Archives for December 2013

A “To Do” List Before 2013 Ends

Don’t leave money on the table

In uncertain economic times, many employees put off contributions to retirement accounts, reasoning that they will make up lost ground when times improve.  Doing so, however, could result in leaving what is virtually “free” money on the table.  


If you have a 401(k) or comparable retirement account where your employer matches your contributions always contribute enough each year to receive your full employer match.  Not doing so leaves money on the table. Taking full advantage of an employer match is the best no-risk return you will ever find.  

Harvest Tax Losses

Analyze your holdings in taxable accounts and find positions that are currently in a loss, especially mutual funds and exchange traded funds (ETFs). Take the loss in 2013 and purchase a similar, but essentially different, investment to keep the spirit of the original investment going.


If you are over 70 ½…

You must take a required minimum distribution from your traditional IRA account(s) by year end. Failure to do so could result in a 50% excise tax on the amount required, but not actually withdrawn. If you turned 70½ during 2013, you have some flexibility. You could take your 2013 distribution by December 31st or you could delay it until April 1st of 2014.  If you opt for the latter, you still must make your 2014 distribution by December 31, 2014, resulting in two distributions during the calendar year. Every year thereafter, the distributions must be made by year-end.


Convert Traditional IRAs to a Roth IRA

If you are considering converting a Traditional IRA to a Roth IRA and will be paying taxes to convert, make that conversion in 2013 while you know exactly what your tax rate will be.


Establish self-employment retirement accounts

If you have self-employment income and are eligible to establish an Individual 401k plan or Roth 401k plan, those plans must be established by December 31st, although you will have until your tax deadline in 2014 to fund the account.


Make your gifts

You may think that your money is yours to give away as you please, but the federal government tends to look on excessive gifting as estate tax evasion. Currently you can gift up to $5 million ($10 million for couples) over your lifetime without incurring federal gift taxes of 35%. The maximum you can give one person each year without tax implications is $14,000 ($28,000 for couples.) This could change in the future, but for now, if you intend to make non-charitable monetary gifts, do so before year end.


Push deductions into 2014

If you expect to be paying higher income taxes in 2014, you might want to look at postponing paying deductible expenses to push them into next year.

Go Big

Buy your big ticket items like cars in 2013 to enjoy the potential sales tax deduction before it goes away. Congress could certainly reinstate or extend it, but you know what they say about a bird in the hand.


Talk to your tax adviser

It is particularly important to talk with your tax adviser and make certain your finances are set up to minimize the tax bite as much as possible. Paying your fair share shouldn’t mean overpaying.

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Ho Ho Ho! Santa Bernanke Arrived

Greetings from usually cold and snowy, but recently tropical and wet Vermont! After three days of skiing in the rain, Old Man Winter came back and cut the temps by 70%! From short sleeve shirts and a light jacket, I am gearing up in full winter weather garb for wind chills around 0 today on top.

Ben Bernanke did it! The master. The maestro. He saw the downside of announcing a taper to their $85B a month in asset purchases, but felt strongly it needed to be done. As much as I really like and admire him, I respectfully disagree. Anyway, the man who has threaded needle after needle after needle threaded his final one last week and it was picture perfect, another beaut!

With enough hawks on the committee to push for the taper, Bernanke gave them what they wanted but also prevented the very nasty negative market reaction so many feared by pushing off the raising of rates farther into the future. It was genius and after a few minutes, the markets celebrated in a huge way with the celebration still ongoing. The Fed’s move also solidified a trend that I and many others have spoken about for some time, the strength of statement day in the stock market. With some qualifiers, it’s been like shooting fish in a barrel, the proverbial layup in trading.

Fed statement day last week also kicked off the traditional Santa Claus Rally. I have done an incredible amount of research in my 25 years in the business, but as I think about it, none more in the seasonal department than December and early January trends. And I know I am far from alone. To date, the stock market has pretty much followed historical patterns that included a mild early December decline to a mid December low from which the year-end rally launches to the most seasonally positive time of the year.

Bernanke may be given the credit (or not), but stocks are in the midst of the Santa Claus Rally that is supposed to last into the New Year. That doesn’t mean that every single day will be up! Depending on when you begin your study and which instrument you use, the positive seasonality can start anywhere from December 17 to the 24 and last until December 30 or through the first week of the New Year. On the flip side, as we recently saw in 2007 is that the famous adage usually works; If Santa Claus should fail to call, bears may come to Broad and Wall, meaning that if the traditional year-end rally does not occur, it is a warning sign to look closely at the market for winds of change.

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Do NOT Taper

As difficult as it was at the time, quantitative easing (money printing) has now become an acceptable weapon in the Fed’s arsenal. Throughout my life, I was always taught, wrongly so, that printing money always leads to inflation and sometimes hyperinflation. And that all we needed to do was look at the Weimar Republic or Argentina or most recently Zimbabwe for examples of a currency gone rogue.

When the Fed cut rates to essentially zero, critics and Doomsdayers came out of the woodwork crying that Bernanke was “out of ammunition” and that “the Fed was now impotent”. The initial decision to print money must have been one of the most difficult debates that any Fed has ever faced. I imagine that the FOMC meetings were only a small part of the spirited discussions that went on during late 2008. But in the end, after rates are zero, Bernanke & Co. used QE as a way to effectively continue cutting rates until the economy and markets began to stabilize and turn.

Having been in the deflation camp since 2007 and remain there today, I have always said that printing money would not even slightly increase the risk of problematic inflation. I can’t tell you how many times I did interviews on CNBC, Fox Business and Yahoo Finance where I defended this very minority view against the masses. And when I boldly declared after QE I that the Fed’s balance sheet would eventually approach $5 TRILLION, I was literally laughed at and dismissed as a nut job (well, part of that may be true!). Furthermore, as longtime readers know, I turned very bullish on the dollar, long-term, in early 2008 and have stayed that way ever since. It was such an easy argument to say that all this money printing would devalue the greenback, but the truth of the matter is that the U.S. dollar bottomed in March 2008 and with almost $5 trillion being printed since, it has never gone lower than that level. Once again, the masses were wrong.

Once a Fed, or anyone else in my opinion, does something that is so distasteful, like having to print money, the hardest part is over, the first act. It makes the next and the next and the next much easier. After QE I ended and people argued against any more printing, it wasn’t a stretch to believe that a whole lot more was on the way. In fact, I would and have argued that once a Fed begins the process, they absolutely MUST see it through to the end, much longer than anyone imagines.

For the fifth time since Bernanke first hinted at tapering in May, the Fed will have the opportunity to begin the scaling back of asset purchases today. I firmly believe they should NOT taper! While the employment picture is certainly much improved, it is far from “escape velocity” with the participation rate at extremely low levels. After a “normal” recession, GDP growth should be double where it is today and remains frustratingly below trend levels. And that says nothing about the inflation rate and money velocity which indicate we should be worried more about deflation than any kind of problematic inflation. No sir. The Fed should NOT taper now or any time in the near future.

Let’s not repeat the mistakes made by FDR in the late 1930s when the government caused part II of the Great Depression by pulling stimulus and raising taxes. And let’s not let the Japanese debacle of starting and stopping and starting and stopping QE become our pattern. From my usual minority seat, my thesis is that the Fed should not begin to taper until we get to the other side of the next recession. Said another way, the Fed shouldn’t consider scaling back their asset purchase program until at least 2015 or later. Doing so now or early next year will jeopardize the flailing recovery and have a very negative impact on the financial markets over the intermediate-term.

I have heard plenty of people say that “tapering isn’t tightening”. I vehemently disagree. If a crack addict smokes 12 times a day and then is cut to 10 and then 8 and then 6 times a day,  his body will certainly feel the reduction. As I have said many times before, our markets have become addicted to QE and are not healthy enough on their own to survive without it.

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Big Week Ahead

For several weeks, I have warned about market sentiment at “rally killing levels”. Not a single thing has changed for the better in this department. The bulls are bulls and the bears are kinda, sorta bulls, at least through year-end. That continues to make me worried, but not enough given the calendar to take serious action.

I want to preface my next comment by saying I absolutely do not believe we are on the precipice of another financial crisis like 2008, but the current sentiment and calendar have a very similar look and feel to late 2007. And my own feelings are similar. At that time I vividly recall being concerned about sentiment after stocks pulled back from the October all time high without bullish sentiment wavering. The calendar heavily favored the bulls and I was too complacent. Currently, the market is in much better shape than it was 5 years ago, but the comp was worth sharing.

Looking at the Dow, S&P 500 and Russell 2000 through last Friday, there was a clear two step pullback with one short intervening rally. The market began the week a bit oversold on a very short-term basis and that has now been relieved. The rally on Monday was underwhelming to say the least with only two stocks up for every one stock down. Most of the major indices closed near their lows for the session, which sets up an interesting next two days.

The FOMC begins their two day meeting on Tuesday and that is also Ben Bernanke’s final meeting as Fed chair. With the announcement not until Wednesday, volume will likely dry up and the trend is to see a mild drift higher into the event. If stocks had closed stronger today, I would have had a lot more confidence in the added upside than I do right now. Perhaps the stock market rallies into the announcement and sells off on the news, whatever the taper decision. On the flip side, we could see something very unusual like a sell off on Tuesday and Wednesday morning and then reversal on the news.

One thing is for sure. Ben Bernanke’s tenure as the most powerful financial person on earth is ending and I for one will be very sad to see him go.

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Like a Broken Record

It’s getting boring, but essentially, the same comments apply. Stocks remain overbought and extended, and as we know, they can get more overbought and extended if all other indicators remain strong. That’s not the case right now and it wasn’t mid December, I would be an outright bear looking for a full fledged correction of at least 10%. As I have mentioned over and over, it is just very, very unusual to see a meaningful peak this time of year as well as a decline of any significance. “Usually”, the market holds on until the last few days of the year and early into the New Year before the bears make any headway.

Today, we still have sentiment at rally killing levels which can be seen in the various sentiment surveys, options market, mutual fund flows and bullish to bearish comments on TV. Something new is bothering me now and that is some of the technical damage done to the number of stocks going up and down over past few weeks. Beneath the surface, we are not seeing a very healthy foundation. Again, given the time of year…

Finally, it is very important that we see the major indices hit fresh highs over the coming week. If I didn’t have to get up at 4:30am to catch a flight, I would post those charts to explain. Right now, the Dow and the Russell 2000 are starting to curl down after briefly bouncing so close to the old highs. If they begin to decline more and breach the lows from last week, we may be seeing something very uniquely negative in the market. Additionally, this is the time of year when the small caps sizably outperform their large cap brethren. Underperformance of the small caps through year-end will usher in some very negative scenarios.

More on this later.

Cautious bull dancing close to the door…

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Expert Year-End Tax Tips

Health Care Reform – Despite last-minute postponements in the effective date of some provisions of the Affordable Care Act (ACA), it’s important to determine now what impact this law will have on your business.  By acting now, we can identify a long-term plan that anticipates the eventual rollout of the reporting and penalty provisions of the employer mandate. 

The Small Business Health Care Tax Credit can help offset the cost of coverage for many companies by providing a credit against taxes, but there will be changes beginning in 2014. The credit rises to 50% of premiums paid (35% for small tax-exempt employers), but it only applies to small businesses that participate in the Small Business Health Options Program (SHOP) Marketplace. We will be happy to answer your questions about the SHOP, as well as other provisions of the ACA.

Employers should also be aware that a number of other provisions will go into effect as originally scheduled, such as the 90-day limit on the period before a new hire can become eligible for employer-provided health coverage.

New Tax Laws in Effect

  • Extended small business expensing under Section 179 through 2013, as well as the availability of first-year “bonus” depreciation, which helps lower the after-tax costs of new business property.
  • The highest individual income tax rate rose to 39.6% in 2013. Taxpayers at this income level also will see tax rates on dividend income and long-term capital gains rise to 20% (up from 15% in 2012). High-income business owners who find themselves paying more in taxes under the new law should consider options for minimizing their outlays.
  • There is a new tax starting with 2013 returns, the 3.8 investment income tax. It applies to single taxpayers with adjusted gross income of $200,000 and joint filers earning $250,000. This new tax may affect the return on the sale of your investments, but proper planning may serve to minimize the impact.  Flow-through entities have been very popular in recent years, but the higher tax rate and new 3.8% net investment income tax could significantly erode their tax benefits. We can advise you on the form of entity that suits your business needs and tax situation.
  • Although the alternative minimum tax (AMT) originally was aimed at high-income taxpayers, it has increasingly affected more and more middle-income taxpayers over the years. Although the AMT now is indexed for inflation, the use of certain tax breaks still could subject you to the tax.
  • DOMA Decision’s Impact on Financial Planning for Same-Sex Couples – If you are a member of a married same-sex couple, then the U.S. Supreme Court’s recent decision to strike down the Defense of Marriage Act could have a substantial effect on many aspects of your financial life. You may want to consider, for example, filing an amended income tax return if you now qualify for deductions or credits available to married couples under federal law. Since same-sex couples are now eligible for the estate tax exemption available to surviving spouses, it may also be time to review your estate planning.
  • Using IRA Distributions for Charitable Deductions – Have you considered using the funds in your individual retirement account (IRA) to make a charitable contribution? If so, it’s a good idea to follow up on your plans sooner rather than later. Under the American Taxpayer Relief Act of 2012, individuals who are age 70½ or older can make a qualified charitable distribution from an IRA directly to a charity. You can exclude donations up to $100,000 of an otherwise taxable distribution from your gross income and count them toward the current tax year’s required minimum IRA distributions. 

Other Key Considerations

  • Is Your Will Up To Date?  When was the last time you reviewed your will? People generally make wills to guarantee the proper disposition of their money and property, which is why it’s a good idea to consult your CPA when it’s time to create or update your will.  We recommend that you revisit your will every time you experience a major life event, such as marriage, the birth of a child, retirement or other significant milestones. Even if there is no meaningful change in your life, it’s smart to review the document every couple of years to ensure it still addresses all your estate concerns and reflects your wishes. Changes in the value of your investments, such as a stock portfolio or real estate may also require adjustments in your estate plans.
  • Stop Tax Identity Theft in Its Tracks – Imagine after sending in your annual tax return, you receive a notice from the Internal Revenue Service saying that another return has already been filed using your name and Social Security number and claiming a refund. Sound impossible? It can happen if you become one of a growing number of victims of tax return identity theft. According to one estimate, tax-related identity theft cases have soared more than 650% since 2008. At the least, this crime can lead to a delay in your refund, but the consequences may be much more serious. In addition, you may face a larger problem with identify theft if the scammer is also running up credit card debt or taking out loans in your name.

To avoid becoming a victim, we recommend steps such as safeguarding your Social Security number and other financial information, keeping an eye on changes to your credit ratings and taking precautions with electronic transfers of confidential information. Be sure to contact us if you believe you have been a victim of identity theft or would like advice on the best ways to secure your financial information.

Stephen M. Ruggiero, C.P.A., M.S.T.

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5 Straight Down Days

The Dow Jones is now down 5 straight days and it’s in a bull market. Without diving into the research, this has to be one of the mellowest 5 straight down days in history! I haven’t heard a single person express concern that this is the beginning of anything more significant on the downside. That’s worrisome in itself, especially if the calendar did not say December.

As I have mentioned before here and in Street$marts, while market sentiment remains at rally killing levels, the calendar is not very supportive to the bears’ argument. In all likelihood, stocks should remain firm at least into the final day of two of the year, if not into January. With 5 straight down days that have not any damage to the market, I would expect the bulls to step up over the coming day or two and try to push stocks back to the highs.

We still have a strong tendency (trend) to see a tradable low this month and that low is usually somewhat close to option expiration on the 20th. However, there have been plenty of years where the low comes earlier or later. You just have to be on your toes and look for signs. We saw one of those signs on Wednesday where the major indices pulled back to their rising average of the last 20 days (20 day  moving average). That’s where we did some buying of the major indices as well as some sectors and dividend paying ETFs. If the market closed below the low from Wednesday, we will either add some hedges or do some short-term pruning.

In short, 5 straight down days in a bull market, albeit small, and it’s time for the bulls to step up!

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Even the Bears are Bulls… for Now

The stock market is tired, again. That seems like a phrase I have used often this year without much follow through. There have been many times in 2013 when the market had risen sharply and then looked just plain weary. Instead of correcting or even pulling back smartly, the stock market behaved like it does when it’s in a powerful bull trend; it’s consolidated sideways within a few percent of its high and then blasted off again.

“Is this time different?” That’s one of the scariest phrases in our business!

The only difference I see now with other 2013 overbought markets is that sentiment is now and has been at rally killing levels, something I mentioned on CNBC and Fox Business over the past few weeks as well as here and in Street$marts. If this was not early December, I would have much stronger conviction to be negative, but it’s almost unheard of to see a meaningful peak or significant decline at this time of the year. That’s tough to ignore. While I absolutely hate when people say they are “cautiously optimistic”, I will say that I am a nervous bull who is dancing very close to the door.

So here we are, during the most positive time of the year. Something like 8 of the last 10 Decembers have been up. Stocks are at all time highs. There is no impetus to sell. There are few downside catalysts. Even the bears are bullish until January. Yet all is not right. Today (December 2) and tomorrow are historically very good days in the market. Stocks opened well and moved higher into lunch, but then the bears tried to make another stand. This time, they were successful, closing the market just off the lows of the day and ending with a semi nasty looking candlestick on the daily chart.

If we do not see an immediate about face on Tuesday, the evidence will point to a sometimes typical early December pullback of 2-5% that should bottom within five days of option expiration on the 20th. Don’t forget there is a two day Fed meeting on the 17th & 18th where taper talk will be all the rage. What a great excuse for a low if the market sold off into that meeting!

While small caps and technology have led the rally for the past few weeks, it looks like they are trying to cede leadership to large and mid caps. IF there is a pullback and IF the small caps and tech underperform for a week or two or so, that would set up such a nice trade into January for buying the Russell 2000, S&P 600 and NASDAQ 100 for the final 5-10 days of the year. There is also a tendency for the semiconductor group, which leads tech, to perform poorly over the next two weeks. It would all fit together nicely.

But that is putting cart so far in front of the horse. Let’s wait and see what happens over the coming few days. There is no need to push and rush here as stocks are extended and tired regardless.

On a separate note, gold was bludgeoned today and is now set up to see sub $1200 sooner than later. Sentiment has been worse than awful, but even that hasn’t been able to thwart the bears. At some point it is going to matter, but that will likely be from lower levels on the metals and perhaps all time bearish levels of sentiment.

I hope you had a meaningful and fantastic Thanksgiving!

Happy Hanukah to those who celebrate!!

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