The 2011 Masters was the most exciting golf tournament I can recall. When the young-in-age leader reached the 10th hole there were 11 players within reach of the lead. He fell apart after one bad shot on that hole and the tournament became a toss-up. I felt very sorry for him because I’ve been there – one bad shot can turn a great round into misery. Perhaps Shakespeare was right when he wrote, “The miserable have no other medicine but only hope”.

U.S. Fiscal Meltdown in Spitting Distance: Arguing over lowering our deficit by just 0.4 percent of GDP when we need to run massive surpluses to deal with the baby boomers’ impending retirement is, pick your metaphor — rearranging the Titanic’s furniture, Nero’s fiddling, Custer’s Last Stand.

Is this malign fiscal neglect, or has Congress somehow missed what its own Congressional Budget Office is indicating? CBO’s baseline budget updates suggest the date for reaching what Carmen Reinhart, Kenneth Rogoff and other prominent economists believe is a critical insolvency threshold — a 90 percent ratio of federal debt held by the public to gross domestic product — has moved four years closer, in just nine months!

The CBO releases its realistic long-term forecast — the alternative fiscal scenario — every June. In between, it provides us with periodic updates of its unrealistic 10-year baseline scenario, based on “current law.” Congress, for political reasons, forces the agency to interpret current law in ways that generally make spending much lower and taxes much higher than is likely.

Take It Seriously: consequently, no one should take the projected levels of spending and taxes in CBO’s baseline scenario seriously. But everyone should take very seriously updates to the baseline. Why? Because these changes give us a pretty good idea of how the next alternative fiscal scenario will differ from the previous one.

Last June’s analysis had us going critical (crossing the 90 percent debt-to-GDP threshold) in 2021. But back then the CBO assumed the Bush tax cuts wouldn’t be extended for the rich starting in 2011. In December, President Barack Obama dropped his demand to immediately raise taxes on the rich in exchange for a one-year cut in the payroll tax, which helps fund Social Security. So much for raising revenue at a time when we are borrowing 37 cents to cover each dollar of spending.

In January, the CBO modified its 10-year baseline forecast, taking into account the December deal. By my calculations, this meant the 90 percent threshold would be crossed in 2019.

What a Difference. A lot can change in a few weeks. In February, the president released his budget and, lo and behold, it proposes maintaining the Bush tax cuts for all except the rich not through 2013, as in the December deal, but indefinitely. In so doing, the president conveniently took the issue of tax increases off the next election’s table.

On March 18, when the CBO released a new forecast that incorporated the president’s budget, the 90 percent mark had moved up to 2017. Actually, 2017 is optimistic. Uncle Sam’s creditors will soon start charging exorbitant interest rates — like those Greece, Ireland and Portugal now face. The market’s concern with those countries’ bonds is outright default, which is unlikely in the U.S. What is likely is rising inflation as the Federal Reserve continues to print vast quantities of money to help pay the Treasury’s bills. I generally don’t give investment advice, but Bill Gross, co-founder of PIMCO and manager of the world’s largest bond mutual fund, has it right. It’s time to dump all but your very short-term U.S. Treasuries and other dollar-denominated bonds. A safer alternative is Treasury inflation protected securities, or TIPS.

The real problem isn’t paying for our current spending. The real problem is paying for the 78 million baby boomers as they retire and claim their promised Medicare, Medicaid and Social Security benefits, and as spending on the new health-care exchanges expands far beyond what’s been projected.

There is one bright spot. Paul Ryan, chairman of the House Budget Committee, has included a version of the Rivlin-Ryan Medicare plan in the Republican budget proposal. This bipartisan proposal, co-authored with Alice Rivlin, former CBO director and head of the Office of Management and Budget under Bill Clinton, would transform Medicare from its current fee-for-service, defined-benefit structure into a defined contribution system in which the government’s liability is strictly capped.

Rivlin-Ryan would be a huge step in the right direction, but what’s really needed is a complete redo that would keep total government health-care spending where it is now, at about 10 percent of GDP. (Source: Laurence Kotlikoff and Bloomberg On Line).

The stock indexes barely budge, trading traffic slows to a crawl, and everyone is holding his breath for the big event. No, not that wedding that has sold out every balconied room overlooking Buckingham Palace, and not even the first-quarter earnings that companies will begin reporting this week, but the end of the Federal Reserve’s “quantitative easing” regime.

Since our Fed chairman talked up his $600 billion plan to buy Treasuries last August, stocks have rallied more than 27%, almost uninterrupted. So the looming end of federal largess this June has created paralysis. Will risky assets give back some of their gains?

Crude oil climbed last week to $113 a barrel, the economy has expanded for seven quarters and employers are hiring anew, so the Fed can’t easily argue for another round of quantitative easing, or QE3. So after central bankers meet on April 26 and 27, Ben Bernanke may have to summon his calmest voice and, without ruffling his beard, prepare investors for life after quantitative easing. With the government spending a staggering $1.60 or more for every dollar it earned in tax revenue, that path back to normal could prove anything but normal.

The good news: The central bank will continue to coddle. Stocks aren’t egregiously expensive. Confidence among both companies and consumers is mending, and cash earning no interest at the bank keeps up the pressure to invest. Also, mergers—and merger speculation—help put a floor beneath stock prices, and just last week Texas Instruments (ticker: TXN) snatched up National Semiconductor (NSM), and Diamond Foods (DMND) agreed to buy Pringles from Procter & Gamble (PG)(Source: Barrons Online).

Last week, Foreign stocks increased while U.S. Stocks and Bonds declined. During the last 12 months, U.S. STOCKS outperformed BONDS.

Returns through 4-8-2011	1-week	Y-T-D	1-Year	3-Years	5-Years	10-Years
Bonds- BarCap  Aggregate Index	-.3	.1	5.0	5.2	6.0	5.5
US Stocks-Standard & Poor’s 500	-.3	6.2	10.7	-3.8	-1.6	1.9
Foreign Stocks- MS EAFE Developed Countries	1.8	5.0	9.6	– 6.2	-1.3	2.9

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.

Congress has yet to settle its first budget fight of the year but is already about to move on to an even more consequential fiscal clash. Even as the two parties struggled over the weekend to reach a deal on federal spending for the next six months and avert a government shutdown at the end of the week, House Republicans were completing a budget proposal for next year and beyond. It is likely to spur an ideological showdown over the size of government and the role of entitlement programs like Medicaid and Medicare.

How this showdown plays out holds extreme importance to avoiding the financial train wreck our country is headed toward. We intend to closely monitor all developments and hope to report favorable results.

“It takes the hammer of persistence to drive the nail of success.”

– John Mason

QUESTION: Two years ago, I retired from my large multi-national employer who maintained a very beneficial “cafeteria plan”. Then, I started my own company. May I start a cafeteria plan for my small company?

ANSWER: Yes, the 2010 Health Care Act created a “simple cafeteria plan” for small businesses and provides a safe harbor from the nondiscrimination requirements for benefits including group term life insurance, self-insured medical expense reimbursement plan, and benefits under a dependent care assistance program.

Feel free to contact me if you or someone you know has this type of situation. Financial Planning and tax 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.

This winter is too long! How could it be, the Monday after the first weekend in April, and I have played only one round of golf in 5 months. I have a feeling that I will not be playing anywhere close to my handicap when I finally get out there for a couple rounds. I think a 2-week Florida vacation in January/February is in order for next year.

Last week there were more POSITIVE than NEGATIVE developments, and the stock market strung together its best two weeks since June.

ECONOMIC REPORTS LAST WEEK

Positives:

1) Private sector payroll growth solid in March
2) ISM mfr’g solid but some key components moderate
3) Feb Pending Home Sales better than expected
4) Irish debt gets some relief as bank stress test in line with bailout cost estimates
5) Taiwan raises rates to join other Asian nations in fighting inflation
6) Yen at 3 1/2 month low providing breather to Japanese exporters (but cost of needed imports go up)

Negatives:

1) No wage growth as inflation pressures continue, WMT endorses that as fact
2) Case/Shiller Home Price Index back to near the lows
3) Consumer Confidence at 4 mo low as 1 yr inflation expectations rise to 6.7%
4) Portugal and Greek debt ever more toxic
5) 3yr, 5yr, 7yr U.S. Treasury auctions soft

Source: The Big Picture

Having snagged its best first quarter since 1998, the U.S. stock market began April on a hopeful, if hesitant, note, encouraged by evidence that our economy is improving, but a little fearful that this may be as good as it gets.

On Friday, the Dow Jones Industrial Average nudged briefly above its recent February peak to reach its highest level in nearly three years, effectively brushing aside recent concerns such as high oil prices, flailing European banks and disruptions in the wake of Japan’s disaster that had so alarmed investors mere weeks earlier.

But the blue chips gave up half those gains by dusk, perhaps mindful that the problems they so summarily shrugged off—like rising commodity costs—could still come back to crimp profit margins and vex consumers in the days ahead.

Buyers were emboldened by the gathering economic momentum: Employers added 216,000 jobs in March, while unemployment shrank to a two-year low. State and local tax revenues bounced back to within 2.3% of their 2008 haul. Our factories enjoyed their busiest winter since early 2004, and both General Motors (ticker: GM) and Ford (F) gleefully reported double-digit sales jumps in March. Meanwhile, companies from eBay (EBAY) to General Electric (GE) broached deals, while Nasdaq OMX Group (NDAQ) and the IntercontinentalExchange (ICE) offered $11.3 billion to lure the NYSE Euronext (NYX) from its proposed merger with Deutsche Bourse.

Will the improving economy let our central bank dial back its extraordinary benevolence? Its campaign to buy Treasuries may expire in June, but bulls hope the coddling Federal Reserve will stay accommodating a lot longer. After all, corporate profits are pushing new nominal highs, but the stock market is still 15% off its 2007 peak. Investors plowed more than $29 billion into stock mutual funds in the first quarter, but that’s a mere fraction of what they yanked from the stock market in recent years.

There are other reasons why the market doesn’t seem close to a major top, argues Jason Trennert of Strategas Research Partners. Cyclical sectors like industrials, materials and technology are humming along merrily, mergers are picking up and getting bigger, and 10-year annualized equity returns are just beginning to turn up from secular lows, which should egg on buyers.

Against this backdrop, can you blame traders for growing unwilling to bet against the market? As of March 30, the value of stocks on loan to short sellers stood at just $273 billion, the lowest in five years, while the ratio of long to short bets is near a six-year high, says Data Explorers, a research firm based in London. Except for spots in solar energy, banking, materials and software, “hedge funds are less willing to take a contrarian view against a rising tide,” says Will Duff Gordon, research director at Data Explorers. The amount of money that can be deployed for short selling also is shrinking with less leverage, fewer proprietary trading desks at big firms and more regulatory uncertainty.

The Dow ended last week up 156, or 1.3%, to 12,377. The Standard & Poor’s 500 is a hair off its Feb. 18 peak. The Nasdaq Composite Index rallied 47, or 1.7%, to 2790, while the Russell 2000 jumped 23, or 2.8%, to 847, its highest close since July 2007. Crude oil climbed toward $108, a 30-month high.

The first-quarter gains tallied 6.4% for the Dow, 5.4% for the S&P 500, 4.8% for the NASDAQ, and 7.6% for the Russell. The S&P 500 has rallied in seven of the past eight quarters and is up 26% since Aug. 30 (Source: Barrons Online).