The Next Phase

2008 IRA Changes
ETFs
The Castle
Opportunity
Next Phase
Grain Inflation

2008 IRA Changes
As we come into tax season it is IRA contribution time for many people. The first thing to remember is to choose an IRA that has no annual fee. At MaxOut Savings Advisors we use Fidelity Investments for our IRA plans although many other companies also offer no fee IRA plans. Next, pick a plan that has numerous IRA investment choices. The IRA program should offer the ability to invest in stocks, bonds and mutual funds allowing you to shift your investment strategy as conditions change. Contribution limits for 2008 have been increased for both IRAs and Roth IRAs. Remember you have until April 15, 2008 to make your contribution for the 2007 tax year.

IRA & Roth IRA Contribution Limits
2007 Contribution over age 50 2008 Contribution over age 50
$4000 $5000 $5000 $6000

Income limits for full deductibility of traditional IRAs have been increased for 2008 as well.

Traditional IRA MAGI (Modified Adjusted Gross Income) limits for full deductibility:

Full Deductibility of IRA Contribution MAGI (Modified Adjusted Gross Income)

2007    MAGI                                     2008   MAGI
$52,000 single                                     $53,000 single
$83,000 joint                                      $85,000 Joint  Spousal IRAs

Deductibility for working or nonworking spouses not covered by employer sponsored plan:

2007 MAGI                                        2008 MAGI
$156,000                                             $159,000

Roth IRAs
The income limits to make a Roth IRA contribution:
                        2007                                        2008       _
Single Filer     $99,000                                   $101,000
Joint Filers     $156,000                                 $159,000

ETFs
The ETF has become a popular way to invest in the stock and bond markets. An ETF is a security that represents a legal ownership of part of a basket of stocks or bonds. They trade on the stock exchanges and are bought and sold just like a regular stock. You typically pay a commission to by the ETF, but other than that they are no-load. In addition, an ETF has much lower fees than most mutual funds and that has made them very popular.   Another advantage of an ETF is that you get the pricing as soon as you put in the order as compared to a mutual fund in which prices are set at the end of the day. This can be a big advantage in these volatile markets. The ETF baskets are composed of indexes or groups of stock in certain industries or sectors. They are an excellent way to invest in an industry you think will do well and at the same time reduce individual stock risk. Some of the industries that are represented are technology, oil & gas, drugs, healthcare, financials, etc. The ETF is also a great way to allocate assets using different indexes or styles such as large cap growth or small cap value.

There are several sources of information on ETFs; the best is www.etfconnect.com as well as http://finance.yahoo.com/etf.   With both of these sites, one can compare different ETFs and run screens to show choices in different sectors.   Some ETFs are closed-end funds that will trade at a discount or premium to the markets. In the closed-end sector the fixed income or bond holds a bigger part of the market due to the difficulty of putting together baskets of the same bonds on a daily basis. As the closed-end bond funds trade at a discount, it opens up some good opportunities.

Gold and Silver ETFs
On the MaxOut Savings Show we often get questions about investing in gold and silver. ETFs are one of the best ways to own gold or silver. This is especially true in IRA and qualified plans where there are restrictions on holding physical gold—with the exceptions of the US Gold & Silver Eagles. We first wrote about gold in the MaxOut Savings Report back in December of 2001 where we predicted “gold was about to start off a major bull market that would last over a decade.” At the time, gold was priced at under $280. It is now over $900 and we believe gold will go higher as the US Dollar decline resumes. If you want to own physical gold it can be purchased in two forms: bullion and coins or ETFs (exchange traded funds).

There are 3 Gold ETFs on the stock exchanges: streetTracks Gold Trust (GLD), iShares Comex Gold Trust (IAU) and PowerShares DB Gold (DGL). The streetTracks (GLD) and the iShares (IAU) are gold trusts that own the physical gold in vaults. The PowerShares (DGL) owns no physical gold, but creates exposure through the commodity futures market by owning futures contracts and has excess funds in the Treasury Bills. This method could reduce expenses as the T-Bills pay some interest and you receive a dividend. We prefer the gold trusts (GLD and IAU) because they own the physical gold and are not subject to the uncertainties of the futures markets.

The silver market offers the same opportunity to invest in silver on the stock exchanges through ETFs. There are two ETFs for silver: iShares Silver Trust (SLV) and PowerShares Silver Fund (DBS). The iShares (SLV) are a silver trust and own the physical silver in vaults. The PowerShares (DBS) use the futures market to “hold” the silver. The PowerShares (DBS) can pay some dividend due to the T-Bills. Again we prefer the iShares (SLV) because it is a silver trust and owns the metal.

When purchasing the physical metal you can also invest in gold and silver coins and bullion. The coins are generally the better way to go when saving gold in the safety deposit box because they do not generally need to be assayed when they are resold. At times, though, there is an assay charge to confirm that bullion is what it states it is.   Coins are much more easily bought and sold and the fees are generally lower. Stick with the American Eagle, Canadian Maple Leaf, Chinese Panda, and South African Krugerrands. These coins are sold on metal weight and not historic value; therefore, you are paying for the metal only. The American Eagle gold and silver coins also can be placed in an IRA. Given it can be invested in an IRA, it is the best coin to buy as it could sell at a premium in the long term.

Do You Have A Castle?
In Europe for the last 1000 years they have built castles. There are castles in England, France, Germany and most counties in Europe. Why were all the castles built in the first place? The castles were built for two reasons; one, Europe was a very dangerous and unstable place. The main reason was that the castle owners had wealth and they wanted to protect their wealth from attack. Today we have developed a whole wealth industry around telling people not to worry about protecting their wealth just leave it in the stock market and everything will be fine. This is ridiculous; you invest to make money not be “in the market.” When times turn perilous that is not the time to listen to the TV talking heads and put your head in the sand. That is when you should retreat to the Castle and watch the index fund crowd be pillaged by the Huns or in this case Attila the Sub-prime. We now have a major credit crisis and you should be retreating to the castle as the credit Huns attack. Remember the first rule of wealth and retirement plans is to try to protect them from attack. So when we ask, “do you have a castle?” ask yourself; do you have a defensive plan for your investments?

When it comes to a defensive plan for this credit crisis take a look at your investments to make sure you are properly diversified using various asset classes. If everything is “diversified” in an S&P 500 index fund you have a problem. With high energy prices here in Houston many people are over-weighted in the energy sector in one oil company or a group of 5-10 energy companies. It is all the same thing. What happens to your retirement plan if oil drops to $55 per barrel? If this happens, you could lose half your retirement plan. Not that this is what we think will happen, but it is something to think about.

Cash, Quality and Opportunity
We have often written about the value of cash in an investment account for two reasons—it stabilizes the account and you have money to buy investments when they are dirt cheap. You cannot buy when there is the proverbial “blood in the streets” if you do not have any money.   Another good sector to be in is fixed income, which often moves counter to the stock markets.   For now, we like agency mortgage and high quality corporate bonds short to mid term in maturity length. We like the shorter term maturities because we think long term rates will move up from here. We are also sticking with foreign currency bonds and money markets. In the stock markets, we would still overweight the large cap sector to take advantage of the sector’s overseas growth and strong balance sheets. We would start to underweight the overseas stock markets though. Remember in an economic slowdown and credit crunch you want to be very targeted with your investments to ensure you are in things that will make money.

Credit Bubble
For the last two years in the MaxOut Savings Report we have worked to highlight the severe credit problems the United States faces and the dangers to your investment portfolio. We have pointed out that we are in a credit bubble and that when it collapses, it will cause a recession. The following is a list of the titles of our MaxOut Savings Report over the last year.

Sub-prime Lending Problem 1/09/07
Bill Gross & Sub-prime 6/26/2007
End of the Credit Bubble: A Time for Caution 7/31/2007
The Eye of the Storm 8/24/2007
           Credit Storm
The Rise of the Dollar Vigilantes Part II 10/18/2007
How Are You Protecting Your Retirement Savings? 11/14/2007

As you can see we have been extremely concerned about the investment markets and the credit bubble for over a year. Now after the stock markets have fallen over 15% we see experts that have been wrong all year, suggesting investments in the financial sectors. We would still avoid the financial sector as the US consumer slows down and credit losses increase as the year goes on. As was the case in Japan during the 1990s, we believe that it will take several years for the financial sector to work through its problems.

Brokerage Firm Debt Bubble (update #2)
During an economic crisis, investment companies’ debt levels should decline as they seek to reduce risk. Ominously, the New York investment firms continue to take on debt as this crisis unfolds. We wrote the following in the July 2007 MaxOut Savings Report: “In our March 07 MaxOut Savings Report we highlighted the huge amounts of debt taken on by the major investment banks. As can be seen from the updated chart below that debt has grown dramatically over the last 6-9 months. Some of this money has been lent out to hedge funds that are now in trouble. In our opinion the debt levels at these brokerages have risen so quickly that it could destabilize if we had a major financial problem. We would avoid brokerage firms bonds. This debt could be at risk in the sub-prime meltdown that we have often talked about.”

Company	Q4 2007 LT & ST Debt	Q1 2007 LT & ST Debt	2006 LT Debt	2000 LT Debt
Bear Stearns	78 up 4%	75	76	17
Goldman Sachs	291 up 24%	234 up 15%	202	31
Lehman Bros.	146 up 28%	114 up 26%	90	29
Merrill Lynch	291 up 45%	199 up 15%	173	51
Morgan Stanley	205 up 6%	193 up 21%	159	42
Citigroup	365 up 27%		288

(Figures in billions of dollars)

Since 2000 the debt levels of many of the brokerage firms have more than quadrupled. As an example, Bear Stearns has a $21 billion market capitalization and over $76 billion in debt. Bear Stearns and Morgan Stanley look much better off because the debt has not risen like some of the others. These numbers do not include certain off balance sheet derivative items that show the actual debt to be much higher. We bring this up to point out the huge credit growth on Wall Street. This credit could turn bad quicker than most people realize as it is backing financial instruments, derivatives and credit default swaps. We would not be a buyer of brokerage firm debt.

The Next Phase of Crisis: Debt
At MaxOut Savings Advisors we believe the high debt levels at the investment banks will lead to a new phase of the crisis in the fixed income markets. The next phase of the credit crisis should be a re-pricing in the corporate bond market downward in price and upward in yield. We think that there will be a new leg down in the value of the LBO (liquidated buy-out), high-yield, junk and high debt bond markets. These areas of the fixed income markets have not fallen as much as they could have because the treasury yields have fallen rapidly as investors flee to safety during the credit crisis. Most bonds are priced off the US treasury yields; this provided a false bid under the lower quality corporate bond markets. Now that treasury yields have stabilized and are starting to move up, the low quality market is overpriced given we now appear to be in a recession. This will lead to two things. The banks will be forced to take further write-offs in the bond market, which will thereby lead to more selling of those bonds by the banks. We are also looking for an acceleration of debt problems in credit card and auto loans. This should open up a great buying opportunity in corporate bonds later this year.

Grain Inflation
The following weekly price chart of wheat http://futures.tradingcharts.com/chart/CW/W shows inflation continues to be a problem. Wheat inventories are now at 60 year lows and there is talk the United States may have to import wheat. Wheat has now broken out to a new high of over $10.90 per bushel. It has been up “lock limit” for 3 days on the commodities exchanges. We are seeing the same thing happen with many of the grains because of world wide demand and ethanol production.

With surging oil, grain and metals prices, we are seeing a replay of the 1970s all over again. If memory serves me, I do not think Paul Volker, Chairman of the Federal Reserve, stopped inflation by taking Fed Funds rates and interest rates down to 2%. Inflation is continuing to move thru the economy as commodity prices remain high. Although some commodities could fall in price as the economy slows, the precious metals markets should stay in a bull market as the Federal Reserves cuts interest rates to stabilize the financial markets. This will also lead to a premature increase in the long term Treasury yields. We feel that at 3.59%, the 10 treasury yield is too low and poised to move higher. Therefore, we would not be a buyer of long-term government bonds at this level. We believe that the credit crisis will bring historic buying opportunities later this year in the investment markets.

Need Help Managing Your Retirement Investments?

In these volatile times, investing your retirement funds can be difficult and time consuming. Why not hire the MaxOut Savings Advisors team to manage your money? 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!

Did you know that the MaxOut Savings Advisors money managers can now manage your IRA Rollover at Fidelity Investments? At MaxOut Savings Advisors we use Fidelity Investments to handle our investments for our clients. We invest in stocks, bonds and Fidelity and non-Fidelity no-load mutual funds. If you would like to sit down with Ted Geoca at MaxOut Savings Advisors and discuss your IRA Rollover or 401-k or just a retirement review give us a call at 713-627-0400 or email me at ted@maxoutsavings.com

Ted K Geoca

President

MaxOut Savings Advisors, LLC

Houston, Texas

ted@maxoutsavings.com 713-627-0400

Remember to catch:

The MaxOut Savings Show with Ted Geoca on Saturday at 11:00am on KNTH 1070AM!

Any recommendation may not be suitable for all investors. Moreover, although information contained herein is believed to be reliable, its accuracy cannot be guaranteed. MaxOut Savings Advisors, LLC may or may not have positions mentioned herein. MaxOut Savings Advisors, LLC is a Registered Investment Advisor registered with the SEC. You should always make investment decisions based on your own financial situation.

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