After meandering through the latter part of December, the markets found traction with the signing of the fiscal cliff deal. After climbing 1.69% on a low volume New Year's eve, the markets resumed their flurry yesterday adding another 2.5% to Monday's gains. With a greater than 4% gain in two trading days, the markets undoubtedly liked the removal of at least one Washington challenge. Next up is the debt limit which could turn out to be even more contentious and problematic than the fiscal cliff. 2012 proved the age-old Wall Street adage of "climbing a wall of worry" as there were plenty of potential negatives on the way to a year of healthy gains. It was a remarkable year in many ways and we expect 2013 to be anything but boring.

Though a fiscal cliff deal was reached, it did little to solve our nation's problems. With a ratio of tax increases to spending cuts of 45 to 1, Congress and the President effectively kicked the can further down the road. While we are all for balance in the discussions, it is painfully obvious that we cannot get our house in order by just raising taxes. Hard choices will need to be made to popular government programs to begin the process of living within our means. The upcoming debt limit discussions will likely create lots of volatility as the end of February approaches. I guess the politicians could settle it early but I have my doubts! We would like to be optimistic about 2013 but the reality is that all the issues that clouded the markets last year still hover. Europe is still in shambles, we are one year closer to a nuclear Iran, the economy is still sputtering along, taxes are going up and government spending is presumably going to be cut at some point, the potential for another downgrade to the US credit rating, stubborn unemployment, etc... There is much to be concerned about and, yet, like last year, that wall of worry could defy the odds and move the market upwards. Among the positives are a very accommodative Federal Reserve, an economy that, while sputtering, is improving, and record corporate profits. Another adage that comes to mind is don't fight the Fed which has certainly proved true over the last couple of years. Will the old adages hold true for another year?   We don't know but we do know that 2013 will prove to be another challenging year and probably not what anyone expects.

We had a good year in 2012. Our goal is to capture 75% of an up market and avoid 75% of a down market. Accomplishing this goal will lead to superior returns and less volatility. Fortunately, over our 20 year history, we have largely met or exceeded this goal. The first couple of weeks of any new year often establishes the market leaders for the coming year. With the markets out of the gates quickly, we are looking at things closely. We will have a much better view of things over the coming few days once the specter of the fiscal cliff fades. For now, we are content to keep our holdings steady with our mix of low volatility funds and a modest position in equities. Here's hoping for a prosperous 2013!

TAX RATES FOR THE "WEALTHY" - The fiscal cliff deal imposes Clinton era tax rates on individuals making more than $400,000 ($450,000 for joint filers). Effective January 1, 2013, the top individual tax rate will be 39.6% (up from 35%). Additionally, capital gain rates increased from 15% to 20% for these same income levels (source: Politifact).

OBAMACARE - A new 3.8% tax on dividends (this tax will also apply to other forms of unearned income) as a result of Obamacare is effective on 1/01/13. There is an income test on this "Medicare Contribution Tax" that causes only taxpayers with a modified AGI of at least $250,000 (joint return) to pay this tax (source: Congress).   

MORE INCOME TAXES - Obamacare also will bring about a Medicare Tax increase of 0.9% effective 1/01/13 on joint taxpayers reporting at least $250,000 in AGI and single returns with at least $200,000. This takes the existing 2.9% Medicare Tax (which is 1.45% each for employee and employer) up to 3.8% (source: Congress).  

PAYROLL TAXES - The reduction in employee payroll taxes (from 6.2% to 4.2%) that has been in place for the last 2 years (2011-12) expires on 12/31/12. The bump in payroll taxes (which supports Social Security) by 2% will increase taxes by an estimated $125 billion in 2013 (source: Congress).

THOSE THAT PAY ZERO - 4,142 taxpayers making at least $500,000 in AGI paid no federal income tax in 2010, equal to 1 out of every 199 filed returns making at least $500,000 of AGI. 48.9 million taxpayers making less than $30,000 of AGI paid no federal income tax in 2010, equal to 5 out of every 7 filed returns reporting less than $30,000 of AGI (source: Internal Revenue Service).    

We had a great Christmas here with Kelly's family in for a couple of days and then to Knoxville for a short visit with the KnoxBills. We are truly blessed with our family as everyone gets along well and we genuinely enjoy each other. As I go through life and see many families with strife, I don't take it for granted. Though our visits were short, we managed to fit in lots of visiting, good food, a few gifts, and lots of laughter. Like the markets, I don't know what 2013 will bring but I am very thankful for another year with our families.

Kelly and I had hopes of spending a few days in sunny Florida for a basketball tournament of Carter's. While Florida was not so sunny and the weather far from warm, we had a great trip. Carter's team had a great tournament run finishing second with a close loss in the championship game. And while the weather was cool and cloudy, Kelly and I made the most of our time away. It is great to be married to your best friend and we have fun wherever we are and whatever the circumstances!  

We wish each of you the very best of 2013 and hope that it is healthy, prosperous, interesting and full of blessings for you and your family. Thank you for your friendships and trusting us with your finances. We don't take it for granted and can't say it often enough.

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. 

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 upcoming fiscal cliff, continued trouble in Iran and the Middle East, and a presidential election 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.      

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. 

Published by Sam C. Bills, Jr.  Copyright � 2008 Bills Asset Management.  All rights reserved.

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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