Monthly Publication January 2005
To All Our Valued Year was greeted with 25 cents per share compared
massive tax selling as to 5 cents per share a year
Clients and Friends of
investors locked in gains and earlier. Analysts had been
the Firm pushed their capital gains expecting 11 cents per share.
taxes to 2005. Normally, Motorola posted earnings of
Welcome to our January
when a January effect occurs, 28 cents per share which was
issue of “Financial Trends.”
tax selling happens in 4 cents more than analysts
Northwest Financial, a Fee
December, then money goes had been expecting.
Only Registered Investment
back to work in the New
Advisory firm, forecasts
Year. Despite the later-than- If this trend continues, the
intermediate and long-
expected tax selling, we still market will be poised for
term investment performance
believe January is not going some large gains in the
based on Business, Economic
to be a wasted month. The coming weeks.
and cyclical conditions. Our
upcoming fourth quarter
access to institutional data-
earnings will likely help filter This, coupled with news on
bases of U.S. and
out all confusion and allow inflation and the dollar, is
International economic and
the cream of the crop to rise very encouraging. Last week,
financial data provides us the
to the top. s
the Fed’ minutes from its
necessary information to
December FOMC meeting
identify the most likely future
The S&P 500 could post rattled the stock market.
economic and financial
about 18% earnings growth Apparently, Fed members are
trends.
for the fourth quarter, which divided on the outlook for
would likely be the strongest inflation. Some members
Special Announcement: quarterly earnings growth were concerned that the weak
announced this year. This U.S dollar was creating a lot
week we have already seen of commodity inflation that,
Northwest Financial is some surprising earnings combined with slower
proud to be ranked growth. Tuesday, IBM productivity growth, could
by Bloomberg Wealth announced earnings of $1.80 lead to rising consumer
Management in July 2002 per share, up sharply from a s
inflation. December’ release
and again in 2003 as year ago. Analysts had been of Producer Prices and
one of the top Wealth expecting growth of around Consumer Prices (both
Managers in America. $1.70 per share. 3M reported declined) point to very little
earnings growth of 16.3% in inflation pressures. More on
the fourth quarter. Wells this will be covered in the
Market Perspective: Fargo reported earnings of economic section of this
$1.04 per share compared to letter.
If you are confused with 95 cents per share a year Other positive conditions for
recent market activity – you earlier. E-commerce giant, the stock market point to
have a right to be. The New Yahoo, reported earnings of the upside rather than to
Corporate Office: 4640 SW Macadam Ave., #280 ? PO Box 69008 ? Portland, OR 97201
503/222-9050 ? Fax: 503/227-1095 ? www.northwestfp.com
the downside. Industrial Although we don’ know t Production and Capacity
Production posted a gain of what corporations are going Utilization, which shows
0.8% in December. Analysts to do with this cash, we do increases in manufacturing
had been expecting a gain of know that they are going to and mining output and
0.4%. Capacity Utilization do something, given the low utilities production. In
rose to 79.2% in December. level of short-term interest addition Capacity Utilization
Analysts had been expecting a rates. They can either invest rose to 79.2%.
reading of 78.3%. The in their own business (capital
combination of November spending) or they can invest Last Friday, the Labor
and December retail sales in other businesses (Merger Department released its PPI
were 5.7%, stronger than a and Acquisitions) or they can (Producer Price Index), which
year ago. Analysts had been return it to shareholders in showed wholesale prices
expecting growth of 4.5%. dividends and share declined by 0.7% in
So, most all signals point to a buybacks. We believe they December, far more than the
growing market. will do a bit of all three. 0.2% decline that economists
had been expecting. Though
Conclusion: On The Economic the decline was driven largely
by falling energy costs, the
Scene:
We believe that most of the core-PPI, which excludes
tax selling that has pressured volatile food and energy costs
The economy is on the mend.
the stock market this month recorded only a 0.1% rise.
Everything we see is pointing This was less than the 0.2%
has concluded. As a result, a to very positive results for the
lot of the cash that was rise expected. It seems that
economy. investors were relieved to see
generated from the tax selling
will have to get reinvested. this key inflation report
On Thursday, we finally remain so tame.
The fourth quarter earnings learned that the holiday retail
season is just now underway session, despite its slow
and should attract investors On Wednesday of this week,
start, was better than
back into the market. There the Labor Department
expected. The Commerce released the CPI (Consumer
may be a pause before another Department reported that
upside rally ensues. The Price Index) and it was a
retail sales for the month negative 0.1%. The core rate
election in IRAQ and the of December increased by
FOMC meeting in February was plus 0.2% indicating very
1.2%, slightly better than the low inflation pressures. On a
will certainly influence some 1.1% that was generally
to remain in cash until the year-over-year basis, the core
expected. While electronics
coast is clear. rate is up only 2.2%.
and apparel declined, general
merchandise, automobiles,
If there is a single key idea and home improvement items Wealth and Estate
that is driving our themes for showed strong gains. In Transfer Techniques:
2005, it is the buildup of cash addition, Internet and catalog
on corporate America’ s sales were very strong during Last month we looked at
balance sheet. Non-financial, the month. “Planning for Big Estates”.
non-farm corporate free cash This month we want to look
flow as a percent of that Last Friday, the Federal at “Donating Art”.
s
sector’ GDP is the highest it Reserve Board released its
has been since 1958. report on Industrial
Cash donations, as long as the resulted in long-term capital must be a public, not private,
actual amount of the donation gain. Capital gain property charitable organization.
is substantiated, will not result includes capital assets held
in an IRS challenge. But more than one year. The In general, qualified public
donations of objects such as general rule is that you can charitable organizations
fine art and collectibles have usually deduct the full fair include nonprofit groups that
always been problematic. market value of the donation are religious, charitable,
This month, we would like to as of the date of the educational, scientific, or
look at “Must Know” TIPS on contribution. literary in purpose, or that
donating personal property work to prevent cruelty to
such as art, antiques, and Donate Long-Term Capital children or animals. You can
collections, so you can Gain Objects: ask the organization whether
maximize all the benefits to it is a qualified organization,
which you are entitled. The amount you can deduct and most will be able to tell
for a contribution of ordinary you. Or, you can check IRS
Why Donating Makes income property is generally Publication 78, which lists
Sense: only your basis (cost) in the most qualified organizations.
property, not the full fair
Donating art, antiques and market value. Property is In most cases, you will only
other collectible objects ordinary income property if receive a deduction of your
to appropriate qualified its sale at fair market value on cost for contribution of
organizations may give you the date it was contributed appreciated art objects to a
possible benefits such as: would have resulted in private charity. However,
ordinary income or in short you will be allowed a
? An immediate income tax term capital gain. Examples deduction of the full fair
deduction. of ordinary income properties market if the contribution is
? Avoidance of the tax on are business inventory, works made to a public charity.
capital gains on of art created by an artist
appreciated assets. donor, and capital assets held We will cover more tips on
? An estate and gift tax one year or less. charitable contributions next
deduction. month.
? The creation of a lasting The deduction for appreciated
legacy with your long-term capital gain Washington D.C. and
organization of choice. property is its full fair market
the Tax Scene:
value. The deduction for
You will receive a higher ordinary income property is
the lesser of fair market value t
“Success isn’ permanent
income tax deduction if you t
and failure isn’ fatal”.
donate an art object or or its basis.
collection that has appreciated Mike Ditka, Professional
in value over the time you Donate To A Public Rather
Football Coach
have owned it. This is called Than Private Charity:
Motivational Speaker
capital gain property.
Generally, property is capital In order to maximize your
This month we would like to
gain property if its sale at fair charitable deduction benefits,
look at some of the tax
market value on the date of the qualified organization
changes that came about this
the contribution would have past year and how they may
affect you. These are the and the donor, i.e. vehicle
result of Working Families identification number, the This is a big improvement for
Tax Relief Act of 2004 and name and taxpayer Washington taxpayers.
the American Jobs Creation identification number of the
Act of 2004. Many donor. A penalty will be As we move forward, we will
provisions of the Military imposed for failing to furnish cover more changes as they
Family Tax Relief Act of such an acknowledgment or start to take place.
2003, and the Jobs and for knowingly furnishing a
Growth Tax Relief false or fraudulent On the Positive Side:
Reconciliation Act of 2003 acknowledgment.
went into effect in 2004. So far, corporate profits are
Capital Gains: Long-term coming in far better than
For years 2004 – 2010: For capital gain rates on all long- expected. On the inflation
tax years through 2010, the term exchanges are now 5% front, there is very little
10% bracket applies to the for taxpayers in the 10% and pressure. These trends will
first $7,000 of taxable income 15% brackets and 15% for ultimately point to a higher
for unmarried individuals and taxpayers in higher brackets. stock market.
$14,000 for married The 5% rate will drop to 0%
individuals filing joint in 2008. Yes, we have seen some
returns. For 2005 these profit taking to lock in the
numbers are $7,150 and Child Tax Credit: The $1,000 gains of late 2004, but this
$14,600 respectively. tax credit previously set to money will slowly work its
expire after 2004 has been way back into the financial
Increased exemptions for the extended through 2010. markets.
Alternate Minimum Tax:
They are for 2005, for State Tax Deductions: There is still a lot of cash on
married taxpayers, $58,000, Individual taxpayers may the sidelines and this too will
and $40,250 for single elect to deduct either state and start working its way back
taxpayers. local income taxes or state into the stock market. The
local general sales taxes as an amount of money coming
For automobiles donated to itemized deduction on their back into the market has more
charity: Effective for federal income tax returns. than doubled in the past three
contributions made after The amount may be the actual months.
2004, a donor of a motor general sales taxes paid as
vehicle with claimed value of substantiated by accumulated It is time to stay the course
over $500 will be required to receipts or an amount from and use dips in the market as
substantiate the contribution IRS generated tables plus, if buying opportunities. 2005
with a contemporaneous any, the amount of general should indeed be a good year.
written acknowledgment for sales taxes paid on the
the donee. The purchase of a motor vehicle,
acknowledgment must boat or other items as
contain certain specific prescribed by the Secretary of
information about the vehicle the Treasury.
Northwest Financial Forecasts:
Our intermediate term (six months to one year) forecasts are:
Growth: Growth was revised up to a positive 4.0% for the third quarter. This was more than what
most analysts had been expecting. Analysts are now projecting growth of 4% into the last
half of 2004. At a bare minimum growth will be at least 3.5% percent.
Inflation: Inflation at the core rate for the wholesale level (PPI) in December was plus 0.1%. Year-
over-year the PPI is up 2.5%. The annual inflation index for the core CPI is also only
+2.2% year-over-year, the best it has been since 1966. At present there appears to be little,
if any, inflationary pressures. Most economists do not see any resurge of inflation in the
near future. December CPI figures were plus 0.1% which was better than expectations, and
year-over-year figures are still very positive
Interest rates: Rates will probably be rising in the coming months. The Fed raised short term interest rates
by another quarter percent at its December meeting. It is expected that the Fed will
continue to raise interest rates but not in any great amounts. Rates are still at 40-year lows.
This is now starting to work its way through the system.
Financial: Our one-year indicator forecast for a total return for the S&P 500 is now increased to plus
15%. The total return for bonds will be about 5%. Small and mid-cap stocks should return
to the mid double-digit returns for the next 12 to 18 months.
Market Position
Current market positions as of 01/20/05
Current Aggressive Growth Growth and Tax
Holdings Growth Income Deferred
US Equities 80% 55% 45% 50%
l
Int’ Equities 15% 15% 10% 10%
l
Int’ Bonds 0% 0% 0% 0%
US Fixed Income 5% 30% 45% 40%
Money Markets 0% 0% 0% 0%
S
YEAR-TO-DATE LOOK AT THE WORLD’ FINANCIAL MARKETS
(January 20, 2005)
Exchange 2005 Exchange 2005
Milan +1.9% Sydney +0.1%
Amsterdam +1.7% Frankfurt -0.3%
Singapore +1.5% Tokyo -0.7%
Paris +1.3% Toronto -1.4%
Zurich +1.2% U.S. Dow -2.3%
Brussels +1.2% U.S. S&P -2.3%
Mexico City +0.9% Honk Kong -3.9%
Stockholm +0.6% U.S. OTC -4.7%
London +0.1%
All materials presented are compiled from sources believed to be reliable, but are not guaranteed, and it is
not our intent to state or imply that our opinions can guarantee profitable results in the future.
Please contact your adviser if there are any changes in your financial situation or investment objectives, or
if you wish to impose, add or modify any reasonable restrictions to the management of your account. Our
current disclosure statement is set forth on Part II of Form ADV and is available for your review upon
request.
We would like to say thank you and please feel free to call if there are questions of any kind. Our next
Financial Trends Newsletter will be mailed around February 15th.
Cordially,
Ronald G. Arends, CFP™
President