December 2010  Issue 22

Greetings!  November is in the rear-view mirror; one of the nasty five months down, and four to go.  Even though it doesn't officially start until December 21, I start my winter doldrums with November.  So, with 20% of the bad months out of the way let's take a quick look back and see how the Market handled November. 

The eleventh month of the year had only 21 trading days but they were all over the map.  Five of those 21 days the Dow Jones Industrial Average (DJIA) moved by more than 140 points.  On November 15 the market dropped 178 points and then two days later it went back up 174 points!  In the end the DJIA started the month at 11,120 and ended at 11,006 for a net loss of 114 points.  

Most of the angst in November came from Europe's sovereign debt problems.  Like most western governments European nations are struggling under a mountain of debt.  The peripheral countries in Europe are fighting to survive what are basically margin calls on their debt.  And since their economic growth is not strong enough to work down the ever-increasing interest expense they end up needing capital infusions, or bail-outs to get them down the road far enough to a place where they hope to work down the bill.  Specifically, the country in trouble in November was Ireland--which formalized its $89 Billion bail-out on November 28.  (http://www.foxnews.com/world/2010/11/28/eu-approves-b-bailout-ireland/)  Next up will probably be Portugal and then Spain and by then it'll come back around to Greece again.      


Since Europe is our largest trading partner and the destination for many of our exports, negative news there affects our economy in a negative way.  Lucky for Portugal, Spain, Ireland, and Greece the European Union has Germany.  Germany, the largest economy in Europe, grew at an expected rate or 0.7% in the third quarter and for as an established economy is doing pretty good.  (http://www.upi.com/Business_News/2010/11/12/Germanys-GDP-up-07-percent-in-quarter/UPI-62311289584076/) 

 

The improving German and World economy is giving the EU a shard of light in the dark room of the debt crisis.  We will have to see how it turns out for the next country in line for a crisis, Portugal. 

 

Marty              

Progressive Taxation, What if? Part II 

  

Last month we detailed the progressive taxation on a hypothetical couple who earned $500,000.  In this issue we will use the same couple to see what their tax bill will be if Congress allows the 2001-2003 tax-reductions to expire.  Just to be straight; if Congress does nothing before now and January 1, the new tax rates take effect.  The new rates could cause the withholding amounts to go up starting January 1.  

So here are last month's calculations based on 2010 tax year rates for a couple who earns $500,000 of reportable income in 2010 and they file jointly.  

 

Now 

For the first $16,750 they pay 10%--or $1,675

The next $51,250 they pay 15%--or $7,687.50 plus the $1,675, or $9,362.50

For the next $69,300 they pay 25%--or $17,325 plus the $9,362.50 for $26,687.50

For the next $71,950 they pay 28%--or $20,146 plus the $26,687.5 for $46,833.50

The next $164,400 costs them 33%--or $54,252 plus the $46,833.50 for $101,085.50

The next $126,350 costs them 35%--or $44,222.50 plus the $101,085.50 for a total tax bill of $145,308. 

 

Next year if Congress does nothing to change the current law: 

 

For the first $57,700 they pay 15%--or $8,655

 

The next $81,800 they pay 28%--or $22,904 plus the $8,655 for $31,559

 

The next $73,100 they pay 31%--or $22,661 plus the $31,559 for $54,220

 

For the next $167,050 they pay 36%--or $60,138 plus the $54,220 for $114,358

 

and for the last $120,350 they will pay 39.6%--or $47,658 plus the $114,358 for a total tax bill of $162,016  

 

Our happy couple owes $16,708 more money in 2011 over what they paid in 2010.  The question is whether they can afford paying some $1,392 more per month to their Uncle Sam?  Of course it depends on their expenses but most people could get by on $337,894 take home pay (not counting Social Security and local State and Municipal taxes).  But, if they are business owners are they going to hire anyone new knowing their incomes have just been cut?  Are they going to spend as much as they did in 2010?  I doubt it to both questions.  Let's keep an eye on the Congress and see what they do.   Marty

 

January Effect? 

I received an email from a friend who's son told him that he heard that January was a bad month for the stock market--"is that true?" was the question.  As you will see, some months are indeed better than others for stock trading.  First, a disclaimer, Investing in the stock market is always a long-term proposition  and month-by-month variations are unimportant.  However, for someone who is speculating in the market then maybe the particular month is important. 

There is a thing called the "January Effect," one of those ubiquitous myths in Stock Trading that says January is a good month to invest.  And like all those little sayings and theories it has a slight grounding in fact.  This one says the good month is due to the annual tax-loss harvesting that typically occurs in December.  The theory being that investors sell out in December and jump back in after the 31-day-wash-rule period expires.  This is contrary to what my friend's son had heard so my interest was piqued enough to do some research. 

So let's look at some numbers--and fortunately someone has already done the work for us--here's a study done by www.Moneychimp.com which averages the monthly returns for the last 60 years of the S&P 500.        

Month

Years Up

Years Down

Avg. Return

Rank out of 12

January

36

24

+0.95

5

February

32

28

-0.39

11

March

38

22

+0.98

4

April

40

20

+1.39

3

May

35

25

+0.33

8

June

31

29

-0.02

10

July

32

28

+0.75

6

August

35

25

+0.04

9

September

26

34

-0.78

12

October

36

24

+0.43

7

November

40

20

+1.41

2

December

45

15

+1.56

1


Well historically at least, we see that January has been the 5th best month for average returns with 36 years up and 24 years down.  The best month, by a long-shot, was December with 45 years up and only 15 down with an average return of 1.56%.  Only three months had negative averages.

Anyway, I guess this is another example of how rumors get started.  We really have no reliable way to predict the future results of the market--only that it will fluctuate!  Marty

(This material is provided for general information and is subject to change without notice.  Every effort has been made to compile this material from reliable sources; however no warranty can be made as to its accuracy or completeness.  All illustrations shown are hypothetical in nature and do not represent any real investments or tax situations. Actual results may vary.  The S&P 500 index is an unmanaged group of securities considered to be representative of the stock market in general.  You cannot invest directly into an index.)
At Desk
Chesapeake Investment Advisors Inc.
 Martin Knight, MBA CFP®
410-810-0735
800-994-0221
Fax: 410-810-3422
 
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