2000. We will keep you updated on this.
�Opportunities come to those who set out to meet them�
As always, we look forward to keeping in touch with our clients. Please keep us updated with changes in your goals, lives and financial situations.
Sandra C. Field, CSA, MBA, CFP
