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Trust Department Quarterly Newsletter 2nd Quarter 2009
Cautious Optimism As we pass the mid-year point of 2009 the question is whether the economy is headed in positive territory for the long term or whether we will face even more serious downturns in foreclosed real estate, job losses, and higher inflation. Are the stimulus packages working? Are new government controls going to help or hinder the business world going forward? We do not have the answers to these questions yet. Only time will tell if the country and its economy are better a year from now and five years from now. History tells us that they should be. Home sales and refinances have been strong over the last three months as interest rates on 30-year mortgages have been under 5%. This was only for a very short period of time and interest rates have returned to over 5%. Unlike the period of home buying that created the sub prime problems, credit has been tightened to those with 20% down and good credit ratings. Otherwise, these lower interest rates are not available. The auto industry continues to suffer as consumers hang on to their older models. This has resulted in our government partnering with GM and Chrysler to restructure their companies after they had declared bankruptcy. This is not unprecedented, as the government invested in Chrysler in the ’80’s, which allowed that company to continue and taxpayers were rewarded by gains on the stock prices. The government is also providing incentives (in addition to those provided by the auto company) in the form of sales tax deductions on income tax returns and up to a possible $4,500 rebate for trade-ins on the so called gas guzzlers. But credit to the consumer is still a problem for the auto dealers. Questions still abound as to exactly where stimulus dollars have gone and an accounting for these. However, we do know that the stimulus packages were not intended to necessarily be a jump start and that the money is being doled out over a number of years. The majority of the funds actually are targeted for the year 2010. By Labor Day approximately $125 billion will be committed to the areas of transportation, health care, housing, education and environmental projects across the U.S. The White House is pressuring governors to speed up approvals of projects across their states to create more job growth. There is no question that the dollars being spent and invested in the stimulus packages are increasing our country’s debt. On the other hand, if we want to use a little bit of rationalization, when we look at how much money we have sent to foreign countries over many decades to stimulate their economies, it certainly makes sense for us to use taxpayer monies to get our own country back on track. The Stock Market March 9, 2009 appears to have been the bottom of the market for both the Dow Jones Industrial Average and the S & P. The market from March 9 to the end of the first quarter made approximately an 8% recovery. Concerns over the continued problems in the housing market as well as commercial real estate and the unemployment rate (which will most likely hit 10% during the year 2009) continue to put a damper on the equity markets. Earlier this year we’ve seen gains in technology stocks and more recently a run-up in financial stocks that had been plagued by the sub prime mortgage fiasco. The price of oil has gone from a high of $145 per barrel during the year 2008 to the $30 range earlier this year and now is bouncing around the $70 per barrel price. We anticipate the price of oil will more than likely increase slightly as we go through the balance of this year, which will have a negative affect on the inflation rate. We continue to see more emphasis on alternative energy sources, which will alleviate our dependency on foreign oil. The equity markets at mid year are still negative. We do anticipate continued market volatility during the next quarter with a fairly positive last quarter of 2009. The Bond Market The Federal Reserve met on June 23 and 24 and again did not make any changes in the interest rates. However, as previously indicated we have seen the interest rates on mortgages increase as well as the rate on 10 and 30 year U.S. government bonds. Again, the issue of government bonds to provide the dollars for the stimulus packages, which creates an imbalance in the supply and demand, will drive up interest rates. However, we probably will not see the interest rates on a 10-year government bond exceed the 4.5% to 5% range until sometime in 2010. Conversion of Traditional IRA to a Roth IRA There are new rules that will apply starting with the year 2010 relative to the conversion of traditional IRA’s to Roth’s. The current rule is that if your income is greater than $100,000 you are ineligible to make this conversion. This limit will not exist in the year 2010. In addition, income tax ramifications of converting from a Traditional to a Roth can be spread out over two years. Please contact us for further information if you are interested in pursuing this. As always, we advise you to consult with your tax advisor before making any final decisions. Quote for the Day “Politics is the art of looking for trouble, finding it, misdiagnosing it, and then misapplying the wrong remedies.” - Groucho Marx |
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