As investors, we continue to endeavor to strike the appropriate balance between structural capital market and economic risks presented in the current environment and the cyclical opportunities available as a result of highly stimulative government policies supporting and catalyzing economic recovery. During the first quarter of this year we concluded that in these circumstances increased participation in the near-term recovery was desirable but wished to effect this in part with managers that have historically positioned their portfolios defensively as risk elevated.
Effective January 1, 2010, high-income individuals will have an opportunity to convert their existing IRA funds (or a portion of these funds) into a Roth IRA, in the process triggering (and accelerating) tax due on their traditional IRA balances. Prior law limited conversion to those with gross income of less than $100,000. While both traditional IRAs and Roth IRAs allow for assets to grow tax-free within the account, the fundamental differences between the two involves whether, and when, taxes must be paid.
Investors and taxpayers will long remember—and carry the baggage of—the “boom and bust” decade. Notwithstanding a roller coaster adventure of historic proportions, and giving effect to the recent “boom” in share prices, equity returns for the S&P 500 for the entire decade were negative. The catalysts responsible for these extremes included excessive leverage, accounting gimmickry, improprieties and frauds, large-scale failures of corporate management, directors and other fiduciaries, the vast mispricing of risk and due-diligence failures by underwriters.
Some consider today’s stock market a “stock pickers market.” Others consider it a “traders market.” Still others label it a “cyclical bull market.” As for individual selection of equities, the recent market actions have demonstrated that rates of return—both positive and negative—are impacted to a far greater extent by asset allocation and portfolio construction than individual stock selection, and should be the primary focus for individuals.
The threat of imminent failure of the financial system has retreated as a result of massive government intervention. Nevertheless, substantial economic, investment and systemic risks remain. While we cannot foresee the future and acknowledge that markets sometimes trade independently (or ahead) of fundamentals, we believe these risks call for continued caution notwithstanding the exuberant rebound of equity and debt markets as they responded to virtually unprecedented government actions and assertions that it would do “what it takes” to turn the economic tide.
During the second quarter of 2009 investors were searching for confidence. Confidence in a near-term time horizon for attaining a sustainable and growing economy. Confidence that such will translate into a growth trend for corporate earnings, and confidence that such earnings will not be materially burdened by legacy or impaired assets still reflected on the balance sheets of major financial institutions.
Recently, the new administration announced its plan to purchase the troubled assets in private-government partnerships. The plan is designed to address two classes of assets held by the banks—portfolio loans and asset-backed securities. There remains considerable uncertainty with respect to these programs. The equity markets have reacted to all this uncertainty, rallying on the hope surrounding government announcements and news of possible relaxation of the mark-to-market rules, and selling off on news of increased unemployment, deepening recession, declining home prices, and declining corporate earnings.
Subprime Mortgages, Financial Guarantors and Municipal Bonds: November 8, 2007
During the past several months there has been much turmoil in the credit
markets focusing mainly on structured investments related to mortgages, and in particular, subprime mortgages. Mortgages are often packaged into pools and securitized in the form of RMBS (Residential Mortgage Backed Securities), which may be packaged into pools in the form of CDOs (Collateralized Debt Obligations). Financial guarantee insurance companies such as AMBAC and MBIA have historically provided credit enhancement to various forms of debt obligations including municipal bonds and structured investments such as RMBS and CDOs. Over the last several weeks, the share price of AMBAC and MBIA has declined significantly due to the concerns of the potential contagion of credit market risks to the financial guarantors.
Liability Risk Management - Think "Downside"
A discussion of techniques which may be employed to manage exposure to future personal liabilities and creditors associated with certain professional, business and fiduciary activities.
Estate Planning - Some Simple Steps (2009)
A discussion of various strategies for managing estate tax exposure through lifetime gifting to one's heirs.
Senior Executive Compensation
A discussion of strategies available to executives whose compensation is concentrated in employer equity.
Topical Matters Memoranda are all in .pdf format and requires the Adobe Acrobat Reader to view or print.
* Analysis, views, and opinions reflected in any materials contained in this Web site are not intended nor should they be relied upon as specific investment advice or investment timing for any particular individual. KLS provides investment advice to its clients based upon analysis of personal and specific client circumstances and investment markets.
© Copyright 2001-2010. KLS Professional Advisors Group, LLC