The debt ceiling debate lingers on. (See my blog post on January 9th 2011.)

 The political train wreck is less than one month away and counting….For the first time in its history the U.S. might have to default on its debt.  Or does it?

There has been some discussion recently about the possibility of the President having the Constitutional right to by-pass Congress and fix the crises.  Some people believe President Obama could declare the debt ceiling unconstitutional by invoking section four of the 14th Amendment:

          “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

If the Aug. 2 deadline passes without an agreement, then President Obama could conclude—statutory debt ceiling or not — that he is constitutionally required to order the Treasury to continue paying its bills.

Whether or not this is a correct interpretation of the U.S. Constitution is a matter for the Supreme Court to decide.  We can only hope we never get to that point and a bi-partisan agreement can be reached for the country’s sake and well as its markets.

The Greek Debt Crises….

The markets are assuming a happy ending to the Greek debt crises.  The Dow Jones Industrial average is up nearly 150 points today or an increase of 1.25%.

Greece needed a loan from the EU to pay off its sovereign debt maturing sometime in August.  The Greek Parliament passed legislation to approve a $142 billion bailout from the European Union.  Greece will need 6.6 billion to roughly cover its August deadline.

Greece’s debts are quite massive.  For the past few years the nation has been involved in one of the most complex sovereign debt problems as it is tied to a major multi-national currency with many parties involved and no unified European view.

As Greece meets it debt obligations for the month of August there will be even more pressure on the EU nation to pay its bills in the future.  Unfortunately, the math does not add up when you consider the amount of debt it has to pay back verses how much the country can produce in terms of GDP.  The bailout is only a temporary reprieve.

The rules of Econ 101 state that every debt is either repaid fully or it ends up in default. Greece will never be able to fully repay its debt.  “When” is the only uncertainty now surrounding the next Greek crises.

The Flood of Oil….

What’s with the flood of oil in the markets these days?  Are the markets now a wash with black gold?  What will happen to oil prices?

On June 23^rd the IEA, International Energy Agency, announced that it would release 60 million barrels of oil held in strategic government reserves over the next 30 days.  This equates to approximately two million barrels a day.  The world consumes roughly 90 million barrels per day.

The purpose of the Strategic Petroleum Reserves is to insure that we have enough oil held in storage in the event of an emergency or supply disruption.  The IEA requires its 23 member countries to hold enough oil reserves to last 90 days.  In addition, many of those countries have agreements to share those reserves. 

The news last week caught the oil markets by surprise, pushing the price of crude oil downward almost five percent to $90/barrel.

Initially, this move should help keep a lid on oil prices until the end of the summer.  The extra two million barrels of oil released will help smooth out some of the disruptions especially in Europe caused by the civil war in Libya.  Oil prices near term should remain relatively flat barring any unforeseen political or catastrophic event.  However, in the intermediate or longer-term, this news is extremely bullish for the price of crude oil.

The global oil markets have very little spare capacity to be brought on stream.  Saudi Arabia is the only oil country in OPEC with significant and dependable spare capacity.  There is approximately four million barrels per day of spare capacity that could be brought on line to help control crude prices.  The supply-demand balance is extremely tight when you consider the growth of the emerging markets in this world, especially in China and in India.  The International Energy Agency predicted last Thursday average world oil demand could rise by 1.1 million barrels a day to 95.3 million by 2016.  In other words, despite tepid economic growth estimates in the U.S., which consumes nearly one-quarter of the world’s oil, the IEA is estimating a daily increase of 1.5 million barrels a day each year over the next four years.  The use of less nuclear power by countries like Japan and Germany should also put more pressure on these estimates.

The ramifications of injecting more oil into the system will eventually create more consumption in the economy and increase additional demand on an already tight supply-demand balance.

The release of the Strategic Petroleum Reserves over the next 30 days has more to do with politics than anything else.  It is an attempt in the short-term to control the price of oil in a very fragile domestic economy as the U.S. attempts to dig itself out from the recession.  The price of crude oil, ultimately though, will be dictated by supply and demand metrics.  Look for oil prices as a consequence to rise significantly by the end of 2011.

A Sign of the times

 College degrees no longer guarantee great jobs. In 2009, for example, 2 out of 3 Harvard graduates did not have a job at graduation. What does it all mean? Simply put, students must do more than “just graduate” to stand out in a global economy with millions of college graduates looking for work

“Sell in May and go away”

The old adage to “sell in May and go away” could tempt investors even more this year to make some irrational decisions in their portfolios. 

With the Dow Jones Industrial Average down more than 3% since the beginning of May it probably makes even more sense to walk away and get back in October.  After all, we know Goldman Sachs advised their institutional clients nearly six weeks ago to sell their investments in commodities.  And, like clockwork, nearly three weeks later, the market for commodities began to implode as margin requirements for silver were raised causing a huge sell-off.  The price of oil dropped over 10% in one week.  You would have thought the sky was falling.   Get Out!  Be smart!  Don’t be like the foolish investors who stuck around for over 8% pummeling last May.  If only it were that easy to time the markets we would all be rich.

A more prudent strategy would be to make investments decisions based on your own individual goals and risk tolerance.  Yes, I realize this concept is not as exciting as preaching the world is coming to an end, but it actually makes for a better investor.  Let’s face it.  If we could all time the market none of us would have been caught up in the crash of 2008. 

Still thinking about selling all of your commodities in your portfolio?

Well, now we understand Goldman Sachs is reversing its bearish call in April.  According to report in “Seeking Alpha” on May 24^th, Goldman Sachs suggested buying oil, copper and zinc, reversing last month’s call to sell commodities. ‘The risk/reward once again favors being long commodities,’ Jeffrey Currie, head of commodities research at Goldman Sachs in London, wrote in an e-mail.

Goldman Sachs’ reversal on commodities is good news for all of those investors who didn’t follow the herd.

Whether “selling in May and going away” until October is just some silly superstition or a real factor for investors is debatable.  What is not debatable is to figure out what makes sense for you individually and to invest accordingly.

The two sentence bill, and I’ll have a Big Mac

What can be accomplished in this world in two sentences?  Most people would agree that very little can be done.  You can’t even place an order at McDonalds without using more than two sentences.  However, the Congressional Republicans have tried to repeal the health-care law in a two-sentence bill on January 26^th 2011.  The repeal passed 245-189 — with only three Democrats voting in favor of it. But the Senate, still controlled by Democrats, will not allow it to pass into law.

The two sentence bill, if it ever became law, would do the following:

1. Add 230 billion to the deficit by 2021 according the Congressional Budget Office.
2. Reduce the number of Americans with health insurance by an estimated 32 million.
3. Allow for health insurers to deny coverage for those individuals who have pre-existing conditions.
4. Deny parents from keeping their children’s coverage up to the age of 26.

By using fewer words than ordering a Big Mac and fries House Republicans are trying to do away with a two-year debate in which both parties invested lots of emotional capital–capital that most Americans, according to the latest poles, do not want spend anymore.  Most Americans want to move forward and end the debate.

The real issue for most Americans is how we can honestly reduce costs while protecting patients’ rights.  These right now include banning health plans from rescinding coverage, eliminating annual coverage limits and lifetime limits, and preventing plans from turning down children with pre-existing conditions.

Moreover, a report released by the US Public Interest Research Group, earlier this month, states that “repeal would strip tax credits from over four million small businesses” and drive up the costs of the individual market by 20% by 2016, leaving 57 million American’s with pre-existing conditions to face coverage denials and price discriminations.  The report estimates that by the end of the decade nearly 4.5 million jobs could be lost due to rising employer health care costs.

No one can really predict what will happen over the next decade in the health care industry.  To repeal the new health-care law after all of the debate that went on in this country isn’t right.  Rather, it seems more advantageous for us to build upon the new law and refine it wherever necessary.  No law is perfect.  So, let’s not dismiss it with a two-sentence bill that requires as little thought as ordering a Happy Meal.

The Politics of Not Raising the National Debt Limit

Recently, Speaker of the House John Boehner reiterated his party’s intention not to raise the limit on our nation’s national debt.   Boehner called for action to “cut spending and end the job-killing spending binge in Washington.” in effort to distract the American people from what got us in the predicament in the first place, mainly the fleecing of our economy by U.S. banks.  These banks were over-leveraged and under-regulated by all rational accounts.

So what happens if the Republicans get their way and refuse to raise the debt ceiling?  Senator Lindsey Graham, who is straying from his ilk on this issue, told CNN point-blank, “Let me tell you what’s involved if we don’t lift the debt ceiling: financial collapse and calamity throughout the world. That’s not lost upon me.”

A letter sent by Secretary of the Treasury, Tim Geithner, to the new Congress outlined the urgency to lift the debt ceiling.  Failure to do so would force the Treasury to default on legal obligations and payments to bondholders here and abroad “causing catastrophic damage to the economy,” Mr. Geithner said.  Stopping payment on the debt would threatened many federal benefits from military salaries to Social Security and Medicare.

“Given the gravity of the challenges facing the U.S. and world economies, the world’s confidence in our creditworthiness is even more critical today,” Mr. Geithner said.

Currently, the U.S. is approximately $335 billion from its authorized debt ceiling of $14.29 trillion. The debt ceiling would need to be raised by the end of March and no later than by mid-May to skirt default.  Like the recession of 2008, the worst since the Great Depression of 1929, missing a debt payment is unprecedented in our country’s history.

One of the first actions taken by the new Congress was to approve new rules, thus making it harder to pass a debt-limit increase. No longer will an increase be automatic with passage of a budget resolution; it will have to be voted on separately.

Is not lifting the debt ceiling just a political ploy by the new Congress to make us think that all of this spending has led this country to 9.4% unemployment rate?  When in reality we know what really happened.

Maintaining our economic strength as a country is vital to our prosperity as a people.  It is imperative that we stand behind our debt obligations and signal to the rest of the world the U.S. is still a viable, global economic power.   Let’s not lose sight of what is important.  Let’s cut through all of this political posturing in Washington and do the “right” thing.  Let’s not play around with the”full faith and credit of the U.S. government,” and our country’s future.

Inside the Obama Proposal

It is estimated that George Steinbrenner’s death this year saved his heirs approximately $500-600 million in estate taxes. The U.S. Government, conversely, has lost an opportunity to fill its coffers due to an unusual clause in the Bush Tax cuts enacted in 2001. In general, the act lowered tax rates and simplified retirement and qualified plan rules. One key provision in the legislation, though, was the extinction of the federal estate tax in 2010.

 Here is a list of some other prominent billionaire’s who died in 2010 free of federal estate taxes courtesy of Forbes.com.

Dying Free of the Federal Estate Tax:

Billionaire Deaths in 2010~ Billionaire Fortune Date of Death ~ Estimated Net Worth (from Forbes billionaires, 3/10/10)

Mary Janet Cargill inherited, Cargill Inc. February 5, 2010 $1.7 bil

Dan L. Duncan self made, energy March 28, 2010 $9.0 bil

Walter Shorenstein self made, real estate June 24, 2010 $1.1 bil (with family)

George Steinbrenner self made, Yankees July 13, 2010 $1.1 bil

John Kluge self made, Metromedia September 7, 2010 $6.5 bil

Their deaths should get the attention of our members in Congress and motivate them to act accordingly to close the loophole.

So what does the new compromise negotiated by President Barack Obama and Republicans leaders do to the federal estate tax law? It would bring the estate tax back at a rate of 35 percent, exempting the first $5 million of an individual’s estate and $10 million of a couple’s estate from any taxation.

If you are serious about cutting the federal debt then this new proposal seems to contradict those beliefs. It is just another instance of kicking the “proverbial” can to the next generation to help solve our deficit gap which is currently estimated at 14 trillion dollars.

Here is a brief history of federal estate tax according to townhall.com. The estate tax at a glance:

The modern estate tax was enacted in 1916, imposing a 10 percent tax on the portion of estates above $50,000.

The rate peaked at 77 percent from 1941 to 1976. From 1942 to 1976 it was imposed on estates larger than $60,000.

 By 2003, the top rate was 49 percent, on the portion of estates above $1 million.

In 2003, Congress passed law that gradually decreased the estate tax until it was repealed for 2010.

In 2011, current law brings back the estate tax, with a top rate of 55 percent on the portion of estates that exceeds $1 million.

Most analysts give this new proposal a 50/50 chance of passing through Congress. And who really knows what it will look like after the Congress finishes mucking with it. We should have an answer by the end of the year if unemployment benefits are to continue to nearly 2 million people. Let’s just hope a compromise can be reached without sacrificing the wealth of future generations.

“Water, Water, Water, Everywhere…”

The Green: “Water, Water, Water, Everywhere…”

After paying $4 for a 16 oz. bottle of water at a spring training baseball game, I thought to myself I had been robbed, or at least, fleeced by the powers that be.  How valuable is that stuff?  Is it really worth $4 a bottle?  I have told you in previous newsletters about oil and natural gas, but what about water?

Peak oil analyst, Matt Simmons, recently proclaimed in a research report called “Twin Threats to Resource Scarcity: Oil & Water” that “without water, we cannot create modern energy.”  Water is used to inject in wells to increase the flow of oil.  As an oil well depletes, it needs more water.  For example, the Saudis pump 2 million barrels per day into their Khuras oil field.  Water is also used to lubricate drills and keep them from overheating.  Modern energy production requires vast amounts of water.  In the U.S. power generation accounts for approximately 40% of our fresh water usage.  The irony, here, is oil and water don’t mix yet we still need both to produce vast amounts of energy.

On a micro-level a human being cannot survive for more than three days without fresh water.  Here are some startling facts worldwide:

• Over the last decade, more children were killed by diarrhea than all the people who died in World War II.
• Every eight seconds, another child dies from drinking dirty water.

Most Americans do not believe a water shortage could seriously affect them.  Maybe that is why they feel “fleeced” after paying $4 for a bottle of water at a ballgame.  We obviously take the supply of fresh water for granted as a country, but did you know that the average U.S. citizen uses 160 gallons of water per day.  Here are some other items you might not be aware of:

• It takes 14 gallons of water to grow a pound of grain, 435 gallons to grow a pound of beef, 2,000 gallons of water to make one gallon of milk, nearly 20,000 gallons of water is needed to make one ton of steel.
• A study by the Environmental Protection Agency estimates that $335 billion will be needed simply to maintain the nation’s tap water systems in coming decades.
• The country’s municipal wastewater systems will need another $36 billion in maintenance.

So it is not hard to imagine that soon we will have to pay more for water in the future.  The scarcity of water will only increase with the scarcity of oil production and other ways in which we produce massive amounts of energy.

Water probably needs to be viewed in the investment arena like other scarce commodities such as oil.  Maybe it will soon be traded on an exchange with traders bidding on the prices daily using sophisticated instruments like futures, options, and derivatives.  And, maybe the $4 that I paid for that bottle was not so bad and I can view it as a rather shrewd investment in the not-so-distant future.  Or, maybe, you know, it has nothing to do with being a scarce commodity at all, but more to do with the high price of Alex Rodriquez’ salary.  Hmmm.

“Bonds, Bonds, Bonds”

 In real estate there are three magic words, “location, location, location.” Investors in financial markets, when looking for safety, covet their own magic words, “bonds, bonds, bonds.” This seems to be a panacea for conservative investors who are not willing to take on a lot of risk in their portfolios. However, there is a word of caution for all “low” risk investors as we move out of this low interest rate environment.

Massive budget deficits and debts, plus a growing concern about credit quality of government debts, should signal a bearish outlook for the bond market in the next few years. In fact, Moody’s Investors Service warned that both U.S. and the U.K. are “substantially” closer to losing their AAA debt ratings. Moody’s estimates that the U.S. will have to spend more than 10% in revenue just to pay off the interest on the growing debt by 2013. A key reason why? Debt service costs –ongoing interest and principal payments-are surging.

We’re also seeing better economic data and a stronger economy. There is one problem with this recovery. It is an economic recovery whose growth has been bought and paid for by Washington. In other words, we are using borrowed money to prop up this recovery which in the short term adds to a growing debt. Here is some of the data that is pointing to a stronger recovery:

Housing starts and building permits are holding steady in the 550,000 to 650,000 range, rather than deteriorating further. This fits with the major housing market bottom.

 Industrial production rose 0.1 percent in February, while capacity utilization rose to 72.7 percent. That was the eighth month in a row of improvement in the utilization rate. It’s now at a 14-month high.

Retail sales rose 0.3 percent, while “core” sales excluding autos climbed 0.8 percent. Both figures topped estimates.

 Even consumer credit rose by $5 billion in January, the first monthly rise in a year.

So, why is a growing economy bad for the bond markets? It puts more pressure on bond prices, helping to push interest rates higher. The Federal Reserve can only control interest rates on short-term borrowing. The Fed continued its pledge to keep short-term interest rates at “exceptionally low levels” for an “extended period.” This artificial cap will put more pressure on bond prices and force interest rates higher.

To protect your portfolio from too much risk you should stick with short-term bonds. Do not hold bonds with a maturity of more than five years. Buy individual bonds, if possible. If you are invested in bond funds look for ones with short-term durations and maturities.

 This time around, when thinking about bonds, use these three magic words, “short-term, short-term, short-term.”

Tiger Woods did the unthinkable last Sunday.

 He blew the lead on the final day of the PGA Tournament in Chaska, Minnesota.  Previously, Tiger Woods was 14-14 when leading a major championship through 54 holes.

More than a year ago the stock market did the unthinkable losing more than 50% of its value from its October peak.  More and more investors sold their stocks and put more of their money in cash. 

This move forced Congress to pass legislation to increase the FDIC insurance coverage per depositor from $100,000 to $250,000 through December 31, 2009. 

Well, what if the unthinkable happens again?

Believe it or not, the unthinkable is now thinkable.  As a precautionary measure Congress has extended this deadline.  Deposits at FDIC-insured institutions are now insured up to at least $250,000 per depositor through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories, except for IRAs and other certain retirement accounts.  IRA’s and other certain retirement accounts will remain at $250,000 per depositor. (This supersedes the October 3, 2008 changes.)

Much like the market, let’s hope Tiger Woods regains his form and stocks continue to stabilize in these uncertain times.

College Planning Seminars

We can all agree that students who pursue a postsecondary education will have more career opportunities and earn much more than those who do not pursue an education beyond high school. According to the U.S. Census Bureau, a person with a bachelor’s degree earns almost twice as much as someone with only a high school diploma. The tricky part, of course, is paying for college. Costs are escalating out of control at an estimated rate of between 5% to 8% annually. Federal Student Aid, an office of the U.S. Department of Education, plays a vital role in the nation’s postsecondary education community through grants, work study, and loans. Understanding how this aid is administered and what you can do to to lower the cost of college is key to giving your child the opportunity he or she so deserves. Starting in September David J. Albahary, CFP(@), who is Director of Ivy Ridge Asset Management, LLC will be holding several free seminars through 123college.com, inc. to help parents of college-bound students navigate through the maze that is the college financial aid system. The seminar is open to parents and grandparents who have children and grandchildren in high school.

Knowledge is power when it comes to unleashing your child’s

potential.

 

College Planning Seminars…

Tuesday, September 15th

 Franklin D. Roosevelt Senior High in Hyde Park, NY at 7pm

Tuesday, October 13th                                                                        

Franklin D. Roosevelt Senior High in Hyde Park, NY at 7pm

Tuesday, November 17th

Franklin D. Roosevelt Senior High in Hyde Park, NY at 7pm

 

Thursday, September 17th

Morton Memorial Library in Rhinecliff, NY at 7pm

Thursady, October 15th

Morton Memorial Library in Rhinecliff, NY at 7pm

Thursday, November 12th

Morton Memorial Library in Rhinecliff, NY at 7pm          

Seating is limited so you’ll need to reserve a spot today

1-866-510-7034.

Backspin

Backspin-a reverse spin placed on the ball to make it stop short on the putting surface.  Much like a ball that is doing a 180-degree turn, the law for Roth income limits for 2010 is changing, but only for tax-year 2010.2010 may seem like a long way off, but something special is going to happen then if you prepare for it.  Recent legislation tucked away in the Bush tax cuts has a unique clause regarding the Roth IRA income limits. Specifically, it contains language that makes the Roth IRA available to anyone regardless of ones income, but only for one year.A Roth IRA is a retirement account that offers a lot of advantages for most people. The primary advantage is that the distributions from the account do not incur any tax. Simply put, they are tax free if a couple of requirements are met. First, the distributions must be made after you pass the age of 59 years and six months. Second, you must have owned the Roth IRA for at least five years. If you meet the criteria the money is yours free of any taxation when you make distributions from the account, thus enabling you to keep all the gains you have made from your investments over the years. The only criticism of Roth IRAs is with caps on income.  In other words, a person with a modified gross adjusted income of $100,000 or more cannot convert an existing IRA to a Roth. While many people fall below this Roth IRA income limits, those that were just over it certainly have been frustrated to say the least. In an effort to extend his tax cuts former President Bush agreed to a number of irregularities in the new tax legislation, including a clause that allows a single year cap exemption. In 2010, the income cap of $100,000 will not apply to the Roth IRA. Therefore, you can convert to a Roth in 2010 regardless of how much you have earned. You can only do it in 2010, not 2009 or 2011. There appears to be no reason why the politicians would create for a one- year exemption to the Roth IRA income limits. It certainly seems a bit odd, but you might as well take advantage of it. While 2010 seems far off in the future, it gives you time to plan any conversion. Remember, if you convert a traditional IRA to a Roth, you must pay taxes on the moved money. If at all possible, you will want to do this with cash you save between now and then. The more money you can jam into a Roth, the better off you will be in the end.  As part of planning for your retirement you can expect to pay higher taxes.  Taxes, ultimately, will cut into your retirement nest egg. Like a tough chip-shot, plan on using some “backspin” to see if it makes sense to convert in 2010 if your AGI is over 100k annually.  It could be the best chip you’ll ever make.