Asset Planning, Inc Blog

The latest from the team.

Dogs of the Dow

There is a theory called Dogs of the Dow that has you buy the 10 lowest value stocks of the Dow at year end and hold them one year. The theory is that those ten stocks will rise to the top over the following year. 

What has happened to the Dow 30 this year? Why had it fallen so far? Well, for roughly $75, you can buy one share of Alcoa, Bank of America, Citibank, General Motors, GE, Intel, Micorsoft, Pfizer and Disney. All of them are worth less than a collective $75. How can that be? Well, the financials have fallen to the bottom because we don't know if the banks are viable or not.  They have to undergo a stress test by Dr Tim Geithner to tell us if they are alive or dead. Those will not be finished until April. GM is dead, along with Ford and Chrysler. Tech spending is cut back for Intel and Microsoft as companies conserve. Disneyland is busy and attendance is good, yet Disney stock is cut in half.

The funny thing is that I went to the mall twice over the weekend. I hate shopping and hate going to the mall. The mall was packed both days. The parking was at the far end of the parking lots. I went to brunch on Sunday morning and it was overflowing with a 30 minute wait.  I don't cook so I do eat out a lot and the restaurants that I have been in have all been busy. I see consumers spending yet the news and the market seem to indicate we are all hoarding dollars, afraid to spend. A client I saw this morning told me of a store with women waiting in line to buy shoes that cost $6,500. That is insane to pay that, in good times or bad.

I know jobs have been lost by some of my clients and those around me. But I still see a disconnet. I did a triathlon in Los Alamitos two weeks ago. It was their first time putting on the triathlon with the 5k and 10k races they hold. Triathlon is an expensive sport and the entry is usually $85 to $115 dollars. This first time event drew a crowd of 700 triathletes, paying an average of $90. Sponsorship for the race was higher than last year instead of businesses in the area cutting back, as I expected.

I feel a market move to the upside. I think the fear on Wall St has taken over a rational view of valuations. Really, when you can buy 9 of the 30 Dow stocks for $75, the market is oversold. Or crazy. Or both. Or is it just me?

Sandy

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401k and 403b Guidance

The most common question I hear right now is "should I keep putting money into my 401k or 403b? It has lost 40% or more and I will just lose the money I put in. Why should I keep adding money to it?"

Yes, you should keep your contributions going into your tax deferred accounts. You can change your allocation within the account and have your new contributions go into a safe choice. You might have a money market option or a guaranteed cash option - something that does not have market risk. Choose that and continue to save for your retirement. Now, more than ever, we need to continue to save for our own retirement.

Our government is burdened with tremendous debt, taken on to bail us out of this financial mess. That debt load may impact Social Security for those under 60. I don't think they have a chance of taking away benefits from those people that are already near or over age 60 but the rest of us are subject to changes in our full retirement age and/or benefits we may have been depending on.

Remember that your taxable income is reduced, thus reducing the income taxes you pay, when you defer income into your 401k or 403b, 457 or SEP IRA account. Keep putting away the most you can save. We need to become a nation of savers once again.

Sandy

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934 Hits

California Budget

As I write this I don't know all the details of the budget that was passed by the State Legislature but here are the major provisions:
California will now have the highest sales tax in the nation. The state hopes to generate up to $13 billion in revenue by raising sales taxes one percentage point. That means Orange County will have a 8.75% sales tax rate and Los Angeles County will be 9.25%. This will probably lead to more on-line purchases. If an on-line company does not have a brick-and-mortar presence in California then they do not have to collect sales tax.

The budget also adds a surcharge on state income taxes of .25% and that would drop to .125% once California gets its share of the Federal Stimulus money. Currently, California has a top income tax rate of 9.3% - one of the highest in the nation. The new budget also increases the vehicle license fee from .65% to 1.15%. I think this will lead to more retirees to flee California to states with no income tax like Nevada and Florida.

The budget also has $15 billion in spending cuts of which $8.6 billion is in education. To save $1.4 billion from state payroll costs, the government will eliminate 2 state holidays, change overtime rules and furlough workers at least one day a month.

The final budget does NOT have a 12-cent-a-gallon hike in the gas tax. That was the compromise that was reached to get the one vote needed to pass the budget.

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938 Hits

Treasury Secretary Tim Geithner's proposal

The market did not think highly of Tim Geithner's new proposal, delivered live yesterday. The Dow finished down 381 points at the end of his speech. All the chatter going on last week involved creating a "bad bank" or a "bridge bank" and most on wall street expected that to be done. Instead, he spoke of a new concept that will be created with the private industry, hedge funds and 500 billion to begin with. The concept was there, the details were missing.

The market was waiting to see how the bad loans and distressed assets would be removed from the banks balance sheets, thus improving the banks positions. That was the concept of the "bad bank". The bad assets of a bank would be moved to the newly created "bad bank" that the government would thus own and they would hold the mortgages or assets to maturity.

Geithner, however, came to market with a new concept and gave no direction in how the assets will be priced or who would actually be buying them or details on how this new concept would actually work. The market wants concrete details and a path to guide us out of the financial black hole the banks have created by the CSOs, leverage and bad loans.

The plan needs to succeed so the banks do not need a continued bail-out , funded by the frustrated the tax payers. I am anxious to read the details when they are released in the coming weeks.

By the way, why was Geithner doing his taxes himself with Turbo Tax? Did this lead to the careless errors which caused him to owe payroll taxes to Social Security and Medicare? No, he underreported income. It seems as though the IRS picked up the errors in 2006 and sent him a bill for taxes owed. Geithner did not pay the taxes due until he was selected to be the Treasury Secretary (chief of the IRS) by President Obama. Ironic, I think.

Sandy

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Monthly Statements & Tax Reports

We just want our clients to know that if you ever need a monthly statement or tax report from TD Ameritrade or Charles Schwab you can contact us or you can go on the TD Ameritrade or Charles Schwab websites and download the statements yourself. If you do not have a log on id for your accounts, please contact me (carols@assetplanninginc.com) and I will set you up for on-line viewing. The month end statements are usually available on-line 3 days after the month end. Normally this is not an issue, but it is tax season and we know you need your statements promptly. Also, if you do not feel comfortable doing this yourself, we can download the statements or reports for you and email, fax or mail them to you.

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Unemployment rises

The pink slips are coming again. For the third straight month, over 500,000 workers have lost their jobs. The numbers are staggering as layoffs are announced. Home Depot announced the closing of Expo stores and 7,000 jobs. Sprint is cutting 8,000, and Texas Instruments 3,400 employees. The largest announcement came from Caterpillar: 20,000 jobs are lost. GM is cutting another 2,000 and ING cut 7,000 workers, including their CEO. Philips shed 6,000 and Pfizer is cutting 19,000 when it acquires Wyeth.

Corporations are slimming down to weather the coming months with leaner labor payrolls. Labor is the easiest expense to cut and can make a dramatic impact on the bottom line in any quarter. This will lead to better earnings quarters ahead as the companies have lower expenses against lower income. The first quarter of 2009 is going to be difficult to post a positive growth number but I applaud the large corporations that are taking fast, decisive action to protect the bottom line, even as the layoffs are painful. No one likes to lose a job or find out their friends or relatives are unemployed.

Now, the good news. Pfizer is spending 68 Billion to acquire Wyeth. This is the second drugmaker take over in the past three months. Five different banks are lending funds to Pfizer,as they will finance one third of the purchase. The banks are lending and companies with cash can pick up good bargains. Just like shoppers intend to do at Expo as the stores liquidate.

Sandy

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Goodbye Secretary Paulson

In December, Secretary Paulson made the unilateral decision to guarantee $306 billion of CitiGroup's assets. The guarantee was in addition to the $25 billion Citi had already received in TARP funding. The $306 billion "guarantee" was not part of TARP and was extended without Congressional approval.

$306 billion is equal to what our government spent in 2007 for the departments of Agriculture, Education, Energy, Homeland Security, Housing and Urban Development, and Transportation combined. (The Economist)

Is it fair that Bank Of America made very bad business decisions to buy Merrill Lynch and Countrywide Financial and now the taxpayers are backing their losses? And, management keeps their jobs? Nancy Pelosi said it best when describing the bailout of GM and Ford that their failure and incompetence is being rewarded, instead of their success.

The number of financial institutions (and others) that are applying for TARP money is astounding. Billions of dollars are being handed out, without Congressional approval, and without a tracking mechanism to know what the banks are doing with the funds.

I guess this is how it worked at Goldman Sachs. Paulson's net worth is estimated to be near 800 million. Maybe he could make some loans with his own money.

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1261 Hits

Estate Planning Tips for 2009

Happy New Year!

Welcome to 2009 and the changes that take place for this tax year. The annual gift tax exclusion amount has increased to $13,000. Required minimum distributions from IRAs are not required this year - see my previous blog for details.

In 2001, the Economic Growth and Tax Relief Reconciliation Act was passed. On January 1, 2010, estate and generation skipping taxes are to be abolished. Both taxes are set to resume at their prior levels as of 2001 on January 1, 2011. Be very careful of the wording in your family trusts if they were drafted several years ago or if they contain a phrase that the credit shelter trust is to be funded in the full exemption amount. This means that in 2010, the entire amount of the trust could be left to the credit shelter trust and nothing to the survivor trust.

Credit shelter trusts are normally left to the children or grandchildren and the survivor trusts are for the surviving spouse. If you have a trust with a credit shelter trust or a marital deduction is set by a formula clause, this could disinherit the surviving spouse. You would want to have a maximum amount that can go to the credit shelter trust., and set a dollar amount or a percentage of the estate value. Seek advice from your estate planning attorney if you think your trust should be reviewed or amended. You will need to see your attorney to have the trust amended.

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Madoff Madness

How did Bernie Madoff mastermind a Ponzi scheme for so long and make fifty billion dollars disappear? How was he able to hide these losses from SEC regulators and his clients? How does a former NASDAQ chairman do this and hide it for so long from the regulators? How do people know if their investments are safe?

A custodian is the firm that actually holds your securities, cash, bonds, and mutual funds.  Mr Madoff's firm was his own custodian. To open an account with him, you made your check out to Bernard Madoff Investment Securities. He allegedly had four sets of books- actually, the man must be exhausted from the moving of money on paper that he did. He made fake statements and falsified the account values on the monthly statements that were sent to his clients. Since the custodian and the money manager were one and the same, the clients had no way of knowing if their account values were correct. There were no third parties involved to catch him. His auditor was not one of the big accounting firms. His niece is married to an SEC auditor. He ran a hedge fund and the government does not regulate hedge funds. There was a lot of movement to get hedge funds to register with the SEC a year ago and the hedge funds won. They stayed unregulated.

If Mr Madoff never deposited the client monies into an account that was insured by SIPC or FDIC, his clients do not have insurance to fall back on. That would only make matters worse.

We use an outside custodian such as TD Ameritrade and Schwab to hold our clients investments. Asset Planning does not take custody of assets- meaning, we cannot ever hold securities on our own. We do not invest, nor have we ever, invested in hedge funds.

When a situation does not have transparency, there is cause for concern. Mr Madoff ran his hedge fund on a separate floor in a locked room where only three people had access. This is where the algorithms were running the money in a black box. No one understood what they were investing in, yet continued to pour millions of dollars into his scheme. The investors were let down by Mr Madoff and by the SEC, who was supposed to protect them from fraud like this.

Sandy

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Property Tax Appeals

Many homeowners were shocked to see an increase in their property tax bills from last year, given the widespread drop in housing prices. Most homeowners saw their bills increase because the assessed value of their property is often different than the market value. This is due to Proposition 13 which rolled property assessments back to 1975 levels and capped the annual increase at 2 percent. A property can be reassessed if it changes hands or the living area is enlarged. Under Proposition 8 – (a 1978 initiative, not this years gay marriage initiative)- counties are required to reassess a property when the market value falls below the assessed value, but many times it is not automatic.

If you purchased your home when prices were much higher, chances are your assessed value is much higher than the current market value. Every county assessor's office offers a process to appeal your property assessment. The Los Angeles County website is: www.lacountypropertytax.com and the Orange County website is www.ac.ocgov.com/newpage/taxinfo.asp Theses websites are very helpful and have the forms and instructions for you to follow.

BEWARE: There are private companies posing as government agencies offering to lower their property tax for a fee. This is a SCAM, there is no fee for the county to review the appeal application.

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