Golden Bells June 2010
"Into the Storm"
2008 was a disaster for housing, banking and investors everywhere. 2009 was a gift and 2010 may be pointing toward a double recession.
This past month of May was the worst May since 1940.
The stock market, measured by the S&P 500 Index, is down 6.5% so far this calendar year. The Dow Jones Industrial Average is at its lowest point since October, 2009.
The last 40 minutes of trading for June dropped the second quarter to the worst performance since 2008, down 10%.
Investors the world over are losing sight of slowly improving corporate earnings and focusing on "macro" issues like chaos in Greece and a Chinese slowdown.
Washington seems to be stuck in the ideological rut of more regulation, higher taxes and profligate spending. This is all in the face of evidence that the "Stimulus" package has not worked and that job-creating businesses are being choked out of finance by our own Treasury Department.
Latest housing numbers show less than half of the expected growth.
The Gulf of Mexico is ending, as many of us have known it our entire lives.
The official unemployment rate was 9.7% in May. Add in discouraged job seekers who had quit looking, part-time workers who wanted full-time employment, and other workers who the Bureau of Labor Statistics called "marginally attached to the labor force" and the total unemployment rate was 16.6%.
There are many things to worry about now, but worry will not help. We need to think about how you will be affected and what you can do about it.
Life savings
The probability of higher inflation and currently low interest rates dictate that you must have some money with at least the chance of growing faster than the cost of living. This means you should invest, but be wary of bad times. We use a number of ways to protect your accounts from bad times:
We encourage liberal cash reserves to cover any emergencies.
We create spending hierarchies when needed to plan for taking income.
We spread your investments among a variety of managers and asset classes.
We use, when appropriate, tactical managers who try to make changes when needed.
We are not naive about promised features and benefits of investment products.
We always do what we can to keep your costs down.
We make sure you know what you own, why you own it and how you are doing.
We actively look for better ways to manage your assets.
The markets affect, but does not completely control your results. Tactical management aims to make possible higher risk-adjusted rates of return than the old "buy and hold" strategies.
Taxes
Taxes of all kinds are almost certainly going up for years to come. Federal and state governments must increase revenue and it seems higher taxes are inevitable. What can we do to lessen the impact?
Deferral
Paying tax on money you actually spend is not so bad. Paying taxes year after year on money you save and invest can be a huge drain. Using company retirement plans, IRAs and tax-deferred annuities all give a measure of control for when you pay tax.
Conversion
The window for converting tax-deferred accounts to tax-free accounts is open. While it is not for everyone, we should at least do the math to see if changing from traditional IRAs to Roth IRAs makes sense for you.
Performance
There is no substitute for performance. While generally higher risk investments do better over time than lower risk choices (all recent experience to the contrary), we should be smart about where we place those investments. If we expect higher returns from a particular money manager, we should put him to work on tax sheltered money, such as IRAs and annuities so that our biggest gains will be protected from immediate taxation. Investments with lower expected risks and returns, like cash reserves, should be kept in taxable accounts since taxes will be less and liquidity greater.
Structure
How assets are held can make a big difference in taxation. That is especially true of passing assets to the following generations. An up-to-date Will goes without saying is a must. The use of trusts, transfer on death accounts and other titling of assets can help tremendously. It is important to remember that no one knows, including Congress, what estate tax laws will be so we need to be diligent in keeping plans up-to-date with current laws.
Note about life insurance: How you own or who or what owns your life insurance can affect your taxes. While life insurance should be tax free to the beneficiary, the death benefit does get pulled back into your estate and can be taxed or make you have a taxable estate. Depending on the size of your estate or life insurance policy it may be wise to have an Irrevocable Life Insurance Trust own and be the beneficiary of your policy. Please see us so that we can direct you to the appropriate attorney.
Regulation
American citizens are beginning to feel more regulation from government than ever. The health care mandate that you buy a product from an insurance company just because you live in this country is unprecedented. Other than vote and lobby there is nothing we can do about this. If you own a business the rate of change appears to be accelerating. One case in point is that Congress is considering ending the "Subchapter S" election. This may seem like an obscure issue, but this is nothing more than a thinly-veiled way to raise taxes on small businesses, like ours. Higher taxes and regulation mean fewer jobs.
Job
You can protect your job by being as valuable as you can. Beyond that, anything you can do to help your employer helps you. If you have a 401(k) available, participate fully. If your company has a Self Directed Option (SDO), ask us about it. If your company either doesn't have a retirement plan in place or does not offer the Self Directed Option, let us know. We can speak to them about providing these benefits at little or no cost. The SDO option could make more difference to your retirement than anything else. Having disinterested institutional managers handling your money on a 24/7 basis could change completely how your life savings are affected by the markets. There are no guarantees, of course, but surely it is better to have active management looking out for your 401(k).
Politics
Pryor McCormick tries its best to stay out of politics. However, for the past two years we have had to pay more attention to Washington than to Wall Street.
At some point ideology doesn't matter. We must do what works. The Gulf oil spill is a great example: Boats that could help prevent oil getting into the wetlands are docked because they must be inspected for the right kind and amount of life jackets. The Jones Act keeps foreign clean-up vessels (and their non-union crews) from helping. Strong-arm politics replaces the rule of law when seeking justice for victims.
We are at the point where it no longer matters what you think about things like free health care for all, free education for all, government-sponsored 'art,' corporate and farm welfare, casino ATM cards for welfare recipients, global warming taxes, cash for clunkers, etc. We cannot afford them. This is not a political screed but a simple, declarative statement of fact.
Ignore all political debates and focus on one thing: jobs. Be for whatever actually helps produce private sector jobs. It is not just the only thing that will help the economy but is the right thing to do.
Resist the urge to throw up both your hands and sit on the sidelines. Whatever you think is best for the country, get involved and fight for what is right. Americans came to the rescue many times before and will again. Slavery, disease, Fascism, Communism, malaise, and more have been defeated. Compared to those things, cannot we conquer governmental overreaching, inflation and high taxation? Happy warriors enjoy the fight because they know they are on the right side and their winning will lift others as well.
Your money is not you. We are not defined by annual returns or how much we have invested. Action is the only thing that matters in times like these.
The struggle is about more than money because there are greater things at risk. Freedom, the pursuit of happiness, and basic rights of all Americans are being threatened. The good news is that we, as a people, do not respond timidly to threats. But, those things have been threatened before. This is our time, our joyful struggle. Let us order our lives for the uplifting of our families, our businesses and our country.
Looking back on these times years from now, our children, our successors and the next generation of Americans can say they are proud of us. They will consider us great examples of how a generation went through the storm.
Optimism has always been the most profitable attitude for American investors, even when the outlook is bad.
Happy Fourth of July.
Trivia question: Do they have the Fourth of July in Great Britain? Of course they do. What would come after July Third? It just doesn't have the same meaning. We should all be thankful to those who sacrificed so much for our freedom. Men and women are doing the same things for us today. They go to work defending us daily and deserve the greatest respect and admiration we can supply. No serviceman or woman should be able to pay for a meal this weekend. Say happy Fourth of July and mean it.
God bless,
Jim and Steve
VIEW OUR GOLDEN BELLS ARCHIVES
What is Different This Time September 2011
Who is Atlas May 2011
Performance Anxiety February 2011
Ball of Confusion October 2010
Year 2009
April 2009
March 2009
Year End 2008
Halloween 2008
PryorMcCormick Investments
4000 Southlake Park, Suite 200
Birmingham, AL 35244
Securities and investment advisory services offered through Sterne Agee Financial Services.
Member FINRA/SIPC.
PryorMccormick is not an affiliate of Sterne Agee Financial Services.