The Month in Brief

November turned out to be a mixed month for broad asset classes, with most of the positive news coming from domestic equity markets. A new round of worries over debt in the European Union, an artillery attack on South Korea by North Korea and concerns about tightening in China changed the mood and sent both developed and emerging foreign stock markets into negative territory for the month. On the fixed-income side, domestic returns showed small losses for the month, but global fixed-income markets fared worse. The losses for U.S investors in both foreign stocks and bonds were largely explained by a strengthening dollar.

Stateside, the midterm elections were an obvious bonanza for Republicans. Also, the Federal Reserve unveiled another round of monetary easing (“QE2”), creating a new round of media hysteria about inflation and the potential insolvency of a few larger states. Mortgage rates also edged up, but remained very low on a historical basis; still, home sales fell and home prices were weak. The dollar and gold both enjoyed a good month, as fear came back into fashion as primary driver of investment flows.

Looking Back….Looking Forward

November was the first down month for the Dow Jones Industrial Average since August, but the losses were minor for blue chip domestic stocks and positive for smaller company stocks. Losses in foreign markets were mainly currency related, as the global economy also appears to be picking up momentum and visibility. The losses in fixed income were not a surprise, as retail investors have been on a two-year buying binge that has driven prices too high and yields too low. Absent a deflationary spiral, fixed income rates have no place to go but up from current rates; translation, we expect capital losses to continue for unwary bond and bond fund investors.

December tends to be a bullish month for stocks. According to The Stock Trader’s Almanac, since 1990 the S&P 500 Index has gained an average of 1.8% in December, posting monthly gains in 16 of the past 20 years. Of course that is simply past performance, and no guarantee of future results, but December has gotten off to a good start. Global markets have reacted positively to assurances from the ECB about controlling EU member debt, there has been a big rebound in pending home sales, and retail sales numbers from Black Friday weekend were encouraging. Extension of the Bush-era tax cuts (and finally settling on a reasonable estate tax system) for 2011 and beyond could give the December rally further impetus.

As we look into the prospects for the coming year, we remain optimistic the economic recovery will continue to gain strength, encouraging investors out of bonds and cash and into higher risk assets – basically stocks and commodities. We still believe that economic growth will be subdued in this cycle and the potential for economic policy errors and geopolitical shocks present wild cards that call for the more intensive risk management approach we have instituted with our Adaptive Risk Management process.

Source: RIA

Source: RIA

Other offsets in the law:

• Separate the application of the FTC limitation to items
• Re-sourced under tax treaties;
• Ensure that earnings of foreign subsidiaries of U.S. companies
  are subject to withholding tax when those earnings are repatriated to a
  foreign parent corporation as a dividend;
• Tighten affiliation rules that seek to prevent taxpayers from
  excluding foreign interest expense from the FTC limitation by placing it
  in foreign subsidiaries;
• Repeal the 80/20 withholding rules for dividends; and
• Eliminate the advance earned income tax credit

Levin Expects Phased-In Carried Interest Change to Be Key Offset for Extenders

House Ways and Means Committee Chairman Sander Levin (D-Mich.) said May 11 that he expects a phased-in change to the tax treatment of carried interest to be a main offset for the tax extenders legislation moving toward the House floor.

Levin said the exact details of the carried interest provision are still being worked out, but the legislation (H.R. 4213) would not include any carve-outs to exempt particular industries and would ultimately match the tax rate paid on carried interest income to ordinary income tax rates.

The bill, which was renamed the Promoting American Jobs and Closing Tax Loopholes Act, will have a total of roughly $50 billion in fully offset tax provisions. It is expected to go to the House floor during the week of May 17, Levin said. He added that there will not be any full committee hearing or markup of the legislation because most of the provisions have already been vetted by the committee in prior bills.

The legislation will include a slightly scaled back version of the Build America Bonds provision originally in the small business tax bill (H.R. 4849). Levin said he and Senate Finance Committee Chairman Max Baucus (D-Mont.) opted to tailor bonds provision back because of its cost.

Levin also said lawmakers are still discussing whether to include a provision from the small business tax bill that would raise $7.7 billion by stopping companies from using subsidiaries to channel deductible payments through U.S. tax treaty countries before earnings are repatriated to a tax haven. Information provided by BNA.com – posted May 11, 2010