Faith Based Investing

WHEN WILL INTEREST RATES RISE?

What factors might influence the Fed in the near future?

Here’s a trivia question for you: when was the last time the Federal Reserve raised the benchmark U.S. interest rate?

The answer: June 29, 2006. On that day, the federal funds rate hit 5.25%. It has declined ever since, and it has stayed at 0%-0.25% since December 16, 2008. The Fed expects to hold interest rates at 0%-0.25% through late 2014, and some analysts think they will remain there into 2015.

All that noted … when should the Fed make a move with rates, and what might happen when rates approach something like historical norms?

Right now, the Fed has little incentive to make any moves. Our economy generated only 75,000 new jobs per month in the second quarter of 2012 compared to 226,000 a month in the first quarter. Unemployment is currently at 8.2% and we have housing and business sectors that are far from healed. Hiking the federal funds rate in such an environment would seem nonsensical. In fact, the Fed’s rationale for its current policy is that interest rates need to stay at or near these levels until we reach full employment (a 5-6% jobless rate). Low interest rates help to encourage business investment and big-ticket purchases, though they are no boon to retirees.

Does the economy warrant further easing? Maybe not. The federal government’s second estimate of Q2 GDP (+1.5%) exceeded the +1.2% consensus forecast of economists polled by Briefing.com. That might signal the Fed to hold off on QE3.

When might rates rise? It might be a while. Right now, we have very mild inflation: as of June, the Consumer Price Index was up just 1.7% across the past 12 months, within the Fed’s target. Demand for capital isn’t what it was before the recession, encouraging lenders to stay competitive. The Fed, the Bank of Japan and the European Central Bank have all printed more money, which encourages low interest rates in the short term.

Of course, bloating the money supply might stimulate inflation in the long run. Some see greater inflation on the horizon: a June Pimco analysis forecast inflation rates rising during the next 3-5 years, citing shifts in exchange rates and rising commodity prices as potential drivers. Earlier this year, Slate founder and Bloomberg View columnist Michael Kinsley warned of “a fierce storm of inflation sometime in the next few years” that will “wipe out a big chunk of the national debt, along with the debts of individual citizens, and the savings of others.”

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What do you do when you’re self-employed or commission-reliant?

When your income stream is uneven, you must deal with some distinct financial issues. Besides cash flow, what do you do about your tax strategy? How should you try to save? If you are self-employed, what about health coverage?

Budgeting. One significant financial detail in your life probably won’t fluctuate – the amount of money that you need to live on per month. A detailed monthly budget is essential. Maybe you need (or want) to pay for 17 expenses in your life per month. In some months, you may be able to easily pay for all 17. In other months, you may be able to pay for only 12. The key is to list them in order of priority, from the crucial to the near-frivolous. List every expense you can think of and rank them in order. Arranging automated bill paying may be useful if you are looking at several fixed monthly debts you will have for the long run.

Managing taxes. Sans withholding, you must be disciplined. If you are self-employed and your income is predictable, you can estimate taxes and arrange quarterly payments to the IRS (take a look at Form 1040-ES, Estimated Tax for Individuals.) For the record, the IRS says you don’t have to make quarterly tax payments until you actually have the corresponding income.

Estimating tax becomes much tougher, however, when your income stream is inconsistent or if you have multiple income streams. If you underestimate your quarterly payments, you must pay interest. Schedule AI of Form 2210 (found in IRS Publication 505) can be a great help here – as complex as it appears, it is a solid way to document and calculate estimated quarterly payments when your income fluctuates. (If you are a self-employed fisherman or farmer, special rules apply.)

Legions of freelancers neglect to set money aside for taxes. It might be wise to set up a savings account dedicated to that purpose, so you don’t have hassles come April.

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Winning at the Money Game

The world’s wealthiest people know how to win at the money game. They have figured out a way to gain leverage with their time, resources, and assets. Leverage is accomplished when you use a small amount of assets to control a greater amount of assets.

This could be accomplished through:

• Borrowing capital to increase the rate of return on your investments
• Using a variety of financial instruments or borrowing capital (i.e. margin) to potentially increase the rate of return on your investments.
• Purchasing commodity contracts that allow you the ability to control large amounts of a commodity with a comparatively small amount of capital.
• Using option contracts that allow you the ability to control large amounts of a company stock or ETF with a comparatively small amount of capital.
• Borrowing funds to finance a percentage of the cost of an investment (i.e. real estate mortgage).
• On and on…

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Beating Low Hurdles

The Eurozone woes were back in the picture this week as the European Central Bank was forced into action. Investors remain caution and the flight to safety is in motion. U.S. earnings reports continue to trickle in with a common theme:

• Earnings are beating low expectation goals
• Sales are soft across the board

Housing continues to pick up as builders gain confidence, but new home sales and the economy at large are moving at a snail’s pace.  Could this force more Fed action?

Is the Risk-on Trade Back in Play?

Earnings have been mixed thus far into the 2^nd quarter reports with soft revenues and cautious outlooks.  The global economy appears to be stuck in the mud.  Yet remarks from the president of the European Central Bank on Thursday sparked a massive rally.  As the ECB remains committed to do whatever it takes to preserve the euro, investors felt more confident and snatched up equities and took on more risk.

We continue to see the battle between risk on (aggressive investments) and risk off (more conservative investments) depending on the headline of the day.  To me, it’s more lip service from the ECB: all talk, little action! At the end of the day what has been to address the debt woes in Italy, Spain, and Greece?  What actions have been taken to stabilize Spain’s banking system?  There are far too many questions and not enough answers.

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How to win at the investing game – discipline!

In school, I hated essay questions! They made me uneasy, panicky, and unpleasantly sweaty. The biggest problem I had with essay questions was wondering what the professor was really looking for. In the end, I’d always end up over-analyzing the question instead of just putting down what made sense.

Many moons ago, I was filling out a job application and I came across a non-typical, hypothetical essay question that threw me for a loop. The question was, if you could have just one superpower what would it be?

Once again, over-analyzing, I thought to myself, “What kind of answer are they looking for? If I write down something like flying, would they think I’m unstable and flighty? Or what if I choose super strength, would they assume I had a strong personality, am very demanding, and would have trouble taking orders from management?”

After struggling for a few minutes, I answered, that if I could choose one superpower it would be having the ability to see into the future.

In all honesty though, that would actually be a horrible trait to possess, as not only would you see the good things to come, but also the bad. However, it sure would come in handy for knowing which stocks to buy and at what price to buy them.

Since none of us have the luxury of a crystal ball, knowing which stocks to buy and at what price is a challenging decision. For a moment, let’s focus on a widely debated strategy called “averaging down”, and how it can help you maximize your returns by becoming a better shopper on Wall Street.

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LOOKING AT THE NEW ESTATE TAX LAWS

What has happened since 2010 & what could happen in 2013.

With 2013 approaching, many families and their financial, tax and legal consultants are weighing major estate planning decisions. A short-term window of opportunity may be closing. The relatively low estate tax rates we have now may soon disappear, along with one of the largest federal tax breaks available in decades. Make sure you have the latest tax software so you’re prepared for all of the new changes.

Estate taxes are at 80-year lows. At the end of 2010, Congress reset the estate, gift and generation-skipping tax (GST) rates at 35% and raised the lifetime federal gift, estate and GST tax exemptions to $5,120,000 until January 1, 2013. Some Capitol Hill legislators want to see these rates retained, even made permanent. Two other scenarios may be more likely.

In the first scenario, the Bush-era tax cuts expire at the end of 2012 and it becomes 2001 all over again: the lifetime estate and gift tax exemptions fall to $1 million and estate taxes are reset to 55% (60% for some households).

In the second scenario, Congress makes good on President Obama’s request to turn the clock back to 2009: estate taxes reset to a top rate of 45% with a $3.5 million personal exemption. (The lifetime gift tax exemption would still fall to $1 million.)

The current $5.12 million personal exemption is portable between spouses. This represents a major tax break for wealthy families – an opportunity to transfer significantly greater amounts of wealth without triggering transfer taxes.

Currently, executors have an option to transfer an unused portion of a deceased spouse’s $5.12 million lifetime unified gift/estate/GST exemption to a surviving spouse. So with this new portability, a married couple can potentially transfer up to $10.24 million of assets without incurring any federal estate tax. In 2013, this portability is scheduled to disappear.

Portability is not automatic. When the first spouse passes away, the executor of his or her estate must file a federal estate tax return even if no estate tax is owed. That move formally notifies the IRS that you are transferring the unused or partially used personal exemption to the surviving spouse. This estate tax return is due nine months after the death of the first spouse, with a six-month extension permissible.

If some planning needs to be done to bring the value of your taxable estate under $5.12 million (or $10.24 million), your executor could make donations to qualified charities or non-profits on your behalf to lower the taxable value of your estate, although your heirs would consequently be left with less.

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Weekly Wrap Up July 20, 2012

Europe finally took a backseat this week, as investors keyed in on Ben Bernanke’s testimony before Congress. The Fed chief didn’t offer any new insight about the economy or QE3, but company earnings reports gave investors more info to chew on.  Second quarter earnings season is now in session. We’ve been seeing flags of caution from many of the blue chip bellwether stocks.

All eyes on Bernanke

Fed chief Ben Bernanke continued to be frustrated by the lack of economic progress, especially with unemployment. He sees further job weakness going forward as the U.S. recovery has been hampered by:

• Tight credit conditions
• Uncertainty with the fiscal cliff of 2013 looming
• The European markets and economy remain under significant stress and could unravel at any moment
• Business spending “appears to have decelerated” and surveys “suggest further weakness ahead.”

Bernanke expects the economy to “pick up very gradually” and the Fed’s is prepared to take action.  However, no hints were left that the Fed might be ready to pull the trigger on QE3 at the end of the month.

• Bernanke expressed deep concern about the economy, reviving talk the Fed would eventually embark on new stimulus.
• I believe Bernanke is waiting for a catastrophic event such as a full-blown European crisis before embarking on another round of easing.  Especially when they have been able to keep the stock market propped up simply by speaking to the public.

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