The Daily Workshop Report
by Robert Sheard (TMF Sheard)

HILTON HEAD, S.C. (July 29, 1997) -- Talk about confusing! In final-hour compromises, the pols in Washington made the capital gains tax structure a bit more complicated. And depending on how one interprets the news releases summarizing the plan, it may actually contain a stinker of a rule for some Dow investors.

The first change is the institution of a new five-year holding period. Starting in 2001, stocks held for a minimum of five years will be taxed at a maximum rate of 18%. Presumably that means stocks one buys today and sells in 2001 would qualify, but the reports aren't entirely clear on that score.

The real concern is the traditional capital gains rate on stocks held a year or more. Supposedly the maximum rate has been dropped from 28% to 20%, but at least one news report this morning suggested that the holding period required to qualify for the long-term treatment has been lengthened from 12 to 18 months. Whether this is really the case or not is still unclear.

A more recent report this afternoon suggests that the longer holding period requirement (18 months) may only apply to families making a total income of less than $41,200, who would then qualify for an even lower rate of 10% (only 8% on stocks held for five years).

For users of the Foolish Four approach, of course, the holding period to qualify for capital gains tax treatment is of vital importance. It appears that at least for taxpayers trying to get the lowest rate of 10%, the holding period we're used to (12 months) will no longer get the favored tax treatment. It's perhaps even possible that it applies to all Foolish Four investors, but I'm still skeptical about the way the reports read. We'll have to be patient and get the actual details of the latest agreement to see where the precise cut-offs lie.

One saving factor if the holding period is indeed being extended to 18 months is that research suggests an even longer holding period works best for the Dow stocks. If we need to extend the holding period to 18 months to maintain advantageous tax treatment, it shouldn't hurt the Dow Approaches at all. I'll keep you posted as I can make out the seemingly ever-changing details.

Monthly Growth Screens
(Jan. 3 to present)
50.68%  Relative Strength  
25.97%  S&P 500 Index  
19.38%  Investing for Growth  
17.14%  Low Price/Sales  
12.09%  Unemotional Growth  
11.29%  EPS Plus RS  
 7.07%  YPEG Potential  
-3.25%  Formula 90  

Annual Value Screens
(Jan. 1 to present)
26.77%  Dow Jones Ind Avg  
21.86%  Dogs of the Dow  
21.29%  Beating the S&P  
16.16%  Dow Combo  
15.91%  Unemotional Value  
15.91%  Beating the Dow  
 5.41%  Foolish Four