Wednesday, June 26, 2013 - Still Some Work to be Done

Still Some Work to be Done

by Sinclair Noe

DOW + 149 = 14,910
SPX + 15 = 1603
NAS + 28 = 3376
10 YR YLD - .05 = 2.54%
OIL + .17 = 95.49
GOLD – 52.40 = 1226.20
SILV – 1.12 = 18.62

Today we'll cover the Supreme Court decisions, but first the economic news.

As you know, the Commerce Department reports the Gross Domestic Product, or GDP of the nation on a quarterly basis. They issue an initial guesstimate, then they settle on a revised number; for example, they said the first quarter GDP was 2.4%; and then today, they revised the revision of the guesstimate. The economy did not grow at 2.4% in the first quarter, instead it was just anemic 1.8% growth.

The latest numbers show that both consumer spending and trade were weaker than the earlier estimates showed. Consumers did not increase spending on health care, foods, hotel, travel, legal or personal care; big ticket purchases such as autos and electronics were flat. Investment in business structures including office buildings and plants dropped 8.3%; worse than the earlier estimates of 3.5%. Exports dropped 1.1% in the Q1; imports were down 0.4%.

Now, the GDP numbers will be revised yet again. Every five years the Commerce Department overhauls GDP data to try and provide a more accurate picture of the economy; they'll conduct that overhaul next month.

And you may be wondering why this is important; after all, we're talking about 1Q GDP and we're almost finished with the second quarter. The GDP data means that it is less likely the Fed will see a drop in the unemployment rate any time soon; and that means the talk of taper might be premature. In Wall Street's perverse thinking, the bad news on GDP was actually a positive because it might mean the Fed will back away from taper. Funny, huh?

Overall growth has hit a soft patch that economists expect to be temporary — but might end up lasting a lot longer than anybody would like. GDP growth during the past 12 months was just 1.6%, including the latest revision. That’s about the expected pace of growth in the current quarter, and it’s actually a slowdown from the pace in 2010 and 2011. The good news is that growth immediately after the recession ended in 2009 was driven by government spending and other fiscal stimulus measures. Those programs have now faded and government spending is now acting as a drag on the economy.

The Fed expects growth to pick up in the second half of 2013, as the effects of “fiscal drag” fade. But the lower numbers for the start of the year, especially the signs that consumers are still struggling, could prompt downgrades in growth estimates for the rest of the year. The row just got a little harder to hoe.

If you have heard any news today, you are surely aware the Supreme Court has issued two landmark decisions. In the US v. Windsor, the court ruled 5-4 that  a provision of the Defense of Marriage Act (DOMA) is unconstitutional, making it illegal to deny federal benefits to married same-sex couples.

Also in a 5-4 decision, in Hollingsworth v. Perry the Supreme Court opted against a constitutional ruling on California's same-sex marriage ban, Proposition 8, in favor of a deferring to a district court that previously outlawed the measure.

The rulings leave in place laws banning same-sex marriage around the nation, and the court declined to say whether there was a constitutional right to such unions.  So, the debate about same sex marriage is not finished; maybe it's just begun. But in clearing the way for same-sex marriage in California, the nation’s most populous state, the court effectively increased to 13 the number of states that allow it.

The ruling striking down the federal Defense of Marriage Act will immediately extend many benefits to couples in the states where same-sex marriage is legal, and it will give the Obama administration the ability to broaden other benefits through executive actions.

The decision on the federal law was decided by 5 to 4, with Justice Anthony Kennedy writing the majority opinion. He was joined by the four members of the court’s liberal wing. He said the law was motivated by a desire to harm gay and lesbian couples and their families, demeaning the “moral and sexual choices” of such couples and humiliating “tens of thousands of children now being raised by same-sex couples.”

The California case was also decided by 5 to 4, but with a different and very unusual alignment of justices. Chief Justice Roberts wrote the majority opinion declining to rule on the constitutionality of Proposition 8. He was joined by Justice Scalia and Justices Ruth Bader Ginsburg, Stephen G. Breyer and Elena Kagan.

Chief Justice Roberts said the failure of officials in California to appeal the trial court decision against them was the end of the matter. Proponents of Proposition 8 had suffered only a "generalized grievance" when the ballot initiative they had sponsored was struck down, the chief justice wrote, and they were not entitled to represent the state's interests on appeal. The ruling in the case,Hollingsworth v. Perry, erased the appeals court’s decision striking down Proposition 8.

As a formal matter, the decision sent the case back to the appeals court, the United States Court of Appeals for the Ninth Circuit, in San Francisco, “with instructions to dismiss the appeal for lack of jurisdiction.” 

Lawyers for the two sides had different interpretations of the legal consequences of the Supreme Court’s ruling. Supporters of Proposition 8 said it remained the law in California, while their adversaries said the trial court's decision struck it down. As a practical matter, Gov. Jerry Brown instructed officials there to start issuing marriage licenses to same-sex couples as soon as the Ninth Circuit acts.

If, or rather when, California becomes the 13th state to allow same-sex marriage, about 30 percent of Americans will live in jurisdictions where it is legal.

The case on the federal Defense of Marriage Act of 1996,United States v. Windsor, concerned two New York City women, Edith Windsor and Thea Clara Spyer, who married in 2007 in Canada. Ms. Spyer died in 2009, and Ms. Windsor inherited her property. The 1996 law did not allow the Internal Revenue Service to treat Ms. Windsor as a surviving spouse, and she faced a tax bill of about $360,000 that a spouse in an opposite-sex marriage would not have had to pay. Ms. Windsor sued, and last year the United States Court of Appeals for the Second Circuit, in New York, struck down the 1996 law.

After celebrating the Supreme Court’s decision, same-sex couples may want to phone their accountants. In addition to having implications for Social Security benefits, child care rights and retirement planning, the high court’s ruling that the Defense of Marriage Act is unconstitutional might mean a check from Uncle Sam. Couples may be able to amend prior years’ tax returns to receive bigger refunds now that their marriages are recognized by the federal government. 

Income tax filing has been frustrating for many couples, some of whom had to file as many as four separate returns because of the conflicting state and federal rules. And since they were unable to file joint returns, same-sex couples lost out on some of the deductions and credits allowed for heterosexual couples, such as breaks offered to those selling a home and child-related tax credits.

Generally, the IRS allows taxpayers to amend returns for up to three years after the filing deadline or up to two years after the taxes are paid. The timeline may be different at the state level, and some couples may have more time if they filed protective claims for previous tax years that would give them an extension for amending returns.

To be sure, the decision leaves some question marks. The court cases did not address how the government should treat civil unions between same-sex couples. Also, the ruling does not mean states that currently prohibit same-sex marriage now have to permit it.

After talking to an accountant, same-sex couples might want to talk with an estate planning attorney, as the estate tax was at the heart of the case of US v. Windsor. Estate planning should be a little easier for same-sex couples. Without federal recognition, many couples were not able to pass assets to their spouses after death, as straight couples could. Some couples that set up trusts to avoid double taxation on assets being passed along to their partners may want to update their trusts to give their spouses tax-free access to the trust’s income or principal. The ruling could also make it possible for married same-sex couples to share assets without being subject to gift taxes.

After talking to an accountant and an estate planning attorney, some same-sex couples might want to talk to their health insurance agent. While more employers are allowing same-sex spouses to be added to their employees’ health plans, it was provided as a taxable benefit—costing those couples an additional $1,069 a year in taxes. Now that taxes should no longer be a factor, some couples may want to re-evaluate their health insurance choices. One spouse may now be able to move onto the other’s more generous plan, which may also be more affordable.

Today's rulings still require individual planning, so there's still some work to be done.

But I remember that I grew up in a time of anti-miscegenation laws, which were overturned in 1967 with the Supreme Court decision of Loving v. Virginia. In my own family I remember when a Mormon married a Jew, and the rabbi that refused to perform the marriage ceremony because he claimed he wouldn't marry a “mixed couple”. My view is that if two people love each other, that's not mixed up, that's good. The one thing this world definitely needs is more love, and there is still some work to be done.