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 IHA Monthly   
December, 2011 
In This Issue
Market Commentary
November 2011 Asset Class Returns
Tax Loss Harvesting
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History Speaks
Charles the Great (Charlemagne) 
Germany and France have taken the lead position in negotiations over the future of the Euro. So much so that the portmanteau word, "Merkozy", has been coined from the names of the leaders of the two countries and is used in describing their joint positions and interactions. France and Germany in their modern form can trace their origins back to a common ancestor, Charlemagne (768-814). Charlemagne inherited much of the territory that makes up the two countries from his father and brother. He later expanded his lands to include most of continental Europe and presided over a period of intellectual and cultural revival. His reign was marked by advances in literature, the arts, legal administration and trade. Key to economic growth in his time, and apropos to today's debate about the Euro, were Charlemagne's monetary reforms, including standardizing the coinage and  introduction of a new coin weight, the so-called Carolingian pound.
Charlemagne Coin
One Carolingian pound comprised 20 schillings (or solidi), of which each held 12 pfennigs (or denarii). Thus, from one pound of pure silver, 240 pfennigs were struck. This coin standard remained unchanged for a very long time - in the United Kingdom, it was in use until 1971. Charlemagne was also the first secular ruler to prohibit usury, the charging of interest on loaned money or goods. With yields on Italian 10 year debts above 6.5% (and Greece's yields above 30%), that must seem an attractive, if impracticable, alternative to Charlemagne's successors in modern day Europe.
Market Commentary

InnerHarbor Advisors is a Manhattan based financial advisory firm specializing in: Financial Planning - Wealth Management - Insurance 
If you would like a fresh perspective on your finances, please contact John O'Meara or Michael Keating at 212.949.0494 ...or simply 'reply' to this email.



Markets continue to be extremely reactive to any news related to the European debt crisis. Leaders there were forced to announce another 'plan to make a plan' in mid-November as markets continue discounting European efforts to salvage their more indebted members. The preferred solution remains the same- a German financed bailout. The price remains in question. Germany would like to see an enforceable fiscal deficit limit - 3% - for the Euro nations and to force a haircut on the current holders of the PIGS debts. The rest of Europe has generally accepted the deficit limit but have convinced the Germans that Greek-style haircuts for other countries' debt-holders is not in Europe's best interest. This is because A) the primary holders of those debts are European banks so the money saved by the haircuts would just be lost again in the recapitalization of those banks and B) like junkies, their addiction to debt means they cannot afford to alienate their dealers, no matter how much they despise them. 
We understand German reluctance to bankroll the profligacy of other nations but think their approach is counterproductive. The introduction, in 1999, of the Euro was supposed to eliminate currency risk in trade between the Euro nations and lower the interest rates of the whole area toward German levels, thus enhancing overall economic activity in region. An unspoken corollary was the less productive, more inflation prone nations (read Greece, Italy, Spain etc.) would gradually become more German-like in regards to their labor and business markets. Well, the Euro did usher in an increase in intra-European trade of which Germany was a great benefactor because of the superiority of its goods. However, the other nations didn't change the structure of their labor and business markets. Instead, they used the lower interest rates to finance their old model and even expand labor rigidity. As a result, these countries became even less productive in comparison to Germany. 
To illustrate this point is a chart of unit labor costs for Germany, Italy and Greece from 2000 to 2009 (from Eurostat, all countries started at base 100):


To reiterate, the introduction of the Euro was supposed to lower the relative cost of labor in Greece and Italy in comparison to Germany. The outcome was the opposite. For more vivid descriptions of how the rules in these nations stifle productivity, read a New York Times account of a Greek-American entrepreneur who managed (against all odds) to open a new brewery in Greece but is prevented by law from selling bottled iced tea as well, or this Wall Street Journal account of an Italian manufacturer whose policy has "always been not to grow"
Our take: If Germany wants to retain the Euro they should be more concerned about reforming rules like these that inhibit growth and innovation, instead of believing reform will flow from a hard budget cap (which, by the way, Germany itself has violated seven times in the last decade).

Outside of Euroland, the United States still seems to be maintaining steady, if unspectacular growth. The November employment report showed a 15th straight month of positive job growth and while the sharp drop in unemployment rate to 8.6% was mainly due to a shrinking labor poolthe US continues to show resilience to the drama in Europe. Emerging markets have been hit harder by the Euro-crisis and have started to respond by loosening their monetary policies, changes that should be a net plus for global growth. All of these factors still pale in comparison with the outcome of the European debt crisis which will continue to dominate markets. 

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Asset Class Returns

Through November 30th, 2011 - Monthly and 52 week returns for major asset classes. Performance information is for total return assuming reinvestment of interest and dividends. It excludes management fees, transaction costs and expenses.   


International stock markets continue their poor year with developed and emerging market down around 5% for the month of November. The U.S. was relatively flat over the same period and maintains its status as a safe haven. Year to date, the U.S stock market has outperformed  international developed markets by 10% and emerging markets by 15%. There was also a divergence in credit markets as investment grade corporate bonds had their worst month in over two years while U.S. government issues were up about 1% for the month. 

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Financial Planning Highlight

Tax Loss Harvesting 
*Thank-you to Zachary Dreyfuss, intern here at IHA, for his significant contribution to this month's highlight.

Turning Capital Losses into Tax Gains


Here's a silver lining to the doom and gloom about the "global economy" harvesting.

Tax-loss harvesting is a method to offset tax on capital gains (does not apply to IRA's or other tax-sheltered retirement accounts). It entails 'selling a loser' to realize the loss in a stock or bond, waiting 30 days, then re-purchasing the same security. The realized loss, believe it or not, can be your silver lining. Take a look at the example below: 


Frank bought $10,000 worth of Citigroup in his taxable account. As of today, it's only worth $7,000. Rather than despairing over the $3,000 loss, Frank sells out of this position, 'realizing' the $3,000 loss. He waits 31 days and buys back $7,000 of Citigroup stock.


Frank has three distinct benefits from utilizing the tax-loss harvesting method. The first is he can offset any capital gains he may have also realized throughout the year, gains which otherwise would have been taxed at 15% ( if a 'long-term gain') or at Frank's highest marginal rate (if gain is 'short term'... and can be 35%-45% if Frank lives in New York City). Second, if Frank has more losses than gains he can deduct up to $3,000 of those losses against his ordinary income. In New York, that can mean up to a $1400 reduction in Frank's tax bill. Finally, remaining losses can be carried forward and applied in future years.


In Summary:

DO consider tax loss harvesting if you have:

  • Realized capital gains to report this year
  • Unrealized capital losses in taxable accounts
  • A desire to reduce your tax bill 



  • Buy back the same stock within a full 30 days. This is considered a 'wash sale' by the IRS and taking that loss will not be allowed.
  • Try to get around the wash sale rules by buying options or other securities 'substantially identical' to the one you sold. The IRS doesn't like that either.
  • Worry too much about tax loss harvesting if you already are carrying over a significant amount of losses from previous years. (Hiring a financial planner would make more sense).


*It is important to keep in mind the security sold could experience substantial appreciation in the 30 days you do not own it. (see: Law, Murphy's).


Luckily for Frank, IRS rules do allow him to buy shares in another company with a similar profile to Citigroup and there are lots of crappy financial stocks for Frank to choose from. Frank could use the proceeds of the Citi sale to buy Bank of America stock on the same day. After 31 days, he could reverse the transaction without being in violation of the wash rule, all the while maintaining exposure to Citigroup's sector. Of course with individual stocks there is still the possibility a particular stock will outperform its competitors over that period of time. 


Index-based investing (adhered to by the advisors at InnerHarbor) allows an investor to make a sale for tax purposes and immediately purchase a separate, distinct index whose price movements correlate highly with the initial index sold.


As always, we welcome your comments on style and content.
Thank-you for reading,

John O'Meara, CFP
Michael Keating, CFP



Mike and John InnerHarbor Advisors 

Contact Info:
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212-949-0494 and