Larry House's  Instablog

I hope this doesn't come across as unAmerican, but as the bonds mature in my Traditional IRA, I am withdrawing the funds to deposit in my brokerage cash account.  Why, you may ask? It all has to do with taxes.  My home state, Illinois, is talking about raising the state income tax from 3 to 4.5%.  Also, I believe in the not too distant future, Federal income taxes will be higher--not just for the rich, but for the little guy--me.  I think I can do better tax wise with the (current at least) advantages of long-term capital gains, which, I hope, to achieve in the cash account.  I will settle the tax consequences each year instead of later.  My income in the future will not be substantially lower than now, which offsets the usual banter that you can withdraw from the Traditional IRA later when you make less and are in a lower tax bracket.

I am NOT recommending this action to anyone else.  I do think it is something that should be considered with Traditional IRAs IF one thinks taxes will be higher in future years, and if other aspects of one's income and tax structure are favorable to it.

My Traditional IRA with an online account also had some limitations as to what I could purchase in the account.  I am getting out from under those limitations with this course of action as well.

This will be a gradual process that will take a few years, but I am moving my cash balance now, and as bonds mature, I will withdraw balances until the account is closed.

Another voice that I listen to when it comes to the markets is Doug Kass.  I respect Doug as a straight shooter.  He has credibility with me because he has skin in the game.  I like to hear what Doug has to say, and I add his opinions to the cerebral mix with which I deal.  I keep up with Doug's views online.  He is a frequent guest of Larry Kudlow on CNBC, but I can't stand to watch Kudlow, even to get to hear Doug.

Doug has posted his latest views on TheStreet.com, and I encourage the reading of his entire piece as I am just touching upon his highlights.  Doug speaks with a calm, knowledgeable voice, and he is using broad strokes in this piece to add his voice of reason to the cacophony of market pundits.

Doug says we have entered the lazy, hazy days of summer (my borrowing from Mr. Cole), and he thinks stocks will behave the same.  He thinks stocks will tread a narrow range (S&P 850-925) for the summer.  He doesn't see much in the way of trading opportunities right now.  He thinks Q2 earnings will be good enough to hold the market in his forecasted range.

Investors are bombarded by opinions, predictions, and advice from all sorts of "talking heads," "pundits," and "experts."  Investors must then go through a filtering process to determine which voices are worthy of attention and which should be routinely dismissed.  I have my own favorites that I think trustworthy, and some time I will share my whole list.  One voice that I heed whenever he speaks is Art Cashin of UBS, director of floor operations at the NYSE.  Art has been in this business a long time, approaching 40 years, and I see him as an unbiased observer who can be trusted.  That doesn't mean Art is always right, but I think he gives sound advice and is an independent voice.

Art said this morning on CNBC that he thinks the next few days will tell us a lot about the market.  He thinks we are currently on thin ice, and the earnings that start coming in today, along with the accompanying outlook for the next quarter or so, will tell us if we are to have a mild correction or a more profound pullback to perhaps the 800 level on the S&P.  Art thinks the size of a possible correction will be fairly clear by Friday, July 17th.  One thing about Art is he calls his shot, and he doesn't hedge in opaque language.  To me, Art's outlook makes a lot of sense, since this is a very crucial earnings season.  My take away from his comments is to just be patient for a few days; let the picture clear a little, and within the next two weeks, I may be putting on some trades or hiding in a cave for a while.

Art also made reference this morning to a 18-year cycle, which is usually divided into a good half and a bad half.  He pointed out that we had such a cycle from 1982 to 2000, and we have finished the first half, the good half, of the next cycle.  That is not real encouraging about the next nine years, but the market can have good rallies in such an environment.

Bill Gross, bond king at PIMCO, has published his July investment outlook.  It is somber reading for equity investors.

Gross opines that consumers are going through a generational change in spending and saving habits.  If that is so, he is in effect writing off the Boomer Generation, some 70 million consumers, as much less of a factor in the U.S. economy.  This has resulted due to the loss of trillions of dollars of personal wealth over the past two years.  Gross states that greed will return, but it will not come from the present generation.

Gross compares those addicted to equity gains over the past twenty years to  those with eating disorders.  Both are powerless to change the behavior that controls them.  Gross repeats what he has said before about stunted future economic growth (more like 2% per year as opposed to 3 1/2%).  This will result from the change in consumers and the higher personal and corporate taxes that are coming.  As a result, Gross sees more modest investment returns and says investors should not take on undue risk reaching for higher gains.  Gross suggests that attempts to regain the "old normal" will fail as we are headed, like it or not, for a "new normal" that cannot be avoided.

If economic conditions weren't enough (and they are) to cause investors to lose sleep, we now have the political influences with which to deal.  I contend that equity investors face a double whammy (economic conditions being the first) because government action is usually harmful to corporate well being.  We don't know what political actions lie ahead, and therefore, the investor is entering the game blind and susceptible.

New financial regulations are a case in point.  We have been given a broad overview of the new regulations.  Does anyone know the final specifics of these regulations? Does anyone know what impact the new regulations will have on  the earning power of financial institutions? Look at what has happened to GE the last couple of days.  It looks like GE Capital may be judged to have systemic importance in the financial system and will face new regulations that may affect the whole company.  The stock price reflects the joy (not) with which investors have received the news.  The new financial regulations are a black hole which cannot yet be plumbed.

The president has called for new taxes.  Does anyone know exactly how much and on whom? This is of concern to everyone.  Here in my infamous state of Illinois, our new governor (after we removed Blagojevich so he could try to become a celebrity) has proposed a 50% income tax increase.  You read that right--50%.  That would put the state at 4.5%.  Not only is Illinios not business friendly, it is fast becoming unfriendly to residents as well.   I don't think Obama's tax plan, when we get to see it, will be friendly to business or residents either.  Until we get the details, we just don't know what it will do to us.

Mohamed El-Erian of PIMCO and author of When Markets Collide, has offered his secular outlook for the next 3-5 years.  El-Erian, who gave us the term "new normal," gives his views of what that new stratus will be and how to invest in it.

El-Erian says we are entering the "new normal," and we will be in it for several years to come.  Some of the characteristics of this new era are slower growth worldwide (more so in the G-3 than in emerging markets), higher unemployment, more deleveraging, more regulation, and a weaker U.S. dollar.  He states that government interventions around the world may avoid a depression, but the actions will not be successful in returning economies to the high growth and low inflation of the past few years.

Of the banking system, El-Erian says it "will be a shadow of its former self," changed for years to come because the sector will be "de-risked, de-levered, and subject to greater burden of sharing."