·         First, we want to wish everyone an enjoyable holiday season and safe travels whether traveling by auto, rail, or air.  If we’re lucky, we won’t have the paralyzing snow storms we experienced last year.  With all that has happened in the last three years, we can all be thankful this holiday time that things are better than they were and, in looking ahead, it appears the trend of improvement will continue.  More on that in a few weeks…until then, HAPPY HOLIDAYS!

 

·         At a time when unemployment is hovering around 10%, you have to wonder why anyone would turn down a legitimate job.  Yet such is the case for the Senate Democrats, who have struggled over the past six weeks to find someone to take over the Democratic Senatorial Campaign Committee for 2012.  Senator Patty Murray of Washington finally took the job after being cajoled by Senator Harry Reid, who couldn’t find anyone else.  Come January, the Democrats will hold a 53/47 majority in the Senate.  Those numbers include two Independents who caucus with the Democrats.  In November 2012, 33 Senate seats will be up for re-election with 23 of those seats being held by Democrats and only 10 by Republicans.  If the electorate remains as angry as demonstrated this past November, Senator Murray could be setting herself up for a big disappointment and the displeasure of the party itself, as they will conveniently “forget” why she took on this thankless job.

 

·         The November unemployment number rose to 9.8%.  This means that 15.1 million people are out of work.  Only 39,000 jobs were added in November, which was significantly below the expectations of most economists.  There are two things to keep in mind.  First, holiday season numbers fluctuate greatly and we believe the November number will be revised upward, although remaining weak.  Second, the unemployment rate is a lagging indicator of the economy.  In the early stages of a recovery, as more people begin looking for work, the unemployment rate actually goes up.  That being said, we are not going to have the robust growth in job creation that we would like.  Although we survived the financial crisis of several years ago, it’s going to take many years for the economy to dig out of that hole.  We don’t expect significant job growth to occur for at least a year, maybe more.  (Source:  Labor Department)

 

·         Being a handicapper of college football teams at the beginning of the season can be almost as perilous as being an economist.  In fact, it can be downright embarrassing.  The BCS Championship Bowl will pit Oregon against Auburn, with both teams undefeated with 12 wins.  Auburn is ranked #1, but at the beginning of the season it was ranked #23 based on USA Today’s Coach’s Poll.  At the other end of the spectrum, the Texas Longhorns were ranked #4 in the same pre-season rankings, but somehow managed to lose seven games and won’t be appearing in a post-season Bowl game.  The team ranked #23 will usually end up with three or four losses and the team ranked #4 will generally only have one loss.  How could the pollsters get it so wrong?  (Source:  USA Today Coach’s Poll)

 

·         Here we are – 15 days before the end of the year and a little over two months into the current fiscal year for the federal government.  November showed the largest federal deficit for that month, coming in at $150.4 billion.  Although this was significantly higher than the same time last year, the first two months have produced a deficit 2% below where we were this time last year.  Given the tax bill in front of Congress, it is entirely possible to have another record deficit in the 2011 fiscal year.  At the same time, the effect of record deficits is beginning to rear its ugly head in the bond market, with interest rates rising and, therefore, bond prices declining.  Although we have been very fortunate for the past couple of years in not having the type of inflation many expected, most still believe inflation is coming.  The ten year treasury has gone from 2.5% just a few weeks ago to around 3.3% currently.  In the world of bonds, this has occurred at “the speed of light”.  We cautioned bond holders that this would happen, and while there may be a slight hiatus, we won’t be surprised if this acceleration in interest rates continues.

 

·         Starting next month and continuing into February, investors will be receiving 1099 forms, a reminder that tax season is just around the corner.  Interestingly, even though April 15^th falls on a Friday, everyone will have until April 18^th to file a return.  Why?  The government will be celebrating Emancipation Day and thus, government offices will be closed.  For many, that will simply allow time to procrastinate a little longer.  It will also make for a very busy weekend for all of our accountant friends.

 

·         Just a reminder to everyone over age 70 ½ - you must take a Required Minimum Distribution (RMD) in 2010.  RMDs were waived in 2009, but Congress did not extend the waiver into the current tax year.  You can do the calculation by looking at the value of your IRA on December 31, 2009 and using the IRS table to determine the percentage that you must withdraw.  It is very important that you withdraw your RMD, as failure to do so not only requires you to pay income tax on the full amount of the withdrawal, but there is a 50% non-deductible penalty as well.  Please don’t wait until the week between the holidays to make your withdrawal if you haven’t already – do it today.  For those who just turned 70 ½ this year, you too, must take an RMD for 2010.  If you haven’t already done so, remember there is a provision that allows you to delay taking your first RMD until April 1^st of next year (2011).  If you take advantage of this one-time opportunity, you will still have to make a second RMD in 2011 for that tax year, so be careful not to push yourself into a higher tax bracket. 

 

·         Recently, the Social Security Administration made an announcement about abandoning a profitable opportunity that was taken advantage of by a limited number of people.  Essentially, the strategy employed was to begin Social Security benefits at age 62, and any time after reaching full retirement, pay back 100% of the benefits, and then re-file for benefits with a significantly higher payout.  In essence, this amounted to an interest-free loan.  Of course, if the money were invested in the interim, an individual might actually have made money in the process.  Not very many people took advantage of this.  The Social Security Administration processed a little over 1,000 withdrawal applications, and during the first six months of 2010, only 345 people actually applied to start the program.  In addition to costing the government in terms of a time value of money, it was also expensive to process the applications.  Although the Social Security Administration has allowed for a 60 day comment period, everything has come to an immediate halt in processing these “re-sets”.  (Source:  USA Today and Social Security)

 

·         We are going to try to resist giving you the umpteenth version of the explanation of the Tax Bill negotiated between President Obama and primarily the Republicans, much to the consternation of the President’s own party – especially the liberal wing.  After the Bill is actually passed, and if there are any substantial opportunities, we will share them with you.  Here are some thoughts about the process.  The inevitable occurred…especially after the November elections.  The liberal Democrats have yet to understand the beating they took in November.  On the other hand, the Republicans are assuming too much.  If they don’t show the ability to compromise and work with the President for the next two years, they will likely find themselves replaced, rather than adding to their majority in the House and potentially taking over the Senate.  On the other hand, the President needs to demonstrate the leadership that can only come from the White House.  It can’t come from the Speaker of the House.  It can’t come from the President of the Senate, or from anywhere else.  We need to have a comprehensive reform of the entire tax package.  We need to set it up in such a manner that all of the special deals are eliminated, and yes, that will hurt some of us.  We need to make it easier for people to complete their tax returns, and yes, it is even possible we will need an increase in taxes.  Our suggestion in that regard is to do it gradually over three, five, or perhaps even ten years.  Conversely, the President needs to show leadership by also encouraging Congress to cut expenses.  Again, these expenses should not necessarily be eliminated overnight – although some obviously will be – but rather should be eliminated slowly over time.  By increasing revenues and decreasing expenses gradually, it shouldn’t be such a shock to the system.  Now, let’s see whether our political leadership has advanced, or whether it will be some of the “same old stuff” for the next couple of years. 

 

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

 

©11/15/10 ProVise Management Group, LLC

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