Trust Department Quarterly Newsletter

4th Quarter 2009

What Went Wrong in the Last Decade

What decisions are the leaders of our country making now that we will look back on at the end of the next decade and say those have had a profound effect on the well-being of our country?  When we look back on the period prior to the year 2000 the biggest concern was the potential crash of the technology system because of the change in the calendar.  Extreme amounts of time and dollars were expended by industry to prevent a calamity that never occurred.

What if the U.S. had been as concerned with what took place on 9/11 as we were with Y2K?  Like Pearl Harbor we failed to keep our guard up and it has had a far reaching effect.  We now spend billions on security that will probably never change because terrorists direct their attacks against the populous more so than against the military.  We are fighting two battles on foreign ground, which unlike World War I and II will never be “won”.  Do we really think the World will ever be free of a terrorist organization such as the Taliban?

The second oversight of our leaders was the deregulation in the latter part of the Clinton administration on lending regulation.  In theory it made credit available and stimulated an economy that was already on a fast track.  In hindsight, we have experienced one of the worst recessions in our country and in the world.  The ability to borrow money is a necessity to the economy and no country or business can function without credit being available.  A real estate crisis, which will plague the economy for years to come, was created because individuals and companies were making large commissions with substandard lending practices.

The point is that as we look back over the last decade these three issues were there when we entered the year 2000.  One of the issues received a lot of attention and did not become a problem.  The other two received little attention and can be blamed for the economic problems the world faces today.

Our leaders don’t get credit for the right decisions.  After all, that is what we expect them to do.  They do need to do a better job of running the country for the benefit of the whole.  It’s hard to see this happening when votes such as the healthcare bill are totally across partisan lines.  It is also a concern when it appears that some senators who may have been wavering one way may have been granted some pet projects for their home states that swayed their votes.

No Action on Estate Exemption

The U.S. Senate adjourned without addressing the Estate Tax Exemption.  As the current law exists people dying in 2010 do not owe any federal estate tax no matter how large their estate is.  Look for Congress to take this up early in 2010.  Our best guess is that the exemption will be permanently set at $3.5 million per person.  Do keep in mind that each state has their own rules relative to estate taxes and that the State of Minnesota currently has a $1 million exemption.  We do not anticipate this changing in the foreseeable future.

The Stock Market

The equity markets finished strong in 2009.  If we look back in history over the last 75 years, the four worst total return years for the S & P index took place in 1937, 1974, 2002 and 2008.  In each of the years following these bad years the S & P has been up over 23%.  But again, looking back over the last decade the S & P is still down 24.1% since 12/31/99.  The five years prior to 12/31/99 the S & P Index was up over 300%.  On average over the last 50 years the S & P has been up 9.4% in total return.  We anticipate the equity markets to turn in another positive year for 2010 albeit not as strong as the past year.

The Bond Market

The Federal Reserve is still maintaining the discount rate at .25%.  During the last quarter we did see problems with Dubai unable to make payments on their debt.  Anticipate that there will be further problems in a number of the European countries during the year 2010.  As evidenced on the rates for 10-year and 30-year treasuries at the top of this newsletter, rates have gone up during the year.  We would anticipate the rate on a 10-year treasury at the end of 2010 to be somewhere between 4.5% and 5%.

Roth IRA Conversions

Reminder:  2010 is the year that you are entitled to extra time to pay your tax liability if you convert all or a portion of a Traditional IRA to a Roth IRA.  You can spread the payment out, reporting half on your 2011 tax return and the remaining amount on your 2012 tax return.  Be sure to consult with your Tax Advisor to see if it makes sense for your situation, and let us know if we can be of any assistance in the process.

Last Thought – Another History Lesson

The concept of universal health care was first introduced by President Theodore Roosevelt more than 100 years ago.

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