LAX is just like the US, once brilliant and modern; now faded and cramped – NY Times, Krugman

Starting Over at 55 – NY Times

What are the Hedge Funds Doing? Interesting to note that the top 10 positions owned among hedge funds include many in  our Alpha portfolio: Apple, Direct TV, Pfizer, Microsoft, and Wells Fargo. (not a solicitation– see disclosures at bottom of this page).

6 time wasters and what to do about them

Better Working Tip: Reclaim the morning

Estate Planning With a Roth IRA

Updated on February 3, 2010.

Estate Tax Uncertainty: Since 2001, the federal estate tax has been scheduled to die in 2010. However, the tax is scheduled to come roaring back with much sharper teeth in 2011. Nobody thought our beloved Congress would allow the estate tax to expire this year, but it happened. We expect the tax to be restored sometime in 2010, but the issue of the effective date is very uncertain. If Congress tries to bring the tax back with a retroactive effective date of Jan. 1, 2010, it might be unconstitutional. Meanwhile, the federal gift tax rules for 2010 are the same as they were in 2009. Chleicrke1 for some advice on estate planning in 2010 between now and when the dust settles.

WHEN IT COMES to saving for retirement, many investors already know how well the Roth IRA fends off Uncle Sam. But what they may not realize is that it’s equally effective as an estate-planning tool. Seniors who convert a regular IRA into a Roth account can reduce their estate taxes and eliminate the income tax their heirs would otherwise have to pay on withdrawals taken from an inherited regular IRA. Sound too good to be true? Here’s how it works.

No Minimum Withdrawals The first benefit comes from the fact that Roth accounts are not subject to the minimum-withdrawal rules that apply to regular IRAs. These rules force you to begin draining your regular IRA the year after you turn 70 1/2. Of course Uncle Sam is there for his handout, and your friendly state-tax collector is next in line. This is galling when you don’t need the money.

Converting your regular IRA into a Roth puts a halt to this nonsense. After the conversion (which is allowed in 2010 regardless of your income), you can live out the rest of your days without being forced to take unwanted withdrawals. You are free to leave the Roth account balance untouched and accumulate as many tax-free dollars as you can for your estate. (If you convert after age 70 1/2, you still have to take one final minimum withdrawal for the conversion year; whatever is left in the regular IRA can then be converted to Roth status.)

Paying the Tax Of course, you will have to pay tax on any accumulated earnings and tax-deductible contributions when you make the Roth conversion. But this isn’t a bad thing, as long as you can pay the tax out of non-IRA assets. Why? When you pay the conversion tax, you effectively prepay income taxes for your heirs without owing any gift tax or using up any of your valuable federal estate-tax exemption of $3.5 million for 2009. Plus, prepaying the income taxes reduces the size of your taxable estate — also a good thing.

After You Die Your heirs won’t owe any income tax on withdrawals from the inherited Roth account. However, the account now falls under the same minimum-withdrawal rules as regular IRAs (seeI”nheriting an IRA2″). Nevertheless, if your heirs don’t need the Roth-account money right away, they can string out those withdrawals over many years while continuing to earn tax-free income on the remaining account balance.

Example: Husband is 65 this year. He converts his regular IRA into a Roth account and lives for eight years, gloating all the while about the tax-free status of the account and never taking out a dime. After his death, his Roth IRA goes to the wife, the named beneficiary, who is age 70 at the time. According to IRS life-expectancy tables, the wife should live another 17 years. Since she can treat the inherited Roth account as her own, she need not take any minimum withdrawals. Being thrifty, she doesn’t take out a dime. As scheduled, she passes the Roth baton at age 87 to her daughter, who was designated as the beneficiary when the wife took over the account.

Daughter is age 55. The IRS says her life expectancy is 30 years. Now the endgame has been reached. She must start taking minimum withdrawals over 30 years. But she takes only the minimum, thus preserving the account’s tax-free earning power as long as possible. In this case, the account “lives” eight years with the husband, 17 years with the wife and 30 years with the daughter. That’s 55 years in all. Not bad, considering the husband was 65 when he did his conversion deal.

What really happened here is that the husband and wife used the Roth IRA to set up a long-term tax-free annuity for the daughter. But it didn’t cost as much. Of course, for all this to work out as illustrated, the husband should designate the wife to be the beneficiary of the Roth IRA upon his death. At that point, the wife should declare the account her own by retitling the account in her name and designating the daughter as the beneficiary upon the wife’s death. Finally, the daughter must begin taking minimum distributions by Dec. 31 of the year following her mother’s death. Otherwise, the daughter will have to liquidate the account after five years, which would bring a premature end to all the fun associated with tax-free Roth IRA income.

RisksRisks For this strategy to make sense, two things must happen. First, the tax rules for Roth IRA rules must remain as they are now. Second, you must believe you won’t need the money in the Roth IRA during your lifetime and that your heirs will pretty much leave the account alone, except when required to take minimum withdrawals to comply with the tax guidelines.

To the extent these assumptions prove untrue, the idea of using a Roth IRA to create a tax-free annuity for your heirs becomes that much less attractive. Remember, you are paying a high price — the upfront conversion tax — in order to set your heirs up for future tax savings that you hope will extend over many years.

Source:  http://www.smartmoney.com/personal-finance/retirement/Estate-Planning-With-a-Roth-IRA-7966/#

• SEC restricts short selling. After nearly a year of debate, the SEC voted 3-2 to curb short selling for securities that drop 10% in a single day. Short sales would then face a test for that day and the next in which they would only be allowed if the price is above the national best bid. Chairman Mary Schapiro acknowledged that short selling can benefit the market, but said it can also “destabilize our markets and undermine investor confidence in our markets.” The rule takes effect in six months and is estimated to cost the industry $1B to implement and $1B annually.
• Everyone wants a piece of General Growth. General Growth Properties (GGWPQ.PK) plans to split itself in two to exit bankruptcy, creating one company with around 200 high-quality malls and a smaller company with high-risk, high-return holdings. To do so, GGP is relying on $2.63B pledged by Brookfield Asset Management (BAM), and may also sell new stock and issue new debt. Yet even as GGP unveiled its plan, various deal maneuverings continued. Westfield Group has reportedly signed a nondisclosure agreement with GGP to begin discussions about a possible offer, while Simon Property Group (SPG), whose $10B bid was rejected, slammed GGP’s new plan but reportedly signed a nondisclosure agreement as well.
• Senate passes jobs bill. The Senate approved a $15B jobs bill in a 70-28 vote, an unusual show of bipartisan support as lawmakers try to breathe some life into the job market. The bill allows companies to write off certain expenses and provides tax breaks for hiring workers. Democratic senators say the bill will save or create 1.3M jobs, though some economists expect that number to be significantly lower.
• Coke may snap up its largest bottler. Coca-Cola (KO) is said to be nearing a deal to buy the bulk of its largest bottler, Coca-Cola Enterprises (CCE). Coke would buy the bottler’s North American operations in a deal that could be valued at around $15B, including debt. The move would be an about-face for Coke, which has spent decades setting up large, independent bottlers, and comes as PepsiCo (PEP) prepares to complete the acquisition of its two largest independent bottlers. Update: The deal is official, and valued at around $12.9B, including equity and debt assumptions. Premarket: KO -1.2%, CCE +30.3% (7:30 ET).
• Apologetic Toyoda grilled in Congress. Toyota (TM) President Akio Toyoda apologized in Congress for his company’s safety lapses, but still faced a series ofhostile questions from lawmakers. A Senate committee also asked a government watchdog to broaden its review of how regulators have handled Toyota’s recalls in order to include how regulators have dealt with other automakers as well. Shares of Toyota rose nearly 4% in U.S. trading yesterday, as investors seemed to feel Toyoda’s testimony was a potential turning point in the automaker’s long road to recovery. Shares -0.4% premarket (7:00 ET).
• Smaller loss at Freddie. Freddie Mac (FRE) reported a Q4 net loss of $2.39 per share, or $6.5B, including a $1.3B dividend payment to the Treasury. Its full year net loss was $21.6B, an improvement from 2008’s loss of $50.1B. Though the mortgage giant said it wouldn’t need additional bailout funds for the quarter and noted “some early signs of stabilization in the housing market,” Freddie warned conditions could worsen as foreclosures accelerate later this year. Meanwhile, Geithner said the government would prepare a reform plan for Freddie and Fannie Mae (FNM) for 2011, a major real-estate trade group wants Fannie and Freddie turned into federally-owned non-profit organizations, and some critics say the two mortgage giants are so firmly ensconced in Washington that they’re beyond reform.
• No surprises from Bernanke. There were no surprises in Bernanke’s testimonybefore the House of Representatives yesterday. In delivering his semi-annual testimony on the economy and monetary policy, he stressed that the federal funds rate “is likely to remain exceptionally low for an extended period.” Despite the Federal Reserve’s substantial balance sheet growth, “we are confident that we have the tools we need to firm the stance of monetary policy at the appropriate time.” The job market is still quite weak, though “recent indicators suggest the deterioration in the labor market is abating.” Inflation will “likely will be subdued for some time.” Bernanke will testify today on the same topic before the Senate.
• Bummer for Hummer. As previously rumored, Chinese regulators blocked the sale of GM’s Hummer brand to Sichuan Tengzhong Heavy Industrial Machinery. As a result, GM will wind the brand down over the next several months. Chinese regulators provided limited details on the rejection, but said Sichuan Tengzhong failed to provide a reasonable purchase plan and the deal would have run counter to government efforts to encourage environmentally-friendly energy consumption.
• Swiss look for solution on UBS deal. The Swiss government will turn to the country’s Parliament for retroactive approval of a tax settlement reached between the U.S. government and UBS (UBS). The decision to bring the deal before Parliament follows a court ruling that called the deal illegal. The government also said it will bill UBS 1M Swiss francs ($928K) to cover part of its costs related to the case. Shares -0.5% premarket (7:00 ET).
• Nearing compromise on financial reform. Legislators are making progress on a financial regulation bill, inching closer to compromise as the White House signals it’s ready to agree that an existing agency, rather than a new one, can oversee consumer protection. Geithner met last night with the two senators leading the negotiations to try to arrive at a bipartisan bill.
• Blockbuster on the chopping block? Blockbuster (BBI) posted a wider-than-expected loss yesterday (see details below), raising fresh concerns about its viability as a business. The company blamed its poor showing on a weak holiday season, and said it aims to reduce costs by $200M, shut down around 500 underperforming stores and raise liquidity by selling international assets. Shares fell 3.9% in after hours trading.
• Greece update. As the Greek government considers new austerity measures, tens of thousands of citizens took to the streets in protest and S&P threatened to downgrade the country’s long-term rating to near-junk status. Sources say Greece is getting ready to issue a 10-year bond next week, after it announces the details of its new €2B-2.5B ($2.7B-3.4B) austerity package. Despite the drama in Greece, some observers believe it’s the troubles in Spain that will determine whether the eurozone stands or falls.
• New home sales fall. New home sales fell 11.2% in January to 309K, a record low and short of both the 355K expected and the 342K from December. The supply of homes rose to 9.1 months from 8.1 months. Poor winter weather was partly to blame for the drop in sales, but this also marks the third consecutive month of falling sales despite sweeping government support.

A long report for the long weekend.  Enjoy.

President’s Economic Report 2010 –

From Business Insider:

The author of the new book, The Quants, talks on Yahoo Finance about the quantitative machine-based trading that has fully taken over Wall Street.

Scott Patterson says that there has been a huge rise in the number of quant traders on Wall Street and they make it really hard for the individual to compete on a level playing field.

“[The individual trader] has no idea the forces that are arrayed against him,” says Patterson.

As he notes, Ren-Tec alone has 90 Ph.D’s figuring out market patterns. Good luck going against them.

CLICK FOR LINK TO VIDEO

Californian scientists think they may have discovered the part of the brain which makes people fear losing money.

The study, reported in Proceedings of the National Academy of Sciences, looked at two patients who had damaged their amygdala, deep within the brain.

These patients were less worried about financial losses than the normal volunteers they were compared with.

The scientists say this could translate to how people make decisions in fields ranging from politics to game shows.

‘Loss aversion’ describes the avoidance of choices which can lead to losses, even when accompanied by equal or much larger gains.

From BBC News– Read More >>

Two of the top three ETF’s with the highest net inflows in January were iShares Barclays TIPS Bond and Vanguard Total Bond Market. The top net outflows included SPDR Trust, iShares FTSE/Xinhua China 25, and iShares Emerging Markets.  Overall, Fixed Income led the pack with the highest total net inflows.

Feb. 8 (Bloomberg) — Corporate borrowing costs are rising at the fastest pace in more than two months on concern that worsening government finances will slow the global economy and make it harder for companies to meet debt payments.

The extra yield investors demand to own corporate bonds instead of government securities widened 4 basis points last week to 169 basis points, the most since the period ended Nov. 27, according to the Bank of America Merrill Lynch Global Broad Market Corporate Index. Spreads widened for three weeks, the longest stretch in about a year, while those for U.S. high- yield, high-risk companies expanded by the most since August.

Optimism over the recovering economy that made January the best start to a year since 2001 for the corporate bond market is fading as finances in Greece, Spain and Portugal deteriorate, Japan struggles to emerge from recession and concerns grow that emerging-market valuations are too high. BES Investimento do Brasil pulled an international bond offering of as much as $350 million, capping a week of canceled sales from India to Korea.

“The potential impact of spill-over into other markets has gotten folks to look at risk assets of all types, and you’re seeing a pullback across the globe,” said Andrew Karp, a managing director on Bank of America Corp.’s investment-grade syndicate desk in New York.

More here.

By Sapna Maheshwari and John Detrixhe

A swing in inventories flattered the growth in U.S. Q4 GDP, but the trend in final demand remains consistent with a moderate recovery.

The U.S. economy expanded at a healthy 5.7% annualized pace in 2009 Q4, but 60% of this reflected a slower pace of destocking. Final sales rose at a more modest 2.9% pace, following a 2% growth rate in Q3. The economy is moving in the right direction and there are some encouraging pockets of strength. Exports are growing strongly, the drag from residential construction is largely over and companies are beginning to invest. Nevertheless, there will be lingering headwinds to growth from the financial meltdown, such as ongoing credit restraint and an upward drift in the personal saving rate. The U.S. economic recovery should be sustained, but it will fall far short of what would normally occur in the wake of a very deep recession. This means that inflation also will stay low, something that was reaffirmed by the modest Q4 growth in employee compensation.

Source:  www.bcaresearch.com