ProVise Bullets

  • HAPPY NEW YEAR EVERYONE! We don’t know what you did on Monday night to ring in 2013, but the U.S. Senate was in session as they were attempting to avoid the so-called “fiscal cliff”. At 2:07 a.m. on New Year’s Day the Senate passed a bill, 89 to 8, which does a number of different things. Then late that same morning, the House also passed the bill. We are going to touch on a few of the highlights in this opening Bullet and promise to give a more detailed analysis in our mid-month Bullets. At the end, they did what they should have done a long time ago – begin the process of compromise that most believed would eventually occur. Of course what they ended up doing was showing us that they enjoy the political games a lot more than dealing with tough issues, at the expense of the country.

A compromise of this nature leaves everyone feeling a bit dissatisfied. The President did not get higher taxes on married couples filing jointly earning over $250,000, but he did get a tax hike for married couples filing jointly earning more than $450,000 and for single taxpayers earning more than $400,000. They will pay a 39.6% rate on the excess. Obviously, the Republicans did not get the $1 million level they had hoped for, but that was unrealistic anyway.

Dividends and capital gains will continue to be taxed at a maximum of 15% for those under the thresholds mentioned above, and will rise to 20% for those over the thresholds. What is not clear is whether it is a tax at a higher rate on the excess or whether it will apply to the first dollar of capital gains. We also don’t know how this will play out in light of the additional tax on the wealthy to help pay for the Affordable Care Act.

In the estate tax arena, both sides gave in. The Republicans wanted the exemption to remain at $5 million and to be indexed every year for inflation and a 35% tax rate on the excess. This would have been $10 million per couple. The President wanted to revert to the $3.5 million exemption ($7 million per couple) and raise the tax to 45%. What we ended up with was the exemption remaining at $5 million and the tax rate increasing from 35% to 40%, but not rising to 45%.

Everyone who is employed will have their taxes go up as the payroll tax for Social Security was reinstated at 6.2% up from 4.2% where it has been for the last two years. Unemployment benefits were extended for 2.1 million people, and the spending cuts were delayed by two months.

In an interesting twist that will require some analysis, previously money could only be withdrawn from a 401(k) Plan at the time a participant changed jobs, retired, or reached age 59 ½. It appears that under the bill, participants in a 401(k), 403(b), and other defined contribution plans can withdraw the money at any time and convert it to a Roth IRA. We will need to look closer at the details, but this may present some interesting planning opportunities. Don’t jump into the fire just yet, however, because the “Devil will be in the details”.

So at first blush, what does all this mean? Taxes for every working American are going up. Someone earning $50,000 per year will have $1,000 less to spend, as Social Security taxes are going up by 2%. This could represent about $125 billion of lost consumer spending and is likely to reduce GDP by about . 5% this year. The good news is that it will be spread out over a 12 month period of time, so it’s not an immediate slap in the face – but it is a slap. However, by not extending this tax cut from the last two years, the Congress and President took a first step toward providing better funding to Social Security on a long-term basis. Social Security reform is still needed and it will be interesting to see if they tackle this issue sometime in the next few years.

The higher taxes on the rich will not have as dramatic an impact on the economy as will the rise in Social Security taxes because much of that excess income would be saved by the taxpayer anyway. Nonetheless, on a long-term basis, not having this capital to invest will cause some slow-down in the economy, but that is likely to be spread out over the next couple of years, so it will be felt very gradually. This will likely shave a couple of tenths off GDP in 2013. But more impact is likely to be felt going forward on a gradual basis as the rich pay their taxes in April of 2014.

Thus, we do not expect GDP growth in the first quarter of 2013 to be much more than 1%. As we outline below, however, we believe the economy will be stronger in the latter part of the year, and that for the year we could see growth at about 2.5% in GDP. More to follow. Now, enjoy our year-end Bullets and our look forward to 2013 on the economy in general.

  • Is it just us, or did 2012 seem to slip by faster than most years? We understand the adage that times goes by faster the older you get, but something was just very different about this year…and what a year it was! For a little over 10 months we were bombarded with television commercials, newscasts, articles in magazines and newspapers, and conversation amongst friends concerning the elections, and we don’t just mean the Presidential election. It was a year in which another dictator was toppled – Libya, and another on the verge of losing control – Syria. It was a year in which no hurricanes hit Florida, but a big one hit New Jersey and New York. It was another year where the economy grew, but it still didn’t feel good. It was the year that the world was supposed to end (again) and it didn’t.

The markets moved all over the place following the news from event to event, even when those events had no projected long-term effect on the economy. At the end of the day, for the most part the markets ended up in positive territory, with the S&P 500 being up 16%, the Dow Jones being up 10.16%, the Russell 2000 being up 16.35%, the NASDAQ being up 15.91%, and the MSCI EAFE being up 17.32%. One stock, Apple, contributed to much of the out-performance of the S&P 500 and NASDAQ. Even the bond market found a way to eke out a gain of 4.22% in the very low interest rate environment. Yet, even after these gains it remains difficult for many investors to feel like it was a good year.

Probably the biggest cloud hanging over the U.S. economy was, and still is, the fiscal cliff. The silly politicians in Washington took us right to the brink before compromising in a small way to keep us from becoming “Thelma and Louise”.

This political game will clearly have an effect on fourth quarter growth as businesses and consumers held back on spending due to the many unknowns. And the games are not over. The easy work of making 98% happy has been done. Within the first quarter, Congress must grapple with spending cuts and raising the debt ceiling.

At the end of the day, however, the American economy is bigger than the politicians. Once the outcome is clearer, businesses and consumers will do what they have always done – adjust and then move forward. We see the same thing happening in the latter part of the upcoming year as the economy will likely have another decent, but not good, and certainly not great year. Before it’s all said and done, perhaps the brightest stars will be the automobile and housing industries. So, after a tepid start, there is a good possibility that the economy will finish 2013 strongly.

Last year we suggested that if the broad markets gave us an 8% to 12% return that investors should feel good about the year. At the risk of repeating ourselves, that’s probably the best that investors can hope for in the current year. At the present time, it’s hard to see a recession in the near term as employment begins to pick up, which should allow for modest GDP growth. Having said that, we are not unaware of the pent up demand that exists in the economy, and if that demand is unleashed, we could have a surprise to the upside.

  • BONDS: As good as the stock market performed for investors over the past year, the bond market was not left in the equity market’s shadow. Not only did government bonds post reasonable gains given the low interest rates with which we started the year, but the corporate bond market, especially investment grade offerings, had an unbelievably good year. So good in fact that for some companies the dividends they paid on their stock was higher than the yield on their bonds.

As a result, it is our belief that there is more risk to the bond markets in 2013 than there is in the stock market. We have already suggested that the early part of 2013 will see continued sluggish growth, but by the end of the year higher employment will likely cause consumers to spend more, making the latter part of the year better than the first. If this growth can be sustained, interest rates are liable to go up and even a small increase in interest rates, given the high price of bonds, could cause bonds to tumble. Thus, U.S. government bonds and investment grade corporate bonds could be in trouble while European government bonds and high-yield corporate bonds may do very well. European bonds are paying high interest rates, and thus, have some room for rising prices should Europe come to grips with some of its own fiscal issues. Why would the yield on junk bonds go down if interest rates are going up? Theoretically, prices on these bonds will go up because, if the economy is getting better, corporations make more money, thus reducing the risk that corporations might default on their high yield bonds.

Large companies are attempting to take advantage of these historically low rates. During the month of December many companies issued bonds in the hope of gathering capital at low rates for future investment.

  • IMMIGRATION REFORM: While much of the new Congress will continue to be focused on the economy and taxation, there are other issues likely to be debated that could have a significant impact in 2013. One of these is a new immigration policy. It is interesting how things have changed since President Bush first introduced legislation in 2007. It’s hard to believe that a Republican was advocating allowing illegal immigrants official status in the U.S. You might recall that it was the Democrats, being pushed by organized labor, who fought off this initiative. It’s ironic that today it is the Democrats who are leading the charge, especially in the Senate. You can expect them to pass a Bill sometime around the middle of the year, if not sooner, that will be sent to the Republican controlled House. While there are those in the House who are vehemently opposed to any type of official status for illegal immigrants, we expect the Democrats will be united and that enough moderate Republicans will join them to pass a Bill. Why would the Republicans, who have been opposed to recent immigration legislation, suddenly switch? Let’s just say it’s all about politics and figuring out a way to win back the Hispanic vote.

On an economic basis this could have a significant impact. Many illegal immigrants are paid “under the table”, avoiding paying taxes as a result. This increased tax revenue could help the federal government offset deficits in several areas, most notably in Social Security. It would make it far less onerous and expensive for corporations to have to verify the working status of these immigrants. This would potentially help increase profits. Perhaps most importantly, it could allow businesses to bring in skilled workers from other places around the world to fill in where Americans lack the skill or don’t have the technology background. Right now, these types of entry visas are too limiting.

  • ECONOMY – GENERAL: As we move into 2013, many Americans are quite distraught with the tax increases they will face over the next couple of years, including the higher costs they may have for health care due to the Affordable Care Act. We can’t help but think about the parallels between the 2012 election and the 1992 election of President Clinton. When Clinton was running, who can forget those famous words, “It’s the economy stupid!”? Of course what then candidate Clinton was not willing to admit, but for which he took full credit when he became President, was that by Election Day in November 1992 the economy was well on its way to being mended. One of the biggest fears that President Obama likely had was losing to Mitt Romney and the economy then recovering much more sharply than most people expected, allowing Romney to end up with all the credit, much like Clinton took the credit in 1993-1994. We think the economy is going to grow during 2013 and so will the markets, albeit most likely with GDP closer to 2.5% to 3% versus something higher.

Let’s look at some other parallels. Once President Clinton was elected, he moved from the middle and became the ultra-liberal which he had said he was not (don’t forget that he moved back to the middle in 1996 when the Republicans took control of Congress). That was a time when taxes were raised and rather than Obama Care, we had “Hillary Care”, along with a very aggressive stimulus package to gear up the economy. Clinton did end up raising taxes, but neither the stimulus package nor “Hillary Care” made it. So what happened after the taxes went up? The economy continued to grow and the country became very divided, causing the Republicans to gain control of Congress. We then all learned who Newt Gingrich really was. What happened to the economy? It grew and the stock market did also throughout the ‘90s.

The point we are trying to make is that the economy is bigger than the person living in the White House and the 535 members of Congress. Simply said, America’s greatness cannot be destroyed by a group of politicians, whose sole purpose in life seems not to do the right thing, but rather to get re-elected.

Therefore, in addition to higher taxes we will also have more government spending than we probably should, at least for a few more years, but the bubble will burst someday. It’s just not likely to occur in 2013.

In 2008, America experienced a very painful recession. Some would argue it was a “Great Recession”. Four years later, we are still trying to work our way back to where we were. However, American businesses are in much better financial shape than they were four years ago. They can weather a new storm.

As a result of those efforts, some interesting things are happening. Manufacturers are bringing jobs back to America because once again, we can be competitive in the labor market. Famously, Apple has made clear its intentions to build more of its products in the U.S. Housing, which in the past has almost always led the economy out of recession, has been in the doldrums for five years, but is finally seeing some strengthening. Notice, we said “strengthening”, as we are past stabilization. Automobile manufacturers, some of whom were bankrupt or almost bankrupt just four years ago, now have booming sales and are regaining market share. Corporations which were fraught with debt now have $1.3 trillion of cash on their books. In short, it is hard to visualize the economy heading south because of politics. What is always unknown, unfortunately, are the geo-political events that could disrupt the U.S. and the rest of the world at any time.

Let’s not forget that one of the major reasons America is once again becoming competitive is our lower dependency on energy imports. Not only have we been able to recover more oil in the U.S. through new methods, but fracking has allowed us to access natural gas with what some estimate to be at least a 100 year supply. Lower labor costs and lower production costs leads to more profits which leads to a stronger economy, which in turn leads to a higher market.

At the risk of sounding Pollyannaish, which we have sometimes been accused of, we recognize the problems in the rest of the world and their potential impact on the U.S. The weakness in Europe is likely going to hold back earnings growth in American businesses; this is being reflected in comments made by CEOs about “business not being as brisk as they would like”.

  • EMPLOYMENT: While we are all focused on the headline numbers concerning unemployment, which has clearly been improving over the past couple of quarters, we often forget about what we have come to know as the “underemployment” rate. This is the number of people who are unemployed and are looking for a job (the headline number), people working part-time but who want to work full-time, and those who are so discouraged about finding any job that they have temporarily stopped looking. There are about 12 million unemployed Americans, but there are about 23 million who are underemployed. This represents about 16.2% of the American working population. Even among people who have found full-time employment, many have still not replaced the pay and the benefits they had before the recession.

There are a couple of potential reasons why companies are looking to hire people on a part-time basis versus full-time. Generally, a part-time person will receive a lower hourly rate than a full-time person. Benefits are generally not as generous for part-time employees, as federal law requires a part-time worker to have a minimum of 1,000 hours to generally be able to participate in a retirement plan. Under the Affordable Care Act, workers need to work at least 30 hours per week before an employer is mandated to provide health insurance. While we often think of 40 hours per week as “full-time” employment, the official definition is 35 hours per week. Even if people are going back to work, there is no pressure on wage rates, which, as we have said many times, is typically permanent inflation as opposed to cyclical inflation from commodities such as oil, food, etc. However, because of the Great Recession, there could be an aberration in wages as well. That is to say, wage hikes gained before the recession may now be lost for a long time.

  • MIGRATION VERSUS IMMIGRATION: Over the past five years, young people, especially those graduating from college, moved back home to their parents’ homes because they could not find a job. The same thing is true for many young people who were either able to maintain a low paying job, or who lost their job. It now appears that this trend is beginning to change, thanks both to the improving job picture, as well as the low interest rates for those who might be able to afford a mortgage.

This is a significant shift not only in terms of demographics, but also for industries as diverse as housing, clothing, or even wedding planners. People who are living with their parents rarely get married, and those who do rarely end up having children. All this puts a little blip in the demographic charts from 2009 through present day. This affects the number of children who will be headed to high school and college over the next 14 to 18 years, the number of new homes needed two decades from now, lower tax revenues for governments today and in the future, etc. In fact, it could be argued that there will be a small baby boom happening over the next four to five years, which will cause its own blip in the opposite direction.

While very little of this has any major impact in helping the economy today, it’s the type of trend that makes demographers smile.

  • THE WORKPLACE, UNIONS, AND MORE: With Congress and the President clearly willing to go to battle over just about any issue, it may take a great deal of time to get new legislation that will be helpful to businesses and thus to the economy. One of the powers of the Presidency is the ability to create regulation rather than legislation. With the President no longer having to face the electorate and with a sense of a mandate, businesses are very concerned about the regulations that may be promulgated through administrative order. While perhaps well intended, much of this potential regulation will likely be very costly to businesses. This will either cut into profits and/or cause them to eventually raise prices, neither of which is good for investors or consumers. It will be virtually impossible for Congress to keep this from occurring. The only thing that may keep the President from pushing hard and fast is the weak economy. But, as the economy improves over the next couple of years, we can expect regulation to increase as well.

You can expect these regulations to encompass all industries, focusing heavily on the work environment. You can also expect that much of this regulation will be utilized to help unions who have continued to lose at the state level. All of this will cause angst and create insecurities within the business community.

  • MERGERS AND ACQUISITIONS: 2013 could shape up as a record year for mergers and acquisitions. In 2012 a record number of deals happened, but not a record amount of money. With all the cash currently on the corporate books, it would not be surprising to see much of this money utilized in the merger and acquisition arena. We believe this will be particularly true in both the health care and technology areas. Health care is one of the bright spots economically, growing at a very fast pace (of course we are all paying for this in increased premiums) and technology titans like Microsoft, Intel, Dell, and Oracle are likely going to look to expand through purchasing what they see as profitable future technology revenue sources. Because there will be intense competition in this area it could help drive stock prices higher during the coming year. However, not all of the mergers and acquisitions will be of public companies; much will involve privately held companies, which will make those founders very happy.
  • TAXES: There has been a lot of debate in Washington during the campaign and since about taxing the “rich”. We thought it might make sense to look at what the “rich” are paying today. According to the IRS, in order to be in the top 1% of all wage earners in 2010 (the most recent year analyzed), it required an adjusted gross income (AGI) of approximately $369,700. These one percenters paid 37.4% of all federal income taxes in 2010, up from 36.3% in 2009. Although they paid 37.4% of all federal income taxes, their AGI only represented 18.9% of all income. On average, they paid 23.4% of their adjusted gross income in taxes. Expanding this to include the top 5%, you had to have an adjusted gross income of approximately $161,600. This group paid 59.1% of all federal income taxes, and accounted for 33.8% of AGI. Looking at the top 10%, you had to have approximately $116,600 of AGI and the top 10% paid 70.6% of the total tax burden, with about 45% of the total AGI. The bottom 50% paid a total of 2.36% of all federal income taxes, but in fairness, they were also paying approximately 7.5% of their income for Social Security and Medicare taxes.
  • Of course the rich pay more in ways other than just income taxes. In 2013 Medicare Part A premiums will be approximately $105 per month, which is a 5% increase over last year. However, for those who exceed $170,000 of “modified” AGI, the premium jumps to approximately $147 per month; at $214,000 the premium jumps to almost $210 per month; at $320,000 the premium escalates to approximately $273 per month; and for those fortunate enough to be over $428,000, the premium is around $336 per month. This is for married taxpayers, filing jointly. You can divide these numbers in half for single taxpayers. Additionally, the wealthy pay more for Part B coverage, which can be as much as almost $67 per month for those with the highest AGI.

We want to wish each and every one of you a very Happy, Healthy, and Safe 2013! We want to thank you for being a part of ProVise Management Group, LLC and we look forward to working with you for many years into the future.

As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon. Proudly and successfully serving our clients for over 26 years.


© 1/2/13 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 (including the investments and/or investment strategies recommended or undertaken by ProVise), or any non-investment related content, made reference to directly or indirectly in these Bullets, will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective or current opinions or positions. 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. ProVise is neither a law firm nor a certified public accounting firm and no portion of these Bullets should be construed as legal or accounting advice. A copy of ProVise’s current written disclosure discussing our advisory services and fees is available for review upon request. If you do not want to receive the ProVise Bullets, please contact us at: [email protected] or call: (727) 441-9022. Please visit our Web Site at:

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