Impact of capital gains tax on U.S. investments

The reduced 15% tax rate on qualified dividends and long term capital gains is currently scheduled to expire on December 31, 2010.

Unless the U.S. Congress extends the reduction (which seems increasingly unlikely, given the lack of a bipartisan consensus on this and other tax reduction extensions), this means that in 2011, dividends will be taxed at the taxpayer's ordinary income tax rate, regardless of his or her tax bracket; and the long-term capital gains tax rate will be 20%.

All eyes will be on the lame-duck session of Congress after the November 2 elections. Even though President Obama and the Democrats have indicated this is one tax reduction they might consider extending (as well as the tax reduction for those earning less than $200,000, or $250,000 for couples filing jointly), it is possible that gridlock and partisanship will set in.

Thus, if you have been considering selling shares or other investments that have a considerable capital gain, it might be to your advantage to do this before December 31st.

There is a similar situation with the estate tax, which will jump from 0 % on Dec. 31st to 55 % on Jan. 1st, barring Congressional action. Other than emulating the plot of "Through your Momma off the train", the only option to get around this is through a donation, which is taxed at a 30 % tax rate.

It is possible that avoiding the increase in the capital gains tax will lead to a significant bear market in the coming two months in the United States, as investors rush to sell before the tax increases. Of course, if the fall in the share price exceeds the difference in the tax rate, it would not be to your advantage to sell.

How to buy shares in Facebook, Zynga, Groupon, ICQ and other new stars

The hottest social networks and other new media stars have not yet launched an IPO (I am talking about companies like Facebook, Twitter, Zynga, LinkedIn, etc.).

However, there are two ways to buy pre-IPO shares:

1. Through the secondary market, as this Financial Times article spells out. You have to go through private equity firms, through investment funds, or through a secondary market, such as SecondMarket.

2. Or, you can buy shares in companies that, in turn, own shares in such new companies. Some examples are Microsoft or Google, but a greater exposure can be had through mail.ru Group (formerly known as Digital Sky Technologies), which itself will be launching a London-based IPO for global depositary receipts on the LSE under the ticker ‘MAIL’. mail.ru Group holds 10 % of Facebook, owns ICQ, and has large stakes of shares in Zynga, Groupon, and Russia’s biggest social network, vKontakte.ru

Further details on the MAIL IPO in techcrunch.

Interesting IMF study on housing prices

Interesting IMF study on housing prices.

In particular:

house prices in the United States and other advanced countries have already undergone substantial corrections since 2008. So in most countries, house prices have moved much closer to their economic fundamentals (see Chart 3). Our econometric estimates indicate that if the remaining adjustment were to happen over five years, house prices would fall modestly—an average annual rate of between 0.5 percent and 1.5 percent.

For countries such as Spain and Ireland there is an additional reason to expect slow recovery. In these countries, the construction sector grew much more rapidly than other sectors of the economy and became the engine of growth. The housing bust has thus brought severe contraction in construction output and employment. The unemployment rate is now three times its 2000–07 average in Ireland and twice its 2000–07 average in Spain, compared with a 20 percent increase on average among euro area countries.

... and problems in the housing market and the labor market are intertwined: U.S. states where the house price bust was more pronounced are also where employment has fallen the most

(that is, Nevada, Arizona, Florida, California).

In sum, in my opinion, prices should fall a little in the U.S. (particularly in States with high unemployment, and in which the prices have not fallen as much yet, such as Michigan and Rhode Island), and more in Great Britain, Austria, France and Spain (where the actual adjustment has been significantly less than the IMF-predicted adjustment).

Great magazine on Latin American Investments

Looking for information on investments in Latin America, I came across this fantastic magazine: "Alternative Latin Investor"

http://www.alternativelatininvestor.com

In the most recent issue (No. 6, September 2010), these articles might be of particular interest:

Infrastructure
Municipal Bonds in Latin America

Emerging Markets
Investment Flows and Stock Market Returns

Art
Pinta: The Contemporary and Modern Latin American Art Show

Philanthropy
Ashoka: Inspiring and Supporting Tomorrow’s Leaders

Renewable Energy
Opportunities in Argentine Biodiesel

Hedge Funds
The Spectrum of Investors for Latin American Hedge Funds by Merlin Securities