We have had some great remarks from our recent blog on taxes. Several asked how a family making $50,000 could pay no federal income tax at all. I found a website that offered a tax calculator and entered this sample scenario: family of four, $50,000 annual income, filing jointly, both children under the age of 17. When I added $4,000 in IRA contributions, I came up with $90 in federal income tax – and that’s with no mortgage interest deductions. I’d like to yield to some experts out there for observations.
Comments were split between different ideas: sales taxes and flat taxes both received support, as did a continued progressive tax. I’m not against a continued progressive tax, but it seems to me that ten percent of the population paying 73% of the taxes is over weighted, especially when nearly half of those benefiting don’t pay anything at all. What do you think? – Stacey Wall
As the deadline for a debt ceiling deal looms before us and Congress debates how we are going to pay for all of the federal spending, I thought I would share a few facts with you on the current tax structure, courtesy of Yahoo finance:
- Nearly half of all U.S. households pay no federal income taxes at all. A family of four making as much as $50,000 can pay $0 in taxes.
- The top 10 percent of households pay approximately 73% of the income taxes collected by the federal government.
- The bottom 40 percent, on average, make a profit from the federal income tax, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment.
- The number of households that don’t pay federal income taxes increased substantially beginning in 2008 with worsening economic conditions.
The fairest solution? In my opinion, replacing the federal income tax with a national sales tax would be the most equitable. Taxes would be based on spending, not income. Those that make more would be taxed more and all households would be incented to save. Not likely to ever happen though – way too much politics involved.
I’ve been asked when does too much federal debt really become too much? The bond market will decide when our debt burden has become too big to handle, and it will come in the form of higher interest rates. Just ask Greece.
For now, the debate rages on. - Stacey Wall
In spite of a lack clarity surrounding the debt ceiling debate, stocks moved higher for the week ending July 22nd. The DJIA gained 1.61%, while the S&P 500 and NASDAQ rose 2.19% and 2.47% respectively. With the August 2nd deadline rapidly approaching, it is clear that investors believe a deal will get done. With the 10-year Treasury below 3%, bond investors appear to believe the same thing.
But what happens if a deal does not get done? Treasury officials have been working diligently with the Federal Reserve to come up with a plan to determine which of the countries checks will clear and which of them won’t. Treasury Secretary Timothy Geithner has been adamant that the U.S. will not default on its debt. Instead, what will likely happen is that all non-essential government service will be shut down, similarly to what happened in 1995 under President Clinton. Continue reading
This is of course a loaded question, since it assumes that you in fact DO have a health care directive. A recent Wall Street Journal online Health Blog post on March 15th titled “A Push for Better End-of-Life Planning” which reported that only about a third of Americans have some form of advance directive such as a living will or a medical power of attorney. This is due to many reasons: lack of understanding of the legal or medical terms (the average American reads at only an 8th grade level), poor access to legal advice, and procrastination, among others that we in the estate planning field see all too often.
If you have prepared a medical directive, does your agent (the person who speaks for you when you can’t) have a copy? Does your physician? If it’s sitting in a bureau drawer or locked in a safety deposit box, it’s not going to do much good when the time comes. Have you restated it within the last four years? Do you still agree with your decisions? Have you discussed your decisions with your agent?
If you have not prepared one, why not? Put yourself in your loved one’s shoes. In the absence of a medical directive, a hospital or physician may be forced to perform whatever procedures are necessary to keep you alive. 12% of all Medicare spending is spent within the last two months of life*, largely due to expensive life sustaining procedures that many people might not want.
The State of Mississippi has a website, where you can complete and print your healthcare directive for free. For more information on Advanced Healthcare Directives, click the link below or talk with your attorney. Preparing one, and letting your agent know where it is and what it says is one of the most unselfish things you can do.
*Sources: CMS, Medpac, Report to the Congress: Medicare Payment Policy, 3/10
In a recent opinion letter in the local paper, a reader chastised President Obama for holding the threat of delayed Social Security checks over Congress as the debt ceiling debate rages on. In the letter, the reader stated that the Social Security Trust Fund has “$2.5 trillion in it”. The statement prompted me to research the topic a little more.
The “Social Security Trust Fund” is a little bit of a misnomer. The fund exists as a means for the federal government to account for monies paid into and out of the Social Security system. Monies come into the fund in the form of contributions from workers and employers. They go out to cover payments for retirees,survivors, disabled and for administrative expenses. But the trust fund has no money. Since 1981, Uncle Sam has taken in more in Social Security taxes than paid out. But instead of saving the additional receipts for a rainy day, Sam just put the excess in the general budget and spent it. In return, the government issued an IOU to itself saying, “I’ll pay myself back whenever I need it.” The IOU comes in the form of securities issued by the government that can be redeemed for payments. The problem is that the securities cannot be sold on the open market. Instead, they can only be redeemed by the government to the government – in effect, an IOU from one branch to another.
Confusing enough? Here’s an analogy that hopefully simplifies things: Let’s say I decide to save $10,000 each year for my retirement. Things go just as planned during year one and in December I’ve accumulated $10,000 towards my goal. I’m doing great until I decide to take a trip to reward myself for my disciplined savings. I spend my $10,000 in savings on a trip, then deal with the guilt by writing myself an IOU. When I retire, instead of an investment nest egg all I have is a stack of paper saying I owe myself a lot of money. At that point I’m just hoping my kids are doing well and love me.
To say their is no Social Security Trust Fund would be inaccurate. There’s just no money there because the government spent the excess on other programs. – Stacey Wall
There is plenty of discussion these days about the U.S. defaulting on its debt. Most don’t realize that it’s actually occurred before – at least technically.
In 1979, Congress also debated raising the debt ceiling until the last minute. Due to the delay and an unprecedented word processing equipment failure, the U.S. experienced a technical default when it failed to make a $120 million interest payment on April 26, 1979. The Treasury was also late in redeeming Treasury bills due on May 3 and May 10 of the same year.
Treasury officials characterized the late payments as a “delay”, however, technically the U.S. was in default. The missed payments, of course, were eventually made – including additional interest for the delay. However, the real cost of the delay was an immediate increase in interest rates.
A study conducted after the incident concluded that while only a fraction of U.S. debt was affected, the resulting increase in interest rates tagged the government with approximately $6 billion a year in additional borrowing costs. Want to hear the scary part? In 1979, the total U.S. debt was only (only?) about $800 billion. At $14.5 trillion, it’s now roughly 18 times that.
Let’s hope we get a timely resolution of the debt ceiling issue before a default – technical or otherwise – costs us trillions. – Stacey Wall
Treasury Secretary Timothy Geithner has said that the failure by Congress to raise the debt ceiling by August 2 would be “catastrophic” to the economy. With long-term Treasury yields near their lows for the year, the financial markets are expressing confidence that a deal will get done. But what if it doesn’t? “If that happens, you’re going to see catastrophic damage across the American economy and global economy,” according to Geithner.
It’s hard to imagine what could happen if U.S. Treasurys were no longer the backbone of the global economy. Interest rates would rise, certainly more for longer maturities since future defaults would be at stake. Interest costs on the federal debt would soar, making federal budget deficits even worse than they are already.
Repos and other credit channels that require collateral would shut down. Credit markets would freeze and liquidity would evaporate. Any entity (governments, pension plans, financial institutions) required to hold AAA securities would suffer enormous losses. Many would be forced to rewrite investment guidelines as there just wouldn’t be enough alternatives available. Imagine the legal implications.
Long deemed the “risk-free” rate – all debt instruments are priced off of U.S. Treaurys in one way or another. Would another country, such as Canada, replace the U.S. Treasury as a pricing standard?
It’s safe to say that we do not want to experience a default debacle. The financial markets are currently telling us that’s not likely to happen. Let’s hope they’re right. – Stacey Wall
Despite a good start to earnings season, stocks ended down for the week ending July 15th. So far, 44 of the S&P 500 companies have reported second quarter earnings. According to Thomson Reuters, 75% of the companies beat estimates, versus only 14% coming in below estimates.
It is likely that this trend will continue throughout the rest of earnings season. This does not mean that investors have to chase stocks at this point in time. Companies have been paying down debt and hoarding cash from profits since the stock market crash in 2008. This will prove to be a significant positive factor for stocks in the future. However, it will likely become a headwind in the coming quarters.
With cash yielding next to nothing and not being invested for future growth, it is not a productive asset on corporations’ balance sheets. Growth in earnings during the current bull market has been a function of companies becoming more efficient (aka: layoffs) and a recovery in the economy. With austerity measures coming, it will be challenging for the economy to continue grow, thus making revenue and earnings growth a challenging proposition. Fortunately, since companies are efficient and have strong balance sheets, they will fare much better through another down market or recession. Continue reading
Since the sell-off in May, stocks have rallied and paused. Seems it’s been hard for the market to get on any solid footing. As it stands, I have three good reasons to be a bear. Runaway federal debt issues, Congress’ inability to tackle serious spending issues, and constant turmoil in the Middle East all give me reasons for great concern. Combine those issues with our belief that we remain in a secular bear market that began in 2000 (with a current cyclical bull since March 2009), and it’s enough to see signs of bear on the horizon.
But I still have reasons to continue to lean bullish – a very aggressive Federal Reserve, beneficial cyclical trends, and the momentum of the stock market itself. While I’m likely to bail on a friendly Fed at some point in the future and cycle composites turn negative towards the end of summer, our disciplined research will not allow us to turn bearish until we get confirmation from stock momentum. An excellent example is the current lack of downside leadership among stocks – essential for a bear market. Only 2.8% of all stocks on the NYSE reached new 52 week lows last week. Whenever that number has been below 3.4%, stocks have gained +13.4% annually – going all the way back to 1940. In fact, new lows in excess of 8.1% of NYSE issues are needed to indicate the kind of leadership for a bear market, as shown in the table below.
S&P 500 % Gain Per Annum When:
|New Lows/Issues Traded
% of Time
|Between 3.4% & 8/1%
Mid-Year Market Update: A Few Seats Still Available
We still have a few seats available for our Mid-Year Market Update luncheons next week: Tuesday, July 26 at River Hills in Jackson, and Thursday, July 28 at the University Club in Oxford. I’ll be giving a brief update of where we’re at before Vice President Jeremy Nelson tells us how the aging Baby Boomer population will affect stock prices in the coming years. Email firstname.lastname@example.org or call 601.957.0323 for more details. – Stacey Wall
After a continued rally in stocks, Friday’s government jobs report halted the move. The Bureau of Labor Statistics reported that only 18,000 jobs were created in June. Analysts had expected around 125,000 jobs. The unemployment rate ticked up to 9.2% from 9.1%. Despite Friday’s correction, the DJIA gained 0.59% for the week while the S&P 500 and NASDAQ gained 0.31% and 1.55% respectively.
Last week’s employment data suggests that the economic soft patch in the U.S. might be a little worse than expected. Although second quarter GDP growth estimates have already come down, it is possible that the number will be below consensus.