WASHINGTON, November 30, 2012 – Yesterday’s trading went pretty much as we predicted in our mid-day column on November 29. The market had opened up sharply, following through from the previous day’s happiness about the nicey-nice, positive comments emanating from the House and the White House regarding a tidy solution to the fiscal cliff problem confronting the U.S. on January 1, 2013. Mid-morning, however, House Speaker John Boehner announced that “Democrats have yet to get serious” about the problem, larding on the tax increases while apparently intending to look at budget cuts some time in FY 3000. The market quickly tanked.
Not long after Boehner’s statement of the obvious, however, other nice noises emanated from some precincts of the Fed, hinting that QE3 could go on, oh, maybe until FY 4000. The markets put their happy face back on and resumed the rally.
Today, we’ll likely get more of the same with, perhaps, an opening upside bias but probably concluding on a less positive note, with those investors still trying to play this game selling off dubious assets lest Syria, Iran, Greece, or Harry Reid do something stupid and unpredictable over the weekend that will jeopardize what money they have left.
To keep things in the spirit of the current Washington merry-go-round, we’ve posted yet another cliff-diving picture at the top of this article. This fellow is leaping into Oregon’s Crater Lake. Looks cold. Maybe a little bit like what will be facing us ahead as Congress will predictably fail to solve the fiscal cliff by January 1.
We don’t plan to do much today ourselves. Even after Tuesday’s bear raid, we’re continuing to hold some positions in precious metals via bullion ETFs, plus, we continue to look for decent yielding stocks that have been taken down about enough this year to make them a deal again, dividend tax or no. Particularly attractive these days are master limited partnerships (MLPs). These are stocks that look like REITs and act like REITs but have a little something special.
REITs, of course, were our mainstay in most of 2012, allowing us to pocket massive dividends, often in excess of 12%, something you won’t get in a T-Bill. We got rid of them all when the market decided to dump them, fearing the dividend tax on those high yields. But now we’re slowly climbing back in. We never wanted to get out, but you have to face market realities. In point of fact, the REITs we hold happen to live in IRAs and therefore most likely won’t face the 2013 dividend tax bit anyway. We simply got out of the way for awhile while everybody was busy panicking.
As to the MLPs, they, too, like REITs, pay high dividends, though not quite so high—maybe 5-10%. But as an extra-added attraction, depending on the MLP, much of the rich dividend action here can be tax exempt. These oil and gas-centric vehicles often characterize a substantial portion of their dividends as return of capital. Which means it ain’t taxed because, well, it was your capital to begin with.
What’s not to love? These puppies can be parked in your regular portfolio with relative impunity, at least for now. Who knows what the Democrats will do if they ever figure this loophole out.
Keep in mind a caveat or two here. MLPs, like any stock vehicle, can go up and down, so they’re not like a Treasury issue. Second of all, there are certain limitations as to how much, in dollar amounts, you can get in dividends before triggering tax problems. Last time the Maven looked, you could book up to $1000 in MLP dividends—per account—without a tax problem. To get around the issue, obviously, you’d calculate potential dividends before purchasing MLPs and then make sure that no single individual account would exceed the dividend limit, which, BTW, apparently applies even to IRA accounts.
Since the tax laws seem to change about every other day in this era, however, we’d strongly encourage you to get a read from your tax advisor or attorney before cobbling together a package of these investments. And also remember that things can still change. Again.
As for us, we currently are holding MLP positions in Markwest Energy Partners (MWE), Legacy Reserves (LGCY), and LinnCo LLC (LNCO), having picked two out of the three up on recent secondary deals. These are like IPOs, but they’re new issues of stock from already-traded public companies. LinnCo was an actual IPO but we couldn’t get in on the deal, so we bought shares when they dropped near the IPO price.
One other option in the MLP arena is the fairly new ETF known as the ALPS Alerian MLP ETF (symbol AMLP). This ungainly moniker is the corporate name for an ETF that carries a basket of MLPs that are part of the Alerian MLP index.
The big advantage of AMLP is quite simple. Like REITs, MLPs have to issue stockholders K-1 forms annually. If you own a lot of these vehicles, the K-1s come in by the bucketload and you have to log every one of them, along with their arcane data, into your tax return. Making matters worse, the K-1s don’t have to be in your mailbox by January 31, like your W-2s. We’ve often gotten them as late as July, so if you own these things, you have to plan on more paperwork and on late filing of your returns since you won’t get all the info probably until mid-summer in some cases.
Which gets us back to AMLP. In return for its slightly higher fee, AMLP simply trades and issues dividends (obtained via its basket of MLPs) like a normal stock. They have to do the paperwork. You don’t, so you also don’t have to wait for those K-1s to show up. Nice.
On other assorted flotsam, we noted this morning a New York Times piece reprinted online at CNBC, which asserted we’re all paying a lot less taxes than we did in 1980. The article is very elegant, impressive, and convincing. Problem is, it’s also a crock if you read between the lines. In point of fact—unless you’re part of Mitt Romney’s free lunch 47%—we’re all paying more taxes, not less, because the incomes of everyone who’s working at least, are much higher.
Second of all, the Times’ figures don’t even mention all the unemployed and underemployed, whom, of course, none of the NYT’s writers even know personally. This tends to artificially reduce the over all tax take anyway, something that’s never mentioned, as the Times gives us no real math and doesn’t disclose its methodology. They also fail to mention the elephant in the room. The reason tax rates themselves went down after 1980 was the Reagan Revolution that cut them and eliminated the inflation indexing of tax increases. The Democrats—backed by the Times—would really like to get that money back.
What the Times is really up to, of course, is carrying water for President Obama and the Democrats. If you buy the Times’ horse hockey, you’d think, “Gee, yeah, I really am getting a deal on my taxes. So sure, I wouldn’t mind paying more to save the country and stuff.” Right. Any new taxes will immediately flow into the pockets of crony capitalists and the teachers’ unions anyway. Were we born yesterday? It’s amazing to think that the Times was once considered America’s paper of record. Still is by those who believe it. Perhaps they still believe in the tooth fairy as well.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.
Any positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
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Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.
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