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BAM MARKET WRAP

December 12, 2013
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HO HO HO OR OH OH OH

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WHERE WE HAVE BEEN

With a little over 11 months of 2013 in the books, this is shaping up to be a banner year for the markets. Despite a number of headwinds and concerns from a growing number of advisors, the markets have pushed onward and upward. The S&P 500 and Dow both broke significant psychological barriers over the last three weeks. To this point, however, both have had trouble holding onto these levels (16,000 on the Dow and 1,800 on the S&P). There has been some modest selling pressure recently but, to this point, certainly nothing to be concerned about especially considering the gains the market has booked for the year.

WHERE WE ARE HEADED

December is one of the strongest months of the investing year and the latter part of December one of the strongest periods. The Santa Claus rally is widely talked about and widely expected. In years past, it has not disappointed. The last three weeks of December have produced positive gains in 8 of the last 10 years. The gains have ranged from 4.99% in 2003 to a modest .19% in 2011. The average of those 8 years is a 1.35% gain. In the two years that the market was down, the losses were -.88% in 2005 and -3% in 2007. So will this year be HO HO HO or OH OH OH? As we have discussed for some time, we remain very nervous about the health of the market and the growing headwinds. We have not wavered in that view. However, we do believe that as long as the Federal Reserve continues or increases its support of the markets, those headwinds are diminished and potential down moves are deferred. That could come into question next week as a small but increasing number of "experts" are predicting that the Fed will begin to taper their market manipulations at their December meeting. With a new Fed Chairman (Yellen) it is hard to gauge what the Fed might do but you could put us in the surprised camp if any changes were made at this meeting or the next for that matter. If the Fed produces no surprises, the markets will likely make modest gains into the end of the year and early January. All that said, one of the most interesting parts of our job and also potentially frustrating is that the markets can and do change quickly. For that reason, we are always ready to adjust our thinking and respond accordingly.

HOW WE ARE DOING

We have made a few modest changes to our portfolios over the last three weeks. It would not surprise us to have a few more days like yesterday (markets down a little) with a mild correction over the next few days. If that happens and the markets stabilize, we will become a little more active and make changes into year-end to capture the potential gains and begin to position ourselves for the new year. In all markets, risk management plays a big part in long-term investing success; even more so when risk is elevated, as it has been all year despite the nice gains. Thanks for your trust.

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Tidbits
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BEN AND THE GANG - The 8th and final meeting of 2013 for the Federal Open Market Committee (FOMC) is scheduled for December 17-18. It was at the Fed's December 2008 meeting (held on 12/16/08) that the FOMC voted unanimously to cut short-term interest rates to near zero from its then current level of 1%. Since then, the FOMC has met 39 times and voted on each occasion to leave rates unchanged (source: FOMC).

MISSED OUT - The median household income in the USA increased +124% (adjusted for inflation) over the 23 years from 1984-2007, an annual increase of +3.6% per year. From 2007-2012, our nation's median household income increased only +1.6% over the 5 years, an annual increase of just +0.3% (source: Census Bureau).

WHAT WE SPEND - Outlays by the US government during the 4 fiscal years of 1998-2001 averaged 18.5% of GDP, the last years that have produced a surplus in the United States (i.e., tax receipts in excess of outlays). Outlays by the government during the last 5 fiscal years (2009-13) averaged 23.8% of GDP. The 75-year average (1939-2013) for outlays is 20.5% of GDP (source: Office of Management and Budget).

WHAT IT WOULD RAISE - The effective tax rate of the 898,415 taxpayers that reported at least $500,000 of AGI in tax year 2011 was 23.5%, i.e., federal income tax paid as a percentage of AGI. Every 1% increase in the effective tax rate paid by taxpayers making at least $500,000 of AGI would increase federal income tax receipts by $13.5 billion (source: Internal Revenue Service).

THOSE THAT PAY ZERO - 4,592 taxpayers making at least $500,000 in AGI paid no federal income tax in 2011, equal to 1 out of every 196 filed returns reporting at least $500,000 of AGI. 46.1 million taxpayers making less than $30,000 of AGI paid no federal income tax in 2011, equal to 2 out of every 3 filed returns reporting less than $30,000 of AGI (source: Internal Revenue Service).

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We will have a busy but very enjoyable holiday season. Carter returns from UT today and Emily will move home for a couple of weeks and we will have a full house once again. It will be great to have the whole family here for a little while. Kelly's family will come into town a few days before Christmas for an early celebration and then we will make our annual Christmas Day trek to Knoxville. One of our most unusual Christmas traditions is our annual Christmas Day lunch at Subway! After Christmas morning at home, we make the drive to Knoxville and by the time we hit Cookeville we are all a little hungry. As it turns out, nearly every restaurant is closed Christmas morning except the Subway in Cookeville. Every year for as long as I can remember we have had lunch at that Subway and it is packed!

We sincerely wish you a very Merry Christmas and Happy Holidays. We hope you have wonderful time with family and friends, lots of good food (or at least a Subway sandwich), and a safe, fun time ringing in the New Year.

Sam and Bo

We continue to make posts to our blog throughout the week so check it regularly if you want to see our thoughts. You can access it by following the link below.

THE GREATEST COMPLIMENT

In these uncertain times, a trusted financial adviser is more important than ever. Whatever comes over the upcoming months and quarters, the markets are certain to have lots of volatility and wild swings. Europe, the US economy and dysfunction in Washington, and continued trouble in Iran and the Middle East to name just a few. If you have family, friends and neighbors that may benefit from our services, would you please forward this email and/or provide our contact information to them. We purposefully do not spend time marketing our services so that we can devote all of our resources to managing your assets. Thank you to all who have provided us referrals - it truly is the greatest compliment you can give us.

BAM MARKET WRAP EXTENDED
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Remember to visit our blog for market comments and observations in between newsletters. We try to provide a few comments in between newsletters and certainly when there is a particularly interesting market day. You can access it by clicking here.

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Contact Information

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Knoxville Office
Sam Bills - (865) 525-1329

Nashville Office
Bo Bills - (615) 371-5928

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BAM Market Wrap is produced and distributed regularly via email by Sam C. Bills, Jr. of Bills Asset Management 3001 Flagstone Drive, Franklin, TN 37069 Phone (615) 371-5928 Fax (615) 250-4903 - www.Billsasset.com

Bills Asset Management is an independent registered investment advisor (RIA) not associated with any financial institution. Data used in this publication is gathered from reliable sources, although completeness and accuracy cannot be guaranteed. Performance results do not take into account any tax consequences and are not predictive of future results. This publication does not give any specific investment advice, does not provide financial planning services, or consider any individual's financial situation, needs or goals. This publication may not be reproduced or retransmitted in whole or in part without the consent of the author, Sam C. Bills, Jr.

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