My interview this morning with Gregg Moss on 9News is now on their website as a featured video. Click on  the Your Money video on their website. The clip is about 4 minutes long, and Gregg first talks about current issues before interviewing me in the second half.

I should have the video up soon on my website.

Patrick

I have been asked by many people whether or not we will have a year-end rally. This traditionally happens during the last six weeks or so of the year as well as the first few weeks at the beginning of the year. Since everything has been different over the past few months, one could kind of doubt that we will have one. I don’t have a crystal ball either, but let me list some facts and you can decide for yourself:

• The CBOE Volatility Index (VIX) is still at astronomical heights. As I write this, the value is at 69.  Before September 12th, the value was around 25.  During the past 2 months it spiked above 90. The year to date low is about 15. During the 4 years prior to the meltdown, 23 was the high. Unless we see a decrease in volatility, there is not going to be a rally lasting more than a few days.
• All the rallies usually fizzle after a few days, sometimes after one day already. The rallies are mainly short-coverings and people selling into the rally. As long as we don’t see something more sustained, it will not happen. The down days also need to be smaller than the up days.
• One of the big question is if all the bad news is already priced into the market. If that is the case, some even modestly good news could potentially change the psychology of the market. Otherwise people will keep sitting on their cash.

We have been testing the lows set in October a few times, but always rallied right after wards just to come back to them. I think it would be best if we stay in that trading range.  I believe a major rally to let’s say over 10,000 on the Dow can not be sustained currently and likely will cause further drops, likely past the lows set in October. If we do go through the lows set last month, we will likely drop another 10% at least. On the other hand, I can see that the current lows could hold if we don’t rally. I personally would not bet on a year-end rally.

For all your traders out there, on the surface it looks like a great time to make money, as long as the timing is right. The extremely high VIX has been punishing for many option traders.

Please feel free to share your thoughts.

Cheers,

Patrick

Gregg Moss from Channel 9 here in Denver will interview me about the current financial environment as well as my book. It will be aired live at 6:40am on Tuesday, November 18.

Turn on the TV if you are up at that time.

Patrick

A friend of mine send this to me. I could not explain our system better, quite funny and maybe some people will start to understand.

Cheers,

Patrick

The Tax System - Explained With Beer

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.

The fifth would pay $1.

The sixth would pay $3.

The seventh would pay $7.

The eighth would pay $12.

The ninth would pay $18.

The tenth man (the richest) would pay $59.

So, that’s what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. ‘Since you are all such good customers,’ he said, ‘I’m going to reduce the cost of your daily beer by $20.’ Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).

The sixth now paid $2 instead of $3 (33%savings) .

The seventh now pay $5 instead of $7 (28%savings) .

The eighth now paid $9 instead of $12 ( 25% savings).

The ninth now paid $14 instead of $18 ( 22% savings).

The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

‘I only got a dollar out of the $20,’declared the sixth man. He pointed to the tenth man,’ but he got $10!’

‘Yeah, that’s right,’ exclaimed the fifth man. ‘I only saved a dollar, too. It’s unfair that he got ten times more than I!’

‘That’s true!!’ shouted the seventh man. ‘Why should he get $10 back when I got only two? The wealthy get all the breaks!’

‘Wait a minute,’ yelled the first four men in unison. ‘We didn’t get anything at all. The system exploits the poor!’

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.

Professor of Economics, University of Georgia

For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible!!!

Tags: our tax system, tax the rich, tax the wealthy, Taxes

I don’t have to tell you, but this has been one ugly October for the stock markets all around the world, with many stock markets actually doing worse than ours.

Today, I don’t want to talk about the stock market, but how some of the other markets reacted to the events of the past six weeks.

Everybody would think that gold is a safe haven in disturbed times like this. That was not the case, as gold lost over 20% of its value and even more since its peak.

Commodity prices, and not just oil, have collapsed. This could be explained at least to some extend by the slowing economy.

The US dollar has appreciated considerably against all major currencies except for the yen. The yen is often perceived as a safe haven in times like this, which is not good for the Japanese economy. The US dollar appreciated big time against the Aussie dollar and the Canadian dollar as well as the Euro and the British pound.  It did not gain quite that much against the Swiss Franc, which has a similar function as the yen. The Swiss economy is starting to hurt as well from its currency appreciation against the Euro as a lot of the exports go to the Euro zone.

So why is the dollar appreciating while we are having such an economic crisis? One reason is the deflation of the commodity bubble. But an equally important reason is that as bad as it is here in the United States, it is worse in other countries. The bail out figures are staggering, but when you look at what is spend as a percentage of GDP, the UK and Germany are spending many times over what we are. Time will tell what the future will hold for the US dollar, but I do think that we will see some continued appreciation over the coming months, although not as steep.

One final thought.  If you were living outside the United States and not calculate in US dollar you were potentially hit by a double whammy if you bought gold two months ago because you thought a big crisis was looming. First of all, gold lost 20% of its value, and since gold is valued in US dollars, depending on your home currency, you potentially had additional losses. Buying gold is often something to do during uncertain times, but not this time.

I think the markets will continue to be wild, and we will see if we have the traditional November through January rally.

Please feel free to comment any time.

Cheers,

Patrick

I have been wondering for a while if besides the obvious reasons, some of the market volatility might be due to our upcoming election. Is the market reacting to the possibility of a one party government with a filibuster proof senate? Is the market scarred about what a potentially very liberal, left leaning government will do to our economic recovery with new social programs and an unwillingness to lower taxes on corporations, capital gain as well as individuals?

I don’t have the answer, but I do think this is a distinct possibility. We might know in the days following November 4th if the market rallies on some unanticipated election results.

Looking at history, having a filibuster proof senate run by the Democrats created large social programs like in the 30s and 60s, and a lackluster economy during the late 70s. The markets certainly don’t like that, as it will be poisonous to our worldwide competitiveness.

If this comes true, I guess we have to bullet proof our portfolios even more and expect inflation to get even worse in the years to come than it will anyway with all the money being created right now.

Cheers,

Patrick

I talked to a friend yesterday whose broker sold a mutual fund to get a tax loss and then bought a similar fund right after wards. The fund purchased was not from the same company, but he told my friend that they are virtually the same.

I believe that this is considered a wash sale by the IRS and the loss will not be allowed. I want to make sure if someone recommends this to you that you are aware that this is likely not allowed under the current tax laws.

I do think it is a little more difficult to assess a wash sale with mutual funds, but if you buy a fund that is virtually the same as the one you sold just from a different company, it could be considered a wash sale.

As always, please feel free to comment.

Cheers,

Patrick

I had quite a few questions lately regarding the FDIC insurance limitations. Let me try to give a brief summary on how the insurance currently works.

The increased limit from $100,000 to $250,000 is temporary and will expire on December 31st, 2009.I guess there is always a chance that it might be renewed.
The limits are on a per type of account basis. The types of accounts are individual, joint, IRA’s and certain other retirement accounts as well as the beneficiary of trust accounts.
These limitations are per bank, so looking at the scenarios below you can repeat this at every bank that provides FDIC insurance coverage.
Let’s look at each of them:

Individual: The insurance covers the individual up to the limit of $250,000, no matter if the person has one or multiple accounts. If the person has multiple account, the deposits in the different accounts will be added together and are insured up to the limit.
Joint Accounts: With a joint account, both owners each get the $250,000 in coverage for a total coverage of $500,000. If a couple has multiple joint accounts at the same bank, the amounts are added together just like with the individual account.
IRA’s: The same rules apply as with individual accounts.
Trust Account: The beneficiary get the same coverage as described under the individual accounts.
If you are married, you could have $500,000 in a joint account, each $250,000 in an individual and IRA and some money in a trust account all with the same bank and be FDIC insured. This means that you could have well over $1,500,000 in a single bank and be all covered. Then you could repeat that at different banks many times over. There are a few other minor FDIC requirements.

The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if purchased at an insured bank.

It certainly has been quite a crazy market, but I think that we are hitting bottom soon. Volume has been so high, the end of the day trading yesterday was so panicky, more than even in previous days during the past few weeks. Volatility is extremely high, which shows extreme fear. What we need is a closing on the up side for more than one day. I do think we will have a snap back, but I think we might then stay on a certain level for a while. A 20% snap back would get us back to about 10K on the Dow. Another sign that we might be close is that is the interest rate on the short term government papers actually went up yesterday, so demand for these is going down, and LIBOR went down, so banks are not asking that much interest among each other.

Anyway, these are just some thoughts, only time will tell.

Patrick

The current market has been quite interesting over the past weeks to say the least, and many of my clients called me for my opinion.  I thought I am going to share a video from Dimensional Funds Advisors (DFA).  I am using DFA for most of the money management for my clients, and their research has been exemplary.  Click here to watch it.

This video gives an interesting historical perspective.

Please feel to comment.

Patrick