Trovena Weblog

Investors in commodity ETFs getting 'eaten alive'

Average Joe smacked by contango, pre-rolling, and Wall Street sharpies; profiting off 'the dumb money'

The following article from Investor's News is an eye opener. It is so easy to think investing is easy - think again. And, enjoy reading this article and take heed.

Like so many investors in the spring of 2009, Gordon Wolf needed to dig out of a hole.

A 68-year-old psychologist in Napa, California, Wolf was a buy-and-hold sort of guy, yet the nest egg he had entrusted to his broker at Merrill Lynch was suddenly down by more than 50 percent.

The broker had invested much of it in a range of exchange- traded funds, or ETFs, a relatively new financial innovation that was replacing mutual funds in the hearts and portfolios of many investors. An ETF, which can be bought or sold like a stock, attempts to track the price of a particular basket of assets--tech stocks, for instance, or high-yield bonds, or commodities ranging from wheat to gold to oil to natural gas.

The commodity ETFs were supposed to offer a hedge against equity losses, but in the crash of 2008 everything fell in tandem. Now it was early 2009, and Wolf was watching oil fall to $34 a barrel. That had to be an opportunity, he figured, so he called his Merrill broker and asked about the U.S. Oil Fund, an ETF designed to track the price of light, sweet crude. “This seems to be something good,” Wolf told the broker, and had him buy about $10,000 of USO.

What happened next didn't make sense. Wolf watched oil go up as predicted, yet USO kept going down. In February 2009, for example, crude rose 7.4 percent while USO fell 7.4 percent. What was going on?

For the rest of this article, go to Investors in commodity ETFs getting "eaten alive"

The Morgan Report: 2Q 2010 Review

Report Entry: Tuesday July 6th, 2010

A definition of perspective is as follows: 

“The appearance of things relative to one another as determined by their distance from the viewer.” 

Volatility in the market has more than doubled since mid-April as measured by the VIX index (measures the volatility of the S&P 500).  I’m sure that was something most investors knew without looking at VIX.  

According to the Bureau of Economic Analysis, real gross domestic product the output of goods and services  increased at an annual rate of 2.7 percent in the first quarter of 2010. In the fourth quarter of 2009, real GDP increased 5.6 percent.  There was a deceleration in real GDP in the first quarter primarily reflected decelerations in private inventory investment and in exports, a downturn in residential fixed investment, a deceleration in nonresidential fixed investment, and a larger decrease in state and local government spending that were partly offset by an acceleration in personal consumption expenditures.

Recent market declines followed reports that showed the U.S. pending-home sales plunged 30% in May right after the homebuyer tax credit expired, and that the Institute for Supply Management’s June manufacturing index dropped more than expected.  There have been further concerns about recent increase in jobs claims, European and U.S. debt concerns, and a very strong “June Gloom” in San Diego.  

On the flip side, value or contrarian investors will see these price declines as an opportunity to purchase lower priced stocks following the principle of buying low and selling high. And, there are countering signals in different sectors indicating stabilization and potential growth.

So the market is reflecting the concern that we may be in for a long haul recovery and potentially a double dip recession.  As an investor, these are no small matters as we continue to evaluate what to do with our hard earned money.  

What is the best thing to do today? Every day we are overwhelmed with ‘great’ ideas.  Gold, currencies, options, bonds, China, Brazil, plastics; you get the picture.  Also, friends usually have some ‘smart’ person they know who has the secret to beating the market consistently; their personal version of Bernie Madoff.  (continued)

A Positive Outcome

 

This morning I woke up thinking about some emails I needed to get out, then scanned the Wall Street Journal. Oil spills, market volatility, political scandals, iPads, and military maneuverings hovered on the computer screen daring me to crawl into my hole.  I remembered how all this news can be daunting especially for clients who have put their trust in all of us here at Trovena, to help them with their lives.  My next thought was that I was sure everyone could use a break from all this and should have a nice three day weekend to enjoy.  What to do?  Beach, barbecue, time with family, I’m looking forward to it. 

So I will do all that, and enjoy it.  I will also spend a moment honoring my dear friend, roommate in flight school for two years, hero, thinker, leader, and jokester, Lt. Patrick K. Connor.  I cannot even scrape the surface of the unique bond we had as friends and fellow Naval Flight Officers.  But I can tell you we worked hard, played hard, and we were once young and invincible.  On February 2nd, 1991, Pat was shot down along with his pilot LCDR Barry T. Cook in their A6 Intruder in the Persian Gulf during a strike mission against Iraqi warships.  One of the highest honors I’ve had was the privilege of speaking about him at his memorial service.  The best figure I could paint of Patrick at that time was that of Marcus Aurelius.

Last year I had breakfast with his father, mother and brother.  It was a fine reunion, warm and stoic.  It brought home a couple of lessons that I have lived through.  You never know what will happen today, and whatever does happen, life will go on.  On that note, it’s best to be prepared for yourself and those you love.  It’s tempting to look at the news and get paralyzed with an overwhelming perception of doom and gloom but life will go on and we all can help create a positive outcome. So, I will enjoy this Memorial Day weekend, recharge the batteries, and get back to the business at hand on Tuesday; helping people create a positive outcome. I hope you do the same as well. 

IRS Offers Details on New Small Business Health Care Tax Credit

If you own a business and employ 25 or fewer full time employees and pay an average salary of $50,000 or less, you may qualify for the Health Care Tax Credit under the recently passed Health Care Reform legislation.

The credit is available for this year, tax year 2010. To get more details and see if your business may qualify for this credit, go to the IRS information release dated yesterday, May 17, 2010.

Own an S-Corp? Duck!

What is Reasonable Compensation for S Corporation Shareholder-Employees?

Some Practical Guidance

The issue of what reasonable compensation for shareholder-employees of S corporations should be has been around for some time. Every time the IRS accepts a Form 2553, "Election by a Small Business Corporation," it sends a CP261, "Notice of Acceptance as an S Corporation." This acceptance letter specifically emphasized the requirement for shareholder-employees to be paid reasonable compensation for the service that they provide to the corporation. The IRS has increased its interest in this area over the past few years, and it is now more likely than ever that the adequacy of a shareholder-employee's salary could become the subject of an IRS audit.

For the rest of this story, go to "What is Reasonable Compensation for S Corporation Shareholder-Employees?"

Posted by Charles L Stanley CFP® who is a Wealth Manager with Trovena, LLC and the founder and editor of Capital Markets U.com Magazine

The European Bailout

European Bailout Synopsis:

The European Union in cooperation with the International Monetary Fund announced a €750 billion ($955 billion) bailout plan to contain the sovereign debt crisis in Europe. This came on top of a €110 billion bailout package for Greece announced last week. The European Central Bank simultaneously unveiled a plan to purchase public and private debt to “ensure depth and liquidity in those market segments which are dysfunctional.” If necessary, the US Federal Reserve has promised additional support in the form of US dollar swap lines to reduce strains in short-term dollar funding markets globally.

 

The Breakdown:

 

I.    €60 billion from an EU emergency fund –the European Stabilization Mechanism– funded by all 27 European Union members.

II.     €440 billion of loans and guarantees from the 16 members of the Euro Zone who share the common currency.

 

III. €250 billion from the International Monetary Fund (IMF).

IV. Purchasing of public and private debt by European Central Bank (ECB) –no amount specified.

V.     US Federal Reserve reopening US dollar swap lines with foreign central banks –no amount specified, but original swap lines were nearly $600 billion US dollars.

 

 

Whoops! My Bad. Typo. Meant 'M' not 'B'

I received a phone call from a friend of mine asking me if I was concerned about the market drop today.  I told him, "No, in fact I did not look at the markets today."  He then asked, "Well, don't you guys worry about that stuff?"  So I then explained to him the distinctions between speculative market timing and investing as a fiduciary.  The research tells us that prudent investing in well diversified portfolios with low expenses will help add value to investors. Also, market timing is a two headed dragon, you need to know when to get in and when to get out.  Daily market movement is usually noise in the long run and focusing on it can cause undue stress and lead to bad decisions. 

So, I peeked at the markets and scanned online for an explanation; here's what I found:

According to multiple sources, a trader entered a "b" for billion instead of an "m" for million in a trade possibly involving Procter & Gamble [PG  60.75    -1.41  (-2.27%)   ], a component in the Dow. (CNBC's Jim Cramer noted suspicious price movement in P&G stock on air during the height of the market selloff.

(Full story here: Stocks Plunge As Investor Fears... )

Lesson learned: Make sure you have someone review important decisions before you push that mutton.   (editors note: he meant button)

Health care law's massive hidden tax change

By Neil deMause, contributing writer

NEW YORK (CNNMoney.com) -- An all-but-overlooked provision of the health reform law is threatening to swamp U.S. businesses with a flood of new tax paperwork.

Section 9006 of the health care bill -- just a few lines buried in the 2,409-page document -- mandates that beginning in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year.
 
The stealth change radically alters the nature of 1099s and means businesses will have to issue millions of new tax documents each year.

Right now, the IRS Form 1099 is used to document income for individual workers other than wages and salaries. Freelancers receive them each year from their clients, and businesses issue them to the independent contractors they hire.

But under the new rules, if a freelance designer buys a new iMac from the Apple Store, they'll have to send Apple a 1099. A laundromat that buys soap each week from a local distributor will have to send the supplier a 1099 at the end of the year tallying up their purchases.

The bill makes two key changes to how 1099s are used. First, it expands their scope by using them to track payments not only for services but also for tangible goods. Plus, it requires that 1099s be issued not just to individuals, but also to corporations.

For the rest of this story please go to Health care law's massive, hidden tax change.

This story was posted by Charles L Stanley CFP®. In addition to being one of Trovena's Wealth Managers, he is founder and editor of Capital Markets U.com Magazine.

Senate Budget Raises Questions if Dividends Rates Will Top 40 Percent

By Brett Ferguson and Jonathan Nicholson
Publication date: 04/29/2010 – from the Bureau of National Affairs, Inc.

The Senate Budget Committee-approved budget resolution does not make room for dividends tax rates to continue to be tied to capital gains rates after 2010, raising questions among some lawmakers about whether Democrats intend to allow the top effective tax rate on dividends to soar to more than 40 percent.

Since the Jobs and Growth Tax Relief Reconciliation Act of 2003 (Pub. L. No. 108-27), the maximum dividend and capital gains tax rates have been linked together at 15 percent. Unless Congress acts in the coming months, the capital gains tax rate will return to its pre-2003 level of 20 percent in 2011 and dividends will again be taxed at ordinary income tax rates of up to 39.6 percent.

When combined with the 3.8 percent surtax created in the Health Care and Education Reconciliation Act of 2010 (Pub. L. No. 111-152), the effective top tax rate on dividends would rise to 43.4 percent in 2013.

For the rest of this article, go to Senate Budget Raises Questions if Dividends Rates Will Top 40 Percent

First Billionaire Dies ... TAX FREE

This will be interesting to watch.

- Christopher

Deaths Highlight Estate Tax Question (Dow Jones)

Estate-tax questions are mounting along with the ranks of very wealthy people who have died in 2010 during the one-year gap in the federal tax.
The recent death of Texas billionaire Dan Duncan puts a point on some of the issues, including the central one: whether Congress is growing more or less likely to impose a retroactive tax as huge estates come into play in the meantime.

Duncan, who died last month at age 77, is perhaps the first billionaire to die this year. Reported by Forbes to be the 74th-richest person in the world and the wealthiest man in Houston, the pipeline mogul had a $9 billion estate. He headed three publicly traded companies, Enterprise Products Partners LP, Enterprise GP Holdings LP and Duncan Energy Partners LP.