Paul Kasriel Celebrates Festivus

This one is worth reading. Kasriel (Northern Trust) is a consistently enjoyable read. A little more playful than your typical economist, his recent piece is a Seinfeld-themed, economic strip search of the American Household. And the message is a serious one.

Don't let the dark prognosis ruin your New Year's good times though. While Kasriel makes some great illustrations and highlights some important forces at work, they are not measured against any of the positive forces in our economy. Its always a tug of war out there, and our path forward will follow the balance...

Is The Writing On The Wall? Or Is That Just The Artwork?

In a memorable essay about a year and a half ago, John Mauldin (one of my favorite economic writers - you can read more here) discussed correlations between economic cycles and the markets for Wine, Race Horses, and Fine Art. His commentary suggested that these three items tend to see a spike in value at the tail end of economic boom, as investors feel wealthy and look for alternative places to speculate on investment value. It is an interesting theory. At the time, he noted some recent value increases in these markets, and expected that our economy would be soon slowing (for other reasons - this was just 'another barometer'). Perhaps he was just a bit early.

The markets today are much less confident, and we are seeing a zigzag in the main indexes with frequent 3-digit gains or losses. Volatility is a sign of uncertainty. The near-term future of the economy is a subject of debate right now amidst the mortgage market and credit market meltdown/paralysis/crunch/etc.

This article caught my eye recently. I had not realized this, but I guess the market for Fine Art is still on a tear (I can't comment on Race Horses or Wine). Just an interesting theory to keep aware of as we are all looking for signs of whats coming next. It feels like any day now we may see a market top, and a realization that we are in (or about to be in) a recession. But I also hope we can digest this whole subprime episode in small bites, and move on without too much damage. I won't be making predictions investment decisions based on the value of Fine Art, but I can't shake that concept either.

Mortgage Relief Act HR 3648 Update From CMPS

Update # 1 - Mortgage Relief Passed by Congress & Signed Into Law by the President!

On Thursday, December 20th, President Bush signed into law a bill passed by Congress: HR 3648 –Mortgage Forgiveness Debt Relief Act of 2007. The three major points are:

· Elimination of the “phantom tax” on foreclosures, short sales or other discharges of debt on a primary residence. Consider this scenario: A property is worth $250,000, and the mortgage balance is $300,000. Under the old rules, if a lender forgave the $50k difference as part of a foreclosure, short sale, refinance or loan modification, the borrower had to claim the $50k as income and pay federal income taxes on that amount. The new law eliminates this “phantom tax”, and the forgiven debt is no longer treated as taxable income to the borrower as long as certain requirements are met, such as the discharged mortgage balance must be on the taxpayer’s principal residence.

· The tax deduction for mortgage insurance premiums is now extended until December 31, 2010 instead of expiring at the end of 2007. The same rules apply as before in terms of the income limitations etc.

· The capital gains exclusion is now $500,000 instead of $250,000 for an unmarried individual who sells their primary residence within 2 years of the time their spouse has died. This new guideline applies to sales after December 31, 2007, and provides relief for widows and widowers by giving them a 2 year window from the time their spouse has died to sell their home and receive the $500,000 exclusion. Of course, the same rules apply as before, where the individual(s) need to have lived in the home as their primary residence for 2 out of the last 5 years.

You can read the full version of the bill by visiting the THOMAS Library of Congress web site and searching for HR 3648. Version # 6 (the enrolled / ENR version) is the final version that was passed by both the House and Senate.

Update # 2 - AMT Relief Passed by Congress

After much drama and a few rounds of chicken between the House and Senate, Congress FINALLY passed AMT relief on Wednesday, December 19. The President has indicated a strong willingness to sign this bill into law, and it is currently awaiting his signature. Under this one year patch, approx. 20 million taxpayers have escaped the clutches of the AMT. However, approx. 3.5 million taxpayers are still expected to be subject to the AMT.

If you have questions related to any of these updates, consult with your tax advisor or contact me for more info.

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*** Posted with help from CMPS Institute

Credit "Issues"

Every day the news headlines seem to set a different tone for this market. Credit "issues" persist, but the Fed is cutting rates, mortgage applications are at a 2 1/2 year high, and then more banks are closing, cutting jobs, or just cutting off access to their money. One day its up, one day its down. Volatility like this is typical of an uncertain market. So until the reach of this market adjustment is defined, we will see choppy waters, and business who lend money will make defensive posturing moves.

Today, the following blurb from "Inside Mortgage Finance":

American Express Stops Allowing Mortgage Payments American Express recently notified some of its customers that it will no longer allow them to make mortgage payments with their credit cards. The company said it will stop allowing such payments in two months. Studies suggest that when borrowers face financial trouble, they default on their credit card payments or auto loans before defaulting on their mortgage. AmEx noted that paying via credit card for fees associated with obtaining a mortgage is still acceptable.

Yikes! I guess it stands to reason that paying a mortgage by credit card would be a great way to rack up frequent flyer miles, but it also seems a slippery slope. I guess I am just amazed to learn this was even possible. But now that it isn't, it represents yet another example of a source of liquidity disappearing...