What Are the Tax Benefits of Charitable Trusts?

Americans give freely to support the causes they value, from churches, education, and the arts to medical research. Fortunately, current tax laws encourage and even reward philanthropy. Beyond the basic tax deductions for charitable giving, setting up one or both of the following types of trusts could provide financial advantages in addition to the personal satisfaction that comes from giving.

Charitable Remainder Trust

When money, securities, property, or other assets are placed in a properly structured charitable remainder trust, the donor or a beneficiary receives income for a specific term or for life. When the trust expires, the designated charity receives the assets that remain.

For the donor, there are several potential tax benefits: (1) Assets placed in the trust may be partially deductible for income tax purposes. (2) At death, trust assets are not subject to estate taxes because they are no longer part of the donor’s taxable estate. (3) Any appreciated assets in the trust are also exempt from current capital gains tax.

Charitable Lead Trust

A charitable lead trust is an estate conservation tool that uses the donor’s assets to provide income for a charity during the donor’s lifetime and then transfers the remaining assets to the donor’s heirs when he or she dies. This type of trust could potentially reduce the estate tax due upon death, most notably on highly appreciated assets, because they are not subject to current capital gains tax.

Keep in mind that donations to both types of charitable trusts are irrevocable. This means that the assets cannot be withdrawn once the trust is formed. Also bear in mind that not all charitable organizations are able to use all possible gifts. It is prudent to check first. The type of organization selected can also affect the tax benefits that may be received.

When structured properly, these tools could possibly be used to benefit the charities of your choice and also help to reduce your tax obligations at the same time.

The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.

What Is a Required Minimum Distribution?

A required minimum distribution (RMD) is the annual amount that must be withdrawn from a traditional IRA or a qualified retirement plan [such as a 401(k), 403(b), and Keogh] after the account owner reaches the age of 70½. The last date allowed for the first withdrawal is April 1 following the year in which the owner reaches age 70½.* Some employer plans may allow still-employed account owners to delay distributions until they stop working, even if they are older than 70½. RMDs are designed to ensure that owners of tax-deferred retirement accounts do not defer taxes on their retirement accounts indefinitely.

You are allowed to begin taking penalty-free distributions from tax-deferred retirement accounts after age 59½, but you must begin taking them after reaching age 70½. If you delay your first distribution to April 1 following the year in which you turn 70½, you must take another distribution that year. Annual RMDs must be taken each subsequent year prior to December 31.

The RMD amount depends on your age, the value of the account, and your life expectancy. You can use the IRS Uniform Lifetime Table (or the Joint and Last Survivor Table, in certain circumstances) to determine your life expectancy. To calculate your RMD, divide the value of your account balance at the end of the previous year by the number of years you’re expected to live, based on the numbers in the IRS table. You must calculate RMDs for each account that you own. If you do not take RMDs, then you may be subject to a 50% federal income tax penalty on the amount that should have been withdrawn.

Remember that distributions from tax-deferred retirement plans are subject to ordinary income tax.

Waiting until the April 1 deadline in the year after reaching age 70½ is a one-time option and requires that you take two RMDs in the same tax year. If these distributions are large, this method could push you into a higher tax bracket. It may be wise to plan ahead for RMDs to determine the best time to begin taking them.

*The Worker, Retiree, and Employer Recovery Act of 2008 suspends required minimum distributions for the 2009 tax year.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.

Is the Estate Tax Going to Be Repealed?

The short-term answer is “yes.” The Economic Growth and Tax Relief Reconciliation Act of 2001 made sweeping changes to the federal estate tax and eliminated the tax entirely in 2010.

However, because the tax legislation is scheduled to expire after December 31, 2010, the federal estate tax will return to its original 50 percent maximum rate in 2011 unless Congress acts to make the repeal permanent.

Estate taxes are levied by the federal government and several states on any property that passes from the dead to the living. All estate assets are subject to federal estate taxes. However, the applicable credit shelters a portion of an estate from federal estate taxes.

The following table illustrates changes to the applicable credit and the top federal estate tax rate from 2002 through 2011.


Year
Applicable Credit
Top Estate Tax Rate
2002
$1 million
50%
2003
$1 million
49%
2004
$1.5 million
48%
2005
$1.5 million
47%
2006
$2 million
46%
2007
$2 million
45%
2008
$2 million
45%
2009
$3.5 million
45%
2010
Tax repealed
0%
2011
$1 million
50%

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.

How Much Money Can I Put into My IRA or Employer-Sponsored Retirement Plan?

All types of IRAs and employer-sponsored retirement plans are subject to annual contribution limits set by the federal government. The limits are generally adjusted periodically to compensate for inflation and the increase in the cost of living.

IRAs

For the 2009 tax year, you can contribute up to $5,000 to all IRAs combined (starting in 2009, the limit will be adjusted for inflation annually). For instance, if you have a traditional IRA as well as a Roth IRA, you can only contribute a total of the annual limit in one year, not the annual limit to each.

If you are age 50 or older, you can also make an annual $1,000 “catch-up” contribution.

Employer-Sponsored Retirement Plans

Employer-sponsored retirement plans, such as 401(k)s and 403(b)s, have a 2009 contribution limit of $16,500; individuals aged 50 and older can contribute an extra $5,500 as a catch-up contribution.

If you are currently contributing to an IRA or an employer-sponsored retirement plan, it may be wise to check the contribution limit each year in order to put aside as much as possible.

Distributions from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income and may be subject to an additional 10% federal income tax penalty if taken prior to reaching age 59½. If you participate in both a traditional IRA and an employer-sponsored plan, your IRA contributions may or may not be tax deductible, depending on your adjusted gross income.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.

What Is the Gift Tax?

The federal gift tax applies to gifts of property or money while the donor is living. The federal estate tax, on the other hand, applies to property conveyed to others (with the exception of a spouse) after a person’s death.

The gift tax applies only to the donor. The recipient is under no obligation to pay the gift tax, although other taxes, such as income tax, may apply. The federal estate tax affects the estate of the deceased and can reduce the amount available to heirs.

In theory, any gift is taxable, but there are several notable exceptions. For example, gifts of tuition or medical expenses that you pay directly to a medical or educational institution for someone else are not considered taxable. Gifts to a spouse who is a U.S. citizen, gifts to a qualified charitable organization, and gifts to a political organization are also not subject to the gift tax.

You are not required to file a gift tax return unless any single gift exceeds the annual exclusion amount for that calendar year. The exclusion amount ($13,000 in 2009), is indexed annually for inflation. A separate exclusion is applied for each recipient. In addition, gifts from spouses are treated separately; so together, each spouse can gift an amount up to the annual exclusion amount to the same person.

Gift taxes are determined by calculating the tax on all gifts made within the tax year that are above the annual exclusion amount, and then adding that amount to all the gift taxes from gifts above the exclusion limit from previous years. This number is then applied toward an individual’s lifetime applicable exclusion amount. If the cumulative sum exceeds the lifetime exclusion, you may owe gift taxes.

For gift tax purposes in 2009, the applicable credit is $345,800 and the applicable exclusion amount is $1 million. These amounts are higher for the estate tax.

According to the IRS, most gifts are not subject to the gift tax, and only about 2% of estates are subject to the estate tax.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.

What Is the Estate Tax?

The estate tax is a tax on property that transfers to others upon your death. Estate taxes are due on the total value of your estate — your home, stocks, bonds, life insurance, and other assets of value. Everything you own, whatever the form of ownership, regardless of whether the assets have been through probate, is subject to estate taxes.

Also referred to as the “death tax,” the estate tax was first enacted in this country with the Stamp Act of 1797 to help pay for naval rearmament. After several repeals and reinstatements, the Revenue Act of 1917 put the current estate tax into place. Despite its long history, this tax remains controversial.

By working in much the same way as marginal income tax brackets, estate taxes claim a graduated percentage of the total value of your estate. For estates of greater value, the percentage amount due in taxes is generally higher.

The IRS calculates the estate tax due on your gross taxable estate by adding the value of your assets and then subtracting any applicable exemptions.

The most common exception to the federal estate tax is the unlimited marital deduction. The government exempts all transfers of wealth between a husband and wife from federal estate and gift taxes, regardless of the size of the estate. Of course, the surviving spouse must be a U.S. citizen to qualify for this exemption. When the surviving spouse dies, the estate will be subject to estate taxes and, unless the appropriate preparations have been made, only the surviving spouse’s applicable credit can be used. Other exemptions include mortgage and other debt, administration expenses of the estate, and losses during estate administration.

The Economic Growth and Tax Relief Reconciliation Act of 2001 made sweeping changes to the federal estate tax. It established a schedule that loweredthe top estate tax rate and raised the applicable credit amount gradually over several years. In 2010, the federal estate tax is scheduled to be repealed. However, because of the tax law’s sunset provision, the federal estate tax will return in 2011 at its previous maximum level unless Congress votes to permanently repeal the tax. (See the table for applicable credit amounts and top estate tax rates.)


Year
Applicable Credit
Top Estate Tax Rate
2006
$2 million
46%
2007
$2 million
45%
2008
$2 million
45%
2009
$3.5 million
45%
2010
Tax repealed
0%
2011
$1 million
50%


Check with your tax advisor to be sure that your estate is protected as much as possible from estate taxes upon your death.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.

What Are the Tax Benefits of Charitable Trusts?

Americans give freely to support the causes they value, from churches, education, and the arts to medical research. Fortunately, current tax laws encourage and even reward philanthropy. Beyond the basic tax deductions for charitable giving, setting up one or both of the following types of trusts could provide financial advantages in addition to the personal satisfaction that comes from giving.

Charitable Remainder Trust
When money, securities, property, or other assets are placed in a properly structured charitable remainder trust, the donor or a beneficiary receives income for a specific term or for life. When the trust expires, the designated charity receives the assets that remain.

For the donor, there are several potential tax benefits: (1) Assets placed in the trust may be partially deductible for income tax purposes. (2) At death, trust assets are not subject to estate taxes because they are no longer part of the donor’s taxable estate. (3) Any appreciated assets in the trust are also exempt from current capital gains tax.

Charitable Lead Trust
A charitable lead trust is an estate conservation tool that uses the donor’s assets to provide income for a charity during the donor’s lifetime and then transfers the remaining assets to the donor’s heirs when he or she dies. This type of trust could potentially reduce the estate tax due upon death, most notably on highly appreciated assets, because they are not subject to current capital gains tax.
Keep in mind that donations to both types of charitable trusts are irrevocable. This means that the assets cannot be withdrawn once the trust is formed. Also bear in mind that not all charitable organizations are able to use all possible gifts. It is prudent to check first. The type of organization selected can also affect the tax benefits that may be received.

When structured properly, these tools could possibly be used to benefit the charities of your choice and also help to reduce your tax obligations at the same time.
The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.

How Can I Keep My Money from Slipping Away?

As with virtually all financial matters, the easiest way to be successful with a cash management program is to develop a systematic and disciplined approach.

By spending a few minutes each week to maintain your cash management program, you not only have the opportunity to enhance your current financial position, but you can save yourself some money in tax preparation, time, and fees.

Any good cash management system revolves around the four As — Accounting, Analysis, Allocation, and Adjustment.

Accounting quite simply involves gathering all your relevant financial information together and keeping it close at hand for future reference. Gathering all your financial information — such as mortgage payments, credit card statements, and auto loans — and listing it systematically will give you a clear picture of your overall situation.

Analysis boils down to reviewing the situation once you have accounted for all your income and expenses. You will almost invariably find yourself with either a shortfall or a surplus. One of the key elements in analyzing your financial situation is to look for ways to reduce your expenses. This can help to free up cash that can either be invested for the long term or used to pay off fixed debt.

For example, if you were to reduce restaurant expenses or spending on non-essential personal items by $100 per month, you could use this extra money to prepay the principal on your mortgage. On a $130,000 30-year mortgage, this extra $100 per month could enable you to pay it off 10 years early and save you thousands of dollars in interest payments.

Allocationinvolves determining your financial commitments and priorities and distributing your income accordingly. One of the most important factors in allocation is to distinguish between your real needs and your wants. For example, you may want a new home entertainment center, but your real need may be to reduce outstanding credit card debt.

Adjustment involves reviewing your income and expenses periodically and making the changes that your situation demands. For example, as a new parent, you might be wise to shift some assets in order to start a college education fund for your child.

Using the four As is an excellent way to help you monitor your financial situation to ensure that you are on the right track to meet your long-term goals.

How Long Will It Take to Double My Money?

Before making any investment decision, one of the key elements you face is working out the real rate of return on your investment. Compound interest is critical to investment growth. Whether your financial portfolio consists solely of a deposit account at your local bank or a series of highly leveraged investments, your rate of return is dramatically improved by the compounding factor. With simple interest, interest is paid just on the principal. With compound interest, the return that you receive on your initial investment is automatically reinvested. In other words, you receive interest on the interest. But just how quickly does your money grow? The easiest way to work that out is by using what's known as the “Rule of 72.”1 Quite simply, the “Rule of 72” enables you to determine how long it will take for the money you've invested on a compound interest basis to double. You divide 72 by the interest rate to get the answer. For example, if you invest $10,000 at 10 percent compound interest, then the “Rule of 72” states that in 7.2 years you will have $20,000. You divide 72 by 10 percent to get the time it takes for your money to double. The “Rule of 72” is a rule of thumb that gives approximate results. It is most accurate for hypothetical rates between 5 and 20 percent. While compound interest is a great ally to an investor, inflation is one of the greatest enemies. The “Rule of 72” can also highlight the damage that inflation can do to your money. Let’s say you decide not to invest your $10,000 but hide it under your mattress instead. Assuming an inflation rate of 4.5 percent, in 16 years your $10,000 will have lost half of its value. The real rate of return is the key to how quickly the value of your investment will grow. If you are receiving 10 percent interest on an investment but inflation is running at 4 percent, then your real rate of return is 6 percent. In such a scenario, it will take your money 12 years to double in value. The “Rule of 72” is a quick and easy way to determine the value of compound interest over time. By taking the real rate of return into consideration (nominal interest less inflation), you can see how soon a particular investment will double the value of your money. 1 The Rule of 72 is a mathematical concept, and the hypothetical return illustrated is not representative of a specific investment. Also note that the principal and yield of securities will fluctuate with changes in market conditions so that the shares, when sold, may be worth more or less than their original cost. Actual results will vary.

How Do Money Market Mutual Funds Work?

Just like individuals, the government, corporations, and banks often need to borrow money for a short time to make ends meet. Unlike most individuals, however, the scale of this borrowing is phenomenal. The money market is the name given to the arena where most of this short-term borrowing takes place. In the money market, money is both borrowed and lent for short periods of time. For example, a bank might have to borrow millions of dollars overnight to ensure that it meets federal reserve requirements. Loans in the money market can stretch from one day to one year or beyond. The interest rate is fundamentally determined by supply and demand, the length of the loan, and the credit standing of the borrower. The money market was traditionally only open to large institutions. Unless you had a spare $100,000 lying around, you couldn't participate. However, during the inflationary era of the 70s, when interest rates sky-rocketed, people began to demand greater returns on their liquid funds. Leaving money in a bank deposit account at 5 percent interest made little sense with inflation running at 12 percent. The money market was returning significantly higher rates but the vast majority of people were prohibited from participating by the sheer scale of the investment required. And so, the first money market mutual fund came into being. By pooling shareholders’ funds, it was possible for individuals to receive the rewards of participating in the money market. Because of their large size, mutual funds were able to make investments and receive rates of return that individual investors couldn't get on their own. Money market mutual funds typically purchase highly liquid investments with varying maturities, so there is cash flow to meet investor demand to redeem shares. You can withdraw your money at any time. For a minimum investment, sometimes as low as $500, money market mutual funds will allow you to write checks. The check-writing feature is most often used to transfer cash to a traditional checking account when additional funds are needed. These funds are useful as highly liquid, cash emergency, short-term investment vehicles. Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in money market funds. Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Puzzles, Games Protect the Brain

Aug. 5, 2009 -- If you are trying to decide what to buy Grandma and Grandpa for their birthdays, consider a board game or good book. Why? A recent study shows that increased participation in activities that stimulate the brain may delay onset ofdementia-related memory decline in older seniors.

Researchers used information from the Bronx Aging Study, which included data on 488 people who were between the ages of 75 and 85 at the start of the study.

At the start of the study, participants did not have dementia. They reported how often they participated in six mentally stimulating activities: reading, writing, doing crossword puzzles, playing a board or card game, participating in a group discussion, or playing music.

Researchers analyzed data on the 101 participants in the study who developed dementia over an average follow-up time of five years.

The more mentally active the person was, the longer it took for the onset of accelerated memory decline to show up.

For each activity, such as reading or playing games, the participant ranked his or her level of participation as daily, several days a week, or weekly. Daily got seven points, several times a week got four points, and weekly got one point. Occasional or no activity received no points.

The median point total was seven among the group that developed dementia. When researchers looked at the time that memory decline started accelerating rapidly for each participant, they found that each additional activity day was linked to a delay in the onset of memory decline by 0.18 years.

“The point of accelerated decline was delayed by 1.29 years for the person who participated in 11 activities per week compared to the person who participated in only four activities per week,” study author Charles B. Hall, PhD, of Albert Einstein College of Medicine, says in a written statement.

This phenomenon held up even after researchers factored in education.

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PLEASE NOTE: The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to

Structure of HIV genome 'decoded'

Scientists say they have decoded the entire genetic content of the HIV-1 virus, a key source of Aids infection.

They hope this will pave the way to a greater understanding of how the virus operates, and potentially accelerate the development of drug treatments.

HIV carries its genetic information in more complicated structures than some other viruses.

The US research, published in Nature, may allow scientists the chance to look at the information buried inside.

HIV, like the viruses which cause influenza, hepatitis C and polio, carries its genetic information as single-stranded RNA rather than double-stranded DNA.

The information enclosed in DNA is encoded in a relatively simple way, but in RNA this is more complex.

“ We are also beginning to understand tricks the genome uses to help the virus escape detection by the human host ”
Ron Swanstrom study author
RNA is able to fold into intricate patterns and structures. Therefore decoding a full genome opens up genetic information that was not previously accessible, and may hold answers to why the virus acts as it does.

The team from the University of North Carolina at Chapel Hill said they planned to use the information to see if they could make tiny changes to the virus.

"If it doesn't grow as well when you disrupt the virus with mutations, then you know you've mutated or affected something that was important to the virus," says Ron Swanstrom, professor of microbiology and immunology.

"We are also beginning to understand tricks the genome uses to help the virus escape detection by the human host."

Deep inside

Dr David Robertson from the University of Manchester welcomed this "definitive analysis".

"What this may reveal is some of the proteins operating at a level below the structures, which may have all sorts of functions within the virus.

"More generally, if we can unpick the structures then we can compare the systems of different viruses and gain new understanding of how they work."

Keith Alcorn of the HIV information service NAM added: "Encouraging the virus to mutate is not a new idea, but it is one of a number of options on the table.

"How important this information will be for the development of new drugs remains to be seen, but it is a useful addition to what we know."

Obama vows to pass healthcare reform

WASHINGTON (Reuters) - Despite polls showing growing public doubts about his healthcare overhaul, U.S. President Barack Obama vowed on Wednesday to get a reform bill through Congress this year even without Republicans on board.

"I promise you, we will pass reform by the end of this year because the American people need it," Obama said in Wakarusa, Indiana, where he traveled to tout his economic initiatives. "We're going to have to make it happen."

Obama's drive for healthcare reform, his top legislative priority, has been attacked on all sides for its $1 trillion cost and scope. Democrats have feuded over how to pay for it, and Obama's popularity has slipped as the debate dragged on.

A Quinnipiac University poll released on Wednesday found 52 percent of voters disapprove of Obama's handling of healthcare while 39 percent approve. That was a shift from 46 percent approval against 42 percent disapproval in a July 1 survey.

Concerns about spending too much and adding to the deficit appeared to fuel the change, with 72 percent saying they do not believe Obama can overhaul healthcare without expanding the deficit.

No Republicans have backed the healthcare proposals under consideration in Congress, and months of Senate Finance Committee negotiations with three Republican senators have not produced a deal. Obama said time was about up.

"I think at some point, sometime in September, we're just going to have to make an assessment," Obama told MSNBC after his appearance in Wakarusa, saying his priority was a plan that reined in healthcare costs, improved care and regulated insurance companies.

Obama wants to expand insurance coverage to most of the 46 million uninsured Americans and make it harder for insurance companies to prohibit coverage of those with pre-existing conditions.

"I would prefer Republicans working with us on that because I think it's in the interest of everybody. That shouldn't be a partisan issue," he said.

'A DELAY GAME'

Democratic Senator John Rockefeller told reporters he suspects the three Republicans negotiating with Senate Finance Committee Chairman Max Baucus -- Charles Grassley, Mike Enzi and Olympia Snowe -- ultimately will reject a Democratic healthcare reform plan.

"My own personal view is that those three Republicans won't be there to vote for it, not in committee when it comes right down to it," he said. "So this will evolve into three or four months of a delay game, which is exactly what the Republicans want."

The Senate adjourns at the end of the week for a monthlong summer recess, joining the House of Representatives, which adjourned last week. Three House committees and one Senate committee have passed versions of the healthcare bill, while Senate Finance is still at work.

Baucus said other Democrats believed the party's negotiators on Senate Finance should "keep working, be bipartisan, but sometime in September we are going to have to make a decision."

Advocates on both sides are preparing for a fierce public relations battle this month. Baucus and Senator Chris Dodd of the Health and Education Committee, the other panel to pass a healthcare bill, held a briefing for Democratic senators on Wednesday to get them acquainted with the proposals.

Obama sent a message to his grassroots supporters asking them to get involved during the August break, contacting their representatives and taking at least one action in support of healthcare reform.

"The cost of inaction is simply too much for the people of this nation to bear," he said in the message.

The six Finance Committee members trying to reach a bipartisan deal -- three Democrats and three Republicans -- met again on Wednesday and discussed a proposal for an independent Medicare Commission to oversee the healthcare program for the elderly.

They were set to meet with Obama at the White House on Thursday to discuss the status of talks, a congressional aide said.

Baucus told reporters the panel would make judgments about Medicare payments while preserving an "appropriate" level of congressional involvement in setting reimbursement rates.

"We're trying to strike the right balance and we did. I think we came up with a pretty good resolution," he said.

(Additional reporting by David Alexander and Andy Sullivan; Editing by David Alexander and Cynthia Osterman)

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PLEASE NOTE: The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to

Monthly Market Monitor - August 2009

Rally Continues, But What’s Next?

The third quarter got off to a good start with most major indexes continuing to rally off of March lows. A renewed appetite for risk coupled with some hopeful signs that the economy is on its way to recovery drove the gains. The Commerce department released its preliminary GDP report for the second quarter and estimated a 1.0% decline, which was slightly better than the consensus forecast of a 1.5% contraction. The number is likely to be revised in the future as more data becomes available. For example, along with the preliminary Q2 GDP report, the Commerce Department also stated that Q1 GDP actually fell by 6.4%, as opposed to the initial estimate of a drop of 5.5%. Of course, the second quarter number could potentially be revised upward as well. Investors focus has now begun to shift to Q3, and some strategists are predicting positive GDP growth in that quarter and beyond. Others, however, don’t see positive GDP growth until the fourth quarter. Another potentially positive sign of stabilization emerged from recent housing data. New home sales rose 11% in June, which was the largest increase in eight and half years and the third straight monthly gain. However, median home prices are still down 12% from a year ago. While these recent trends are encouraging, some analysts think that a significant supply of foreclosed homes remain unsold and are likely to depress the market for some time.

As June was heavy with corporate earnings reports, many investors were looking for signs of improvement in corporate profits. As of July 24, about 40% of the companies in the S&P 500 had reported second quarter earnings.¹ Of these, 76% managed to top consensus forecasts.¹ Market strategists generally attribute these positive surprises to two factors. First, expectations had been set very low given the sharp contraction in the global economy. The lower the bar is set, the easier it is for companies to beat earnings estimates. Secondly, and more importantly, many companies went through significant cost reduction initiatives recently. These are beginning to pay off as evidenced by recent earnings reports. Over the long term, corporate profits drive stock prices. Some strategists, while encouraged by recently reported earnings, caution that this is only one quarter of data and that earnings growth might not be sustainable if the economic recovery takes longer than expected.

Interest Rates and the Deficit

Last fall, credit markets froze up and interest rates on various types of debt, from bank loans to corporate bonds, soared. Unthawing these markets is an important step towards recovery and several recent data points suggest notable improvement. In late July, 3-month LIBOR (London Interbank Offered Rate) fell to its lowest level on record at 0.49%. LIBOR is an average rate at which banks borrow unsecured funds from one another and is an important proxy as it forms the basis for a number of credit products. These include things such as mortgages, student loans, and credit cards. At the peak of the financial crisis, LIBOR had spiked to 4.8%. Some analysts argue that the decline is due increased confidence among banks, while others believe that it is the result of the numerous central-bank programs aimed at restoring normalcy to credit markets. Either way, the fall is good news for the many products that derive their interest rates from underlying LIBOR rates. Other fixed income rates have also shown notable declines. For example, the spread between high yield corporate bonds and 10-year Treasuries rose to nearly 22% at the height of the panic.¹ As of June 30, the spread had fallen to 8.6%.¹ These compare to a 25-year average of slightly over 5%. While some of the contraction is due to a rise in Treasury yields, most of the decline stemmed from buyers stepping back into the high yield market and driving up prices of these bonds (which in turn lowers the yield, as yields move inversely to price.)

One ongoing concern among many economists is the size of the U.S. budget deficit. The unprecedented amount of borrowing and spending has led to record deficits and nobody expects the gap to be closed soon. For the first nine months of fiscal year 2009 (which began on 10/01/08), the Congressional Budget Office (CBO) estimated the federal budget deficit at $1.1 trillion.² It sees an FY 09 total deficit of $1.8 trillion, followed by deficits of $1.4 trillion on FY ‘10 and $974 billion in FY ‘11.² While it is possible that the actual numbers won’t be this large, the deficit is going to be significant. In order to finance these gaps, the government must sell Treasury bonds. A large portion of such sales go to foreigners and China in particular. If these countries pull back on their purchases of U.S. debt, it will become more difficult to finance the deficits. Such buyers would likely demand higher interest rates, which would in turn raise the interest costs to the U.S. government. Thus far, however, such problems have not arisen. If the Fed is successful at removing a good portion of the liquidity from the markets and the government undertakes real efforts to reign in future deficits, holders (and future buyers) of Treasury bonds will likely be relieved.

FDA Seizes Skin Sanitizers Over Bacterial Contamination

The Food and Drug Administration today announced it has seized skin sanitizers made by Clarcon Biological Chemistry Laboratory because the products contain potentially harmful bacteria.

The products, sold under several different brand names, are marketed to treat open wounds, damaged skin, and to protect against infectious diseases. Clarcon recalled the skin sanitizers in June 2009 after FDA inspections of the company’s manufacturing facility in Roy, Utah detected high levels of bacteria and violations of the FDA’s Current Good Manufacturing Practice regulations that allowed the contamination.

The FDA has now taken the extra step of seizing the recalled products and all ingredients and components used to make them in an effort to further protect consumers from bacteria. The bacteria detected in the Clarcon products can result in opportunistic infections of the skin and underlying tissues, which in some cases may require surgery to treat and can result in permanent damage, the FDA said.

“The FDA is committed to taking enforcement action against firms that do not manufacture drugs in accordance with our current good manufacturing practice requirements,” said Deborah M. Autor, director of the FDA’s Center for Drug Evaluation and Research Office of Compliance. “We will remain vigilant in our efforts to protect consumers from defective products.”

More than 800,000 bottles of the skin sanitizers were made and distributed throughout the United States since 2007, the FDA said. The following brands of products were recalled and now have been seized by the FDA:

• Citrushield Lotion

• Dermasentials DermaBarrier

• Dermassentials by Clarcon Antimicrobial Hand Sanitizer

• Iron Fist Barrier Hand Treatment

• Skin Shield Restaurant

• Skin Shield Industrial

• Skin Shield Beauty Salon Lotion

• Total Skin Care Beauty

• Total Skin Care Work

Consumers who have the Clarcon products in their possession are advised not to use them and to throw them in the trash.

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Google CEO Schmidt to quit Apple board

NEW YORK (Reuters) - Google Inc Chief Executive Eric Schmidt is resigning from Apple Inc's board of directors, the companies said, citing increased competition between the two leading technology companies.

The move, which Apple CEO Steve Jobs said was mutually agreed upon, comes amid increased regulatory scrutiny of the relationship between Google, the No. 1 Internet search company in the U.S., and Apple, the maker of iPhones and Mac computers

Jobs said on Monday that with Google's recent introduction of a computer operating system, "now is the right time" for Schmidt to step down from Apple's board.

Last month, Google revealed plans for software for personal computers based on its Chrome Web browser, which would compete with Microsoft Corp's Windows as well as Apple's OS X system.

At the time, Schmidt said he would talk to Apple about possibly recusing himself from its board. The Google executive has been on Apple's board since 2006.

"Unfortunately, as Google enters more of Apple's core businesses, with Android (software for mobile phones) and now Chrome OS, Eric's effectiveness as an Apple Board member will be significantly diminished, since he will have to recuse himself from even larger portions of our meetings due to potential conflicts of interest," Jobs said in a statement.

The U.S. Federal Trade Commission is looking into whether ties between their boards violate antitrust laws. Schmidt and former Genentech CEO Arthur Levinson are directors of both companies.

The move also comes days after the Federal Communications Commission said it is looking into Apple's decision to reject Google's voice application for the iPhone. Google Voice allows users to store transcripts of voicemail messages in their email inbox and find specific information within a phone message.

Both Apple's and Google's shares moved higher in morning Nasdaq trading, with Apple climbing 1.7 percent to $166.10, and Google shares rising 1.6 percent to $450.11.

Microsoft shares also rose, gaining 1 percent to $23.76. The Nasdaq Composite Index was up 0.6 percent.