Zach Tripp's  Instablog

I'm a little late in publishing the Q3 results, so I am going to include them in my blog here on Seeking Alpha.

This year I decided to participate in a contest among bloggers with financial-focused websites. The rules are simple:

• Four stocks picked at the beginning of the year
• No trading allowed (buy and hold)
• Canadian or USA stocks
• Dividends count in end-of-year yield calculation

Since I do not promote individual stocks on my blog, I chose a diversified ETF portfolio instead. My choices were

• WisdomTree Dividend ex-Financials Fund (DTN)
• Vanguard REIT Index Fund ETF Shares (VNQ)
• ETRACS Linked to the Wells Fargo Business Development Company Index (BDCS)
• PowerShares DB Energy Fund (DBE)

For a benchmark, I am using Vanguard's S&P 500 ETF (VOO).

• My logic for this selection of ETFs can be found here.
• First-quarter results can be found here.
• Second-quarter results can be found here.

Here is a summary of the 2012 Q3 (ending Sept. 28, 2012) and YTD results. All results include reinvested dividends but exclude trading costs and taxes.

Good news: My portfolio performed as well as the S&P 500 during the third quarter, mostly because of DBE, which was at its yearly low right at the end of Q2. DBE is just barely positive for the year.

Also, my portfolio is outperforming 8 of 10 contestants so far (Q3 results found here).

Year to date, the inflation component of my portfolio is the weakest component, so let's see how other inflation hedges would have performed. My inflation hedge is a very narrow aspect of inflation. For energy prices to increase, either geopolitical tensions need to increase or a robust economy needs to drive demand. Neither has happened so far.

(click to enlarge)

Gold (GLD) has been a roller coaster this year. GLD pays no dividend. The Federal Reserve continues with its money printing; therefore, the price of gold should have some solid support. I am nervous that gold prices are more of a trading vehicle now with the inventions of ETFs and, therefore, will not act as it has in the past.

A broad, generic inflation hedge such the as U.S. Treasury Inflation Protected Securities (TIP) would have been a safer bet for this type of portfolio. If I had used TIP as opposed to DBE, TIP would have been up 6.06% as opposed to 1.61% for DBE. TIP would have brought my entire portfolio to a gain of 14.23%, almost on par with the S&P 500.

Monday, December 31, 2012, marks the last day of trading, so it will be only a matter of time till we can see what this portfolio returns for the year.

Disclosure: I am long TIP, VNQ, BDCS, DTN, DJP, VOO, SGOL.

The 2012 election is over. The market (and the economy) has one less uncertainty to worry about. In response, the market dropped 2.2% from its close on Nov. 6, 2012 (as measured by SPY). The media claims this drop is due to the fiscal cliff and weakening economy in Europe, neither of which is new information. Everyone agrees we need to fix the fiscal cliff; our country needs real tax reform, which Congress needs time to figure-out, like a year. What to do about the fiscal cliff in the meantime? I think the revenue/tax side should be the easiest to get an agreement on.

Kicking the can down the road is an option. I believe neither side of the aisle is willing to hold their noses and pass the status quo or only a tax increase on the wealthy. The first sign of leadership from Washington has come from Speaker of the House Representative John A. Boehner (R - OH), who agreed to accept some additional revenues for a cleaner tax code (link). Since I believe the true solution is complex and requires significant time to iron out the proper details, I would like to propose an interim fix to bridge the gap between the cliff and the solution.

The win-win interim fix needs to have a little for everyone, including a stimulating aspect. In order to get revenue to the levels everyone would like, we need a growing economy. Tax increases and spending cuts will not stimulate economy. The Federal Reserve cannot be expected to do all of the heavy lifting.

Stimulus

• Extend the Corporate R&D tax credit for two years (CY2013 and CY2014).
• Extend Bonus Depreciation and 100 Percent Expensing (CY2013 and CY2014).

Both will encourage companies to use money sitting on the balance sheet. If put in effect for two years, it will reduce some uncertainty in regard to what the final fiscal resolution may be.

Stimulus and Revenue

• Reduce the Repatriation tax to 5% for four years (CY2013, CY2014, CY2015 and CY2016).

Currently, that money is sitting overseas and produces no revenue for the federal government. Any increase in repatriation would be an increase in revenue (link, link). It is estimated U.S. companies have $1-trillion overseas. If 60% comes back home at 5%, that would $60-Billion increase in revenue. Some would say this would "cost" the government money because of the lower rate. This is not true. Currently, there is no revenue at the higher rate. If there is $60-Billion at a lower rate, this costs the government nothing. Bringing that money back home will allow corporations to reinvest here. An interesting compromise may be the Foreign Earnings Reinvestment Act introduced in 2011 (link). Combining the repatriation with the bonus depreciation and 100% expensing could give this economy the kick in the pants it needs.

Revenue

I will use the married, filing jointly tax brackets for this discussion.

Step 1: Let the individual payroll tax holiday expire. Reducing the revenue for entitlements is not a wise idea. Replace it with a marginal tax rate cut of two percentage points for the $16,500-$65,500 bracket (15% to 13%). Granted, a good number of the tax payers in this bracket don't pay federal income taxes.

Step 2: Keep all rates the same (including dividends, short-term and long-term capital gains) for all tax brackets below $385,000.

Step 3: Add two new brackets: (1) $385,000 to $1,000,000 and (2) $1,000,000+.

Step 4: For the $385,000 to $1,000,000 bracket, eliminate the mortgage deduction tax credit. Increase the dividend and short-term capital gain rate to 20%. Keep all other tax rates the same. This should help the revenue side of the equation without hurting small business owners too much.

Step 5: For the $1,000,000 bracket, keep the marginal earned income tax rate the same, but eliminate pre-tax payment of medical insurance and eliminate these popular deductions: mortgage interest, residence interest, passive interest, business interest, income taxes paid, real estate taxes paid, rental expense, gambling lost, childcare tax credit, medical and dental expenses. Finally, for the $1,000,00 bracket, keep long-term capital gain tax low (15%) and increase short-term capital and dividend/interest income to 25%. These changes may actually result in a higher tax payment for this bracket than just increasing the rate back to 39.5%. Since taxes are a form of penalty, this tax bracket will be penalized for earned income and rewarded for dividend and capital gains income, which, in theory, should encourage investment and CEO/CFO level compensation in the form of dividends.

The above deductions alone could raise as much as $30-Billion in one year according to U.S. Tom Coburn, M.D. (R-OK) report, "Subsidies of the Rich and Famous, Nov. 2011" (link). During the 2011 debt-ceiling talks, President Obama wanted approx. $800-billion in new revenue (link) over 10 years. This $30-billion from deduction elimination is 37.5% of the way there.

Revenue (misc.)

Per U.S. Senator Tom Coburn, M.D. (R-OK) oversight report, "Wastebook 2012" (link), eliminate the non-profit loophole used by the NFL, NHL and the PGA (estimated at $91-million in revenue).

Spending

Spending cuts, like it or not, would also hurt this economy. Ideally, spending cut would occur during rapid growth period and spending would be controlled from that point forward.

We are just finishing the first quarter of FY13 for the federal government. Congress should include a rough budget that caps the remaining FY13 spending at FY11 levels or less (excluding Health, Medicare, Income Security, Social Security, Veteran benefits and Net Interest).

In FY2011, the federal government spent $1,144,928,000,000 (excluding Health, Medicare, Income Security, Social Security). In FY2013, the federal government is "budgeted" to spend $1,158,244,000,000 (excluding Health, Medicare, Income Security, Social Security). If we remove Veteran benefits, reducing the FY2013 budget to FY2011 will reduce spending by $13,315,987,072, a small drop in the hat compared to the $190 Billion/year that is currently scheduled.

I would challenge Congress to complete only two tasks between January-2013 and September-2013; (1) Comprehensive, Pro-growth, Internationally Competitive Tax Reform and (2) Balance Budget for FY14, FY15 and FY16.

In conclusion, I believe the above plan is a reasonable bridge between the fiscal cliff and a true long-term solution. The republicans can keep the marginal rate essentially the same. President Obama can "get revenge" on the wealthy with an even more progressive tax code. Also, with a reduction in deductions and an increase in the dividend tax rate, Mr. Buffet should be paying more in taxes also, which should make him happy (link).

This solution, accompanied by reasonable spending cuts (like any of the items in the various "pork reports" available), could go a long way in restoring some trust and leadership in Washington.

Personally, I do not believe in the progressive tax system; it is, by nature, the opposite of fair and just. Unfortunately, I do not see Washington's feeling on a flat tax changing any time soon.

Review of current federal income tax situation. Who got what tax cuts? http://seekingalpha.com/instablog/620714-zach-tripp/1399361-the-truth-about-president-bush-s-tax-cuts

Disclosure: I am long VOO, DTN.

The Truth About Taxes and Why You Have to Verified Everything a Politician Says

(originally published Friday, March 27, 2009)

Here is a quote from President Obama's town hall speech at the Orange County Fair and Event Center in Costa Mesa, California (March 2009):

"…Let's talk tax policy for a second, because, again, some on the other side have said, oh, Obama, he's a tax-and-spend Democrat - tax and spend. Well, it turns out, yes. You know, what I've said is we should return to the tax rates that we had under Bill Clinton, which means - which means this: which means that for people who are making more than $250,000 a year, they would pay instead of 36 percent, they'd pay 39 percent. Like, a 3 percent increase on their tax rate."-President Barack H. Obama

So President Obama had a little mathematical error in this speech. He said that raising the taxes on the rich from 36% to 39% is only a 3% increase. Actually, it is an 8.3% increase (please see math example at the end of this article for more clarity). This has always rubbed me the wrong way and politicians do it all the time. During the campaign, President Obama made several mentions of the Bush tax cuts only benefiting the rich. Let's look at some numbers and see who got what tax cuts.

All numbers are for a married couple filing jointly.

Starting with 1992-2000 with President Clinton.

Q: Whom did President Clinton cut taxes for?
A: If we look at only married couples filing jointly, he cut taxes for couples making between $16,500 and $44,500 (under $16,500 DID NOT get a tax cut).

Q: Whom did President Clinton raise taxes on?
A: Couples making $162,000 or more.

Percentage increases/(decreases):

$0 - $16,500:……………………………….0% [stays at 15%]
$16,500 - $37,000:……………………….(46.4%) [28% to 15%]
$37,000 - $44,500:……………………….(46.4%) [28% to 15%]
$44,500 - $65,500:……………………….0% [stays at 28%]
$65,500 - $86,000:……………………….0% [stays at 28%]
$86,000 - $106,500:……………………..0% [stays at 31%]
$106,500 - $132,000:……………………0% [stays at 31%]
$132,000 - $162,000:……………………0% [stays at 31%]
$162,000 - $205,000:……………………16.1% [31% to 36%]
$205,000 - $288,000:……………………16.1% [31% to 36%]
$288,000 - $358,500:……………………27.4% [31% to 39.5%] {Oops, President Obama forgot the 0.5%}
$385,000+:………………………………….27.4% [31% to 39.5%]

2000 - 2008 with President Bush.

Q: Whom did President Bush cut taxes for?
A: Everyone except couples making between $16,500 and $44,500.

Q: Whom did President Bush raise taxes on?
A: No one.

$0 - $16,500:……………………………….(33%) [15% to 10%]
$16,500 - $37,000:……………………….0% [stays at 15%]
$37,000 - $44,500:……………………….0% [stays at 15%]
$44,500 - $65,500:……………………….(46.4%) [28% to 15%]
$65,500 - $86,000:……………………….(10.7%) [28% to 25%]
$86,000 - $106,500:……………………..(19.4%) [31% to 25%]
$106,500 - $132,000:……………………(19.4%) [31% to 25%]
$132,000 - $162,000:……………………(9.7%) [31% to 28%]
$162,000 - $205,000:……………………(22.2%) [36% to 28%]
$205,000 - $288,000:……………………(8.3%) [36% to 33%] {Oops, married couples making $250k are at 33%, not 36%.}
$288,000 - $358,500:……………………(16.5%) [39.5% to 33%] $385,000+:………………………………….(11.4%) [39.5% to 35%]

What did we learn?

1.President Obama is misleading the public with his current stump speech on taxes, which is a shame. I find it hard to believe he does not know what the current rate actually is or what the real rate was under President Clinton. Also, I am pretty sure President Obama knows how to use percentages, so it is disheartening to see him misrepresent the actual percentages.
2.If President Obama changes the tax rate for married couples making over $250,000 back to the rate during the 1990's (39.5% since $250,000 is not the start or end of an actual tax bracket currently), then the rate would change from 33% to 39.5%, a 19.7% increase.
3.Even after President Bush cut the taxes on the rich, his tax rates were still higher than the tax rate when President Clinton took office in 1992, so the tax cut was not that deep.
4. Under President Clinton, if you had two teachers making $45,000 each, they did not get any tax cuts. Under President Bush, they got a 24% tax cut.
5.Just about everyone got tax cuts under President Bush. Couples making less than $16,500 were essentially removed from the tax rolls (after standard deductions, their taxes essentially go to zero percent).
6.Under President Bush, the 4 largest percent tax cuts were all under $205,000.

Math Example

Let's use the raise in the tax rate from 33% to 39.5% as an example. Going from 33% to 39.5% is a 6.5 percentage point change. This is not the percent increase. 6.5% is 19.7% of 33%. Another way of thinking about it. Lets say you make $100,000 and your tax rate is 33%. Your taxes would be $33,000. If your tax rate was raised to 39.5%, then your taxes would be $39,500. Your taxes increased by $6,500 ($39,5000 - $33,000). $6,5000 is 19.7% of $33,000. Therefore, you are paying 19.7% more.

(click to enlarge)

1992, 2000 & 2008 Tax Rates

Link to President Obama's speech: http://latimesblogs.latimes.com/washington/2009/03/obama-text.html

Historical Tax Rates: http://www.taxfoundation.org/files/federalindividualratehistory-20090102.swf