Summer Doldrums?

You can go with the crazy people in the Crooked House
You can fly away on the Rocket or spin in the Mouse
The Tunnel of Love might amuse you
And Noah’s Ark might confuse you but
Let me take my chances on the Wall of Death
- Richard & Linda Thompson from the album Shoot Out the Lights

Summer 2006

If you watched or listened to CNBC and the market news over the past three months, your head, hands and stomach may feel a bit like they do when riding a roller coaster. That reaction is understandable given that volatility, or what we like to call the measure of “up and down-ness” in the markets, has increased lately. The great thing about roller coasters is that they deliver you back to the same point where you started from - albeit with white knuckles. Fortunately, that is pretty much what happened to the stock market this quarter too.

News

The market has been anything but the doldrums the first few weeks of this summer and for most of the 2^nd quarter. Rather, major stock market averages had some of their largest swings up and down, in years. This volatility was not however reflected in the indicies relatively flat performances. As measured by their total return for the quarter: the Dow Jones Industrials Index was up 0.4%, the Morgan Stanley EAFE (foreign index) was down 0.26% and the Lehman Bro’s Aggregate Bond Index fell 0.08% during the quarter.¹

In the category of widely reported and of no surprise was the Federal Reserve’s announcement to raise the fed funds rate another ¼ point. This is the 17th consecutive quarter-point hike since June 2004 and brings the rate to 5.25%. The pundits are all over the map on whether this is the last hike or whether the Fed has some tightening left to do. A lot will depend on the strength of corporate earnings in July and predictions are that they are very strong. Our guess is that The Fed still sees looming inflation and will raise several more times before they are done.

In the category of underreported and important was the news last week that the House Ways & Means Committee approved a bill to permanently eliminate estate taxes for 99.7% of all Americans². The bill as approved by the House awaits Senate approval and would exempt estates worth up to $5 million from federal estate taxes. The Senate has failed to pass previous estate tax legislation, let’s hope this round puts an end to the uncertainty.

¹ Wall Street Journal: July 3, 2006 issue
² House Ways and Means Press Release: June 22, 2006

Commentary

If your trips to the family mailbox are anything like mine, only a small percentage of what you receive is actually useful and important, the rest is for the recycler. This is no less true for all the brochures, emails and newsletters we receive here in the office. Our job is to sift through the mountain and find the nuggets that are important and useful to you.

One such nugget is a recently published book in the area of retirement planning, Conserving Client Portfolios During Retirement, by Bill Bengen CFP^®. This book explores Bengen’s groundbreaking research on maximum rates of withdrawals during retirement. We have also received ‘white papers’ from investment companies and other sources on similar topics. The popular press is not far behind because this is going to affect millions of the baby boom generation just starting to retire.

Mr. Bengen’s research suggests that long term historical average rates of inflation and investment returns may not be appropriate for retirement projections in the future. Retirement expectations have changed dramatically from the last generation. Life expectancies and the fact that people are generally leading more healthy and active lifestyles later in life is one of those “new” planning paradigms. The virtual disappearance of pension plans in favor of employee financed plans combined with the uncertainty of Social Security are additional factors as to why Mr. Bengen is suggesting financial planners adjust their approach and he makes some suggestions in that light.

We are currently looking at ways to incorporate this research into to our work to help both those already in retirement and those working towards that goal. So we will try to keep you informed, as this is probably not “the last word” on the subject.

Ideas

Tax reform again heads up our “Ideas” for this quarter. President Bush signed into law on May 17th The Tax Increase Prevention & Reconciliation Act. Here are some of the “need to know” and best ideas to come out of this legislation.³

Many of you converted all or a portion of your traditional IRAs to ROTH IRAs when the IRS last permitted a favorable time window for conversion. The Act lifts the income limitations currently set at $100,000 to convert your traditional IRA to a ROTH IRA. Additionally, The Act allows taxpayers who convert in 2010, to receive a two year time period to pay the resulting tax. Our feeling that tax rates will eventually rise again, makes this a smart move for working individuals with large IRAs. Just as diversification and asset allocation are keys to investment results, tax diversification in retirement (retirement income sources both taxable and non-taxable) will be important in the future.

The Capital Gains & Dividend Tax Rate of 15% for taxpayers in the 20% bracket and above was scheduled to expire after 2008. Those lowered rates have now been extended through December 31, 2010.

We mentioned the increasing number of people affected by the Alternative Minimum Tax in the last newsletter. The Act increases the AMT exemption amount to $62,500 (married filing jointly) and $40,500 (single filers) for 2006 only. While this is a welcome help to many of you, it is a small adjustment to a little known tax that is showing up on more and more clients returns each year. In our opinion, Congress needs to do a lot more remodeling (or elimination) of this burdensome tax.

³ Financial Planning Association: Executive Summary of the TIPRA 2005

Closing thoughts

Closing thoughts… There has been a lot of hubbub lately about the bull market in commodities and natural resources - old boring investments like oil, copper and nickel. The rapid industrialization of countries all over Asia, the Asian sub-continent and even South America creates demand for such raw materials. Some of you may already have this asset class in your portfolios. To keep you informed and properly diversified, we may be talking to you about this trend either during a review meeting or by telephone. Remember that, not all investments are suitable for your unique investment characteristics.

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