Download MCM Market Quarter January, 2013 Dr. Jerry Webman, Chief

MCM
Market Quarter
January, 2013
Dr. Jerry Webman, Chief Economist at Oppenheimer & Co. writes on January 2, 2013 “Investors
often live in a state of denial. In the good times, we’ve seen investors reject the notion that the
party will ever end. In the bad times, we’ve seen investors cling to the belief that things will
never get better. I’ve seen recent surveys which suggest that, some three years after the
official end of the Great Recession, three out of four Americans still believe that the economy is
in a downturn with most Americans expecting the economy to be worse next year, irrespective
of Congress’ last minute dealings to prevent income tax hikes on millions of middle class
Americans. The fact that the economy continues to recover is indisputable even as the pace of
growth continues to disappoint.
And there’s the rub. The lingering aftermath of a financial crisis has left us an unacceptable
situation. Who among us is willing to tolerate high unemployment, anemic wage growth,
growing income inequality, and to boot, a debt burden that is on track to equal the total output
of the U.S. economy by the end of this decade?
Investing is a forward-looking exercise, however, not a backward – or even coincident – looking
one. The market, having rallied sharply in three of the last four years, has accepted that our
collective circumstances continue to get better, even as the utopian state remains maddeningly
out of reach. As investors grasp for reasons not to put money to work, the economy improves
and the markets continue to pass them by. With deference to the late Jerry Garcia, it’s when
life looks like easy street that there is danger at your door. In other words, complacency is
hazardous. With many investors still focusing on the bad guys in Washington or Wall Street, or
remembering how cool it was when their home values appreciated every day, complacency
now seems scarce – and that’s a good thing. Hard as it is to accept the plodding pace of
economic improvement, that’s precisely what investors must do.”
Obviously Dr. Webman is optimistic. We, at MCM, are also quite optimistic. The DOW has
climbed to within range of all - time highs. We have to look hard to find any negative statistics,
except for the Government - both U.S. and State. Tennessee, by the way, is among the top five
most financially stable states in this country. The states with the most debt and irresponsible
spending are California and then New York. Imagine that!
Of course there are the negative economists. Leading the pack is Gary Shilling who has been
negative since 1982 when the DOW was at 1,000. Any time the media needs a negative
response they call on Shilling.
The debate among most economists today is whether the upward trend will be for 7 years or
up to 10 years before we have another 15% correction? The second part of the debate is
whether or not growth in the U.S. will speed up to catch the growth rate in the rest of the
world?
Except for government policies and actions we have a lot to be positive about. However, just to
prepare for corrections one has to keep a balanced asset allocation. Given your risk tolerance a
balanced portfolio gives you opportunity to take advantage of market weaknesses in both U.S.
and foreign markets.
2013 Tax Code
We are having so much fun being optimistic. But just to keep our optimism in check, we have
listed below just a few of the 2013 tax code changes. It is unbelievable to us that Congress has
named it the “AMERICAN TAXPAYER RELIEF ACT OF 2012”. We can just feel the RELIEF of
paying more!
In summary:
Payroll Tax Holiday is dead. All workers will pay 2% more social security taxes up to $113,700 of
income. From 2010 – 2012 the average couple could save $4,404 on social security taxes. That
savings is gone.
Rates on Ordinary Income. The maximum rate of income taxes will rise from 35% to 39.6%.
Rates on Long Term Gains and Dividends. Higher wage earners will have an increase in long
term capital gains and dividends from 15% to 20%. For many lucky folks a 3.8% Medicare
surtax tacked on top of that makes the total rate 23.8%
Personal and Dependent Exemption Deduction Phase Out. If a couple has adjusted gross
income of $300,000 or more they can say goodbye to personal and dependent exemptions.
Itemize Deduction Phase – Out. If a couple has adjusted gross income of $300,000 or more
they can also say goodbye to mortgage interest, state and local property taxes, and charitable
contribution deductions.
Alternative Minimum Tax Patch ( AMT ). The AMT is eliminated for some and it is estimated
this could help 30 million people that would have been subject to the AMT tax.
Gift and Estate Taxes. The Federal estate and gift tax exemption will permanently remain at $5
million. The tax above that cap will go from 35% to 40%.
Child Tax Credit. The $1,000 maximum credit for an eligible child under age 17 is extended
through 2017.
Earned Income Tax Credit. The earned income tax credit for families with 3 or more children
and low income is extended through 2017.
American Opportunity Higher Education Tax Credit. This tax credit for up to $2,500 can be
claimed up to 4 years through 2017.
Higher Education Tuition Deduction. Restored through 2013.
Option to Deduct State and Local Sales Taxes. Restored through 2013.
Charitable Donations from IRA’s. Restored through 2013.
Tax Free Treatment for Forgiven Principal Residence Mortgage Debt. Extended through 2013.
$250 Deduction for K – 12 Educators Expenses. Extended through 2013.
$500 Energy – Efficient Home Improvement Credit . Extended through 2013.
If you studied the above “American Taxpayer Relief Act of 2012”, may you be blessed. Stronger
opinion could prevail.
We look forward to 2013.