ProVise Management Group, LLC, an SEC Registered Investment Advisor
PROVISE BULLETS ©
(December 1, 2008)
- We recently received a card from the Templeton organization which included some quotes from the late Sir John Templeton: “To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest rewards.” (August 1958). You have most likely heard similar words uttered by Warren Buffett. Some of Sir John’s other statements included “bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the time to buy and the time of maximum optimism is the best time to sell.”
- For many weeks now, we’ve been hearing a lot about bailing out Wall Street, Detroit, etc., but we thought we’d take just a moment to mention a few things that were in the so-called “Bail Out Bill” that were helpful to Main Street. For about 23 million taxpayers there was continued relief from the Alternative Minimum Tax (AMT). The AMT exemption amount for 2008 was increased to $69,950 for joint filers and $46,200 for single taxpayers. Of course, Congress didn’t do anything to fix the problem on a long-term basis – they simply applied yet another band aid. Earlier in 2008, a Bill was passed exempting homeowners who either had their homes foreclosed on, sold their homes for less than they owed on the mortgages, or restructured their mortgages, from having to declare the difference as ordinary income. If, for instance, you borrowed $400,000 for the purchase of your home and then the home was foreclosed and the bank sold that same house for $350,000, you would be hit with $50,000 of ordinary income due to the forgiveness of the debt. This provision was set to expire and the Bail Out Bill extends it through 2011. Letting people know that education is still a high priority to Congress, the Bill also allows those paying college tuition, (including tuition for graduate schools) for themselves, a spouse, or children to deduct up to $4,000 in 2008 and 2009 as long as their adjusted gross income (AGI) is $80,000 or less for single taxpayers and $160,000 or less for joint filers. This deduction can be taken even if the taxpayer does not normally itemize. One small caveat: If the taxpayer is taking advantage of Lifetime Earnings Credits or the HOPE Program, then the deduction is not allowed. For those who qualify for both, they will generally be better off using the existing credits; but for people who earn too much to use the credits, they might be able to take the deduction. There is good news for people who live in states without an income tax. State income taxes are deductible, but over the past two decades sales taxes were not. There was a provision where, for a couple of years, sales taxes were deductible, but that expired after 2007. It is now continued in the law for 2008 and 2009. This will be very helpful to people who may have purchased an expensive car or boat. Single homeowners who do not itemize can deduct up to $500 for property taxes, and joint filers can take up to $1,000. This provision was in the law for only one year (2008), but it will now apply to 2009 as well. The rule allowing people age 70 ½ or older to withdraw $100,000 from their IRAs and donate it directly to a charity tax-free was also continued. Obviously, you cannot take a deduction for this, but it does eliminate the income tax on the distribution. In 2009, taxpayers who make energy efficient improvements to their homes may qualify for a tax credit of up to $500.
- We hear a lot of “talking heads” comment about whether we are headed into a depression like we experienced in the early ‘30s. As we have already discussed in the Bullets, the unemployment rate as of September 30th in 1932 was 23.6% and for 2008 it was 6.1%. Even the most pessimistic numbers concerning unemployment that we have heard is that the number might approach 8.5% to 9% before this recession is over. This is not good, but it is a far cry from Depression Era levels. The gross domestic product (GDP) was a negative 13% in 1932; and while 2008 was anemic, it has still so far produced a positive return of 1.6%. Inflation is still a concern, although with at least temporary declining energy prices, some of those fears have abated. It is estimated that the Consumer Price Index (CPI) will finish the year up about 4.2%. During the depression there was actually deflation, with a -9.9% decline in prices. Consumer spending declined 8.9% in 1932 and is estimated to be slightly up at 0.5% for 2008. (Sources: International Monetary Fund; U.S. Commerce Department)
- Although no one knows when the lowest point in a bear market will occur, there is a phenomena which cannot be ignored. In the 12 months following the low point of each of the previous nine bear markets since 1957, the S&P 500 has experienced a double digit return. Now that we are in the 10th bear market, the question is, what happens from here? While history is not indicative of future performance (isn’t that getting old?), it is interesting to note that the best 12 month return was 58.3% and the worst was up 23.2%. (Source: BTN Research)
- It comes as no surprise that real estate prices are down, but sometimes perception is different from reality, because the drop in prices depends on where you live. Yes, the prices that went up the most have come down the most; so let’s take a look at what is really happening to the price of real estate around the country. Since its peak in July 2006, according to Standard & Poor’s/Case-Schiller Index, real estate prices are down nationwide an average of 21.8% and down 17.4% over the past 12 months. The decline is likely to continue nationwide for a little while longer, but some larger metropolitan areas are not faring all that badly. For example, let’s take Dallas, which had a decline in real estate prices of 2.7% year over year through September, along with Charlotte with a decline of 3.5%. This might surprise some people given the fact that Charlotte is a major banking hub. Even New York City, where a lot of people are being laid off in the financial district, the real estate prices have only declined by 7.3%. Look at the other end of the spectrum, Phoenix had a decline of 31.9% which was closely followed by Las Vegas with a decline of 31.3%. Three of the cities in the top ten are in California (San Francisco, Los Angeles, and San Diego), and there are two in Florida (Miami and Tampa). As interest rates continue to decline along with the price of houses, it may not be too far into the future before home prices stabilize and the inventory begins to shrink.
- Speaking of home ownership, we were intrigued by a report we read in Investment News, which showed a 40 year history of home ownership. What struck us was the fact that the average home price in 1968 was $20,100 and by September of 2008, it was $190,600, down from a high of $221,900 in 2006. This represented a 5.8% compounded annual return over that period of time, but it should be noted that an increase in the average square footage has accounted for a portion of the return. This isn’t a bad return considering many believe we are at or near the bottom of the current real estate market slump. It did not surprise us too much to see that the equity as a percent of market value had declined from almost 66% in 1968 to about 48% at the end of 2007. This drop, however, began in the early ‘90s, as prior to that time it had remained relatively steady. We found it very interesting that home ownership rates have been almost constant in the mid 60 percent range over the entire 40 year period, with the lowest being 63.5% in 1985 and the highest being 69.2% in 2004. (Sources: Federal Reserve, National Association of Realtors, US Census Bureau, Windemere Real Estate/GH)
- With all of the problems in the economy and the stock market, some people may have to delay their current retirement plans. According to the Life Options Institute, up to 29% of people in their late 60s were still working as of 2006, which is up from 18% in 1985. You can expect this trend to continue, not only while Boomers wait for their portfolios to recover, but also because they feel younger and healthier than previous generations. Oh yes, and let’s not forget that they enjoy making money, and many enjoy staying actively engaged in their occupations.
- With the weak economy, you would think that the cost of the gifts from the song “The Twelve Days of Christmas” would be down. Such is not the case, as it increased almost 11% from $78,100 in 2007 to $86,609 this year. It appears that the Seven Swans A Swimming have become extremely expensive, having jumped from $4,200 to $5,600. The song has apparently not caught up with the economic downturn, as only the Three French Hens, Five Gold Rings, and Six Geese A Laying declined in cost, with the Four Calling Birds and the Nine Ladies Dancing coming in at the same price as last year. (Source: PNC Wealth Management)
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
©12/01/08 ProVise Management Group, LLC
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