Tuesday, September 28, 2010

An open letter from the IRS to CT charities: File or lose tax-exempt status (w/list)

The Internal Revenue Service released this open letter Tuesday, as an outreach effort to let these charities and nonprofits know that they must file by Oct. 15 to retain their tax exempt status.

Dear Editor:

We at the Internal Revenue Service are concerned because as many as 3,900 small community-based nonprofits in Connecticut are in jeopardy of losing their tax-exempt status. The loss of this status could greatly impact the organizations' charitable work and their donors' potential tax deductions.

Among the organizations that could lose their tax-exempt status are local sports associations and community support groups, volunteer fire and ambulance associations and their auxiliaries, social clubs, educational societies, veterans groups, church-affiliated groups, groups designed to assist those with special needs and a variety of others.

The organizations that are at risk failed to file the required returns for 2007, 2008 and 2009, according to IRS records. The requirement to file is the result of a tax law change that occurred in 2006. For many of these small organizations, complying with the new law may be as simple as completing a 10-minute form online. They can preserve their exempt status under a one-time relief program the IRS announced in July, but only if they file by Oct. 15, 2010.

The IRS has made numerous attempts to alert these organizations, but we are concerned that many may not have gotten the word. A list of the organizations that were at-risk as of the end of July is posted at IRS.gov along with instructions on how to comply with the new law.

We encourage everyone who is connected with a small nonprofit community group to make sure that their organization is aware of the law change and is in compliance before the Oct. 15 deadline.

Best regards,
Gregg Semanick
IRS CT Spokesperson
200 Sheffield Street, Mountainside NJ

Friday, September 24, 2010

The Coming Tradeoff between Dividends and Appreciation

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

The 2003 tax cuts reduced the tax rate on most ordinary dividends from the taxpayer's personal income tax rate to a maximum of 15%, equalizing the tax treatment of dividends and long-term capital gains. One result of the change was renewed focus on income investing. Many public companies initiated dividend programs to attract stable investors.

Unless the 2003 tax rates are extended, or new rules are enacted before then, dividends will be taxed at ordinary income rates once again after December 31, 2010.

The question for investors is how will that impact dividend payouts or the number of firms paying regular dividends.

Studies of corporate behavior following the 2003 tax cut show total dividends reversing their recent downward trend and special dividends spiking. Perhaps more important was the increase in the number of firms paying regular dividends.

  Total Regular and Special Dividends
Non-Financial, Non-Utility and Non-Foreign Firms

Effect of Tax Cut on Initiation of Dividends
Breakdown by Expected Earnings Growth

With the expiration of the 2003 tax cuts, dividends again will be taxed at a taxpayer's personal tax rate. This could be as high as 43.5% when the tax to pay for health care, imposed on couples who earn more than $250,000 a year, goes into effect in 2013. In addition to giving the U.S. one of the highest dividend tax rates in the industrialized world, the change in dividend tax treatment can also be expected to change investor behavior and corporate dividend plans.

The reason is simple mathematics. A dividend of $10,000 will be worth $5,650 in after tax value at the highest income rates. A capital gain of $10,000 will have an after tax value of $8,000 based on the long-term capital gains tax rate of 20% effective 2011. The incentive to high income investors and corporations is to increase long-term capital gains and minimize dividends. Another advantage of long-term capital gains is that investors have greater ability to "schedule" the recognition of capital gains to offset losses.

For assets held in a tax-deferred retirement account, the tradeoff between dividend and long-term gain is a non-issue, because all withdrawals are taxed at the individual's personal income rate (with the exception of non-deductible IRA contributions where only gains are taxed).

What's the best approach for you to take with respect to dividends versus capital gains? The right answer depends on your personal circumstances.

Feel free to email me with any questions or comments at Paul@investfortomorrow.com.

Until next time…

Paul Schatz

Heritage Capital LLC

Thursday, September 23, 2010

Insurance Fraud Swells During Storm Season

This past summer, when Connecticut Department of Consumer Protection investigators were operating an undercover sting house designed to catch unregistered home improvement contractors, they were "amazed" at the offer they received from one contractor. Their work and cooperation with local police and agents from the National Insurance Crime Bureau led to the arrest of the contractor for insurance fraud, and the case is now being tried in court.

The investigators were posing as homeowners seeking bids on a variety of home improvement jobs, including roof repairs. According to the investigators’ report, a contractor visited the house in June, and before even inspecting the roof, asked if any roof damage had been caused by wind or storm, and indicated that if he, the contractor, “can time the damage to a storm, [the homeowner’s insurance company] will pay.”

In other words, he told undercover agents (who were posing as homeowners) that they could get a free roof, paid for by their insurance company.

The contractor offered to bury the insurance deductible into the cost of the job and to contact the insurance company right away to begin the claims process. When inspecting the roof, he noted where damage existed and indicated that he would have to show damage to both sides of the roof in order to get the entire job paid for.

Once the insurance company paid the claim, the 'homeowners' were to sign the check over to the contractor.

“Consumers should avoid doing business with anyone whose business practices are questionable or seem fraudulent. When arrested, this contractor claimed he didn’t believe he had done anything wrong, and placed that the blame on the consumers. You don’t want to place your home and your trust in the hands of someone who is ready and willing to involve you in committing a crime,” Consumer Protection Commissioner Jerry Farrell said.

Nationwide, the total cost of non-health insurance fraud is estimated to be more than $40 billion each year, Farrell said. “That means insurance fraud costs the average family between $400 and $700 a year in the form of increased premiums," the commissioner said.

Friday, September 17, 2010

Washington Needs a Wake-up Call

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

So far so good on the preferred path for the stock market. I’ve written many times since early July about higher and much higher prices coming and now, the major indices are sitting right at their June and August high levels. While I am very happy to see that (beats a stick in the eye), as stocks go higher and higher, so does risk. Once we see another 1% on the upside, I believe volatility is going increase along with the chance for a downside reversal within 3-5%. If you’ve benefited from the rally, now is not the time to get complacent and party like its 1999. Dancing close to the door is a good strategy now and will be even more warranted at higher levels.

I am keenly watching the behavior of high yield (junk) bonds along with the number of stocks advancing and declining daily and which sectors are leading the market higher or not participating. This should give at least some warning of a change coming, but it’s far from guaranteed.

The big political/market news lately was something I discussed during the summer; the potential for the democrats to throw a Hail Mary in hopes of saving the mid-term elections in November, although with the Tea Party doing so well this week, that’s got to have dems celebrating!

Barack Obama did not disappoint. From my seat on the positive side, the administration is seeking to allow businesses to write off all new plant and equipment investments in 2011, rather than amortizing over many years. The end result is a potential positive shock to jobs to create the goods as well as potentially more jobs from the company making the investment.

This is one area I've written about and discussed in the media for years; the need to offer tax incentives and credits and help business help themselves without bailouts and handouts. Hopefully, this is a sea change for the administration and more programs like this will follow,

On the negative side, long time readers already know my skepticism (to put it politely) regarding government stimulus. It's a slippery slope that once begun, there's no turning back. During the first quarter of 2009, Congress and the administration passed a record $787B spending bill without the means to pay for it that was sold as a modern day New Deal, heavy on new jobs and infrastructure. It's far from a stretch to say that it's been a bust with only a small percent of "shovel ready" projects funded and underway.

Now we are being a sold another infrastructure bill of goods that emphasizes jump starting the jobs market with "only" $50B to start and at least another $50B over the next five years. Do we need monies allocated for our aging and almost decrepit infrastructure? OF COURSE, we do! And we need monies for job training and education improvements and disease research and technological upgrades and renewable energy, etc. But targeting big energy by "closing loopholes" because the ground is fertile against them isn't the answer.

Where does it end? Does the government just keep creating spending bill after spending bill and hoping they work? Hope certainly isn't a viable investment strategy and it's no better a fiscal one either! As George W. Bush so eloquently mumbled in 2002, ""There's an old saying in Tennessee - I know it's in Texas, probably in Tennessee - that says, fool me once, shame on - shame on you. Fool me - you can't get fooled again."

Regarding taxes, I am pleased that both parties have embraced making the Bush tax cuts permanent for the middle class. That makes perfect sense in any economy, but especially one in as poor shape as ours. The problem I’ve had all along is that raising taxes on any constituency is bad enough in good times (but sometimes necessary and palatable), but is simply disastrous in bad economic times.

According to Wilbur Ross, fully 40% of all discretionary spending in the U.S. is from families making $250,000 a year or more. Raising taxes is only going to curtail and hamper what little growth is currently occurring. To further rub salt in the wound, the Obama administration is also floating the idea of adding more taxes on top of the already largest tax increase in history. While I am not a believer in high taxes and big government, it’s more tolerable in “normal” years without trillion plus dollar deficits. Raising taxes will not work to cut the deficit!

I’ve noticed a very interesting paradigm shift in this country since I began my career in 1988 when the entrepreneurial spirit was so high. It used to be that we all strived to become successful, and revered and idolized people who made it on their own with creativity, perseverance and good ole American ingenuity. It seems like successful Americans are now demonized and targeted, as somehow they are to blame for our woes and should be punished. That’s not good for our long-term health and survival as a world power. We are all in this together!

I will be on CNBC’s The Call today (September 17) between 11:05am and 11:15am.

Feel free to email me with any questions or comments at Paul@investfortomorrow.com.

Until next time…

Paul Schatz

Heritage Capital LLC

Friday, September 10, 2010

Sell Rosh Hashanah...Buy Yom Kippur

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

I was watching Squawk Box this morning on CNBC and heard an interview with a Chicago regular who offered that stock market volume may remain low for the rest of 2010 as many large market players are in the process of essentially closing up shop, not for the quarter, but for the YEAR. By "closing up shop", I don't mean that they are liquidating all of their portfolios and going to cash, but rather, not committing new money to trades, not taking on more risk and hedging where appropriate. It's dumb enough to hear this mindless drivel in October when mutual funds have their own fiscal year ends, but now? With four full months left in a toss-up year? It's absurd!

I can’t imagine what my clients would say if I took that tact, yet still charged them management fees. I’ve always thought we were hired and paid to do a job over the long-term. If we compromise that for an arbitrary annual date, how long until it’s quarter by quarter and then month by month?

Turning to the markets, we left off with stocks set to Explode Higher or Implode Lower? at a critical juncture and my call for a significant rally looking like the former division leading San Diego Padres, losers of 10 games in a row. The Dow was trading just below 10,000 and it was make or break time for the bulls. With all of the positive indicators and supportive sentiment, the market was supposed to rally strongly. If it could not, I feared an imminent meltdown that would have really turned our own very good year into sour grapes.

The bears came close, but their efforts were thwarted several times in late August and the bulls turned around and shot stocks higher, something I was very glad to see! The stock market continues to support a rally, although it's come very far, very fast. A few days down to refresh the rally would be healthy and welcomed, and set up another assault on the June and August highs this month.

With the Jewish holidays upon us, the old Wall Street adage may apply. Sell Rosh Hashanah, buy Yom Kippur, which means the market tends to be on the weak side during the week that separates the two holidays.

As I mentioned recently, I fully expect this rally to be more selective with some sectors rising to new 2010 highs, like our largest positions, REITs and Consumer Staples, while other sectors, like banks, will be pulled along but lag the market.

The ultimate peak, which I had forecasted to be in place by Labor Day still seems unclear to me. It could have been the April high, but there just may be enough energy to test that high before long. As always, we'll take it one day at a time and let our models guide us. Unless we see dramatic improvement in market internals, like the number of stocks going up and down, new highs and lows along with sector leadership, the potential for a 10-20% decline still exists this year.

On the bond side, there continues to be a tsunami of money heading that way from the investing public along with corporations issuing debt at a record pace, just like we saw with tech stocks in 1999 and 2000 and housing after that. Similar to tech and housing, the bond party isn't going to end well, whether that's this year or 2011 or 2012. Manias tend to go on much longer and higher than anyone forecasts, but when they end, it's with a bang and not a fizzle.

Several of our investment programs own high yield, investment grade and treasuries, but are under no impression that it's for the long-term. As I mentioned here and on CNBC, we happily rode the treasury bandwagon for many months in our Global Asset Allocation Program before becoming more active of late with our trades. I continue to believe that the more nimble you can be, the better the chance to avoid the upcoming bond collapse and earn money elsewhere.

I will be on CNBC’s Squawk on the Street this Monday, September 13, at 9:35am.

Feel free to email me with any questions or comments at Paul@investfortomorrow.com.

Until next time…

Paul Schatz
Heritage Capital LLC

Friday, September 3, 2010

Explode Higher or Implode Lower?

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Several weeks ago, I wrote a piece called Time to Cheer or Jeer? where I offered three different scenarios for the stock market as you can see below (as of August 19).

At that time, I opined that scenario “A” was my chosen path for a variety of reasons. Fast forward to today, as you can see below, and the stock market is in the exact same spot as it was on August 19. So far, scenario “B” seems to be winning out, even though junk bonds, the cousin of stocks, continue to rally strongly to new highs. This behavior would be very atypical, but impossible, of a market about to really collapse.
But over the past few weeks, investors have become even more pessimistic about the future prospects for the stock market, which is a contrary indicator. That means, the more pessimistic people get, the greater the likelihood for a rally. If that doesn’t make sense, think back to the dotcom days or housing bubble. Right at the peak, investors couldn’t buy tech stocks fast enough. Remember “eyeballs over earnings”? With housing, people were saying that real estate had reached some kind of permanent shield against decline since “there was only so much land” and Wall Street figured out a way to make it forever cost effective.

At the bottom of the stock market in March 2009, we saw negativity like we have never, ever seen in the modern investing generation, just as stocks were turning on a dime and rocketing higher. Today, I am seeing sentiment somewhere between neutral and the worst of all time, which is fairly negative in itself. Investors have been running as fast as they can away from stock mutual funds and into bond funds. This has and continues to accelerate over the past few years. I think the bond wave will end very badly at some point, now or in the future, and people will be left holding the bag with massive losses, but that’s a topic for a different day.

Looking at stock market sentiment, traders using the more active Rydex funds are exhibiting negative behavior. Popular sentiment surveys from AAII and Investors Intelligence are also showing individuals and newsletter writers high level of bearishness. Small time option traders, aka mom and pop, have committed most of their money lately anticipating a lower market. Add all these together and you have the masses being very negative on the stock market, something that’s rarely right over the long-term.

I can throw all kinds of technical measures, like the “washed out” nature of the advance/decline line, number of stocks making new highs and lows along with volume, but I think you get the picture. Those reading the Wall Street Journal or watching CNBC, FOX or Bloomberg probably have seen all kinds of scary warnings from the Hindenberg Omen, Death Cross, etc. There is PLENTY of negativity out there!

In short, stocks remain poised to rally and must do so almost immediately, scenario “A” above. Think of a rocket, filled with fuel, just ignited and trying to clear the tower. Unless it gains speed, takes off and explodes higher, it will fall back to the ground and implode. If the stock market cannot rally here (I think it will) with all the fuel loaded and ignited, I have grave concerns that at least a short-term collapse would ensue. And, of course, my chosen scenario would be wrong!

Feel free to email me with any questions or comments at Paul@investfortomorrow.com.

Until next time…

Paul Schatz

Heritage Capital LLC

Thursday, September 2, 2010

ABA survey says...Just under half of consumers reject overdraft protection

Bank customers, to the tune of 49%, say they did not opt in to their bank's overdraft protection protection program, while 46%, say they either already did - or will - enroll. Another 5% of customers did not know or were unsure of what they will decide.

That means they're willing to pay a fee to ensure that debit card transactions will be approved even if the purchase will overdraw their account. The survey was conducted by Ipsos-Reid, a market research firm that polled more than 1,000 adults by telephone on Aug. 14 and 15 of this year.

On Aug. 15, new federal regulations went into effect requiring banks to get permission from customers before paying debit card overdrafts and charging a fee for the service. Under prior practices, banks would approve the transactions and thereby automatically trigger fees. No permission was required.

Customers who do not opt in for overdraft protection will have transactions denied if there is not enough money in the account to cover the purchase. But they will not be charged any fees.

The new rules do not affect checks or automatic bill payments.

 The survey's margin of error was plus or minus three percent.

"These results show that many bank customers value debit card overdraft protection and are willing to pay for the service," said Nessa Feddis, vice president and retail banking expert for the American Bankers Association. "They are now in the driver’s seat and control the way their accounts are managed."

I haven't opted in. But I'm curious, what did you decide?