MARCH 5, 2008
MARCH 2008 COMMENTS - POLITICAL SIDESHOW OFFERS LIMITED ECONOMIC SOLUTIONS
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The narrowing of the political field over the past two months has offered a peek at the issues facing investors at the end of the Bush Administration. There are two paths voters will have to choose between in the upcoming November election with the candidate's economic choices becoming more limited. On the Republican side, the likely nominee, John McCain, has clarified his economic position to keep the Bush tax cuts in place which are due to expire in 2010. McCain also would cut corporate taxes to stimulate production and make our products more competitive overseas. On the Democratic side, both candidates are focusing more on balancing the budget via a variety of tax increases aimed at higher-income earners. Given the weakness in the economy, any tax increase at this stage might retard the recovery we believe will occur in 2009. The Democrats also are taking aim at the current preferential dividend and capital gain rates and are likely to raise those rates back to pre-Bush levels in 2009. Again, we believe this will have a negative impact on growth.
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For Beacon clients with low cost basis "legacy" type positions, careful consideration should be given to how these positions are handled in 2008 and 2009. The decision process is likely to be dicey owing to the fact that both parties have diametrically opposed positions on the capital gains issue. On top of the tax issue, the election more than likely will be close, so it is anyone's guess at the tax rate outcome. If the Democrats win the general election, the window to preserve the current preferential rate on long-term capital gains will be short. If that outcome becomes a reality, the gains rate will likely go up in 2009 and very well could be retroactive to January 1st, 2009. Your Beacon administrators and portfolio managers will be available to discuss this with you over the course of the year.
ECONOMY CONTINUES TO SUFFER FROM ASSET BASED DETERIORATION
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Everyday we read of steadily deteriorating housing prices. This is at the core of the current economic weakness. Housing downward spiral which is pronounced in California, Florida and Nevada (to name a few) is impacting the consumer's ability to spend. Clearly lower interest rates are helping as the adjustable mortgage reset problem has been mitigated by lower rates. Still, weakness in housing and high foreclosure rates are impacting are both affecting the way consumers spend. The impact is also being felt by the institutions that hold the mortgage paper. We believe the Federal Reserve is far from ending the current easing cycle. For all the noise the Fed has made on being tough on inflation, (which is still proving persistent), in the end the desire to head off a steep recession will outweigh the worries over inflation.
Personal service and the ability to communicate with your own portfolio manager are cornerstones of the Beacon Trust Company's business philosophy. If, during these volatile market conditions, you have any questions or concerns, please do not hesitate to call or e-mail us for prompt attention to your needs.
THIS MONTH'S FOCUS - AN UPDATE ON MUNICIPAL BOND INSURANCE
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Municipal bond insurance typically gives the issuer Aaa insurance financial strength rating to a bond that is rated, on its own merits, below Aaa. The policy regarding municipal bond insurance at the Beacon Trust Company has always been that nothing can substitute for fundamental credit analysis of the underlying security, and that if a highly-rated bond also has "insurance" that is a "bonus". As a matter of practice, this means we tend to avoid lower-rated investment-grade municipal bonds (those rated A3 through Baa3), even if they are insured and thus nominally rated Aaa.
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On December 14th, Moodys's credit rating agency affirmed 2 of the 6 major municipal bond insurers/financial guarantors (AMBAC and FSA) at Aaa insurance financial strength and with a stable outlook. The 4 other bond insurers were placed on various levels of review.
- The reasons Moody's cited for these ratings adjustments included the exposure of the insurers to potential losses stemming from both residential mortgage-backed securities and asset-backed securities, and the status of the insurers' plans to strengthen their capitalization.
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On December 28th, Warren Buffet announced that he was starting a bond insurer, Berkshire Hathaway Assurance Corp. Needless to say, this appears to be an extremely positive and stabilizing step, with perfect timing, as a fresh, high-quality name enters the business.
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Please feel free to contact us with any questions you may have on this or any other topic.