www.youtube.com/watch?v=qlAC22_pSOU

Quote of the week. “It is easier to do a job right than to explain why you didn’t.”– Martin Van Buren

Pete Mitchell here with your Weekly Economic Update for April 5^th, 2010.

After lasts week’s comments on the Heath Reform Act, I received many, many emails. Some people were in agreement with my comments, others weren’t. I realized that I have been doing all of you a disservice by not providing more content on how politics is affecting your money and investments.

The single biggest factor in what happens to your investments is controlled by our government. By not providing you with insight on how these government decisions will affect your financial future, I’m letting you down.

It’s true that you may not agree with my position from time to time and that is OK. In a constitutional republic like the form of government we enjoy, a healthily dialog is important.

My goal is to present 1 blog post a week on what our government is doing and how that will affect you. This week, I’m going to look in depth at the Heath Reform Plan and point out just a few of the areas that I believe are going to hit you in your wallet. I’ll even discuss why I think salaries are going to decrease under the new Obama plan.

But as for this week, let’s look at those financials.

Job growth at last. Employers added 162,000 jobs in March, the biggest gain in three years. While some of the increase reflected temporary hires for the U.S. Census (another words, more government spending), private payrolls swelled by 123,000 last month. The jobless rate was 9.7% in March, exactly where it had been in January and February.¹

Consumer spending up by 0.3%. February’s gain was in line with the forecast of economists. Wages were flat last month after a 0.1% increase in January.²

Is consumer confidence flat, or rising? Two polls tell two stories. The Conference Board’s March Consumer Confidence Index hit 52.5, up from 46.4 in February. In contrast, the March Reuters survey remained at 73.6, unchanged from February.^3,4

Factory orders up 0.6%. The February number represented the tenth gain in the last 11 months. Excluding the defense category, the gain was 1.0%.⁵

Home prices inch higher. The January S&P/Case-Shiller home price index (of 20 major real estate markets) showed prices up 0.3% for January and down just 0.7% from 12 months earlier, the smallest year-over-year drop in nearly three years.³ If that doesn’t make sense to you, what it means is that we are all excited because we are losing the value of our homes at a slower pace.

Stocks have been red hot. At the close on April 1, the Dow, S&P 500 and NASDAQ had respectively gained 5.83%, 6.66% and 7.34% in a 5-week period. Thursday, the DJIA finished at 10,927.07, its highest close since September 28, 2008. Wall Street trading paused for a day in observance of Good Friday.⁶

Now for last week’s riddle. Two-and-a-half artists spend two-and-a-half hours painting two-and-a-half models on two-and-a-half canvases. How many artists would be necessary to paint 24 models on 24 canvases in 20 hours?

The Answer:  This would only require three artists. 24 artists can paint 24 models in 2.5 hours. Since the time available has increased by eight (20 = 8 x 2.5), then you can reduce the number of artists by the same amount (3 = 24 / 8).

Doc Pierce gave an excellent try, a gallant effort indeed. Unfortunately, not the right answer. That means last week’s prize of a starbucks gift card carriers over to this week’s winner.

This week’s riddle. A rooster sits atop a farmhouse. Its roof is unequally pitched. One half slopes down at an angle of 60º, and the other half at 70º. If the rooster lays an egg right on the peak of the roof, on which side is the egg more likely to fall?

Contact my office or see next week’s Update for the answer.

www.youtube.com/watch?v=Qxl0_sUbRus

Quote of the week. “Nothing in life is to be feared. It is only to be understood.”– Marie Curie

Reforms become law. President Obama signed his long-envisioned health care reforms into law on March 23, a truly dark day for America and proof that we have long since turned the corner from being the land of the free.  Obama will sign the amendments to the bill into law on March 30. Most of the major changes will take effect after the next Presidential election, when health insurance will become compulsory for nearly all Americans. Those that will be excluded from this will be Native American’s, Inmates and those with religious objections. I think we are going to see a lot more with religious objections. After all, if there is one thing that politicians have taught us is that it all depends on your definition of the word “religious.” Right President Clinton? Of course, new taxes will help fund the reforms which means that nothing you hold sacred is safe from the government, because after all, any money that we get to keep after a hard days work is a privilege from the state and federal governments, not a God given right.^1,2,3

But let’s talk about some good news. Home sales still underwhelming. I seam to remember a campaign slogan, it is the economy stupid.  Anyway, existing home sales dipped 0.6% for February while new home sales slipped 2.2% to another all-time low (although data only goes back to 1964). So were there any positives in the new Commerce Department report? Yes. The median sale price of new homes was about 5% above where it was a year ago.⁴

A gain in durable goods orders. The 0.5% rise in February was accompanied by news that durable goods inventories increased by 0.3%, the best such gain since December 2008.⁵

USDI surges north. When the U.S. Dollar Index is up 1.10% for the week (and 4.82% for the month), what happens with gold and oil? Well, gold and oil prices respectively fell 0.30% and 1.20% last week, with crude futures at exactly $80.00 per barrel at Friday’s close on the NYMEX.⁶

S&P 500 climbs 5.62% in 4 weeks. Stocks had another fine week from March 22-26, with the NASDAQ advancing 0.87%, the Dow 1.01% and the S&P 500 0.58% as part of a great 4-week run.⁷

Now the riddle of the week:

Last week’s riddle: Is there a number made of eleven tens of thousands, eleven thousands, eleven hundreds and eleven units? If so, what is it??

The answer: Yes -- the number is 122,111. 110,000 + 11,000 + 1,100 + 11 = 122,111

This week’s riddle. Two-and-a-half artists spend two-and-a-half hours painting two-and-a-half models on two-and-a-half canvases. How many artists would be necessary to paint 24 models on 24 canvases in 20 hours?

Good question. Congress has elected to keep us in suspense.

www.youtube.com/watch?v=o_6CnlAwiPM

0% estate taxes in 2010 … for now, anyway. On January 1, the federal estate tax went away – at least for the time being and perhaps for all of 2010 as envisioned back in 2001. President Obama and Congressional leaders wanted the estate tax to stick around in 2010 at 2009 levels (estate taxes up to 45% with a $3.5 million exemption), but lawmakers were preoccupied with other matters.^1,2

Will Washington really give families million-dollar tax breaks? If no estate tax is imposed in 2010, it could mean a savings of millions for wealthy families. There is talk of bringing the tax back retroactively – after all, the federal government could really use the money. Yet the further we get from January 1, the more difficult reinstating the estate tax for 2010 may become.

As American Institute of Certified Public Accountants vice-president for taxation Tom Ochsenschlager told MarketWatch, “They’re still talking (in Congress) about making something retroactive, but at some point they can’t do that … is it even constitutional? There’s a real question about that.”

The unconstitutional argument goes like this: if Congress moves to retroactively apply the estate tax for 2010, an estate could take the mater to court and point out that Congress had all year to reinstate it but failed to do so.

That argument aside, some estate planners think Congress will get around to a retroactive measure – one that would put the 2009 estate tax levels back into place for 2010.

So, what taxes are in place now? Some taxes still apply to estates in 2010 even if the estate tax doesn’t. People who give away more than $1 million during their life still face federal gift taxes – though in 2010, they max out at 35% instead of 45%.³

Also, all assets with capital gains are to be taxed at 15% above a $1.3 million federal exemption when sold by heirs in 2010. The big news here is that heirs don’t get to use a step-up this year. When they compute the value of an inherited asset, they have to use the basis (the original price paid for the asset) instead of how much that asset was worth when the original owner died. (In addition to the $1.3 million exemption per estate just mentioned, there is another $3 million exemption available for assets inherited from a spouse.)³

What precautions may be wise this year? As a potential heir, you’ll want to document the cost basis of any assets you might receive in 2010. Good recordkeeping is in order.

Additionally, you may want to search a trust or a will for so-called formula clauses anchored by words such as “that portion”, “that amount” or “that fraction”, especially if the will or trust was created some years ago with the presumption of a constantly increasing federal estate tax exemption.

These formula clauses are fundamental to bypass trusts created to defend estate tax exemptions for a couple. However, these clauses assume that there is an estate tax. With no estate tax in place, there is the possibility (depending on how the formula clause is worded) that a deceased spouse’s assets would not be inherited by the surviving spouse, but instead go directly into the family trust – not the most useful result for the surviving spouse.³

What will 2011 bring? Well – if there are no changes – the estate tax and the generation-skipping tax would come back in 2011. Only the first $1 million of an estate would be exempt from estate taxes. Assets above the exemption would be hit with a 55% federal penalty.³ However, the Obama administration had talked of keeping the 2009 estate tax levels in place for 2010 and beyond, which would be better than returning to the pre-EGGTRA levels in 2011.

www.youtube.com/watch?v=w5-TxwTyErQ

Quote of the week. “Reputation is what other people know about you. Honor is what you know about yourself.”– Lois McMaster Bujold

4Q GDP: 5.7%: That is the preliminary reading from the Commerce Department, and that is the best reading since 3Q 2003. Economists pointed out that much of the increase reflected companies rebuilding their inventories rather than personal spending.¹

Consumers think positive. The final University of Michigan/Reuters consumer sentiment index for January improved 1.6 points to 74.4. Economists polled by Briefing.com felt it would come in at 73.0.²

New concerns about home sales. Both new and existing home sales retreated markedly in December with the threat of federal tax credits being pulled. Existing home sales fell by 16.7% in that month while new home sales slipped 7.6%. In annual terms, residential resales for 2009 were about 5% higher than 2008 totals. Just 373,000 new single-family homes were sold in 2009, the fewest since the government began tracking sales stats in 1963.^3,4

A $5K hiring rebate? Last week, President Obama pitched the idea of giving companies of all sizes a $5,000 credit to offset payroll taxes for each new worker, up to a $500,000 ceiling. Net new hires (increasing employee hours) and salary increases could also make companies eligible. A proposal to enact the plan is now in the Senate.⁵

Dollar hits highest level since August. The buck went on an intraday climb to 90.92 yen and the euro traded below $1.39. The new GDP report helped.⁶

So long to a subpar month. Stocks retreated in the last week of January, with the Dow ending the month at 10,067.33, the NASDAQ at 2,147.35 and the S&P 500 at 1,073.87.⁷

(Source: CNBC.com, CNNMoney.com, ustreas.gov, bls.gov, 1/29/10)^7,8,9,10

Indices are unmanaged, do not incur fees or expenses, and cannot be

 invested into directly. These returns do not include dividends.

Riddle of the week. A plastic bottle filled with cola weighs one liter. What do you need to add to it to make it weigh less than two ounces?

Contact my office or see next week’s Update for the answer.

Last week’s riddle: A glass of water has an ice cube in it. If the ice cube fully melts, will the water level increase, decrease or remain the same?

Last week’s riddle answer: The water level will stay the same as the ice cube just displaces its weight.

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Citations.

1 pbs.org/newshour/rundown/2010/01/us-economy-expands-at-fastest-rate-in-six-years.html [1/29/10]

2 money.cnn.com/2010/01/29/markets/markets_newyork/ [1/29/10]

3 money.cnn.com/2010/01/27/real_estate/new_home_sales/ [1/27/10]

4 nytimes.com/2010/01/30/business/economy/30charts.html [1/29/10]

5 time.com/time/business/article/0,8599,1957663,00.html?xid=rss-topstories [1/29/10]

6 cnbc.com/id/35136215/ [1/29/10]

7 cnbc.com/id/35017549 [1/29/10]

8 money.cnn.com/quote/historical/historical.html?pg=hi&close_date=1%2F29%2F09&mode=add&symb=DJIA [1/29/10]

8 money.cnn.com/quote/historical/historical.html?pg=hi&close_date=1%2F28%2F05&mode=add&symb=DJIA [1/29/10]

8 money.cnn.com/quote/historical/historical.html?pg=hi&close_date=1%2F28%2F00&mode=add&symb=DJIA [1/29/10]

8 money.cnn.com/quote/historical/historical.html?pg=hi&close_date=1%2F29%2F09&mode=add&symb=COMP [1/29/10]

8 money.cnn.com/quote/historical/historical.html?pg=hi&close_date=1%2F28%2F05&mode=add&symb=COMP [1/29/10]

8 money.cnn.com/quote/historical/historical.html?pg=hi&close_date=1%2F28%2F00&mode=add&symb=COMP [1/29/10]

8 money.cnn.com/quote/historical/historical.html?pg=hi&close_date=1%2F29%2F09&mode=add&symb=SPX [1/29/10]

8 money.cnn.com/quote/historical/historical.html?pg=hi&close_date=1%2F28%2F05&mode=add&symb=SPX [1/29/10]

8 money.cnn.com/quote/historical/historical.html?pg=hi&close_date=1%2F28%2F00&mode=add&symb=SPX [1/29/10]

9 ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield.shtml [1/29/10]

9 ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield_historical.shtml [1/29/10]

10 treasurydirect.gov/instit/annceresult/press/preanre/2000/ofm11200.pdf [1/12/00]