12/31/12

Next Up, Debt Ceiling

With the fiscal cliff looking more like a fiscal bump, the big debate is coming.

The DEBT CEILING.

Up until the last few years, the United States ability to borrow was rubber stamped by Congress.  That it failed to do so a few years ago led to the USA's downgrade of debt largely because of the fact that the US govt looked disfunctional.

Well, in March 2013, the USA will need to increase the debt ceiling or it could be deja vu.

I believe any President should have the ability to raise the debt ceiling, he or she shouldn't be held hostage by congress in times of distress, war, etc.

I think the fiscal bump will be reactively worked in february/march with a grand bargain to include the debt ceiling.  Call me an optimist but that's the way I see it.

11/26/12

Dividend Taxes and Stocks Performance

With the so called fiscal cliff looming, politicians in Washington are listening to those investors who are scared to death of higher taxes on dividends but the evidence is that higher taxes on dividends does not hurt stocks.



Facts don't lie and clearly the chart above shows us that the years in which dividends where taxed fully where the best.

11/12/12

USA Will Become Energy Independent Says IEA

Every US President since Nixon has promised energy independence and obviously none have been able to acheive it but someone will and soon.

According to the IEA (International Energy Agency), the U.S. will become the world’s top producer of oil within five years, a net exporter of the fuel around 2030 and nearly self-sufficient in energy by 2035.

Recently, however, an “energy renaissance” in the U.S. has caused a boost in oil, shale gas and bio-energy production due to new technologies such as hydraulic fracturing, or fracking. Fuel efficiency has improved in the transportation sector. The clean energy industry has seen an influx of solar and wind efforts.
By 2015, U.S. oil production is expected to rise to 10 million barrels per day before increasing to 11.1 million bpd by 2020, overtaking second-place Russia and front-runner Saudi Arabia. The U.S. will export more oil than it brings into the country in 2030 and Iraq will exceed Russia to become the world’s second largest oil exporter.
At that point, real oil prices will reach $125 a barrel. By then, however, the U.S. won’t be relying much on foreign energy, according to the IEA’s World Outlook.
Globally, the energy economy will undergo a “sea change,” according to the report, with nearly 90% of Middle Eastern oil exports redirecting toward Asia.
And what of energy efficiency efforts?
Fossil fuels, which enjoyed a 30% jump in subsidies last year to $523 billion worldwide, will still surpass renewable energy sources, according to IEA. But so-called green power will become the world’s second-largest form of generation within three years and will threaten coal’s supremacy by 2035.
That progression, however, “hinges critically on continued subsidies” for wind, solar and bio-fuel technologies, which last year amounted to some $88 billion and needs to reach $4.8 trillion through 2035, according to IEA.
Even then, however, “the world is still failing to put the global energy system onto a more sustainable path,” according to the report.
Global energy demand will boom by more than a third by 2035, rising to 99.7 million barrels a day from 87.4 million last year. China’s demand will rise 60% over the period; India’s will more than double. Demand in developed countries will increase just 3%, with the desire for oil and coal losing share in the overall energy mix.
Energy-related carbon dioxide emissions will creep up, causing a long-term average temperature increase and energy production will continue to suck at the world’s water resources – it already accounts for 15% of total water use.
My opinion is that the IEA oil price target of $125 is high, while demand will continue to increase, supply is also increasing and the OPEC cartel lock on pricing oil will come to an end.
Next up, wars over water!

10/17/12

Which Candidate Is Best For Stocks ???

Which Candidate is Better for Your Portfolio?
by Marc Lichtenfeld, Investment U Associate Investment Director
This year's presidential election is being billed as the most important election in our
country's history.  Of course, that's what was said about the last election.

And the same thing was said about Bush versus Gore. And Reagan versus Carter. 
And probably Harrison versus Van Buren, Taft versus Bryan and many others.

People mostly vote with their wallets. Whichever candidate is perceived to be better for
their finances usually gets their votes. Sure, social issues, foreign policy and character
matter, but it ultimately comes down to money - and the belief that a candidate will lead to
more of it for the voter.

By this point, each candidate has made numbers up out of thin air and straight out lied
about his track record and his opponent's. Last night's debate would have embarrassed
Pinocchio.

Both candidates are trying to convince the American public that they can return the
nation to prosperity. Frankly, I don't have much confidence in either guy, as they're
both full of "malarkey!"

So I decided to take a quantitative look and see how the market performed under each 
candidate's party.

The results may surprise you.

The Study

I looked at the performance of the Dow Jones Industrial Average starting at the beginning of 
every presidential administration, going back to 1901. The S&P 500 data began in 1929 
(including a proxy for the index before it actually started in 1957).

I also broke it down further to see what effect having a Congress that was the same or 
opposition party would have on the results.

Lastly, I wanted to get a sense of the long-term impact of the administration's policies. 
A President's actions don't only impact the economy from inauguration day to inauguration day. 
They can have long-lasting effects.

For example, some say President Clinton is the recipient of the good fortune that was a result 
of President Reagan's policies. The argument can also be made that President Obama is 
suffering through the malaise caused by President George W. Bush's mistakes.
The first table shows the performance of the Dow and S&P 500 with a Republican or 
Democrat President. There were 15 Republican terms and 13 Democrat.


Presidents

RepublicanDemocrat
Dow Jones Industrial Avg.

1 Year5.61%8.30%
3 Year20.85%30.32%
5 Year49.49%42.72%
10 Year110.05%109.10%
S&P 500
1 Year0.9%15.04%
3 Year26.50%49.75%
5 Year48.25%68.48%
10 Year171.22%206.64%

According to the numbers, when it comes to the Dow Jones Industrials, Democrats appear to
be better for the market in the short term, while Republicans are in the intermediate term.
Long term, however, the results are identical.

In the broader S&P, however, the market performed way better under a Democrat President
across all time periods studied.

Now, let's take a look at how Congress impacted the results.


Rep. Pres. w/Rep.CongressDem Pres. w/Dem.CongressRep. Pres. w/Dem.CongressDem Pres. w/Rep.CongressRep. Pres. w/SplitCongressDem Pres. w/SplitCongress
DJIA





1 Year8.61%9.77%-1.23%25.05%15.26%-24.65%
3 Year1.73%33.88%25.27%87.90%66.97%11.52%
5 Year40.20%45.90%41.14%69.30%142.39%-15.65%
10 Year11.15%111.03%163.42%135.37%338.12%63.49%
S&P 500





1 Year-3.89%14.71%-0.23%34.03%13.94%N/A
3 Year-19.03%44.52%26.59%108.60%53.70%N/A
5 Year-28.17%92.29%47.91%67.07%126.43%N/A
10 Year-19.11%253.69%188.62%125.58%277.21%N/A

A couple of notes:

The sample sizes of a split Congress (meaning the House and the Senate were controlled by different parties), were very small. Only Ronald Reagan's two terms in office for the Republicans and Woodrow Wilson's second term for the Democrats. 

For the Dow, Reagan's two terms blew all other combinations away across every time period except five-year performance. When you add the S&P 500, Reagan's five- and 10-year performance was best, but shorter term, investors did better with a Democrat in the Oval Office and Republicans in control of Congress.

If you eliminate Reagan's term so that only larger sample sizes are used, a Democrat President with Republican Congress had the best one-, three- and five-year performance in the Dow. The 10-year champion was a Republican President and Democrat-controlled Congress.

For the broader S&P 500, the market climbed much higher when a Democrat was in the White House. Short- and intermediate-term performance was enhanced when the Democrat President had an opposition Congress. 

But perhaps the most surprising results were that long-term performance was much stronger when the Democrats were firmly in control of the government, returning 253.69% over 10 years or an average annual return of 13.57%.

The perception is that Republicans are more pro-business. I think their policies and plans back that up. But at least as far as the market is concerned, over 100 years of results suggest you'll make more money on your stock investments with a Democrat in the Oval Office (how much of it you'll get to keep is another story due to differing tax proposals).

Lots of factors go into who Americans select as their President. Foreign policy, tax policy, social issues, etc. The stock market is usually not a big consideration. If it was, George W. Bush wouldn't have had a prayer against Al Gore, as the market more than doubled under Clinton's last term. And Mitt Romney would be the Republican equivalent of Walter Mondale after President Obama's 69.6% bull market.

But it's useful to look back and see how the market has performed under various circumstances throughout history. After all, as Mark Twain said, "History does not repeat itself, but it does rhyme."

9/22/12

Forget 47%, go for 100% with a consumption tax instead

The talk this week was about the 47% of Americans who pay no federal income tax.  Keep in mind, they pay other taxes, payroll, gas, etc.

The problem is that the US government takes in approximately 18% of GDP and spends 20.5% (these are forty year averages).  That is unsustainable and has grown the deficit under both parties leadership.

Consumption Tax Now
The answer is not to tax wealthier Americans, there simply isn't enough money at 100% tax to help.  The answer is not to increase taxes on the middle class either and certainly taxing those 47% of Americans who pay no federal income taxes (retirees, low income people, military) will help a little but really won't move the needle either.

The answer is simply a flat tax on individuals of say 5% and corporations of say 5% and then a consumption tax.

The consumption tax would not only tax the 47% a little but would also tax the millions that are living and working under the radar, in the black market, etc. because everyone consumes, milk, gas, houses, etc.

The 5% on corporations may seem small but in 2011 while the headline tax or base number is 35% (highest in the world), the average US corporation paid just 1.3% in taxes after deductions (lowest in the world).

We might need to adjust the numbers slightly to make sure the government takes in enough to run the country, say to 6% but businesses would have the certainty they are looking for and without the massive loopholes, businesses could concentrate on building business, not tax dodging.

This idea would have massive bi-partisan support and would pass congress easily.  The President who signs this bill into law would be popular long after its passage.

9/7/12

What Is Labor Participation Rate?

Along with today's unemployment figures came the labor participation rate which is simply the percentage of people in the country that are working (that want to work).

The value of full employment changes with demographics (more people living longer now) and with more women joining the workforce every year.  Keep in mind that 100% includes retired folks, kids, etc and since baby boomers make up a larger percentage of the population now than in the past, it's more likely that 67.5% is full employment.

At 63.5%, today's reading is the lowest since 1981.

That four percent (difference between 67.5 and 63.5) represents about 12 million people unemployed (4% x 300 million people in the US) which is probably not coincidentally the amount of jobs that republican presidential candidate Romney says he wants to create.

It is up to the voters in less than two months now to decide whether they believe this lack of jobs is the fault of President Obama or his situation created during the great recession.

8/6/12

Fiscal Cliff, Congress Is Closed Today

For those that don't know, congress has a pretty sweet deal, great benefits including five weeks off in the summer.

As the fiscal cliff looms, most congressman and congresswomen are back home - while we all work everyday, lucky to get a week off, without pay or healthcare but that's another subject.

This is hard to believe and it is both parties fault, there is middle ground to be found and a deal has to be struck.

The good news is that congress has been in session all year so far and hasn't accomplished anything so a five week recess vacation isn't too tragic.

As always, congress is likely to act just in the nick of time, probably in November or December, after the 2012 elections with some kind of short term solution, six or so months.

As for the market reaction, tough to say but suffice to say that uncertainty is what wall street hates most.

6/11/12

The USA Needs To Decide On Future - Mexico or Norway?

The Presidential election is just five months from now and of course, 1/3 of the senate and all of the house seats will be elected at the same time.

The question is the future.  Does the USA want to look more like Norway or more like Mexico.  There really can not be an in between.  Let me explain.

With the debt where it is today, outside of some really great growth, something like 4-5% a year for a decade, which isn't likely to happen, the country has a problem that is well documented and the two parties have definitely dug in for a fight!

Those on the right wish to cut entitlements to the bone which would make us look a lot like Mexico or similar countries with a low gini index, a small percentage of folks with a lot of wealth and little in the way of a social safety net.

Those on the left wish to raise taxes on virtually everyone skewed more to the wealthiest among us which would make us look a lot like Norway or Sweden or Canada, a more even society with less wealth at the top and a safety net for all.

Both have positives and negatives and the electorate will decide!

5/11/12

Volcker Rule

Few places does money and finance intersect more with politics than the Volcker Rule.

Paul Volcker was federal reserve chairman from 1979 to 1987 under both Presidents Carter and Reagan and was credited with single heavy handedly squashing the stagflation of the 1970's and lowered inflation from over 13% to 3% in just under 2 years which led to wonderful growth during the 1980's.

Fast forward to 2008 during the financial crisis brought on by many factors but among them proprietary trading at the largest banks in the US (which is trading by banks using leverage to enhance earnings).

The Volcker Rule which is part of the Dodd-Frank financial reform limits banks ability to make risky trades, including derivatives and leverage that do not benefit customers.

Of course, the rule which Volcker has stated would be a four page bill is still being written and debated has thousands of pages and is a hot political topic these days.

JP Morgan's loss of $2Billion reported on 5/10/12 due to trading losses in CDO derivatives will only strengthen the resolve of those that hope to curtail bank proprietary trading.


4/27/12

Neither Obama or Romney Take Free Election Money

This looks the first election where neither candidate will accept presidential matching funds to finance their campaigns.

On the surface, you say great, its a waste of taxpayer money anyway but not so fast.  

The Watergate scandal produced the system, starting in 1976 whereby candidates are allowed to use public funds to finance their campaigns.  The first to forego was Steve Forbes since he had his own fortune to spend on his campaign.  This year the matching funds would have been around $90 million.

But in the 2012 election to come, $90 million is a pittance.  Both candidates will reject public financing, instead opting for private donations which comes with no spending limits or rules and we can thank the 2010 citizens united supreme court decision for this.

Analysts expect each campaign to spend close to a billion dollars bashing each other.  

I just wonder what governing will be like after this.  It's safe to say it won't be easy!

4/10/12

President Obama and the Stock Market

On President Obama's inauguration day, the Dow Jones Industrial Average (the Dow)(DJIA) closed at 7949 and the Nasdaq closed at 1441.

As of this blog post, the DJIA is 13052 and the Nasday is 3017.

That is a gain of 64% and 109%.

To the republicans reading this, you'd say well, the President has nothing to do with the markets or it was all congress to which democrats would respond saying that wasn't what you where saying about Reagan with a democratic congress.

Bottom line is that while some of the markets performance are indeed a reflection on the President of the day, certainly some of the credit or blame has to fall on congress, on the business cycle and ultimately good or bad luck.

Its up to the politicians to decide how to frame the number but the bottom line is the bottom line, under President Obama, the stock market has done exceedlingly well, in fact, the best performance under any one term President in history!

4/5/12

JOBS bill signed into law

What's this?  A bipartisan bill?  I am speechless!

The JOBS bill signed today by President Obama may by itself not necessarily change the world but the fact that congress got together on a bill that the President would sign putting into law is proof that maybe, just maybe, the politicians are hearing what regular Americans have been saying for quite some time now - GET TO WORK!!

The bill co-sponsored by Eric Cantor (r-va) may help smaller businesses raise capital and that is great news.

3/19/12

Keystone XL Pipeline

OK, I have heard enough about this Keystone XL Pipeline.  This is the pipeline that TransCanada Pipeline wanted to build winding its way from Alberta's Tar Sands (some call it Oil Sands) through the middle of the US all the way to the Texas gulf.

President Obama vetoed it and republicans claim it is politically motivated and it would have created jobs and lessened our dependency on foreign oil.  Jobs, yes.  Foreign oil, no, Canada is a foreign country, get it.

Where is it in the agreement that the oil coming from the Tar Sands has to be sold to the US?  Its not.
Where is it in the agreement that the oil would be sold to the US at market prices?  Its not.

Bottom line is that this was never a good deal for the US, its a great deal for Canada, they get to either sell their oil in the US or have access to shipping via the Houston Ship Channel to sell overseas to the highest bidder!

Did you ever wonder why Canadians don't build their own pipeline from Alberta through the Rocky Mtns to British Columbia and the Pacific Ocean?  I don't, why bother when you can have Americans do it for you?

Lets not be suckers.  Keystone XL is terrible for America!

3/8/12

Super-Pacs Are Ruining The 2012 Election

We all know about the US Supreme Court decision (citizens united) in 2011 that allowed for unlimited funds to be donated to so called super-pacs (political action committees) without knowing the source of those funds.

With a 5-4 decision (5 republicans for and 4 democrats against), the seeds were sown.

It appears as if the super-pacs are the fuel that is keeping the republican nomination race going and going and going.  And the 2012 general election will surely be the first billion dollar election.

Just wait for this fall.  Its going to be a mind-boggling show of money muscle on both sides.  Democrats on principle may not like the idea but in the end have no choice but to play along.  The law is the law and rules are rules.  I may not like the new speed limit for example but if I am in a race, I have to go the speed limit!

I wonder what will happen to this law when we find out some time that a foreign government is funding one party?

Wouldn't it be ironic that the republicans on the supreme court (who voted for) would ultimately undermine the republican nominee for president (Mitt Romney) in the very next election cycle!

2/22/12

28% Corporate Tax Rate, Republicans, Obama

The base corporate tax rate in the US is 35% with most companies paying an effective rate of 1.3% in 2011.

The republican nominees and the President are both proposing a move to 28% and all have said it will, of course, not add to the deficit (which is the issue of our time).

I hope some of the proposals come with some actual substance, ie.  what types of corporate subsidies or tax loop holes will be cut in lieu of the new 28% deal.

My guess none will be forthcoming and of course, neither side will allow the other to pass this legislation through congress so its an election year promise that no future President will ever have to deliver.

2/14/12

Higher Gas Prices Is Great News

Most people understand the relationship between oil prices and gas prices.  As oil increases in price, so does gas which is refined oil.  Sometimes a convenient refinery shutdown will temporarily increase prices even further.

What most people do not understand is that higher gas prices is great news.  

Demand for the commodity that is oil goes up when the economy is doing better and vice versa.

Understand, when the economy good, oil demand goes up and so do gas prices.

I heard some ridiculous conservative talk show guy mention that President Obama doesn't get it when he mentions that increase in gas prices is actually good news for the economy.

Its idiots like that buffoon who don't get it or probably do but would just rather find something negative to say about the President or the economy when things are indeed turning around and getting better.

2/9/12

Mortgage Settlement Deal with Banks

Well it looks like the banks, the feds and the states have all come out with a mortgage settlement to the tune of $26 Billion.

This is a good deal for most.  It's good for the banks because this mess is largely behind them now and $5 Billion for a big bank (the settlement was with five banks) is a rounding error and in my opinion, the banks weren't to blame for people taking out loans they couldn't afford but they were complicit.

This is a good deal for President Obama as well as he has promised to do something for homeowners.

Ultimately, this may help the economy as well since mortgage principle reduction is part of the deal as well as probably allowing banks the freedom now to refinance more mortgages which ultimately ends up as spent money in the economy.

1/25/12

Tax Rates On US Corporations in 2011 just 1.3%

I am tired of hearing that US corporations are saddled with some of the highest tax rates in the world and often quoted as 35%.

While 35% may be the starting point, US companies are allowed deductions like no other country on Earth to the point that the average tax rate on US companies is just 1.3% according to the OMB (office of mgmt and budget).

Maybe some of the politicians should use this figure going forward when it comes time to balance the budget.

You want to talk fair share, how about corporations pay their fair share and maybe we could actually balance the budget, build our infrastructure, offer the kinds of social services that are just and fair - while we enjoy lower personal income taxes?!

1/23/12

US Small Businesses Seriously Disadvantaged In Healthcare

OK, you have two small companies, both supply widgets to bigger companies around the world and they have five employees.  One is in Buffalo, NY and the other is in Toronto, Canada.

The company in Toronto has a huge advantage over the company in Buffalo.  Why?

Because of universal healthcare.  I am not here to debate which system is better but the bottom line is the bottom  line.  The employees in Buffalo have to shell out upwards of $500 a month for terrible coverage with high deductables.  The employees in Toronto have universal healthcare and sure they pay a higher personal tax rate but in the end, this small difference is not so small.

Extrapolate that across thousands of small companies in hundreds of countries, and you see the problem.  In the end, costs have to be passed on to the customer and our boys in Buffalo are a serious disadvantage.

As we compete globally, we have to consider universal healthcare for business reasons.

1/10/12

Mitt Romney, Private Equity and Politics

As most people know, Mitt Romney made a lot of money at Bain Capital, a firm he founded.

What most people don't know is what private equity is and what Bain Capital does.  Bain is a private equity company which basically buys distressed companies using leverage in hopes of selling them in the future for a profit.  That profit is a capital gain and thus currently taxed at 15%, not the 35% most people would pay.  

During the course of 'managing' the companies that were acquired, often times people are let go aka fired and of course, sometimes everyone involved makes out pretty well.

The other republican contenders are jumping on this opportunity to paint Mitt as an elitist who cares nothing about the people they fire and are interested in only profit for themselves (and the investors).

Mitt can probably weather this storm but private equity will be in the spotlight until after the election.  Watch for Gordon Gekko and "greed is good" analogies.

1/6/12

Consumer Protection Agency

President Obama has been trying to fill the vacancy of the head of the newly created Consumer Protection Agency for quite some time only to be blocked by republicans at every turn.

He just filled the position with an old political trick called a recess appointment.  Basically when Congress is out of session, the President can make these (all have done it hundreds of times) appointments.

Republicans oppose the agency period and are trying to thwart the appointment of the head of the department and will undoubtedly try to defund the agency as well and if that's really what the people that they represent really want, well then that is their job, however, I can't believe that most citizens even know what their elected representatives are doing on this issue.

Now I know its an election year but how can an agency that protects consumers and their money be a bad thing?

It's not.