Tax Revenue Drop
According to a study by the American Institute for Economic Research, federal tax revenue plunged $133 billion, a 34% drop in April compared to April a year ago.  This gives us an idea of the extent of the economic decline.  We are now seeing large declines in tax revenue for state and local governments as well.  This is a particular concern because most states and local governments have constitutionally mandated balanced budget requirements.  Unlike the federal government they cannot borrow money year after year to pay for operating expenses.  We believe that this will result in a number of financial crises across the country later this year and next in state and local governments.  We will also see further layoffs and service cutbacks across the country as governments struggle to balance their budgets.  We will also see tax hikes across the country.  Something to watch for is to see if the Value Added Tax (VAT) gets traction in Congress.  The VAT tax is a glorified sales tax that is popular in Europe.  The VAT would be a huge tax on the middle class.  The only reason it would be considered is that the federal government is desperate for revenue to close the one trillion dollar deficit we see going forward.

NUA: Company Stock IRA Rollover or Not
At retirement, some people need to take a large distribution from the rollover of their 401(k) plan or they may just want their company stock moved out of their retirement plan.  The most efficient way to do that in some cases is to take advantage of the net unrealized appreciation (NUA) tax rules.  The NUA rules allow you to transfer your pre-tax company stock in your 401(k) or company plan out of your IRA rollover and pay only the ordinary income tax on the cost basis of the company stock.  Here is the key: after that, when you go to sell the stock, you only pay capital gains tax, which is 15% at the present time.  This strategy works best with highly appreciated company stock.  With the highly appreciated stock, your ordinary income tax portion is low and the appreciated capital gains portion is much higher.  In some cases, the difference could be a 40% ordinary income tax vs. a 15% capital gains tax.

As an example, say an employee of Exxon was retiring with a $1,250,000 plan that has one million dollars in mutual funds and $250,000 of XOM stock with a $23 per share cost basis.  At retirement he would rollover the one million dollars in mutual funds into an IRA rollover.  He would then transfer the stock in-kind to his regular taxable account in his name and pay income taxes on the $23 per share.  No additional taxes are owed until he sells the stock.   The stock would then be out of his plan at retirement.  When he goes to sell the stock at today’s price of $73, the difference of  73 - 23 = $50 would only be taxable at the 15% capital gains tax rate instead of the higher ordinary income rate.  The stock could also be left to grow over the long term at the low long term capital gains tax rate.

The advantage of the plan is that it can reduce taxes, especially for large distributions near retirement.  One of the negatives is that you do not receive a step-up at death.  Overall, the NUA rules are beneficial when you want to move money out of a 401(k) plan at retirement.

New Dow Stocks
This week, both General Motors (GM) and Citigroup (C) were removed from the Dow Jones Industrial Average.  General Motors was removed because of its recent bankruptcy.  Citigroup was removed because of the extent of government control of the company.  In their places, Cisco (CSCO) and Travelers (TRV) were added to the Dow 30.  Although we still watch the DOW closely, overall the S&P 500 is a much broader and more representative index for the stock markets.  The S&P 500 index is the index most investment professionals use today.

Outlook
The investment markets have seen a substantial rally from the March lows as it has become clear the financial system would not collapse.  We have witnessed what can be best described as a second derivative rally.  The second derivative rally simply means that the rate of change is slowing or, to put it other way, the economy is no longer in free fall therefore it must be a buy!  We believe that what is less understood is the depth to the credit slowdown and the extent of the fall in the economy.   We have just witnessed a substantial slowdown with many companies reporting a 20% or more drop in sales from the 2008 quarter.  Given the huge amount of secondary stock issues to clean up the balance sheets of many companies, the rally has probably seen a top in here.

We believe that the economic recovery will be very tepid and take several years for the following reasons:

1.     We are in the process of delevering balance sheets of corporations and individuals that took on too much debt as a result of the debt bubble.

2.  The government has moved decisively into the economy with bailouts and regulation.  This will raise risk premiums for US investments.

3.     Credit availability has dried up and will remain tight for individuals and corporations.

4.     Real estate, particularly the commercial sector, has not yet bottomed.

5.     State and local governments are in trouble throughout the country.

6.     Tax will be going up at the Federal, state and local levels.

The investment markets at the present time appear to be anticipating a more substantial V shaped recovery.  We are anticipating a recovery more along the lines of a hockey stick.  Over at PIMCO, they are expecting a 1-2% GDP growth rate going forward; something we would agree with.  In this environment of very slow growth for the economy, we want to continue to maintain our cautious stance in the investment markets.  In a very weak economy characterized by excessive debt, it is best to invest in high quality companies that can afford to continue to grow their business worldwide.

One of our major themes for 2009 is income.  This year we want as much income coming in as possible.  Income can be generated in a portfolio from bond or money market interest and stock dividends.  We would continue to avoid the high yield bond sector due to very low recoveries we are expecting from continuing bankruptcies.  For the higher yield side we believe that the loan sector should outperform.  We continue to see value at the lower end of the investment grade bond markets.  With the prospect of a declining dollar, foreign bonds are a great place to be.  For all bonds, we would keep a sharp eye on maturity and call features.  In an environment where inflation could be a problem over the next couple of years the shorter term the bonds the better.  Bonds should have a maturity of 10 years or less, ideally less than five years.

In this environment the central themes should be quality, income, overseas growth, weak dollar and inflation.  At the present time we would expect some type of correction.  We would have some cash available to for investment opportunities as they appear in what should be a very opportunistic market going forward.

Need Help?
Do you already have an account at Fidelity Investments?  Why not let the MaxOut Savings Advisors Team manage the assets for you at Fidelity?  In most cases you can sign a simple form and we can use your same Fidelity account to get you started.

Considering an IRA Rollover?
If you are retiring or considering an IRA rollover let the MaxOut Savings Advisors Team handle your IRA rollover.  We will sit down with you and go over your financial situation and needs and come up with a plan.  We will show you how we manage accounts using our value analysis strategy to grow your investments and reduce risk.

Who is MaxOut Savings Advisors LLC?
In these volatile times, investing your retirement funds can be difficult and time consuming.  Hiring the MaxOut Savings Advisors team to manage your money or IRA rollover is a great first step.  MaxOut Savings Advisors is an SEC registered, fee-only investment advisor based in Houston, Texas.  Ted Geoca has over twenty year’s investment experience managing clients’ retirement assets. We invest in stocks, bonds and mutual funds for our clients using a value analysis strategy that we have developed over the last twenty years.   We use Fidelity Investments as the custodian for our clients’ assets. If you would like MaxOut Savings Advisors to manage your retirement investments using our value methodology, I would be happy to meet with you.  To schedule an appointment please give us a call at 713-627-0400 or email me at ted@maxoutsavings.com.

Remember Save Aggressively and Invest Conservatively!


Ted K Geoca                          Doug Saam                 Kellan Caldwell
President
MaxOut Savings Advisors, LLC
Houston, Texas
ted@maxoutsavings.com                                   713-627-0400