Gift to Wall Street

September 19, 2007

Today’s 50 bps rate cut in the Fed Funds and Discount Rate has set everybody into a frenzy, and for good reason.  It’s hard not to feel great – my accounts were up 2.72% today. 

For the inflation-obsessed, today was a great chance to prove the point that Fed policy continues to be inflationary.  The Dollar fell hard today against foreign currencies, gold, oil, and agriculture commodities.

 

Was the rate cut appropriate?

There are well-reasoned arguments on both sides of this debate but something has me feeling uneasy about this rate cut.

Bernanke promised not to bail out the banks and hedge funds that lent recklessly during the boom.  If the rate cut isn’t a bailout, then why is everybody on Wall Street so damned excited today?  The rate cut has instantly helped to “reflate” asset prices.  This is hugely helpful to banks, brokerages, and the people that work there – bonuses are being saved by the Fed.

Practically speaking, the Fed really didn’t have much of a choice today — everybody expected at least 25bps and the bond market expected 50.  Without this rate cut we would have had a resumption of the crazy volatility and almost certainly a worsening of the credit crunch.

By cutting rates today, the Fed is sending the message that they are more concerned with preventing a recession than they are about protecting the value of the Dollar.  I won’t be selling my gold any time soon!

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My Thoughts on Gold

September 14, 2007

One of my favorite bloggers, Miserly Bastard, has posted recently on why he thinks gold is a bad investment. His post has inspired me to write about why I think gold is a good investment.

Readers of my old blog know that I am somewhat of a gold bug. I have been playing around in gold stocks, options, and futures (with disastrous results) for at least three years. By no means am I a doom and gloom guy, but I think that the arguments for owning some gold are very compelling. To frame my thinking on gold, I like to think of it as both a currency and an investment:

As a currency gold is

  • The world’s oldest currency and store of value
  • Impossible to create without digging it out of the ground – unlike Diamonds, real gold cannot be made in a chem lab
  • Hedge against a falling USD and fiat currencies in general
  • Hedge against inflation
  • Gold pays an attractive and tax-defered yield (this is a leap of faith but I consider it to be true because of the contango in gold futures)


As an investment:

  • Very strong demand for gold jewelry in India and China
  • Asian central banks hold a tiny percentage of their reserves in gold. Any meaningful change in this policy will present a huge upward force to the gold price
  • Gold bugs have a somewhat religious fervor for gold. If gold prices decline, there are lots of eager buyers

MB argues that the main reason he would own gold would be to protect against extremely unlikely economic situations “namely high inflation and/or rapidly weakening fiat currency.”

I don’t think either of these situations is extremely unlikely, in fact I think we’re experiencing them now and will continue to for some time. The government claims that inflation is 2% on an annualized basis. In my opinion, this number is a joke – the government cooks up the lowest possible number that they can reasonably get away with. Also, it’s in the government’s interest to have real inflation running at a much higher rate than reported inflation: it minimizes inflation-linked payments (Social Security & TIPS for example) and shrinks the real size of the outstanding debt.

As for MB’s second point, fiat currencies (especially the USD) have been weakening against hard assets for years. The forces causing this are secular in nature.

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How I own gold:

In my medium-term cash management account, I keep about 20% invested in GLD. GLD is an ETF which holds a pile of gold in a warehouse somewhere.

As an investment/speculation I own gold stocks: GDX and AAUK. Gold mining companies can do really well when the price of gold rises but it’s not a guarantee. Lately, the cost of mining gold has risen, causing profit margins to fall.

My total exposure to gold is less than 10% of my networth.


Great Buying Opportunity: Municipal Bonds

September 12, 2007

Back in early July when I wrote my Q2 ’07 Portfolio Review, I wrote about how I had created a “cash management account” where I segregated money which I anticipated needing in the next two to three years. The idea was to physically separate the money so that I wouldn’t be so tempted to trade with it.

It hasn’t exactly worked out as planned but I think it’s OK. My new goal for this account now is to maximize my after-tax returns. I am allowing myself to actively manage the account, with one caveat: I’m not going to ever use leverage.

In July and August I had all the cash parked in Yen. This turned out to be a good trade. As the fixed income markets broke down in August, the Yen has rallied sharply. On Friday I sold my position for a 4.01% profit which includes a miniscule amount of interest. Nothing spectacular, but it turned to be a lot better than municipal bonds (which is what I had thought of buying instead).

Speaking of which, the selloff in Munis has provided us a really great buying opportunity — I swapped out of Yen and bought shares of GHYIX . This fund invests in high yield (higher risk) municipal bonds from around the country. When I bought the fund last week, the yield was 4.8%. Since I don’t have to pay Federal taxes on this interest, my after tax yield is slightly above 5.13%. Not only is the yield very attractive, but I think the fund itself will appreciate as the fixed income markets return to normal over the coming months.

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On this subject there’s a great article on MSN Money by Tim Middleton. He lists three high quality, low cost, municipal bond funds you can easily and cheaply buy in your brokerage account. He also makes a great point about why it’s important to buy a fund with a low expense ratio:

The municipal bond market place has hazards for investors. In addition to above-average interest-rate risk, many muni funds accept significant credit risk as they reach out for higher yields. The average long muni fund has an expense ratio of 1.07%, meaning its manager spends a fifth of investment income paying himself. Since investors would notice such a huge price tag, managers patch it over with higher-yielding – i.e., riskier – bonds.


Flying

September 10, 2007

Thanks Toby for a great flight today!

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Is Your MBA Deductible?

September 6, 2007

 

Situation: A client of mine will be starting business school part-time this fall. His employer will not be reimbursing his tuition expenses of $30,000 per year.

Question: Can he deduct the full amount of this expense on his Schedule A? Forget about the Hope & Lifetime Learning credits for now. We want to know if he can deduct the full amount of the tuition as an itemized deduction.

Answer: The short answer is that I believe my friend should go ahead and take the full deduction. There is no guarantee the IRS will allow it but a recent court decision is very encouraging. Read on for more details.

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Section 162 of the Internal Revenue Code allows individuals a deduction for un-reimbursed business-related expenses. (The deduction is allowed only to the extent these and other miscellaneous items exceed 2% of the taxpayer’s AGI.)

In certain cases, job-related education expenses may be considered a business-related expense (Section 1.162-5). To qualify, the coursework needs to meet either of these two tests:

1. The classes must maintain or improve the skills needed to perform current job function.

2. The education is required by your employer or the law to keep your present salary, status or job.

However, if the coursework meets either of the next two tests, it is not qualifying work-related education, and thus not deductible:

1. The education is required to meet the minimum education requirement of a profession

2. The education will qualify you to perform a new trade or business

Because of these rules you can’t deduct your tuition for college, med school, or law school. Attending med school is a minimum requirement to become a doctor. Furthermore, graduating med school qualifies you to perform a new trade or business: being a doctor.

But what about business school? Generally speaking, an MBA does not qualify you to do any particular job. Moreover, it is not a truly a requirement for any profession that you have an MBA.

Until very recently however, the IRS did not agree with that assessment. In McEuen et. ux. v. Commissioner, the Court found that the MBA was indeed a requirement for the taxpayer’s industry (investment banking) and that the MBA qualified the taxpayer for a new trade or business (to be a full-fledged investment banker, as opposed to her previous title: Financial Analyst).

Earlier this year, however, in D.R. Allemeier v Commissioner, the Court ruled that the taxpayer, Daniel Allemeier, was allowed to deduct the full amount of his MBA tuition. The reason: his job responsibilities did not directly change as a result of the MBA.

Here is an excerpt from the Court opinion which addresses the rules listed above (Note: Respondent=IRS, Petitioner=taxpayer Daniel Allemeier):

 

Rule: MBA is not deductible if it is a requirement of his employment with the company

Court: We must determine, therefore, whether Selane products conditioned promotions, rather than employment generally, on petitioner beginning the MBA program. The record does not support respondent’s contention, however, that petitioner’s promotions were contingent on his beginning the MBA program. Encouraging petitioner to obtain MBA and speculating that he might advance faster with the MBA is not tantamount to a requirement that petitioner obtain the MBA. Moreover, we decline to find that a minimum education requirement existed merely because petitioner’s promotions happened to coincide with his enrollment in the MBA program.

 

Rule: MBA Does the MBA qualify the taxpayer to perform a new trade or business?

Court: We must next determine whether petitioner’s MBA qualified him to perform a trade or business that he was unqualified to perform before he earned the MBA. The Court has repeatedly disallowed education expenses where the education qualifies the taxpayer to perform “significantly” different tasks and activities.

Respondent claims that petitioner’s evolving duties and promotions after he enrolled in the MBA program demonstrate that petitioner was qualified for and indeed entered a new trade or business at Selane Products once he began the MBA program. In sum, respondent argues that the MBA qualified petitioner for the specific new trade or business of “advanced marketing and finance management.”

Petitioner disagrees and argues that the MBA enhanced and maintained skills he already used in his job, but did not qualify him for a new trade or business or for any particular promotions. Petitioner argues that the MBA merely capitalized on his abilities that he had before beginning the program, giving him a better understanding of financials, costs analyses, marketing, and advertising. After careful consideration, we agree with petitioner.

Accordingly, we find that petitioner’s MBA did not meet a minimum education requirement of Selane Products. Nor do we find that the MBA qualified petitioner to perform a new trade or business. Petitioner may deduct the amount of MBA tuition expenses.

 

Using this interpretation as precedent, it seems that MBA tuition will be allowed for many (if not most) people. It is highly dependent on individual “facts and circumstances” – the two most important being:

1. Did the MBA lead to a job in an entirely new field – one for which you would have been unqualified before earning the MBA?

2. Is obtaining the MBA a requirement of the job?

In other words, with careful planning and great documentation, the full amount of an MBA – which could be as much as $80,000 – can be written off. Great news!!

Whatever you do, don’t take this as specific advice. This post is meant as a starting point for further research and planning only.

 

Sources:

Daniel R. Allemeier, Petitioner v. Commissioner of Internal Revenue
United States Tax Court T.C. Summary Opinion

McEuen, Petitioner v. Commissioner of Internal Revenue
United States Tax Court T.C. Summary Opinion

Section 1.162-4 Business Related Educations
Code

Section 162 Trade or Business Expense
Code

Business Deduction for Work-Related Education
IRS

Is An MBA Deductible?
Wandering Tax Pro

Tax Court Ruling Allows Deduction on MBA Degree
Wall Street Journal

Writing Off an MBA
Business Week


Biking in NYC

September 5, 2007

A couple of my friends have recently acquired inexpensive bikes that they ride around town. I want to jump on the bandwagon but there are a couple of things holding me back. First, it’s not really that safe to ride on the major roads in NYC. I think the city is slowly becoming more bike-friendly and less car friendly. Nevertheless, it’s still very dangerous, all things considered.

The other problem: I don’t have a good place to store the bike when I’m not riding it. There’s just no way I could keep it in my apartment or building. Keeping it outside on the street seems no good either. I always see bikes chained to poles or fences with some part of the bike stolen. I snapped these pics walking along East Houston street yesterday:

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KC Concert

September 1, 2007

Thanks Dan for a great time at the Kenny Chesney concert!

A whole lot of John Deer-themed green lighting for She Thinks My Tractor’s Sexy: