Hard To Suggest the Recession Is Really Over --- by Guy Baker
Despite the constant stream of news from various sources and Fed announcements, it is hard to suggest the recession is really over. The economic data confirm things are not getting worse, but it is hard to say there is any significant improvement yet. As some of the primary data demonstrated, there are too many conflicting signals to figure the recession is over no matter what Mr. Bernanke says.
If we look at the positives:
For the fifth consecutive month, the Conference Board's index of leading indicators rose 0.6% in August.
New home sales went up 0.7% in August. This too was for the fifth consecutive month.
Continuing claims for regular state benefits declined 123,000 to 6.14 million.
The Richmond Fed Index, a measure of manufacturing in mid-Atlantic states, remained at +14 in September, the fifth consecutive month in positive territory, signaling a manufacturing expansion in this region, which is not heavily related to the auto sector.
The inventory of new homes dropped to 7.3 months, down significantly from a high of 12.4 months in January. The best part of this report is the supply has fallen to the lowest in more than two years.
The negatives included:
Existing home sales fell in August, partially offsetting the huge upward spike in July. This was the first decline in existing home sales since March, but sales were up 3.4% from the same time last year.
Durable goods orders fell by 2.4% in August, a surprise to most analysts.
The Fed decided to do nothing based on the current data. More specifically, the "Fed Funds" rate stayed in the 0% - .25% range and is likely to not be increased for the foreseeable future. The Fed also commented, "economic growth is likely to remain weak for a time."
The tension between savers and borrowers remained in the borrower’s favor as a low Fed rate adversely impacts T-bills, CDs, and money market funds. The short term rates will stay near zero until short-term rates rise. The only way to increase returns is to extend maturities. But if inflation is truly in the future, this would be a bad decision.
MARKETS
As one might expect, with no action by the Fed and some cautionary comments and mixed performance in the economy, the markets took a pause from the recent steady advance over the last few months. The Dow [-1.58%; +10.13%], the S & P 500 [-2.24%; +15.66%], and the NASDAQ Composite [-1.97%; +32.59%] all threw it into reverse.
September 30 is the end of 3Q, so the markets may linger until corporate earnings are announced. If profits are up and the most of the economic indicators are positive, the market could advance during the rest of the year. But if the corporate profits are flat or down, we may see a lot of this year's gains quickly erased.
It is hard to know why the markets have rebounded so much this year. One could suppose the various bailout and stimulus programs were at the heart of the optimism, especially given the high unemployment and the severe drop in personal consumption. Clearly government spending cannot continue and if the personal consumption doesn’t revive soon, the markets will likely reverse course.
Mortgage rates were flat again this month. Even with these historic low rates, homes sales still languish. It is hard to think of a scenario to suggest this is going to change anytime soon.
Oil prices declined, driving gasoline prices lower. The significant contributing factor was oil exploration in 2009. Newly discovered reserves reached record levels due to new technologies being used for oil exploration and recovery. The largest discoveries have been in the Gulf of Mexico and should keep petroleum prices low for some time.
2010 - The Year of the Roth
The Roth IRA has been an incredible tax saving tool, but very few have really been able to avail themselves of the benefits. Conversion is limited to households with incomes less than $100,000. But in 2010, that rule changes and millions with IRAs will have the opportunity to switch to a Roth IRA.
Why should you change? Let’s look at the benefits:
Unlike traditional IRAs, withdrawals from a Roth IRA are tax free. You must have held the Roth for five years or more and reached 59-1/2. If you want money early, there is the 10% penalty just like an IRA.
All accumulations are TAX FREE and come out TAX FREE.
There are no required minimum distributions after age 70-1/2.
You can give a Roth IRA to heirs. They can maintain the same tax-free withdrawal benefits over their lifetimes.
What’s the catch? You must pay tax on the conversion now. It is considered a taxable event by the IRS. But the IRS allows you to spread the amount equally over your 2011 and 2012 tax returns.
So if you think your tax bracket is going up, paying the tax now has two benefits. The rate is lower AND when you ultimately want the money, you get all of the income, tax free. We already know the administration intends to raise tax rates at the end of 2010 when the Bush rates expire. That means the top rate will be 39.6%.
It is likely tax rates may go even higher to pay for the government programs like Medicare and Social Security. It is possible the "tax-free" benefits of the Roth IRA may be reversed. But if you have already paid tax, they are not likely to tax it twice.
A big factor is where the money to pay the tax on the conversion would come from. One source is taking it from the IRA or 401(k) you are converting. But if you can get it into the tax free zone, it would be better to pay from other assets.
If you have a Roth now, you may want to open a separate ROTH so if the IRS does change the rules, you can convert back to a regular IRA easily.
This is not a simple question, so you may want to discuss this with us, if you think there is a benefit in making the conversion. Many clients simply may not be aware of this opportunity and we can help you explore the options.
www.RothRetirement.com – this is a free site with helpful videos explaining the ins and outs of the conversion possibilities. It also has a calculator to help see if a conversion makes sense for you.
FINANCIAL FOOTNOTE
For 2009, the income limitation for a Roth IRA is $120,000. If you are married, filling jointly, the limit is $176,000.