• 
  Well, the wrangling in Washington carried on right up until the last minute of 2011.  In fact, it was after the last minute that the House passed, by unanimous consent, a two month temporary extension of the payroll tax reduction.   They didn’t hold a formal vote.  Fortunately, no one objected.  Two weeks prior to that, the House passed a bill extending the payroll cut for one year along with various ways to pay for the tax cut.  The Senate, in a bi-partisan bill, extended it for two months.  The House initially said they would agree to the temporary extension, but then pulled back and said they wanted the extension to be for a full year.  They felt it was important to allow businesses and individuals to do long-term planning and not to continue passing legislation on a “short-term” basis.  While we applaud the House for wanting to do something long-term, and two months clearly is not long-term, we really don’t think 12 months is long-term either.  In the world of investing, anything less than three years is considered short-term.  Thus, what do we have other than six more weeks of the same old arguments with the same old disagreements that will likely end up in the same place (or very close to it), anyway?  In short, you can look for this wrangling to continue throughout the year with no one in Congress willing to make commitments past the end of this year in the hope that their party will win a majority and be able to control things next January.  Only time will tell where we go from here.  

 

• So, the season for predictions is behind us (almost) and we thought it might be fun to come up with a few predictions that go out on a limb, both positively and negatively.  The problem with predictions, of course, is that they are often biased by the predictor’s point of view.  Here are five semi-wild, but possible predictions for 2012. 

 

1:  Jobs, especially manufacturing jobs, return to America.  How is that possible given the cheap labor costs in China, Asia, and African countries that we have been hearing about for a long time?  First, you have heard us talk about inflation in China which is likely to be big news this year.  Wages there  are climbing as their standard of living improves, making the wage differential smaller than it once was, but not many analysts have caught on to that fact yet.  Natural gas is another part of the story.  With manufacturing energy costs in the U.S. having decreased dramatically, the cost of production for those using natural gas is much lower than in countries that rely on oil.  Speaking of oil, it also plays a role in that transportation costs have become increasingly more expensive with oil costing $100 per barrel, and if the distance finished products have to travel to the market can be lessened, that too will drive down the costs.

 

2:  Switching from the economy to politics, the Republicans will hold a majority in the House, although they will lose some seats.  Nothing wild here.  They need to pick up four seats in the Senate in order to gain control, but we would not be surprised to see a 51/49 split favoring the Democrats, or even a 50/50 division (we had that during the Bush Administration – remember?) with Vice President Hillary Clinton providing the tie-breaker vote.  But wait a minute.  What happened to Biden?  Gone in place of Clinton, as Obama needs her to win.  As to the White House, it will be a very dirty and close race, no matter who runs against the President.  There are a lot of people who are betting on Obama losing the race due to the high unemployment rate and the generally sluggish economy.  Because the Republicans do not find a candidate who resonates well with Independents, it will be a very close race, and our wild prediction is that Obama wins.  Yes, we know that no President since Roosevelt has been elected when unemployment is over 7.3%, but there are always exceptions to the rule and this could be one of them.  Today, the incumbent is even more powerful in politics than ever before.  See prediction 4 for something else that might help the President’s chances.

 

3:  Turning to the world, the euro survives in spite of its being badmouthed over the past several months, and it strengthens late in the year.  The Arab Spring of 2011 manifests itself again in other Muslim countries such as Iran, Syria, and perhaps even Pakistan.  Putin is elected President by a narrow margin in Russia.  In spite of his responsiveness to current protests, they will continue, and will distract the Russian government from worldwide events as it deals with their domestic issues.

 

4:  Returning to the markets and economy, they could be much better than is currently anticipated and this surprise would be the one that would be embraced by everyone.  It would also be one of the reasons Obama is re-elected.

 

5:  Now here’s the only one we are absolutely convinced will happen.  It’s what we don’t know that we really need to worry about.  There will be surprises, and while some may not be big, there will always be something occurring which will cause investors to worry in the short run.  That’s why it is so important that, regardless of what happens on a day-to-day or hour-to-hour basis, investors remain focused on the long-term.

 

6:  Nothing is going to happen regarding taxes until after the elections, but then in a Lame Duck session, Congress extends the $5 million for estate taxes along with AMT exemptions, sales tax write-offs, and RMD credits.  Then, in a surprise, Congress also extends the Bush tax cuts.

 

Remember…these are WILD off the wall predictions.  Possible?  Yes.  Probable?  Maybe.

 

• In analyzing the market last year, the S&P 500, without taking into consideration dividends, had a small negative return, but taking into consideration the calculation of dividends, it was up 2.1%.  As investors, we don’t believe you can simply measure the movement of the Index.  You also have to take into account the dividends you receive.  It’s important to delve beyond the index average for more insight.  Fifty-eight stocks in the S&P 500 produced a gain of 25% or more, while 155 stocks gained at least 10%.  Unfortunately, however, 53% of the stocks finished with a lower price.  Please keep in mind that the S&P 500 is a market capitalized index.  That is, the bigger a company is, the greater impact is has on the movement of the Index.  The ten largest companies in the S&P 500 make up 20% of the total value.  (Source:  S&P 500)

 

• For three years, President Obama and the Democrats have pushed the idea of “taxing the rich”.  “Rich” has been defined in several different ways.  In the beginning, the definition was any individual having more than $200,000 of taxable income, or a married couple with $250,000 or more of taxable income.  Most recently, there was a proposed tax on the super rich – those earning $1 million or more.  In both cases, the Republicans have staunchly fought off attempts to raise taxes on any of these groups, but the power of the Presidency is great and President Obama has found another way to get at the rich.  The IRS recently announced that it had audited almost 12.5% of individual tax returns on people who earned $1 million or more.  It doesn’t really sound like a lot, but it is an all-time high and, in fact, is almost 50% higher than the previous record of 8.36%.  If you can’t tax them, then audit them to see if there are any opportunities, intentional or otherwise, to capture additional revenue.  From the taxpayer’s point of view, it’s not just the risk of having to pay more in taxes; it’s the cost of defending their tax return.  Clearly there have been some abuses, particularly in the area of overseas investments.  The IRS has not only been looking at wealthy individuals.  It actually audited around 27% of all corporations with assets of more than $250 million.  In all, the IRS collected around $55 billion from enforcement activities during fiscal 2011.  Even though the IRS will have about 3,000 fewer enforcement personnel, it claims that technology will enable it to continue to keep the heat on large individual income earners and corporations.

 

• It is not often we rant and rave or editorialize, but we just can’t help ourselves when it comes to the subject of Suzy Orman.  For anyone who has not heard of her, she is a self-professed “financial planner” who has written many books and appeared on numerous television and radio shows.  While she is well-intentioned, she has evolved first and foremost into an entertainer.  Unfortunately, some of her entertainment is not good.  We were recently made aware of a PBS show she did, where essentially she said the American dream is dead, and everyone might as well get used to it because it is never going to come back.  Needless to say, those in the audience and people watching at home had to feel a deep loss and sense of disappointment, because we all grew up with the idea that if you worked hard and did the right thing you would have a better chance to achieve success in America  than anywhere else in the world.  What makes Suzy think this has changed?  We have our problems in the U.S., and we will not enumerate them here.  There are economic and political problems all over the world.  Orman says that jobs are gone and they are not coming back.  She is full of poppycock and maybe something else.  How do you ignore the 1.6 million jobs that were created during 2011, and the additional jobs that are likely to be forthcoming during 2012?  How do you ignore the real, albeit slow growth of the economy over the past two and a half years?  How do you ignore the fact that we have been through difficult economic times in the past and have always emerged stronger and better?  Those who remember the ‘70s know how bad things were then.  Back in the ‘70s, who could imagine getting a 30 year mortgage at an interest rate of 4% or less?  In those days, a “good” interest rate for a mortgage was something under 15%.  Who can ignore the many recessions we have gone through since the Great Depression and yet have managed to survive?  Some of you can still remember the Great Depression and 25% unemployment.  We can’t help but wonder what Orman would have said about the American dream during the 1930s.  How can you justify that the American dream is dead, when corporations are making record profits and consumers are buying record amounts of Smart Phones and Tablets?  Not even our politicians have been able to dampen the American dream over time, especially over the past few years.  We offer the following to Orman:  If you think the American dream is dead and there is no opportunity for it to come back, why do you keep making money in America?  Why not go to some place where there is “real” opportunity?

    

• The IRS was so successful in its attempt to go after taxpayers who had money offshore that they are going back one more time.  They collected $4.4 billion from 33,000 taxpayers, and they believe there is even more out there.  Once again, they will offer taxpayers the opportunity to come forward to pay the tax and penalties before they go after them seeking criminal charges.  Given their success in the past, we are willing to bet that even more people come forward now than before.

 

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 over 25 years.

 

 

 

 

(c) ProVise Management Group

www.provise.com