Tax Extender Bill Passed by House and Senate

The Senate has finally acted on the Bill that the House passed earlier in the month to extend many taxpayer friendly income tax provisions which previously expired at the end of 2013. Unfortunately, the extension will only have a two week shelf life and therefore will expire again on December 31, 2014. The President is expected to sign the bill into law before the end of this week.
Due to how long it took for Congress to act on these extensions, it is most likely that the start of the tax season and the date in which tax returns can start to be filed with the IRS will be extended to late January or early February (similar to last year when Congress also allowed politics to delay implementation of needed tax legislation).
Many of the favorable business related provisions can be applied without the need for transitional application rules. However, individual provisions including the ability for those over 70 to take tax free distributions from individual retirement accounts for charitable purposes will need special rules given that most taxpayers have already taken their annual required minimum distributions (RMDs) for 2014.
Below is a summary of the provisions applicable to individuals that are part of the Senate Bill. In addition to the provisions listed below, there are also over 30 provisions related specifically to businesses.
• Tax credit for purchasing health care insurance
• Tax deduction for expenses of elementary and secondary school teachers
• Exclusion from gross income of imputed income from the discharge of indebtedness for a principal residence
• Equalization of the exclusion from gross income for employer-provided commuter transit and parking benefits
• Tax deduction for mortgage insurance premiums
• Tax deduction for state and local general sales taxes in lieu of state and local income taxes
• Tax deduction for contributions of capital gain real property made for conservation purposes
• Deduction from gross income for qualified tuition and related expenses
• Tax-free distributions from individual retirement accounts (IRAs) for charitable purposes
• Tax credit for residential energy efficiency improvements
• Tax credit for energy efficient new homes
• Tax credit for energy efficient appliances
• Increased expensing allowance for business property including computer software and depreciation of qualified real property
• Additional (bonus) depreciation of business assets and the election to accelerate the alternative minimum tax (AMT) credit in lieu of bonus depreciation

Please contact your advisor or tax professional to discuss how these provisions may apply to your particular situation or circumstances.

Benzinga PreMarket Prep Show, December 12, 2014

[su_youtube url=”https://www.youtube.com/watch?v=lo3LfMYmvOY&list=UUqQs28K2zj2dOsc5NfXUKEg”]

Telemus December 2014 Market Commentary

The world financial markets are reflecting a wider divergence between economic fundamentals and investor hope and sentiment. The US economy is showing meaningful life with much improved GDP readings, a declining rate of unemployment, improved corporate balance sheets, and quarterly S&P 500 earnings per share growth annualizing at 8%. However, despite five years of near-zero interest rates, expectations for real growth (nominal minus inflation) are barely above one percent, hourly wage gains are de minimis, and consumer confidence is waning. Despite less than robust economic fundamentals, US equity markets are at or near all-time highs.

As for economic fundamentals outside of the US, with just a few exceptions, the news is not good. Japan is in recession, Europe is fighting to stay out of recession, and China is trying desperately to meet growth targets that are cosmetic fabrications of the Chinese government. However, the equity markets of China and Japan are both at seven-year highs and the Euroland equity markets are all back at multi-year highs after a brief correction. The conflicting data is most evident in the bond market where the 10-year US Treasury yields 2.3%, well more than the 10-year government yields of France, Italy, Ireland, and Spain. Of course, this would imply that US Treasuries are a riskier investment than the sovereign debt of the Euroland countries in question. At the same time, credit default swaps (CDS), which price the risk of default, tell an entirely different story. CDS for these four Euro-players are priced at four to six times the price of US CDS. Clearly, in the mind of the CDS market, investors in government bonds of France, Italy, Ireland, and Spain are NOT being paid for the risk they are taking. This dynamic carries through to the equity markets and gives us concern regarding the sustainability of the continued climb of global equity markets.

Stocks

Domestically it’s been a tale of two markets this year. Big stocks have done well and small stocks have struggled. This is the largest margin of outperformance by big stocks in years and an anomaly as small stocks historically have outperformed their larger brethren. U.S. markets face two potential headwinds going into next year, tighter monetary policy and higher valuations. A historically weak economic recovery is not helping top line growth enough to drive stock valuations and prices materially higher from here. A strong dollar is also a negative for the economy, but lower energy prices are a positive for a consumer driven economy. While the global equity markets are making us nervous, U.S stocks are still the prettiest girl at the global dance and we’ve increased our domestic exposure. We’re invested in mostly large-cap and mid-cap stocks with a modest allocation to small cap stocks.

Most major overseas markets have performed poorly with the real exception being Japan and India. Overseas markets look cheaper than the U.S. at the present time, but they look more like a value trap to us. Most foreign central banks are well behind the monetary action of the Federal Reserve and are now looking to prime the pump even more as a way to stimulate growth. Weaker currencies and lower rates will help but won’t be enough to create a strong rally from these levels. Recent studies have shown that the increased correlation of international markets to the U.S. have reduced the diversification benefits of investing overseas. We have recently made the decision to meaningfully reduce of our direct international exposure as the diversification argument loses validity.

Bonds

Interest rates in the U.S. have been the big surprise this year with yields dropping due to relatively stagnant global growth and global yields driven lower by aggressive monetary easing on the part of global central banks. We were in the camp that thought rates wouldn’t rise much, if anything, but even we are somewhat surprised by the rally that has taken place. Credit risk did well up until the sell-off in late September and early October when slowing global growth was thought to be contagious. Credit risk investments have yet to recover, but look inexpensive to us relatively speaking. We like private lending funds, when appropriate, where better risk-adjusted yields can be found. We continue to keep our domestic maturities short and our credit risk exposure in place.

Global bond markets have also rallied on the back of central bank easing as noted above. However, weakened global currencies against the U.S. dollar have offset some of the gains. We continue a relatively modest allocation to global bonds and hedge the currency risk where possible.

Inflation

Inflation doesn’t currently seem to be an issue anywhere but the financial markets. In fact, a broad basket of commodities have fallen in price, most significantly oil, and expectations remain muted for future increases. We are currently limiting our inflation sensitive investments to a relatively small exposure to real estate.

Energy

Oil prices in the $60 range were not on anyone’s radar a year ago, but there is a growing consensus that a new-age of oil prices is settling in well below $100 per barrel. We don’t typically invest directly in energy, but we do invest in oil and gas master limited partnerships (MLPs) which transport and process crude, natural gas and derivative products. MLPs have been a very rewarding investment over the past few years and we continue to like the fundamentals for the industry irrespective of the pullback in oil prices.

Conclusion

Our concern regarding the mispricing of risk is important in context to our goals-based investment process and we’ve spent considerable time and effort thinking about bringing more certainty and predictability to our investment returns. At the same time we’ve been thinking how to truly diversify risk in an increasingly correlated investment world. As a result, we are allocating money to some new areas, including option-hedged strategies, insurance linked securities, and life settlements, all of which will help us to mitigate portfolio volatility. We continue to actively look for investments that provide true diversification to the portfolios. While traditional investments like stocks and bonds will continue to represent the bulk of our investments, we think adding truly non-correlated investments to this mix will help us compound money more effectively for clients over time with lower risk.

David E. Post
Chief Investment Officer

PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. This market commentary is a matter of opinion and is for informational purposes only. It is not intended as investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on the client’s specific financial needs and objectives, goals, time horizon and risk tolerance. The statements contained herein are based solely upon the opinions of Telemus Capital, LLC. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third party sources, which we believe to be reliable, but not guaranteed.

Cheaper Oil… Who Wins?

Oil prices have dropped nearly 30% since June of this year and subject to the rules of a zero sum game there will be winners and losers. Over the short run, all oil-based energy consumers are winners and that includes me – I recently filled my gas tank at $3.10 per gallon! The consumer’s short-term win will be at the expense of oil producing countries and companies, but what will be the impact of a sustained lower oil prices?

A look at the production numbers helps us to better understand the dynamic. The world produces 90 million barrels of oil every day, which five months ago was generating $3.5 trillion of annualized revenue. Today that same production generates $1 trillion less in annualized revenue, which means consumers will put most of that $1 trillion in their pockets – at least until they hop on Amazon and buy one of 200 million products.

The U.S. occupies the unique position as the largest consumer, importer, and producer of oil. While our oil production has increased from $5.4 million barrels a day in 2010 to $8.2 billion barrels a day in 2014, we are still a net importer of oil. Accordingly, the US will continue to be a net winner when oil prices decline – at least until our energy production exceeds our consumption.

David Post
Chief Investment Officer

PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. This market commentary is a matter of opinion and is for informational purposes only. It is not intended as investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on the client’s specific financial needs and objectives, goals, time horizon and risk tolerance. The statements contained herein are based solely upon the opinions of Telemus Capital, LLC. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third party sources, which we believe to be reliable, but not guaranteed.