CBO Points Out the Fiscal Cliff

CBO Points Out the Fiscal Cliff

  • Posted on: 8 December 2015
  • By: admin

CBO Points Out the Fiscal Cliff

The Congressional Budget Office (CBO) released its review of the economic impacts of the upcoming fiscal cliff faced by the United States. If tax hikes and spending cuts are enacted, the CBO believes the U.S. will fall into recession. You can read the Reuters story at http://news.yahoo.com/fiscal-cliff-could-cause-u-recession-cbo-221828941--business.html

WHY YOU SHOULD CARE

Just as in 2011, when we faced the debt ceiling debate, we need politicians in Washington to come together to find a compromise to help us avoid some of the fiscal head winds that are set to kick-in at the beginning of 2013. Hopefully we’ll get a better showing from our elected representatives this time around, but to be back in this situation, held hostage by Washington again, is truly unsettling. 

The fiscal cliff refers to the scheduled expiration of the Busch tax cuts, the addition of new taxes associated with the new healthcare legislation, expiration of the payroll tax holiday, expiration of extended emergency unemployment benefits, cuts to Medicare reimbursement rates, and, just for good measure, the agreed upon automatic spending cuts which came as part of the debt ceiling debate known as sequestration.

All told, this list totals between $450 - $550 billion worth of spending cuts and tax increases. Now, the U.S. economy is roughly $15 trillion, so this represents roughly 3.0-3.7% of U.S. GDP. The U.S. grew real GDP by only 1.7% in 2011, so you can see the problem we face. The global economy is already under pressure from a recession in Europe and slowing growth in China and other emerging market economies. We simply cannot afford to have the U.S. in recession as well. 

Unfortunately we are in the midst of a Presidential election, so the focus is on electing a Commander-in-Chief and Congress has been relatively silent so far, preferring to play the waiting game to find out who the leader of the free world will be rather than shaping the debate and proposing legislation. 

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Tech Giants HP & Dell Falter, Who’s Next?

Tech Giants HP & Dell Falter, Who’s Next?

  • Posted on: 8 December 2015
  • By: admin

Tech Giants HP & Dell Falter, Who’s Next?

 

HP is going to cut 27,000 of their astonishing 330,000+ person workforce due to slumping demand for printers, PCs, and equipment. Yesterday, Dell had a similarly disappointing quarterly earnings announcements that showed how difficult it is to transition a business. Businesses must evolve to keep pace with the changing landscape, which is particularly evident in technology. Current leaders of companies weren’t even a twinkle in their parents eye, when HP was helping to create what is now Silicon Valley or when Michael Dell was building PC’s in his Texas Dorm room. Both of these companies are facing a dreaded business problem, commoditization of their product. When people don’t care much about what kind of server, PC, or printer they use the product is a commodity and with that comes a loss of pricing power- Can you say, “Adios Profit Margins”…

 

http://www.bloomberg.com/news/2012-05-23/hp-third-quarter-forecast-misses-estimate-27-000-jobs-to-be-cut.html

 

WHY YOU SHOULD CARE

 

Competition is at the heart of capitalism, it’s what makes products and services better and cheaper. It’s also ingrained in the DNA of Americans. You can stop keeping score in Little League Baseball, but try as you might you will not kill the competitive spirit. Perhaps nowhere is this competition more visible than in Silicon Valley, where every genius engineer with an idea and a T-shirt thinks they can unseat the current leader. This is healthy, it is exciting, but it’s also dangerous for investors. Leadership changes often happen abruptly and if you are not astute and recognize seismic shifts then you may get left holding the bag. Think about the changes we’ve seen within internet search leadership- Netscape, AOL, Yahoo, Google and that’s just in 13 years. Think about servers, personal computers, and cell phones- those lists are long. Here’s the moral of the story: If you are going to invest, especially in technology, you cannot go to sleep on what you own. Do your homework, know your competencies, or else stay away. 

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Greek Communist Student Leader Takes Leadership Role

Greek Communist Student Leader Takes Leadership Role

  • Posted on: 8 December 2015
  • By: admin

Greek Communist Student Leader Takes Leadership Role

 

It may be alarming that a leader with Communist leanings has a legitimate role in Greek politics, but it should not be surprising. 37-year old Alexis Tsipiras’s rhetoric has struck a nerve with Greek youth that are excited about his anti-austerity ideas. Tsipiras may or may not earn an official role in Greece, but the fact that there is a shift in Greece’s accepting of the ECB austerity measures can be important. The social upheaval going on here, could be replicated in Portugal, Spain and Italy.

 

http://www.cnbc.com/id/47500606

 

 

WHY YOU SHOULD CARE

 

Austerity, or living within your means, makes sense in a vacuum but not always in real life. Social uprising from citizens in Europe will undoubtedly put pressure on the previously agreed-upon plans to cut spending and certain social programs. Europe has seen political leadership changes in France, Greece, and Italy and will likely see others as the people of each country will demand better for themselves, not the region. With heightened unemployment, particularly among the youth segment of these populations, it would be foolish to believe that these individuals will not fight back. A poor economy, no jobs, and social division is the exact breeding ground for political change and social uprising. These social pressures will make it particularly challenging for politicians that wish to stay employed and increasingly challenging for relations between the European Central Bank and the above mentioned countries. The realization that execution of austerity is going to be very hard, increases the risk of a country exiting the Eurozone; or conversely if the Euro leaders are truly committed to keeping it intact, this will likely require monetary intervention of staggering proportions.

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Facebook Comes In Like a Lion and Goes Out Like a Lamb

Facebook Comes In Like a Lion and Goes Out Like a Lamb

  • Posted on: 8 December 2015
  • By: admin

Facebook Comes In Like a Lion and Goes Out Like a Lamb

Facebook, the most anticipated IPO since the last most anticipated IPO, began trading today after pricing its IPO at $38/share. With approximately 900 million users, expectations were extremely high for this new issue, but at the end of the day, Facebook was only able to muster a 0.6% gain, closing at $38.23. Read a recap from Bloomberg at http://www.bloomberg.com/news/2012-05-17/facebook-raises-16-billion-in-biggest-technology-ipo-on-record.html

WHY YOU SHOULD CARE

Well, it finally came, and you’re probably wondering what all the fuss was about given the lackluster greeting shares of Facebook’s IPO were given on their first day of trading. First there was a software issue at the NASDAQ market site which delayed the opening and delayed order confirmations to retail investors that bought shares throughout the day. Second was the lack of “enthusiasm” shown by investors as Facebook could muster only an 18% "pop" in the stock at the open of trading. Lastly was the rapid move back toward its IPO price of $38 where investment banks that participated in the underwriting were no doubt set-up to support the stock to make sure that it did not fall below the IPO price. Not the best welcome to the public company club.

The Facebook IPO is truly a great lesson for investors, and actually should be seen as a good thing. It shows that we have learned a few things since the dot.com bubble, where companies seemingly drawn on a napkin were able to get to the public markets and have their stocks trade at astronomical valuations. Facebook has earnings, $1 billion in 2011 to be exact, and the valuation at roughly 100 times earnings is a bit rich. But the general public held back and didn’t bid it up to 150x, 200x, or more, and they should be applauded for that.

This is a very rare instance where every member of the general public has a chance to now purchase shares of the “hottest” IPO at the same price as the Wall Street insiders that typically make out like bandits on these deals. But buyer beware, the lack of enthusiasm for the IPO could lead to a stagnant or weakening stock price in the short term.   If you want to own Facebook, please treat it as a long-term investment and make sure that it is suitable given your current financial situation. 

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A U.S. Manufacturing Renaissance?

A U.S. Manufacturing Renaissance?

  • Posted on: 8 December 2015
  • By: admin

A U.S. Manufacturing Renaissance?

 

Industrial production in the United States posted its fastest growth in over a year led by output in utilities and increased manufacturing. In what is a positive sign for the U.S. economy the gains were broad based, including capacity utilization rising to its highest level since 2008. Capacity utilization is a measure of how fully companies are using their resources. 

 

http://www.cnbc.com/id/47444167

 

WHY YOU SHOULD CARE

 

The United States transitioned from a manufacturing economy to a service, consumption, and intellectual property based economy over the last 50+ years. Basically, we stopped making stuff. The transition is due much in part to the fact that it it cheaper to produce many goods abroad. However, with the increasing costs of transportation as well as wage pressures in the developing world, we are seeing U.S. manufacturing levels increase. Throw in the fact that unit labor costs have declined in the United States and there is a real possibility that manufacturing in the United States is likely to grow over the next decade. Now, there is little chance that manufacturing will assume a dominant economic role, but its impact on jobs can have a meaningful impact. Let’s hope that this trend continues and in the future Made in America will be a common stamp on many of the products we purchase.

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California = Greece: What Happens When No One Is Willing To Compromise?

California = Greece: What Happens When No One Is Willing To Compromise?

  • Posted on: 8 December 2015
  • By: admin

California = Greece: What Happens When No One Is Willing To Compromise?

Yesterday, California Governor Jerry Brown revealed that the state faced a $15.7 billion budget deficit, 71% larger than the original $9.2 billion estimate. To close this gap Governor Brown proposed various spending cuts in addition to tax increases. Read the whole story from Reuters at http://www.reuters.com/article/2012/05/14/us-california-budget-idUSBRE84D0ZP20120514

WHY YOU SHOULD CARE

California is truly a microcosm of what we as a nation, and as the developed Western world, face today.  Plain and simple, we live beyond our means, expect services from the government to be provided and yet have no desire to actually pay for them. We as a citizenry are incapable of taking pain in order to shore up the deficit problems that we face, and we constantly blame inept politicians for our plight. 

Well, the blame is ours. We cannot continue to expect everything and be unwilling to give anything. That means special interest groups that fight tooth and nail to keep inefficient government programs alive, that means government employees and pensioners whose retirement packages consume ever more of the State’s budgets, and that means American taxpayers that use every loophole there is to drive their effective tax rates toward 0%.  

California has its own unique problems because in 1911, an amendment to the California Constitution established the California initiative process, giving voters an equal ability to enact legislation by placing a proposed statute or amendment directly on the ballot after gathering the requisite signatures as a general show of support for the measure. Additionally, to get a tax increase through the state legislature requires a 2/3 majority. What that means is that new programs, which eat away at the state budget, keep getting public approval, while tax increases continue to be voted down (shocker I know). 

Both sides, when is enough, enough? When will we finally stop fighting each other, and finally start working to actually solve something? We live in a society, and living in a society comes with certain responsibilities to one another, but it also means not sacrificing the whole for the sake of the individual. At the end of the day we’ve become a world of profligate spenders that have lost the core principles prior generations held dear, namely save for a rainy day and debt is bad. We still have time to turn it around, but the window is closing quickly. 

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Gold Drops to 4 ½ month low on Euro Worries

Gold Drops to 4 ½ month low on Euro Worries

  • Posted on: 8 December 2015
  • By: admin

Gold Drops to 4 ½ month low on Euro Worries

 

Gold prices fell to $1,561 per ounce on Monday as European contagion worries continue to capture headlines. After reaching 2012 highs on $1,734 per ounce in February Gold has steadily marched lower and no longer seems to capture the daily attention and fervor of investors and the media. Perhaps all the Goldbugs are now focused on Facebook? http://finance.yahoo.com/news/gold-ticks-bargain-hunting-off-031251534.html.

 

WHY YOU SHOULD CARE

 

Assigning value to an asset that does not generate a cash flow can be extremely challenging and akin to pure speculation. While we could argue the historical relationship between inflation and gold and gold’s ability to store value as currencies depreciate, it is clearly not that elementary. Case in point: Recently, pessimism has grown about the ability of the European Union to stay intact with Greece the first country to potentially exit. This, combined with the push-back on austerity and realization that the ECB will likely need to turn on the printing presses again, is seemingly the perfect recipe for gold prices to move higher. Fear of inflation, risk of currency debasement, and economic risk would seem to be the scenario under which gold prices would accelerate. However, the exact opposite has happened and we’re not exactly sure why. Maybe the price was just too high, or maybe people see more value in currencies despite the risk of QE3 around the world? It really doesn’t matter, what does matter is that regardless of asset type be they houses, stocks, loans, oil, or gold one must recognize the risk attributes inherent in any investment.  The lesson with gold (and for the record we think the environment does argue for higher gold prices) is to BE CAREFUL. When the investment feels too good, it’s probably too late. When you hear people say, “you can’t lose”, you can and probably will.   So remember this: Price DOES Matter and timing IS important.

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J.P. Morgan Trading Loss Another Argument For Regulation

J.P. Morgan Trading Loss Another Argument For Regulation

  • Posted on: 8 December 2015
  • By: admin

J.P. Morgan Trading Loss Another Argument For Regulation

Last night, J.P. Morgan reported a $2 billion trading loss in the unit that was supposed to help reduce risk in the bank’s asset portfolio (read the story from Bloomberg http://www.bloomberg.com/news/2012-05-11/jpmorgan-falls-9-after-reporting-2-billion-trading-loss.html). 

WHY YOU SHOULD CARE

By any measure this is a large loss, but J.P. Morgan still made $4 billion in profit during the quarter, so the bank is not at risk, nor is the financial system as a whole at risk. What this loss highlights is the continued assumption of increasing levels of risk by too-big-to fail banks in search of profits. That need on the part of banks to reach ever further to generate returns also invites heightened levels of regulation for the financial industry.

Now, we aren’t proponents of regulation in most cases, but it is becoming increasingly clear, with examples like Bear Stearns, Lehman Brothers, AIG and most recently MF Global and J.P. Morgan, that risk management is not a core tenet of many large financial institutions. The Federal Reserve, with a 0% forever interest rate policy, has created an environment where simple lending is not very profitable, and that leads to institutions seeking out new business lines to supplement the bottom line.

The only way to reign in the risk taking is to have stronger rules in place that curb risky behavior. The Volker Rule is being proposed as part of the Dodd Frank legislation that was passed in response to the 2008 financial crisis, and would limit the proprietary trading (trading for their own account) of commercial banks. 

Now with more intense regulation of financial institutions you should expect reduced levels of service at your bank and also higher fees. Many of the services that you enjoy today for free would likely be slapped with a fee as banks try to make-up for lost profit opportunities. This is the tradeoff. A tradeoff you have to be willing to make to help create a more stable banking system. 

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CEO’s Write Open Letter to Treasury Secretary Geithner: Don’t Raise Taxes on Dividends

CEO’s Write Open Letter to Treasury Secretary Geithner: Don’t Raise Taxes on Dividends

  • Posted on: 8 December 2015
  • By: admin

CEO’s Write Open Letter to Treasury Secretary Geithner: Don’t Raise Taxes on Dividends

18 Top CEO’s of companies ranging from Altria to UPS recently wrote a letter to Treasury Secretary Geithner, which you can read at http://www.politico.com/news/stories/0512/76050.html. The basis of their argument centers around the negative economic impact an increased tax rate on dividends would have, particularly on seniors.

WHY YOU SHOULD CARE

The potential expiration of the Bush Tax cuts at year’s end has an impact on several forms of taxation. However, the focus of the abovementioned letter is the increase in dividend tax rates from the current 15% to 39.6%. One of the arguments for reducing the rate in 2004 was to avoid double taxation. A corporation makes profits which are taxed and then some of those profits are distributed to shareholders via dividends which are then taxed again. If a corporation’s tax rate is 30%, then the distributed profits were taxed at 39.6% the true tax rate on that dollar of profit was 69.6%. 

Many believe that only wealthy individuals hold investments that pay dividends hence a tax increase only effects the wealthy. However, a 2007 Ernst & Young survey found that of the 27.1 million tax returns that had qualified dividends, 65% are from returns with less than $100,000 in taxable income. Furthermore, 16.2% had taxable income between $50,000 and $25,000. Clearly, a reduction in dividend income through higher taxes impacts many Americans of various economic levels, but perhaps more than any group seniors are affected the most.

Many seniors and retirees depend on dividend income to supplement other sources of retirement income, namely social security. Any reduction in their ‘take home’ can have a substantially negative impact on one’s quality of life. Contrary to popular belief, an increase in dividend tax rates will impact a lot of people and is most impactful to the lower income levels. We believe seniors have such political clout that politicians will feel a lot of pressure to make sure dividends continue to received favored tax treatment; however, we certainly don’t want to make a living out of predicting the actions of a dysfunctional Congress. As the year progresses, you can be certain this topic will be part of the conversation.

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Housing Market Stabilizing as Prices Start to Increase

Housing Market Stabilizing as Prices Start to Increase

  • Posted on: 8 December 2015
  • By: admin

Housing Market Stabilizing as Prices Start to Increase

The National Association of Realtors reported that the median price of single family homes rose in 74 of 146 metropolitan areas in the first quarter of 2012. That compares to only 29 areas in the fourth quarter of 2011. http://www.bloomberg.com/news/2012-05-09/home-prices-rise-in-half-of-u-s-cities-as-markets-stabilize.html

WHY YOU SHOULD CARE

One of the most important aspects of the price of a home is the flexibility, or inflexibility, it allows the owner when looking to relocate. As home prices fall, trapping homeowners in underwater mortgages, the ability to pursue employment opportunities in other geographies is greatly diminished. The homeowner is forced to either contemplate a foreclosure or short sale and take a large hit to their credit, something that follows them for seven years, or remain shackled to the depreciating asset and forego potentially better employment opportunities elsewhere.

The mobility of our workforce in the United States is extremely important to economic growth. Even in an economy which has an official 8.1% unemployment rate, some states and industries are having trouble finding enough people to fill necessary jobs. There are 10 states whose unemployment rate is below 6%, with North Dakota posting a 3% rate due to the boom in the shale oil and gas industry. They simply cannot attract enough people.

Conversely, the four states held out to be the poster children for the housing mess, Arizona, Florida, California, and Nevada sport unemployment rates above the national average at 8.6%, 9.0%, 11%, and 12% respectively.

Nevada now has roughly 60% of mortgages underwater, Arizona roughly 48%, Florida roughly 44%, and California roughly 30%. In comparison, North Dakota only has roughly 7% of homes underwater. The data are extremely telling.

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