ProVise Management Group, LLC, an SEC Registered Investment Advisor

PROVISE BULLETS ©

(October 31, 2008)

• Unfortunately, the significant volatility we experienced over the past two weeks has continued.  This causes a great deal of anxiety for investors in the United States and around the world.  Due to the 24/7 coverage on television and the spectacular headlines in the press, many people are beginning to believe that this Bear market is “different from all the others”.  In the midst of any financial crisis, it often appears that the current crisis is “different” from others.

The advice we have provided is to stay the course.  To move your assets to cash would be “guessing” on our part, and you didn’t hire us to guess about when to get out of the market, nor did you hire us to guess about when to get back into the market.  In 2002, the Consulting Firm SEI prepared a report analyzing the last 12 Bear markets.  They found that investors who held on gained 32.5% in the first year of the recovery of the markets.  The investors who got out because they wanted to wait to get back in when the market recovered saw their gain drop to 24.3% if their timing was just one week too late, and be further reduced to a 14.8% return if they waited three months before getting back into the market.

 

There are probably a few soothsayers who told investors to get out of the market one year ago.  They were correct.  But, there have always been people who have prophesied when the best time to get out of the market was.  Interestingly though, the same person never seems to get it “right” more than once.  In other words, it is generally luck, or the fact that they keep preaching about the Bear market, which eventually makes them “right” at least once.  But as pointed out in the SEI report, they always have to get it right the second time about when to get back into the market.  That is even more difficult.

• In just the past 10 or 11 years, we have seen financial crises due to the “Asian contagion”, the Russian collapse, the dot com bust, the decline of real estate, the rising price of oil, and the sub-prime debacle.  Prior to that, we had the crash of ’87, the recession of the late ‘70s and early ‘80s, and the ’73 - ’74 Bear market.  In each of those occasions, it felt “different” because different things caused the problems.  The one constant, however, was that there was always a recovery and the economy came out much stronger than it was when the Bear market started.

Let’s look at other very frightening times.  On October 19, 1987 the market declined 22.6% in one day.  It declined a similar amount during a 10 day stretch this October 2008.  By 1988, the markets had risen around 23% and two years later the markets had gained 54% from the low.  In 1997 and 1998, we had the failure of Long-Term Capital Management, the “Asian contagion” and the Russian Government Bond default.  After falling steeply in August of 1998, the Dow Jones went on to post a 44% increase.  Make no mistake.  No two events are ever exactly the same, they are always unique, but again, staying the course has always proved to be the best strategy.

 

Now that we’re here, what do we do other than to just stay the course?  For those with taxable accounts, we will look to do some tax harvesting between now and the end of the year.  We will also rebalance both taxable and non-taxable accounts, moving the assets back to an appropriate asset allocation.  For those who have a need for cash flow, we will generally look to use the fixed income components and dividends to produce this, hopefully allowing time for the equities to increase in value.  These are general guidelines which won’t be followed in every account, because as you know, each account at ProVise is managed individually.  As always, should you have any questions, please don’t hesitate to give us a call or send us an e-mail.

• Amongst all of the uncertainty within the economy and stock market, it is sometimes hard to find a plus, but the government handed out a “big plus” to Social Security recipients when they announced that payments will increase by 5.8% beginning in January.  That’s $63 per month increase for the “average” retiree, who will now receive $1,153 per month.  Perhaps of equal, if not greater, joy was the fact that Medicare Part B premiums will have no increase except for retirees who have more than $170,000 per year of adjusted gross income.  Social Security taxes will be owed on the first $106,800 of income in 2009.  Other cost of living changes were also announced.  401(k) Plan contribution limits will increase from $15,500 to $16,500, while the catch up for people over age 50 will rise to $5,500 from $5,000.  As other numbers become available, we’ll pass them along.

• There are a few silver linings to be found among all of the current market worry.  Just two weeks ago, gasoline had fallen to $2.99 per gallon in some areas.  Today, the average price of a gallon of gas is at $2.67.  Although it has not necessarily felt like gas prices have fallen as quickly as oil prices, they certainly have started to catch up very quickly.  September reflected housing sales continuing to increase with the monthly number coming in at 2.7% according to the Commerce Department.  That’s the good news.  The median price per home, however, was down 9.1% across the country.  Finally, the dollar has continued to strengthen dramatically as investors around the world sold off equities, and in many cases bonds, only to reinvest that money back into the U.S., mostly in U.S. Treasury Bills, Notes, and Bonds.  Having the capital available for the inevitable recovery is very important.  Finally, and perhaps most importantly for future activity, the Federal Reserve lowered interest rates by half a percentage point this week.

• Those who have been with ProVise for a long time know that we consider 6% unemployment to be an important number for a healthy economy.  In September, the unemployment rate climbed to 6.1%, with all but three states posting larger unemployment numbers.  The best number came from South Dakota with 3.2% unemployment and the worst number came from Rhode Island with 8.8%.  Idaho had highest percentage increase, 86.6% higher than in September of 2007.

• While U.S. investors have been focusing on domestic markets, there has been a lot happening overseas - especially in China.  As you know, we have said “eventually the bubble would burst in China.”  While year-to-date our market as measured by the S&P 500 is down around 33%, the Chinese Shanghai Class A Stock Index has lost approximately 65%.  As our market firms up, we would not be surprised to see the Chinese market continue under significant pressure.  (Source:  VTN Research)

• There is nothing worse than someone making a prediction which not only doesn’t come true, but is so wrong that they decide to issue a new prediction, in a vain attempt to make people remember they made the first one.  Harry Dent, who was famous in the 1990s for his work concerning demographics and market increases, made a prediction in 2000 that the Dow would climb to 40000.  Of course, some day he might be right, but it’s hard to believe that will occur any time soon, given the market’s current level.  He blamed his inaccuracy all on an economic downturn that “occurs once every 80 years”.  His new prediction says that the “current downturn will last 12 years or until 2020.”  This is almost as funny as Jim Cramer of CNBC’s “Mad Money” show recommending Wachovia stock, citing Wachovia as one of the strongest banks in the U.S.  Days later they collapsed into the hands of Wells Fargo.  One thing we have learned over the years is that predictions provide fodder for conversation but seldom can be relied upon.

• Here’s an update to something shared in the last set of Bullets.  On July 16th the price of gasoline at the pump hit a high of $4.11 per gallon.  On October 24th the average price at the pump had fallen to $2.78 or a drop of $1.33 per gallon.  For every one cent decline in the price of a gallon of gasoline, American drivers save $3.4 million per day.  The drop of $1.33 per gallon equates to $447 million of savings each day for consumers.  On an annualized basis, it puts $161 billion back into the hands of the American consumer to spend on other things.  The government is talking about a new stimulus package.  We just got one, courtesy of the declining oil prices.  (Source:  AAA, Wall Street Journal, Fortune)

• There are less than five days remaining before the Presidential election.  Over three debates, one thing has become very clear.  Obama and McCain have very different approaches to taxing income.  Let’s try to cut through all the chatter and analyze what each of them wants to do.  Obama would basically keep the Bush tax cuts in place for couples with an adjusted gross income (AGI) of $250,000 or less, and for single taxpayers with an AGI of $200,000 or less.  Yes, that’s right.  He’s actually keeping the Bush tax cuts for people earning below these levels.  Conversely, McCain would keep the Bush tax cuts in place for all taxpayers across the board.  Thus, upper income Americans would continue to enjoy the lower tax rates.

When it comes to other parts of taxation, their platforms diverge greatly.  Obama would keep the four lowest tax rate levels, along with a maximum 15% rate on capital gains and dividends at the lower levels.  The marriage penalty relief would continue, along with the $1,000 child tax credit.  Although Obama has spoken about a higher capital gains tax rate, his plan, at least during the campaign, is to tax couples with AGIs above $250,000 and single taxpayers with AGIs above $200,000 at 20% on both long-term gains and dividends.  This is not nearly as bad as what Obama had proposed earlier.  He does want to increase the top tax rate from 35% to 39.6% for joint filers with AGIs over $373,100.  By contrast, McCain would keep the dividend and capital gains tax rate at 15% and leave the top tax rate at 35%.  However, McCain would give those in the top two brackets the opportunity to pay a flat tax of 15% or 25%.  Essentially, anyone who decided to utilize the flat tax, would lose their itemized deductions.  He also proposes to allow the dependent exemption to reach $7,000 by 2016 by increasing it by $500 per year.

 

Those in the lowest income tax brackets under Obama’s plan would see a significant reduction in taxes, and in fact, they might even make money, because they would be given a new tax credit to offset a portion of Social Security and Medicare taxes.  The Earned Income Credit would be expanded, and the Child and Dependent Care Credit would be made 100% refundable.  In other words, many people in this category would not only pay zero taxes, they would actually make money by filing a return.  In an appeal to senior citizens, Obama has also said that any senior with an AGI of less than $50,000 would simply pay no income tax. 

 

The candidates do agree on estate tax relief, although they get there in slightly different ways.  Also, neither one of them wants to eliminate estate taxes.  Obama wants to cap the tax-free amount at $3.5 million and impose a tax of 45% beyond that amount.  On the other hand, McCain would cap the tax-free amount at $5 million and only tax the wealth above this level at 15%.

One of the more controversial ideas which has not been discussed very often, is that taxpayers who earn more than $250,000 would have to pay more in Social Security taxes.  In other words, instead of capping their liability on Social Security at approximately $106,000 of salaried income, only the income above the current cap and $250,000 would be free of Social Security.  Above this level, the tax would kick back in again.

One last area we want to touch on where information has been very misdirected, is how each candidate would pay for healthcare reform.  Obama likes keeping in place the employer coverage and allowing it to continue to be tax exempt to the employee.  Businesses that do not provide health insurance to their workers would be required to pay a new tax of 6% of their payroll in order to fund either a new national program or an extension of Medicare.  Small businesses, with less than 10 employees would be exempt from this rule.  McCain feels that taxpayers who currently provide their own coverage (i.e., who don’t get it through their employment) aren’t being taken care of.  Therefore, he would provide a $2,500 tax credit for single filers and $5,000 for families, to help offset the cost of healthcare insurance.

Regardless of who wins the election, the only thing we know for sure is that the final tax bill will have elements of the above, but certainly not everything.  It is also obvious that if the government continues to spend money as it has for the past eight years, taxes are going to have to increase to support that spending.

• Many parts of the Tax Code are indexed for inflation.  Because inflation has increased significantly over the last 12 months, we are going to see some pretty hefty jumps.  The annual gift tax exclusion will finally jump from $12,000 to $13,000.  Thus, a husband and wife can give $26,000 per donee if they wish.  Inflation indexing will also increase the allowable amount of contributions to 529 College Funding Plans by a similar amount, and also allow for the advance payment to be $65,000 per person, or $130,000 per couple.  The $3,500 personal exemption in 2008 will increase to $3,650.  Perhaps one of the most notable increases will come in the standard deduction which will rise by $500 to $11,400 for married couples filing jointly and $250 for single taxpayers to $5,700.  People over age 65 will get an extra $1,100 deduction if they are married filing jointly and single taxpayers over age 65 will get an extra $1,400 deduction.

As always, we encourage you to give us a call if you would like to discuss anything further.  We will visit again soon.

RAY, KIM, ERIC, BRUCE, and LOU

©10/31/08 ProVise Management Group, LLC

This material represents an assessment of the market and economic environment at a specific point in time.  Due to various factors, including changing market conditions, the contents may no longer be reflective of current opinions or positions.  It is not intended to be a forecast of future events, or a guarantee of future results.  Forward looking statements are subject to certain risks and uncertainties.  Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in these Bullets, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.  Moreover, you should not assume that any discussion or information contained in these Bullets serves as the receipt of, or as a substitute for, personalized investment advice from ProVise.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Information is based on data gathered from what we believe are reliable sources.  The information contained herein is not guaranteed by Provise Management Group, LLC as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.  The indices mentioned are unmanaged and cannot be directly invested into. .  If you do not want to receive the ProVise Bullets, please contact us at:  info@provise.com or call:  (727) 441-9022.  Please visit our Web Site at:  www.provise.com.

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