This is NOT the Season for
New Mutual Fund Purchases

Today's comment is by Eric Roseman, Investment Director and editor of Commodity Trend Alert.

Dear A-Letter Reader,

This time every year, I make it a point to warn my readers about adding new mutual funds to your portfolios.

Here's why: Mutual funds typically pay out the bulk of their annual shareholder distributions in December. This means if you invest right now, you'll be stuck with a year's worth of taxes but only a month's worth of gains, when your new mutual fund sends out distributions next month.

So if you're debating making a new investment now before those payouts, you better watch out!

Despite the ongoing turmoil in credit markets this year, stocks have generally performed strongly, especially in foreign markets. That means mutual fund payouts will hit record levels in December. If you're contemplating buying a fund now, my advice is to wait until mid-January following the year-end distribution cycle.

Taxable Accounts Hit Hard

Many investors in taxable accounts will get socked with record capital gains distributions in 2007 amid a bull market in stocks. That's especially the case overseas where emerging market equities have gained another 37% this year and major markets have risen 10%.
Also, natural resource funds have been one of the hottest sectors along with emerging markets since 2003. These funds have rallied an additional 28%.

According to the Investment Company Institute, non-U.S. mutual fund equity inflows continue to hit records virtually every month this year. Indeed, the longer a bull market runs, the more difficult it becomes to manage a growth fund tax-efficiently.

Emerging Markets Going...Going...
Gone...Off the Charts!

With foreign stocks and commodities hitting record highs, you could be stuck with big tax bills this year on your mutual funds, unless you're invested in tax-deferred accounts.

Worse, a new investor buying a stock fund now will get nailed by distributions.

Record Payouts Coming in 2007

Even if you invest in November, you're still responsible for paying your share of the full years' tax burden on mutual fund shares. A number of funds have also exhausted their supply of losses booked during the last bear market, which they've used to offset gains in recent years.

In 2006, U.S.-domiciled mutual funds paid US$259 billion in capital gains distributions. That's the highest amount since the bull market peak in 2000. Stocks, however, are higher in 2007. That means mutual funds will slam investors with an even larger tax burden next spring.

The top federal tax rate on long-term capital gains and qualifying dividends is 15%. The top federal rate on short-term gains and interest income is 35%.

Exchange Traded Funds Less Taxing

Unlike the majority of mutual funds, which make year-end distributions, many exchange traded funds (ETFs) are far more tax-efficient. They also rarely make annual distributions. That can certainly alleviate your tax burden, especially in a bull market.

ETFs trade like stocks on a recognized exchange. They're also far more liquid than mutual funds and charge a fraction in fees compared to mutual fund management fees.

Also, ETFs are passive investment companies. So they usually result in less portfolio turnover than actively managed funds. A mutual fund that constantly trades or churns its holdings will suffer a greater tax burden compared to an ETF.

That's a win-win situation for you because lower trading costs boost total returns and reduce your tax burden.

But before canning your mutual funds, remember that unlike many ETFs, actively managed mutual funds employing a value investment philosophy can potentially reduce your portfolio volatility in a bear market, despite a higher tax burden. Although ETFs reduce your tax liability, investors shouldn't make investment decisions solely on after-tax returns.

ERIC ROSEMAN, Investment Director

P.S. ETFs, if chosen profitably, can indeed reduce your tax liability over the long-term. My colleague, Mike Burnick, is the editor of Global Market Investor, an ETF-focused signature research and investment service that spans the entire investment world. Mike's an old hand at picking emerging profit trends in global markets and has a great track record that proves it. Just the last month, Mike recommended a fantastic commodity-based ETF that tracks natural gas. Click here to see Global Market Investor for yourself and read all about his outstanding recommendations.

Hundreds of Thousands of Americans Are Buying Offshore Property - and You Can Too

A few weeks back, I noted that a large number of American citizens are leaving the good old U.S.A. for new homes abroad.

A 1999 U.S. State Department survey says 4.1 million Americans lived overseas then. It was estimated that each year about 250,000 U.S. citizens and resident aliens leave America to make a new home in some other nation. In 2005, the U.S. Bureau of the Census upped this estimate to over 350,000 U.S. citizens and resident aliens leaving the United States permanently each year.

Now comes the U.S. National Association of Realtors (NAR) with their own extensive study of official U.S. data sources. With this study, the NAR wanted to find out more about Americans who not only live offshore, but buy new or second homes in foreign countries such as Panama, Mexico and even Switzerland.

They wanted to know how often U.S. citizens and permanent residents are buying foreign homes. To begin to answer the question - the NAR commissioned the study to measure those Americans moving, working and/or living abroad and whether or not they purchased a residential property in foreign countries.

The NAR examined several possible indicators of trends. They looked at the U.S. State Department data on how many Americans live abroad, Social Security Administration data on the number of American retirees collecting Social Security benefits abroad, (yes, those checks keep on coming when you live abroad). They also examined the Internal Revenue Service statistics on the number of tax returns claiming the foreign-earned income exclusion (US$72,400 tax exempt for qualifying Americans working offshore).

The NAR data showed some interesting factoids:

• The analyzed data suggests that there are possibly as many as 500,000 to 600,000 foreign properties owned by Americans living abroad.
  
  
• Analysis of retired American workers living abroad suggests they likely own between 54,000 to 63,000 properties.
  
  
• U.S. employees working abroad and filing IRS Form 2555 (foreign-earned income exclusion), suggests that their foreign home ownership rates are probably in the range of 80,000 to 100,000.
  
  
• The American demand for offshore vacation and short-stay foreign properties may be in the range of 370,000 to 440,000 units. Overall, this suggests approximately 150,000 foreign properties owned by retirees and Americans working in a foreign country.

Tune in tomorrow to find out why you could join these thousands of Americans searching for greener pastures offshore. Also, find out how to avoid reporting your offshore real estate to the IRS.

BOB BAUMAN, Legal Counsel

Wealth

Can You Top This Write-Off...?

In a game of "can you top this," banking analysts from around the world are desperately trying to get a handle on the full extent of losses from the sub-prime credit crunch. Each day the estimates get more sobering.

According to an article in Bloomberg, a Deutsche Bank analyst is predicting that "losses from the falling value of sub-prime mortgage assets may reach US$300 billion to US$400 billion worldwide.

Wall Street's largest banks and brokers will be forced to write down as much as US$130 billion," as a result of the sub-prime credit crunch. That figure tops a similarly dire forecast floated last week by the Royal Bank of Scotland.

Deutsche Bank's analysis reckons that 30% to 40% of the approximately US$1.2 trillion in sub-prime mortgage loans outstanding will eventually default, while so far default rates are running in the mid-teens. "Banks and brokers may have to write off US$60 billion to US$70 billion this year," according to the report.

Over the past several months, big Wall Street firms have so far acknowledged about US$40 billion in sub-prime related losses or asset write-offs. Presumably, we can expect a very sharp increase between now and year end.

MIKE BURNICK, Senior Editor & Global Markets Analyst

EDITOR'S NOTE: The write-offs are hitting the news so fast and furious these days that it's nearly impossible to keep up. To combat this economic misery in the markets, Mike is hosting a special FREE audio briefing next Tuesday at NOON EST. Mike will reveal his best ideas on how to navigate these turbulent markets in the months to come. Registration is free! But space is limited, and to save your spot, you need to R.S.V.P now to let us know you'll be listening in.