We’re only weeks away from both the Republican and Democratic Conventions. Perhaps one could argue that the Presidential campaign has already begun, even though it doesn’t “officially” begin until after the Conventions. With the price of oil now over $140 per barrel, both candidates have tried to come up with ideas to lessen the costs for consumers, especially at the gas pump. The real answers are years away and there are no easy answers. Let’s look at what is “doable” and what isn’t, while at the same time attempting to come up with what might reasonably happen. It came as a great surprise to a lot of people in Florida when Governor Charlie Crist reversed his decision regarding drilling for oil in the Gulf of Mexico when John McCain made that suggestion last month. This debate will rage throughout the rest of the presidential campaign and will continue after that, especially if McCain is elected. It is unlikely that Democrats will change their minds and lift the current moratorium and rules. The fact is, drilling has not begun in some places where there are leases. There is likely to be a compromise with an expansion, but that is years away, and at best, it would likely be modest. Let’s not forget that there will be drilling not too far from the Florida coast, as Cuba and China are currently looking into drilling in the Gulf of Mexico. This will add pressure on American politicians to do the same and it will provide them with some political cover. However, don’t expect to see drilling rigs while standing on the beaches of Florida, like you can while walking the beaches in Texas. Turning to the Arctic National Wildlife Refuge in Alaska, as long as Congress is controlled by the Democrats, it’s hard to imagine that any change in the law will likely happen. In fact, if Obama is elected, it’s very possible that the laws may be changed to make it even more difficult to drill on national wildlife land. You’ll hear a lot from Democrats about “price gouging” on the part of the oil companies, OPEC, etc. The fact is, there is no way we can change what OPEC does, even though that sounds like a good idea. Price gouging is very hard to prove. This leads to the “excess profits tax” espoused by the Democrats. Any tax of this nature is likely to be passed on to consumers, even if legislation attempts to keep that from happening. It’s also a very scary proposition for other businesses. Who will determine what is excessive? Again, while these are currently politically popular issues, it’s very hard to imagine any of this going into effect. The consumer doesn’t want the speed limit reduced to 55 miles per hour as was done many years ago, so that idea is “DOA”, along with a reduction in the federal gas taxes which would likely increase, rather than decrease, consumption. Higher gas prices have already changed, and will continue to change, consumer behavior. Any solution to the problem is years away, including nuclear power. Interesting enough, nuclear power is one of the few issues upon which both Obama and McCain agree. Our best guess is that there will be some type of legislation next year to further the development of alternative sources of energy. Of course, one of the problems is that most people don’t want anything in their “own back yard”. Who wants to look at a bunch of windmills on the hillside, or large solar panels across the landscape? The fact is, hard choices will have to be made, not only by the politicians, but also by the consumer. There is no easy way to get around all of this. What we do know is that American ingenuity will come into play, and over the next decade or so we will take major steps toward finding alternative sources of energy and reduce our dependence - not only on foreign oil - but on oil in general, to take care of our energy needs.
In a very unusual mid-year move, the IRS raised the standard mileage rate by 8¢ to 58.5¢ per mile. This was in direct response to the increase in gasoline costs. This took effect on July 1st and will run through the end of the year. Since most businesses follow the lead of the IRS, it is likely that this will cut into the profitability of many companies. On the other hand, it will help create a larger tax deduction for self-employed people. The IRS also increased the mileage rate for moving and medical expenses by 8¢ to 27¢ per mile, but they left the charitable mileage rate at 14¢ per mile. Go figure. Should gas prices go back down, you can expect lower reimbursement figures at some time in the future. Yes, this has happened before when the rates were lowered in January of 2006.
The costs for long-term care keep spiraling higher, according to a study done by Fidelity Investments. According to the study, a 65 year old couple needs $85,000 per year to cover the costs for a stay in a nursing home (and that’s an average nursing home). Those who would prefer to go into a high quality facility, especially one that specializes in Alzheimer’s, will find the costs run even higher. It’s a good time to consider long-term care insurance coverage, if you don’t already have it. Simply give us a call and we will be happy to help you.
It’s been a tough year for investors and even the most successful ones have had their share of humility. Berkshire Hathaway, managed by Warren Buffett, saw its shares hit their all-time high back on December 10, 2007 at $149,200 per share (that is not a misprint). On July 3, 2008, the shares closed at $116,700, a decline of 21.85%. During that same period of time the S&P 500 lost 16.7%. Fortunes can change quickly even for people like Warren Buffett. Last year, Berkshire Hathaway reported record earnings of $13.2 billion. This year, due primarily to their holdings in the insurance arena and other financials such as Wells Fargo, earnings will be down and it may be a long time before that record is surpassed again. Is Buffett worried? We doubt it. He takes a long-term approach and knows that all businesses, as well as the economy, go through cycles, and if you remain focused on the long-term, you will likely be rewarded, even though it may be very uncomfortable in the short-run.
While it is still too early for Congress to do anything about the estate tax situation (we will have to wait until next year), we can report that, at least at the present time, there seems to be some consensus building between the Democrats and the Republicans. Obama supports a $3.5 million individual exemption, while McCain would raise the exemption to $5 million per individual. Either way, it’s a big improvement over what we have now. Another interesting provision which seems to be gathering support is the ability of the second spouse to “use” any of the exemption that was not used by the first spouse who died. In other words, estate equalization, i.e., dividing the estate equally between husband and wife may not have the same importance that it does today. Having said that, it may still make sense to balance estates for asset protection purposes. The big question mark, of course, is what will be the tax rate on the amount above the exemption? There is wide disparity in this issue, with Obama wanting to keep it at the 45% rate, which will be in effect in 2009, while McCain would drop it to 15%. Something is going to happen and the new estate tax law will probably be referred to as the “Attorney Employment Act”, because it is likely that everyone will need to review their estate plan and consider making changes.
It seems the tough economy is not just affecting American households, but is affecting the government as well. The Treasury Department announced that, for the first nine months of the current governmental fiscal year, the deficit was $268.7 billion. This is more than double the $121 billion deficit at this time last year, and represents the third highest ever achieved during the first nine months. It is interesting, however, that spending this past year was only $100 billion more than last year, while revenue was down a $150 million. With tax payments coming in during June, positive cash flow occurred. The largest spending during the first nine months occurred in the Health and Human Services Department, which of course includes Medicare and Medicaid, and it was followed in second position by Social Security. Then came the military, and finally, the interest on public debt, which in and of itself has now reached $377.3 billion. The Bush Administration estimated that there would be a deficit of $410 billion this year, but given the slow down in the economy, it would not surprise us if this turned out to be a much higher number.
According to a study down by Ernst and Young on behalf of Americans for a Secure Retirement, middle income Americans entering retirement will have to reduce their standard of living by 24% in order to avoid outliving the assets they have set aside for retirement. People closer to retirement, i.e., seven or fewer years from now, will have to cut their standard of living by 37%! With the demise of the Defined Benefit Pension Plan and the advent of the 401(k), the safety net of a predictable source of income is left to Social Security, which may or may not be very predictable, depending on whom you ask. The study focused on three different income levels: $50,000, $75,000, and $100,000. Those who recently retired have a 59% chance of running out of money and those near-retirees mentioned before could have as high as a 74% chance of running out. These are scary numbers that once again demonstrate the importance of retirement planning. For people with a lot of years before retirement, saving as much as possible is the first step. For people near retirement, they should perhaps consider working longer and for people who have already retired and who have no desire to go back to work, they should examine carefully their expenses. Is it really necessary to eat out every night of the week? Congress is also concerned, and a Bill was recently introduced that would exclude from taxation income from a lifetime annuity up to possibly $20,000 per year. Thus, the staid old product of a fixed lifetime annuity may become an extremely popular way for people to invest at least a part of their money for retirement. For people with large amounts of assets and cash flow, there is likely to be an income cap on this tax break.
We have been very fortunate over the years to have met some prominent people in the investment business. One of those was Sr. John Templeton, founder of the Templeton Funds, who passed away earlier this month at the age of 95. Templeton’s humble beginnings began in Winchester, Tennessee. He attended Yale University and went on to Oxford as a Rhodes Scholar. He was a relatively young 28 years old in 1940 when he began his own investment firm and the very famous Templeton Growth Fund started in 1954, as one of the very first international funds. In 1992, he sold his investment business to the Franklin Funds. Normally, people think of those “Wall Street Hotshots” as being high powered people as depicted by Michael Douglas in the movie Wall Street. Sr. John was anything but. He was one of the most humble people we ever met. His charitable work over the past many decades will leave a lasting legacy for this gentle giant of the investment world. He will be missed by many.
As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon.
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