Dubai Debt Problems
Risk Aversion
Three Stages of Debt Bubble
Gold
Dollar
State Budget Deficits
NUA Deadline
Investment Markets: Income
Zero Money Markets?

Dubai Debt Problems
Dubai’s debt problems have moved back to the forefront when Dubai World, a quasi government entity, requested a six month delay in interest payments.  As we have written about over the last couple of years, Dubai the country is one big real estate bubble; think Houston, Texas with no industry and a bunch of empty buildings.  It was the ultimate “field of dreams” in real estate.  Build the buildings and high rise apartments and people will come!  The debt in Dubai is about $70-80 billion; we believe it is actually much more than that.  This is the start of the restructuring of that debt.

Risk Aversion
The Dubai debt could be very disruptive worldwide because no one is really sure what bank or institution holds that debt.  The other thing to watch is how other developing countries, particularly the Eastern Block countries, Hungry, Greece and Spain react to this crisis.  All of these countries have debt problems, particularly in the eastern block with private and corporate debt.  We must now watch to see if this spreads to other parts of the world, we doubt that Dubai is a unique one off event.  We believe that this will lead to a worldwide move to risk aversion as investors seek to reduce risk.  If this investment risk aversion spreads, it could move the dollar higher over the short term.  That could unwind the dollar carry trade and cause investors to sell stocks.  If this happens, we could see the start of the long awaited correction in the world stock markets.  We would closely monitor risk in investment portfolios at this time.

Stage 1 Credit Bubble
The present economic crisis has unfolded in three stages; the first was the Credit Bubble stage, a massive increase in debt throughout the country as Wall Street and real estate investors leveraged up their balance sheets.  At the same time, consumers quit saving for retirement and started borrowing and went on a spending spree.  This resulted in the US savings rate going to zero.  At the height of the problem, some Wall Street investment banks were growing their balance sheets over 25% every nine months.  The debt bubble stage broke in July of 2007 as the subprime CMO market began to collapse.  We wrote about this in a MaxOut Savings Report in July 2007 entitled “End of the Credit Bubble”.

Government Borrowing

California had the worst budget shortfall for fiscal 2010 of 49.3% followed by Illinois at 47.3%, Arizona at 41.1%, Nevada at 37.8% and New Jersey at 29.9%.  The average for the US overall was 17.7% as of July of 2009.   Now in most cases, these budget shortfalls will be closed, but this gives you an idea of the cuts that need to be made in many state budgets.  Revenue in many states has fallen for Q1 2009 from Q1 2008 by a surprising amount.  Oregon leads the decline with a 19% drop in revenue.  Arizona, Michigan, California and New Jersey had revenue declines bunched around 16%.  If you are wondering where Texas came in, we had one of the lower budget deficits at 9.5%.  From 2008 to 2009 Q1, we had a state revenue decline of 8.8%, above the United States average of an 11.7% decline.  As can be seen from the above chart, Texas compares very favorably in the Pew study.

We continue to believe that state and local governments will have major budget problems in 2010 as the recession continues to take hold.   The above revenue and budget shortfalls will lead to continued cutbacks across most spectrums of state and local governments.   This will result in higher taxes and fees across the country.  We believe that this will create opportunities next year in the tax free municipal bond markets.

NUA
One of the best tax breaks available to corporate retirees is the Net Unrealized Appreciation (NUA) of company stock.  NUA allows a retiree to take his low cost basis company stock out of his company qualified plan, pay the taxes on the original cost basis as ordinary income and then they can title the stock in their name.  The difference in original cost and what the shares are now worth is called Net Unrealized Appreciation (NUA).  You pay no taxes on the NUA until you choose to sell the stock, at which time you pay the tax at the lower capital gains rate, which is currently 15%.   To qualify for the NUA 15% capital gains rate, you do not need to hold the stock an additional year.  This is a great way to get money out of your qualified plans at a low tax rate.  The lower the cost of your stock the better the tax break becomes.

NUA Deadline
In order to qualify for the NUA, you have to empty your qualified plan to zero by year end.   The NUA stock is taken out in your name and the remainder of the plan is rolled over into an IRA rollover.  If you roll the company stock from your company plan over to an IRA rollover you lose the NUA tax break.  The problem right now is that many plans take over thirty day to make distributions.   If you are retiring this year, you need to get things rolling right away to ensure that your plan is completely emptied by year-end.

As we have often discussed on the MaxOut Savings Show, we like the energy sector as well as the precious metal sector.  Unlike the mining stocks, many energy stocks pay a good dividend as well.  This also falls into our income strategy.  Both have good long term potential; as the dollar continues to decline, oil and gold should move higher.  In addition, as the economy recovers and worldwide growth resumes, oil should move higher.  In these uncertain times you should work to build a well diversified and structured portfolio to profit from multiple possible outcomes.

Investment Markets: Income
We continue to emphasize income as a major theme for investing at this stage of the economy.  The key will be picking up investments that pay income through dividends or interest that also have some type of inflation protection.  This is easier said than done.  For bonds, it would involve shorter term maturities ten years or less; preferably less than five years.  For stocks, we want to find companies that, if inflation hits, can raise prices and are not locked into long term price contracts or whose sales are regulated by the government.  As an example, oil companies can easily raise prices and their dividends as oil rises.  An electric utility that is regulated might take several years to get the price hikes through (we are looking at some special situation stocks in the group that could be an exception).  The Burlington Northern railroad is somewhat of an unregulated utility that can raise prices as inflation increases; this could be one reason Warren Buffet made an offer to purchase it recently.  The stock also pays a good dividend.

Zero Money Markets?
With money markets yielding close to zero, blue chip common stocks with dividend yields from 3½% to 6% offer good investment opportunities on a pullback in the stock markets as they have potential growth overseas.  Our favorite sectors are energy, stable demand, healthcare and metals/mining.  We continue to believe that, in this type of volatile investment market worldwide, we would maintain a higher level of cash on the sidelines, particularly after the substantial rally we have had off the March lows.  Cash will get us buying power on the ultimate correction in the markets and reduce portfolio volatility.  By having cash as the markets decline, it this allows you to make investments and not become frozen by being all in as the markets fall.  In this market, we would use corrections take advantage of bargains in the stock market as they appear.  The key to profits over the next five years will be bargain buying opportunities when we have corrections.  As we have seen this week with Dubai, we have a long road ahead of us that should present some outstanding investment opportunities as long as you have the cash.

Do you have an account at Fidelity?
Do you already have an account at Fidelity Investments?  Why not let the MaxOut Savings Advisors Team actively manage the assets for you at Fidelity?  We will make the investment decisions and you can sit back and relax.  We use the same value based investment strategies we talk about on the MaxOut Savings Show.  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 soon or considering an IRA rollover, let the MaxOut Savings Advisors Team handle your IRA rollover.  We can help you take advantage of the NUA tax break if you have low cost basis stock in your company plan.  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.

MaxOut Savings Advisors: Actively Managing Risk
In these volatile times, investing your retirement funds can be difficult and time consuming.  Is your advisor looking at risk and actively managing your retirement? Hiring the MaxOut Savings Advisors team to manage your money or IRA rollover is a great first step toward a successful retirement.  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 look at risk as well as return to actively manage your investments through today’s changing markets.  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.