Bull and Bear Capital Advisors Newsletter

This is a headline which you can certainly be forgiven for thinking must have come from a newspaper or magazine published in the last few days. Instead, it is the headline for the cover story in Time magazine on January 13, 1992.

And thereby hangs a highly cautionary tale. Before recounting that tale to you, let me invite you to go—right now—to www.time.com, and, where you’re cued to look up past covers, enter that date. It will be well worth your while; I’ll wait here for you.

•••

Quite clever, don’t you think? An apple seller in current (that is, 1992) garb, handing an apple to a well-clad passerby of 1932, in an iconic Depression-era photograph. Indeed, there is only one important thing wrong with this cover, and with the accompanying story: the recession to which it alluded had ended nine months earlier, in March of 1991. (This is not an opinion; it is taken directly from the data kept by our official recession watcher, the National Bureau of Economic Research, and is readily available on that august body’s website.

How did Time miss that? Indeed, since the mainstream media never do anything but report back to the masses what we already believe anyway, how was the whole country managing to miss it? For that matter, came the fall of 1992, how was Bill Clinton—faithfully adhering to James Carville’s war cry, "It’s the economy, stupid"—able to trounce George H. W. Bush, who haplessly continued to repeat the incontrovertible fact that the economy was by then expanding quite smartly, and whom nobody believed?

The answer is stark, simple, compelling, and extremely dangerous to today’s investor, sitting on the sidelines in cash, waiting for some real sign that the economy is turning the corner. The reason people remained absolutely convinced that a recession was still raging on—more than a year after it had ended—was that unemployment was still going up. And that’s all the mainstream media would talk about.

The media report unemployment as a coincident indicator of the economy. That is, journalism implies (without ever saying in so many words) that economic activity and employment trends do the same things at the same time, rising and falling together. When this past December’s horrific job loss numbers came out—capping off a year that saw the most layoffs since 1945, when all the defense plants suddenly shut down and furloughed the entire civilian workforce, near about—headlines everywhere screamed, "Job losses stack up as recession deepens." And the whole country nodded sagely, intoning, "Yup; that’s how it works: unemployment still going up, economy still going down." And went back to reading its money market fund statement.

Unemployment has, in fact, historically been a significantly lagging indicator of the economy. Far more to the point, the equity market has usually been a leading indicator of the economy – and particularly of unemployment. The fact is that in all seven previous recessions over the last 50 years, the market turned up, on average, nine months before unemployment peaked, and while recession was still ongoing. (See chart, above.)

This is not some dry statistical anomaly that entertains economists and has nothing to do with real life. It’s a dire warning to today’s investor, who may be all too susceptible to drinking the media Kool-Aid. If unemployment headlines are your key economic indicator, then using historical averages, you may miss the upturn in the market by something like three quarters of a year. This is not a prediction. It’s a warning.

The most extreme example of this phenomenon is the recession of 1990 - 1991, which spanned the eight months from July 1990 to March 1991, and coincided with the nation’s last real doozy of a banking crisis before the current cataclysm. Right on time—on October 11, 1990—the stock market troughed.

Consider the litany of disaster that befell "investors" who waited until unemployment peaked to invest in equities during this cycle.

The single worst thing you could have been watching all through that cycle—the one indicator a slavish devotion to which would have cost you by far the most money—was unemployment.

A couple of important caveats remain to be made, here.

1. After the market turned up in the recession of 2001, which ran for eight months, it then jackknifed and continued lower, brought down by the accounting/research scandals of 2002 even as the economy resumed its expansion. Once again, this essay isn’t stating a rule, nor making a prediction. It’s simply sounding a warning: don’t assume that unemployment still going up tells you that either the economy or the market is still going down. Resist media hysteria about unemployment.

2. Of necessity, the narrow focus of this little essay is timing, and specifically a very common and usually very expensive timing mistake. But, in the larger sense, you shouldn’t be trying to time the economy and/or the market at all. If you’re a long-term investor with long-term accumulation goals and long-term income needs, you should be matching your portfolio to your life expectancy, not to any view of current events.

Economic and market violence tends to telescope our focus down to days, and sometimes even hours. But if you’re looking at a three-decade, two-person retirement, you shouldn’t care about next Friday’s unemployment report, nor how the market will react to it. You should be concerned—very concerned—about how your income is going to rise through those three decades to offset the inexorable increases in your cost of living.

And you’re not going to accomplish that sitting in a money market fund, trying to time a market turn that you’re most probably going to miss—and that, in a very few years, won’t matter anyway.

© 2009 Nick Murray. All rights reserved. Reprinted by permission.

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When a close relative or friend starts to display signs of dementia or related neurological ailments, it is a family tragedy requiring speedy action and medical care. But in many cases, the disease comes on gradually, and it becomes evident with inconsistencies in behavior and sometimes, problems with money.

It is not uncommon for older people with diminished cognitive function to be a ready target for scams and ID theft as well as out-of-character decisions with regards to savings or investments.

Last July, a Mayo Clinic study reported that men were twice as likely as women to develop mild cognitive impairment over the age of 70, a transitional phase between healthy aging and full-blown dementia, which is a significant loss of intellectual and memory abilities severe enough to interfere with social or occupational functioning. Women develop Alzheimer’s disease in greater numbers than men, but that’s due largely to the fact that women live longer than men.

So when does this become a money issue? In the best circumstances, as part of a full estate planning process, before an individual becomes ill. In the worst, it needs to happen immediately after a loved one is diagnosed.

Once stricken, older relatives may be unable to understand questions or express their wishes in proper detail. If there is no plan, family members grasp at responsibilities – or shirk them – without any idea of what the older relative would really want.

So what’s the answer? Everyone should make a plan that includes the worst-case scenario of incapacity in one’s long-term financial plan. Some key points:

Have a discussion with people you trust to make decisions for you: It’s not fun to imagine yourself in the state dementia brings, but it’s important to consider trigger points where trusted people would step in to do specific functions for you. It would make sense to pre-select individuals as your executor as well as your health and financial powers of attorney, responsible for paying bills and executing your specific investment wishes under specific circumstances. All of this can be covered in your estate plan.

Make sure how major assets will be used to pay for care: If an elderly relative becomes sick and irreversibly incapacitated, the equity in your home may come under consideration as a resource to pay uncovered medical or household maintenance. Since the home is both a major asset and an emotional focal point, it’s best to get good advice and spell out specifically what you want done with your property and under what conditions.

Pick the right experts: It would be wise to confer with a tax professional as well as a trained financial expert such as one of the CFP® professionals at Bull & Bear Capital Advisors. The professionals and nonprofessionals in this role should have significant experience working with seniors and be prepared to interact with other members of your team if they notice anything particularly out of character in your future actions.

Put it in writing: Once you’ve established the team that will carry out your wishes in a variety of situations – not just in the case you are diagnosed with dementia – then you should have such instructions written into a formal estate plan with the necessary powers of attorney as well as your updated will.

This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Bull & Bear Capital Advisor Robert Liggero, MBA, CFP®, a local member of FPA.

Bull & Bear Capital Advisors is a comprehensive financial planning firm with its own law firm to help you create a well thought out estate plan that can protect your interests if you become incapacitated.

Return to top of page

One Good Thing About A Tough Market:
It’s a Good Environment for Roth IRA Conversions

Most of us are not starting the new year happy about our investments. But if you are looking for a bright spot, it’s not a particularly bad time to consider converting a traditional IRA to a Roth IRA.

Right now, anyone with modified adjusted gross income of less than $100,000 a year (individual or joint income) can convert a traditional IRA account to a Roth IRA. Higher-income Americans will get the same break in 2010 if Congress doesn’t reverse its 2006 approval of provisions in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA).

Keep in mind that this also might be a good idea for people who were also unemployed or disabled during the past year and therefore had lower income. Talk to your Bull & Bear Capital Advisor or tax professional about doing a full or partial Roth IRA conversion.

Remember that when you do a conversion, you must pay income tax on the amount you are converting, which can be all of the funds in the traditional IRA or just a portion of those assets. But, subject to certain restrictions, you won’t pay tax when you finally need to withdraw your money. That’s where the silver lining comes in for you or for your heirs if you pass that money on to them.

Take another look at your statements and how much your investments are down. Assuming that the markets perform historically and fight their way back, your tax-free amount available for withdrawal could accumulate significantly under that Roth status.

The conversion issue is a potentially attractive retirement and estate-planning idea for all Americans who want to make sure they maximize the assets they have for themselves and for their heirs on a tax-free basis.

But anyone considering such a move—regardless of his or her income status—should first review their current retirement asset strategy with a tax or financial adviser such as one of the CERTIFIED FINANCIAL PLANNER™ professionals at Bull & Bear Capital Advisors.

The difference between a traditional IRA and a Roth IRA: Traditional IRAs allow investors to save money tax-deferred with deductible contributions (within certain income limits if either spouse is eligible for a qualified plan at work) until they’re ready to begin withdrawals any time between age 59½ and 70½. Roth IRAs don’t allow tax-deductible contributions, but they allow tax-free withdrawal of funds with no mandatory distribution age, and allow these assets to pass to heirs tax-free as well. If you leave your savings in the Roth for at least five years and wait until you're 59½ to take withdrawals, you'll never pay taxes on the gains. You can convert a traditional IRA to a Roth, but you must pay taxes on any pre-tax contributions, plus any gains.

Time to retirement matters: If you have more than five years until you plan to withdraw your retirement funds, conversion of traditional IRA assets to a Roth IRA might make sense. The longer the time span where earnings can grow tax deferred, the greater the benefit of being able to withdraw those earnings without paying tax on them.

Your tax rate at retirement is important: Many people, such as business owners, may be paying taxes now at a fairly low rate. So they might pay higher taxes at retirement. If that’s the case, converting to a Roth might make a lot of sense. Additionally, with Social Security benefits being taxable at certain income levels, Roth IRAs can allow you to limit or eliminate such taxes.

A Roth conversion can be expensive: You’ll have to pay taxes on contributions that you previously deducted, as well as taxes on the accumulated earnings. Also, you need to be aware that conversion could push you into a higher tax bracket, especially if you've accumulated sizeable earnings over the years. This is why a conversion needs to be planned with a tax expert or a qualified CFP® professional. Why? It may trigger the Alternative Minimum Tax (AMT) due to those high earnings.

Return to top of page

BULL & BEAR CAPITAL ADVISORS
6817 Southpoint Parkway, Suite 1003 · Jacksonville, Florida 32216
phone: 904.363.3600

Securities offered through Bull & Bear Brokerage Services, Inc., Member MSRB, NASD, SIPC.




	Issue #14: February, 2009 In This Issue... The Recession: How Bad Is It? Dementia Is Also A Financial Matter It’s A Good Environment for Roth IRA Conversions
	The Recession: How Bad Is It? This is a headline which you can certainly be forgiven for thinking must have come from a newspaper or magazine published in the last few days. Instead, it is the headline for the cover story in Time magazine on January 13, 1992. And thereby hangs a highly cautionary tale. Before recounting that tale to you, let me invite you to go—right now—to www.time.com, and, where you’re cued to look up past covers, enter that date. It will be well worth your while; I’ll wait here for you. ••• Quite clever, don’t you think? An apple seller in current (that is, 1992) garb, handing an apple to a well-clad passerby of 1932, in an iconic Depression-era photograph. Indeed, there is only one important thing wrong with this cover, and with the accompanying story: *the recession to which it alluded had ended nine months earlier, in March of 1991.* (This is not an opinion; it is taken directly from the data kept by our official recession watcher, the National Bureau of Economic Research, and is readily available on that august body’s website. How did Time miss that? Indeed, since the mainstream media never do anything but report back to the masses what we already believe anyway, how was the whole country managing to miss it? For that matter, came the fall of 1992, how was Bill Clinton—faithfully adhering to James Carville’s war cry, "It’s the economy, stupid"—able to trounce George H. W. Bush, who haplessly continued to repeat the incontrovertible fact that the economy was by then expanding quite smartly, and *whom nobody believed? The answer is stark, simple, compelling, and extremely dangerous to today’s investor, sitting on the sidelines in cash, waiting for some real sign that the economy is turning the corner. The reason people remained absolutely convinced that a recession was still raging on—more than a year after it had ended—was that unemployment was still going up. And that’s all the mainstream media would talk about. The media report unemployment as a coincident indicator of the economy. That is, journalism implies (without ever saying in so many words) that economic activity and employment trends do the same things at the same time, rising and falling together. When this past December’s horrific job loss numbers came out—capping off a year that saw the most layoffs since 1945, when all the defense plants suddenly shut down and furloughed the entire civilian workforce, near about—headlines everywhere screamed, "Job losses stack up as recession deepens."* And the whole country nodded sagely, intoning, "Yup; that’s how it works: unemployment still going up, economy still going down." And went back to reading its money market fund statement. Unemployment has, in fact, historically been a significantly lagging indicator of the economy. Far more to the point, the equity market has usually been a leading indicator of the economy – and particularly of unemployment. The fact is that in all seven previous recessions over the last 50 years, the market turned up, on average, nine months before unemployment peaked, and while recession was still ongoing. (See chart, above.) This is not some dry statistical anomaly that entertains economists and has nothing to do with real life. It’s a dire warning to today’s investor, who may be all too susceptible to drinking the media Kool-Aid. If unemployment headlines are your key economic indicator, then using historical averages, you may miss the upturn in the market by something like three quarters of a year. This is not a prediction. It’s a warning. The most extreme example of this phenomenon is the recession of 1990 - 1991, which spanned the eight months from July 1990 to March 1991, and coincided with the nation’s last real doozy of a banking crisis before the current cataclysm. Right on time—on October 11, 1990—the stock market troughed. Consider the litany of disaster that befell "investors" who waited until unemployment peaked to invest in equities during this cycle. The market bottomed in October 1990; the economy bottomed the following March; and unemployment didn’t peak until the middle of 1992. In the interim, the market went up about 30%. The single worst thing you could have been watching all through that cycle—the one indicator a slavish devotion to which would have cost you by far the most money—was unemployment. A couple of important caveats remain to be made, here. 1. After the market turned up in the recession of 2001, which ran for eight months, it then jackknifed and continued lower, brought down by the accounting/research scandals of 2002 even as the economy resumed its expansion. Once again, this essay isn’t stating a rule, nor making a prediction. It’s simply sounding a warning: don’t assume that unemployment still going up tells you that either the economy or the market is still going down. *Resist media hysteria about unemployment.* 2. Of necessity, the narrow focus of this little essay is timing, and specifically a very common and usually very expensive timing mistake. *But, in the larger sense, you shouldn’t be trying to time the economy and/or the market* at all. If you’re a long-term investor with long-term accumulation goals and long-term income needs, you should be matching your portfolio to your life expectancy, not to any view of current events. Economic and market violence tends to telescope our focus down to days, and sometimes even hours. But if you’re looking at a three-decade, two-person retirement, you shouldn’t care about next Friday’s unemployment report, nor how the market will react to it. You should be concerned—very concerned—about how your income is going to rise through those three decades to offset the inexorable increases in your cost of living. And you’re not going to accomplish that sitting in a money market fund, trying to time a market turn that you’re most probably going to miss—and that, in a very few years, won’t matter anyway. © 2009 Nick Murray. All rights reserved. Reprinted by permission. Article recommended by Bull & Bear Capital Advisor Greg Pritchard. Return to top of page Dementia Is Not Only a Family Matter; It’s Also a Financial Matter When a close relative or friend starts to display signs of dementia or related neurological ailments, it is a family tragedy requiring speedy action and medical care. But in many cases, the disease comes on gradually, and it becomes evident with inconsistencies in behavior and sometimes, problems with money. It is not uncommon for older people with diminished cognitive function to be a ready target for scams and ID theft as well as out-of-character decisions with regards to savings or investments. If this were you in five, 10 or 20 years, would you have a plan? Last July, a Mayo Clinic study reported that men were twice as likely as women to develop mild cognitive impairment over the age of 70, a transitional phase between healthy aging and full-blown dementia, which is a significant loss of intellectual and memory abilities severe enough to interfere with social or occupational functioning. Women develop Alzheimer’s disease in greater numbers than men, but that’s due largely to the fact that women live longer than men. So when does this become a money issue? In the best circumstances, as part of a full estate planning process, before an individual becomes ill. In the worst, it needs to happen immediately after a loved one is diagnosed. Once stricken, older relatives may be unable to understand questions or express their wishes in proper detail. If there is no plan, family members grasp at responsibilities – or shirk them – without any idea of what the older relative would really want. So what’s the answer? Everyone should make a plan that includes the worst-case scenario of incapacity in one’s long-term financial plan. Some key points: Have a discussion with people you trust to make decisions for you: It’s not fun to imagine yourself in the state dementia brings, but it’s important to consider trigger points where trusted people would step in to do specific functions for you. It would make sense to pre-select individuals as your executor as well as your health and financial powers of attorney, responsible for paying bills and executing your specific investment wishes under specific circumstances. All of this can be covered in your estate plan. Make sure how major assets will be used to pay for care: If an elderly relative becomes sick and irreversibly incapacitated, the equity in your home may come under consideration as a resource to pay uncovered medical or household maintenance. Since the home is both a major asset and an emotional focal point, it’s best to get good advice and spell out specifically what you want done with your property and under what conditions. Pick the right experts: It would be wise to confer with a tax professional as well as a trained financial expert such as one of the CFP® professionals at Bull & Bear Capital Advisors. The professionals and nonprofessionals in this role should have significant experience working with seniors and be prepared to interact with other members of your team if they notice anything particularly out of character in your future actions. Put it in writing: Once you’ve established the team that will carry out your wishes in a variety of situations – not just in the case you are diagnosed with dementia – then you should have such instructions written into a formal estate plan with the necessary powers of attorney as well as your updated will. This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Bull & Bear Capital Advisor Robert Liggero, MBA, CFP®, a local member of FPA. Bull & Bear Capital Advisors is a comprehensive financial planning firm with its own law firm to help you create a well thought out estate plan that can protect your interests if you become incapacitated. Return to top of page One Good Thing About A Tough Market: It’s a Good Environment for Roth IRA Conversions Most of us are not starting the new year happy about our investments. But if you are looking for a bright spot, it’s not a particularly bad time to consider converting a traditional IRA to a Roth IRA. Right now, anyone with modified adjusted gross income of less than $100,000 a year (individual or joint income) can convert a traditional IRA account to a Roth IRA. Higher-income Americans will get the same break in 2010 if Congress doesn’t reverse its 2006 approval of provisions in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). Keep in mind that this also might be a good idea for people who were also unemployed or disabled during the past year and therefore had lower income. Talk to your Bull & Bear Capital Advisor or tax professional about doing a full or partial Roth IRA conversion. Remember that when you do a conversion, you must pay income tax on the amount you are converting, which can be all of the funds in the traditional IRA or just a portion of those assets. But, subject to certain restrictions, you won’t pay tax when you finally need to withdraw your money. That’s where the silver lining comes in for you or for your heirs if you pass that money on to them. Take another look at your statements and how much your investments are down. Assuming that the markets perform historically and fight their way back, your tax-free amount available for withdrawal could accumulate significantly under that Roth status. The conversion issue is a potentially attractive retirement and estate-planning idea for all Americans who want to make sure they maximize the assets they have for themselves and for their heirs on a tax-free basis. But anyone considering such a move—regardless of his or her income status—should first review their current retirement asset strategy with a tax or financial adviser such as one of the CERTIFIED FINANCIAL PLANNER™ professionals at Bull & Bear Capital Advisors. Things to consider: The difference between a traditional IRA and a Roth IRA: Traditional IRAs allow investors to save money tax-deferred with deductible contributions (within certain income limits if either spouse is eligible for a qualified plan at work) until they’re ready to begin withdrawals any time between age 59½ and 70½. Roth IRAs don’t allow tax-deductible contributions, but they allow tax-free withdrawal of funds with no mandatory distribution age, and allow these assets to pass to heirs tax-free as well. If you leave your savings in the Roth for at least five years and wait until you're 59½ to take withdrawals, you'll never pay taxes on the gains. You can convert a traditional IRA to a Roth, but you must pay taxes on any pre-tax contributions, plus any gains. Time to retirement matters: If you have more than five years until you plan to withdraw your retirement funds, conversion of traditional IRA assets to a Roth IRA might make sense. The longer the time span where earnings can grow tax deferred, the greater the benefit of being able to withdraw those earnings without paying tax on them. Your tax rate at retirement is important: Many people, such as business owners, may be paying taxes now at a fairly low rate. So they might pay higher taxes at retirement. If that’s the case, converting to a Roth might make a lot of sense. Additionally, with Social Security benefits being taxable at certain income levels, Roth IRAs can allow you to limit or eliminate such taxes. A Roth conversion can be expensive: You’ll have to pay taxes on contributions that you previously deducted, as well as taxes on the accumulated earnings. Also, you need to be aware that conversion could push you into a higher tax bracket, especially if you've accumulated sizeable earnings over the years. This is why a conversion needs to be planned with a tax expert or a qualified CFP® professional. Why? It may trigger the Alternative Minimum Tax (AMT) due to those high earnings. This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Bull & Bear Capital Advisor Robert Liggero, MBA, CFP®, a local member of FPA. Return to top of page BULL & BEAR CAPITAL ADVISORS 6817 Southpoint Parkway, Suite 1003 · Jacksonville, Florida 32216 phone: 904.363.3600 Securities offered through Bull & Bear Brokerage Services, Inc., Member MSRB, NASD, SIPC.

Issue #14: February, 2009 In This Issue... The Recession: How Bad Is It? Dementia Is Also A Financial Matter It’s A Good Environment for Roth IRA Conversions

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Issue #14: February, 2009

In This Issue...

The Recession: How Bad Is It?
Dementia Is Also A Financial Matter
It’s A Good Environment for Roth IRA Conversions