Q1/2008 Market Review ~ Independence Day 2008: April 23rd!
April 11, 2008
Welcome to the Kalorama Wealth Strategies Quarterly Market Review. These
quarterly briefs update the performance of the financial markets and provide
commentary on topics affecting investments.
Stocks were pummeled in the first quarter as companies revealed their exposure
to the turmoil in credit markets. Investor anxiety about a slowing economy and
weak housing, employment, and corporate profits also continued to weigh on stock
prices. The widespread sell-off left all indexes in the red, with Domestic Large
Growth, Domestic Small Growth, and International Emerging Markets all posting
double-digit declines. The best thing to happen to the first quarter was that it
came to an end, providing for the first day of the second quarter and a rebound
in most stock indexes of more than 3%.
The Federal Reserve continued to take extraordinary actions during the quarter
to free up the gridlock in credit markets and prevent an unraveling of the
financial system. In addition to cutting the Fed Funds rate three times by a
total of 2.0% to 2.25%, in what has been characterized as the biggest expansion
of Federal Reserve lending since the 1930s, the Fed created a $200 billion
lending program for commercial banks and an auction program of an equal amount
for investment banks. This was followed by the unprecedented step of opening its
discount window to investment banks (also known as "securities dealers" or
"primary brokers") to provide short-term loans in exchange for assets in which
the credit market is not functioning.
The Fed also agreed to guarantee certain assets in connection with JPMorgan
Chase's "purchase" of highly-leveraged Bear Stearns. Further, they extended
agreements with other central banks which allow them to borrow dollars from the
Fed to inject money into their financial systems.
Meanwhile, lower interest rates sent the yield on the 10-year Treasury Note
below 3.40% during the quarter and at quarter-end the yield was 60 basis points
lower to close at 3.42% (the yield as of April 10th was 3.54%). Consistent with
lower yields and a weaker dollar, bond prices strengthened. Global Aggregate
jumped 6.6%, U.S. Aggregate gained 2.2%, and International Emerging Markets
crept up 0.2%. U.S. Corporate High Yield acquiesced to the credit-market turmoil
by unloading 3.0%.
Consistent with Kalorama's globally-diversified investment strategy, beginning
with this newsletter, the FTSE EPRA/NAREIT Global Real Estate Index will replace
the domestic-focused Dow Jones Wilshire REIT Index for the returns of the real
estate asset class. In addition to representing the returns of stocks worldwide,
the global index includes real estate companies which are not structured as
REITs. Demonstrating the benefits of diversification, for the 10-year period
ending December 31, 2007, the compound annual return for the broad-based global
index was 12.8%, compared with 11.1% for the REIT- focused domestic index. Over
the same period, the volatility of the global index (as measured by standard
deviation) was lower at 18.7% versus 19.9% for the domestic index.
Another change includes the addition of the Lehman Brothers U.S. Treasury TIPs
Index, representing the returns of treasury inflation-protected securities (TIPs).
Initially issued by the U.S. Treasury in January 1997, these bonds have become a
separate asset class in many investors' portfolios. The unique feature of TIPs
is that they offer protection from inflation by adjusting the underlying
principal and coupon payments to compensate for inflation as measured by the
consumer price index (CPI).
Below are rates of return for selected market indices for the first quarter of
2008, full-year 2007, and the three, five, and 10-year compound annual returns
as of December 31, 2007.
Independence Day 2008: April 23rd!
In the spirit of the tax-filing season, happy Independence Day! What, you may
ask, it's a little early for Independence Day?! No, not that Independence Day,
the day we Americans celebrate our freedom from England -- Tax Freedom Day, a
celebration of the day on which Americans have earned enough money to pay all
their federal, state, and local taxes for the year.
According to the Tax Foundation (www.taxfoundation.org/taxfreedomday/), for
2008, Tax Freedom Day will fall on April 23rd, three days earlier than in 2007.
Using the latest government data on income and taxes, the Tax Foundation's
annual calculation attributes the earlier celebration to stimulus rebates and a
projection of slow growth.
Based on total tax collections and total income, taxes are projected to amount
to nearly 31% of income, and the 113 days from January 1st to April 23rd is 31%
of the year. The 31% is comprised of 20% federal taxes and 11% state and local
taxes. Compared with the 74 days required to pay federal taxes and the 39 more
days to pay state and local taxes, housing requires 60 days of work, health and
medical care 50 days, food 35 days, transportation 29 days, recreation 21 days,
and clothing 13 days.
In the Washington Metro Area, if the District of Columbia was a state, its May
3rd Tax Freedom Day would fall between California (April 30) and New York (May
5). The only other states which have to wait until May to celebrate are New
Jersey (May 7) and Connecticut (May 8). Maryland is ranked 7th worst (April 28)
and Virginia is 12th (April 25). Although the states with late Tax Freedom Days
have high state and local taxes, the primary reason is the progressive nature of
federal income taxes. Residents of these states tend to have higher-paying jobs
and earn enough to pay income tax at the highest federal income tax rates
(currently 25%, 28%, 33% and 35% versus 10% and 15% for the lowest tax
Some other interesting tax tidbits from the Tax Foundation:
The mortgage interest deduction was first permitted in 1894. In fact, when the
first modern federal income tax was created in 1894, all forms of interest were
deductible. However, the Supreme Court ruled the tax to be unconstitutional, so
it wasn't until 1913 that the Constitution was amended and federal taxes as we
know them today were enacted. Tax Freedom Day in 1913 was January 19th and taxes
as a percentage of income were 5.2%. It wasn't until 1941 that taxes as a
percentage of income exceeded 20%.
The Alternative Minimum Tax (AMT), a parallel federal tax system designed to
ensure that high-income people with many deductions pay at least some tax,
actually began as a 10 percent "minimum tax" in 1969, and wasn't fully replaced
by the current "alternative minimum tax" until 1982. The minimum tax was
originally created in 1969 after Congress was surprised to learn that 155
wealthy individuals were not paying tax because they used too many of the
deductions Congress enacted. Because the AMT exemptions were not indexed for
inflation, the tax has been capturing a rapidly increasing portion of taxpayers.
If the exemptions are not adjusted for 2008, an estimated 26 million people will
be caught by the AMT, up from about four million for 2006 and 2007.
The year 1969 is also notable for being the first year taxes as a percentage of
income rose above 30%. The April 23rd Tax Freedom Day was the same as it is for
The Tax Reform Act of 1986 was celebrated for being the broadest revision of the
federal income tax since its inception. It was intended to simplify the tax code
by minimizing tax breaks and lowering rates. However, Congress has since passed
thousands of changes, many of which reinstate tax loopholes eliminated by the
Act. According to tax publisher CCH, based on its Standard Federal Tax Reporter,
the number of pages including the tax code, regulations, and IRS rulings has
swelled from 26,300 in 1984 to more than 67,500 in 2008.
In 1986, Tax Freedom Day was April 19th and taxes as a percent of income were
29.7%. The proportion rose above 30% in 1987 and peaked out at 33.6% in 2000 as
a result of increased tax collections attributed to previous years' economic
growth and soaring stock prices. The recent bottom was 29% in 2003 after the
2001 and 2003 tax cuts. The higher percentage for 2008 is a result of escalating
And so we all don't go away from this article completely jaded about paying
taxes, according to an IRS Oversight Board 2007 Taxpayer Attitude Survey, a
majority of taxpayers "tell the truth and nothing but the truth." When asked:
"how much do you think is an acceptable amount to cheat on your income taxes?",
a whopping 84% of respondents answered "not at all," 8% "a little here and
there," and 5% "as much as possible" (percentages do not add up to 100% as the
balance either said they don't know or didn't respond). The question remains:
how many of the survey respondents answered truthfully?
Thank you for your business, trust, and referrals. Please feel free to forward
this email to friends and colleagues who can benefit from information about
investing and financial planning. If I can be of any assistance to you or anyone
you know, please do not hesitate to contact me.
P.S. - For more information, please visit our web site at
David M. Taube, CPA, CFA, CFP®, CRI
Founder and President
Kalorama Wealth Strategies
Investment advice offered through Medallion Advisory Services, LLC*, Registered
Investment Adviser. *Wholly owned subsidiary of TMG Holding Company, Inc. T/A
The Medallion Group. Kalorama Wealth Strategies and TMG Holding Company are not
Logo: Kalorama in Greek means "beautiful view." Through our planning process,
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