Nearman Financial Report - January 2009
Financially entertaining since 1992
From the folks at Nearman Financial Consulting of Old Town

Inauguration-Free Issue

Since we weren’t able to rent our office for $50,000 for the inauguration week, we had to actually go to work this month. After a year in the market like 2008 which made some of the rides at Kings Dominion look tame, we were hoping for some time off to reflect.

And this is what came of hours and hours of that reflection – in 2007, we developed and managed portfolios. In 2008, we ended up with shortfolios.

What do we make of 2009?

Here’s all we are going to say right now about 2009 – we’ll take you back in time with a story about the past, filled with eerie coincidences, “irrational exuberance,” sprinkled with greed and fortunes, if, of course, you ended the story in October 2007.

But here goes…

We remember back to October 2002, when the Dow Jones Industrial (and no, it isn’t pronounced DOWN Jones), which is a weighted average which measures nothing more than 30 of the largest U.S. industrial companies including McDonalds and Wal Mart, and which sunk to a miserable low of 7,286.27. According to Yahoo! Finance, that was the closing price on October 9, 2002, and while nobody knew it at the time, that day signaled the very bottom of a wealth-crushing market decline that began on January 14, 2000, when the Dow was at 11,722.98 and former President Bill Clinton had just 51 weeks left in office.

Then “W” gets elected, 9-11 occurs later that year and by the next October 2002, the Dow is down nearly 38 percent from January 14, 2000.

Stock market prices continued to fluctuate widely as September 2002 gave way to October. On October 9, the Dow closed at 7286.27, a five-year low. Just four trading days later, on October 15, the Dow had rebounded to 8255.68, a jump of 13.3 percent.

Why? Was the world any better of a place on October 9 than it was on October 8, or 7?

So we scoured the headlines for October 2002, looking for a clue for such a universal change of heart amongst American and world investors alike. We went through the tedious yet hugely important exercise because it was more fun than explaining to clients over and over that we were missing parts of their portfolios – we mean shortfolios.

But more importantly, we were looking for something earth-shattering that led to a turnaround, maybe so we could understand and even predict when the current downturn will hit bottom and head north for good.

[We interrupt this long and rambling set-up of an important point to encourage you to stay with us here, even if it requires No-doze and massive volumes of coffee, cola and other caffeine-infused digestibles]

Yes, we found it - it must have been that famous wealthy peanut farmer - and by the way, former Prez - Jimmy Carter winning the 2002 Nobel Peace Prize on October 10.

Well, maybe not. How about these world-shaking events?

- The former CFO of Enron, the bankrupt energy-trading company, was charged October 2 with fraud, conspiracy, and money laundering; or

- On October 7, Buford Yates became the second former official of WorldCom, another mega-bankruptcy, to plead guilty to securities fraud; or

- The man we can thank when we take off our shoes at the airport - "Shoe Bomber" Richard Reid - pleaded guilty October 4, in federal district court in Boston, to all charges against him relating to an incident aboard a Paris-to-Miami flight in Dec. 2001; or

- Four U.S. citizens living in Portland, OR, were arrested October 4 and charged with plotting to join al-Qaeda and Taliban forces against the United States; or

- In a speech in Cincinnati, October 7, President Bush said that only Saddam Hussein's removal from office would end the confrontation with Iraq. He set out a detailed case for resorting to military action if other efforts failed. He said that the Iraqi regime had ties to al-Qaeda terrorists and that Iraq could attack the U.S. at any time with chemical or biological weapons. Over the next four days, the House (296-133) and the Senate (77-23) passed measures giving Bush its backing for using military force against Iraq.

All the while, from October 2 through October 24, the Washington area was terrorized by two nutjobs – 41-year-old John Allen Williams, 41 and his sidekick 17-year-old John Lee Malvo, as they left 10 people dead and three wounded in a series of random sniper shootings.

Not stuff that makes for major market turnarounds – BUT, after the Dow hit its low close of 7286 on October 9, 2002, over the next 35 trading days, to November 27, the Dow gained a whopping 22 percent!

So why the turnaround? With no big announcements and changes in the economic numbers – actually the economic numbers continued to get worse through the fall of 2002 – we are left only to speculate on the market’s rapid recovery.

We believe that 13 months after September 11, people decided they had mourned enough, been mired down in a funk for long enough, that it was finally time to live again, that America was still a strong nation and that America still had strong corporations and that the world was not about to come to an end as many had felt after September 11.

It was this renewed sense of optimism that changed the tone of the financial markets in 2002 and we suspect it will take a major dosage of that optimism in 2009 or 2010 to change the course of our economy today.

Thank Us for the Peace and Quiet

All Cell Phone numbers are being released to Telemarketing Companies and you will start to receive sales calls and other annoying calls. What’s even worse, you will be charged for these calls.

To prevent this, call the following number from your cell phone - 1-888-382-1222.

This is the National DO NOT CALL list. It should only take about 30 seconds of your time. Just call the 888-number from the phone you want on the list, then hit "1" for English (unless you speak only Spanish of course), then "1" again, then type in the phone number and it is on the DO NOT CALL list.

It blocks your number for five years. But you must call from the Cell Phone you want to have blocked; you cannot call from a different number. This 888-number also is good for your land lines too. Now don’t go blaming us if your cell phone doesn’t ring anymore.

Bush Rules!!!!!!

On December 23, a month before “W” hit the road, he did one very significant thing – other than spending the equivalent of the GNP of Malaysia on White House china – he signed legislation (the Worker, Retiree, and Employer Recovery Act of 2008) suspending required minimum distributions (RMDs) from IRA and employer-sponsored retirement plan accounts for the 2009 tax year. (Regular RMD requirements are supposed to resume in 2010).

Examples of these accounts: Traditional and Rollover IRAs, SEP IRAs, Inherited IRAs, Inherited Roth IRAs, 401(k)s, and 403(b)s. It does not apply to non-inherited Roth IRAs.

This change in law will not help us for our 2008 taxes, but starting now, this suspension will allow you to keep the money you would have had to withdraw for 2009 in your retirement accounts without penalty. What’s more –

•             Clients who are turning 70 1/2 in 2009 will not have to take any RMDs this year;

•             Beneficiaries of a retirement plan account or an IRA currently taking payouts under the five-year rule also can skip their 2009 RMDs. (The new law will extend the five-year rule one year beyond the 2009 suspension.);

•             Retirement plan participants, IRA owners and beneficiaries currently taking periodic distributions under RMD rules can stop your systematic withdrawals for 2009. However, you’ll need to start the withdrawals again in 2010.

Amazingly, our esteamed (typo intentional) members of Congress must have opened their recent investment statements and make the following brilliant observations:

•             In the current economic environment, many contract values have been diminished by the deep declines in the stock market;

•             Congress was concerned that requiring individuals to take 2009 RMDs could have the unintended effect of forcing individuals to “sell low.” As a result, the RMD would diminish the likelihood of the individual being able to participate in any economic recovery.

Charity Begins @ Home and in Your 70s

According to the IRS, clients who are IRA owners and are at least 70 1/2 years old can still make tax-free donations to charities instead of taking taxable distributions from your IRA accounts in the 2008 and 2009 tax years.

This option, which was introduced as part of the Pension Protection Act, was set to expire in 2007, but according to the IRS, it was extended it through 2009.

Clients can direct their IRA custodian to make a tax-free donation of up to $100,000 to a charitable organization of their choice.

Adjust Your 401(k), Other Retirement Plan Salary Deferrals

The IRS released its numbers for 2009, raising the maximum elective employee deferral into an employer-sponsored 401(k) to $16,500 from $15,500 in 2008. And who says age doesn’t matter – the IRS will let those of you 18,250 days and older (come on, that’s 50 years people!) add another $5,500 in “catch-up” deferrals for a grand total of $22,000.

So if you are doing the monthly payroll deduction and you are under 50 years young, you should be maxing out at $1,375 per month. If payroll is every other week, you could max out around $635 per pay period or if you are paid twice a month, you might just want to contribute $687.50 per pay period. And remember, if you do not want to put money into stock funds in your 401(k), there is always the Money Market option.

SIMPLE IRAs go to $11,500 in 2009 from $10,500 and the limit on annual additions to defined contribution plans rises to $49,000 from $46,000. And exclusions from estate tax soars to $3.5 million in 2009 from $2 million and next year the estate tax is repealed, so make your plans now before the estate tax exclusion drops way down to $1 million in 2011 (that’s supposed to be a joke).

And Roth IRA contribution limits, if you qualify, stay at $5,000 for peeps under 50 and $6,000 for the rest of the folks.

Closing Bell…

So now must close this month’s newsletter which naturally was full of wise and prudent information. During the time it took to write this, the financial markets hacked off more of their value, greeting our new president Obama with a swift selloff on his first day on the job – who the heck was selling when everybody it seemed was freezing their assets off in the cold of Washington that afternoon?

But before we go, we pass along some financial advice and a fitting tribute to one of our most favorite pitchmen for the Chrysler Cordoba and partner of one of the biggest little guys in Hollywood. Of course we refer to Ricardo Montalban, who passed this month, and his sidekick Tattoo, who took his life nearly 16 years ago.

If Mr. Rourke, Ricardo’s Fantasy Island character, were your financial advisor, he’d be saying right now: “Smiles, everyone, smiles…”

Nearman Financial Report is a complimentary newsletter for clients and friends of Nearman Financial Consulting Inc. of Old Town Alexandria, a leading provider of financial products and services including fixed annuities, retirement plans, life/health/dental/ disability and long-term care insurance, and mortgages. Securities and advisory services offered through representatives of Lincoln Financial Securities Corporation, Member FINRA/SIPC. Nearman Financial Consulting and Lincoln Financial Securities Corporation are not affiliated. Lincoln Financial Securities Corporation and its representatives do not offer tax or legal advice. You should consult with your individual tax or legal professional regarding your individual circumstances. And as always, the opinions expressed is this insightful newsletter are exclusively that of Nearman Financial and its modest employees and do not represent the opinions of Lincoln Financial Securities Corporation or any other person or entity.

snearman@securitiesmail.com    703-683-4660