Strategies
Middle-Class Taxpayers May Have Skirted The Worst Tax Increases Now But Tax Creep Will Make Them Subject If Two Stealth Taxes Are Left Intact
Wednesday, February 27, 2013 08:53

Tags: new tax rules | social security | Taxes

Middle-class taxpayers may have skirted the tax increases of the fiscal cliff but two stealth tax hikes will surely affect them if left unchecked.
 
The .9% surcharge on earnings over the $200,000 annual salary threshold and the 3.8%
Medicare surtax on investment income for those earning higher than threshold salaries could easily affect middle-classers as inflation boosts incomes.

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Just like the AMT, the threshold will creep down to middle-class earners over time if it is not indexed to inflation.
 
The other tax middle-classers will become subject to is the 50% income tax on Social Security benefits.
 
Twenty years ago, the threshold for paying this tax was pretty high, subjecting only about 15% of taxpayers.
 
Today, that percentage is more like 35%. Incomes have risen significantly since 1984 when the original thresholds of $25,000 for single taxpayers and $32,000 for married taxpayers were set.
 
If neither of these tax thresholds become indexed to inflation, they will become an additional tax sweep over taxpayers who were never intended to become subject to them.

It's a good idea to begin talking to your clients now and adjusting their investment strategies to prepare for this possibility down the road.

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Dimon Says Stringent Capital Requirements Are Impeding US Growth And US Banks Should Not Be Held To International Standards
Wednesday, February 27, 2013 08:20

Tags: banks | Congress | Federal Reserve

Banks have become flush with cash in their efforts to prepare for stringent capital requirements handed down by Congress.
 
JPMorgan Chase & Co. CEO Jamie Dimon says the capital buildup is becoming excessive and could hinder economic growth.

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US banks are lending the smallest portions of their deposits in five years. Cash is flooding in from savers, demand has been dampened by the economy, and regulatory efforts increase.
 
The average loan-to-deposit ratio fell to 84% in the fourth quarter of 2012 from 87% in 2011 and 101% in 2007.
 
Meanwhile, banks are cutting mortgage staff and community banking staff excluding home lending throughout the balance of this year.
 
Dimon noted that the Federal Reserve’s efforts to better equip banks to withstand another financial crisis is patterned after international standards that are impeded growth in the American economy.

 

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Things Don't Sound Much Different Than 2011 With Europe Once Again In Turmoil And Sequestration Two Days Away
Wednesday, February 27, 2013 08:02

Tags: bonds | European crisis | markets

The current state of the marketplace doesn’t sound a whole lot different than it was in 2011. The Eurozone is in trouble, having never really climbed out of it.
 
And Congress can’t seem to get its act together about the budget. The equity markets quaked over the indecisiveness of the Italian election and imminent sequestration.
 
It’s all adding up to a form of March madness for the markets. What should advisors do to prepare?

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The risks aren’t as great as in 2008 or 2011 but BlackRock chief investment strategist Russ Koesterich says Treasuries are a good place to hide for the month.
 
Treasuries are not exactly a good value at these levels but they do add diversification and stability in an unstable market and economic environment.
 
TIPS are the way to go, according to Koesterich. They haven’t been as susceptible to risk on/risk off trade as the 10-year Treasury note.
 
Classic defensive stocks are expensive here so he warns against flocking to them.
 
Investment grade corporates and municipal bonds are better values and have been less volatile than the broad Treasury market.

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Housing Market Is Economy's Bright And Shining Star But What Will Fix The Housing Finance System?
Wednesday, February 27, 2013 07:59

Tags: banks | economy | mortgage debt

Everything has sounded pretty rosy for the housing market as it has become the focus of hope for the economic recovery.
 
But the housing finance system isn’t shining quite as brightly. There’s still the matter of what to do about Fannie Mae and Freddie Mac. And the majority government ownership of mortgage loans still inhibits private sector lending.

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One plan is to replace Fannie Mae and Freddie Mac with a government agency that would offer reinsurance to mortgage-backed debt, something firms would have to pay for.
 
The plan would minimize government backing of the mortgage market but would not shield investors against another housing market downturn.
 
This highlights the question of whether it is possible to have a housing market without government backstops or a 30-year fixed-rate mortgage with no prepayment penalty.
 
Experts say it is likely not possible to have both.
 
This type of long-term financing is rarely available in other countries. Shorter-term and variable rate mortgages are much more the norm and other countries do not have entities like Fannie Mae and Freddie Mac.
 
The point is that any plan to repair the ailing housing finance system must admit that fixed-rate mortgages come at a high cost.

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Calculations In Economic Reports Are Increasingly Viewed With Skepticism By Investors, Making It Difficult To Make Decisions And Possibly Hampering Economic Recovery
Tuesday, February 26, 2013 08:50

Tags: Congress | Economic Outlook | investor behavior

Are government statistics and economic reports really offering investors the information they need to make prudent investment decisions?

 
John Browne says that the calculations used in these reports over the last 20 years have increasingly been distorted in favor of the government.

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The inflation rate may be the most important gauge for investors and is published in the form of the consumer price index (CPI).
 
The report is designed to reflect the spend rate of the average US citizen. But factors like the healthcare component of the report are raising skepticism on the part of investors.
 
Healthcare is only 1% of the CPI. This price weighting seems ridiculous in the face of America’s growing obesity problem and its aging population.
 
The overall inflation rate quoted by the Fed is around 2%. But costs for food and energy fly in the face of such a low number.
 
How do these reports affect the stock markets? For all the lauding and celebration of the Dow breaking through 14,000, it would need to reach 15,400 to equal its previous high of 14,165 on October 9, 2007.
 
The unemployment rate is another number that is viewed with skepticism. A world of politically manipulated statistics makes it more difficult for investors to make good investment decisions.
 
False or manipulated reports can cause investors and businesses to hoard cash in an effort to be prepared for the worst just when the economy needs investment and spending.
 
Leading US equity funds still are showing outflows of investment funds at significant levels. The rising markets have done little to incite individual investors to get back into the game.
 

 

Antiquated measures that have not kept up with globalization could also play a role. But the point is that lack of trust in government and in financial institutions doesn't just lie with the stalemate in Congress.

 

How would you begin to restore trust in America's institutions and leadership?

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