That Was The Week That Was-1st Week December

Ronald Reagan’s first tax cut was in July, 1981. Over the following three years the Reagan tax cuts would slash some 25% off the marginal income tax brackets of every American. The one thing that Reagan did not do was promote consumer saving by increasing the IRA contribution. It stayed at $1500 a year but increased to $2000 in 1982 and stayed there until 2001. Reagan understood that cutting taxes allowed people to spend more. Like politicians before, and after, he was not about to encourage people to save rather than spend. This country has always been about spending. The myth is that consumer spending is 70% of Gross Domestic Production. While there is argument over the percentage and the method calculating it there is no question that spending is a big part of the United States economy. Not big- huge. We outspend everyone. There is no nation or group of nations that can compete against the American consumer.

In the past, for most people, saving was not a huge priority. With the economic recession we are getting accustomed to the idea of socking a few dollars into an IRA or retirement plan. The shock of 2008 Market Meltdown has created a sense of saving urgency. The go-to saving element for most is the 401k plan. It has replaced the defined benefit pension. The problem with the 401k is that a worker could save for years and years and still end up with less than they put in. The education process of money management is years away. Still the 401k is the one plan that has the possibility of providing financial security at retirement.

Now  there are whispers that the tax deductibility of the 401k will be removed under a Congressional compromise. The United States needs money because of its free spending ways and those of us who are prudent, and have a few dollars salted away, are in the Congressional bulls-eye. The so-called ‘new’ plan is to grandfather certain ages who are or close to retirement. Others will have their 401k plans rolled into a Social Security managed portfolio and guaranteed 3% a year (this eliminates the need for thinking about money management). Tax-Deduction of contributions, no matter how much the contribution, will be capped at $600 per individual. Also gone would be the tax deferment on earned dividends, interest and capital gains. Those would become taxable in the year earned. At retirement the individual would receive an income for life depending on how much they have in their account.

Common Sense dictates that if that idea was made into law 401k individual plans would be disappearing quicker than pay telephones. Nothing could kill qualified plans faster than removing the very incentives to save. Congress would also ruin a future tax stream. Americans may not like saving but they dislike more the idea of saving and then having the government tell them what they can and cannot do with their own money. 

Timothy A. Bassett, CFP @ Talmer Bank & Trust reiterated Fed policy that is expected to keep rates low through 2015 but will adjust if conditions improve. Basset, as others, will be watching Washington this week for some sort of compromise as he will the FOMC meeting. He reports that they do not expect any new news from the Fed.

How Bad Could It Be If Congress Doesn’t Quit Bickering? Falling off the fiscal cliff would be ruinous for the country. That’s why it was put in place, to force politicians to compromise. Failing that it would immediately create $500 billion in tax increase, $200 billion in Federal spending cuts and the tax law would revert to pre-2001 level. Also the estate tax would go back to $675,000 and subject to 55% tax rate. Child credit would be gone. Unemployment would go up to 9%, Want to look at historical precedent go to 1937 when Industrial Production fell 30% and unemployment was 19%. Investors Ignore the Cliff assuming someone in Washington has a scintilla (okay, a crumb) of common sense. The disaster that would happen to the country could take decades to unravel. In this backdrop investors are not seeing an increase in the market’s volatility index or Vix. The WSJ reported Tuesday last that this complacency by investors indicates that a deal could be reached before year’s-end.

Wednesday The President said he’d be okay with no resolution unless the Republicans agreed with his tax on rich proposal. Thursday on the Today Show Alan Simpson said that anyone, either Dem or Republican, who said they’d be okay with the country falling off the cliff was stupid. He also urged the younger people to get organized for their future. The old folks have organized to protect their rights and the younger gen had better do the same. Sunday on Meet the Press a discussion for the President allowing the country going over the cliff amounted to him getting a liberal agenda in place and able to pin the blame on the Republicans. There would be massive spending cuts and huge tax increases (see the following table in this blog). Liberal Dems would be celebrating. But, as Bob Woodward pointed out, it would throw the country into a recession and it would be the President’s recession and not the Republicans.

Fiscal Cliff? Not just for the rich… tax hikes in 2013 if Congress and the President don’t compromise…

Goldman Sachs offers some insight into 2013.

• Stocks will outperform treasuries.
• Equities will beat credit returns.
• Cyclical sectors (materials, industrials, information technology) will beat consumer stocks (telecom and healthcare).
• Stocks with high sales exposure to BRIC will beat domestic facing firms. 

Monday markets down. Not much enthusiasm, including gold that is teasing with breaking below $1700 an ounce. At the end of the week it did and closed below support. JP Morgan said Eurozone stocks would outperform their U.S. cousins in 2013.

Jim Jubak @ MSN Money likes McDonalds back over $100 by next October. The stock has had a minor pullback and not enough, sez the Jubak, to be a buyer. Look to around $72 a share, it goes that low if the U.S. falls off the FC. McDee pays a heft 3.6% dividend at current prices.

Friend from JP Morgan called yesterday and reported that the firm was ‘Bullish’ on 2013. I don’t know if folks there are whistling in the dark or just looking at all the money on the sidelines that has to go somewhere. Talking about the FC my friend repeated the old saw that you can count on politicians doing the right thing if only to save their own skin. To remind investors-Don’t get excited about interest rates popping anytime soon. Unless there is some sort of a disaster interest rates should muddle along right about here, maybe lower through 2013. The Federal Reserve is buying the long-end of mortgages and selling bonds and making a ‘fortune’! The spread between the cost of borrowing (selling our bonds) and buying mortgages that are yielding double that is a once in a lifetime opportunity. Why no one is talking about this is unbelievable. The Federal Reserve is using good old fashioned capitalism with OPM (Other People’s Money). But that’s me talking and thinking….

Corporations have taken note and enthusiastically borrowed the Bernanke game plan for their own shameless selfish ways. Rather than borrow money at the bank companies have gone to the public and issued bonds at an average yield (this from Bloomberg) of 2.38% to fund…(wait for it) their stock buyback programs. Finance 101 tells us that reducing outstanding stock has a purpose of increasing corporate stock value. Plus many company stocks pay a healthy dividend far in excess of what the cost is of borrowing and magically! corporate treasurers have created Value. Investors just may want to look for companies that are doing just that. Call or email me if you have questions. 

Stinky Tuesday. Gold fell, briefly, below $1700 an ounce. Apple flirts with trading under 200 day average, signaling bad things not only for Apple but for the markets. Facebook is elevated to Nasdaq 100, replacing Infosys, which is switching to listing on NYSE. Got Cars? Lots of them and I mean lots of empty lots loaded with unsold cars. A return of the 80s. Honda and Toyota go on a discount pricing spree and domestics don’t. Now we have four months backlog for Ford, GM has five months and Chrysler has six months with their new Dart not doing well at all. In fact, news is the new Dart is selling for a higher price than Ford and GM compact competition. 

Bad meatball? Darden restaurants fell 10% as the parent of Olive Garden and Red Lobster still hasn’t gotten it right and sales down. Cutting guidance the casual dining group has problems either cutting prices or quality. On the retailing side the Gap is off 7%. Yum is off on China growth and Mickey Dees didn’t hit numbers for the quarter. Seems the entire fast to casual dining sector is off its feed.- I’ve been waiting all year to write that…

Ask the richest person you know if they really mind paying more in taxes.

Am I the only conservative that misses Bill Clinton? Speaking in Sacramento the President said the Republicans and Dems were a lot closer to a compromise than their public ‘Kabuki’ dance. He went on the explain, ‘They’re sniffing each other out. They are moving toward a deal.’ Only Bill could put it in words just about everyone finds repulsive.

Markets down most of the day on Wednesday and then Dow moved up in a mixed day. Gold closed under $1700. Big news was from Sotheby’s where a drawing by Raphael sold for…$47.9 million! and I thought I was a spendthrift buying a Keurig! (where’s my sketch pad?)

 Morningstar Publishes Their Ultimate Stock Pickers Top Ten List. Greggory Warren, CFA, compiles the list along with a play-by-play of what and why active managed fund managers are buying and selling during the past quarter.

• Microsoft
• J&J
• Berkshire Hathaway B
• Google
• Wells Fargo
• P&G
• AIG
• Wal-Mart
• Pepsico
• Oracle

Window Dressing?  I write about this every year. The WSJ reported Friday that they ran an analysis on 10,000 stocks and found on the final trading day of each quarter there was a sharp increase in the number of stocks that beat the market by at least 5% points. Then the next trading day the same stocks trailed by three points or more. This practice is called ‘marking the close’ or ‘portfolio pumping’. Managers do it for bonuses and to make their portfolios look good.  It’s illegal but either difficult to prove or ignored by regulators. At the end of the year investors will see a lot of thinly traded stocks get that Santa Claus treatment. Investors who rely on total return numbers to pick next year’s investment can be sucked in to buy the fund because of the manager’s faux acumen. It could mean millions in extra personal income to the fund manager.

Friday MarketWatch Cody Willard sez Apple over $1000 in 24 months.

Looking in their crystal ball, Nigam Arora of Dow Jones, reports that Goldman Sachs downgrades its projection for gold prices in 2013. Freeport McMoRan has bet $9 billion acquiring energy diversification from metals is a clear signal that QE3 or the economy will not cause gold to skyrocket. GS puts a price tag of $1800 an ounce on gold.

Friday Markets Closed Mixed with Dow and S&P 500 Indices Up and Naz Down. S&P clinging to support over 1400 at 1418. Gold made a weak move and finished  $1706. The story of the day was that everyone expected a bad- a miserable if you will- jobs report. Instead the jobs number was north of 100,000, as The Jimbo Cramer sez. So any number north of 100k was good ‘nuff for The Street. Some Chartists were predicting a market meltdown on a bad employment number. ‘Get out before Friday,’ a few said. It didn’t happen and next you’ll hear from the chartists is that they’re still right and the market will drop only they cannot predict just when…Finally: send  a note to your Congressional Representative and tell them folks in Washington to, ’get ‘er done! ‘

Year-end Questions call Paul @ 586 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.