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10 INVESTMENT IDEAS FOR 2010 (PART I)
By SEEMA RAMROOP
We have had a challenging 2009 and as we get into 2010, Morgan Stanley Smith Barney has 10 investment ideas for 2010. It should be noted that these ideas are not applicable to everyone since each person’s risk tolerance is different and these are no guarantees of performance. In this article, I will share the first five of them and next month we will share the other five ideas. If you will like more information, see the details below:
1. Emerging Markets-Equities: BRIC
One of our most significant equity themes for the year ahead is that emerging markets equities should again outpace developed-market equities. Our expectation is that during 2010 the developing economies will grow at about three times the rate of the developed economies. Moreover, valuations are reasonable — at 13 times the 2010 consensus earnings forecast. The economic outlook favors the emerging markets, too. In the 19 of 22 years since 1988 that the U.S. economy was recovering from a recession or was expanding, emerging markets equities outperformed the developed markets by an average of 9 percent. This analysis includes the challenging 1994 through 1998 period, when the emerging markets were racked by crises in Mexico, Asia and Russia. Within the emerging markets, we favor Brazil, Russia, India and China — the so-called BRICs. Though investors often see them as a block, we have specific reasons for recommending each country: Brazil’s economic recovery is strengthening and the outlook for private consumption is bright; Russia features a valuation discount of more than 40 percent from the MSCI Emerging Markets Index, based on its forward P/E ratio, and is a beneficiary of higher oil prices; India gets a nod for its forecasted 2010 GDP growth rate of 8 percent combined with improved political stability; and China — the largest of the emerging markets — carries the best growth expectations, up 10 percent in 2010.
2. Emerging Markets Debt
Expectations for global economic growth and an even more favorable outlook in the developing economies will be a positive for emerging markets debt, in our view. We note that, in the wake of the recession, many developing countries have stronger current-account positions and better fiscal policies than many of the developed markets. As that view becomes more widespread among investors, we believe emerging markets debt spreads — the extra yield over Treasuries — will continue to tighten. In addition, there is potential for upgrades from the debt ratings agencies, which leads us to favor this asset class for 2010.
3. Foreign Exchange
In our opinion, one of the key developments in the currency markets this year will be a rebound in the U.S. dollar versus the major developed currencies, especially versus the euro and the yen. We believe the dollar’s strength will be a result of the diverging GDP growth rates in the developed-market economies — with the United States growing the fastest at 2.8 percent, followed by Europe at 1.2 percent and Japan at 0.4 percent, according to the Morgan Stanley economics team. By the same measure of relative economic growth driving currency appreciation, we expect that the U.S. dollar will weaken against the majority of emerging markets currencies. For example, Mexico, Brazil and Korea are forecast to grow at 3.8 percent, 4.8 percent and 5.0 percent, respectively, which will tend to favor their currencies vis-à-vis the dollar.
4. Municipal Bonds
The opportunity for municipal bonds appears compelling, especially with the prospect of higher U.S. Treasury yields later this year. On the positive side, some formidable offsets may enable municipal bonds to outperform Treasuries, thus mitigating rising yields. These include: the impact of the federally taxable Build America Bonds program, which diverts what would otherwise be tax-exempt issuance into taxable securities; a strong history of debt repayment and low default rates among investment-grade bonds; and unusual yield differentials in moderate investment-grade debt. For example, spreads for both A- and BBB-rated bonds over comparable maturity AAA-rated municipal bonds stand at almost 2.5 times their respective long-term averages, according to Municipal Market Data Co. As the economy continues to recover and market sentiment improves, we expect these relationships to gradually tighten. We enter 2010 favoring general-obligation and essential service revenue bonds from larger issuers holding investment-grade ratings in the upper-BBB-and-higher tiers. We also view the new-issue market as an efficient way to access the municipal-bond market. Given their defensive nature, we also advocate the purchase of premium-priced securities over bonds trading at par or at a discount to par. While we view pre-refunded securities as fairly priced in the current market, they represent a reasonable consideration for those interested in ultra-high credit quality.
There is an immense need to build and upgrade the water infrastructure in both the developed and developing economies. The coming growth around delivery and disposal of this essential commodity leads us to have a positive view on water-related investments. Areas of focus include the production of drinking water in the face of population growth where resources are scarce or of low quality, water distribution networks and the collection and treatment of wastewater. Key drivers of investment opportunity within the global water market include: significant capital-expenditure requirements; increased recognition of the value of water, water quality, water sanitation and the security of supply and sanitation; political willingness to price water according to economic principles, thereby charging users accordingly; political willingness to include environmental protections in water pricing; and the potential for consolidation within a fragmented global industry.
To be continued
Seema Ramroop, Financial Advisor at Morgan Stanley Smith Barney in Palm Harbor, can be reached at (727) 773-4629 or e-mail email@example.com
new law extends health insurance subsidy for the unemployed
By KAMLESH H. PATEL, CPA
The government has provided a late reprieve to unemployed workers by extending the COBRA health insurance subsidy program initially authorized by the American Recovery and Reinvestment Act of 2009 (ARRA). The extension was tacked onto a defense appropriations law signed on Dec. 19, 2009.
ARRA allowed a worker who was involuntarily terminated from the job between Sept. 1, 2008, and Dec. 31, 2009, to continue employer-provided health insurance coverage under COBRA by paying only 35 percent of the cost of premiums. For this purpose, an "involuntary conversion" covers most firings and layoffs other than dismissals for gross misconduct. The employee’s old employer was responsible for paying the 65 percent balance of the premiums, but this cost was reimbursed by the government through a special payroll tax credit or reduced withholding deposits.
Now, the new law extends the COBRA subsidy program to workers who are involuntarily terminated during the first two months of 2010. In addition, it expands the maximum subsidy period by six months to a total of 15 months.
The new law also requires employers to notify workers about the latest changes in the COBRA subsidy program. If an employee paid the full premium in December 2009, and is now eligible for a discount due to the extended coverage, the employer must provide credit against future payments.
The COBRA subsidy is effectively phased out for certain taxpayers. Single filers with an adjusted gross income (AGI) above $125,000 and joint filers with an AGI above $250,000 must repay all or part of the subsidy as an additional tax.
don’t overlook ways to trim your 2009 tax bill
Even though 2009 is history, you may still be able to trim your 2009 tax bill. Be sure you don’t overlook these actions and deductions that could save you money.
�Maximize your 2009 IRA contribution. You have until April 15, 2010, to make deductible 2009 contributions. The maximum 2009 contribution is $5,000 ($6,000 if you were 50 or older last year).
�If you changed jobs in 2009, make sure you didn’t have excess Social Security taxes withheld. Claim credit for the excess on your Form 1040 if you paid over $6,622.
�Look into itemizing deductions if you usually take the standard deduction. Search for allowable deductions that you might have overlooked, such as the 2009 deduction for state and local sales taxes in lieu of deducting state and local income taxes.
�Medical deductions are allowable to the extent they exceed 7.5 percent of adjusted gross income (AGI). Don’t forget items such as eyeglasses and hearing aids. You can deduct mileage for medical appointments at 24¢ a mile, plus parking and toll fees.
�Don’t overlook tax preparation fees, safe deposit costs and certain investment advice. They all qualify as miscellaneous deductions, subject to a 2 percent of AGI limit.
�Up to $2,500 of student loan interest is deductible whether you itemize or not.
�The deduction of up to $4,000 for qualified tuition and school expenses is available for 2009. Qualifying amounts for you, your spouse, and dependents may be deductible. Income limits apply.
�If you’re a teacher or teacher’s aide, you can deduct up to $250 for classroom supplies that you purchased with your own money.
�If you purchased a hybrid gas-electric car in 2009, you may be entitled to a tax credit.
�Even if you don’t itemize deductions, you can take a deduction of up to $1,000 ($500 for singles) for real estate taxes paid in 2009.
tax filing reminders
It’s tax return filing time again. Here are a few important reminders for 2009 returns.
�The law has strict recordkeeping requirements for deducting charitable contributions. For each contribution under $250, you must have a bank record such as a cancelled check, credit card record, or receipt from the charity. For donations of $250 or more, a receipt from the charity must be obtained before filing your return. Generally, donations of used clothing and household items will qualify for deduction only if the items are in “good condition or better.”
�If your 2009 IRA wasn’t fully funded by Dec. 31, 2009, and you make IRA contributions prior to April 15, 2010, designate to the bank or trustee that these 2010 contributions are for 2009 until you reach the maximum allowed. You can then deduct these amounts on your 2009 tax return for a quicker tax benefit.
�Check your children’s need to file a 2009 tax return. Generally, a 2009 return is required if the child had wages of more than $5,700, self-employment earnings over $400, or investment income (such as dividends, interest, or capital gains) over $950. If your child had both earned and investment income, other thresholds apply. Also, if your child is due a refund, a return must be filed to get it.
�April 15, 2010, is more than just the deadline for filing your 2009 personal income tax return. It’s also the deadline for making 2009 IRA and education savings account contributions, filing 2009 partnership returns, filing 2009 gift tax returns, amending 2006 returns, and paying the first installment of 2010 individual estimated taxes.
�March 15, 2010, is the deadline for filing tax returns for calendar-year corporations. It’s also the deadline for corporations to elect S corporation status for 2010.
Kamlesh H. Patel, CPA, can be reached at (813) 949-8889 or e-mail firstname.lastname@example.org or email@example.com.
CANCELLATION OF DEBT INCOME – UNDERSTANDING THE RULES MIGHT HELP SAVE YOU MONEY! By AMOL NIRGUDKAR, CPA
The current economic downturn is attributed a large part to the real estate asset bubble that finally burst in 2008 and led the country on a downward spiral. The United States government has resorted to almost draconian steps to reign in the recession by announcing a slew of trillion dollar spending programs. Such programs have not worked their magic as of yet, but time (or the November elections) will certainly determine their destiny.
The unemployment rate, currently at 9.7 percent, is not a true indicator of current joblessness. Many unemployed who have fallen off the unemployment rolls are not even counted and several economists believe that the true rate is close to 12 percent. Individuals are not the only ones affected. The recession has caused a sharp decline in the top line of many businesses.
In the midst of this crisis, people are losing their homes and many businesses are not able to service their debt. The foreclosure rates are soaring nationwide and more individuals and businesses are expected to lose their properties in 2010.
Many distressed individuals and businesses are trying to avoid foreclosure by structuring deals with banks to either reduce or modify the terms of their debt. Several are engaging in “short-sales” — a term that has gained infamous popularity over the past few years. A short sale, in the context of real estate, is the sale of property below the amount owed on its debt, i.e., the bank receives proceeds that are lesser than the loan amount.
Whether it is a foreclosure, a modification or a short sale, the resulting tax effect is the lender discharging all or part of the borrower’s debt. The discharged debt is called COD (cancellation of debt) income and the borrower has to report it on his tax return in the year the debt is forgiven. Naturally, this situation makes the borrower’s situation much worse. Not only has he lost his down payment and the property but there also are adverse tax consequences.
For those in despair, Section 108 of the Internal Revenue Code provides much needed help. If you encounter COD income, you may fall within one of the special situations whereby you could exclude the COD income from your tax return. Basically, Section 108 allows for income exclusion from the discharge if any of the following conditions are present:
1)The discharge occurs in a title 11 bankruptcy case;
2)The discharge occurs when the taxpayer is insolvent;
3)The indebtedness discharged is qualified farm indebtedness;
4)In the case of a taxpayer other than a C Corporation, the indebtedness discharged is qualified real property business indebtedness; or
5)The indebtedness discharged is qualified principal residence indebtedness, which is discharged before Jan. 1, 2013.
If you fit in any of the above situations, you may be able to avoid the tax on the COD income. The discussion of the exclusions is beyond the scope of this article and you should consult your tax advisor or attorney in determining whether you could take advantage of the § 108 provisions. The exclusions are being litigated in courts across the country and it is important to follow those precedents in understanding the implementation of the law to your specific situation.
Amol Nirgudkar, CPA, is the managing partner of Reliance Consulting LLC, and recently presented a seminar on this topic at the INDO-US Chamber of Commerce in Tampa. He can be reached at (813) 931-7258 or via email firstname.lastname@example.org
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