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Stocks Continue to Defy Investors' Sour Mood
Stock Investing

Amid a fresh barrage of bad economic news, the mood among investors these days is glum. So it might come as a surprise that stocks are actually up so far this year.Stocks had swooned during the spring amid yet another flare-up of worries about Europe, with the Dow Jones Industrial Average losing 820 points in May alone. But since then, the Dow has rebounded almost 700 points. Crucial to the bounce has been expectations that the Federal Reserve will move quickly should the U.S. economy deteriorate further. As a result, even after a couple of white-knuckle days last week, the Standard & Poor's 500-stock index is up 10% so far this year. The Dow has struggled a bit more, gaining 7% so far in 2012, but the technology-heavy Nasdaq is up a hefty 14%. While that's good news for many portfolios, investors shouldn't get complacent. There are considerable risks both in the U.S. and abroad that could quickly send the still-jittery markets into a tailspin.

Want to Save Money? Move Downtown

If you want to save money these days, you have to move into the city. Crazy, but true. No wonder McKinsey & Co., the strategy consultant, recently produced a report predicting a new golden age for the American city. When I was growing up, the story of the American city was a sad one. The middle class had fled to the suburbs. Downtown was dying. But based on my math, people are going to be moving back. Why? Three reasons: Interest rates. Gas prices. And the Internet. Let me explain. Sure, real estate outside the city looks cheaper. But then we'd have to buy two cars. And while the cost of a car is going up, the cost of real estate has come down, thanks to the collapse in interest rates. Thirty-year Treasury bond yields have now plummeted to 2.5%. The ten year is down to 1.44%. You can thank the Federal Reserve, as well as the economic slump. This is great news for a homeowner. We are in the process of refinancing a thirty-year fixed rate mortgage at 3.6%. The interest, of course, is deductible at the federal level. So after taxes the rate, on a net basis, is less than 3%. According to the American Automobile Association, the average car costs about $9,000 a year. That includes about $3,500 in depreciation, as well as $5,500 in fuel, insurance, maintenance and so on. It seems a little high to me. But it's hard to see how you could run a car for less than about $4,000 a year, including depreciation. Two cars: $8,000. This is lowballing it. And I think over the long term fuel costs are probably heading higher.

Get Ready for the New Investment Tax
Personal Finance

Until this week, investors were waiting to see what the Supreme Court would do about the 3.8 percentage-point surtax on investment income, part of President Obama's health-care overhaul. The Internal Revenue Service hasn't yet released guidance on the new tax. So when the court affirmed the law on Thursday, investors—and tax advisers—started scrambling. The new tax, which Congress passed in 2010, affects the net investment income of most joint filers with adjusted gross income of more than $250,000 ($200,000 for single filers). Starting on Jan. 1, 2013, the tax rates on long-term capital gains and dividends for these earners will jump from their current historic low of 15% to 18.8%, assuming Congress extends the current law.If, on the other hand, Congress allows the tax rates set in 2001 and 2003 to expire on Dec. 31—an unlikely scenario, according to many experts—the top rate on capital gains will rise to 23.8% and the top rate on dividends will nearly triple, to 43.4%. Whatever the fate of the 2001-03 tax rates, advisers are telling clients to start making moves to minimize the new levy.The new levy's ramifications extend far beyond the end of the year, however, and will be a game changer for many taxpayers. In the future, affluent investors will need to manage both their adjusted gross income and their investment income in order to minimize this tax, says CPA Dave Kautter of American University's Kogod Tax Center.Many will likely seek more shelter in assets and structures where the tax doesn't apply. Municipal-bond income is doubly blessed because it doesn't raise adjusted gross income and isn't subject to the 3.8% tax, notes Jonathan Horn, an accountant in New York.

Government-Backed Loans Went to 6,300 Delinquent Taxpayers
Personal Finance

More than 6,300 homeowners who owed millions of dollars in federal taxes received government-backed mortgages in violation of a federal policy, according to a report by a federal watchdog.The Government Accountability Office study, viewed by Dow Jones Newswires, was conducted from April 2011 through last month and examined loans made in 2009 that were guaranteed by the Federal Housing Administration, a federal agency that backs loans made to buyers with low down payments. The report also found that borrowers with unpaid taxes had foreclosure rates two to three times higher than those who had paid taxes. The agency insured over $1.44 billion in mortgages for borrowers who faced $77.6 million in federal tax debt, the GAO report said. Of those borrowers, about 3,800 received $27.4 million in tax credits for first-time homebuyers under a federal economic stimulus program that expired around two years ago.Consumers who owe back taxes are not eligible for FHA-backed loans, unless the borrowers repay their debt or are in a valid repayment plan with the Internal Revenue Service. However, the first-time homebuyer tax credit was available to those who qualified, regardless of their tax debt.

What Your 401(k) Costs…Sort of
Personal Finance

You may have heard that employers finally will be required to give employees detailed information about 401(k) plan fees. You could be disappointed when you see the results. The new annual disclosure form, which the U.S. Labor Department said employers must provide to workers by Aug. 30, may run more than 15 pages long. But it won't provide a simple figure for your annual cost and some employers may bury the plan's administration costs in with investment expenses.The new form will list, as a percentage, the annual operating expense for each investment offered. It's basically a price list, says Dave Gray, vice president of client experience for Schwab Retirement Plan Services, in Richfield, Ohio. To figure how much you're paying for your 401(k) investments, multiply the balance you have invested in each option by the expense ratio listed for that investment, then add up your cost for each. (The new form also will describe expense ratios as a dollar figure—the cost per $1,000.) To get the full cost of your 401(k), you'll need to add in any plan-administration expenses—for record-keeping, legal and other services—that your employer requires employees to pay, plus any transaction costs, such as what some plans charge to savers who take out a loan or distribution. The annual disclosure form will describe what your employer's plan charges for such transactions, and, in some cases—depending on how your plan is structured—the form will say what employees pay for plan administration.

Are Bond Rates on a Road to Nowhere?
Personal Finance

The "bond vigilantes" who once imposed law and order on financial markets are being run out of town. That means investors thirsting for a quick return to "normal" interest rates might stay parched for a long time to come. Throughout most of the bull market in bonds over the past 30 years, big investors dumped Treasury securities whenever the U.S. flirted with fiscal recklessness. By sending a stinging signal to Washington that they wouldn't tolerate irresponsible policies, the vigilantes imposed discipline and kept rates stable at yields investors could live on.Historically, the bulk of U.S. Treasury debt was held by private investors—including the big institutions that used their enormous market power, vigilante-style, to keep interest rates in line.With so much demand from price-insensitive buyers, "Treasurys are priced like fire insurance gets priced after the buildings are already burning," says Dan Dektar, chief investment officer at Smith Breeden Associates, which manages $6.4 billion in bonds in Durham, N.C. The conventional wisdom is that after another year or two, interest rates are bound to go up as investors penalize lawmakers for their profligate ways by demanding higher yields.

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