Well, there will finally be a new automobile manufacturer in town! We are excited to see how well the government can run the new and, hopefully, improved Government Motors (GM). GM headlined the news over last week, with the looming bankruptcy filing seeming imminent with all kinds of news articles about how big of an impact the filing would have on both the US and the psychology of foreign investors to the US markets in general. Many of the last minute deals to restructure outstanding debt appear to have been accepted, after the government sweetened the deals a bit, but we really do not think that it will matter too much because the basic problem is still: GM is not selling cars. We are not clear how a restructured GM can completely turn a 180 on the types of cars they make and start turning a profit in any short amount of time. With Chrysler already in bankruptcy and very little information about what they are up to, and now GM joining the party, one has to wonder about the psychological effect of such actions on foreign investors who, for a long time, have viewed GM and Chrysler as pillars of the US economy. One thing is certain: the foreign auto makers will pick up market share in the US as US consumers continue to feel unsure about buying US manufactured vehicles. We have yet to see the trickle-down effects, as some parts manufacturers will probably have to file for Chapter 11 along with many dealership owners. The increase to unemployment as a direct result of the filing will be minimal because, even with the projected 12 plants being shut down and others going idle, there could be about 21,000 people unemployed, which, as large as it seems, represents a very small piece of the employment pool.
For the shortened trading week the broad market indexes all increased in value with the NASDAQ leading the way by increasing nearly 4.9 percent, followed the S&P 500, and the Dow. The world markets last week also had a very good week as shown by the Dow Jones World Index advancing by a little more than three percent. Gold rallied for the week, increasing by a little more than two percent, and oil made a huge move upward of more than eight percent. The large upward move in commodities last week was partially due to the falling value of the US dollar, which hit new lows over the course of the previous week against many of the major world currencies. With Geithner traveling to China for the first time as the Secretary of the Treasury this week, we should see some sort of unity stance on the US dollar, since a continued decline in the value of the dollar hurts both the US economy and our major trading partners, such as China. The overall volatility in the S&P 500 as measured by the VIX continued to move lower over the course of last week, and now sits right at the low for 2009 which was set the previous week. In general this rally continues to shows signs of life as the weeks roll by with higher and higher returns on the broad indexes, if this is a new bull market it is one of the strangest turnarounds that the financial markets have ever seen. Then again, there has never been the amount of government intervention into the financial markets as there has been this time around. We are currently maintaining our stance of protecting principal while slowly moving back into the equity market more fully, so that the rally does not continue to run without our participation.
For the shortened trading week ending 5/29/09, the returns in our portfolio models are as follows:
Last Week
Year to Date
S&P 500 WD (benchmark)
3.67 %
3.13 %
Aggressive Model
1.75 %
8.45 %
Growth Model
1.20 %
6.47 %
Moderate Model
0.45 %
3.07 %
Stable Model
0.79 %
5.71 %
We made only one change during the course of last week, and that was to trim back our position in Westcore Colorado Tax Exempt Fund (WTCOX). The move to sell approximately half of our position was due to the market seeming to favor equities over fixed income. This thought is in line with the general consensus that interest rates will have to begin increasing at some point in the future as inflation becomes more of a concern. When prices increase, the value of bonds typically decrease, thus we would want to be allocated less toward the bonds and more toward equities. We continue to look at our positions and the markets in general in an attempt to find investments which we feel are a good value.
Economic Wrap Up: Last week the largest piece of economic news that surprised the markets was the consumer confidence figure for the month of May which showed consumers having far more confidence than expected. The figure released was 54.9 while the market had been expecting 42.6 and the previous month’s reading was 40.8. This increase is one of the largest one-month-increases in consumer confidence, and could be a precursor for what is to come. The figure is supposed to be, in part, forward looking, which could be a very strong indication that the US consumer believes that the worst of this economic cycle is behind us. One dampener for last week was the continued weakness shown in the housing market on Tuesday through the release of the Case Shiller Home Price Index, which showed an annualized decline during the month of March of 18.7 percent, while the markets expected a decline of 18.4, and the previous months reading was a decline of 18.67. This could be a bottoming out process starting in home values, but it is still too early to make that call. The GDP figures released on Friday showed that the US economy shrank by 5.7 percent during the first quarter of 2009, this being revised from first expectations of a negative 6.1 percent. While the number is not finalized yet, the revision was at least in the correct direction. Rounding out the week for economic news was the durable goods orders figure which came in much stronger than expected, indicating that the manufacturing industry may be starting to pick up in order to replenish some of the diminished inventories.
This week there is a long list of economic news slated for release with the majority of it not expected to move the markets. The week kicks off with personal income and spending on Monday as well as the ISM index and construction spending. Construction spending as well as Tuesday’s release of pending home sales could provide a little insight in the housing market to see if a bottoming out process has begun. Auto and truck sales are also being released on Tuesday (to no one’s surprise, the figures are not expected to be very good at all, with all of the uncertainty that surrounded GM during the month of May). Factory orders are on the docket for Wednesday, and could provide insight into the replenishing of various inventories. Initial jobless claims are expected to be lower this week over last. We will see if the markets are correct about them when they are released on Thursday. Rounding out the week on Friday is the release of the Unemployment figures for the month of May; the markets are expecting the reading to show a little over nine percent unemployment; a slight increase since the previous month’s reading of 8.9 percent. Overall there are a lot of releases but most of them will not be market movers, provided that they are reasonably close to expectations.
Financial Planning Tip: Distributions from Roth IRAs
In most cases the best strategy is to leave as much money as possible in your IRAs, and for as long as possible. However, if you need early access to money in your IRAs, it is generally better to take a distribution from a Roth IRA rather than a traditional IRA. You can withdraw your regular contributions at any time without paying tax or penalty. This is not the case for the earnings, however. Unless you pass the tests described below, a withdrawal of earnings will be taxable — and may be subject to a penalty as well.
Withdrawing Your Contributions
The rules for Roth IRAs permit something that is not allowed for traditional IRAs: you can withdraw the nontaxable part of your money first. Distributions from traditional IRAs come partly from earnings and partly from contributions. But when you take money out of a Roth IRA, the first dollars you take out are considered a return of your regular contributions. You do not have to meet any special criteria to receive those dollars free of tax. You can take them out any time, for any reason, without paying tax or penalties.
When you apply this rule, you treat all of your Roth IRAs like a single big Roth IRA.
Example: Suppose you have a Roth IRA with a balance of $2,500 (a $2,000 contribution and $500 of earnings) and another Roth IRA with a balance of $3,000 (a $2,000 contribution in a different year and $1,000 of earnings). You can withdraw the entire $3,000 from the second Roth IRA without paying tax, even if you do not pass the tests to withdraw earnings tax-free. Your other Roth IRA will now be treated as if it has $1,000 of contributions and $1,500 of earnings.
In a way, it might be considered a disadvantage to be able to take money out of a Roth IRA so easily. The best way to grow your investments is to keep as much as possible in your Roth IRA as long as possible, so it will continue to earn investment income tax-free. You may find it difficult to resist the temptation to take money out of your Roth IRA — and later regret that you withdrew the money.
Qualified Distributions
If you receive a distribution of earnings from your Roth IRA, you are required to pay tax (and possibly penalties) unless you received a qualified distribution. A qualified distribution is a distribution that passes both of the following two tests:
Five-Year Test: The five-year test is satisfied beginning on January 1 of the fifth year after the first year you establish a Roth IRA. If you established a Roth IRA in 2004, for example, any distribution from a Roth IRA will satisfy the five-year test if the distribution occurs on or after January 1, 2009.
The five-year test is satisfied on January 1 even if you establish your Roth IRA late in the year. In fact, you’re treated as if you established your Roth IRA in the previous year if you make the contribution on or before April 15 and designate it as a contribution for the previous year.
When you meet the five-year test for one Roth IRA, you meet it for all Roth IRAs. For example, suppose you contributed $500 to a Roth IRA in 2004. Three years later you decided to set up another Roth IRA and contribute $2,000. Both IRAs will meet the five-year test on January 1, 2009.
Type of Distribution: Even after you meet the five-year test, only certain types of distributions are treated as qualified distributions. There are four types of qualified distributions:
Distributions made on or after the date you reach age 59½.
Distributions made to your beneficiary after your death.
If you become disabled, distributions attributable to your disability.
Qualified first-time homebuyer distributions.
A distribution of earnings that fails to meet these tests will be taxable, and may be subject to a penalty as well.
Well, there will finally be a new automobile manufacturer in town! We are excited to see how well the government can run the new and, hopefully, improved Government Motors (GM). GM headlined the news over last week, with the looming bankruptcy filing seeming imminent with all kinds of news articles about how big of an impact the filing would have on both the US and the psychology of foreign investors to the US markets in general. Many of the last minute deals to restructure outstanding debt appear to have been accepted, after the government sweetened the deals a bit, but we really do not think that it will matter too much because the basic problem is still: GM is not selling cars. We are not clear how a restructured GM can completely turn a 180 on the types of cars they make and start turning a profit in any short amount of time. With Chrysler already in bankruptcy and very little information about what they are up to, and now GM joining the party, one has to wonder about the psychological effect of such actions on foreign investors who, for a long time, have viewed GM and Chrysler as pillars of the US economy. One thing is certain: the foreign auto makers will pick up market share in the US as US consumers continue to feel unsure about buying US manufactured vehicles. We have yet to see the trickle-down effects, as some parts manufacturers will probably have to file for Chapter 11 along with many dealership owners. The increase to unemployment as a direct result of the filing will be minimal because, even with the projected 12 plants being shut down and others going idle, there could be about 21,000 people unemployed, which, as large as it seems, represents a very small piece of the employment pool.
For the shortened trading week the broad market indexes all increased in value with the NASDAQ leading the way by increasing nearly 4.9 percent, followed the S&P 500, and the Dow. The world markets last week also had a very good week as shown by the Dow Jones World Index advancing by a little more than three percent. Gold rallied for the week, increasing by a little more than two percent, and oil made a huge move upward of more than eight percent. The large upward move in commodities last week was partially due to the falling value of the US dollar, which hit new lows over the course of the previous week against many of the major world currencies. With Geithner traveling to China for the first time as the Secretary of the Treasury this week, we should see some sort of unity stance on the US dollar, since a continued decline in the value of the dollar hurts both the US economy and our major trading partners, such as China. The overall volatility in the S&P 500 as measured by the VIX continued to move lower over the course of last week, and now sits right at the low for 2009 which was set the previous week. In general this rally continues to shows signs of life as the weeks roll by with higher and higher returns on the broad indexes, if this is a new bull market it is one of the strangest turnarounds that the financial markets have ever seen. Then again, there has never been the amount of government intervention into the financial markets as there has been this time around. We are currently maintaining our stance of protecting principal while slowly moving back into the equity market more fully, so that the rally does not continue to run without our participation.
For the shortened trading week ending 5/29/09, the returns in our portfolio models are as follows:
Year to Date
S&P 500 WD (benchmark)
3.67 %
3.13 %
Aggressive Model
1.75 %
8.45 %
Growth Model
1.20 %
6.47 %
Moderate Model
0.45 %
3.07 %
Stable Model
0.79 %
5.71 %
We made only one change during the course of last week, and that was to trim back our position in Westcore Colorado Tax Exempt Fund (WTCOX). The move to sell approximately half of our position was due to the market seeming to favor equities over fixed income. This thought is in line with the general consensus that interest rates will have to begin increasing at some point in the future as inflation becomes more of a concern. When prices increase, the value of bonds typically decrease, thus we would want to be allocated less toward the bonds and more toward equities. We continue to look at our positions and the markets in general in an attempt to find investments which we feel are a good value.
Economic Wrap Up: Last week the largest piece of economic news that surprised the markets was the consumer confidence figure for the month of May which showed consumers having far more confidence than expected. The figure released was 54.9 while the market had been expecting 42.6 and the previous month’s reading was 40.8. This increase is one of the largest one-month-increases in consumer confidence, and could be a precursor for what is to come. The figure is supposed to be, in part, forward looking, which could be a very strong indication that the US consumer believes that the worst of this economic cycle is behind us. One dampener for last week was the continued weakness shown in the housing market on Tuesday through the release of the Case Shiller Home Price Index, which showed an annualized decline during the month of March of 18.7 percent, while the markets expected a decline of 18.4, and the previous months reading was a decline of 18.67. This could be a bottoming out process starting in home values, but it is still too early to make that call. The GDP figures released on Friday showed that the US economy shrank by 5.7 percent during the first quarter of 2009, this being revised from first expectations of a negative 6.1 percent. While the number is not finalized yet, the revision was at least in the correct direction. Rounding out the week for economic news was the durable goods orders figure which came in much stronger than expected, indicating that the manufacturing industry may be starting to pick up in order to replenish some of the diminished inventories.
This week there is a long list of economic news slated for release with the majority of it not expected to move the markets. The week kicks off with personal income and spending on Monday as well as the ISM index and construction spending. Construction spending as well as Tuesday’s release of pending home sales could provide a little insight in the housing market to see if a bottoming out process has begun. Auto and truck sales are also being released on Tuesday (to no one’s surprise, the figures are not expected to be very good at all, with all of the uncertainty that surrounded GM during the month of May). Factory orders are on the docket for Wednesday, and could provide insight into the replenishing of various inventories. Initial jobless claims are expected to be lower this week over last. We will see if the markets are correct about them when they are released on Thursday. Rounding out the week on Friday is the release of the Unemployment figures for the month of May; the markets are expecting the reading to show a little over nine percent unemployment; a slight increase since the previous month’s reading of 8.9 percent. Overall there are a lot of releases but most of them will not be market movers, provided that they are reasonably close to expectations.
Financial Planning Tip: Distributions from Roth IRAs
In most cases the best strategy is to leave as much money as possible in your IRAs, and for as long as possible. However, if you need early access to money in your IRAs, it is generally better to take a distribution from a Roth IRA rather than a traditional IRA. You can withdraw your regular contributions at any time without paying tax or penalty. This is not the case for the earnings, however. Unless you pass the tests described below, a withdrawal of earnings will be taxable — and may be subject to a penalty as well.
Withdrawing Your Contributions
The rules for Roth IRAs permit something that is not allowed for traditional IRAs: you can withdraw the nontaxable part of your money first. Distributions from traditional IRAs come partly from earnings and partly from contributions. But when you take money out of a Roth IRA, the first dollars you take out are considered a return of your regular contributions. You do not have to meet any special criteria to receive those dollars free of tax. You can take them out any time, for any reason, without paying tax or penalties.
When you apply this rule, you treat all of your Roth IRAs like a single big Roth IRA.
Example: Suppose you have a Roth IRA with a balance of $2,500 (a $2,000 contribution and $500 of earnings) and another Roth IRA with a balance of $3,000 (a $2,000 contribution in a different year and $1,000 of earnings). You can withdraw the entire $3,000 from the second Roth IRA without paying tax, even if you do not pass the tests to withdraw earnings tax-free. Your other Roth IRA will now be treated as if it has $1,000 of contributions and $1,500 of earnings.
In a way, it might be considered a disadvantage to be able to take money out of a Roth IRA so easily. The best way to grow your investments is to keep as much as possible in your Roth IRA as long as possible, so it will continue to earn investment income tax-free. You may find it difficult to resist the temptation to take money out of your Roth IRA — and later regret that you withdrew the money.
Qualified Distributions
If you receive a distribution of earnings from your Roth IRA, you are required to pay tax (and possibly penalties) unless you received a qualified distribution. A qualified distribution is a distribution that passes both of the following two tests:
Five-Year Test: The five-year test is satisfied beginning on January 1 of the fifth year after the first year you establish a Roth IRA. If you established a Roth IRA in 2004, for example, any distribution from a Roth IRA will satisfy the five-year test if the distribution occurs on or after January 1, 2009.
The five-year test is satisfied on January 1 even if you establish your Roth IRA late in the year. In fact, you’re treated as if you established your Roth IRA in the previous year if you make the contribution on or before April 15 and designate it as a contribution for the previous year.
When you meet the five-year test for one Roth IRA, you meet it for all Roth IRAs. For example, suppose you contributed $500 to a Roth IRA in 2004. Three years later you decided to set up another Roth IRA and contribute $2,000. Both IRAs will meet the five-year test on January 1, 2009.
Type of Distribution: Even after you meet the five-year test, only certain types of distributions are treated as qualified distributions. There are four types of qualified distributions:
A distribution of earnings that fails to meet these tests will be taxable, and may be subject to a penalty as well.
For additional information please consult your tax advisor or refer to Chapter 2 (Roth IRAs) of IRS Publication 590, http://www.irs.gov/publications/p590/index.html.
Posted in Weekly Commentary