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Keeping Client Trust is First and Foremost at Raymond James

Thursday, December 15th, 2011

By now you’ve heard of the collapse of MF Global Holdings Ltd. and its finance subsidiary MF Global Finance USA Inc. At present, the company and its executives, including former New Jersey Governor Jon Corzine, are being questioned by officials as to why the firm failed to keep customer money separate – as required by law – from company money used in failed investments in the euro-zone. The firm’s business model has also come under scrutiny.

Rest assured Raymond James is aware that public trust and confidence in our industry is one of the most significant concerns we face. That is why Raymond James operates a far more conservative business model; unlike many of the other firms that have incurred the kinds of problems that result in client distrust and ultimately business failure.

As a firm that celebrates financial pragmatism and prudent business practices, Raymond James has delivered 95 consecutive quarters of profitability. Raymond James has chosen not to be in the commodities business directly because it does not want to expose clients to the inherent risk and the potential for loss. And Raymond James does not put the stability of the firm at risk by incorporating high degrees of leverage on its balance sheet in order to enhance shareholder return, a practice that saw the company through the financial crisis of 2008 without having to take a bailout or lay off employees. Yes, Raymond James’ goal is to be profitable – but not at the peril of its business, investors or clients.

Raymond James is equally dedicated to high principles of honesty and business ethics. That means it meticulously adheres to SEC rule 15c3-3 that was put in place to protect clients and their funds from financial misfortune. In fact, in March 2011, in a survey that involved 673 companies from 32 countries, Fortune magazine ranked Raymond James Financial the fourth most admired securities company in the world because of its quality of management, products, services and social responsibility.

 Our business and personal reputation rest confidently having a company like Raymond James behind us. And it is a confidence we do not bestow lightheartedly. The firm’s unwavering commitment to its founding core values of putting clients first, conservatism, independence and integrity is demonstrated each and every day. And we have the utmost confidence Raymond James will be as committed to protecting client trust in the future as it is today.

 If you have any further questions concerning the stability of Raymond James or would like to discuss the many other issues facing investors today, please don’t hesitate to contact us.

 Compliance approval M12-0435

 

Year End Tax Planning: 10 Things to Keep in Mind

Wednesday, November 23rd, 2011

The window of opportunity for many tax-saving moves closes on December 31. So set aside some time to evaluate your tax situation now, while there’s still time to affect your bottom line for the current tax year. With that in mind, here are 10 things to consider as the curtain closes on 2011.
1. Deferring income to 2012 means postponing taxes

Consider opportunities you might have to defer income to 2012. You might be able to delay a year-end bonus, for example. If you’re able to push what would have been 2011 income into 2012, you may be able to put off paying income tax on the deferred dollars until next year.


2. Paying deductible expenses sooner may help you in 2011

Does it make sense for you to accelerate deductions into 2011? If you itemize deductions, it might help your 2011 bottom line to pay deductible expenses like medical costs, qualifying interest, and state and local taxes before the end of the year, instead of waiting until 2012.


3. Income tax rates to remain the same in 2012

The same six federal income tax rates that apply in 2011 will apply in 2012. So, depending upon your income, you’ll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket. And, as in 2011, long-term capital gains and qualifying dividends will continue to be taxed at a maximum rate of 15% in 2012; and if you’re in the 10% or 15% tax rate brackets, a special 0% tax rate will generally continue to apply.


4. Is AMT a factor?

If you’re subject to the alternative minimum tax (AMT), special rules apply. For example, the AMT rules can effectively disallow a number of itemized deductions, making it a potentially significant consideration when it comes to year-end planning. You’re more likely to be subject to AMT if you claim a large number of personal exemptions, deductible medical expenses, state and local taxes, and miscellaneous itemized deductions. If you’ve been subject to the AMT in the past, or think that you might be for 2011, you’ll want to make sure that you understand how the AMT rules might affect you.


5. IRA and retirement plan contributions

Employer-sponsored retirement plans like 401(k) plans and traditional IRAs (if you qualify to make deductible contributions) present an opportunity to contribute funds on a pre-tax basis, reducing your 2011 taxable income. Contributions that you make to a Roth IRA (assuming you meet the income requirements) aren’t deductible, so there’s no tax benefit for 2011–they’re still worth considering, though, because qualified distributions are free from federal income tax. The window to make 2011 contributions to your employer plan closes at the end of the year, but you can generally make 2011 contributions to your IRA up to April 17, 2012.


6. Special distribution requirements at age 70½

Once you reach age 70½, you’re generally required to start taking required minimum distributions (RMDs) from any traditional IRAs or employer-sponsored retirement plans you own. It’s important to make withdrawals by the date required–the end of the year for most individuals. The penalty is steep for failing to do so: 50% of the amount that should have been distributed. Barring additional legislation, 2011 will be the last year to take advantage of a popular provision allowing individuals age 70½ or older to make qualified charitable distributions of up to $100,000 from an IRA directly to a qualified charity (these charitable distributions are excluded from your income, and count toward satisfying any RMDs that you would otherwise have to take from your IRA for 2011).


7. Depreciation and expense limits to drop for business owners and the self-employed

If you’re a small business owner or a self-employed individual, you’re allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011; this “bonus” first-year additional depreciation deduction will drop to 50% for property acquired and placed in service during 2012. For 2011, the maximum amount that can be expensed under IRC Section 179 is $500,000, but in 2012 the limit will drop to $139,000.


8. Last chance to deduct energy-efficient home improvements

This is the last year you’ll be able to claim a credit for energy-efficient improvements you make to your home (up to 10% of the cost of qualifying property). Improvements can include a qualifying roof, windows, skylights, exterior doors, and insulation materials. Specific credit amounts may also be available for the purchase of energy-efficient furnaces and hot water boilers. However, there’s a lifetime credit cap of $500 ($200 for windows). So, if you’ve claimed the credit in the past–in one or more years since 2005–you’re only entitled to the difference between the current cap and the amount you’ve claimed in the past.


9. Other expiring provisions

Barring additional legislation, this is the last year that you’ll be able to elect to deduct state and local general sales tax in lieu of state and local income tax, if you itemize deductions. This also will be the last year for both the above-the-line deduction for qualified higher education expenses, and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals.


10. Get help

Making effective year-end moves requires a solid understanding of the rules that are in effect for both 2011 and 2012. It also requires a comprehensive grasp of your overall financial situation. A financial professional can help you evaluate potential opportunities, and can keep you apprised of any last-minute legislative changes.

Approved Re:FX2011-1118-903/E

Social Security Increases Benefits by 3.6%

Thursday, November 10th, 2011

For the first time since 2009, the Social Security Administration announced a cost of living adjustment (COLA) to recipients’ monthly Social Security and Supplemental Security Income (SSI) benefits. More than 60 million Americans will see the 3.6% increase in their payments by January 2012. The increase was put in place to ensure the purchasing power of these benefits isn’t eroded by inflation and is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers.

This is good news for many, but I wanted you to be aware of another change, as well. Starting next year, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase from $106,800 to $110,100. Of the estimated 161 million workers who will pay Social Security taxes in 2012, about 10 million will pay higher taxes as a result of the increase in the taxable maximum.

Keep in mind, as of May 2011, new recipients of federal benefits – including Social Security retirement benefits – are required to establish direct deposit to receive their payments electronically; physical checks will no longer be issued. In addition, beginning March 2013, all federal benefits – new and existing – will require direct deposit. So if you’re already receiving benefits by this date, you will need to establish electronic transfers to your bank or financial institution. I’m happy to help you set up a cash management solution that will satisfy the new direct deposit requirements.

You may also like to know that we’re now in the annual open enrollment period for Medicare that happens each fall. This year, you have until December 7 to review your benefit choices and costs and elect new coverage, if you need to make changes. Please take the time to go over these important options. If you haven’t yet enrolled in Medicare, keep in mind you must do so within the seven-month period around your 65th birthday. Please contact me if you have any questions or need assistance; I’m available to help.

Compliance approval M12-0202

Standard & Poor’s Downgrades Long-Term U.S. Credit Rating to AA+

Monday, August 8th, 2011

On August 5, Standard & Poor’s announced that it has lowered its long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating. The outlook on the long-term rating is negative. Standard & Poor’s also removed the short- and long-term ratings from CreditWatch negative.

According to its website, a Standard & Poor’s rating outlook assesses the potential direction of a long-term credit rating over the intermediate term (typically six months to two years).  CreditWatch highlights Standard & Poor’s opinion regarding the potential direction of a short-term or long-term rating.

Standard & Poor’s has indicated it will release more information on August 8 “concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance and structured finance sectors.”

Separately, on August 2 Moody’s confirmed its ‘Aaa’ bond rating with a negative outlook for the U.S. government.

More information about ratings is available at standardandpoors.com, moodys.com and fitchratings.com.

While the immediate effects of these actions are currently unknown, we will continue to monitor the situation and the markets. To view updates and commentary as they are available, please visit raymondjames.com.

Compliance approval M11-1680

The Budget Control Act of 2011

Monday, August 8th, 2011

After a last-minute agreement finally brought the stalemate over the nation’s debt ceiling to a close, President Obama signed the Budget Control Act of 2011 into law on August 2, 2011, enabling the U.S. Treasury to avoid defaulting on existing obligations.

The Budget Control Act of 2011 left all sides with plenty to argue about over the next few months. In addition to increasing the debt ceiling, it would bring down the federal budget deficit by an estimated $2.1 trillion over the next ten years. It also sets the stage for more debate over how to achieve that $2.1 trillion reduction, focusing on spending cuts rather than increased revenues. Here are some of the key provisions.


Debt ceiling will be increased in stages

The $14.3 trillion debt ceiling will be increased immediately by $400 billion, and by another $500 billion after September. The increases will allow the Treasury to pay bills without interruption after August 2.

Assuming deficit reduction measures are adopted by the end of the year, an additional $1.2 trillion to $1.5 trillion in borrowing authority will be available in 2012, which is believed to take care of the Treasury’s needs until 2013. Though Congress could vote to disapprove the additional borrowing authority, that action could be vetoed, which would prevent a rerun of the recent uncertainty.


Immediate limits are imposed on discretionary spending

Caps on domestic and defense spending will cut an estimated $900 billion to $1 trillion–roughly the same amount as the initial increase in the debt ceiling–from federal budgets over the next decade.


Joint congressional committee will seek $1.5 trillion in additional deficit reduction

A special joint select committee of 12 Democrats and Republicans from both the House and Senate will be charged with finding ways to reduce the deficit by an additional $1.5 trillion. The committee, which must be appointed within two weeks after the legislation is signed, is directed to report its proposals by November 23, 2011; by December 2, it must submit legislation to implement them. Both houses of Congress must vote on that legislation, which cannot be amended, by December 23.


Additional spending cuts, 2012 debt ceiling increase tied to deficit reduction agreement

The joint committee’s deficit reduction proposals will determine the amount of an additional increase in the debt ceiling. If the committee’s proposals are approved by Congress, the debt ceiling will be increased in 2012 by the amount saved by the deficit reduction measures. If the committee cannot agree on how to cut the deficit by at least $1.2 trillion, or if Congress doesn’t approve the committee’s proposals, the new debt ceiling increase would be limited to $1.2 trillion.

To try to prevent gridlock on the committee, failure to agree on at least $1.2 trillion in deficit reduction would automatically trigger an additional $1.2 trillion in broad-based spending cuts beginning in January 2013. The cuts would apply to both defense spending, such as the Departments of Defense and Homeland Security, and to nondefense spending, such as payments to Medicare providers. However, Medicare cuts would be limited to 2% of the program’s cost, and programs such as Social Security, veterans benefits, food stamps, and Supplemental Security Income (SSI) would be exempt.


Balanced budget amendment would give authority to increase debt ceiling

President Obama also would be granted immediate authority to increase the debt ceiling by $1.5 trillion if Congress were to pass by year’s end a constitutional amendment requiring a balanced budget. Such an amendment also would need to be ratified by three-quarters of the states.


Subsidized loans for graduate students eliminated

Subsidized-interest Stafford Loans for graduate and professional students (other than those in state-required teaching or certification programs) will end after July 1, 2012, though unsubsidized loans will still be available. The Act also adds $17 billion in mandatory funds over two years for Pell Grants to compensate for the funding gap.

Compliance approved: 2011-005539

Update on U.S. Debt Ceiling and Possible Credit Downgrades

Tuesday, July 19th, 2011

Chances are you’ve heard about the ongoing debate surrounding raising the U.S. debt ceiling and even more recently about Moody’s announcement that it could potentially downgrade its credit rating for U.S. Treasuries and other institutions linked to the U.S. government. On top of that, Standard & Poor’s placed the U.S. on “CreditWatch Negative” based on the rising risk of a policy stalemate. The agencies themselves believe the risk of any payment default by the U.S. government is low, but increasing slightly.

Moody’s also placed on review for possible downgrade the Aaa ratings of institutions directly linked to the U.S. government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks and the Federal Farm Credit Banks. Also included are those securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the U.S. government or the affected financial institutions.

With all the uncertainty, we wanted to give you some perspective from the renowned investment professionals at Raymond James.

  •  Our fixed income team, for example, is following Standard & Poor’s closely because the agency has said it may downgrade the outlook for U.S. ratings even if the debt ceiling is raised, unless a “substantial and credible” deal is struck to put the nation’s future borrowing and spending ways on a more sustainable path. This, in turn, could have implications for AAA-rated municipal credits that are linked to the federal government or otherwise vulnerable to sovereign risk. At least 7,000 top-rated municipal credits may also be placed under review for possible downgrade if the U.S. government loses its Aaa grade, according to Moody’s.
  • Chief Economist Scott J. Brown, Ph.D., believes “it’s important to remember that the debt ceiling crisis is a manufactured problem. The U.S. must address its long-term budget situation and the debt ceiling has to be raised, but these are separate issues. Lawmakers can raise the debt ceiling right now if they want to, and worry about the long-term budget deficit later. Using the debt ceiling as a political bargaining tool is foolish.”

While we do not yet know what decisions will be made, rest assured that we are monitoring events closely to better gauge their potential impact on investors.

If you’d like to read the latest updates, please visit the Bond Market Commentary page on our website at http://www.marvinellis.com/deliver/marketcommentary.php.

Please let us know if you have any questions about these ongoing events or how they may impact your portfolio. We’d be glad to discuss them with you.

Compliance approval M11-1569

There’s Still Time to Contribute to an IRA for 2010

Thursday, March 17th, 2011

There’s still time to make a regular IRA contribution for 2010! You have until your tax return due date (not including extensions) to contribute up to $5,000 for 2010 ($6,000 if you were age 50 by December 31, 2010). For most taxpayers, the contribution deadline for 2010 is April 18, 2011. Normally, your tax return must be filed by April 15. However, the IRS has extended the deadline to April 18 this year because the 15th is a holiday in Washington D.C. (Emancipation Day).

You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit. You may also be able to contribute to an IRA for your spouse for 2010, even if your spouse didn’t have any 2010 income.


Traditional IRA

You can contribute to a traditional IRA for 2010 if you had taxable compensation and you were not age 70½ by December 31, 2010. However, if you or your spouse was covered by an employer-sponsored retirement plan in 2010, then your ability to deduct your contributions depends on your filing status and whether your modified adjusted gross income (MAGI) is within prescribed limits. Even if you can’t deduct your traditional IRA contribution, you can always make nondeductible (after-tax) contributions to a traditional IRA, regardless of your income level. However, in most cases, if you’re eligible, you’ll be better off contributing to a Roth IRA instead of making nondeductible contributions to a traditional IRA.


Roth IRA

You can contribute to a Roth IRA if your MAGI is within certain dollar limits. For 2010, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is $105,000 or less. Your maximum contribution is phased out if your income is between $105,000 and $120,000, and you can’t contribute at all if your income is $120,000 or more. Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your income is $167,000 or less. Your contribution is phased out if your income is between $167,000 and $177,000, and you can’t contribute at all if your income is $177,000 or more. And if you’re married filing separately, your contribution phases out with any income over $0, and you can’t contribute at all if your income is $10,000 or more.

Finally, keep in mind that if you make a contribution to a Roth IRA for 2010–no matter how small–by your tax return due date, and this is your first Roth IRA contribution, your five-year holding period for identifying qualified distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2010.

Created by Forfield 2011

Compliance Approved till 12/31/2014

Estate Tax Exemption Is Portable (For Now)

Monday, February 21st, 2011

Introduction

Recent legislation introduced a new, but perhaps temporary, estate planning concept–exemption “portability.” In short, the estate of a deceased spouse can transfer to the surviving spouse any portion of the federal estate tax exemption that it does not use. The surviving spouse’s estate can then add that amount to the exemption it is entitled to, increasing the total amount that can be passed on to heirs tax free. This new feature makes it easier for married couples to minimize the potential impact of estate taxes.


The federal estate tax exemption defined

The federal government imposes a tax on the value of your property when you pass it along to your descendants at your death. Any amount that is passed to a surviving spouse is generally fully deductible. The estate is also allowed to exclude a certain amount that passes on to nonspouse beneficiaries. That amount is called the “basic exclusion amount,” which is $5 million in 2011.


How the exemption works for married couples

Prior to the new tax law, if a spouse died without having planned for his or her exemption, the deceased spouse’s estate would have passed tax free to the surviving spouse under the unlimited marital deduction (assuming all assets passed to the surviving spouse), and the deceased spouse’s exemption was lost or “wasted.” The surviving spouse’s estate could then only transfer an amount equal to his or her own exemption free from federal estate tax. To solve this dilemma, married couples typically set up what is commonly referred to as a credit shelter trust (aka “bypass” or family trust) that sheltered or preserved the exemption of the first spouse to die.

The following example illustrates how portability can achieve a similar result without the use of a credit shelter trust.


Example: Result without portability

Assume Henry and Wilma are married, have all of their assets jointly titled, and have a net worth of $10 million. Henry dies first, when the federal estate tax exemption is $5 million and there is no portability. Henry’s estate passes to Wilma free from federal estate tax under the unlimited marital deduction and does not use any of his $5 million exemption. Assume that at the time of Wilma’s death, the exemption is still $5 million, the federal estate tax rate is 35%, and Wilma’s estate is still worth $10 million. With Henry’s exemption completely wasted, Wilma can pass on only $5 million free from federal estate tax. Assuming no other variables, Wilma’s estate will owe about $1,750,000 in federal estate tax: $10 million estate – $5 million exemption = $5 million taxable estate x 35% estate tax rate = $1,750,000.


Example: Result with portability

Assume Henry and Wilma are married, have all of their assets jointly titled, and have a net worth of $10 million. Henry dies first, when the federal estate tax exemption is $5 million and there is portability. As above, Henry’s estate passes to Wilma free from federal estate tax under the unlimited marital deduction and does not use any of his $5 million exemption. Even though Henry’s estate owes no tax, Henry’s executor files a timely return on which he elects to transfer Henry’s unused exemption to Wilma. Assume that at the time of Wilma’s subsequent death the exemption is still $5 million, the federal estate tax rate is 35%, and Wilma’s estate is still worth $10 million. Since Wilma has “inherited” Henry’s unused exemption, she can pass on the entire $10 million estate free from federal estate tax. Portability of the estate tax exemption saves Henry and Wilma’s heirs $1,750,000 in estate tax.


Portability does not eliminate the benefits of credit shelter trusts

Even with portability, there are still tax and nontax considerations that may lead you to use a credit shelter trust, such as:

  • The portability feature is in effect for only two years and will expire after 2012, unless Congress enacts further legislation.
  • The trust can help protect assets against creditors of the surviving spouse or future beneficiaries (typically children and grandchildren).
  • The trust gives the first spouse to die control over the ultimate distribution of his or her assets. For example, in a second marriage situation, one spouse may wish to ensure that any assets remaining after his or her spouse’s death pass to his or her children from a previous marriage.
  • Appreciation of assets placed in the trust will escape estate taxation in the survivor’s estate.
  • The portability feature applies only to estate tax; it does not apply to the generation-skipping transfer (GST) tax. Without a trust, any unused GST tax exemption of the first spouse to die will be lost.


Some technical information

To use the exemption portability, the first spouse to die must elect to use portability on his or her estate tax return. An estate tax return must be filed by the first spouse to die to use portability even if the return is not otherwise required to be filed.

Many states have state estate tax exemptions that are less than the federal estate tax exemption. So, while your surviving spouse might not be subject to federal estate tax upon your passing, your surviving spouse may have to pay state estate tax if you rely solely on the federal exemption portability.

Exemption portability is available only from the last deceased spouse. It will be lost if the surviving spouse remarries and is widowed again. In other words, if the surviving spouse survives spouse 1, the surviving spouse can use spouse 1′s unused exemption even if the surviving spouse marries spouse 2. However, if spouse 2 also predeceases the surviving spouse, the exemption of spouse 1 can no longer be used. However, the surviving spouse can then use the unused exemption of spouse 2.

Source: Forefield Inc.
© Copyright 2006 – 2011 Forefield Inc. All rights reserved.  AD #: 2011-001184

Investment Implications from Egypt Crisis

Monday, February 7th, 2011
Written by Joseph S. Tanious, CFA, Vice President Market Strategist at J.P. Morgan Funds

In 1974, while in their early 20s, my parents picked up and left their native country of Egypt for North America. Having grown tired of Egypt’s corrupt political system and religious oppression, they left their friends and family, along with everything they had, in the hopes of creating a better life for their future family. Three years later, my sister was born, and four years after that, I was born.

Watching the events of the past week unfold in Egypt evokes mixed emotions for all Egyptians, both those living in Egypt and abroad. In one corner, there’s hope. Perhaps this really is the end of the autocratic regime that has ruled Egypt for decades and, as a result, the beginning of a democracy. In the other corner, there’s fear. Over the course of one week, the country has completely fallen apart, and there appears to be little, if any, law and order. Over the past few days, I’ve reached out to several relatives living in Egypt, and despite Internet and cell phone service being shut down, I was able to connect with them. The following is based on conversations with them, along with some broader perspectives on the implications, and potential implications, of the Egyptian crisis for markets and investors.

Boiling Over

In a sea of confusion, one thing is clear: Egyptians have grown tired of Hosni Mubarak and the National Democratic Party. By way of background, the National Democratic Party is only democratic by name, as Egypt has been in a “State of Emergency” since 1967, which has given the president unilateral control.

While Egypt is rich in history, it is beset by problems in the present, the culmination of which ultimately led to these protests. With an official unemployment rate of around 10% (many argue the real number is significantly higher), it is estimated that approximately 20% of Egypt’s population of 80 million live below the poverty line. In talking with people in Egypt, their perception and belief is that the real figure is about twice that. Moreover, Egypt’s GDP per capita is around $6,200. To put this in perspective, U.S. GDP per capita is approximately $46,000 and even Mexico’s is $13,200 as people over the age of 15 who can read and write) at a very low 60%-70% of this even worse is that there appears to be no catalyst for change and, therefore, no hope.

With all of these issues growing and compounding, there was bound to be a breaking point. So what was it? While the successful protest movement that ousted the Tunisian dictator, Ben Ali, in mid-January 2011 may have been the immediate spark for the riots, Egypt was already at the boiling point as a result of last November’s Parliamentary election. Once again, Hosni Mubarak’s party managed to gain over 80% of the seats in Parliament through what was supposed to be a democratic vote. After growing tired of corruption and rigged elections, the youth of Egypt (the median age in Egypt is 24 years old) decided it was time to retake control of their country. Through the use of social media outlets like Facebook and Twitter, the youth organized demonstrations beginning on Tuesday, January 25, 2011, that drew more protesters each day.

While the underlying issues in Egypt would seemingly affect poor Egyptians more than the wealthy, the call for Mubarak to resign comes from a unified Egypt – the voice of all social classes, ages and religions. Perhaps that’s what makes this movement so powerful; not only are students out in the street protesting, but doctors, lawyers and business owners are standing by them, voicing the same demands. Word of these organized protests spread like wildfire, and by Tuesday, February 1, 2011, these demonstrations had grown so large that they were referred to as the Million Man March.

In the meantime, much of the country’s normal business has come to a standstill. The stock market is closed, businesses are shut down and the classrooms are empty. Since the police disappeared for a few days (the rumor is that Mubarak disbanded the police to create chaos in an attempt to end the protests), civilians were forced to arm themselves in an effort to protect their homes and businesses. One person I spoke with hired Bedouins from the deserts of Egypt to come guard his warehouse with swords. The jails have been raided, and many criminals have been released. Civilians have set up two to three checkpoints on every major street and are searching people when they are found driving after curfew. If the driver appears suspicious or carries a weapon, the civilians tie the suspect to a light post until the army can come arrest him. Stores are running low on food and water, ATM machines are limiting cash withdrawals and the situation is quickly deteriorating. What makes it even worse is that Mubarak pulled the plug on Internet and cell phone services, which only makes life that much more difficult.

What happens next?

The situation in Egypt changes almost hourly. That said, based on the latest events, it appears this situation could play out in one of three ways:
  1. Mubarak resigns and turns power over to the Egyptian people immediately and, through some type of international support, Egypt holds its inaugural truly democratic election, ending the protests.
  2. Mubarak maintains that he will not run for office in September, but wishes to complete his term – this eventually appeases the public and the protests end.
  3. Mubarak maintains that he will not run for office in September, but wishes to complete his term – the public is unhappy and continues to protest until he resigns.

While it seems clear that Mubarak’s rule will soon come to an end, the bigger question is what happens next? One result of the long suppression of opposition movements in Egypt is that this is particularly unclear.

Although it seems unlikely, a change in power from one dictator to another would certainly be a step in the wrong direction. However, for the West, it’s probably even a bigger problem if the new government is hostile to the West.

The U.S., in a tough political spot, obviously wants to encourage democracy, yet has been dependent on the Mubarak administration to provide some stability in an always volatile Middle East region. America has also paid for this stability, providing Egypt with nearly $2 billion in military and economic aid.

The risk to oil

However, if stability turns to instability, what does it mean for the global economy?

The first concern is the production and distribution of oil. Here the direct effects should be relatively minor. Egypt is not a significant oil producer, ranking only 29th in the world in oil production. Nor is the Suez canal that crucial a trade route for oil, as it is too narrow for the largest supertankers. Moreover, unlike the Straits of Hormuz at the mouth of the Persian Gulf, goods that can’t get through Suez always have an alternative route.

However, the issue of contagion is a far more significant risk. Egypt is not the only nation in the region marked by autocratic rule and great income inequality. If a revolt in Egypt becomes a revolution that encourages similar revolutions in the states that surround the Persian Gulf, the result could be a temporary, but serious, disruption in oil supply to the world. Even concerns about such an eventuality could lead to a spike in oil prices.And nothing is more chilling to the global economy than a surge in oil prices. According to a 2004 study conducted by the International Energy Agency, even a $10 per barrel increase in oil prices has the potential to cut U.S. real GDP by 0.3%(3) Oil is currently trading around $92 per barrel, a modest jump from the high $80s we saw before the demonstrations in Egypt began. If these issues continue to escalate and the price of oil were to rise, for example, to $145 per barrel (where oil peaked in 2008), the U.S. economy would take a hit of approximately 1.5%. To put things in perspective, the U.S economy grew at a rate of 2.8% in 2010. A sharp increase in oil prices to $145 per barrel would have knocked off about half the economic growth we saw last year. An even bigger shock to oil prices would obviously have an even larger impact on the economy. Imagine the cost of gasoline rising to $10 per gallon? How about $20? In theory,it would literally cripple the U.S. and possibly the global economy.

A few final thoughts

While these fears may never materialize, and we don’t expect them to, it is clear why this issue in Egypt and, ultimately, stability in the Middle East, remains critical. The Egyptian crisis has not yet reached a level that changes our overall view of the U.S. economy, global economy or the relative evaluation of assets. However, it does remind us that despite the strong recovery in corporate profits, attractively valued equity markets and a strengthening global economy, it’s important that investors maintain a balanced approach to risk in their portfolios.

While I sincerely hope these issues are resolved in a peaceful manner, I’m also hopeful that Egypt’s government will make a true change for the better. As someone in Egypt told me yesterday, “It’s not the person that needs to change, it’s the system.” I hope the government makes the appropriate constitutional changes to truly reflect a democratic system; a system that allows the freedom of speech, freedom of religion and a system that creates opportunities. I personally thank today’s Egyptian youth for standing up for what they believe in and hope they eventually see the positive changes that they are fighting for. Additionally, I hope that today’s generation of young Egyptians and the generations after them, unlike my parents’ generation, aren’t forced to leave their country in hopes of creating a better life for their own future families, but can instead build that better life in their native land.

Contact JPMorgan Distribution Services, Inc. at 1-800-480-4111 for a fund prospectus. You can also visit us at www.jpmorganfunds.com. Investors should carefully consider the investment objectives and risks as well as charges and expenses of the mutual fund before investing. The prospectus contains this and other information about the mutual fund. Read the prospectus carefully before investing.

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3 International Energy Agency: Analysis of the Impact of High Oil Prices on the Global Economy, May 2004

College Board Releases New College Cost Numbers

Thursday, November 4th, 2010

College cost trends
Every October, the College Board releases its Trends in College Pricing report that highlights college cost increases and trends. While costs can vary significantly by region and individual college, the College Board publishes average cost figures, which are based on its survey of 3,500 colleges across the country.

Here are highlights from its latest report:

  • At four-year public colleges for in-state students, tuition and fees increased an average of 7.9% from last year to $7,605, and room and board costs increased an average of 4.6% to $8,535. Total average cost for 2010/2011 is $20,339.
  • At four-year public colleges for out-of-state students, tuition and fees increased an average of 6.0% from last year to $19,595, and room and board costs increased an average 4.6% to $8,535. Total average cost for 2010/2011 is $32,329.
  • At four-year private colleges, tuition and fees increased an average of 4.5% from last year to $27,293, and room and board costs increased an average of 3.9% to $9,700. Total average cost for the 2010/2011 year is $40,476.

“Total average cost” includes tuition and fees, room and board, books and supplies, transportation, and a small amount for miscellaneous expenses.

To read the Trends in College Pricing report, visit www.trends-collegeboard.com.

Student aid trends
The College Board notes that the average cost figure is not necessarily representative of what most college students pay. That’s because approximately two-thirds of undergraduate students receive grants that reduce the actual price of college. The largest provider of grant aid is individual colleges, followed by the federal government, private sources and employers, and state governments. Some students and their parents also benefit from federal education tax benefits.

The College Board estimates that for the 2010/2011 academic year, students at public colleges will receive an average of $6,100 in grant aid from all sources and federal tax benefits, while students at private colleges will receive an average of $16,000 in grant aid from all sources and federal tax benefits. Federal tax benefits include the American Opportunity tax credit (formerly called the Hope credit), the Lifetime Learning tax credit, and the deduction for qualified higher education expenses.

Every year, the College Board releases a sister report to Trends in College Pricing, called Trends in Student Aid, that examines student financial aid in more detail. To read this report, visit www.trends-collegeboard.com.

Source: Forefield Inc.
© Copyright 2006 – 2010 Forefield Inc. All rights reserved.  AD #: 09-05991

09-05991

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