What Does It Take to Be in the Top 1 Percent? Not As Much As You Think

What Does It Take to Be in the Top 1 Percent?

Not As Much As You Think

By Frank Holmes

CEO and Chief Investment Officer

U.S. Global Investors

When you think of the top 1 percent of all income earners in American households, how much do you think this group rakes in? Millions? Tens of millions? What about the top 10 percent or even top 20 percent?

You might be surprised to learn that the top 20 percent of income earners bring in a household income of just over $100,000. The top 10 percent of earners have a household income of more than $148,687. To be considered in the top 1 percent, household income is at least $521,411.

My friend Alexander Green of The Oxford Club brings these figures to his readers’ attention in “How to Know if You’re Rich.” I’ve known Alex for years. He is a great source of inspiration for me and for many investors with his uplifting, holistic articles that relate to both health and wealth. If you aren’t already a fan, I encourage you to check out his prolific writings at oxfordclub.com.

Earning enough income to be in the top 1, 10 or 20 percent is no small accomplishment, but chances are good that many people you know, and may not think of as rich, fall into the top 1, 10 or 20 percent.

Contrast these income statistics with the picture often painted in the media that the wealthiest Americans aren’t paying their fair share. According to the Tax Foundation, the top 1 percent of households collectively pay more in taxes than all of the tax-paying households in the bottom 90 percent.

Take a look at how much this has changed over the past few decades. In 1980, the bottom 90 percent of taxpayers paid about half of the taxes. The top 1 percent contributed about 20 percent.

Now, the top 1 percent pays more than the bottom 90 percent. Perhaps this is more than their fair share?

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Here’s the line chart from the Tax Foundation showing how the income tax share for each category has changed since 1980. For the majority of years, the share of the bottom 90 percent fell while the share of the top 1 percent rose.

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Even though many of today’s tax policies punish the top-earning households, there are still tax advantages for hard-working Americans who make saving and investing a priority in their lives.

A great new year’s resolution is to make sure less of your money is going to the government and more money is working for you in your investments. One way to keep this resolution is to maximize your contributions to tax-advantaged investment vehicles such as an individual retirement plans, a 401(k) or SEP for the self-employed, all of which offer tremendous tax benefits.

You may be surprised to see how annual deferral limits have increased over the past few years. Take a look at our new 2014 tax rate guide, which is a great resource giving you a quick look at tax brackets, deferral limits for retirement plans, and alternative minimum tax exemptions.

To make it easier to have the discipline to set money aside, try an automatic plan that invests a fixed amount at regular intervals, such as U.S. Global Investors’ ABC Investment Plan.

No matter how much you earn, wealth is determined by how much you keep. Alex says wealth isn’t necessarily determined by an income figure. Instead, real wealth is determined by looking at your balance sheet. Here’s his formula:

Maximize your income (by upgrading your education or job skills). Minimize your outgo (by living beneath your means). Religiously save the difference. (Easier said than done.) And follow proven investment principles.”

What matters most is being grateful for what you have. I’m a big believer that wealth is not a number or an amount, it’s an attitude and the umbilical cord to attitude is gratitude.

Index Summary

• Major market indices finished mixed this week. The Dow Jones Industrial Average rose 0.13 percent. The S&P 500 Stock Index fell 0.20 percent, while the Nasdaq Composite advanced 0.55 percent. The Russell 2000 small capitalization index moved higher by 0.33 percent this week.
• The Hang Seng Composite rose 0.96 percent; Taiwan gained 0.78 percent while the KOSPI advanced 0.31 percent. The 10-year Treasury bond yield fell 4 basis points this week at 2.82 percent.

Domestic Equity Market

The S&P 500 Index ended the week modestly lower. This week kicked off earnings season with several high profile reports, including JP Morgan, Bank of America and General Electric just to name a few. Overall the results so far have underwhelmed and the market reacted accordingly.

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Strengths

• The technology sector was the best performer this week, led by Juniper Networks which rose by more than 10 percent. Activist hedge fund Elliot Management Corp. disclosed a 6.2 percent stake in Juniper Networks and is seeking cost cuts, stock buybacks and a potential dividend payment.
• The telecom services sector was also among the best performers this week. Verizon was among the best performers as the company won at least a partial victory in its appeal of “net neutrality” lawsuit against the Federal Communications Commission.
• Beam was the best performer in the S&P 500 this week, rising 24.44 percent. The alcoholic beverage maker received a buyout offer from Japanese firm Suntory.

Weaknesses

• The consumer discretion sector was the worst performer this week as numerous retailers’ disappointed street expectations including Best Buy, GameStop and Staples.
• The energy sector was also weak as the refiners and offshore drillers lead the group lower. U.S. gasoline inventories rose to the highest levels since February 2013, pressuring the refining group, while negative fleet updates by Noble Corp, Transocean and Ensco dragged down the offshore drilling group.
• Best Buy was the worst performer in the S&P 500 this week, falling 35.39 percent. The company announced same store sales for the fourth quarter declined 0.8 percent vs. expectations of a small gain. The company also aggressively cut prices to compete with Amazon and Wal-Mart which will hurt margins. The company has been in turnaround mode and this was viewed as a serious and unexpected setback. Fortunately, our funds didn’t own Best Buy. Though we are leaning into the strength of the consumer discretion sector, our stock selection models indicated that Best Buy was not a best buy based on company fundamentals.

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Opportunities

• The current macro environment remains positive as economic data remains robust enough to give investors confidence in an economic recovery but not too strong as to force the Fed to aggressively change course in the near term.
• Money flows are likely to find their way into domestic U.S. equities and out of bonds and emerging markets.
• The improving economic situation could possibly drive equity prices well into 2014.

Threats

• A market consolidation could occur in the near term after such strong performance.
• Higher interest rates are a threat for the whole economy, the Fed must walk a fine line and the potential for policy error is potentially large.
• Potentially a lot of good news is priced into the market and the economy will need to deliver to maintain the positive momentum in the market.

The Economy and Bond Market

Treasury bond yields fell modestly this week. Economic data was more or less in line with expectations this week and financial markets are shifting their emphasis to earnings reports which started in earnest this week. After moving higher for two months, 10-year Treasury bond yields have fallen by about 20 basis points this year, with the big catalyst being last week’s disappointing jobs report.

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Strengths

• Housing starts remained strong for the second month in a row. December housing starts registered right around 1 million units (annualized) which is a key psychological level and the highest in five years.
• Mortgage applications jumped 12 percent in the week ending January 10. Mortgage rates fell 6 basis points and that could have been a catalyst after several weeks of higher rates.
• European industrial production rose 1.8 percent in November, the strongest monthly gain since May 2010.

Weaknesses

• The University of Michigan consumer confidence index unexpectedly fell in January's preliminary reading.
• On a related note, short-term retail sales data for the week ending January 11 indicated unexpectedly weak results. This comes on the heels of a tough holiday selling season for many retailers.
• It is early in the earnings reporting season but the initial results and reaction in the stock market has been underwhelming.

Opportunities

• The Fed continues to remain committed to an overall accommodative policy and newly confirmed Fed Chair Janet Yellen will not likely deviate from an accommodative path.
• Key global central bankers remain in easing mode such as the European Central Bank (ECB), Bank of England and the Bank of Japan. ECB president Mario Draghi vowed to take “decisive action” if needed to combat deflation. Speculation is building that the ECB may cut rates to 10 basis points, essentially matching the Fed.
• There are many moving parts to the taper decision and while the Fed began the process it is very possible that tapering could be delayed.

Threats

• Inflation in some corners of the globe is getting the attention of policy makers and may be an early indicator for the rest of the world.
• Trade and/or currency “wars” cannot be ruled out which may cause unintended consequences and volatility in the financial markets.
• The recent bond market sell off may be a “shot across the bow” as the markets reassess the changing macro dynamics.

Gold Market

For the week, spot gold closed at $1,254.02, up $5.57 per ounce, or 0.45 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 5.85 percent. The U.S. Trade-Weighted Dollar Index rose .67 percent for the week.

Strengths

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• Gold strengthened $5.60 this week, with its price increasing $48.40 per ounce so far this year. As the chart above shows, the yellow metal continues to form its technical double bottom and is now breaking away from the 50-day moving average. Normally, as U.S. economic prospects improve, gold retreats. However, so far this year the negative correlation between the dollar and gold is at the lowest since October of last year, as purchases of bullion coins, bars and jewelry boost demand. As of the beginning of the week, the U.S. Mint sold 67,000 ounces, far more than in all of December.
• Gold received a boost this week as a government report showed the cost of living in the U.S. increased by the most in six months, boosting gold’s appeal as a hedge against inflation. The consumer price index (CPI) rose 0.3 percent in December from the previous month, putting inflation back on everyone’s radar.
• Imperial Metals rallied to a new 52-week high on positive commentary about the company’s development at its copper-gold Red Chris project in British Columbia. The stock was also a beneficiary of Goldcorp’s unsolicited bid for Osisko, which revived talks about merger and acquisition (M&A) activity increasing, especially for advanced-stage developers. In addition, the company’s high-grade copper resource at Red Chris helped the stock, as other copper names saw additional buying.

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Weaknesses

• Mining companies continue to slash exploration expenditures as budgets tumble. The massive cuts in exploration seen in 2013 are being extended for a second year, setting the next leg up in gold prices as China continues its relentless pursuit of the yellow metal. Last year, exploration spending plunged by roughly $10 billion, or 30 percent, and may drop an additional 10 percent this year as major producers and junior explorers alike trim budgets, according to MinEX Consulting.
• Coeur Mining reported full-year 2013 silver production of 17 million ounces, 5 percent below the low end of the company’s guidance. CEO Mitchell Krebs said the shortfall was mostly a result of slower-than-expected leach recoveries at the company’s Rochester mine in Nevada. In addition, Coeur expects to record a $770 million non-cash impairment charge in the fourth quarter, primarily as a result from the impact of sustained lower silver and gold prices.
• Colossus Minerals, a former star of the junior mining sector, announced it will seek creditor protection after failing to make an interest payment due at the end of 2013. The fall of this name was predictable earlier last year when its dewatering process proved unsuccessful. However, Colossus continued to be a component of the GDXJ ETF up until the latest rebalancing in December. This is yet another reminder for investors of the risks posed by passive gold ETFs and their stock selection lacking fundamental analysis.

Opportunities

• The U.K. Financial Authority gold price setting investigation has claimed its first casualty as Deutsche Bank announced it will withdraw from participating in setting gold and silver benchmarks in London. The bank justified the move as a means of scaling back its commodities business. On a side note, China granted licenses to HSBC and ANZ banking group to import gold in an attempt to broaden the number of channels it uses to bring its record-setting physical gold purchases into the country.
• UBS sees platinum outperforming gold, pulled by higher economic growth in developed nations. In addition, the metal could see added upward pressure in the near term as Lonmin Plc and Impala Platinum Holdings, two of the world’s largest producers, will start to receive strike notices after a South African union called for yet another stoppage.
• Randgold Resources is a catalyst-rich company with recent underperformance, according to Barclays’ analysts. The recent de-rating is attributed to speculation around operational and political issues in the DRC, which the company expects to resolve with a site visit to its Kibali project next week. In addition, the company will report its fourth-quarter results on February 3, which has been a positive catalyst in the past.

Threats

• The Precious Metals Research team at BMO published a report that seeks to debunk some of the misconceptions about the outlook for the gold mining industry. According to the analysts, production is not likely to decline short term the way many have speculated, which will remove one of the positive supply tailwinds for gold. In addition, it asserts that companies will have a harder time cutting costs than is being assumed, and that the enforcement of the cost-cutting measures will be harder than it may appear.
• The Indian Government on Thursday announced a hike in import tariff value for gold and silver. The import tariff value of gold was hiked by 3.83 percent, and that of silver was hiked by 3.92 percent, in tandem with the precious metal prices in the international market. The move shows the Indian Government sees no urgency to remove or decrease the import burden that led to a dramatic decrease in legal gold imports to the world’s second-largest buyer of the metal.
• Goldman Sachs’ Head of Commodities Research Jeffrey Currie remains bearish on virtually all commodities, but particularly on gold, reiterating his prediction of last year that gold will fall to $1,050 per ounce by the end of this year. Speaking in London, Currie noted that not one commodity has a bullish supply story; not even gold after the recent cuts to exploration and development budgets across the industry.

Energy and Natural Resources Market

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Strengths

• U.S. aluminium premiums jump to record highs, rising 25 percent in the past few days to 19.5c/lb, renewing concerns about dwindling supplies and rising costs even as market struggles with constrained LME inventories.
• The price of nickel gained 6 percent this week to $6.67 a pound, the highest level since mid October as news flow surrounding the Indonesian government’s ban on raw mineral exports heats up.
• U.S. industrial production rose 0.3 percent from the prior month in December, the fifth consecutive monthly expansion. In the fourth quarter of 2013 output was 6.8 percent higher (at an annualized rate) than in the third quarter, the fastest growth since 2010 and an all-time high, finally overtaking the pre-financial crisis peak set in the fourth quarter of 2007.

Weaknesses

• BHP Billiton reportedly settles February monthly pricing for coking coal at $138-139/t fob (HCC Peaks Down; -$4-5/t m/m), below the initial offers of $141/t fob and the first quarter 2014 price of $143/t although above the current spot price of approximately $132/t.
• South African platinum group metals mine production in November was 5 percent lower than last year and 11 percent lower than in October, according to data released by Statistics South Africa. The ongoing strikes, which began on November 3, would have accounted for much of the decline.
• The Capesize dry bulk freight shipping market has nosedived since the start of this year, with time charter rates falling from $38,999 per day to $13,611 per day to begin this week, a drop of 65 percent.

Opportunities

• State-owned China General Nuclear Power Corporation (CGN) will put another five nuclear reactors into operation this year, increasing its total electricity capacity by over two-thirds from a year ago to 14 Gig watts, the company said. China's plans to increase its reliance on nuclear power has turned it into one of the few growth areas for the industry as countries such as Germany and Italy phase out their nuclear plants in the wake of Japan's 2011 Fukushima disaster.
• Copper is seeing price support. Growth in copper mine supply over the next three years has been revised lower by 18 percent (1.1Mt) by the International Copper Study Group (ICSG). This is equivalent to a year’s production at Escondida, the world’s largest copper mine. The revision is because “significant delays are expected in many projects,” according to the ICSG, which is symptomatic of an industry under pressure to streamline spending.

Threat

• The U.S. federal government is set to take its first formal step towards capping the role of investment banks in physical commodities by issuing a notice to seek public comment on the topic.
• In 2014, concerns over excess iron ore supply again look likely to dominate sentiment towards to the sector, which could negatively impact the large global mining companies in the back of the year given their exposure to the commodity.

Emerging Markets

Strengths

• Poland's core inflation declined for the second consecutive month in December, easing to 1 percent from 1.1 percent in November and 1.4 percent in October. As a result, Poland’s central bank reiterated its pledge to keep borrowing costs at a record low, at least until mid-2014 in order to sustain economic revival.
• The wholesale price index (WPI), India’s gauge of inflation, rose 6.16 percent in December, down from a 7.52 percent increase in November, and below the 6.90 percent median estimate in a Wall Street Journal poll. The reading is easing pressure on the central bank to hike rates. With industrial output shrinking 2.1 percent in November, business has been clamoring for a cut in lending rates to help boost growth.
• Despite a continued slowdown in bank loans and money supply growth in China, shares of bank lending to households reached 42 percent in 2013, up from 31 percent in 2012 and 26 percent in 2009, to the benefit of small private companies and general consumption. For the week ended January 17, China stood out with $0.41 billion in equity fund inflows, while overall emerging markets saw another $1.3 billion in outflows.

Weaknesses

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• The mix of rising prices and foundering growth, known as stagflation, is depriving Russia’s central bank of monetary tools used to boost demand. With inflation running above the central bank’s target for the sixteenth month in a row, Elvira Niabullina, Bank Rossii Governor, has been unable to cut rates as a measure to spur economic growth. The chart above shows the resulting decline in investment, partly caused by higher rates, and its negative impact on GDP growth.
• Turkey's lira weakened to near record lows on Tuesday after data showed the current account deficit had widened in November. The current account shortfall widened to $3.9 billion in November from $2.9 billion the previous month, according to the central bank. The currency traded as low as 2.23 per dollar, from 2.15 at the beginning of the year.
• Singapore’s November retail sales declined by a worse-than-expected 8.7 percent year-over-year driven by lower car sales, as its government tightened curbs on vehicle loans earlier last year. This included a 40-50 percent down payment and maximum five-year loan tenure.

Opportunities

• Bond sales by emerging markets are up 21 percent to $55 billion this month, the busiest start to a year on record, as both government and corporate borrowers in developing nations flood markets before reductions to Federal Reserve monetary stimulus drive up funding costs. Demand by lenders was evidenced last week when Ireland tapped the international markets for the first time in two years, receiving offers for seven-times the size of the planned issuance.
• Indonesia’s president signed the raw nickel ore export ban into law, representing a key tail risk with nickel prices, given the fact that Indonesia supplies approximately 25 percent of global nickel. Additionally, China’s nickel pig iron industry relies on Indonesian imports for 60 percent of its raw materials. The greatest opportunity at the moment is for Russian producers who have direct export channels, to supply Chinese demand after this market-disruptive event.

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• Further penetration of smart phones, proliferation mobile payment apps and 4G network roll outs in China, should drive more rapid adoption of mobile e-commerce in the country. As of the third quarter last year, mobile e-commerce transactions already comprised 9.5 percent of total e-commerce volume, up from just 0.7 percent in the first quarter of 2011. Leading mobile Internet players should benefit from this ongoing trend.

Threats

• According to BCA Research, the credit environment will remain a key headwind to growth in the euro area for at least the next couple of years. The euro region banks have trailed their U.S. counterparts in strengthening balance sheets and will require additional capital to boost capital ratios. The core, eurozone countries are in the worst shape, however, the capital needs of the peripheral country banks are more modest.

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• Italian energy company Eni is yet another major business abandoning efforts to produce shale gas in Poland, raising questions over shale’s prospects elsewhere in Europe. Eni argued the geology was much more unfavorable than had been earlier thought, a statement made by other companies in the past. In addition, the government has struggled to come up with a new energy law, which has dissipated the initial excitement over the country’s shale prospects.
• Lingering uncertainty about the Fed’s taper schedule of its quantitative easing (QE) program remains a major source of concern for Southeast Asian countries in the near term, as skepticism towards any quick fix may prevent global capital from flowing back into these markets en masse.

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