ProVise Bullets

  • We are very pleased to announce that for the second year in a row ProVise Management Group, LLC was selected by Barron’s as one of the top 1000 advisors in the country. Thank you to all of our friends and clients for their faithful support over the years. Without you, the ProVise team could not have achieved this great feat.
  • With the battle over sequestration going on in Washington, the President has made it clear he wants to raise more revenue. Just what does he have in mind? First, he would like to limit itemized deductions beginning at the 28% tax bracket. This means that taxpayers in the top three brackets would lose some of the benefit of their itemized deductions. Of course, these deductions have a phase out, so the effect may not be as great as is perceived. Where it gets tricky, however, is this application of the 28% limit would apply not only to itemized deductions, but to deductions for IRAs, health insurance premiums, 401ks, tax free interest and employer provided medical insurance.
But it’s not just individual taxes that would be affected. Many small businesses file as an “S” Corporation and many owners keep their salaries low since profits avoid the Social Security and Medicare Tax. The IRS requires that a business owner pay himself/herself a fair wage to do a job. The President has proposed that “S” Corporation distributions would be subject to Social Security and Medicare taxes if 75% of its income is from three or fewer stockholders. Although we don’t expect much of this to be passed you can rest assured it will come back again at some time in the future.
States, on the other hand, are going in the opposite direction with Louisiana, Nebraska, North Carolina and Kansas each having proposals to eliminate individual income taxes and in some cases even corporate taxes. It shouldn’t surprise you that all of these are Republican led states. The Governors of New Jersey, Oklahoma, Indiana and Ohio (again all Republicans) are looking to reduce tax rates. Conversely, Massachusetts is looking to raise tax rates while cutting sales taxes. Maryland and California have already raised their rates. No surprise as these are three large Democratic states.
  • The Princeton Review (not affiliated with Princeton University) has just come out with a list of 150 colleges that offer the best value for the dollar spent. These schools aren’t necessarily cheap, but the students come out of their four year experience owing less money than the average student. The top five private universities are Swarthmore College, Harvard, Williams College, Princeton University and Pomona College (California). In the public university space we start with the University of Virginia followed by North Carolina, New College of Florida, College of William and Mary and UCLA. The average cost of attendance for the private universities is $54,200 per year, but a freshman receives on average $21,700 in grants and graduates from school with about $20,500 in debt. At a public university the average cost is $19,500 for the year with about $10,600 in grants, but the average debt load is actually slightly higher than the private universities at almost $21,400.
  • From an investor’s point of view, 2013 is off to a great start, especially as it relates to merger activity. Talk about big deals all happening at once, you can’t help but wonder if all this pent up demand and cash won’t be even more forthcoming over the remainder of the year. First, we have Michael Dell teaming up with a group of private equity firms to buy back Dell Corporation for $24 billion and make it a private company. Don’t be surprised to see it re-emerge several years from now in another IPO. Next, there is the merger of US Air and American Airlines, which is valued at about $11 billion. There are still many hurdles to overcome before the merger actually takes place in the fall, but the early signs are that it will go through. You have to wonder what moat it is that Warren Buffet was thinking about when Berkshire Hathaway agreed to buy H.J. Heinz for approximately $23 billion. Although Heinz is trying to expand its markets on a worldwide basis, this company has not shown a lot of growth in its current saturated marketplace. The deals are not all in the U.S., as John Malone bought the British cable business, Virgin Media, for another $16 billion. All of this is good for investors because most of these deals occur at a premium to the public price and they reduce the number of companies available in the marketplace. Therefore, you have more money chasing fewer shares; which is almost inevitably a bullish sign. Of course, these deals would have meant a lot more to investors last year when capital gains were at a maximum rate of 15% versus today’s potential 23.8%.
  • With sequestration set to kick in on March 1st, it seems a little foolish to look ahead to the events of next January when Federal Reserve Chairman Ben Bernanke’s term comes to an end. It will come as no surprise to long-time readers of the Bullets that, although we have not agreed with everything Bernanke did during the fiscal crisis, we applaud him for having the guts to try things that others said would not work. In the end, even if they weren’t completely successful, they certainly made things better than they would otherwise likely have been. We think Bernanke will go down in history as one of the greats in the job.
So who is his likely successor? It’s important to realize that Wall Street never likes change at the Federal Reserve, so it will weigh in long before the end of the year. Even if Bernanke decides he wants another term, we don’t think the President will re-appoint him. Why? As much as he has done to flood the markets with cash and low interest rates, the President likely wants even more. Nothing would build the legacy of the President more than a booming economy for the 2014 elections, and especially when he leaves office in 2016.
In order to make this happen, he needs to appoint someone who will be even more accommodating to fiscal policy. The name that keeps reverberating in our minds is Janet Yellen, currently the Vice Chairman of the Fed, and who, most people believe, is the most dovish on fiscal policy. In other words, she would not be opposed to inflation. Given that politicians rarely mind inflation after they have run up big debts, it would be a perfect scenario for even the Republicans to potentially support that nomination. They are likely to make it a rough path, though, just as they have for former Senator Chuck Hagel for Secretary of Defense.
All of this fits nicely with the central bankers around the world, who seem to believe it is time for central banks to move beyond controlling inflation (and in the United States full employment), and extend fiscal policy to guarantee an ongoing, forever successful economy. This, of course, is a fool’s game. While inflation may be controlled for some period of time and in some places around the world, it all catches up eventually. This type of loose money will allow foreign currencies of emerging countries to strengthen and will likely offer real opportunities for growth.
It could also lead to another strong advance in stocks and the belief once again even after 12 years of virtually no growth, that stocks would be the place to invest. It’s these long-term trends upon which we focus rather than continuing to see the headlines turn from “bullish” to “bearish” back to “bullish” day-to-day.
  • Back in 2007 when George Bush was President, he proposed increasing the minimum wage from $5.15 per hour to $7.25 per hour by July 2009, which represented a compounded increase over those two years of 18.65% per year. In his State of the Union Address, President Obama has now proposed that it be raised to $9.80 by July 2014, which represents a 22.8% average annualized return over the next 16 months. Not too surprisingly, this was totally embraced by the Democrats, with even Senator Tom Harkin (D-OH) and Representative George Miller (D-CA) wanting to increase it more over three years. Both of the proposals suggested that it should be adjusted for inflation. While all this makes for great political fodder and there will be a lot of “facts” presented by both sides of the aisle to support their positions, the fact remains that in 19 states the minimum wage is already higher than the federally mandated rate. These 19 states represent a significant amount of the U.S. population, so deciding exactly what the effect will be is much more difficult than just throwing around the rhetoric. It is safe to say, however, that many lower paying jobs, which traditionally go to young people, women, and foreigners, would benefit from this increase, but the net economic impact on GDP probably works out to be very close to neutral by our calculations. How or why could this be the case? Many estimate that as much as $22 billion of new wages will be created as a result, but at the same time, some employers will cut back on the number of employees. Any increase of this nature - which is essentially permanent - is likely to also be passed on to the consumer which means they will be forced to pay more, thus offsetting the benefit of part of the $25 billion that would inure to the lowest paid group in the U.S. In short, increasing the minimum wage again is probably not a bad idea economically, if phased in over a reasonable period of time (five years). Raising it from $7.25 over that five year period to $9.80 would represent a 6.2% annual increase. In our opinion, businesses would be in a much better position to absorb this increase and the impact to consumers would not be as severe.
  • While the childishness continues in Washington, tomorrow the sequestering will occur with deep cuts to both the military (while our troops are still overseas) and domestic programs. For the past two months, and especially during February, the President talked of a “balanced” approach of closing what he perceives as tax loopholes in exchange for “cuts”. The Republicans on the other hand are saying the President got a significant tax increase in January and if he thought he needed more it should have been negotiated then. Now it’s time for the cuts that the Democrats promised the Republicans.
As is often the case there is a little bit of truth on both sides of the aisle. It is unfortunate that no one has risen to provide adult supervision to our elected officials. Only time will tell just what the effect on the economy might be if this continues for an extended period of time. At present it looks like it will. There is no chance of the sequester having a positive impact on jobs or any other part of the economy.
The next deadline is March 27th when the government literally will run out of money without further action from Congress. It appears that there are several proposals emerging to fund the government until the end of the fiscal year on September 30th, and a compromise here is likely. Shutting down the government just isn’t an option although there may be those that would argue it’s a very viable alternativeJ.
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 26 years.
RAY, KIM, ERIC, BRUCE, LOU, NANCY, TINA, and JON
© 2/15/13 ProVise Management Group, LLC
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