MARKET NUMBERS AS OF FRIDAY MARCH 19, 2010
S&P 500: 1,159.90
10-Yr. Bond: 3.687%
HEALTH CARE LEGISLATION
Brinker Comment: Bob addressed the health care legislation in Congress from a financial standpoint. Bob noted that the legislation will impose taxes on unearned income, including dividends, interest, capital gains, annuities, rents and royalties. This is a new tax of 3.8% above the income thresholds for high earners. When it becomes effective, this will drive the capital gains tax rate in places like California to over 34% for earners in the top bracket. This will occur because it is expected the federal capital gains tax rate will go up to 20% in January of next year, and then you add in the state taxes. Bob criticized the President for this tax policy included in the legislation. Bob said he cannot understand why you would penalize people through these taxes who are out there risking their money on investments.
DAVID KORN: The Medicare Payroll Tax on investment income would start in 2012 and would be expanded to include unearned income. That will be a 3.8% tax on investment income for families making more than $250,000 per year ($200,000 for individuals)
Brinker Comment: Bob noted that under the proposed legislation insurance companies will have to pay a hefty tax on high end insurance plans — the so called, “Cadillac” plans. There is even a 10% excise tax on indoor tanning services.
DAVID KORN: This tax isn’t supposed to go into effect until 2018, but would require insurance companies to pay a whopping 40% excise tax on high-end insurance plans worth over $27,500 for families ($10,200 for individuals). Dental and vision plans would be exempt and not counted in the total cost of a family’s plan.
Caller: This caller receives a structured monthly settlement payment and in two years will get a lump sum payout. Will the new taxes apply to that? Bob said those types of payments are normally tax-free and so the new healthcare taxes should not apply.
Brinker Comment: Bob said tax policy is changing rapidly. Starting in January, the new top federal bracket will be 39.6%. If you are a California resident, where many people live and work, the top bracket will be 50.1%. Add on the current two-sided Medicare tax and you are at 53% and when the tax goes up it will go to 54%. Consider that the current capital gains tax is 20% in January. For California residents, add on another 10.5%. That takes their capital gains tax rate to 30.5% in January. And then whenever they get to the effective date of the proposed Medicare unearned tax rate, you are at 34.3% capital gains tax! These numbers are staggering.
DAVID KORN: Here is a timeline of tax provisions in the house health care bill:
Brinker Comment: There has been a lot of talk about the Congressional Budget Office (CBO) projections on the health care legislation. Usually, there is positive talk about the CBO putting forth reasonable projections that are more reliable than what the partisan politicians will say. But Bob said he did some research on the CBO, and back in 1965 on the passage of Medicare under President Johnson, the CBO made a long-term projection that by 2010 the annual cost of Medicare would be $60 billion. How much did it really cost this year? It is not even close! The 2010 cost of Medicare will come in at $480 billion. That is 8 times greater than what the CBO projected. Bob asked rhetorically what kind of cost overruns will come up on this new entitlement program as 32 million people are being brought into healthcare under this proposal. Bob said he is guessing the cost overruns will be massive. If the CBO was off by a factor of 8 for Medicare, how much will they be off here? Bottom line, we are looking at incurring massive government debt over the long term with this legislation. And we don’t need that right now. We are already up around $12 trillion and they are talking about $20 trillion debt in the decade. All of this national debt has to be financed. We must borrow the money to pay the interest.
DAVID KORN: The CBO has predicted a $940 billion price tag for the new insurance coverage provisions in the bill and a reduction of the future federal deficits of $138 billion over 10 years. The New York Times has an article entitled, “Checking the Math on Health Care” at this url:
NEW JOBS BILL
Brinker Comment: President Obama just signed a new law which is an $18 billion jobs package that is called the “HIRE” Act. This is an incentive for business to hire unemployed individuals by providing a payroll tax forgiveness period with an added credit for each qualified retained worker. So if you hire a new unemployed individual, you get forgiveness of the 6.2% employer’s share of the employee’s payroll tax for the rest of 2010. Unlike Medicare, Social Security tax is capped on $106,800 of earnings for 2010. And you get the tax forgiveness up to that full amount.
DAVID KORN: This is part of the Hiring Incentives to Restore Employment Act which was signed into law on Thursday. To qualify for the benefits, employers must hire unemployed workers between February 3, 2010 to January 1, 2011. The reduced tax will have no impact on the employee’s future Social Security benefits. Additionally, for each unemployed worker retained at least a year, a business may claim an additional general business credit of up to $1,000 per worker when filing their 2011 income tax returns.
OTHER TAX ISSUES
Brinker Comment: Bob said it is reasonable to expect that as we head into summer Congress will be moving forward to address the expiration of the estate tax in 2010 and put one back in. Right now, nobody can make any plans because they don’t know what tax policy will be. Bob said he also expects Congress to address the soon-to expire marginal tax rate cuts and the marriage penalty. There is a sea change in tax policy afloat. But Bob pointed out one thing we know for sure; namely, every single freshman Democrat in Congress that voted in favor of the unpopular tax increase in 1993 was voted out of office in their next election. Looking at the results of Virginia, New Jersey and Massachusetts in recent months, Bob said he thinks we are going to see a number of political careers come to an end this November.
DAVID KORN: Read the article entitled, “Congress to Start Fixing Estate Tax” at this url: http://tinyurl.com/yhda6o4
Brinker Comment: The Federal Reserve Bank had its most profitable year in its 96-year history. The Federal Reserve provides funding for its own operations and in 2009 they made a $45 billion profit, all of it which gets turned over to the U.S. Treasury as income on the Treasury statement. The Treasury needs everything it can get these days. These numbers may not be big compared to companies like JP Morgan, but the truth is the Fed had an aggressive program in 2009. They were buying bonds and by the end of the year they owned $1.8 trillion in US government debt, up from $500 million the prior year. They earn interest on those securities and that was a major source of income in 2009 and largely responsible for their profits. They also made money when they made emergency loans to banks and other Wall Street companies.
Bob praised Ben Bernanke and the Fed for the job they did. Bob said most of the flack that gets thrown at the Federal Reserve is bogus. The critics want to abolish the Fed and turn over control of monetary policy to the federal government, which Bob said would be the worst possible idea.
DAVID KORN: The Federal Reserve’s Open Market Committee announced this week that it was maintaining the target rate for the fed funds rate at 0 to 25% and said conditions are likely to “warrant exceptionally low levels of the federal funds rate for an extended period.” Read the statement at this url: http://tinyurl.com/ycdbbwr
MUTUAL FUND SAFETY
Caller: Who monitors the big mutual fund companies like Vanguard, Fidelity, T.Rowe Price, etc. How can you ensure that you don’t have a situation like Bernie Madoff? Bob said these are entirely different situations. Bernie was essentially a one man show. His situation had nothing in common with the big mutual funds. There is no evidence that he was making any transactions with investor funds. When you have money in a mutual fund, you can get the accounting reports and transactions. There wasn’t that kind of transparency with Madoff.
DAVID KORN: To add insult to injury, there are look-alike web sites mimicking the Securities Investors Protection Corporation targeting Madoff victims! Some serious financial sharks out there. Speaking of protection against your investments, here is a link to the SIPC web site to learn how SIPC protects your accounts: http://www.sipc.org/
On Saturday, Bob had William Cohan, author of “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.”
On Sunday, Bob had Mark Gilbert, author of the book, “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable (Bloomberg)”
FINAL THOUGHTS FROM DAVID KORN: Have a great week! - David
Background: David Korn and I have been writing about Bob Brinker since the 1990s. I also write about other financial pundits such as Jim Cramer, Bill Flanagan, Sy Harding, Lynn Jimenez and Suze Orman.
It became clear to us that many of the popular TV, internet and radio pundits were too aggressive for those in or about to enter retirement. For example, Bob Brinker had is conservative "balanced model portfolio #3" at nearly two thirds equities when the market peaked and he told a caller on the radio it was not his advice to rebalance the portfolio back to 50% equities and 50% fixed income. David and I formed a partnership and at the start of 2007 we began offering The Retirement Advisor newsletter with our model portfolios that we felt subscribers could "sleep well at night with."
Contrary to Brinker's advice, we rebalanced our portfolios by selling equities and adding to fixed income after a good year for equities in 2007. Thus our losses at the end of 2008 were much less than Brinker's losses from the top so our subscribers could sleep better at night. Then at the start of 2009 we rebalanced again buying equities considerably lower then were we sold at the end of 2007.
David Korn Links:
- Download a FREE Copy of The Retirement Advisor
- The Retirement Advisor web site and blog.
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