A Christmas Carol: Oil-Style

640px-Marley's_Ghost-John_Leech,_1843I was awakened the other night by the Ghost of Christmas Past. He brought me back to times when a gallon of gas was over $4 and it cost me around $75 to fill up my car. He reminded me how back then we didn’t yet have today’s fracking methods of obtaining what was hard-to-extract oil from our American land. He also reminded me that the demand for oil was much stronger then, thanks largely to China’s growing needs. He showed me how it wasn’t so bad in that a new alternative energy industry was born with innovative companies working on hybrids, electric cars, and other things.

Then – poof – he was gone.

I regained my composure and wondered if what had happened was really true or just a dream. But before long another Ghost appeared: The Ghost of Christmas Present (“TGOCP”). TGOCP took me to the nearest gas station where I saw people with big grins on their faces filling up their cars for an average of $2.51/gallon (according to AAA). He urged me to fill up my car, that same car, that used to cost $75 to fill in years past. Low and behold, it only cost me about $40. Wow! That’s $35 I can spend on something else, TGOCP told me, stuff like clothes, smartphone gadgets, to use at the movies, or to eat out. If you’re like me and fill up at least once per week, this extra dough really can make a difference. TGOCP told me that basically this drastic reduction in oil prices is essentially a bump in salary for most Americans as it leads to more fun ways to spend our discretionary incomes. He flew me over to the nearest Wal-Mart and I saw delighted shoppers spending this extra money on all kinds of things! Wow, I thought to myself, stocks of retailers like Wal-Mart and Target must be really benefitting from this…

I told him how great this was and asked him to show me more, which he did by taking me to Norway. Not so many happy faces there. He said that this crash in oil prices isn’t a win for everyone. He told me that the big losers in all of this are oil exporters like Norway for whom commodity exports are some 20% of GDP. And that the currencies of oil producing nations, like Russia and Nigeria, get whacked in times like these which leads to drastic measures like Russia raising its key interest rate to 17% from 10.5% after the ruble’s sharpest daily drop against the dollar in more than a decade. Then he flew me to Wall Street where he showed me how this destabilization makes traders very nervous with the thought that it could lead to political unrest. He reminded me that there is always the fear that weakness overseas can wind up hurting the US since we are now such a global economy. While at the NYSE, he pointed out the share prices for energy companies and how many of them had fallen big time. He also pointed out the drop in high-yield bond prices as many of the companies in that space are linked to energy.

Yikes, stocks and bonds falling?!? Wake me up from this nightmare! Then – poof – he was gone.

I got a grip and assured myself that all of this was a silly dream, only for the Ghost of Christmas Future to come walking through my bedroom door. He said something about Marley this or Jacob that, and then grabbed me and brought me to Washington D.C. where some future Federal Open Market Committee (“FOMC”) meeting was taking place. Not sure how far off in the future this was, but Janet Yellen was talking about raising interest rates yet again. She was saying how these low oil prices were helping the American consumer appetite and keeping our economy heated to the point that they could continue to raise rates. Ghost of Christmas Future chimed in saying that he and his buddy Marley had been traders before and they don’t like talk of Fed interest rate increases…

I awoke. This time for real. It was the morning of December 17, 2014 and the Fed was going to conclude its FOMC meeting that afternoon. I pondered if these revelations were anything to hold a candle to and I awaited this afternoon’s FOMC remarks….

Editor’s Note: Oil is definitely a hot topic now and will probably be for a long while. We’ll keep our clients informed where necessary. In the meantime, have an excellent Holiday season and try to get out and see the real Christmas Carol, a Detterbeck family tradition for many, many years.

Can Money Buy Happiness?

happy moneyThe holidays bring an opportunity to examine many inherent aspects of our lives and assess the quality of our existence. It can be a profound and rather daunting ritual as we prepare for New Year’s resolutions and year-end evaluations. One question that comes to mind is how connected is our happiness to our financial circumstances? Can money buy happiness?

It turns out that how you spend your money is more important than how much you have. “Happy Money: The Science of Happier Spending”, by Elizabeth Dunn and Michael Norton outlines some core principles for spending that shows how to “buy” more happiness in your life. These authors and professors suggest that there are spending strategies and habits that can contribute to your overall happiness. Here is a breakdown:

• Buy experiences

Our human instinct is to acquire possessions and material goods for our comfort and convenience. People tend to believe that the purchase of a tangible item that lasts will bring more value than an experience that is fleeting. However, studies show that experiences might be worth more than you think. Experiences tend to bring a greater sense of connection to others and provide life-long memories that increase in value over time. You will always remember a wonderful birthday dinner at a special restaurant, a fishing trip to Costa Rica, or a family trip to Disney World, and talk about it for years to come.

• Make “luxuries” a treat

The truth is that everything is more enjoyable when consumed on a limited basis and that you CAN have too much of a good thing. The pitfalls of overindulgence are a good thing to remember during the holidays! This concept is also behind many corporate marketing strategies of limiting certain items to occasional offerings, making them more desirable.

• Buy some time

Make time for the things and people you love the most. Slowing down and not rushing allows you the ability to savor small pleasures. Taking that new job with longer hours or living in a bigger house that might require a longer commute may cause stress that makes you unhappy. A university of Zurich study estimated that you would need to earn 40% more to counteract a one-hour daily commute increase! Researchers at Princeton have determined that there is a certain income level of comfortable satisfaction, defined as around $75,000 in the U.S. They concluded that the “beneficial effects of money tapered off entirely after the $75,000 mark.”

• Break the Consumerism pattern

The authors suggest that saving up for something that you really want will increase the value you place on it and your happiness with it. Some studies also show that debt has a detrimental effect on happiness and that married couples in more debt had more marital conflict. As author Professor Elizabeth Dunn notes, “Savings are good for happiness” and incurring short-term debt has a negative impact. Have the money saved before you do something, not after.

• Don’t take things for granted

How many times have you watched a child have tremendous anticipation for and then excitement upon receiving a coveted gift? And then watched as the novelty and thrill of the new object quickly wears off? We tend to adapt to our purchases, so taking time to be grateful for what we have is shown to boost happiness. Studies show that employees tend to do a better job when they feel appreciated by their bosses, too.

• Spend on Others

Many studies have shown that people who spend money on others, or who practice “pro-social” spending behavior are generally happier. One study even suggested that people would be less resentful about paying taxes if they had more choice about how it was spent and felt more like it was a charitable contribution. A 2014 U.S Trust Study showed that 98.4% of high net-worth households make charitable donations and that 75% of these individuals volunteer their time. But what counts is not the dollar amount, but the perceived impact of the donation that increases your overall happiness. Studies show that people are happier when donating to charity, in time or in money, and in poor and rich countries alike.

As this year closes, take some time to give to others, spend time with those you love, show gratitude and don’t overspend. That is a financial plan that will make you happy!

Turning Uncle Sam into Santa Claus

uncle sam santa clausWe hope everyone had a great Thanksgiving holiday. We certainly did. Now starts the final countdown for 2014. Only twenty-some days to Christmas, and less than 30 days left before 2015 arrives. Hard to believe. Certainly, most everyone’s calendar is packed full for the next four weeks. We just wanted to make sure that tax planning is on your list of “must do” items before year-end. Of course, tax planning doesn’t rank in the same category as giving my mother a Christmas kiss, being with my family or watching Dickens’ “A Christmas Carol” for the fiftieth time, but it is important.

Two good reasons: none of us likes surprises and most everyone wants to take advantage of every legal way to reduce taxes. By reviewing your taxes before year-end (hopefully with your CPA), you not only see roughly where you are for the year, but also learn what you might be able to do before year-end to reduce Uncle Sam’s share of your income.

Congress is making it tough on all of us this year. They have delayed action on more than 50 business and individual tax breaks that expired on December 31, 2013. These so-called “tax extenders” include provisions that allow businesses to write off the cost of substantial equipment at a faster rate, tax credits to weatherize homes and some higher education expenses to be deducted.

The tax extenders have commonly been renewed each year, often right after elections or even retroactively at the beginning of the next year. As we go to press, the jury is still out on renewal. Even so, there are some tax breaks you should consider for 2014:

  • Consider upping your charitable contributions. This could be writing a few more or larger checks and/or giving non-cash items, like clothing, furniture and even an old car.
  • Consider giving appreciated stock to charity this year. You get a deduction for the value of the stock given, not the cost. And, you don’t pay capital gain taxes on the money if you have held the security for 12 months. If you aren’t sure of the charity you want to give the funds, you can make the gift to a donor-advised fund, such as Schwab’s, which allows you to get a deduction this year and then advise on the recipient next year.
  • Consider gifts to your family. No, there is no tax deduction for gifts. But, you can give up to $14,000 ($28,000 if you are married) to as many individuals as you like before December 31 without anyone incurring any tax. And, if you would like to, you can do it all over again on January 1, 2015.
  • Consider harvesting tax losses within your portfolio. DWM clients know that we already did this for our clients last month. It was tough again this year, as most positions for our clients are showing unrealized gains. Furthermore, remember that you can’t sell a loss position and buy it back within 30 days. That’s a “wash sale” and the IRS bars you from claiming this loss.
  • Consider paying certain items before year-end. These could include items such as real estate taxes, state income taxes, college costs, and mortgage payments.
  • Consider funding your IRA or Roth early. Yes, you have until April 15th to make the contribution for 2014, but why not get it working for you as early as possible. And, consider making 2015 contributions in early 2015.
  • Consider a Roth conversion for part of your IRA funds. Pay the tax once and allow the funds to grow tax-free forever; for your lifetime and that of your descendants. Furthermore, there are no required minimum distributions from Roth accounts starting at age 70 ½. You and your tax adviser will need to look at current and expected future tax rates to determine if this makes sense for you.
  • Check your withholding. Compare your estimated taxes to how much you have withheld. If you are way under, consider taking extra withholding in your final paychecks. And, if you are way under or way over, consider revising your withholding allowances for 2015.

So, between all the holiday festivities in December, you’ve got some homework to do. Get with your CPA and review your 2014 taxes and see if you can lower them. Let’s try to make Uncle Sam start to look like Santa Claus. Cheers!