Monday, December 27, 2010

2010 Review

I hope that your Christmas was filled with blessings and that you are safe and warm given the Christmas snow. Since this is the last week of 2010, this gives a brief review of 2010 from an Economic Business Cycle Investing perspective. The first section is the weekly recap from Vanguard.

Vanguard

With the holidays upon us, consumers are increasingly jolly with their spending, as evidenced by personal income reports. Third-quarter real GDP was revised upward again to an annualized increase of 2.6%, even as the housing industry continued to struggle and durable-goods orders fell. For the holiday-shortened week ended December 23, the S&P 500 Index rose 1.0% to 1,257 (for a year-to-date total return of about 14.9%). The yield of the 10-year U.S. Treasury note rose 8 basis points to 3.41% (for a year-to-date decrease of 44 basis points).

2010 Review

The US economy stayed in the recovery mode of the economic business cycle for the year with hints of growth toward the end of the year. As with any economic recovery, this year had some turbulence with periods of fear and jubilation creating swings in interest rates and the value of stocks.

Interest Rates: Interest rates tend to stay flat during a recovery. Looking at the entire year the interest rates have been relatively flat where the rates at the end of the year being similar to that at the beginning. So far the 10 year US Treasury rate has dropped by 0.44%, not much of a change. The interest rates did drop giving a great opportunity to refinance a mortgage. Purchasing of US Treasuries by the Federal Reserve did influence interest rates.

Stock Market: Stocks typically do well in a recovery. The S&P 500 index has risen 14.9% for the year, above the historical average. Considerable volatility did exist as a high was reached in April followed by a significant drop and ending the year at an even higher level. It kind of looked like a yoyo climbing a flight of stairs.

Employment: The employment rate normally stays relatively flat in a recovery. The key metric is hours worked per week as employers delay hiring until the growth phase of the business cycle. Next year will bring employment gains.

Commodity Prices: The price of commodities normally stay flat during a recovery and rise during the growth phase. This was true during most of the year with increasing prices toward year's end. This recent rise indicates that the economy is entering a growth phase especially if you look at the price of oil, gas, and copper. We should expect even higher commodity prices next year.

The bottom line is that 2010 acted fairly normally for the recovery phase of the economic business cycle. Commodity prices are indicating that economic growth is coming and because of this some changes will occur to investing profiles during 2011.

The next posting will give the investing gameplan for 2011. I encourage you to read it and respond if you have a question as it is important to have a common vision for the upcoming year. Also, feel free to forward it to others.

Saturday, December 18, 2010

Merry Christmas and Social Security Tax Change

A week from today is Christmas, my how the year flew by. Merry Christmas to you and your family, enjoy the time and remember that the birth of Jesus is the reason for the season. This newsletter will be relatively brief and will discuss the change in the Social Security Tax in the recently signed tax cut bill as well as give some Christmas Facts.

Social Security Tax Change

The recently signed legislation called the tax cut bill or the extension of the Bush Tax Cut Bill has a provision to reduce the Social Security tax withholding from 6.5% to 4.5%. This tax is withheld twice, both from the individual and the employer unless you are self-employed they you pay both amounts. So the total tax is being reduced from 13% to 9%, for a total of 4% reduction.

The reasons for the change include an increase in the amount of take-home pay for people increasing consumer spending and to reduce business expenses so that businesses will hire people. This sounds great, it is always good to get more money. Unfortunately, some downside exists with this change.

Since the Social Security benefit payment that you get when you retire is based upon the amount that is withheld this change also reduces your future benefit. Having a reduced future benefit is a concern given the road of debt that our nation is driving down. My advice is to increase the amount you are putting in your retirement account next year by 2% and keep your retirement plan on track.

Christmas Facts

1) Each year, 30-35 million real Christmas trees are sold in the United States alone. There are 21,000 Christmas tree growers in the United States, and trees usually grow for about 15 years before they are sold.
2) Today, in the Greek and Russian orthodox churches, Christmas is celebrated 13 days after the 25th, which is also referred to as the Epiphany or Three Kings Day. This is the day it is believed that the three wise men finally found Jesus in the manger.
3) In the Middle Ages, Christmas celebrations were rowdy and raucous—a lot like today's Mardi Gras parties.
From 1659 to 1681, the celebration of Christmas was outlawed in Boston, and law-breakers were fined five shillings.
4) Christmas wasn't a holiday in early America—in fact Congress was in session on December 25, 1789, the country's first Christmas under the new constitution.
5) Christmas was declared a federal holiday in the United States on June 26, 1870.
6) The first eggnog made in the United States was consumed in Captain John Smith's 1607 Jamestown settlement.
7) Poinsettia plants are named after Joel R. Poinsett, an American minister to Mexico, who brought the red-and-green plant from Mexico to America in 1828.
8) The Salvation Army has been sending Santa Claus-clad donation collectors into the streets since the 1890s.
9) Rudolph, "the most famous reindeer of all," was the product of Robert L. May's imagination in 1939. The copywriter wrote a poem about the reindeer to help lure customers into the Montgomery Ward department store.
Construction workers started the Rockefeller Center Christmas tree tradition in 1931.

Merry Christmas and Social Security Tax Change

A week from today is Christmas, my how the year flew by. Merry Christmas to you and your family, enjoy the time and remember that the birth of Jesus is the reason for the season. This newsletter will be relatively brief and will discuss the change in the Social Security Tax in the recently signed tax cut bill as well as give some Christmas Facts.

Social Security Tax Change

The recently signed legislation called the tax cut bill or the extension of the Bush Tax Cut Bill has a provision to reduce the Social Security tax withholding from 6.5% to 4.5%. This tax is withheld twice, both from the individual and the employer unless you are self-employed they you pay both amounts. So the total tax is being reduced from 13% to 9%, for a total of 4% reduction.

The reasons for the change include an increase in the amount of take-home pay for people increasing consumer spending and to reduce business expenses so that businesses will hire people. This sounds great, it is always good to get more money. Unfortunately, some downside exists with this change.

Since the Social Security benefit payment that you get when you retire is based upon the amount that is withheld this change also reduces your future benefit. Having a reduced future benefit is a concern given the road of debt that our nation is driving down. My advice is to increase the amount you are putting in your retirement account next year by 2% and keep your retirement plan on track.

Christmas Facts

1) Each year, 30-35 million real Christmas trees are sold in the United States alone. There are 21,000 Christmas tree growers in the United States, and trees usually grow for about 15 years before they are sold.
2) Today, in the Greek and Russian orthodox churches, Christmas is celebrated 13 days after the 25th, which is also referred to as the Epiphany or Three Kings Day. This is the day it is believed that the three wise men finally found Jesus in the manger.
3) In the Middle Ages, Christmas celebrations were rowdy and raucous—a lot like today's Mardi Gras parties.
From 1659 to 1681, the celebration of Christmas was outlawed in Boston, and law-breakers were fined five shillings.
4) Christmas wasn't a holiday in early America—in fact Congress was in session on December 25, 1789, the country's first Christmas under the new constitution.
5) Christmas was declared a federal holiday in the United States on June 26, 1870.
6) The first eggnog made in the United States was consumed in Captain John Smith's 1607 Jamestown settlement.
7) Poinsettia plants are named after Joel R. Poinsett, an American minister to Mexico, who brought the red-and-green plant from Mexico to America in 1828.
8) The Salvation Army has been sending Santa Claus-clad donation collectors into the streets since the 1890s.
9) Rudolph, "the most famous reindeer of all," was the product of Robert L. May's imagination in 1939. The copywriter wrote a poem about the reindeer to help lure customers into the Montgomery Ward department store.
Construction workers started the Rockefeller Center Christmas tree tradition in 1931.

Sunday, December 12, 2010

Tax Cut Plan

I hope this finds you safe, warm, and dry. Winter has arrived early before the official start date. This is a lot like what happened this past week on the tax cut plan, it got started before the official start date of the next group of US House of Representatives and US Senators. This blog will include information from Vanguard, and the proposed tax cut plan that has people really talking. Just as the weather has changed this past week so has the investing climate.

We now have fiscal policy that is attempting to grow the ecomony at the same time the Federal Reserve has monetary policy that is also attempting to grow the economy. We have both feet on the gas pedal and we are going into the first turn on the track. Any NASCAR driver or fan knows the real pickup in speed will occur on the back straightaway. This means that it will take awhile for this action to have an impact on the economy.

Vanguard

While Washington buzzed contentiously over tax rates and other domestic policy items, this week's activity suggested the economy is still trying to sound a positive note. Consumer sentiment improved and new jobless claims dropped, but unusual short-term volatility in the fixed income markets depressed bond prices and bumped mortgage rates to their highest level since June. For the week ended December 10, the S&P 500 Index rose 1.3% to a 2-year high of 1240 (for a year-to-date total return of about 13.4%). The yield on the 10-year U.S. Treasury note jumped 26 basis points to 3.29% (for a year-to-date decline of 56 basis points).

Tax Cut Plan

This past week the news of the Obama compromise plan with the Republicans has really gotten people talking. I am going to avoid any political comment and focus on the impact for investing. I view this as positive for stocks and neutral to negative for longer term bonds.

Stocks go up and down with future growth rate. Since growth rate increases with this move so does the price of stocks. I have stated that we have been in a trading range with stocks. This move in my opinion changes things and allows stocks to go higher. We still have some end of year selling for tax reasons so some volatility will exist for awhile. It will be interesting to see what happens going into 2011.

Bonds are another story and they are in a tug of war. The 10 year treasury bond rose 0.26% last week based upon the news, a significant move. This tells us that the lower rates of about 1 month ago, when I wrote that it was a good time to re-finance your mortgage, are probably gone. While investors are selling long term bonds and driving prices up the Federal Reserve is buying them to keep prices down in a classic tug of war. This means that any rise in longer term rates should be muted. The significant move occurs next year when the Federal Reserve unwinds their position and sells these bonds.

This means that now is a good time to fund your IRA or savings account as we have a new buying opportunity. Do not let fear of the future keep you from enjoying life and investing today.

I understand the statements of growing our national debt. Remember that debt is measured as a function of GDP. The people who drafted this legislation is looking at the annual level of debt as well as long term level of debt relative to GDP. The growth of GDP for the longer term is the current focus.