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Date(s) - 11/29/2012
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INVESTMENT SEMINAR 2012

November 29, 2012

The global economy and financial markets are at a crossroads.  As 2012 draws to a close, economic growth has slowed sharply in many parts of the world.  Europe and Japan are already in recession, according to the most recent purchasing managers’ surveys.  China’s growth appears to have stabilized in the past few months, but definitely at a slower pace than a year or two ago.  Ditto for Brazil, India and other major emerging economies; with so many countries struggling, particularly in the developed world, the United States stands out as a comparatively bright light.  Yet our own Gross Domestic Product (GDP) is growing at only a tad over 2% a year in “real” (inflation-adjusted) terms, a far cry from the 3%-4% pace regularly achieved during the 1990s.  

Almost immediately after the elections, the next big talking point on Wall Street and in Washington is the now infamous “fiscal cliff”, a series of automatic tax increases and spending cuts that was the result of a congressional compromise reached last summer and is to take effect on January 1, 2013, unless congress finds an alternative.  This “taxmageddon” as it has been dubbed, consists of the January 1, 2013 intersection of expiring tax breaks (Bush II tax cuts) and scheduled tax increases (due in large measure to the Patient Care and Affordable Care Act) that will affect nearly every American taxpayer.  For investors, the fiscal cliff includes a tax increase on dividends (making them the equivalent of ordinary income, on which rates could rise as high as 39.6 percent) and capital gains (up to 20 percent from 15 percent).  However, many expect the rate for both dividends and capital gains to be negotiated to 20 percent.

None of these issues are new.  President Obama took office facing a fiscal policy dispute that was not and probably could not be settled given the gridlock in congress.   No solution is in sight for Europe’s problems.  Tension in the Middle East is escalating as fast as nuclear technology.  And the Federal Reserve’s monetary policy is at its most opaque since the Reagan administration.    Relief, if it comes at all, could emerge during the lame duck session, or even worse, deferred until a new Congress re-convenes next January.  

Given the drastic contrast between the possible outcomes, our strategy sets a higher priority than usual on capital preservation. We have prepared ourselves for this uncertainty by following a disciplined four-part strategy as the markets work their way toward an ultimate cyclical peak:

  1. Diversify among asset classes – history suggests that when the bubble bursts the markets that soared the most will fall hardest.  We have tried to maintain enough exposure to high-grade bonds (even Treasuries) and cash to provide a cushion if riskier assets suddenly hit the skids.  We have tried to maintain our exposure to stocks to represent no more than 50% of the total portfolios. This is the lowest ratio of equity allocation that we recommended to most of our portfolios since our inception.
  2. Cull portfolios periodically – we typically cull stocks that have climbed at an unsustainable pace over the past 12 months.  In addition, with year-end approaching, we plan to book some losses in our taxable accounts.
  3. Buy during pullbacks only – this principle applies to everything we buy, not just stocks.  The lower the price we pay, the higher our future returns.
  4. Focus on cash yield – late in a market uptrend and as you approach the top, any remaining capital appreciation for the current cycle shrinks to the vanishing point.  At this stage any new investment purchase we make should generate a plump cash yield.

The uncertainty facing taxpayers in planning for 2013 and beyond has been partly clarified as a result of the election.  However, “uncertainty” has become the watchword over the last several years for many chief executives, politicians and economists as an explanation – or perhaps an excuse-for the economy’s slow growth, for the lack of hiring by business and for the volatility in the stock market.  Most of these folks claim that businesses and households are uncertain about future taxes, spending levels, regulations, health care reform and interest rates.  In turn, this uncertainty leads them to postpone spending on investment and consumption goods and to slow hiring, impeding the recovery.

The election is over, but the battle for America’s fiscal future has just begun.  The real question now is “will congress and the White House finally rise to the occasion and give us genuine tax and spending reform?  We are hopeful for a grand fiscal bargain but time is running out.  What our leaders in Washington accomplish (or do not) over the next four weeks may well determine whether stocks and the economy prosper in 2013-or flop.

Now that we have discussed the investment portion of our seminar, let us now concentrate on possible year – end tax planning strategies.  There are an abundance of changes to the tax law scheduled to take effect in 2013 and they are almost universally going to take a bigger chunk of your money and hand it over to Uncle Sam.  If nothing changes between now and the end of the year, you are likely to pay more in taxes next year than you are this year. Rather than providing you with a lot of technical tax laws, I would rather begin our discussion of the tax laws by providing answers to all your individual questions.  I will now try to quiet down so that we can open up the floor for questions or comments.