Archive for the ‘ Taxes ’ Category

Green Light or Caution ahead?

Posted by Abigail M. Huffman, CFA on April 13, 2013 at 2:36 pm

Since the beginning of the year, Health Care, Staples and Utilities have outperformed the overall market

The US stock market has been on a tear in 2013 with the first quarter showing advances worthy of an entire year (average annual returns are 9-10%.)  For the oft-cited overall indices, the year-to-date gains (not including dividends) through April 11th are shown below:

Dow Jones Industrial Average: up +13.4%

Standard & Poor’s 500:  up +11.7%

Nasdaq Composite: up +9.3%

Russell 2000: up +11.5%

Source: Wall Street Journal

With such healthy returns, is it full steam ahead? Or time for the market to take a breather?

Here’s the good news

As noted in my November post, “With consumers becoming more confident, is it time for a positive feedback loop?” , increased net worth from appreciating real estate and improved employment should drive spending, economic growth and stock market advances.  In the last six months we have seen:

  • House prices rebounding to a post-recession high (See latest Case-Shiller) for March 26th.
  • Improving employment numbers.
  • Increased economic activity as measured by gross domestic product along with positive leading economic indicators.
  • More retail investors gaining the confidence to invest again in stocks.  (See Mom and Pop Run with the Bulls)
  • Safe haven investments, such as gold, languishing. (See recent NYTimes article on gold)
  • Stronger than expected corporate earnings.

Is it time for the market to take a breather?

Given this positive backdrop, what are the risks of repeating the “Sell in May and go away” pattern? The last several years, in particular, have seen the stock market advance in the early part of the year through May, and then retreat during the summer months.  While this year’s US economy is stronger than the last few years, what are some upcoming data that bears watching?

This year I am focusing on the following concerns:

  • First, as of April, we are entering the earnings season when companies report profits.  Will companies surprise to the upside despite muted expectations?
  • Also, the defensive sectors, such as health care, staples and utilities are leading the market advance instead of those sectors that usually perform during bullish periods such as materials, technology, industrials.  [Refer to chart of sector performance year to date.] Such market action may be a flashing yellow light indicating “Caution ahead.”
  • Volatility, as measured by the VIX  is at a historically low range around 12-14 (normal ranges are in high teens to low 20’s).  Are investors becoming too confident given the recent robust advance?
  • The US debt ceiling needs to be increased and lawmakers are sharply divided as to how to proceed.  A stalemate – if similar to summer 2011 – could cause the market to retrench.
  • The macro environment has been quiet lately but economies in Europe and Asia are still struggling.

Take the long view

While the market may retreat in the short term, it’s important for investors to keep a long view.  Historically over long periods, stocks have appreciated more than bonds or cash.  And for building a diversified portfolio, stocks are an important component. will keep you apprised of trends in the markets.

Print Friendly, PDF & Email

Asset Allocation – Let the Fiscal Cliff be an impetus for a portfolio checkup!

Posted by Abigail M. Huffman, CFA on December 11, 2012 at 5:40 pm


While lawmakers attempt to resolve the fiscal cliff (15 days until year end and counting down!) this would be a good time to check in on your portfolio’s asset allocation.  Why?  Because volatility is low[1] and has the potential to increase [See chart #1.]  Moreover, stock market returns have been decent this year after underperformance in the last few years.   Portfolio allocations may need a revisit by investors who are complacent because of healthy returns and who may be making unintended bets on the future direction of the financial markets and their portfolio values.  By paring back winners that have appreciated and are now expensive on a valuation basis (such as price to earnings multiples), gains can be redeployed into cheaper assets before an unpleasant reality check or sell off.  The assumption that capital gains taxes may increase in 2012 is an added incentive.  In any case, systematic rebalancing keeps a portfolio on track.  Below I detail some important tenants:

What is strategic asset allocation and why is it important?

Strategic asset allocation is the long-term plan an investor (individual or institution) sets for financial assets based on specific goals, objectives, time frame and contributions for a set period.  The strategic asset allocation is an investment roadmap for growth that takes into account investor risk tolerance, liquidity needs, requirements specific to his/her objectives and personal circumstances (such as early retirement, need for income over growth or vice versa) and a time frame for achieving these goals.

Example:  For most of us, it is critical to have a plan for retirement so that an individual can measure over time whether the plan is on track.  Academic studies conclude that roughly 85% or more of investment returns over time are attributable to how funds are allocated among asset classes.[2]

What are some components of a successful strategy?

Diversification among asset classes:  A prospective range of investment returns over time are attributable to how investment funds are allocated among asset classes (including stocks, bonds, cash and alternatives – such as hedge funds, real estate, commodities) Of course, this assumes that asset class allocations are diversified and perform according to general market risk, as shown in chart #2, rather that specific security risk. (Security risk is associated with a company or industry.  Examples: Tobacco companies face lawsuit risk associated with the dangers of smoking.  Drug companies face the risk of patent expiration on the drugs and the competition from generics)

Allowing for time in the market as “timing” is not perfect.  While an investor may plan to ride a particular security or asset as it appreciates while vowing to jump out before a sell-off, this clairvoyance is rarely achieved on a consistent basis.  So disciplined “rebalancing” based on periodic readjustments according to a combination of price or calendar guidelines can help maintain intended allocations.

Chart #1:  Volatility, as measured by the VIX, spiked to historical levels during the Global Financial Crisis in 2008 and has subsided to below average rates in the last six months.  Source:  Bloomberg

Chart #2:  The efficient frontier curve (according to Modern Portfolio Theory), illustrates the optimal performance of a diversified asset class given its measured risk.  Source:  Investopedia

Despite the uncertainty, move forward!

Investors have had to grapple with uncertainty, volatility, and a weird investing environment in the past few years.  Interest rates are very low, inflation appears quiescent despite a huge buildup of government debt, unemployment is high and there is excess growth capacity in an economy that could ramp up if demand returned to historical levels.  Internationally, many of our trading partners are also dealing with a low-growth environment and high debt.  Is this a reason to shun the financial markets? No!

Despite the uncertainty and distressing environment, time can be on the side of the patient investor who takes a long-term view toward compounded returns and appreciation.  While nervous investors have rotated into less volatile investments (such as government bonds), there are opportunities in the market due to lower prices of risk based assets.  Set sail and move forward!



[1] According to Bloomberg, average annual volatility, as measured by the VIX index, for the last 10 years is 20.89 versus 16.85 for the last six months.  Click here for a definition of VIX.


[2] Gary Brinson’s landmark asset allocation study and subsequent academics have argued over the percentage of returns attributable to asset allocation for twenty-six years.  For a recent detailed discussion, see Asset Allocation


Print Friendly, PDF & Email

Less than 50 days until Fiscal Cliff : Who blinks first?

Posted by Abigail M. Huffman, CFA on November 13, 2012 at 2:34 am

I have recently returned from post-election meetings in Washington, D.C. where universal attention is now focused on the “fiscal cliff”, the automatic tax increases expected to kick in at the beginning of the year due to the expiration of Bush tax cuts and other provisions.  Lawmakers are once again preoccupied with breaking the impasse that has hamstrung policy advancement since the days of the debt ceiling crisis (May through August 2011), rejection of Obama’s bipartisan deficit committee proposal (also know as Simpson Bowles) and subsequent alternative proposals.   Time to resolve a large hit to the economy is of the essence, with less than fifty days until the deadline, and the consequences are sobering.


Last week, The Congressional Budget Office published a report that reiterates the difficult scenarios of either maintaining scheduled tax raises or extending Bush tax cuts:

1)                   If all provisions are allowed to expire, the debt to gdp ratio will come down over ten years but the economy will face a probable recession in 2013 or,

2)                   Extending tax cuts would maintain positive economic growth but increase long-term debt to unsustainable levels.

While it is debatable how much can be achieved by a “lame duck” Congress in 21 days of sessions until the end of the year, here are some of the things that lawmakers and pundits are saying inside the beltway:

  • Both parties are claiming a “mandate.”  The Republicans base their assertion on the very close popular tally for the Presidential race.  The Democrats, of course, point to Obama’s electoral victory (and 49.4% of the popular vote versus Romney’s 49.1%.)  It looks to me as though Americans hedged their bets:  voting  progressively on social policies for Obama, but conservatively on spending policies since the Republican Congress controls spending.  The American electorate wants many things – universal healthcare, maintenance of Social Security and Medicare, and does not want to pay for it!
  • Some lawmakers claim that going over the fiscal cliff could easily be reversed and that while uncertainty would prevail in the meantime, policy and tax reform cannot be hurried.  This argument could also be used to support a temporary solution and would be analogous to the last three years of continuing resolutions to enact annual budgets.  And while both sides may be using rhetoric, this writer asks, have any of these folks seen the stock market reaction to status quo politics when the stock market sold off almost 3% after the election?  Could lawmakers really be so deaf to financial markets, corporate CEOs, foreign leaders, credit agencies and the IMF?  
  • Present lawmakers are likely to take an approach that buys time (until the more cantankerous newly elected Congress arrives in Washington) and avoids the automatic cuts in defense and discretionary spending.  The prevailing assumption is that the real deal will take some time. 
  • Some numbers:  The US Treasury collects almost $1.3 trillion in revenues from individuals, while $1.1 trillion is lost to loopholes and deductions.  “Lowering rates and broadening the base” is probably intuitively attractive to any taxpayer because the verbiage seems to promise that those who are already paying will pay less at lower rates.  I expect, however, that all of us will be paying more in the long run despite any attempt by either party to protect a particular constituency.  Potential targets include homebuilders (save the mortgage interest deduction) or charitable organizations (save the deduction for charitable donations).  On the spending side,  entitlements could be tweaked with Social Security cost of living increases adoption of “chained CPI”.[1]

It remains to be seen if things are going to get better, or get worse before they get better, or just get worse.  As of Friday, both Boehner (who does not want to go down in history as a political hack) and Obama (also considering his legacy) have made conciliatory remarks, a dim positive if not yet substantiated by any agreement.  In any event, the Huffman Broadsheet promises to keep you up-to-date on how policy impacts financial markets and the economy and who blinks first.





While the S&P 500, Nasdaq (CCMP or orange line), and Dow Jones (INDU or yellow line) are up nicely for the year, the market accelerated its retreat last week after peaking in September.  Source: 

[1] “Chained CPI” lowers cost of living increases due to adapting the basket of goods to new products and services.  See Investopedia

Print Friendly, PDF & Email

Simpson Bowles – Part 2: How it affects you

Posted by Abigail M. Huffman, CFA on October 18, 2012 at 1:53 am

Simpson Bowles – Part 2 – How it affects you

Last week I discussed the goals of Simpson Bowles and the comprehensiveness of the proposal.  While the appointed bipartisan commission ultimately rejected its own plan in December 2010, this road map for cutting the long-term debt and deficits continues to resonate in political debates.

Most notably, the proposal calls for shared sacrifice by taxpayers and government employees.  And what makes the plan unique – compared to subsequent plans – is that it addresses both the revenue (taxes) and spending (outlay) sides of government in every sphere.  Even entitlement costs, which are growing at more than twice the rate of the economy, are reigned in to solve long-term funding gaps.   

My goal here with The Huffman Broadsheet is to give you, dear reader, useful information as you contemplate your verdict within this political maelstrom.  The politicians can haggle over spurious details during debates and avoid the full and total analysis involving painful choices that we, as a responsible citizens and taxpayers cannot ignore.

What are the Main Components of the Simpson Bowles Plan?

There are six main parts to “the Moment of Truth” plan. (Click on the title for full document)  Highlights are listed by category.

1)   Discretionary spending cuts

The commission notes that forecasting and controlling discretionary spending was how the government balanced its books in the 1990s.  Members suggest there be enforceable spending caps, realistic disaster budgeting, and that total government employees be reduced through attrition.

2)  Tax reform (click here for quick summary)  

  • For individuals: the commission suggests lowering rates and broadening the base of payers through the elimination or curtailment of many deductions. Mortgage interest deduction and charitable donations are two examples.
  • Reduce the deficit by ensuring that revenues reach 21% of gross domestic product by 2022.
  • Simplify the tax code.
  • For companies:  Establish a single corporate rate and lower it to between 23% and 29%.
  • Align US tax system with international trading partners by moving to a territorial system whereby income earned overseas is not subject to domestic taxes.

3)   Health Policies

  • Reform or repeal those parts of Medicare that are subject to fraud or are inadequately budgeted for such as long-term care insurance.
  • Pay for the Medicare “doc fix”, a sustainable growth-rate formula aimed to control Medicare spending, which now equals more than $200 billion.
  • Reduce Medicare fraud.
  • Address Medicaid funding and state implementation.
  • Adequately budget for health care programs.

4)   Other Mandatory Policies

  • Protect the disadvantaged.
  • End wasteful spending.
  • Review and reform federal workforce retirement programs.
  • Reduce agricultural programs.
  • Give post office greater management autonomy. 

5)   Social Security

  • Make retirement benefit formula more progressive.
  • Reduce poverty by providing an enhanced minimum benefit for low-wage workers.
  • Gradually increase retirement ages based on increases in life expectancy.
  • Gradually increase the taxable maximum to cover 90% of wages by 2050.
  • Adopt an improved inflation measure to calculate Cost of Living Adjustment.

6)   Process Reform

  • Establish a debt stabilization process to enforce deficit reduction targets.
  • Design effective automatic triggers for extended unemployment benefits.

Fast-forward 2 years later: Facing the Fiscal Cliff and how it affects you – or “What, me worry?[1]

Almost two years have passed since the Simpson Bowles plan was rejected.  The economy now faces a potential recession if numerous short-term provisions are allowed to expire.  For individuals, the tax code remains needlessly complex and outdated.  (Refer to charts 1 and 2 to see how you may be affected.[2])

The good news is that:  tax receipts are rebounding and the government operating deficits are shrinking. (See the Congressional Budget Office  October report.)

The bad news it that:  the US cannot continue to “kick the can down the road” forever.


Chart #1:  Federal tax rates for individuals would increase roughly 5% if all provisions in the fiscal cliff are allowed to expire.  Source: Tax policy center

[1] Attributed to Alfred E. Neuman, the fictional mascot from Mad Magazine.

[2] The Tax Policy center aims to provide independent and bipartisan analysis of the tax code.  See Tax Policy Center


Print Friendly, PDF & Email

Simpson Bowles: Worth a visit? Part 1

Posted by Abigail M. Huffman, CFA on October 10, 2012 at 11:23 pm

The first presidential debate covered tax policy and the economy. Since the candidates brought up Simpson Bowles several times, I picked up my copy to review. If you would like to read the entire 65-page proposal, titled “The Moment of Truth” click on the title.

Otherwise, I’ll summarize the main points here – since you will be hearing a lot about it in the coming weeks.

First, what is it?

The report was published December 2010 by the National Commission on Fiscal Responsibility and Reform. This 18-member bipartisan commission, appointed by President Obama, devised a blueprint to reduce the national deficit by $4 trillion by 2020, reduce the deficit and put the nation on a better, more sustainable footing. While the “Mission and Goals” continue to be laudable almost two years later and almost unanimously agreed upon, the implementation of these objectives is the sticking point.

Where there is universal agreement…

The goals of the plan are wide ranging, comprehensive and ambitious. The “guiding principles and values” underlie the difficult choices and compromises made by the group. Here are the core principles:

1. A commitment to make America better off tomorrow than it is today.

2. Don’t disrupt the fragile economic recovery.

3. Cut and invest to promote economic growth and keep America competitive. This means cutting waste in government but at the same time investing in education, infrastructure, and establishing policies to augment economic growth and keep the US globally competitive.

4. Protect the truly disadvantaged.

5. Cut spending “we cannot afford – no exceptions” in the federal government, the tax code, entitlement spending.

6. Demand productivity and effectiveness from Washington.

7. Reform and simplify the tax code (by lowering rates and broadening the base of taxpayers).

8. Don’t make promises that we can’t keep.

9. The problem is real, and the solution will be painful requiring shared sacrifice (interest payments on the debt may reach $1 trillion annually by 2020).

10. Keep America sound over the long run.

The sticking points: Shared sacrifice — or something for everyone to hate.

The last fifty pages of the plan detail how the commission would implement these values. And they really spread the pain around, so much so that by the time Obama was presented with the final plan, not enough commission members were supportive to take the plan to Congress. The plan died, only to be resurrected repeatedly as other legislators have tried to develop a plan with less pain. Voters are also unenthusiastic given the potential limitations on beloved deductions such as the mortgage interest rate deduction or proposed increase in retirement age. (For more history, see my previous blog “Tough Choices“).

Over the next few weeks, look to The Huffman Broadsheet for discussions about specific components of Simpson Bowles that look like they’ll survive.

Print Friendly, PDF & Email

Tax policy update:
Keeping your head when all about you are losing theirs1

Posted by Abigail M. Huffman, CFA on September 25, 2012 at 9:44 am

The 2012 presidential election brings a renewed emphasis on US fiscal health and its long-term future.  A candidate asks: “Are you better off?” But I suggest two more important questions:  What fiscal policies will provide you with a better future?  And what role do you want government to play in that future? 

Where to start searching for an objective viewpoint?

The choices are complex and the ideological divide between the two political parties have led to stalemate in Congress-so what’s an ordinary citizen to do?  I suggest seeking objective information that outlines the possible consequences of specific policies. Read the rest of this entry »

Print Friendly, PDF & Email