December 2008

A Monthly Newsletter Source of Financial Sources

Don’t miss this month’s timely story ideas, direct dial phone numbers, and E-mail addresses of these accessible experts!

INVESTMENTS

• PMFM Managed Portfolio Trust (ETFFX) is a Top Performer of all U.S. Stock Funds

• President Elect Blesses Infrastructure Sector
A tsunami of new spending will likely create an earnings tailwind for the infrastructure sector decimated this year by the global slowdown. Markman

• Avoid the Temptation of Fleeing to U.S. Treasury Bills
Because of market uncertainties, some clients may well be tempted to dump all their equities and corporate bonds in exchange for the safety of U. S. Treasuries. McCoy

• Student Housing is Bright Spot in a Dreary Real Estate Investment Market
(But what's a good property and who's a good sponsor?)

ESTATE PLANNING/REAL ESTATE

• Paying Gift Taxes Now on Asset Transfers to Children Saves Big on Estate Taxes Later
What is clear is that taxable gifts to family and children will remain less than death taxes for the foreseeable future. Pearson

PERSONAL FINANCE

• Plans Go Terribly Wrong in Decision to Rent Rather than Sell
A couple wanted to move to be closer to aging parents, but decided to wait to get their price on house in deeply undervalued market, a decision that turned out to be emotionally and financially devastating. Arzaga

• It’s Not Just Love, But Legalities to be Considered Before Same Sex Couples Marry
If the marriage does not work out, they can't get divorced or have the civil union/domestic partnership dissolved if their state of residence never recognized it in the first place or if they are no longer living in the states that did.  A relationship contract before marriage is essential. Moore

TAXES

• Capturing Deductible Losses
Prior to year-end, it is important that your money manager make trades in your taxable accounts to capture deductible losses.

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INVESTMENTS

PMFM Managed Portfolio Trust (ETFFX) is a Top Performer of all U.S. Stock Funds

Retirees cannot live on "relative" returns.  Those who have seen devastation in their retirement accounts know the truth.  They cannot buy what they need with relative returns.  Absolute returns are what count.  The media and investment consultants consistently focus on how much less certain mutual funds may have lost than the S&P 500 Index, despite the fact these funds may be posting double digit negative returns that permanently damage investors’ future financial security.

As of December 5, 2008, the average U.S. stock mutual fund has declined an average of 43.05% over the last year (source: Morningstar). For the same period PMFM Managed Portfolio Trust (ETFFX) has experienced only a 5.32% decline (this number does not include a deduction for the Fund’s maximum sales charge of 5.75%). ETFFX’s performance record has placed it as the fifth best performer among U.S. stock funds for both year-to-date and one year period ended 12/05/08, according to Morningstar.   

Preservation of Capital

To illustrate the importance of preservation of capital, please consider that ETFFX would need to post approximately a 6% gain over the next twelve months in order to recover its 5.32% loss while an investor that has incurred losses similar to those of the average U.S. stock mutual fund (i.e. 43.05%) it will take approximately an 76% return for that investor to recover. As expected we are never satisfied with negative absolute returns, but during a year where the average U.S. stock fund is down 43.05% and fewer than 10 of 10,092 U.S. stock funds have losses of less than 10%, we believe the Fund’s conservative asset allocation strategy has held up quite well.

Bottom line, you can't eat relative returns. Retirees and others need to know about a mutual fund that is designed to protect assets during turbulent markets.  

For updated numbers through current month end please call (800) 222-7636 or visit www.pmfmfunds.com

*The Advisor has entered into Expense Limitation Agreements with the Funds under which it has agreed to waive or reduce its fees and to assume other expenses of a Fund, if necessary, in an amount that limits each Fund’s annual operating expenses to not more than 2.25% of the average daily net assets of the Core Advantage Fund and 1.70% of the average daily net assets of the Managed Fund for the fiscal year ending May 31, 2008 (exclusive of 12b-1 fees). As a result, the Net Expense Ratio will be limited to 1.87% for the Managed Fund for the fiscal year ending May 31, 2009. It is expected that the Expense Limitation Agreements will continue from year-to-year, provided continuance is approved by the Board of Trustees of the Funds.

President Elect Blesses Infrastructure Sector
A tsunami of new spending will likely create an earnings tailwind for the infrastructure sector decimated this year by the global slowdown.

The investment consequences of the impending changes in the country’s administration and political plans signaled last weekend by President Elect Obama to enact recovery programs to drag the country out of the 2008 market carnage points to one word – infrastructure.

Governments around the world are making plans to jumpstart their economies by throwing hundreds of billions of dollars at infrastructure projects. Add that to the probable spending in Asia, Europe and the U.S., an amount potentially in excess of $1 trillion over the next two years could be spent on infrastructure.   While one might debate the efficacy of these actions, one cannot question that this tsunami of new spending will likely create an earnings tailwind for a sector decimated this year due to concerns about the global slowdown.  A trillion dollars worth of new business coming literally ‘out of the blue,’ combined with enormously depressed valuations could set up a significant bull move in this sector.

Looking at the landscape objectively, questions remain unanswered in many investment sectors:

• Consumer discretionary: Who knows what shape the consumer will be in next year?  Recovering, or suffering even more?
  

• Financials: What will this sector look like when the dust settles?  What levels of profitability, what new levels of PE’s will be where we settle after it is all over?
  
  
• Technology: How much will the slowdown affect a sector that still has valuations that reflect strong growth prospects? Is the worst over, or still to come?
  
  
• Durable goods: Of course not!
  
  
• Health care: Possibly some good news.  But in a sector that must cut costs, profitability will be spotty at best.

Infrastructure construction and repair, however, is one broad sector that can see new business and increased spending even as we approach overall economic Armageddon.   ronically, this area, while possibly having the best potential of any sector, is the least well known and understood. It’s a good bet that most financial editors and reporters have ten tech or retail analysts in their rolodex for every one industrial equipment analyst.

Most investors have never been introduced to engineering and construction and industrial equipment companies.  Clearly, a global infrastructure build-out is coming.

 Robert Markman, Managing Director, Markman Capital Management, Edina, MN, is the portfolio manager of the Markman Core Growth Fund (MTRPX) and the Markman Global Build Out Fund (MGBOX)  bob@markman.com, (952) 920-4848.

Avoid the Temptation of Fleeing to U.S. Treasury Bills
Because of market uncertainties, some investors may well be tempted to dump all their equities and corporate bonds in exchange for the safety of U. S. Treasuries.

After months of negative market returns and bleak economic news, many investors are frazzled and concerned about what is left of their accounts. But there is a problem when considering investing in U.S. Treasury bills now.

The problem isn't the investment grade risk; it is the premium you have to pay for the right to own Treasuries.  A 10-year Treasury may carry a 9% coupon, but its true yield to maturity may be as low as 3.6% due to the premium you pay in the secondary market.

As the price of a bond goes up, its yield decreases even though the coupon never changes.

A year ago would have been a great time to buy Treasuries.  Now, Treasuries, while backed by the full faith and credit of the US government, have very little yield.  Investors have bid up the price of Treasuries out of fear of the current financial crisis and recession.  Investors who are tired of market losses and just want something safe need to realize that the Treasuries they buy today may drop significantly in value should the equity markets, corporate bond market, and municipal bond market begin to rebound.

An investor in Treasuries can always hold them to maturity and receive the face value back.  If, however, an investor buys 100 10-year Treasuries trading at $144, at maturity, they will only receive $100 for each of the bonds.  The U.S. government guarantees that it will pay the stated interest on the Treasuries and return the par value upon maturity, but the government is not responsible for any premium the investor may have paid initially. It is this disappearance of the premium that reduces the yield to maturity so much.

Treasuries can offer security, but many investors could be disappointed if they want to sell their Treasuries as market conditions improve.

Student Housing is Bright Spot in a Dreary Real Estate Investment Market
(But what's a good property and who's a good sponsor?)

Imagine a college dormitory and your first image might be an ivy covered brick building of vaguely English architecture recalling someone’s 1920 Alma Mater with Mr. Chips as house master.  The second might be a badly maintained three-decker recalling Animal House with John Belushi in charge. Either way, it’s not an investment property, and it’s not the dormitory for attracting students and impressing parents in the 21st century.  If you are a college administrator looking to collect good prospective students from the echo-boom generation neither is too appealing. 

You need good students to attract and keep good faculty and vice-versa, but you need labs and classrooms and research facilities to attract faculty and you need good safe comfortable fully modern dorms to attract today’s students. 

You need safe, affordable ones to attract their parents.  All that costs piles of cash.  Endowments are being punished by the stock market, student loans are being curtailed nationwide, and parents just can’t afford to pay more. 

Administrators are seeking to out-source properties with large capital needs, but classrooms and faculty really can’t be sold and leased back.  Luckily dormitories can be constructed with outside capital, and the institution is not selling its soul.  In fact sometimes it gets better housing than it could afford to build on its own.

In the current dreary real estate investment market, with new construction at historic lows and many investment and real estate sub sectors in varying states of collapse, the better privately-owned student housing properties are typically running 98 and 99% occupancies.  With capital markets in violent disarray, even through the fall of 2008, average student housing properties were reported to be trading at 7% cap rates and the better ones at 6.5%.  That is about a 75 basis point shift from their all time highs.  In a 12 month period, the Dow Jones is down almost 40%, the S&P more than 40%, but American Campus Communities, a REIT that focuses on student housing is only down 16%, it is up 17% from its November low, and – with a dividend yield of over 6% it could be looking to get December 2007 investors back into the black in 2009.

The basic drivers of student housing are limited supply (there are enough students now to fill 7.5 million beds, only 2.2 million are on college campuses, and most of the rest are in substandard building where civilized amenities are often nonexistent.  Security in particular is a troubling issue for both students and parents.)

As real estate expert Ralph Block said to The New York Times:  “It is much more management intensive” than traditional housing. He called the sector “risky in one sense and not as risky in another.”

“The risk comes with the fact that the turnover period is very short; if you make some bad estimates and you don’t get your apartments filled at the right time, you’ll have a vacancy rate lasting the entire year, because it’s hard to convert them to alternative uses,” Mr. Block explained. “But the steadiness of demand and still fairly limited supply argues for less risk.” And the credit crunch has strengthened occupancy in existing properties.  Stricter lending requirements have meant that student housing development has been slowed, thus strengthening occupancy at existing properties.

Still universities are growing as the college age ”echo-boomers” hit the campus (Between 2006 and 2011 college enrollment will grow by 1.3 million students.  Most university dorms were built 40 or more years ago, and in the 25 years ending in 2016 the Wall Street Journal notes college and university enrollment will have gone up 42%.  To accommodate that growth colleges and universities are working to expand their staffs and classrooms and sports facilities and laboratories.  Money for increasing on campus dorm rooms is hard to budget.  Harvard’s got it, Stanford does, but many smaller (and more reasonably priced) schools simply do not.  The stock market’s recent bad behavior is not helping endowments or the ability of alumni to chip in.

Public and private investors have recognized that supply/demand opportunity and private investment have become increasingly available for near-campus housing, but as Mr. Block points out, the key for successful investors is management.  As Boston Bay Capital’s Terrence Sullivan says: “It’s fine to say real estate is ‘location, location, location’ but who selects the locations, builds the properties and manages them?  ‘People, people, people.’”

Successful student housing properties depend on a management that understands both the students as well as their parents and has a strong relationship with the University or college with which it is co-located. Consider these issues:

• When considering student housing investments, consider the occupancy track record of the development firm’s properties.  It is the key to an excellent long-term investment. 
  
  
• What should administrators look for?  Look for developers who have experience in this space.  Look for management companies that know what “blue light” means in providing safety in a dark parking lot.  (That’s a place in a parking lot or a campus lawn with bright blue lights and a secure phone connection.  A worried student in the dark can push a button and summon security to walk him or her back.
  
  
• Go to a student housing building they did a few years ago and see if you can get in the front door without a good ID.  How many doors are there into the property?  Are they all secure?
  
  
• Is there a connection between the campus and the property?  Would you want to walk or drive it daily for a few years?  Would you feel your dorm would be part of your campus experience?
  
  
• Is the property architecturally appropriate?  Does it look like it wants to be part of the university?  Buildings dramatically affect the environment.  Who needs a cinder block to remember at Alma Mater?
  
  
• Is the property near where kids at that location will want to eat and have entertainment at night?  They may be old enough to drink legally but administrators and parents really don’t want kids (and a lot of them still are kids) walking long distances in the dark or worse yet driving after an evening out.
  
  
• Is there one bedroom per student?  Most don’t put up with the multi-bunk rooms of Mickey Rooney’s college days.  And Mickey only had a saxophone.  Is there room for computer, printer, stereo, and does it provide Wi-Fi connections?  Mickey may not have needed them.  Today’s students do.
  
  
• If you want a successful development near your campus, does the developer know how to market to students?  Does it know how to use Facebook as well as college newspapers to connect to students?  Is its marketing hip and fun or boring? 
  
  
• What is the condition of the health and fitness facilities with weight and aerobic training equipment, quality furnishings in kitchens and bathrooms, game rooms, study lounges, some sort of social opportunities to meet other students, computer labs, printers and faxes?

Financing is difficult for all real estate today and developers who know how to find good locations, design good student-friendly facilities and manage them in a way that creates a student life style reminiscent of Mickey Rooney’s days, not just a garden apartment.

But don’t forget the Wi-Fi.

SOURCES:
http://www.primepropertyinvestors.com/news/NewYorkTimesReprint.pdf
http://www.commercialpropertynews.com/cpn/content_display/property-types/multi-family/e3i8c3efd0edfe72551825c995391e326e1

Contact:  Michael Dowd, Senior Vice President, (781) 264 2678, mdowdmcm@aol.com, www.ugoc.com Millennium Credit Markets, LLC, headquartered in Rockefeller Center, New York is an affiliate of United Group of Companies.
Trends from Ink&Air --Editor: Lisbeth Wiley Chapman, beth_chapman@inkair.com, 508-479-1033

ESTATE PLANNING – REAL ESTATE

Paying Gift Taxes Now on Asset Transfers to Children Saves Big on Estate Taxes Later
What is clear is that taxable gifts to family and children will remain less than death taxes for the foreseeable future.

It is widely believed that due to the economic downturn, the current tax rates will expire in 2010, and that means that families can anticipate increases in estate or death taxes.

Many families are familiar with the annual tax-free $12,000 gift that can be given to as many individuals as the family chooses. Families are also familiar with the $1 million lifetime exemption that allows parents to gift a total of $2 million to their children tax free. But what if the estate is larger than $2 million.

What is clear is that the tax on taxable gifts to family and children will remain less than death taxes. A conservative estimate is that gift taxes are 30% less than death taxes.

Paying the gift taxes and transferring assets before parents die is a smart strategy that accomplishes two things. The tax at the time of transfer is less than it would be after the death of the parents. Equally important, the future growth of gifted assets is also free of gift and death taxes.

Jeff and Karen Miller gave each of their children $1 million and paid the gift taxes as an estate planning strategy. Their estate was worth $10 million. By removing $2 million and paying gift taxes, they have reduced their estate to $8 million. They will save the estate $300,000 in taxes after they die.

The process is relatively simple. A gift tax return must be filed.

PERSONAL FINANCE

Plans Go Terribly Wrong in Decision to Rent Rather than Sell
A couple wanted to move to be closer to aging parents, but decided to wait to get their price on house in deeply undervalued market, a decision that turned out to be emotionally and financially devastating.

Take the case of John and Joan Wolters, in their early 60s, who wanted desperately to move from Northern California to Arizona so they could be closer to year-round golf, a less hectic pace, and a much less expensive standard of living. John was a national consultant whose home base did not matter, so the move was possible from his point of view. But they could not sell their home they bought five years ago for $360,000.  The value went up to $425,000 in mid 2005, and is now worth about $275,000. With selling and closing costs, they will have lost over $100,000 from their original value, and the property was $170,000 lower than its high water mark. Although they had the resources to take the hit and move, they could not emotionally stomach the loss of market value. Like many others in their place, they decided to rent the property. Here is what went wrong with this decision:

• The “napkin” calculation showed that they would likely break even on the expected rental income against the mortgage, taxes, and insurance. When they factored in other current expenses missed in their original calculations, they end up subsidizing the property by $10,000 each year.
  
  
• The rental income is lower than expected because of all the other sellers who decided to rent. So performance is even worse than reported above.
  
  
• They are not wired to manage real estate, and are more interested in golf. They hired a property manager, but do not have the appetite to manage the manager, an important component in owning rental properties


• Although titled to the family trust (not an entity protection strategy), they did not want to take the time to create an entity for the property, plus it saved a few thousand dollars upfront plus almost another $900 each year. Currently, a successful claim against that property could subject their entire estate to claim.
  
  
• If the investor is suited for real estate investments and prefers not to get their hands dirty, they should consult an alternative investment advisor for discussion about non-traded (private) real estate trusts or similar strategies. These strategies typically generate a higher yield than directly owned real estate investments. If investors are insistent that directly owning is their preferred strategy they need to work carefully on the financial modeling and acquisition process with a qualified advisor. They should be aware that they might be sacrificing control for yield.
  
  
• John and Joan have set their sights on selling in the future for $400,000. This price would allow them to feel that they had not made a bad decision. Assuming that the market has stabilized, which it has not, to get from $275,000 to $400,000 requires an increase in value of 45%. Assuming an appreciation rate of 5% simple each year, it will take nine years to get to the sale price of $400,000 future value, which represents a present value of $293,492 (assuming an annual inflation rate of 3.5%)… less than $20,000 from the current value!


• As they pine away for their price, they will have spent over $100,000 to subsidize the property, excluding the risk of a claim, time, and opportunity costs.

Rich Arzaga is Founder and President, Cornerstone Wealth Management, San Ramon, California, a life planning company specializing in providing options and solutions for residential and commercial real estate investors. He is also an instructor in the nationally-recognized financial planning certification program at U.C. Berkeley, and teaches the highly-acclaimed Real Estate Investments course at U.C. Santa Cruz and U.C. Berkeley. Rich can be reached at rich@consultrich.com or toll free (888) 290-9900.
Trends from Ink&Air --Editor: Lisbeth Wiley Chapman, beth_chapman@inkair.com, 508-479-1033

It’s Not Just Love, But Legalities to be Considered Before Same Sex Couples Marry
If the marriage does not work out, they can't get divorced or have the civil union/domestic partnership dissolved if their state of residence never recognized it in the first place or if they are no longer living in the states that did.  A relationship contract before marriage is essential.

The status of marriage or civil unions for gay and lesbian couples is in great flux these days.  In Massachusetts and Connecticut, and until recently in California, these couples could marry.  In nine other states they can form civil unions or enter domestic partnerships.  

Gay couples who love each other and want to make a commitment have a strong desire to marry as well as to receive the same legal rights and protections to which a heterosexual married couples are entitled.  But some of these couples will go through the same difficulties that heterosexual couples encounter – they may break up. Given our mobile society, sometimes these break-ups will occur when the couples have moved out of the state in which their marriage or civil union was recognized. Or, they never lived in the state, but vacationed there to get married.

It is no longer uncommon to see couples break up who married in a state where it's legal (or entered into a civil union/domestic partnership where legal), then moved to a state that doesn't recognize the legal relationship.

Other couples who live in states that don’t recognize a legal status for same-sex relationships have visited Massachusetts and Connecticut or other states so that they could get married (or enter a civil union/domestic partnership.)  When the state these couples now live in does not recognize the legal status of their relationship, they will find themselves in a legal limbo when trying to dissolve the relationship.  They can't get divorced or have the civil union/domestic partnership dissolved if their state of residence never recognized it in the first place.  They face some difficult choices: 

• Move to the state where the legal status is recognized for the required period just so they can get their divorce/dissolution?  This could cause considerable disruption to careers and lifestyles.
  
  
• Go their separate ways, ignoring that they still have a legal status recognized in some states but not others?  What happens if one of them moves back to one of these states where they are still legally married or in a civil union, and they now want to commit to someone else?  Or if the state they are now in changes its laws and begins to recognize the legal status of the original marriage/civil union?

There are many possible complications in this scenario relating to divorce settlements, alimony, division of assets, parental rights, and inheritance.  The possibility that one person in the couple might pursue a settlement from the other exists as long as the legal relationship has not been dissolved.  

While it’s tempting to advise gay couples to resist marriage/civil unions/domestic partnerships until these relationships are recognized consistently from state to state, many will want to pursue legal recognition anyway.  Because in many cases it would be difficult to dissolve such a relationship in an orderly legal manner, couples need to understand these potential complications, even if they likely will not heed the advice and are in denial about the possibility of a breakup.  

The best defense for couples that are determined to enter into a legal relationship is a relationship contract.  This document can serve some of the same purposes as a prenup, and would spell out terms under which the relationship could be dissolved.  In effect, the couple is planning their divorce in advance.  It can be difficult to get a couple who wants a legal commitment to contemplate what happens if they break up.  But it can also be easier during the happy times to work out these agreements without acrimony, stress and anger.  

Gay and lesbian couples and their advisers have a problem and there are no easy answers.  The lack of consistent Federal recognition of the right of gay and lesbian couples to marry in all states means that their divorces are uncharted territory, and this problem will become highlighted and possible solutions developed as more couples find themselves in this situation. 

Susan Moore, CFP®, Moore Financial Advisors, Ltd., Watertown, MA, (www.mooreadvisors.com) provides fee-only financial planning and investment management services for individuals and families. She can be reached at moore@mooreadvisors.com or (617) 393-9999. She is a member of the steering committee for the 2009 PridePlanners Fifth Bi-Annual Conference to be held in Fort Lauderdale, FL, June 11 to June 13. This is the only financial services conference that focuses on the financial needs and issues of the GLBT community.

TAXES

Capturing Deductible Losses
Prior to year-end, it is important that your money manager make trades in your taxable accounts to capture deductible losses.

Deductible losses will offset other capital gains includable in 2008 income.  You are also allowed to deduct $3,000 ($1,500 for a married couple filing separately) of capital losses in excess of capital gains against ordinary income.  Capital losses which exceed these limits are carried forward indefinitely and will offset future capital gains.

A second benefit from this action is to avoid capital gains distributed by mutual funds.  Throughout 2008, the combination of weak equity markets and higher then normal mutual fund redemptions resulted in forced selling by funds to meet liquidity needs.  The sale of appreciated securities may result in taxable capital gains being passed through to fund shareholders, concurrent with these shares losing value due to the declining market.

In order to capture the loss you must adhere to the 30 day “wash sale rules”.  You are permitted to deduct a capital loss as long as you do not purchase the same security within the 30 day period(s) before or after the “loss” sale.  During this transition phase, we will maintain your current allocation through short term investments in exchange traded funds (ETF’s) and other mutual funds.

After the wash sale period has expired, these transitional investments can be sold and replaced by the original or similar funds.  In most cases,  the tax benefits from these trades will far exceed the modest trading expenses that you will incur.

Many money managers will also be rebalancing your portfolio in order to bring your investments in line with your target allocation.  However, it is important to delay that action until the market’s extreme volatility has declined.

Stonegate Wealth Management’s highly experienced professionals, including partners Thomas J. Geraghty, Jr., CPA, CFP, Steve Craffen, MBA, CFA, and Craig Marson, JD, CPA, solve complex financial challenges and provide counsel for the pressing financial issues confronting their high net worth clients.  They have deep knowledge and experience in taxes, estate planning, investment management and divorce settlement counseling.  The firm manages $175 million in assets under management. stevec@stonegatewealth.com, office, (201) 791-0085