The Commerce Department revised its estimate of 3Q Gross Domestic upward from an annual rate of only 1.6% to 2.2% in November.  Most of the other economic reports released over the last month were on the negative side, including the housing market and even the manufacturing sector.  Yet consumers remain surprisingly confident, and retailers are expecting at least a decent holiday sales season.

The latest disappointing GDP report makes it much more likely that the Fed is finished raising interest rates, and that we should expect the Fed to begin cutting rates early next year.  Even though Fed chairman Ben Bernanke continues to talk tough on inflation, The Bank Credit Analyst continues to predict that we will see several Fed rate cuts next year, which should contribute to an economic rebound in the second half of 2007. 

The stock and bond markets have continued to rally on the news that the economy is slowing and the Fed is likely done raising interest rates.  The Dow Jones continues to set new record after new record.  Bond yields continue to fall.  As Iwill discuss on the following page, BCA expects these trends to continue in 2007.

This month, I will discuss the subject of “gifting” to your kids, grandkids and/or other loved ones by way of the gift tax exclusion.  Current tax law allows you to gift up to $12,000 per year to a child, grandchild, or anyone, with no tax consequences to either the donor or the recipient.  A husband and wife can give $12,000 each, or a total of $24,000 a year, with no tax consequences for the donor(s) or recipient(s).

With the Democrats now in control of both Houses of Congress, I expect they will change the estate tax laws to be more onerous in the next few years.  So, I believe now is the time to get serious about gifting to those you love as a way to transfer wealth legally and tax free.  I will also discuss ways you can target these gifts into investment programs that can benefit your intended heirs for years to come, especially if they don’t have enough money to invest on their own. I think you’ll find this very interesting.

I WISH A JOYOUS HOLIDAY TO ALL & A HAPPY NEW YEAR!

As you know, I have been a continuous subscriber to The Bank Credit Analyst for almost 30 years now.  I continue to find BCA’s advice on the economy, inflation and the major investment markets to be the most accurate of any source I have followed.  And Martin Barnes, the Managing Editor of BCA, is kind enough to allow me to share BCA’s thinking with you from time to time, as have previous Managing Editors over the years.

For the last year or more, BCA has predicted that the US economy was headed for a slowdown, but they have maintained the view that the most likely outcome would not be a recession.  Instead, the editors have predicted a slowdown that would last for 2-3 quarters, followed by a rebound in the economy next year.  And so far, they have been right on the money, as usual, unlike the gloom-and-doom crowd that always predicts a recession or worse.

BCA’s relative optimism, if you will, has been based primarily on two factors.  First, the editors believe that the US inflation rate will trend lower in the months ahead, and we have started to see evidence of this, with more to follow in their opinion.  Second, the editors believe that the slowing inflation rate would compel the Fed to stop raising interest rates.  We have seen this as well.

These two factors, primarily, led BCA to become bullish on stocks late last year, and even more bullish earlier this year.  They have been long-term bulls on energy for the last couple of years and believe we are at or near another low point now.  They are not bullish on precious metals, and in fact, have been bearish for most of this year.  As usual, BCA has been accurate in these forecasts, at least to this point. 

With that background in mind, here is BCA’s latest thinking as of this first week of December, as published in their latest weekly U.S. Investment Strategy report (along with my bracketed comments for better understanding).

“The case for a soft economic landing [no recession] remains intact, which is sustaining our bullishness on financial markets. Hopes that housing has troughed, or will even soon revive, are premature, underscoring that the gradual retrenchment in consumption has further to run. The slowdown has spread to manufacturing, with the ISM survey dropping below 50% in November. The silver lining in this slowdown is that inflation pressures have quickly receded, thereby providing the Fed with the leeway to ease down the road.

The Fed is still talking hawkishly, but this has not been a roadblock to lower Treasury yields. Inflation expectations have more downside, and the Fed eventually will ease policy (undoubtedly only after the unemployment rate moves up). For stocks, the market is getting stretched, but still offers good value compared with other assets. The case for a re-rating [higher prices] in equities remains good, although much higher P/E ratios may not develop until the economic slowdown is nearing an end, and investors start to gain conviction in the durability of the economic expansion.

The correction in energy prices is probably over, and we have upgraded our stance on energy plays to overweight. Conversely, base metals prices still seem at risk of correcting [falling], or at least consolidating, given the slowing global economy, including the key source of demand - China. That said, the longer-term outlook is still favorable.”

So, the editors at BCA continue to believe the most likely economic scenario is not a recession, and that the economy will rebound next year.  They remain positive on stocks, and bonds to a lesser degree, and look for energy prices to rebound next year.  They are mildly negative on the metals markets.  These forecasts assume, of course, no major negative surprises such as terrorist attacks, wars, etc., etc.  To subscribe to BCA, call 800-724-2942 or visit www.bcaresearch.com.  Highly recommended!

Introduction”

While we're all very busy this time of year, the holidays are also a good time to review your investments and make any changes you deem necessary prior to the year-end.  Use your holiday time to implement changes, if needed, and get everything in place for the start of the new year.

Since we're entering the season of giving, I want to talk about the issue of "gifting" and how you can give up to $12,000 per year to your kids or grandkids (or anyone for that matter) with no tax consequences.  A husband and wife can give $12,000 each, or a total of $24,000 a year, with no tax consequences for the donor(s) or recipient(s).

Gifting is one good and legal way to minimize estate taxes.  You can transfer large sums of money to your kids or grandkids (or whomever) by taking advantage of gifting.  Of course, there are smart ways to do this, and there are not-so-smart ways to do this.  You need to be careful in how you take advantage of the "gift tax exclusion."

The point is, this is the time of year to consider the smart ways of gifting to those that you love.  I will discuss this in more detail in the pages that follow.

As we approach the Christmas season and the holidays, I will finish by telling you what I am particularly thankful for at this time of year.

Gifting To Those You Love

Let me begin this discussion with a quick bit of background.  Being in the investment management business, we get questions every year from clients and prospective clients who are trying to help their kids or grandkids learn to save and invest wisely.  One of the most common comments we hear from clients and prospective clients is: "I would really like to help my kids with investing, but they just don't have enough money to get started.  They just don’t seem to be able to save enough money."

This is often all too true.  Most young families just make ends meet and don't have the savings to start an investment program when they are younger and really need to.  Along that line, another very common comment we hear is: "I would love to give them the money to get started, but I worry they would just blow the money on wasteful things."

Yet there are ways to gift money to your kids or grandkids that are not only earmarked for certain financial expenditures (college, medical, etc.), but can be targeted for investments that will serve them well later in life.  And there are ways you can increase the odds that money you gift to your kids or grandkids will be used for the purposes you desire.

I will talk more about that below, but first let's explore the basics of the gift tax exclusion.  Current tax law allows you to gift up to $12,000 per year to a child, grandchild, or anyone, with no tax consequences to either the donor or the recipient.  As noted above, a husband and wife can give $12,000 each, or a total of $24,000 a year, with no tax consequences for the donor(s) or recipient(s).  And there is no limit on how many persons you can gift the $12,000 to in a given year.

The annual gift tax exclusion is one of the most popular ways that wealthy individuals transfer a portion of their estates to their heirs over the years prior to their deaths, thus reducing the significant estate taxes their heirs will have to pay.  Gifting has the double benefit of helping those you love and reducing estate taxes that go to the government.

I'm surprised that more families don't take advantage of the gift tax exclusion.  My wife, Debi, and I gift the maximum to our two kids - currently $12,000 per parent or $24,000 a year to each child.  We gift this money each year into trusts that we have set up for each of our kids.  Trusts are a very popular and effective way to transfer assets to your kids, grandkids or anyone you care about.

Gifting: Control Is The Issue

One of the requirements of the gift tax exclusion is that the beneficiary must eventually have ownership and control of the assets donated.  This is a big deal when considering gifting $12,000-$24,000 (perhaps annually) to a child, grandchild or other person(s).  Generally speaking, if you gift it, the money becomes theirs at some point (depending on how you give it), and it is possible that they can just blow the money on wasteful spending if they want.

This is one reason why many people do not elect to take advantage of the gift tax exclusion, as far as I can tell in talking to estate tax attorneys.  But there are ways - directly and indirectly - to effect control of the assets gifted to the beneficiary.  If the child is a minor, the gifts can be made to a trust which can designate what the money may be spent for, such as college, medical expenses or whatever.

As noted above, Debi and I have established trusts for each of our minor children, and these trusts are where we make our annual contributions.  Trust laws vary among the states, so I won't get into what type of trusts may be best in your particular situation, but this can be a very good way to transfer assets to minor children or grandchildren and maintain control over those assets, at least until they reach legal age, or whatever age(s) you specify in the trust(s).

In some states, minors do not have the right to execute a contract, and thus cannot own stocks, bonds, mutual funds, annuities and life insurance policies in their names.  In such cases, parents cannot simply transfer assets directly to their minor children, but instead must transfer the assets to a trust. The trust(s) can be a private trust you establish for your kid(s) with the help of an attorney, or a custodial account such as a UGMA or UTMA account, both of which can hold securities.

The Uniform Gift to Minors Act (UGMA) established a simple way for a minor to own securities without requiring the services of an attorney to prepare trust documents or the court appointment of a trustee. The terms of UGMAs are established by state statute instead of a trust document. The Uniform Transfer to Minors Act (UTMA) is similar, but also allows minors to own other types of property, such as real estate, fine art, patents and royalties, and for the transfers to occur through inheritance. The UTMA is slightly more flexible than the UGMA.

To establish a custodial account, the donor must appoint a custodian (trustee) and provide the name and social security number of the minor. The donor irrevocably gifts the money to the trust. The money then belongs to the minor but is controlled by the custodian until the minor reaches the age of trust termination. The age of trust termination is 18 to 21, depending on the state and whether it is an UGMA or an UTMA. Most UGMAs end at 18 and most UTMAs at 21, but it does depend on the state. Custodial accounts are most often established at banks and brokerages.

If you create your own trusts, be sure to use a competent attorney.  Trust laws vary in different states, especially the rules regarding the age of trust termination.  In most states, the age of trust termination is 21; however, in some states, the termination can be later, in which case you might consider multiple ages (even up to 40 years of age) so that they don’t get the money all at once, and get most of it when they are older and more mature.

Whether its a private trust or a UGMA or UTMA, the custodian has the fiduciary responsibility to manage the money in a prudent fashion for the benefit of the minor.

The bottom line is that gifting is a great way to transfer assets to those you love without tax consequences.  But there must be a high degree of trust involved, and if you form trusts, be sure to use an attorney that is familiar with the laws of your state.

Gifting To Adult Children

As noted above, you can gift to minors by establishing trusts, or UGMAs or UTMAs, in which the donor(s) can maintain control of the assets.  But there is also a way to gift to adult children which can  be very effective, at least in my experience.  Consider gifting them an investment account. 

Here is one way it can work.  Let's say you are the parents or grandparents of an adult child.  The two of you agree to gift $24,000 (or some lesser amount) to your adult child or grandchild.  But you only agree to gift the money if it goes into a specified investment account.  And you may agree to gift another $24,000 in the following year (or years) if things go as planned.

This approach is only advised if you have a good relationship with the adult child (or whomever you wish to help).  It should be laid out carefully at the onset that this investment account is indeed a long-term program, and that the money should be kept in the account and not withdrawn for expenses, spending, etc.

For donors who have the where-with-all to gift for more than one year, the main gamble is really the first year in regard to adult children.  You make it clear that if they maintain the investment, rather than spending the money, you may (at your discretion and under certain specified conditions) continue to make gifts in future years.  This provides a huge incentive for the beneficiary to keep the money in the investment account.

If they don't follow your instructions, you simply stop the gifts beyond the first year.  Sounds simple, but it can be very effective.

This method of gifting will also create a big incentive to the child or grandchild to become more knowledgeable about investing in general, which is what you want.  If they get into investing, that means they'll likely get more serious about saving, cutting expenses, building wealth, etc., etc.

A Good Gifting Strategy, In My Opinion

Let's say that you and your spouse want to gift $24,000 to a child or grandchild via the gift tax exclusion.  And let's say you agree with me that an investment account is the way to go.  Now what?  In previous issues of this newsletter, I have discussed our "Absolute Return Portfolios."  We have searched among the thousands of stock mutual funds to find those that have delivered consistent returns in both up and down markets.  We have put together groups of these successful funds to make up our Absolute Return Portfolios.  Of course, past results are no guarantee of future results.

The Absolute Return Portfolios are structured to fit the needs and goals of different types of investors.  We have three different Absolute Return Portfolios which we refer to as Moderate, Moderate-Plus and Aggressive.  Each of the three portfolios contains 5-6 different mutual funds.  The funds selected for each of these portfolios vary in terms of performance, ranging from conservative to more aggressive.

Best of all, the Absolute Return Portfolios can accommodate various levels of gifts.  The minimum investment required to invest in one of our Absolute Return Portfolios is normally $15,000.  However, if you would like to gift an investment to someone you love, we will accept minimum accounts of only $10,000 for a limited time.  There is no maximum amount that can be invested in our Absolute Return Portfolios.

In order to do this with our assistance, you establish an account at TD Ameritrade where your funds are held, and grant us the authority to purchase the selected mutual funds on your (or the recipient's) behalf.  You will receive copies of the monthly account statements if you are the custodian for a trust or an UTMA or UGMA account.    

As always, I have my own money invested in all three of these programs.  We have our kids' money invested in the Moderate Absolute Return Portfolio.  If this sounds like something you are interested in, or if it may be a suitable gift for someone you love, give us a call at 800-348-3601 and we will send you the necessary paperwork to get started.

Gifting Professionally Managed Accounts

Here’s another option.  Most of you reading this newsletter have accounts with one or more of the professional money managers I recommend.  You know and appreciate the value of having professionals direct some of your investments with “active management” strategies that can get out of the market (or hedge positions) should we get into a bear market or an extended downturn.

In last month’s issue of Forecasts &Trends, I highlighted one of my favorite professional money managers - Potomac Fund Management.  Potomac has an excellent long-term performance record as you can see from last month’s newsletter or you can go to www.halbertwealth.com/Potomac. While past performance is not necessarily indicative of future results, you might consider gifting enough money to open a Potomac account to a child, grandchild or other loved one.

Potomac’s normal minimum account requirement is $50,000.  However, my clients can open accounts with only $48,000 for a limited time.  Here’s one way you could make that happen.  Let’s say you and your spouse each want to gift $12,000 to a loved one, for a total of $24,000.  You could gift $24,000 this year and another $24,000 in early January for next year, making a total of $48,000.  Potomac accounts are held at Fidelity Investments, so you would open a Fidelity account this month to hold the first donation of $24,000 (placed in a money market account).  Then in the first  week of January, you would add the second donation of $24,000, for a total of $48,000.  At that time, Potomac could begin to manage the account.

If this plan makes sense for you, then you need to act quickly to establish the account at Fidelity Investments this year and get it funded with the initial $24,000 this year.  You can open the Fidelity account by going to www.fidelity.com or by calling 800-FIDELITY.  You will find the account opening process very simple and easy.

At the same time, you need to contact us at 800-348-3601 so that we can send you the Potomac Fund Management account paperwork.  You can get this paperwork in place with us, and we can send it to Potomac at the same time you make your second donation of $24,000 in the first week of January.  Once that is done, Potomac can begin to manage the account and start investing in the funds it selects.

If this sounds complicated, just give us a call and we will walk you through it.

Now More Than Ever,
Think About Gifting

With the Democrats taking control of both House of Congress, and a good chance a Democrat will be elected President in 2008, I fully expect that the plan to eliminate the estate tax by 2010 will be scrapped.  And if the Democrats have their way, estate taxes are likely to go up, not down.  As we all know, the estate tax is targeted at wealthy individuals that have assets in excess of the applicable exclusion.

For this reason, I would seriously recommend that you consider a gifting program now.  This is an effective way to transfer wealth to your beneficiaries without tax, while you are alive, and reduce your estate taxes later on.

The simplest way to accomplish this through my company is to invest in our Absolute Return Portfolios.  Call us at 800-348-3601 and we can get you the paperwork needed to establish your account, as well as discuss with you which of the three portfolios is suitable for you or your beneficiaries.  If you are interested in establishing such an account with Potomac Fund Management, we can get you the information you need right away.  In either case, you need to act quickly in order to make your gifts count as 2006 donations.  Think about it.

In the October 31 issue of my weekly Forecasts & Trends E-Letter entitled ‘Beyond Living Wills,’ I emphasized how important it is to organize and write down information on your financial/investment assets in one place so that they are readily available to your spouse or other loved ones upon your death. 

It is amazing to me how many different places financial information is kept in many families.  Some have part of their information at their office, other parts at home, some in a file cabinet, some in a dresser drawer, some in all of the above, etc., etc.  There are times when survivors find important documents only by accident, and sometimes many years after death.

There’s no wonder why many survivors have a hard time figuring out what their financial situation is, because they are having a hard time finding all of it, much less sorting it out.  An article I recently read  estimated that as much as 25% of life insurance benefits are not paid to beneficiaries because they didn’t know a policy existed.  How sad!

In that same October 28 E-Letter, I also announced that we had secured the right to reproduce a very valuable booklet entitled “All They’ll Need To Know” which provides a comprehensive set of lists for recording all of your important financial and investment information in one place.  It even includes sections for you to record your wishes upon your death, including your funeral arrangement preferences and other instructions for your loved ones to follow upon your death. 

We sent a copy of ‘All They’ll Need To Know’ to all of our clients in early November, and then I offered it to my E-Letter subscribers on October 31 - all free of charge, of course. 

Well let me tell you, the response has been absolutely overwhelming!  We initially printed 3,000 copies of the booklet, thinking that would be ample to handle all the requests.  No way!  We have had a huge response from readers, and had to order an additional 2,000 copies for a total of 5,000.

We have also been surprised by the number of clients and subscribers that have subsequently called or e-mailed asking if they could get extra copies of the booklet for their kids or other loved ones.  Obviously, ‘All They’ll Need To Know’ has been a huge hit with our clients and subscribers, and I know it will fill a very important element of their financial and estate planning.

I must tell you that this is by far the largest response we have ever received for anything I have ever offered in my weekly E-Letter.  We’re amazed!  And we got more comments from readers than ever before.  I am overwhelmed with the number of readers who took the time to thank me in writing for making ‘All They’ll Need To Know’ available, to thank me for writing my weekly E-Letter, and to tell me how much they enjoy it. 

When you work so hard week in and week out on something like my weekly E-Letter, which is typically 7-8 pages long, 52 weeks a year, it is very gratifying to hear from so many readers with such positive comments.  Likewise, I am very pleased that so many E-Letter subscribers took advantage of this offer and will benefit greatly from ‘All They’ll Need To Know.’

If you did not receive your free copy of “All They’ll Need To Know,” you can still get one by calling us at 800-348-3601.  If you have loved ones that you feel may need a copy, you can also request extra booklets free of charge as long as supplies last.

Thanks so much for your huge response on this and all the very kind comments.  Now make sure you take full advantage of ‘All They’ll Need To Know’ for the benefit of your loved ones after your death.

Time For Giving Thanks

The outpouring of thanks and positive responses to ‘All They’ll Need To Know’ reminded me that it is also important for me to convey my thanks to those who influence my life and my business throughout the year.

First, I want to express appreciation for my clients, who really make all of this possible.  Were it not for those who have entrusted us to manage their investments, there would be no newsletter.  My companies currently have almost 1,300 clients representing every state in the Union, and many of these individuals have been our clients for over a decade.  In many cases, what began as client/advisor relationships have now developed into warm friendships.

Next, I want to express my sincere appreciation to all those who regularly read my weekly E-Letters.  Since its start in September of 2002, I have continued to be impressed at the quality of most responses to my writing.  I greatly appreciate your input - positive or negative (within reason).  These comments, help me to put out a better E-Letter and monthly newsletter.  I also want to thank the good folks at InvestorsInsight.com that publishes my weekly E-Letters to apprx. one million subscribers.  I greatly appreciate the platform they provide to get my message out nationally.

Next, I would like to offer my sincere thanks to all of the Advisors we recommend.  Since we perform due diligence on each of them, we are well aware of all of the work it takes to formulate and implement a successful market strategy designed to  deliver good results and manage the risks of being in the market.  Thanks to them and their staffs.

I would be remiss if I did not extend a hearty thanks to my internal staff.  I am very fortunate in that all of my employees have been with my company at least four years, and a number of them have been with me for over a decade.  There are members of my staff that help me research topics for the weekly E-Letters, while others process information requests and speak to clients and readers who call with questions or comments.  And all of this is over and above their regular duties required in our investment management business.  The recent reader response for the "All They'll Need To Know" booklet seemed overwhelming to me, but my staff handled it like a well-oiled machine.  So thanks guys, you really help make me look good.

Of course, it is important to never forget to be thankful for your family.  My wife, Debi, who started the business with me, continues to work fulltime in the company and consults with me on all important business decisions.  She is also the CFO of the company and handles all of the detailed financial duties that allow me to concentrate on writing and overseeing our investment management business.   She does all that and is still my best friend and a great Mom!

I'm also thankful for my kids.  While we hear so many stories lamenting "out of control" teenagers, I am thankful that my kids are not among them.  My son, Tyler, is now a high-school junior, makes good grades, plays sports year-round, and works in the business during the summers.  My daughter, Jordyn, is an energetic freshman who also makes good grades and plays sports, and I expect that she will also begin working here in the near future.  Both are also actively involved in their youth group at our church.

On a larger scale, I am thankful to be living in the greatest country on the face of the earth.  Sure, we have our problems, but I am very thankful to live in the USA.  Most important of all, I am most thankful for our Lord God who has blessed me, my family  and our nation so bountifully.  May we all keep that in mind as we celebrate the holidays just ahead.

I wish you a Merry Christmas, a joyous holiday season and a happy and profitable New Year!!