ProVise Management Group
By Ray Ferrara
September 30, 2011
- As the Congressional Committee of 12 meets to figure out what to do about spending and taxes, we thought you might find the following of interest: “Again, some people think it would be a good idea to distribute purchasing power by taking more millions of citizens off the federal income tax rolls entirely. While everybody wants relief from high taxes, there are at least two things wrong with this proposal. Government would probably have to borrow to make up the deficit – because it is questionable whether the Treasury could wring much more revenue out of those taxpayers who would be left and government deficits and borrowing lead to inflation, higher prices.
Even if it were morally right or financially practical to squeeze the remaining income taxpayers ever harder, that would further shrink the kind of purchasing power that buys factories and provides jobs.
People’s real earnings can be increased, as they always have been, by productivity advances. When productivity is ignored in an attempt to give everybody a raise, nobody really gets one.”
It might be easy to think that this comes from the Tea Party (and well it might), but the reality is this is a clip from an articled called “Food For Thought” out of a business journal from 55 years ago. (Source: Borden Milk Company)
- It is said that the “smartest” investors are the executives of companies. If you follow their insider trading, theoretically, they are in the best position to know when their company is doing well (that means they are buying) and when it isn’t (which obviously means the opposite). Notwithstanding all the negative news coming out of Wall Street and around the world, it appears that the executives, and in some cases, boards of directors, are quite optimistic. Vickers Weekly Insider Trading reported that the ratio of the number of shares sold to those that were bought dropped to 1.2 to 1, compared to a 40 year normal range of 2.0 – 2.5 to 1, and according to Mark Hulbert, the eight week moving average is almost 1.1. Buy backs continue to be announced by boards, as well. Dell’s board approved a plan to buy back another $5 billion of stock on top of the current $2.2 billion remaining from a previous buy back. GE is buying back $3.3 billion of preferred stock that was bought by Berkshire Hathaway during the fiscal problems witnessed in 2008. Berkshire Hathaway is doing its first buy back in four decades. Even a retailer like Staples feels pretty confident, as they announced a new $1.5 billion stock repurchase program. Clearly, this bullish sign doesn’t always turn out the way executives hope, but generally, it seems to have worked in their favor. (Source: Prudent Speculator)
- When was the last month the U.S. government had revenue greater than expenses? You must go all the way back to September of 2008. For 36 consecutive months, the government has spent more money than it has taken in. (Source: Federal Reserve)
- We don’t believe history necessarily repeats itself, but there certainly can be parallels. Much is being said about our current economic environment appearing to be very similar to what happened in the 1930s. In 1932, three years after the Great Depression began in 1929, Congress decided it needed more revenue and raised the top marginal tax rate from 25% to 63%. Following that increase, you might recall that the Depression continued for at least another six to eight years, and it actually got worse before it got better. Does anyone see a parallel to today? (Source: Tax Foundation)
- Let’s take a few moments to talk about the housing industry, which is now sitting at the lowest level of completed homes since 1973. When the housing industry does turn around it will be a major boost to the economy. While it’s hard to believe that the day is coming, every day that goes by makes it more likely to happen. Recently the headline news has been about a “wave of foreclosures” which puts families out of their homes. However, it doesn’t mean that these families are going to wind up living on the streets. In many cases, it means they will rent an apartment. Two or three years ago rents were at very reasonable levels but rents have been increasing over the past 18 months as more people have moved into apartments as an alternative to owning homes. Thus, foreclosure doesn’t mean we lose the need for housing, it just means that the housing dynamic is shifting. With the continuing decline in home prices over the past 12 months, (and in some areas, still dramatic decreases), and with the incredibly low mortgage interest rates, the cost of living in a home is getting much closer to what it costs to rent.
A healthy housing market has about a six month supply of homes for sale, and according to Economagic.com, the current supply has now drifted down to just under seven months. This seems to imply we’ve reached some equilibrium in home prices. Yes, it may not feel like that today, but it is possible a slow turn could happen sooner than most investors think, as our population continues to grow and the need for housing does as well. We want to thank our friend Tom Lokey, who is in the real estate business, for providing us with some additional information regarding home sales. On average, how many homes do you think are sold in the U.S. each day? Currently, it is 13,780. This is a 7.7% increase over the prior month, and 18.6% over the same time last year. This puts annualized sales at a little over 5 million homes. Yes, it is still below the record numbers from 2006, but it is a clear indication that the housing market is not dead everywhere. (Source: National Association of Realtors: Existing Home Sales Report)
- One provision of the President’s jobs bill that has not gotten nearly the attention it should is the provision that allows a prospective employee to sue a company in the event the prospective employee is denied a job because they are unemployed. Yes, that’s right. It raises them to a discrimination level equal to race, gender, religion, etc. The President’s intent is noble, given that some companies have actually run ads that read “if you’re unemployed don’t bother applying”. We find the corporate practice reprehensible; however, the solution is equally so.
- Let’s try to put some perspective on Social Security. The political candidates, especially the Republicans, have already been bashing the so-called entitlement programs and calling for reforms even for a program like Social Security. They are, however, very quick to make it clear that the changes they want to make in order to “stabilize the system” will not affect current retirees. In fact, the changes probably wouldn’t affect anyone within 10 years of retirement. The common reform proposals are to increase the age at which one can begin taking Social Security (currently age 62) and to increase the age at which full retirement benefits would begin. Originally this was age 65 but for those born in 1947 it is age 66, and it goes up on a schedule over the following 10 or 12 years to where the top benefit is available at age 67.
Now for the facts: It is highly likely that Social Security will remain stable for at least the next 25 years since the current projections indicate that there will be positive cash flow through the next 11 years (2022), thus building a surplus. Without any changes being made, which is highly unlikely, the surplus will disappear sometime in 2035. Even then, there is projected to be enough money coming in to cover 75% of all obligations until 2085. Congress has made 63 changes to the Social Security system since it was introduced in 1937. Everyone knows that something needs to be done, but none of the political leaders want to tackle it until after the 2012 elections. Of course, the longer they delay, the bigger the solution needed to solve an increasingly difficult problem. Having said all of that, it is important to understand that Social Security is not going bankrupt any time soon. (Source: Kiplinger Letter 9-23-11)
- Cash seems to be king. Banks are hoarding cash in case there is another soft patch in the world economy and/or there is another credit crunch similar to 2008. While a soft patch in the world economy is possible, because of the cash that the banks are holding, a credit crunch similar to 2008 is far less likely – even if Greece defaults. By the way, Greece will likely get another $11 billion, which will carry it through November. The Greece issue will not go away any time soon. But, others are holding a lot of cash as well. Corporations have $2 trillion, with about half of that on the balance sheets of S&P 500 companies. Notably, Apple, which on a day-to-day basis is the largest company in the S&P 500, has $76 billion, Microsoft has $52 billion, HP has $13 billion, and Intel and IBM have $12 billion each. They too are preparing for any credit crunch that might occur, and while they have not been quick to reinvest this cash, large corporations have increased their dividends, bought back stock, and are looking for opportune acquisitions, especially in the technology sector. Consumers are also holding on to their cash and have built up their savings, even as they have paid down debt. All in all, it means that there is a lot of cash sitting on the sidelines and eventually something will happen with it. The interest most people are receiving on their savings is so low it is negligible. For those carrying super large cash balances, like corporations, they may actually be charged by the bank to cover some of the FDIC costs.
This hoarding of cash is not just occurring with large corporations. One of our clients in the technology area who assists small businesses with their websites was recently fired by a client because the client had gotten too much business. The client had plenty of cash, but simply didn’t want to spend it to expand the business for fear the economy would begin to go backwards. Obviously, this is not a positive mentality for the economy, but eventually companies will have to start spending some of their cash, as much of their equipment is becoming obsolete. When this begins to happen it will create an unbelievable surge of growth.
- We’re getting ready to enter into the last quarter of 2011, leading us into the first quarter of 2012, a Presidential election year. Historically, Presidential election years have led to gains in the markets. In the years since 1928 in which a Democrat candidate won (11 times), the S&P 500 has gained an average of 4.9%. In the years in which a Republican candidate won (10 times), the market has increased an average of 14.8%. (Source: BTN Research)
- Last Sunday, the St. Pete Times published an article in the Business Section titled: “Obama’s call for taxing the rich not that simple…they already pay most of the income taxes in the United States”. It was written by Angie Drobnic Holan as part of a politifact.com article. We found it to be very balanced and encourage you to visit the following link to read the entire article: http://www.politifact.com/truth-o-meter/article/2011/sep/21/does-secretary-pay-higher-taxes-millionaire/ For a quick executive summary, however, the following is a short quote from the article: “In 2007, the top 10 percent of tax payers accounted for 72.7 percent of all income taxes owed. That top 10 percent included people making adjusted income of $102,900 or higher. Keep in mind, that top 10 percent accounts for 42 percent of all income earned. They paid an average tax rate of 26.7 percent.”
As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon. Proudly and successfully serving our clients for 25 years in 2011.
RAY, KIM, ERIC, BRUCE, LOU, NANCY, TINA, and JON
©9/30/11 ProVise Management Group, LLC
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