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Pay attention to your investments

June 22, 2008|By Robert Gary

Analysis of the tax positions of Barack Obama and John McCain suggests that the Dow will drop below 11,000 in 2008, and here's why. People who have held stocks for the past eight years or so, and who have capital gains that could be realized, would rather take those gains with a 15 percent tax on them than a 20 percent tax. The only way they can be sure of this is to sell in 2008.

But people are busy, distracted and don't do long-term planning. Everyone discovers certain truths at about the same time. Then they move like a herd all in one day, or a few days. When this happens, there are very few buyers in a market where many people are trying to sell to get the 15 percent rate that might end in December of 2008.

Warren Buffett apparently told Barrack Obama that a 20 percent capital gains rate would not deter people from buying stocks. Strictly speaking, this is true. One would expect that many of the same people who will be locking in their 15 percent rate by realizing their gains in 2008, will come back into the market to re-purchase (possibly the same stocks) starting fresh with a higher basis in 2009.

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The House and the Senate are both likely to be in Democratic hands in 2009. Obama's 20 percent capital gains rate is likely to be made retroactive from the day it is enacted back to Jan. 1, 2009. So people who got out and paid 15 percent on their gains in 2008 will seem like the smart ones, unless they waited until herd-awakening day and lost back most of their capital gains by selling with the Dow around 11,000. This might be a good time to realize some capital gains if you can.

There are other differences between Obama and McCain that will also play a role in determining stock values in 2009. First, McCain is a free trader who believes in globalism. This approach has allowed many of the Fortune 100 Companies to derive much of their profits from overseas sales - to the benefit of their shareholders - many of whom are also overseas: The sovereign wealth funds, the funds from Arab financiers and princes, etc.

Obama is interested in trade arrangements beneficial to Americans, first and foremost, with academic theories coming in last and least. So his commitment to globalism is not as absolute and rigid as McCain's. This might mean some loss of revenue for American-based multinationals whose overseas operations have been the mainstay of their income during the Bush/Cheney years.

Another factor that might affect the U.S. stock markets is that dividends are payable in U.S. dollars. If the value of U.S. dollars in the future becomes so speculative that it imposes risks that are far greater than the business risks of investing in any particular U.S. company, then U.S. company share values will be affected.

Companies might decide to pay dividends in gold, silver or a market basket of hard currencies. This would allay fears that the return on investment might be wiped out by the vanishing value of the U.S. dollar. My expectation is that this will be exceedingly rare, with the possible exception of the Swiss banks, which might decide to pay their American shareholders in Swiss francs.

In any case, the inflation-protected I Bonds, which are a way of hedging against uncontrolled inflation, are a tempting alternative to the stock market for many investors. The I Bonds are low risk and what they pay is adjusted for inflation, so you get back the rate plus the inflation adjustment.

Holding Swiss francs, or better yet, an annuity denominated in Swiss francs, might be as good or better than I Bonds as a way of hedging against runaway inflation. The bottom line is that if Obama wins the White House, it would be prudent to have some sort of protection in case he turns out to be the tax-and-spend ultra-liberal that he walks, talks and quacks like.

Finally, platinum looks like a good investment. Why? It has no substitute as a catalyst for oxides of sulfur and oxides of nitrogen mitigation. The New Clean Air Act is going to kick in more and more over the next decade, and when it does, a lot of platinum catalytic screens will be needed.

The stuff is also essential as a catalyst in low-temperature fuel cells (anything below 300 degrees C). These may come into greater use in cars and in homes over the next 10 years. The platinum Eagles are widely recognized and easily traded, so if I'm wrong about this commodity's investment potential, at least you can unwind the investment and get out easily. Another thing to consider is that U.S. Eagle bullion coins are OK to put in an IRA or, even better, a Roth IRA.

Twenty years later, if they are in a Roth IRA, you take them out with all their increased value tax free - no matter what the tax levels are at that time.

But keep an eye on the law, because the government could pass a new law that eliminates the tax break you get with a Roth IRA. You can't stop them from changing the rules, so you have to keep an eye on the rules.

Nothing in this opinion is intended as either legal or financial advice. Use it at your own peril, or disregard it if you have better sources and can find information that will be more helpful to your individual situation. These are just my speculative musings, put out there for your amusement and consideration. Talk to a pro before making any decisions.

Robert Gary is a Hagerstown resident who writes for The Herald-Mail.

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