The Jacobs Financial Group

Richard’s Rebuttal February 2010

• In December 2009, I wrote, “High growth opportunities will still be found in emerging markets especially in Brazil, China and Vietnam, but it will likely be very volatile in 2010 – hold on to your hat”. I still believe this to be true especially for Brazil. But the harsh downdraft in the past few weeks was particularly brutal for emerging markets. Be prudent.

• According to Martin Sullivan on Tax.com the rich pay higher taxes than the super-rich. Those earning $1 million to $1.5 million a year pay (2007) an effective rate of 24.1%, while those earning more than $10 million a year pay 19.4%. The reason is because the super-rich have more capital gains income which is taxed at 15%. The 19.4% effective tax rate is nearly the same as those with income in $500 thousand to $1 million range. I guess the super-rich have much better lobbyists – who says Congress can’t be bought.

• I have always questioned the need for lower tax rates on capital gains income. I could never understand the rational for the lower rates. During the Reagan era (Tax Reform Act of 1986) all income, including capital gains, was taxed at the same rate. Ironically, that 1986 tax legislation decreased the highest rate from 50% to 28% and the lowest rate increased from 11% to 15%. This would be the only time in the history of the U.S. income tax (which dates back to the passage of the Revenue Act of 1862) that the top rate was reduced and the bottom rate increased at the same time.

• Most middle class investors have most of their money invested within a 401k or an IRA, which interestingly at retirement are mostly long term capital gains. Yet, withdrawals are taxed at normal income tax rates not at the capital gains rates – Go Figure!!

• At full retirement age individuals are permitted to have unlimited earned income without reduction of Social Security benefits yet that earned income is still subject to FICA and Medicare taxes – Really!! At some point you would have thought a retired individual has paid enough into the government retirement plan. Since many baby boomers are going to need some earned income in retirement, some changes might be in order.

• Laurence J. Kotlikoff, a professor of economics at Boston College University, has suggested that if Americans had to publicly disclose their tax return filed with the IRS, there would be far greater income tax reporting transparency (personal information such as Social Security numbers would be safeguarded). Sounds radical. Actually at various times in our history, individual and business tax returns were part of the public record. Maybe it is time again for full disclosure.

• Factoid – According to the New York Times, China at the end of 2000 had a $28 billion trade surplus. During the same time period the U.S. had $422 billion trade deficit. In 2008, China had a $267 billion trade surplus an increase of 841%. In the U.S. during 2008 the trade deficit increased to $842 billion or 102%. One begins to wonder how much longer that can continue.

The opinions stated in this column are the sole responsibility of Richard Jacobs and should not be contrued as investment advice.

Richard’s Rebuttal

January 2010

- Congress failed to amend the Federal Estate Tax provisions that went into effect January 1, 2010. Under current law the estate tax rate is now zero. In 2009, the first $3.5 million was excluded from tax. The tax on large estates was about 45%. When the US Congress reconvenes in late January 2010 they will be addressing Estate Tax reform. Call me a cynic, but if I were an unhealthy, wealthy individual I would be very, very wary of my heir’s intentions in the next few months. Let the Death Panels convene.

- The US stock market as measured by S&P 500 was up 2.68% in the first week of 2010. Hopefully a strong January start is a harbinger of things to come. Small cap indexes out paced their larger brethren by 48 bps (basis points). I know that I am an outlier, but I believe small cap stocks will out perform large cap stocks during 2010.

- During the same time period mentioned above foreign stocks perform much better than US stocks. Developed market foreign stocks returned about 3.56% or 88 bps more than their US counterparts. Small cap foreign stocks returned about 4.43%. Emerging markets specifically Brazil – 3.94% and China – 4.12% performed well. A portion of these gains reflects dollar weakness in the currency markets. Again, I must caution investors that foreign stocks have had a significant run-up – Be Careful and Prudent.

- To follow-up on last month’s comment on Ponzi schemes – according to Investment News there were about 150+ Ponzi schemes uncovered in 2009 more than triple the number uncovered in 2008.

- A new fiscal stimulus will likely be passed into law during the first quarter of 2010. I have an idea that might please both those on the right and the left. Consider the following: Reduce 2010 FICA taxes on both employees and employers for the first $50k of income for those making less than $100k. For those making less than $50k the FICA tax would be zero for both the employee and the employer. The tax reduction would be very significant for those under $30k since these individual’s FICA tax is usually larger than their federal income tax. Lower income individuals will have more cash to spend and save. From the employer’s perspective the employer’s portion of FICA would lower employment costs and free up cash for business investment. Small sole proprietorships and partnerships would benefit greatly since they pay both the employee and employers portion of FICA on their income.

- Everyone likes to blame Wall Street as the primary and significant cause for the collapse of the economy, but I think this is a Pogo moment – “We have met the enemy and he is us.”. All through out the US, ‘Main Street’ took on too much debt on houses they could NOT afford and bought too many consumer goods (from China – see factoid below) they did NOT need with credit cards they could NOT pay back. The moment of reckoning is here.

- Factoid – According to the New York Times, China at the end of 2000 held $166 billion in U.S. foreign currency reserves. In September 2009, China held $2.273 TRILLION in U.S. foreign currency reserves. That increase in debt is 1,273%. One begins to wonder how much longer that can continue.

The opinions stated in this column are the sole responsiblity of Richard Jacobs and should not be contrued as investment advice.

Richard’s Rebuttal December 2009

- The Unemployment Rate will rise as more jobs are created in 2010. It appears to be a paradox. Those unemployed individuals who had given up finding a job will become more optimistic and enter the job market thus driving up the unemployment rate until they find a job. Expect unemployment to be below 8.6% by the end of 2010.

- US GDP growth for 2010 will be over 5%. The “New Normal” naysayers such as Bill Gross and Nouriel Roubini who say the economy will grow at very low rates will be proven wrong. There will always be someone who says “it’s different this time”.

- Expect the Stock market as measured by S&P 500 to be up 10-15% in 2010. We haven’t seen such high returns in the US markets since the Clinton era. Remember all that peace and prosperity at the same time – even with higher capital gains taxes and marginal tax rates. And let’s not forget balanced budgets. I could say more but, I think it is time for a cup of tea.

- High growth opportunities will still be found in emerging markets especially in Brazil, China and Vietnam, but it will likely be very volatile in 2010 – hold on to your hat.

- Interest rates will remain at present rates for the next two quarters in 2010. The Fed will begin raising interest rates in the 3^rd Quarter 2010. Investors will be looking for higher returns than .01% found in money market accounts. Investors are now more concerned about return on capital than return of capital.

- Every day in the financial press there is reported a new Ponzi scheme – some are big like Madoff but mostly they are much smaller $10 – $100 million. They all have one common thread – the investor WANTS to believe that someone can promise a high rate of return with no risk. This suspension of rational thinking always amazes me. This happens to both the supposedly sophisticated and neophyte investors. If someone promises too much with little or no risk it is time to figure out who the sucker is – if you are not sure who it is, it probably is you. Do your due diligence.

- When the Medicare drug benefit was passed during the Bush administration what taxes were increased to fund this huge new entitlement benefit for senior citizens? Absolutely none. Ponzi scheme? Might want to ask Congressman Kevin Brady about his so-called fiscally conservative voting record on that issue (I was in favor but, I thought it should have been funded with additional taxes).

- Every time you buy or sell a security because you think it is a great idea – there is someone on the other side of the trade with equal conviction that thinks you are wrong.

- Factoid – According to the New York Times, the US at the end of 2000 had 29 of the world’s top 50 companies – the Chinese had 1. The world largest was General Electric. In November 2009, 21 were American and 9 were Chinese. The world’s largest was PetroChina.

The opinions stated in this column are the sole responsibility of Richard Jacobs and should not be construed as investment advice.

Richard’s Rebuttal November 2009

- Employed economists say the recession is over. Unemployed economists are not so sure.

- Capitalism is founded on greed and avarice (a good thing – remember Gordon Gekko). Why are we so surprised when Capitalism gets it so wrong? Capitalism will always serve its own self-interest not the public good.

- 2010 economic growth rates will exceed estimated consensus economic growth.

- Interest rates will remain low for the foreseeable future. Money market yields will stay at historic lows. Good returns will have to be found elsewhere.

- Deflation is still a bigger threat than inflation.

- Retirees demand for an increase in Social Security of $250 for 2010 is unconscionable. This money will be coming from their children, grandchildren and future generations since the money will be sourced from larger deficits. Maybe the ‘Greatest Generation’ wasn’t so special after all. They did spawn the ‘Baby Boomer’ generation – the largest and most self-centered cohort – enough said.

- Expect unemployment to rise to 10.25% or higher. This will set off another round of economic stimulus. Nothing focuses politicians like the threat of losing their seat in Congress. The Dems will be in favor of stimulus and the GOP will oppose – no surprise.

- My forecast of a 17% increase in the S&P 500 for 2009 will likely hold up (looked very dubious on March 9^th).

- Factoid – China has 710 million mobile phone users according the Chinese government. The entire US population is estimated to be 308 million people.

- Healthcare reform will expose the value proposition of healthcare insurance providers. Significant structural changes will be implemented – rescission of anti-trust preferences is most likely.

- Conventional wisdom suggests that capitalism promotes democracy. Capitalism is agnostic about democracy. The Chinese political system is clear example of capitalism flourishing within a non-democratic framework. Russia is in the process of replicating the Chinese model. I believe emerging economies with a short democratic history will look at China’s response to the latest economic collapse and find their solutions appealing. Brazil and other South American countries with a short and fragile democratic history could follow if there is enough pressure and instability.

- Those opposed to bailouts need to realize their money markets funds were supported (read as – bailout) by the federal government after the Lehman Brothers failure last year. The federal support was lifted in the past few weeks. Also, FDIC protection (read as -bailout) on your bank deposits was increased to $250K during the economic crisis. The opposition to these bailouts was strangely silent.

The opinions stated in this column are the sole responsibility of Richard Jacobs and should not be construed as investment advice