TEMPORARY TAX PROVISIONS SET TO EXPIRE IN 2014

Some may be renewed, others may not be.

At the end of every year, certain federal tax breaks face a sunset. Some are renewed, some expire. As 2014 will soon start, here is a list of some notable tax provisions that may go away next year - offering some opportunities that you may want to take advantage of this year.

Qualified tuition deduction. For 2013, an individual taxpayer has the chance to claim an above-the-line deduction for tuition and fees. This applies only to qualified higher education expenses. This deduction is set to expire at the end of this year; it may or may not be extended.1,2

Mortgage insurance premiums deductions. Are you paying for private mortgage insurance (PMI)?This year, you can treat qualified PMI premiums as home mortgage interest, but the deduction only applies if your adjusted gross income is no greater than $109,000. This tax break could go away in 2014; it is available only for mortgages entered into during 2007-13.1,3,4

Mortgage debt relief. In 2013, canceled mortgage debt of up to $2 million (or $1 million, in the case of married taxpayers filing separately) can be excluded from taxable income. The debt must be forgiven on a qualified principal residence (i.e., a taxpayer's primary home) due to the borrowers' financial condition or a decline in value of the residence. You can thank the Mortgage Debt Relief Act of 2007 for this. The tax break is set to sunset at the end of 2013, though - and if it does, then any such debt forgiven next year will be taxable income.2,5

State & local general sales tax deduction. 2013 might be the last year individual taxpayers can choose to deduct state and local general sales taxes as opposed to state and local income taxes. This option is set to expire at the end of the year.1

Educator out-of-pocket expenses deduction. Classroom teachers/instructors, counselors, principals and aides who work in grades K-12 have enjoyed a special deduction of up to $250 in out-of-pocket costs above the line in 2013. As for 2014, this deduction is still a question mark.1

Qualified charitable distributions from an IRA. If you are over 70½, you have through December 31 to make a tax-free transfer of assets from an IRA directly to a qualified charity. While you can't deduct the amount as a charitable contribution, it does count toward your annual required minimum distribution (RMD). Will this option be extended into 2014, or be made permanent? No one knows just yet.1

Increased expensing & bonus depreciation allowances. This year, the Section 179 deduction is set at $500,000 while the qualifying property limit is $2 million. In 2014, these limits are slated to drop dramatically: a Section 179 deduction of $25,000, a qualifying property limit of $200,000. In 2013 you can expense off-the-shelf software under Section 179; not so in 2014. This year, you can amend or irrevocably revoke a Section 179 election; next year, a Section 179 election will generally be irrevocable with IRS consent. While you can claim the Section 179 deduction on up to $250,000 of qualified real property this year, 2014 may offer you no such chance. For 2013, qualified leasehold and retail improvements and qualified restaurant property were given a 15-year straight-line recovery period; in 2014 the straight-line recovery period becomes 39 years. Congress may act to preserve all these current allowances.1,2

Currently, 50% special depreciation is permitted for qualified property additions placed into service in 2013, only long production-period property and certain kinds of aircraft will are slated to qualify to special depreciation in 2014. Again, Congress may preserve the current allowance.2

Electric vehicle credit. If you bought (or even leased) an electric car this year, you may be eligible for a tax credit of up to $7,500 (variable based on the size of the battery pack used by the vehicle). This tax perk is set to sunset in 2014. If you bought a qualifying 2-wheel or 3-wheel plug-in electric vehicle this year, you are eligible for a federal tax credit of up to $2,500.2,3

Personal energy property credit. Since 2006, there has been a $500 lifetime tax credit available to taxpayers who remodel their homes for energy efficiency. If you haven't remodeled enough to claim the full $500 credit yet, a heads-up: it is set to expire at year's end.1,3

R&D tax credit. This credit is admittedly hard to figure, but it can bring about major savings and can be carried forward or back. Up to 20% of R&D expenses (above a base) may generally be used as a credit against tax owed. Who knows, it may not be around for 2014.6

Transit benefits. In 2013, the exclusion for transit passes and/or vanpooling, provided by an employer, is $245 monthly; this is the same as the exclusion for employer-provided parking. Next year, the benefit for public transportation falls to $100 per month (with adjustment for inflation) while the exclusion for employer-provided parking stays at $245 per month.2,3

One more thing to keep in mind. The IRS will delay the start of the tax-filing season by at least a week, a consequence of October's federal government shutdown. It had planned to accept tax returns on January 21; that date will now be January 28 or later, with the final determination coming in December. The April 15 deadline for filing returns or requesting extensions still applies.7

Citations.
1 - accountingtoday.com/gallery/disappearing-tax-deductions-67830-1.html [10/30/13]
2 - tinyurl.com/k4pgc8f [11/5/13]
3 - dailyfinance.com/2013/11/05/8-tax-breaks-expiring-year-end-2013/ [11/5/13]
4 - inman.com/2013/08/20/dont-count-on-private-mortgage-insurance-deduction-in-2014/ [8/20/13]
5 - efile.com/home-foreclosure-mortgage-forgiveness-tax-relief-exclude-canceled-debt/ [11/14/13]
6 - inc.com/gene-marks/take-advantage-of-tax-breaks-before-december-31.html [10/31/13]
7 - bloomberg.com/news/2013-10-22/irs-delays-start-of-2014-u-s-tax-filing-citing-shutdown.html [10/22/13]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

THE AFFORDABILITY WINDOW

Mortgage rates are still low but trending upward. Banks are offering 30-year mortgages at a national average rate of 4.35%, up from 3.81% in May. Housing prices are still low by historical standards, but are trending upward--sales prices have risen an average of 10% over the last 12 months. Wages for American workers are going up slower than the inflation rate. Mix these three numbers together, and you have a decline in the affordability of homes in the U.S.


The National Association of Realtors issued its most recent update to the U.S. Home Affordability Index a few days ago: the index fell from 178.1 earlier in the year to 160.8--which is about where it was in the third quarter of 2009. However, to put that into perspective, this compares favorably with the average level of the index (134) since the NAR began tracking it in 1986. That means the current market remains unusually accessible for homebuyers--at least by historical standards.

The problem with these numbers, of course, is that different markets have different housing dynamics; homes can be affordable in one region and outside the reach of most residents in others. Examples of affordability include Syracuse, NY (median home price: $92,000, compared with a median income of $65,800), Indianapolis, IN ($93,000; $65,100), Cleveland, OH (median listing price: $63,729), Flint, MI ($84,437) and Sioux City, IA ($97,969).

At the other end of the spectrum, consider the San Francisco bay area, where the median home costs $779,000 and the median income of local residents is $101,200--a 7:1 ratio. Los Angeles (median home price: $425,000 vs. median income of $61,900), New York ($464,000 vs. $66,000 median income), and the Silicon Valley ($625,000 vs. $101,300) also tend to fall into the less-affordable-market category.

Regardless of where you live, however, people are likely to look back at this brief period when interest rates were still low by historical standards and housing was still selling at prices below their historical norms, and see this as a window of opportunity that will, eventually, slam shut as housing recovers and rates rise. It's hard to predict the future, but the trends suggest that our current affordability index level won't last forever.

Sources:
http://ycharts.com/indicators/30_year_mortgage_rate
http://www.realestateabc.com/outlook/overall.htm
http://www.businessinsider.com/the-14-most-affordable-places-to-live-2013-11?op=1#ixzz2lEmVae86
http://www.businessinsider.com/the-14-most-affordable-places-to-live-2013-11?op=1#ixzz2lEmIXcHY

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

INDEX ADJUSTMENTS

We tend to think of stock market indices as fixed and stable; the same mixture of stocks year over year, which we can benchmark our own investments against. But the truth is, the indices are actually actively-managed portfolios of stocks.

The most recent example of this is the Dow Jones Industrial Average, which is made up of just 30 companies. On September 10, the S&P Dow Jones Indices swapped out three (10%) of them; it dropped Alcoa, Bank of America and Hewlett-Packard, and replaced them with Goldman Sachs, Visa and Nike. This was not a felicitous change in terms of the index's performance; in the next two weeks, Goldman shares fell 2.2% and Visa dropped 0.4% of its share value. Nike fell 0.6% as well. Goldman's drop alone cost the Dow 29 points.

Meanwhile, most investors believe that the S&P 500 index is made up of a fixed list of the 500 largest U.S. companies. Not true! The index--and other S&P midcap and small cap indices--are actually trading stocks onto and off of the list on a fairly regular basis. On September 11, the S&P 500 added Vertex Pharmaceuticals and SAIC, Inc.; this was five days after Delta Air Lines was added after S&P 500 member Bain Capital acquired another member of the club, BMC Software. The index replaced Apollo Group with News Corp on June 20, Zoetis, Inc. replaced First Horizon National Corp on June 14, Kansas City Southern replaced Dean Foods on May 16, Regeneron Pharmaceuticals replaced MetroPCS Communications on April 24, PVH Corp. replaced Big Lots, Inc. on February 7--and that's all just in the first three quarters of this year. There were 18 additions and deletions in 2012, although some of those were the result of acquisitions and spin-offs.

Does it make sense to compare your actively-managed investments with actively-managed benchmarks? Does it make sense to invest in index funds that actually have to change their composition up to 18 times a year? There are no clear answers to these questions. Index funds and ETFs--even actively managed ones--usually show up well in the performance rankings, in part because they can be managed cheaply, in part because they remove some (but not all) of the decision-making and therefore are not likely to follow the herd. But you should know that the performance of the most widely-quoted indices reflects not just movements in the market itself, but changes to the yardstick being used to measure market movements.

Sources:
http://blogs.barrons.com/stockstowatchtoday/2013/09/23/dow-changes-costing-investors-as-goldman-sachs-visa-fall/
http://en.wikipedia.org/wiki/List_of_S%26P_500_companies

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

BEARISH THOUGHTS PERSIST IN A BULL MARKET

Today is Veterans Day - the day when we honor those who have served our nation in the armed forces. Today, we can think about the commitment these men and women have made and the courage inherent in that dedication. We can thank them for their service, knowing that they have risked much to perpetuate our freedom.


Thank a veteran on Veterans Day. Let them know that their honor, duty, and sacrifice are valued and remembered.

Bearish Thoughts Persist in a Bull Market

Are memories of the downturn hurting the financial potential of boomers?

At the end of October, the S&P 500 was up 24.39% in the past 12 months. What investor wouldn't want gains like that? As uplifting as that market advance was for many, some baby boomers missed out on it. They were simply too afraid to get back into stocks - they couldn't dispense with their memories of 2008.1


Would most boomers take a 4% return instead? Earlier this year, the multinational investment firm Allianz surveyed Americans with more than $200,000 in investable assets. Allianz found that for most of these people, protecting retirement savings was financial priority number one. Aversion to risk ran high: 76% of the respondents said that they would prefer an investment vehicle that offered a 4% return with no chance of loss of principal over an investment that offered an 8% return without principal protection.2

In the equity markets, risk and reward are not easily divorced. They come together in an imperfect marriage, a problematic one - but it is one you may need to put up with these days if you are seeking decent yields. With interest rates so minimal, fixed-rate, risk-averse investing can put you at a disadvantage even against mild inflation. If you turn your back on equity investing right now, you could find yourself thwarting your retirement savings potential.

Psychology froze some boomers out of the Wall Street rebound. The awful stock market slide of 2008-09 left many midlife investors skittish about stocks. As Wall Street history goes, that was an extraordinary, aberrational stretch of market behavior. These events, and the fears that followed, may have scared certain investors away from stocks for years to come.

What price risk aversion? At the end of the third quarter, more than $8 trillion was sitting in U.S. money market accounts, doing basically nothing. It wasn't being lost, but it sure wasn't returning much. In the Allianz survey, 80% of baby boomers polled viewed the stock market as volatile; 38% said that volatility was prompting them to keep some or all of their cash on the sidelines.2,3

While all that money isn't being exposed to risk, it is also bringing investors meager rewards.

Consider the psychology of our society for a moment. Generation after generation is told to save and invest for future objectives, most prominently a comfortable retirement. That need, that purpose, is not going away. As long as that societal need is in place, people are likely predisposed to believe in the potential of equity investing. So there is a collective American psychology - as yet unshaken - that the stock market is a strong option for investing, making money, and building wealth. (The same unshaken assumption remains in the housing market, even after everything homeowners have been through.)

That powerful collective psychology has contributed to the longevity of bull markets - and it isn't going away. We had the bulk of the federal government shut down for 16 days last month, and yet the S&P 500 gained 4.46% in October. After 10 months of 2013, the index was up 23.16% YTD - and this is a year that has brought fears of a conflagration in the Middle East, the threat of a U.S. credit rating downgrade and a "fiscal cliff," sequester cuts, a banking crisis in Cyprus that scared the international financial community, and continued high unemployment. Stocks have vaulted past all of it.1

Consider the view from this wide historical window: in the last 10 years, the S&P 500 has averaged better than a 7% annual return, even with its appalling 47% drop from October 2007 to March 2009. Since 1926, the S&P has a) had 23 years where it returned 10% or better, b) never gone negative over a 20-year period, and c) advanced 8 to 10% a year on average.3

If you bought and held, congratulations. If you opted for tactical asset allocation during the downturn, facing that risk paid off. The point is: you stayed in the market. You didn't cash out in late 2008 or early 2009 and decide to buy back at the top (as some bearish investors have recently done).

It isn't time to throw caution to the wind.The Federal Reserve is not going to keep easing forever; QE3 will eventually end, perhaps early in 2014. When it does, Wall Street will react. The market may price it in, or we may see something worse happen.When you look at all the hurdles this bull market has overcome in the past few years, however, you have to think there is at least a bit more upside to come. Wall Street is optimistic and the performance of stocks certainly demonstrates that optimism, even as bearish thoughts persist.

Citations.
1 - money.cnn.com/data/markets/sandp/ [10/31/13]
2 - foxbusiness.com/personal-finance/2013/10/24/wall-streets-rallying-so-why-are-boomers-so-scared/ [10/24/13]
3 - business.time.com/2013/09/27/seeking-shelter-from-stock-swings-savers-take-on-a-different-kind-of-risk/ [9/27/13]

Sincerely,

William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

A NOBEL PRIZE IN PROGNOSTICATION?

Yale economics professor Robert Shiller won the Nobel Prize in Economics this year, thrusting him into the spotlight of the mainstream media, and also making millions of investors aware that he has been predicting, for the past several decades, that housing and stock prices are due for a fall. Financial advisors everywhere are fielding different versions of the same question from their nervous clients: If a brainiac like Shiller sees a stock market downturn in our future, then shouldn't we all be selling stocks and hiding our money in our mattresses until the bear market blows over?


Prof. Shiller's newfound fame offers a great opportunity to discuss one of the biggest challenges we face as professional investors. Few people who are not in the business can understand how difficult it is to know the future, and especially how hard it is to move into and out of the investment markets, avoiding downturns and catching market updrafts.

Let's start by looking at the case Prof. Shiller has been making about the investment markets. One of his innovations is to update the standard price/earnings (PE) ratio--which, as the name implies, divides the total price of all the shares of a given stock by the company's total earnings. The higher the PE, the more you are paying for a dollar of earnings. A PE of 8 means it costs $8 to buy a dollar of corporate earnings. A PE of 25 means it costs $25 to buy that same dollar of earnings. In general, cheaper is better; that is, a lower PE implies higher future returns over the next 10-20 years.

This sounds straightforward, but the question is: what earnings measure should you use? The past four quarters (which gives you the trailing PE), or the estimate of earnings for the next four quarters (the forward PE)? Company earnings jump around unpredictably, in part because of one-time writeoffs, making a stock seem expensive one quarter and cheap the next. So Prof. Shiller proposed that we measure the relative cost of stock market shares using the CAPE--the "Cyclically-Adjusted Price/Earnings Ratio"--which basically means using the 10-year moving average of earnings for each company over the past 10 years. This is also called the P/E 10.

Prof. Shiller's P/E 10 is currently at or around 25, which is well above the long-term average of 15.89. This is also above the trailing 12-month P/E ratio of 19.89. So stocks are overvalued and due for a fall. Right?

Well... The problem is that other brainiacs have different opinions about the market. At the same time the mainstream media was discovering Prof. Shiller, Leon Cooperman, chairman and CEO of Omega Advisors (one of the largest and most successful hedge funds on the planet) was telling reporters that the market is reasonably valued, and he doesn't see a bear market anytime soon. He noted that China's economy is improving, Europe is recovering, and the U.S. economic growth is slow but steady. What is going to trigger panic selling?

Meanwhile, it is helpful to remember that at the beginning of 2012, most market pundits seemed to agree that the long bull market that started in March of 2009 was over. Peter Boockvar, a technical analyst, described the market as "overbought." Ken Tower, at Quantitative Analysis Service, said that he was leaning more on the side of concern about risk than about generating profits.

And consider the advice of Paul Franke of the Smarter Investing website at the beginning of 2013: "Statistically, our research shows that the American stock market is extremely overvalued." He compared stock market conditions at the start of this year to 1929 (before the crash), 1999-2000 (before the "tech wreck" downturn) and 2006-2007 (before the Great Recession).

Should we have jumped out of stocks at the beginning of 2012? If we had, we would have missed a 15.83% total return on the S&P 500. Should we have abandoned stocks at the start of 2013? If we had, we would have missed out on the 23.52% returns year-to-date. And it is worth remembering that taking Prof. Shiller's advice would have had us out of stocks for most of the recent bull market and, indeed, mostly out of stocks for as long as many of us have been investing. Prof. Jeremy Siegel of the Wharton School has pointed out that the PE-10 ratio has been above its long-term average for the past 22 years, with the exception of nine months, mostly concentrated in late 2008 and early 2009.

But the most interesting fact of all may be that Prof. Shiller shared his Nobel prize with Eugene Fama and Lars Peter Hansen of the University of Chicago. Prof. Fama has argued that stock prices are always fairly valued, because they incorporate all available information known to investors at the time. Prof. Hansen won his prize for testing rational expectations models--which basically are derived from the efficient markets model which Prof. Fama embraces. In a recent editorial in the New York Times, Prof. Shiller acknowledged that he and his co-Nobel laureates disagree on many points about market valuations.

When so many smart commentators are telling us different things about the future, who should we listen to? The truth is, no matter how smart (or dumb) any of us happens to be, none of us can see into the future. The gift of intelligence is not the gift of foresight. If we followed the advice of every really smart analyst that we read, we would be pulled in every direction at once--and that would be the worst thing possible for you and your hard-earned dollars at work.

Sources:
http://www.marketwatch.com/story/is-the-stock-market-overvalued-or-not-2013-10-24
http://www.cnbc.com/id/101112587
http://news.yahoo.com/no-october-jinx-time-stock-market-205743884--finance.html
http://blogs.marketwatch.com/thetell/2012/01/23/are-stocks-overvalued/
http://investing.covestor.com/2013/02/warning-the-stock-market-is-overvalued-and-may-fall-10-in-2013
http://www.ft.com/cms/s/0/496a3844-0013-11e3-9c40-00144feab7de.html#axzz2jSaXiEbl
http://www.nytimes.com/2013/10/27/business/sharing-nobel-honors-and-agreeing-to-disagree.html

Sincerely,

William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

WHAT'S NEXT IN THE DEBT CEILING DEBATE?

Implications for the short term & the long term.

In January, will the federal government be shuttered again? At first thought, it seems inconceivable that Congress would want to go through another protracted fight like the one that shut things down for 16 days in October. That could occur, however, if a new budget panel doesn't meet its deadline.

Once more, the clock is ticking. By December 13, a group of 30 senators and representatives have to hammer out a bipartisan budget agreement. It must a) reconcile the markedly different House and Senate FY 2014 budget plans passed earlier in 2013, and b) map out a longer-term plan to shrink the federal deficit. If a) doesn't happen, then the country will be threatened with another federal shutdown on January 15. If b) doesn't happen, then another round of sequester cuts from the 2011 Budget Control Act will be initiated as of that same date.1,2,3,4

Does this seem like déjà vu? It does among many political and economic analysts, who fear a repeat of the supercommittee debacle of 2011, when a bicameral, bipartisan group of 12 Capitol Hill legislators just gave up trying to find a way to shave $2 trillion from the deficits projected for the next decade.4

This new committee is bigger, and like the supercommittee, its leaders are far apart politically. Sen. Patty Murray (D-WA) and Rep. Paul Ryan (R-WI) are the budget chairs of their respective chambers of Congress. The key difference lies in the modesty of its ambition. On October 18, Murray told Bloomberg that the committee would aim for "a budget path for this Congress in the next year or two, or further if we can" rather than a "grand bargain" across the next 10 years.1,3

Will they manage that? Some observers aren't sure. Murray co-chaired the failed supercommittee of 2011, and while Ryan was quiet during the fall budget fight, he recently authored an op-ed piece for the Wall Street Journal reiterating his controversial ideas to slash the deficit by reforming entitlement programs. Still, Sen. Lindsey Graham (R-SC) told Bloomberg that "there's a real desire to take another effort, not at a grand bargain, but at a sequestration replacement," and Sen. Jeff Sessions (R-AL) commented that "we don't want to raise expectations above reality, but I think there's some things we could do."1,3,5

Leaders from of both parties maintain there will be no shutdown in January. Senate Minority Leader Mitch McConnell (R-KY) stated that a shutdown is "off the table" this winter. On CNN's State of the Union, Sen. John McCain (R-AZ) warned that the public would not tolerate "another repetition of this disaster"; on ABC's This Week, House Minority Leader Nancy Pelosi (D-CA) said she sympathized with the public's "disgust at what happened." These comments do not necessarily imply expedient negotiations ahead.3,6

The short-term fix didn't fix everything. As a FY 2014 budget hasn't yet been agreed upon, the Treasury is still relying on stopgap funding to keep the federal government running through January 15 and "extraordinary measures" to raise the federal debt limit through February 7.2

The long-term outlook for America's credit rating didn't really change. Fitch put its outlook for the U.S. on "negative" and warned of a potential downgrade; Dagong, the major Chinese credit ratings agency, actually downgraded the U.S. from A to A-. Even so, S&P and Moody's didn't take action as a result of October's shutdown; while S&P thinks the shutdown will cut 0.6% off of Q4 GDP, it still gives the U.S. an AA+ rating (downgraded from AAA in 2011).7,8

America lacks top-notch credit ratings, but few nations have them. In fact, only 11 countries possess the coveted AAA rating from S&P and Fitch plus the leading AAA rating from Moody's. If you look at S&P's ratings for the globe's ten largest economies, Germany is the only one with an AAA. China gets an AA- with a "stable" outlook and Japan has an AA- with a "negative" outlook. While Russia has the world's eighth biggest economy, Moody's, Fitch and S&P all rate it one grade above junk bond status.7

Is Wall Street all that worried about another shutdown? At the moment, no - because there are several reasons why the next debt debate could be less painful. As the goal appears to be a near-term bargain instead of a grand one, it may be more easily realized. If the newly appointed budget panel fails, the economy can probably weather $20 billion of 2014 sequester cuts. Also, many mid-term elections are scheduled for 2014; do congressional incumbents really want to damage their reputations further with another shameful stalemate?8

While confidence on Wall Street and Main Street would erode with a repeat shutdown, the Treasury might face a slightly easier challenge in January than it did in October. Sequester cuts would trim the already-shrinking federal deficit further in early 2014, conserving some federal money. As a Goldman Sachs research note just cited, Fannie Mae and Freddie Mac could also make their dividend payments to the Treasury early in Q1, which would also help.8

Global investors can't really back away from America. The dollar is still the world's reserve currency, and China owns about $1.3 trillion of our Treasuries. Those two facts alone should compel our legislators to work things out this winter, hopefully before the last minute.7

Citations.
1 - cnn.com/2013/10/17/politics/budget-talks-whats-next [10/17/13]
2 - csmonitor.com/USA/DC-Decoder/2013/1017/A-new-shutdown-clock-is-ticking.-Can-Washington-avoid-a-rerun-video [10/17/13]
3 - bloomberg.com/news/2013-10-18/obama-s-goal-of-grand-budget-deal-elusive-as-talks-begin.html [10/18/13]
4 - tinyurl.com/lchxblz [10/18/13]
5 - cnn.com/2013/10/09/politics/shutdown-ryan/ [10/9/13]
6 - tinyurl.com/lbp8cxn [10/20/13]
7  - globalpost.com/dispatch/news/regions/americas/united-states/131018/credit-rating-debt-explained [10/20/13]
8 - cbsnews.com/8301-505123_162-57608220/5-reasons-wall-street-thinks-the-next-fiscal-feud-will-fizzle/ [10/19/13]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

A SHORT-TERM DEAL ENDS THE SHUTDOWN

The fix is merely short-term, but it is certainly welcome.

At the eleventh hour, a default is averted. After weeks of contention, a bill to reopen the bulk of the federal government and raise the debt ceiling made its way to the White House late Wednesday. President Obama signed the bill into law shortly after midnight, and by the middle of Thursday's trading day, both the S&P 500 and the Russell 2000 had reached all-time highs.1,2

In a sense, Congress merely kicked the can down the road. Capitol Hill lawmakers passed a stopgap deal to fund the federal government through January 15 and extend America's borrowing authority through February 7. A bipartisan negotiating committee will face a December 13 deadline to create a federal spending and tax blueprint for the next ten years.1

Asked Wednesday night if another shutdown would occur in the coming months, President Obama emphatically told a reporter: "No." On October 17, Senate Minority Leader Mitch McConnell (R-KY) told the conservative National Review that "a government shutdown is off the table" this winter.1,3

The deal resulted in just one alteration to health care reforms. The Affordable Care Act emerged from this battle relatively unscathed. People who receive federal subsidies for their health insurance under the ACA will face a new income verification test, but the subsidies will remain in place. House Republicans had demanded a 2-year delay for the 2.3% tax on medical devices stemming from the ACA, but that effort was set aside Tuesday. Congressional Democrats had argued for a 1-year delay in the $63 per-person "reinsurance" fee slated to hit group health plans in 2014; they didn't get it.4,5,6

Retroactive pay is coming for furloughed federal workers. All federal employees sent home as a result of the shutdown are slated to receive delayed salary payments "as soon as practicable."7

The budget cuts passed into law in 2011 remain in place. The $1.2 trillion in automatic federal spending cuts scheduled through 2021 will still be carried out, as mandated by the Budget Control Act of 2011 that brought an end to that summer's debt ceiling fight. The 2013 sequester cuts represented the first step in this reduction of federal spending.4,8

A short-term fix is better than none at all. You could argue that this deal simply postpones a solution in favor of a short-term truce on Capitol Hill. Even so, it beats the potentially catastrophic alternative of a U.S. default. Wall Street will now wait to see if Congress can provide a gift for the holidays - a larger-scale solution to trim future deficits.

Citations.
1 - chicagotribune.com/news/chi-government-shutdown-20131017,0,1184326.story [10/17/13]
2 - tinyurl.com/ljh5xhl [10/17/13]
3 - blogs.marketwatch.com/capitolreport/2013/10/17/mitch-mcconnell-says-another-shutdown-is-off-the-table/ [10/17/13]
4 - tinyurl.com/m94pmd5 [10/16/13]
5 - tinyurl.com/lsp6gkg [10/16/13]
6 - washingtonpost.com/blogs/wonkblog/wp/2013/10/15/delaying-obamacares-reinsurance-fee-would-be-a-win-for-insurers/ [10/15/13]
7 - foxnews.com/politics/2013/10/16/senate-budget-deal-provides-back-pay-for-furloughed-federal-workers/ [10/16/13]
8 - washingtonpost.com/blogs/wonkblog/wp/2012/09/14/the-sequester-explained/ [9/14/13]

Sincerely,

William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.