ProVise Management Group
By Ray Ferrara
December 15, 2012
- So help us understand…where did 2012 go? While we know time really “fly”, it sure feels like it does when we think that 12 months have almost passed. We want to wish you and your family the happiest of holidays! Please remember the women and men serving in our Armed Forces, especially those overseas.
- While the housing market is not well, it certainly seems to be on the mend. According to one measure from Core Logic, U.S. home prices were up 6.3% at the end of October compared to a year earlier, in spite of the fact that prices have declined slightly over the past two months. This is the biggest one year jump since July of 2006. Although prices increased dramatically in Arizona (plus 21.3%), and in Hawaii (plus 13.2%), Illinois, Delaware, Rhode Island, New Jersey, and Alabama all posted declines during the same period. Because of very little building over the past couple of years during the financial crunch, the availability of homes is quite low, and with mortgage interest rates also very low, it is driving demand. In many areas around the country, it is becoming a true seller’s market – something we have not seen since the real estate bubble five years ago. Although anecdotal, we know one client who purchased a foreclosed home, fixed it up, and put it on the market. Within 36 hour, it was under contract for $2,000 more than its list price. As we said, there are still problems, but it seems we are moving in the right direction.
- It seems that several corporate boards are attempting to get ahead of the President and Congress and the high probability that dividends are going to be taxed at a higher rate than they have been for the past few years. It is anticipated that taxes on dividends will rise from 15% on qualified dividends to almost 43.4% on the highest earners (39.6% income tax and 3.8% to fund the Affordable Care Act). They have announced that they will advance dividends due in 2013 with a special dividend this December. We have long believed that companies should not hoard cash, rather use it to grow the business through internal growth and/or acquisitions. If the company is not going to use the cash for those purposes, then the cash should go back to its shareholders through a dividend. For companies that are doing this and are admitting they do not need their cash for growth, we cheer them for giving it back to the shareholders, who can then re-deploy that cash themselves, which could lead to a small upward bump in the stock market as this money finds its way back into the market! Some companies are actually borrowing money to pay the dividend. You can call that the “Federal Reserve Free Lunch Ticket” because, with interest rates as low as they are, the cost of borrowing this money is very low. Among those that intend to borrow money to pay out this special dividend are Costco, HCA, Clear Channel Outdoor Holdings, and Murphy Oil Company, just to name a few. We hope the Boards of these companies are asking whether it is prudent to borrow money to pay out dividends in order to avoid the anticipated higher tax. In fact, one could ask if this is somewhat self-serving since many corporate boards are populated with people with large stock positions.
- While the economy seems to be moving forward at an agonizingly slow pace, the messages are certainly mixed. Surprisingly, unemployment dropped to 7.7% last month and non-farm payrolls increased by 146,000 jobs. This job increase was particularly surprising in light of the disruption caused by hurricane Sandy in the Northeast. Consumer debt also increased last month and hit a new record of $2.75 trillion. The largest increase did not come from credit cards, which did go up $3.4 billion, but rather from student and automobile loans, which increased by $10.8 billion. Interestingly we might thank/blame hurricane Sandy for this increase as November was a big month for car buying as a result of the storm. On the other side of the coin, two studies showed that consumer confidence dropped significantly over the past month. The drop was blamed in large measure on the concern consumers and investors have about the impending “fiscal cliff”.
- It appears that the very popular 401(k) program offered by many corporations may change significantly. First, as part of the “fiscal cliff” talks, some lawmakers see the deductibility of contributions to all retirement plans as “easy prey” to help balance the budget. Last week IBM announced that it will make contributions to the 401(k) on an annual basis, rather than with each pay period. The amount is not decreasing, just the frequency of the payments. There will be very small administrative cost savings with this move, so why is IBM doing this? Since it intends to make the contributions on December 15th each year, anyone who leaves the company prior to that time will not receive a matching contribution.
- Another popular tax break is the tax-free interest on municipal bonds. This benefit has been around for more than 100 years. On the surface, eliminating this feature looks like an easy way to tax the rich to the benefit of the middle class. In our opinion, nothing could be further from the truth. While it would clearly raise revenue for the federal government, we have to appeal to the law of unintended consequences. It will cause state and local governments to pay higher interest rates to attract investors to purchase their bonds. In turn, this will increase their costs, which in turn means they will have to increase state and local income taxes and/or raise property taxes. In this case it will be more than the “rich” who will be paying more in taxes. In other words, eliminating the tax exemption on municipal bonds is really a tax on almost every citizen across the country.
- Just how much cash do U.S. corporations have? Well, it’s much bigger than a bread basket. Currently, on corporation balance sheets it is estimated to be as much as $1.7 trillion. What are they doing with this cash? As mentioned above, some are paying it out in a special dividend, but most are planning on keeping this cash for use once they understand the direction of the taxation policy out of Congress and the President. Should corporate America decide to unleash a good portion of this cash – and we think they will – it could lead to more jobs, as plants are built and equipment is acquired, which in turn would lead to even higher consumer spending, which in turn would lead to more profits, which in turn would lead to more reinvestment. If they decide to hold on to this cash and not reinvest it in growth, expect shareholders to demand that the money be paid to them. This too will allow for expansion, so one way or another, you can expect this cash to make its way into the economy.
- In late November famed investor, Warren Buffet, wrote an op-ed piece for the New York Times in favor of ending the Bush tax cuts. He did suggest, however, that instead of the $250,000 limit proposed by President Obama, that the cut-off should be $500,000 of AGI. This would affect about 825,000 taxpayers, or slightly more than one-half of one percent of the roughly 142.9 million returns filed last year. For 2010, this group paid an effective tax of 23.5% of their AGI. For every 1% increase in this tax rate, it would increase these taxpayers’ tax bill by $13 billion per year. Multiply that times 10 years and you come up with $130 billion. Raising their tax rate by 10%, or 2.35% overall would raise about $29 billion per year or $290 billion over the next 10 years. All of this hardly makes a dent in the annual deficit. This is one of the reasons why raising the rates on high income earners alone will not solve the problem. By the way, for 2010, this same group earned approximately 16% of all the AGI in the U.S. and paid 32% of all the federal income tax. (Source: Internal Revenue Service)
- Based on the Mayan calendar this could be the last ProVise Bullet you ever receive. According to the calendar, a catastrophic event, perhaps even the end of the world, is supposed to occur on December 21st ending a 5125 year countdown. Rather than being the end of the world, we prefer a commentary we once heard while visiting Mayan ruins in Belize. They looked at it simply as one cycle ending and a new cycle beginning…an Age of Enlightenment. Maybe that enlightenment can start in Washington, DC.
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