For several weeks, we have been watching closely as events in Egypt unfolded.  First, to sort through all the claimants and wannabes of this revolution, and find out whom the main powers are. Second, to search for signs of Egypt’s crises spreading to other countries.  It is important to not get all wrapped up in what people are saying and look objectively at what has happened so far.  Click here  for more details on Egypt.

“The right information is nine-tenths of any battle”

Abraham Lincoln

Question:
I own a business, a sole proprietor, so I file my income tax return with a Schedule C. My children, ages 15 and 17, help me around the office to do chores I assign to them. Should I pay them?

Answer:
Yes. There are some very important income tax benefits to do so-it is better to put them on the payroll and pay wages to them rather than an allowance. Your net profit from this business is taxed at the highest tax rate of any income; thus, any deductions like wage payments to children will save substantial income taxes. And, you can even set up an IRA or SIMPLE IRA account to benefit them later. Note that the IRS requires the children to perform meaningful work and that you pay them the going rate for such work.

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Feel free to contact me if you or someone you know has this type of situation. Tax and Financial Planning advice presented here is general in nature, and individual circumstances make applying these general rules tricky; thus, the above answer cannot be applied to all circumstances because the slightest variation could cause a different outcome.

I am pleased to announce an important addition to our team at Valley National – Matthew Petrozelli as Vice President and Financial Advisor. After graduating from Lehigh University, Matt developed a strong financial services background with demonstrated success at the following employers during his career path:

1. Developing customized insurance and investment solutions in the career agency program at Northwestern Mutual, a flagship company in the Insurance industry.

2. Investment, retirement and financial planning specialist in the Fidelity Investments retail side where he worked extensively with investors and retirement minded clients.

3. Wealth management and service coordinator in New York City region for HSBC, one of the world’s 5 largest banks.

Matt will see clients in New York City at our new location at 415 Madison Avenue, as well as, work with you alongside our current team of Laurie Siebert, Donna Young, Betty Adam, Joe Goldfeder, Jackie Cornelius and Tim Roof in the Bethlehem office.

The economy continues to give us mixed signals.  Here is a detailed list of these signals:

Positives:

1) US equity markets power higher still
2) NFIB small business index rises to best since Dec ’07
3) Initial Claims fall below 400k but normalizing for bad weather as 4 week avg back in line with prior good trend
4) US exports rise to within $3b of record high
5) Univ of Michigan confidence rises a touch to the highest since June
6) China hikes rates again to tame inflation pressures

Negatives:

1) Egypt still a powder keg? (markets certainly don’t think so)
2) Inflation figures in Germany, UK, Brazil, and South Korea all at multi yr highs
3) US short rates move higher, catching up to recent move in long end
4) Mortgage rates back above 5%
5) Portuguese 10 yr yield back above 7%
6) Emerging stock market correction continues

This is a time where people say things and reporters write them down and record them and everybody wonders what they mean. Mostly what’s being said has no meaning. It is simply saying, “It’s over. The world will be better than it was before,” and so on and so forth. Pay very little attention to what people are saying at this point. Even as we saw we didn’t have to pay much attention to what Mubarak said. So let’s take a look at the objective situation, let’s forget all the statements and so on.

The army was in charge yesterday, it was in charge last week, it is in charge now. Whether or not the army will call elections, it will be a decision by the army. And as it has been for about 60 years, they will take place under the aegis of the army. The army remains a central institution of Egypt. It is, as in many of the countries, the most modern, the most efficient and certainly the most powerful entity. That has not been shaken. And if there are elections, as the Constitution requires, the candidates will be running within this context. Do I expect an election in which a dramatic change takes place in who was elected? I suspect not, but that I’m not even sure when elections would be called because it’s not really clear whether martial law will be declared. Just a lot of things aren’t clear, except the most important thing: the army is in charge (Source: Stratfor).

We’re in the midst of a chauvinist’s rally in U.S. equities. Our country ’tis of greatness. The rest of the globe…? Well, it’s in trouble.

Evidence? Here in the U.S., the economy is picking up. Corporate sales and profits continue to improve. Inflation has remained muted. Investors have begun to commit capital to equities. Our biggest overhang might be too much bullishness.

Outside our borders, there’s political unrest. Governments are being toppled. Food inflation is an expanding problem. Investors are scaring out of risky assets in favor of safer harbors.
If it seems a little trite to define the world in these “We’re okay, you’re not” contrasts…well, it is. Problems? We’ve got them, starting with the labor situation. Emerging markets’ economic growth, meanwhile, mostly dwarfs ours.

But if you look at how equities have performed lately, there’s an argument to be made that, early in 2011, there’s been some kind of global disconnect going on. The S&P 500 is up nearly 6% this year. The MSCI Emerging Market ETF, which outdistanced U.S. equities last year, is down nearly 4% for 2011.

“Inflation has been a primary story in emerging markets this year,” says Alec Young, equity strategist at Standard & Poor’s. “In the U.S., it’s been about improving fundamentals. Our markets are reacting the right way.”

For the week, the S&P 500 added 18 to close at 1329, its highest since June 2008. The Nasdaq Composite increased 1.5%, to close within two percentage points of a nearly four-year high. The latter came despite the poor outlook from Cisco Systems (CSCO); shares of the tech bellwether surrendered 15% in the wake of its earnings statement.

For the most part, though, earnings have been strong, and of a better character than in preceding quarters, when companies were topping estimates, sure, but largely by savagely hacking away at costs. Now, earnings are up, but sales are, too. Some 70% of companies that reported fourth-quarter results beat their revenue targets, and with lean cost structures in place, margins have swelled to high single-digits.

“Estimates for revenue growth have been going up quite a bit,” says Nicholas Colas, ConvergEx Group’s chief market strategist. Where analysts had been forecasting something on the order of 6% growth, it’s now 7% or 8%.

That’s allowed stocks to continue to rise—80% of the S&P 500 is trading above its 50-day moving average, an important technical indicator—despite rising raw-material costs.

Commodity prices continue to climb. Corn hit a 31-month high at more than $7 a bushel in the futures market. In releasing earnings, Kraft (KFT) bemoaned costs.

Still, “the economy, as a whole, is okay,” Colas says, though he worried that, at some point soon, cyclical factors are going to have to overtake government stimulus programs such as the legendary QE2.

One reading showed consumer credit—crucial to organic economic expansion—rose last month, the third consecutive positive reading. There haven’t been three months of expansion in that since July 2008. Small-business confidence rose to its highest level in three years. The character of the market, admittedly, has seemed a little suspect. Volume has dwindled. The number of stocks posting new highs isn’t as large as earlier in the recovery.

“Sometimes you’ll see the market in this kind of sideways consolidation,” Young says. “But the key thing is that the uptrend is being maintained.”

That’s especially good news in the face of the unrest in Egypt prior to and following the resignation of Hosni Mubarak—the kind of geopolitical event that could have, prospectively, created some turmoil in global capital markets. If anything, investors probably have a right to be nervous about the relentless “What, Me worry?” nature of the market.

“This doesn’t feel like a tipping point,” Colas says. “Because it’s predicated on better fundamentals, as well as easy money…As much as it feels like we’ve had a run, I don’t see anything imminent that takes us off the rails.” (Source: Barrons Online).

During last week, U.S. Stocks advanced and Foreign Stocks and Bonds were unchanged. During the last 12 months, U.S. STOCKS outperformed BONDS.

Returns through 2-11-2011	1-week	Y-T-D	1-Year	3-Years	5-Years	10-Years
Bonds- BarCap  Aggregate Index	0.0	–   .9	4.4	5.0	5.6	5.6
US Stocks-Standard & Poor’s 500	1.5	5.9	22.6	-3.8	-1.0	.8
Foreign Stocks- MS EAFE Developed Countries	0.0	4.0	17.6	– 4.0	–  .3	1.8

Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.