Good Day! I’m Terrence Wittman of LPL Financial Services and I want to thank you for taking the time to review our current conditions.. The fact that you’ve taken time from your busy schedules to review this today is a measure of your interest in the direction of our economy and the markets, and their impact on you and your financial goals.
Here is what we’re going to cover in the presentation. First I want to provide an overview of the current market conditions. Next, consistent with the title of this presentation – is the glass half full or half empty -- we’re going to look at the economy from two perspectives. First we’ll address some very good reasons to be optimistic. But in spite of those encouraging signs, there are reasons for caution. We want to make sure you get the full picture. We’ll also dissect the impact of the possible expiration of the Bush tax cuts, which, regardless of the outcome, will impact investors in multiple ways. Finally, we’ll offer some ideas on how both the economic and political scenes will impact investors.
Let’s start with some good news. Even though it might not feel that way, the recession is officially over. In fact, it ended last June. As you know, you can’t be sure there is a recession until it’s well underway and you’re not sure it’s ended until well after the fact. The National Bureau of Economic Research declared recently that the recession, which started in December 2007, ended in June 2009. That’s 18 months – a record – as you can see from this graph. Not only has the recession ended, but so has the post-recession rebound we saw in 2009. We are now in a period of slow economic growth. The recession was sufficiently deep and long that coming totally out of it will take some time. We enjoyed a quick rebound last year and now we face what appears to be a long, slow and sometimes bumpy ride to a full recovery. The good news is that while the growth is slow – there is, indeed, growth! It’s also clear that a double-dip recession – feared by some economists earlier this year – is highly unlikely.
Now let’s take a look at some reasons for us to be optimistic, beginning with Gross Domestic Product, which is a measure of the total goods and services produced in the United States in any given period. This chart shows annual GDP since 1981 through second quarter 2010. Look where GDP dropped off sharply in 1982, 1991 and 2001. Each of those down years was followed by sharp increases in GDP. Historically, that’s been the pattern: sharp declines in production are generally followed by rapid improvement. Look at the last few years. GDP has been dropping steadily since 2004 and took a sharp turn south in 2008. In 2009 it began to turn around and we’ve now experienced economic growth. Granted, that growth has slowed but we ARE growing.
Investor confidence in economic growth and corporate profitability propelled global developed markets higher in the quarter Weakness in European debt markets in the fourth quarter combined with improving global growth prospects put price pressure on global government bonds, pushing yields higher For the year, markets were led by high return asset classes such as emerging market equity, emerging market debt and high yield bonds
Next, I’d like to draw your attention to manufacturing. This chart shows the Purchasing Managers Index, which is a very reliable measure of manufacturing activity. Purchasing and supply managers for manufacturing firms are surveyed about their purchasing activities. Are they pessimistic about the economy and holding back on purchasing supplies, or are they optimistic and increasing the level of purchasing? A score of 50 or above for the Purchasing Managers Index means that a majority of the managers are optimistic and have increased their purchasing because they anticipate increased orders and business expansion. As you can see from this graph, the results from December 2009 to December 2010 are all above 50. That’s 12 consecutive months of growth in manufacturing. That bodes very well for our economy and eventually the creation of new jobs.
We can also evaluate the health of corporate America by looking at certain market data. One of the key measurements of U.S. equities is the PE ratio or price-to-earnings ratio, which is a measure of the price paid for a share of stock relative to that firm’s annual earnings. Generally, the lower the PE ratio, the cheaper the stock. This chart tracks the PE Ratio of the S&P500 from 1881 to 2010. You can see the volatility of the ratio, including the major drops in 1930, following Black Tuesday, and again in 2000 when the tech bubble burst. You can also see that the ratio is currently around 20, which is a little higher than the long-term average. What this tells us is that analysts and investors believe that stocks are a good value – or fairly valued – at this point in time. As we demonstrated in the previous slide, corporations appear to be relatively healthy, with good earnings, an abundance of cash and a willingness to invest in growth. So that means we have financially healthy companies available at fair valuations. That spells opportunity for investors. In fact, a recent survey of institutional money managers showed a lot of optimism. The survey, sponsored by Russell investments, found that 57% of managers consider equities to be undervalued, and only 7% think the market is over valued. Translation? Many of the world’s largest investors are bullish on stocks.
I’d like to offer one more note of optimism before we move on to looking at the glass from the other perspective. This chart, from data provided by the U.S. Department of Commerce, shows the growth in per capita GDP – or gross domestic product adjusted for inflation. As you can see from the line graph, GDP was $3,500 just after the Civil War and has climbed steadily upwards to about $45,000 in 2009. Think about that. Remember, the GDP data has been adjusted for inflation, which means that Americans today, on a per-person basis, are more than 1,200 times more productive than Americans 150 years ago. That speaks volumes about American productivity and the resilience of our economy, and – as much as anything I’ll share today -- provides strong reason for hope.
Now let’s look at the glass from the other perspective. For every piece of good news, there is bad news, especially in the job market. Unemployment, a trailing indicator, is stuck at high single digits. Granted it’s down sharply from the crisis levels of 2008 and early 2009, but not anywhere close to acceptable. What we’re hearing about job creation is to not expect a lot of improvement, at least over the next six to 12 months. The pace of economic growth is sufficiently slow that any meaningful growth in jobs will be hard to come by, until the second half of 2011 or even 2012. The unemployment rate fell by 0.4 percentage point to 9.4 percent in December, and nonfarm payroll employment increased by 103,000, the U.S. Bureau of Labor Statistics reported. Employment rose in leisure and hospitality and in health care but was little changed in other major industries.
The slowed pace of growth is also clear from the leading economic indicators, which tracks 13 separate indicators, and rolls them up into a single index. Individual indicators include everything from building permits and unemployment gains to stock prices and consumer expectations. This chart shows growth in the index over the last several months. The index rose steadily since the economy hit bottom in March 2009, but has since flattened out, with little or no expansion. The Conference Board Leading Economic Index for the U.S. increased 1.1 percent in November to 112.4, following a 0.4 percent increase in October, and a 0.6 percent increase in September
Also holding the economy back is the lack of improvement in the housing market. There are any number of ways to look at the market, including new construction, the sale of existing homes and the price of newly built homes. These tables show the prices for existing homes. Look at the top table first, and you can see the catastrophic drop in home values from 2007 to 2009. Now look at the bottom table, which shows prices and the percentage change from November 2009 to November 2010. In April, we got a nice bump (3.9%), but it’s been almost flat since then. So it appears that the market for existing homes has hit bottom, but we have yet to see any meaningful improvement. We’re going to be watching that too going forward. .
Now let’s turn our attention to another major concern – the U.S. budget deficit and national debt. As you can see from this chart, federal debt has increased steadily since 2000 and dramatically since 2008. Further, the U.S. Office of Management and Budget forecasts hefty increases through 2015. The deficit is currently around $14 trillion and will likely jump to over $19 trillion by 2015. Since September 2007, the deficit has been growing at an astonishing $4 billion per day. To put that number in perspective, with a U.S. population of over 307 million*, each citizen’s share of the debt is a little over $45,000.** Here’s the challenge with the budget. Currently, interest rates are relatively low, with the United States still benefiting from an ongoing flight-to-safety into U.S. Treasuries, helping to lower long-term interest rates However, interest rates will not remain low forever, and in fact are already inching up. As the economic recovery continues, institutional investors will reallocate their portfolios, selling the safe Treasuries and buying investments with potentially higher risk-return characteristics. As this happens, long-term interest rates will likely rise -- increasing the U.S.'s borrowing costs. The likelihood of rising rates is one of many reasons why we need to be concerned about the deficit and get spending under control. * US Census Bureau ** http://www.brillig.com/debt_clock/
In addition to the federal deficit, we also need to keep an eye on oil prices. As you can imagine, oil prices and all energy costs can have a major impact on global economies and make a sustained economic recovery even more difficult. As you can see from the chart, oil prices, after rising steadily for nearly a decade, topped out at over $130 a barrel in 2008 and then plummeted throughout 2009. Outside of the specter of widespread deflation – which is good for no one – falling oil prices is good news. But now prices are starting to jump again. This chart only goes through 2009, but I can tell you prices are much higher today. It was just over $88 a barrel in early January but it had approached $100 in December. To quote the chief economist for the International Energy Agency, “Oil prices are entering a dangerous zone for the global economy.” He said, and I quote again “The oil import bills are becoming a threat to the economic recovery. This is a wake-up call to the oil consuming countries and to the oil producers.” * *Source: “Rising oil price threatens fragile recovery,” FinancialTimes.com January 4, 2011.
In December, Congress passed the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.” The length of the name indicates the sweeping nature of this bill. In addition to multiple changes to the tax code, the bill also extended unemployment benefits for 13 months for millions of Americans. Let’s go through the highlights and see how it impacts taxpayers. In short, the bill lowers taxes for most Americans and provides some much needed clarity around the tax code that’s been missing for the last couple of years. As you know, the 2003 Bush tax cuts were set to expire at the end of 2010, which would have increased taxes for nearly all tax payers, especially those at the higher income levels. In general, the act created: Two year-extension of favorable capital gains and dividend tax rates One-year cut in employee payroll taxes Multiple incentives for businesses, including improvements in bonus depreciation Extension of many business tax benefits A “patch” to the alternative minimum tax benefits for middle-income tax payers. Repeal of the limitations on itemized deductions Multiple extensions on credits and benefits Keep in mind that most of the cuts and extensions are temporary and will expire in 2012 or earlier, which should make the next presidential election very interesting. Clearly these proposed changes will impact the recovery and your financial plans. Fortunately, we can help you manage your taxes, especially those on capital gains and dividends. I encourage you to talk to me about this if you haven’t already. Now let’s go through the revisions one at a time.
The most notable aspect of the tax relief bill is the two-year extension of the 2003 Bush tax cuts. The tax brackets are 10, 15, 25, 28, 33 and 35 percent. Without a congressional compromise, the top bracket would have reverted to the pre-Bush rate of 39%. No less significant is the “patch” to the Alternative Minimum Tax or AMT. It’s dubbed a “patch” because it’s only a temporary band-aid – two years -- on a long-term problem. The AMT was originally put in place to ensure people at high income levels pay taxes, but because it wasn’t indexed for inflation, it has pushed more and more middle income taxpayers into the higher brackets. We’ll have to wait and see what kind of permanent fix Congress can come up with. Changes to taxes on capital gains and dividends are welcome for almost all tax payers. Capital gains and dividends will be taxed at 15% through 2012, and 0% for taxpayers in the 10 and 15% brackets. Rates would have reverted to 20% had the cuts expired.
The “personal exemption phase-out” or PEP has been a type of “back-door” tax for years because it devalued exemptions for most high-income taxpayers. Under the new tax law, PEP has been repealed for two years, effectively lowering taxes for most affluent investors. Other good news includes the extension of the $1,000 child tax credit, again through 2012. Without the extension, the child credit would have reverted to $500. However, the credit will phase out for taxpayers with income above $110,000 for joint filers and $75,000 for others. The new law also makes it easy for investors to continue making charitable donations using tax-free distributions from their IRA. There are other additional credits and benefits for taxpayers, including: Marriage Penalty relief extended through 2012 Education incentives extended through 2012. Adoption credit Dependent Care Credit Employer-Provided Child Care
One of the more historic, and unprecedented elements of the bill is the one-year reduction in Social Security taxes. The employee’s portion of the tax has been reduced from 6.2% to 4.2% for 2011 only. For someone who earns $106,800 – the maximum amount subject to Social Security – they’ll save $2,136. There were no changes to the Medicare portion of the Social Security, which is currently 2.9%. Employers, however, were not so fortunate. Their share of the tax remains at 6.2%, although the rate for self-employed taxpayers drops from 12.4 to10.4%
The changes impacting business are as pervasive as those affecting individual taxpayers, beginning with the bonus depreciation option. To help business to more quickly recoup investments in capital equipment, the bill increases the 50% bonus depreciation to 100% for qualified investments made on or after September 9, 2010, or on or before December 31, 2011. Additionally, taxpayers can: Monetize accumulated AMT credits in lieu of taking bonus depreciation. Write-off under Section 179 up to $125,000, and $500,000 on investments, for tax years beginning in 2012. In addition to these incentives, there were extension to several business tax benefits, including: Extension of business energy incentives, including credit for biodiesel and renewable diesel fuel. Multiple extensions of tax benefits that had expired in 2009.
Taxes on estates were lowered steadily under the Bush Plan, until they were eliminated altogether by 2010. If no compromise had been reached, the pre-Bush rate of 55% with a $1 million exclusion would have gone back into effect in 2011. Under the compromise, the bill sets for two years a 35% rate with a $5 million exclusion for individuals and $10 million for couples. These provisions will cut by one-third the number of estates subject to the tax. Interestingly, gift taxes were revised to match estate taxes. The top rate on gifts is now 35%, with a maximum allowable exclusion of $5 million.
Now let’s take a lock at how the tax bill impacts families. Of course, there are endless possible variations of family size, income and tax status, but let’s take a look at four representative examples. A married couple with one child in middle school and an annual income of $75,00 would have paid $12,558 in taxes under the old law. Under the new law, their taxes in 2011 would be $9,663, a savings of more than 22%. They will continue to get a larger tax credit for their child, and will keep paying federal income taxes at the current rates. However, they will benefit from a one-year tax cut on Social Security, although they’ll lose their tax credit under the old stimulus plan. The example on the right is also interesting. A married couple with two children in high school and income of $300,000 will see a nearly 18% drop in their taxes. They will continue paying federal income taxes at the current rates and keep a higher itemized deduction for mortgage interest. They will also avoid a large increase in the AMT. They will gain a one-year cut in Social Security tax on the first $106,800 of their income.
Now let’s look at a married couple with two children in college and $150,000 in income. Their 2011 tax will drop nearly 33% from $34,753 to $23,170. They will continue paying federal income taxes at the current rates and keep a partial education tax credit for each of their children in college. They will gain a one-year cut in payroll tax, saving $3,000 between them. They will lose a tax credit from the stimulus plan, which would have been worth $800. Finally, we have retired couple with an income of $100,000 from dividends, Social Security, their pension and taxable interest. From a percentage standpoint, the retired couple will enjoy the largest tax break, more than 37%. These four examples are meant to be just that – examples. We share them to give you a sense for widespread impact of the 2010 tax bill – taxpayers in nearly all income levels will see a reduction in what they will owe Uncle Sam in 2011. Remember, most of these adjustments are temporary. We’ll be going through all of this again in two years. To learn more about how the new taxes will affect you, your family, your estate or your business, we encourage you to call your advisor or accountant.
Now let’s switch gears and talk about what other things are going on in Washington. One of the more pervasive actions by congress is the Dodd-Frank Bill, otherwise known as the Financial Reform Bill. Full understanding of this Act is not yet seen as the Act empowers various agencies to engage in rulemaking to achieve the high-level items mentioned in the Act. Again, we’ll leave the political question moot as to whether these are a good idea. A preponderance of small businesses, for example, are quite vocal in their opposition. But regardless of how you feel, let’s look at the main features of the measure. First, the bill creates an independent watchdog agency, the Consumer Financial Protection Bureau, to help consumers get the information needed to shop for mortgages, credit cards, and other financial products. It also helps to protect them from hidden fees and deceptive practices. The bill also ends the possibility taxpayers will be asked to bail out financial firms that threaten the economy by creating a safe way to liquidate failed financial firms and imposing tough new capital and leverage requirements. The bill eliminates loopholes that allow risky, unregulated security transactions of instruments like derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders. It provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation and golden parachutes. The full impact of this legislation will take years to unfold; many of the previsions won’t go into effect for several months, and there is a chance some or all of the provisions will be repealed by the next congress. Either way, we will argue that transparency and accountability are always good ideas, especially with your investments. Finally, the Patient Protection and Affordable Care Act – otherwise known as healthcare reform -- has numerous provisions, too many to cover here. For our purposes, the act broadens the Medicare tax base for higher income taxpayers. Specifically, it imposes an additional 0.9% tax on earned income in excess of $200,000 for individuals and $250,000 for joint filers; Also, there is 3.8% Medicare Surtax on investment income for individuals with AGI above $200,000 and joint filers with AGI above $250,000 .
At this point, we’ve updated you on the state of the economy, discussed the impact of changes in the tax code and advised you on recent regulatory developments. I’d now like to return to taxes, focusing on what steps you and your advisors can take to lower your tax bite. Even with some much welcomed tax relief, it’s still important to manage your taxes. And when I saw manage, I don’t just mean in April when you’re filing a return. Good tax management is a year-round exercise. There’s an axiom in investing that says, “It’s not what you make, it’s what you keep.” In other words, don’t allow your hard-earned investment gains to get eaten up by taxes. This slide shows just how damaging taxes can be. Look at the top line in the graph. A $100,000 portfolio invested in 60% stocks and 40% bonds in 1979 would have grown to $2.14 million before taxes by 2008. However, with no efforts to mitigate the tax effect, Uncle Sam would have eaten more than 50 percent of the gain, lowering the investor’s wealth to just over $1 million. Assuming that none of you want to pay more than your fair share of taxes, let’s look at some ways we can work to lower them. Source: Parametric Portfolio Associates
Explain that, as you go through the various tax management tools available to their advisor, you will first define the tool and then discuss the benefits. For many investors, tax loss harvesting is the single most important tool for reducing taxes. If properly applied, it can save you taxes and help you diversify your portfolio in ways you may not have considered. Although it can't restore your losses, it can soften the blow. For example, a loss in the value of Security ABC could be sold to offset the increase in value of Security XYZ, thus eliminating the capital gains tax liability of XYZ. Even with the extension of the Bush-era tax cuts, the benefits of tax-loss harvesting are numerous. It can save you taxes and help you diversify your portfolio. Taxpayers can take up to $3,000 of excess losses against ordinary income. It allows you to gift appreciated securities in lieu of cash, which is more tax-efficient. For individual taxpayers, unused capital losses can be carried forward indefinitely.
One common estate planning tool is a Charitable Remainder Trust (CRT). The CRT can provide a steady income stream (often for life), a tax deduction, a deferral of capital gains, and a gift to one or more charities. A CRT is ideal for anyone holding appreciated assets with a low cost basis like stocks or real estate. Funding the trust with appreciated assets allows the donor to sell the assets without incurring a capital gain. We encourage gifting appreciated securities because generally giving cash to a charity is tax inefficient. Here’s an example: Let’s say you own 1,000 shares of ABC stock with a cost basis of $10,000 and a fair market value of $50,000. By gifting the stock directly to your favorite charity, the taxpayer avoids the long term gain of $6,000 as opposed to selling the stock and then gifting cash. I encourage you to talk to your advisor about the benefits of setting up a CRT if you haven’t done so already.
In 2010, there are no income limits for investors who want to convert a traditional Individual Retirement Account to a Roth Individual Retirement Account. Previously, individuals were ineligible to convert if their modified adjusted gross income exceeded $100,000. That limitation, or cap, no longer applies. To review, when you invest in a Roth IRA, your funds are taxed at the time of investment, but the earnings are never taxed. In a traditional IRA, all funds — including earnings — are taxed at the time of withdrawal. This year is interesting because, rather than paying the tax all at once, you can elect to spread conversion income over 2011 and 2012, depending on your tax situation. Also, importantly, investors in a Roth IRA have more flexibility around required minimum distributions, or RMD. Remember, owners of traditional IRA’s and 401(k)’s are required to begin taking out taxable account distributions annually beginning at age 70.5. In a Roth IRA, it is possible to extend tax deferral of assets for a lifetime, as investors are never required to take taxable account withdrawals. The entire “convert-or-not-to-convert” question is complicated and depends on numerous factors. Consider working with your advisor or tax accountant to understand the tax issues and costs on doing a Roth conversion before you make a decision.
For those of you who are working, and your employer provides a tax-deferred, or qualified savings plan, you’ll want to be aware of your options for making contributions. I know that many of you may be considered “highly comped” and qualified contributions are not a major issue. Nevertheless, you should be taking full advantaged of the tax-deferral benefits of your employer’s plan. I encourage you to visit your HR department to ensure your contributions are at the limit, including the catch-up provisions, if you can afford to do it.
Okay, so we’ve looked at the glass as half full and as half empty. We’ve pointed out that there are reasons to be optimistic and there are reasons for us to be more cautious. Importantly, we need to recognize economic growth will be slow in 2011. That fact has consequences for the job market. Due to the slow pace of economic expansion, we’re not likely to see significant job growth until the second half of 2011 or even 2012. So is the glass half full or half empty? I’ll let you decide for yourself. But I prefer to look at things positively, so while we need to be cautious, I think it’s reasonable to have faith in the resilience in the economy and an eventual return to full economic health. Regardless, I’d like to remind you that you’re not alone in these economic waters. I’m here to help address your concerns and to keep you on track. If you haven’t already, I can help you review your goals, manage your tax obligations, reexamine your risk tolerance and encourage you to remain invested for the long term. Thank you.
So, as an investor, how should you react to these trends, if at all? I like to remind my clients that this is about you, not the markets. As investors, we should focus more on our behavior and not on market behavior. The golden rule in investing is to change your investment strategy when your circumstances or goals change – not when the market changes. So here’s what we advise. Follow the Three “Rs.” Review your financial goals – they may have changed given the extraordinary events of the last three years. Reexamine your investment strategy – if your goals have changed, your investment strategy will likely need to change also. Further, many investors have discovered they aren’t as risk tolerant as they thought they were prior to the crisis. Research shows that more and more investors are concerned with protecting principal as opposed to investing for growth. If that sounds like you, you’ll need to take a close look at your risk level and make sure you’re not tilted to far in either direction. I can help you with that. And finally, remain invested. Many investors headed for the sidelines in 2008 and missed the run-up in 2009. The chart on the right shows the consequences of missing the market’s best days. The markets can surprise us, rebounding one or two percent in a day or seven percent in a week. You don’t want to be sitting in cash when that happens.
That kind of research and proactive investment management are two of the many benefits of working with an advisor. As an advisor, I can help you evaluate your risk level. That starts with a thoughtful reexamination of your current goals – retirement, college education, business transition or estate planning – whatever they may be. Keep in mind, progress towards those goals likely took a hit last year. I can help you stay focused on the long-term. If you ran for the sidelines last year – and many did – and you still haven’t gotten back in, then it’s not too late. I can walk you through the situation and share the facts. I can help you construct a portfolio built for long-term steady growth, designed to withstand the obstacles in tough economic times. That’s our program for today. Thanks so much for your attention and I look forward to working with all of you in the future.
Terrence Wittman is an Independent Advisor Representative with LPL Financial, Member FINRA/SIPC, licensed to provide investment and advisory services in the following States: IL, GA, IN, OH, PA & SC
The Glass IS Half Full!
Terrence D. Wittman, MBA | LPL Financial Services 236 W. Lake St., S-100 Bloomingdale, IL 60108 Is The Glass Half Empty or Half Full ECONOMIC RECOVERY 2011: TAX LAW EDITION Helping Investors Cope with Slow Growth and Continued Uncertainty Advisor Logo Ph: 630-307-6933 Fax: 630-622-0416 [email_address] Licensed in : IL, IN, GA, OH, PA & SC
<ul><li>Terrence D. Wittman, MBA – Financial Advisor since 2000 </li></ul><ul><li>Michigan State University, BA Business– 1988 </li></ul><ul><li>Loyola University Chicago, MBA Finance – 1995 </li></ul><ul><li>FINRA Licenses – Series 7, 24 & 66 </li></ul><ul><li>Independent Advisor with LPL Financial since 2003 </li></ul><ul><li>President Roselle Chamber of Commerce 2010-2011 </li></ul><ul><li>My office is here to provide Independent, Wealth Management advice based upon the needs and desires of the client. We build a Financial Roadmap to their future together. </li></ul>Viewing the Glass Half Full | About Us
Viewing the Glass Half Full | Presentation’s Agenda <ul><li>Economic update – is the glass half full or half empty? </li></ul><ul><li>Reasons for optimism </li></ul><ul><li>Reasons for caution </li></ul><ul><li>Tax Law Certainty: Impact of continued Bush-era tax cuts </li></ul><ul><li>What conclusions can we draw from the data? </li></ul><ul><li>What does it mean for investors? </li></ul>
Viewing the Glass Half Full | Economic Update Longest U.S. recessions (months) Start Date Recession ends June 2009 Recession is over! Source: National Bureau of Economic Research
Gross Domestic Product – 1981-3Q 2010 Source: Bureau of Economic Analysis Economy is growing -- slowly Viewing the Glass Half Full | Reasons for Optimism
Viewing the Glass Half Full | Reasons for Optimism <ul><ul><li>Investor confidence in economic growth and corporate profitability propelled global developed markets higher in the quarter </li></ul></ul><ul><ul><li>Weakness in European debt markets in the fourth quarter combined with improving global growth prospects put price pressure on global government bonds, pushing yields higher </li></ul></ul><ul><ul><li>For the year, markets were led by high return asset classes such as emerging market equity, emerging market debt and high yield bonds </li></ul></ul>Source: SEI, in USD, Large Cap = Russell 1000, Small Cap = Russell 2000, Real Estate = DJ Wilshire RESI Index, Developed International Equity Markets = MSCI EAFE, Emerging Markets Equity = MSCI EME, World Equities = MSCI World Index, Global Bonds = Barclay’s Capital Aggregate Global Bond Index, US Investment Grade Bonds = Barclay’s Capital US Aggregate, High Yield = Merrill Lynch US HY Master II Constrained, Emerging Markets Debt = JP Morgan EMBIGD, Treasury = Treasury component of the Barclay’s US Aggregate, Inflation Linked = Barclays Capital 1-10Yr US TIPS to 6/30/2009 and Barclays Capital 1-5 Year US TIPS Index from 7/01/2009, Cash = ML USD LIBOR 3M Sorted by 4Q 2010
Viewing the Glass Half Full | Reasons for Optimism Purchasing Managers Index Source: Institute of Supply Management Growth in manufacturing 50 and above equals manufacturing growth
Viewing the Glass Half Full | Reasons for Optimism Source: Yale School of Management Attractive price-to-earnings (PE) ratios PE Ratio S&P500 -- 1881-2010
Viewing the Glass Half Full | Reasons for Optimism American productivity – a steady climb to greatness Source: Nick Murray Interactive, U.S. Department of Commerce; BLS; The Economist
Viewing the Glass Half Full | Reasons for Caution U.S. Unemployment Rate (%) December 2009 to December 2010 Source: U.S. Bureau of Statistics Stubborn unemployment
Viewing the Glass Half Full | Reasons for Caution Leading Economic Indicators –November 2009 to November 2010 Source: The Conference Board Slow expansion
Viewing the Glass Half Full | Reasons for Caution Existing Home Prices – 2006 to November 2010 ($ thousands) Source: National Association of Home Builders Flat housing market
Viewing the Glass Half Full | Reasons for Caution Federal Debt 2000 to 2015 -- $Trillions Source: U.S. Office of Management and Budget Mushrooming Federal Deficit * Estimate
Viewing the Glass Half Full | Reasons for Caution Federal Debt 2000 to 2015 -- $Trillions Rising cost of energy
Viewing the Glass Half Full | Tax Clarity <ul><li>Congress passes “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010” </li></ul><ul><ul><li>Two-year extension of favorable capital gains and dividend tax rates </li></ul></ul><ul><ul><li>One-year cut in employee payroll taxes </li></ul></ul><ul><ul><li>Multiple incentives for business </li></ul></ul><ul><ul><li>Extension of many business tax benefits </li></ul></ul><ul><ul><li>A “patch” to the alternative minimum tax (AMT) benefitting middle-income tax payers </li></ul></ul><ul><ul><li>Repeal of limitations on itemized deductions </li></ul></ul><ul><ul><li>Multiple extensions on credits and benefits for individual taxpayers </li></ul></ul>
Viewing the Glass Half Full | Tax Clarity Individual Tax Rates Source: “Tax Cut Extension Bill Winds Its Way to White House,” Accounting Today , Dec. 17, 2010 Tax rate brackets and AMT Capital gains and dividends Tax rates extended across the board Maximum capital gains rate 15% <ul><li>What this means : </li></ul><ul><li>2003 Bush tax cuts extended through 2012. </li></ul><ul><li>Tax rate brackets are: 10, 15, 25, 28 33 and 35%. </li></ul><ul><li>Top rate would have increased to 39% had cuts been allowed to expire. </li></ul><ul><li>A temporary “patch” to AMT. Ensures 21 million households will not face tax increase. </li></ul><ul><li>What this means: </li></ul><ul><li>Qualified capital gains and dividends for 2010-2012 will be taxed at a maximum rate of 15%. </li></ul><ul><li>Zero percent for taxpayers in 10 and 15% brackets. </li></ul><ul><li>Rate would have reverted to 20% had cuts expired. </li></ul>
Individual Taxes Source: “Tax Cut Extension Bill Wends Its Way to White House,” Accounting Today , Dec. 17, 2010 Viewing the Glass Half Full | Tax Clarity Improvement of reductions Credits and benefits Overall limitation on itemized deductions repealed Multiple extended credits and benefits <ul><li>What this means : </li></ul><ul><li>Two-year repeal of “personal exemption phase-out” (PEP) effectively lowers taxes for high-income taxpayers. </li></ul><ul><li>$1,000 child tax credit extended through 2012. </li></ul><ul><li>Charitable incentives extended, including tax-free distribution from IRA. </li></ul><ul><li>What this means: </li></ul><ul><li>Marriage Penalty relief extended through 2012 </li></ul><ul><li>Education incentives extended through 2012. </li></ul><ul><li>Adoption credit </li></ul><ul><li>Dependent Care Credit </li></ul><ul><li>Employer-Provided Child Care </li></ul>
Social Security Taxes Source: “Tax Cut Extension Bill Wends Its Way to White House,” Accounting Today , Dec. 17, 2010 Viewing the Glass Half Full | Tax Clarity Employee share Employer share One-year reduction in FICA payroll tax Employer share of FICA remains unchanged. <ul><li>What this means : </li></ul><ul><li>Normal employee rate of 6.2% reduced to 4.2% for wages earned in 2011. </li></ul><ul><li>$2,136 savings for employee with $106,800 salary. </li></ul><ul><li>No changes in Medicare portion of Social Security tax (2.9%) </li></ul><ul><li>What this means: </li></ul><ul><li>The employer’s share of the tax remains at 6.2%. </li></ul><ul><li>Rate for self-employed individuals reduced from 12.4% to 10.4%. </li></ul><ul><li>Cost of measure estimated at $111 billion. </li></ul>
Business taxes Source: “Tax Cut Compromise Summary,” Jamie Dupree’s Washington Insider, December 9, 2010. Viewing the Glass Half Full | Tax Clarity Business incentives Business tax benefits Multiple incentives for businesses of all sizes Extends through 2011 multiple business tax extenders <ul><li>What this means : </li></ul><ul><li>50% bonus depreciation increased temporarily to 100%. </li></ul><ul><li>Taxpayers can monetize accumulated AMT credits in lieu of taking bonus depreciation. </li></ul><ul><li>Write-off under Section 179 is limited to $125,000, and $500,000 investment limit for tax years beginning in 2012 . </li></ul><ul><li>What this means: </li></ul><ul><li>Extension of business energy incentives, including credit for biodiesel and renewable diesel fuel. </li></ul><ul><li>Multiple extensions of tax benefits that had expired in 2009 . </li></ul>
Estate and gift taxes Source: “Tax Cut Extension Bill Wends Its Way to White House,” Accounting Today , Dec. 17, 2010 Viewing the Glass Half Full | Tax Clarity Estate Taxes Gift taxes Compromise results in higher exclusions Set to match estate taxes <ul><li>What this means : </li></ul><ul><li>Maximum estate tax rate of 35% </li></ul><ul><li>Tax free amount of $5 million and $10 million for married couples. </li></ul><ul><li>What this means: </li></ul><ul><li>Top tax rate on gifts 35% </li></ul><ul><li>Maximum applicable exclusion of $5 million </li></ul>
Impact on families Source: “In the Balance,” Wall Street Journal, Dec. 17, 2010. Viewing the Glass Half Full | Tax Clarity Married couple with one child in middle school Married couple with two children in high school Income from wife’s job: $75,000 Income from husband’s job, capital gains, dividend income, interest: $300,000 <ul><li>What this means : </li></ul><ul><li>2011 tax under old law -- $12,558 </li></ul><ul><li>2011 tax under new law -- $9,663 </li></ul><ul><li>22% savings </li></ul><ul><li>What this means: </li></ul><ul><li>2011 tax under old law -- $71,182 </li></ul><ul><li>2011 tax under new law -- $58,719 </li></ul><ul><li>18% savings </li></ul>
Impact on families Source: “In the Balance,” Wall Street Journal, Dec. 17, 2010. Viewing the Glass Half Full | Tax Clarity Married couple with two children in college Retired couple Income combined from husband and wife’s jobs: $150,000 Income from dividends, Social Security, pension and taxable interest: $100,000 <ul><li>What this means : </li></ul><ul><li>2011 tax under old law -- $34,753 </li></ul><ul><li>2011 tax under new law -- $23,170 </li></ul><ul><li>33% savings </li></ul><ul><li>What this means: </li></ul><ul><li>2011 tax under old law -- $13,672 </li></ul><ul><li>2011 tax under new law -- $8,590 </li></ul><ul><li>37% savings </li></ul>
Viewing the Glass Half Full | Regulatory Update <ul><li>Impact of financial reform (Dodd-Frank Bill) </li></ul><ul><ul><ul><li>Establishes Consumer Financial Protection Bureau </li></ul></ul></ul><ul><ul><ul><li>Ends “too big to fail” bailouts </li></ul></ul></ul><ul><ul><ul><li>Improves transparency and accountability </li></ul></ul></ul><ul><ul><ul><li>Controls executive compensation and corporate governance </li></ul></ul></ul><ul><ul><ul><li>Protects investors </li></ul></ul></ul><ul><li>Impact of Patient Protection and Affordable Care Act </li></ul><ul><ul><li>Broadens Medicare tax base for higher income taxpayers </li></ul></ul>
Viewing the Glass Half Full | Tax Management Tools Source: Parametric Portfolio Associates: 60% Russell 3000; 40% Barclays Capital Aggregate; No Liquidation. Interest income and dividends are taxed annually at historical top marginal tax rates; capital gains are realized at 50% per year and are taxed at the historical long-term capital gains tax rate. Past performance is no guarantee of future results. *A hypothetical tax-free $100,000 portfolio (invested 60% in stocks and 40% in bonds) held for 29 years would have grown to about $2.2 million. If the portfolio was taxed like an average mutual fund, it would have lost 50% of its value, due to taxes paid and earnings lost on that money, Tax-managed investment strategies are designed to minimize capital gains distributions and maximize after-tax returns. 50% Lost to Taxes <ul><ul><li>Designed to produce higher after-tax returns </li></ul></ul><ul><ul><ul><ul><li>Tax Lot Accounting </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Loss Harvesting </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Wider Rebalancing Ranges </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Tax-Aware Trading </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Gain/Loss offset </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Transition of Low-Cost-Basis stocks </li></ul></ul></ul></ul>
Viewing the Glass Half Full | Tax Management Tools <ul><li>Defined </li></ul><ul><li>Selling securities at a loss to offset realized capital gains. Harvesting losses helps to limit the recognition of short-term capital gains, which are normally taxed at higher rates than long-term gains. </li></ul><ul><li>The benefits </li></ul><ul><li>Loss harvesting is an important tool for reducing current and future income. </li></ul><ul><li>It can save you taxes and help you diversify your portfolio. </li></ul><ul><li>Taxpayers can take up to $3,000 of excess losses against ordinary income. </li></ul>Tax loss harvesting
Viewing the Glass Half Full | Tax Management Tools <ul><li>Defined </li></ul><ul><li>The CRT is a tax-efficient vehicle that provides the donor with a steady income stream, a tax deduction, deferral of capital gains, and a gift to one or more charities. </li></ul><ul><li>The benefits </li></ul><ul><li>Funding the trust with appreciated assets allows the donor to sell the assets without incurring a capital gain. </li></ul><ul><li>Efficient way to transfer appreciated property, benefit from charitable income tax deduction and reduce estate taxes. </li></ul><ul><li>Donor retains the benefits of underlying assets for income purposes. </li></ul>Charitable Remainder Trusts (CRT)
Viewing the Glass Half Full | Tax Management Tools <ul><li>Defined </li></ul><ul><li>A Roth IRA is similar to a traditional IRA, but contributions are not tax deductible and qualified distributions are tax free. </li></ul><ul><li>Like other retirement plan accounts, non-qualified distributions from a Roth IRA may be subject to a penalty upon withdrawal </li></ul><ul><li>The Benefits </li></ul><ul><li>Investor can avoid Required Minimum Distributions (RMD) from qualified plans during his or her lifetime. </li></ul><ul><li>Help to minimize future tax bracket creep </li></ul><ul><li>Investor can vary distributions based on cash flow needs and tax situation. </li></ul>Roth IRAs
Viewing the Glass Half Full | Tax Management Tools Maximize contributions to your qualified plans Limitation 2010 (and 2011) Maximum annual contribution to qualified plan $49,000 401(k), 403(b), 457 maximum elective deferral limit $16,500 SIMPLE plan elective deferral limit $11,500 Traditional IRA / Roth IRA contribution limit $5,000 Catch-up contribution limit – (401(k), 403(b), 457 (over age 50) $5,500 Catch-up contribution limit – SIMPLE (over age 50) $2,500 Catch-up contribution limit – traditional/Roth IRA (over age 50) $1,000
Viewing the Glass Half Full | Conclusions <ul><li>What does it all mean? </li></ul><ul><ul><ul><li>Recession is over </li></ul></ul></ul><ul><ul><ul><li>Double-dip recession highly unlikely </li></ul></ul></ul><ul><ul><ul><li>There are reasons for optimism and reasons for caution </li></ul></ul></ul><ul><ul><ul><li>We expect slow growth in 2011 </li></ul></ul></ul><ul><ul><ul><li>Significant improvement in job market not likely until second half of 2011 or 2012 </li></ul></ul></ul><ul><ul><ul><li>Investors can still realize additional tax savings through active tax management </li></ul></ul></ul>
Viewing the Glass Half Full | Message for Investors <ul><li>Follow the “Three Rs” </li></ul><ul><ul><ul><li>Review your financial goals </li></ul></ul></ul><ul><ul><ul><li>Reexamine you investment strategy </li></ul></ul></ul><ul><ul><ul><li>Remain invested </li></ul></ul></ul>Source: SEI, FactSet. Past performance does not guarantee future results. An investor cannot invest directly in an index or average and they do not include sales charges or operating expenses associated with an investment in a mutual fund, which would reduce total returns. It’s about you, not the markets
<ul><li>Benefits of working with a financial advisor: </li></ul><ul><li>Identify and reconfirm short-term and long-term goals </li></ul><ul><li>Maintain customized investment strategy that supports individual objectives </li></ul><ul><li>Guidance through fluctuating markets, avoiding emotion-driven mistakes </li></ul><ul><li>Access to broad selection of diversified mutual funds and other securities </li></ul><ul><li>Advise during market crisis, upcoming bull market and the next market dip (they will all happen again!) </li></ul><ul><li>Educate so you can understand and make the right investment decisions </li></ul><ul><li>Uncertainty over tax law: Need to consider implications and scenarios resulting from tax law changes </li></ul>Viewing the Glass Half Full | Role of Advisor
Disclosure <ul><li>This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. </li></ul><ul><li> </li></ul><ul><li>SEI Investments Management Corporation (SIMC) is the adviser to the SEI Funds, which are distributed by SEI Investments Distribution Co. (SIDCo.) SIMC and SIDCo are wholly owned subsidiaries of SEI Investments Company. Neither SEI nor its subsidiaries are affiliated with your advisor </li></ul><ul><li> </li></ul><ul><li>Carefully consider the investment objectives, risk factors and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses, which may be obtained by calling 1-800-DIAL-SEI. Read it carefully before investing. </li></ul><ul><li>There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results </li></ul><ul><li> </li></ul><ul><li>Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index. </li></ul><ul><li>Neither SEI nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein: and (iii) you should seek advice based on your particular circumstances from an independent tax advisor. </li></ul>