Permanent Value Inc. - Registered Investment Advisor

Unrest in the Middle East

Given the events in the Middle East, we wanted to give you a brief update on our thoughts through the lens of a three-act play.

How the Three-Act Drama Unfolding in Egypt

May Affect Your Money

After 30 years in power, it took only 18 days to topple Egyptian President Hosni Mubarak. He capitulated to the demands of the protesters and resigned as President. Now comes the hard part.

Since the glory days of ancient Greece, we’ve had the three-act play. You know how it goes. Act I sets the stage, introduces the characters and identifies the main problem. Act II is the most important act because the main problem becomes much more dangerous and difficult and the protagonist of the story looks like they will lose. Act II usually ends on an emotionally-charged cliffhanger so you’ll be compelled to come back from intermission. Act III pulls it all together and the story wraps up with the protagonist (usually) winning and everybody (usually) living happily ever after. Ah, if only real life was so neat and tidy!

What’s happening in Egypt could follow this script—or not.

We’ve just completed Act I as the protesters were able to chase Mubarak out of office. Act II is now starting as the country tries to move toward a democratic society. However, with parliament dissolved, the constitution suspended and elections for a civilian government still about six months in the future, it could be rocky. As one of the protesters said in a Wall Street Journal article on the day of Mubarak’s resignation, “It’s easy to throw stones at the aggressor but it’s not easy to chart a new course. Our hard work begins tomorrow.” As today’s youth would say, “True that.”   

While it’s too early to know the outcome of Act II or Act III, it may make sense to look at two potential extreme outcomes. These bookends give us a sense for a possible worst case and best case.

Extreme Outcome One

If Egypt is not able to pull a democracy together and internal squabbling spills into neighboring countries, it could be a serious problem for the world. The Middle East can be a powder keg and with its strategic importance in the oil market, any disruption there could send the world economy into a tailspin. Neighboring countries are also experiencing unrest among their people so the call for reform in the region is strong and certainly not over yet.

Extreme Outcome Two

On the positive side, the changes occurring in the Middle East could usher in a new era of democratic reforms that lead to faster economic growth and rising stock prices. Remember the fall of Eastern Europe’s Soviet satellite states and the toppling of the Berlin Wall in 1989? The decade that followed was a strong one for worldwide economic growth and stock prices. If the fall of Eastern Europe is a blueprint, then there could be some rocky, but survivable times ahead followed by a long period of growth.

The Impact of Technology and Social Media

One of the big differences between the fall of Eastern Europe’s dictators back in the late 1980s and the situation in the Middle East is the rise of the Internet, and, in particular, social media. The educated, Internet-savvy young adults who helped fuel the protests in Egypt reportedly used Twitter and Facebook to mobilize their followers. While the fax machine was the technology of choice back in 1989, the tools of today are exponentially more powerful.

Victor Hugo said, “An invasion of armies can be resisted, but not an idea whose time has come.” For the Middle East, that idea is political and economic freedom. Our interconnected world enables the far reaches of the globe to see how the politically free and economically prosperous countries enjoy a relatively high standard of living. The people in these emerging countries see it on TV. They read about it on the Internet. They travel to our country and become educated in our universities. They like what they see and now they want it for their home countries.

A few months ago, nobody was predicting the imminent downfall of Hosni Mubarak. His swift decline is another example of how we live in a “speeded up” world of instantaneous communication and a desire for immediate gratification. That potentially dangerous combination means the ultimate denouement of this unfolding drama is anybody’s guess.

As your advisor, though, we’re not in the guessing game. Instead, we are actively monitoring the start of Act II and its potential implications for your investments. Regardless of how this drama unfolds, we will do our best to try and meet your goals and objectives.

In the meantime, please let us know if you have any questions or concerns.

2010 Year-End Financial Planning

Over the last few years, doing a year-end plan review may have been akin to hopping on the creaky old Belmont Park roller coaster- the unsettling ups and downs yield to a sense of relief the moment you glimpse that the end is near.  No matter how scary or exciting a year-end review might be, it remains one of the most powerful tools to assess your current financial position.  It will also give you ample time to make changes and plan for future years.  This end of year review is especially important because of expiring tax laws and the introduction of new policies and laws in the areas of taxes, estate planning and health insurance.  Below are a few points to consider while reviewing this year and planning for changes in the New Year. 

2010, “The Year of the Roth IRA”

While the cap on who is permitted to convert a traditional IRA to a Roth IRA has been permanently repealed, a special provision that allows conversions to be split into each of the next two tax years will expire on December 31st.  Among other benefits, Roth IRA conversions can be an especially powerful retirement and tax planning tool for those that feel they may end up in a higher tax bracket in retirement and have extra liquid funds to “prepay” their taxes on retirement accounts.

Don’t Forget those RMDs

In 2009, those age 70 ½ or older who were subject to an RMD (Required Minimum Distribution) were given a year’s holiday from taking a distribution from their IRA and qualified retirement plans.  That holiday has come and gone and it’s important to resume those RMDs in 2010.

Reviewing Your Investment Plan

Each year your investments should be reviewed to ensure your holdings are appropriate for your risk tolerance and return expectations so that you have the highest likelihood of accomplishing your financial goals.  Within your overall investment plan, an end-of-year investment review should allow you to position your holdings so that you can benefit from the current economic cycle.

Allocating Income and Investments to Minimize Taxes

Many of the Bush Era tax cuts are set to expire or sunset at the end of 2010 and tax rates across most fronts will be changing.  It’s important to review which changes will most affect your financial situation and develop a tax strategy for your current and future income and investments before the year is over.

Avoiding Capital Gains Tax Increase

One area in particular that is changing for 2011 will be how capital gains are taxed.  In all tax brackets, except the lowest, capital gains taxes will be increasing for the first time in 17 years, rising from 15% to 20%.  This means that if you’re planning on selling property with a gain, it might make sense to do so this year instead of waiting.  If however, you have net losses this year (after netting your short-term and long-term gains and losses) you still have a deductable limit of $3,000 from your ordinary income.

Charitable Giving

There are no changes this year or next on types of charitable deductions or deduction limits, but it’s important to note that charitable deductions must be made before the end of the year in order to realize them in 2010.  However, with top tax rates increasing by almost 5% next year, the traditional tax strategy of accelerating deductions and deferring income into the next year may not apply to regular deductions, like charitable contributions, for top income tax filers this year.

Green Home Improvement Credit

Over the last few years, the government has encouraged the public to make investments and improvements in green energy efficiency by handing out tax credits of upwards of $1,500.  These credits are set to expire at year end.

Retirement Savings

Unlike IRAs where you have until April 15th of the following year to make contributions, qualified retirement plans like 401(k)s and 403(b)s require that you make your final contributions before the end of the year.  Once December 31st comes and goes, you won’t be able to bring your contribution up to the maximum of $16,500 for 2010.

We look forward to reviewing these points for each one of our clients as this year winds down and the New Year begins.  If you know of anyone that might benefit from having a year-end review, we’d be happy to meet with them before the end of the year.