Will the Republicans Actually Close the Government?

At midnight on Monday we will find out if the hard-liners within the Republican party (read: the Tea Party) will follow through on their threat to close the government as they refuse to negotiate in good faith on a deal to expand the debt ceiling. Whether one agrees with ObamaCare or not, I think it’s reprehensible that the right-wing members of the Republican party led by Congressman Ted Cruz of Texas, seeks to draft policy after losing the election, rather than focus on what is important right now: ensuring that the government can pay its bills. Now is not the time for extreme partisan politics. Now is the time for statesmanship; for cool heads to find common ground and a compromise that is in the best interests of the country.

I’ve ranted countless time in my newsletter, this blog and my twitter feed about the gutless and selfish sycophants that pretend to be our leaders in Congress. I won’t bore you by repeating the same withering criticisms. Suffice it to say that these morons are once again holding America hostage as their inability to put aside partisan politics in order to draft a federal budget leaves us a scant three days shy of a partial government shutdown. I can make an argument that, in certain circumstances, it wouldn’t be a bad thing for the government to close for a while. I do believe that we’d all be better off with a much small federal government. But that’s a conversation for another day. In this case though, it would be a very bad thing for all concerned. I still hold out hope that a deal will be struck before October 1 as our Congressional leaders are concerned first and foremost with their own re-election, and to be blamed for shutting down the government won’t help any of them at the ballot box.

As I write this about 30 minutes after the market opened for trading on the last day before the weekend, the Dow Jones Industrial Average is down about 100 points thanks to all of the uncertainty regarding the fight to raise the debt ceiling and agree on a budget for fiscal 2014. The Treasury Secretary has stated that the government will run out of money no later than October 17 and will thereby begin to default on its debts. Before that there will likely be furloughs and other cost cutting measures employed to stretch the deadline out as long as possible. None of those measures are likely to be good for workers or for an already weak economy.

I don’t believe that a crisis will come to pass. I think that the moderates in the Republican party will bring the extremists to heel and that a deal will get done. I do think the Democrats will have to agree to some spending cuts to get a budget deal done. But I don’t believe that any aspect of ObamaCare will be on the table, although the inter-party fight over this legislation will likely continue for the remainder of this Presidency. Hopefully the budget will include a combination of spending cuts and tax enhancements that will make a meaningful impact on the deficit.

So what does this mean for investors? I think the market will likely close lower today, and losses could continue through the close on Monday. I think a stop-gap measure will be agreed to sometime Monday night, allowing the government to continue in business. That agreement will likely trigger a rally in the market. Therefore, I think Monday may provide a nice buying opportunity. Stay tuned.

Advertisements

Market Achieves Record Levels

About an hour into trading today, the S&P 500 and the Dow Jones Industrial Average have both surpassed previous all time highs and achieved significant milestones. As I write this around 10:30am, the DJIA is at 15,003, marking the first time in history the venerable index has reached that level. Similarly, the S&P 500 is at 1,616, the first time that index has ever been over 1,600. And the Dow Jones Transportation Average is only 7 points below its high. Should the DJTA move to record levels concurrent with the DJIA then we’ll have a bullish confirmation according to Dow Theory. This is all great news.

Yet surprisingly, given these lofty levels, the overall enthusiasm seems relatively muted. There are no fireworks, no parties on the floor of the stock exchange and relatively muted commentary on CNBC. I think that’s a good thing. It suggests that this in not a period of “irrational exuberance”, like 1999. Corporate balance sheets and earnings are in much better shape than in 1999 or 2008 and the global economy continues to be propped up by central bankers. So as long as the money continues to flow unabated, the good times should continue.

That being said, it appears to me that market sentiment remains relatively bearish, or at best very overly cautious, despite the record levels. I think too many individual investors have remained on the sidelines since the crash in ’08, missing out on this stupendous rally. Also, the plethora of contradictory economic news, both in the US and around the world, has left market participants confused and scared. It seems as though every day one economic statistic reveals a slowing economy while another suggests that everything is more robust than expected. Earlier this week the PMI data indicated that the manufacturing sector was slowing. Comments by the Federal Reserve seemed to confirm that thesis. Yet today it’s all wine and roses after the BLS released a stronger than expected employment report. More jobs were added than expected in April, and February and March were revised higher. Additionally the unemployment rate dropped to 7.5%, the lowest level since the crisis began.

It’s possible that since the DJIA and S&P have now breached important psychological barriers that the rally will really take hold as cash begins to move from the sidelines and investors and money managers who have under-performed the market rush to add equity positions. If that is the case, the broad market could move markedly higher from here, dispelling the old adage to “sell in May and go away”.

Conversely, these lofty levels could spur some investors to take some profits and wait for the inevitable correction. We’ve already had a great year after only four months. I certainly would have signed up for a 12% return for the year. If this momentum continues, we could be looking at 20%+ returns for the year. Only time will tell as there is still a long way to go before the story of the market for the year is fully written. Personally, my clients and  I remain almost fully invested, but we’re selling weaker holdings into the rally to raise some cash for the next buying opportunity.

The Cliff, The Deficit and What It Means To You

A few weeks ago (the December 8th entry) I told you that the world wasn’t coming to an end because of the Fiscal Cliff. I said that “it is HIGHLY UNLIKELY that every tax increase and spending cut will, in fact, come to pass. Some compromises will certainly be made by our leaders in Washington, despite the radical bleatings of the far right and far left. Whether the deal is brokered in the next two weeks or the next two months, I’m confident a deal will be made that will leave both sides less than happy but will stave off the worst result, which would be simply doing nothing.

As I predicted, a deal was struck with much fanfare and with thundering applause from Wall Street which rewarded the hack show by staging a huge two-day rally. That’s the good news. The bad news is that the deal accomplished virtually nothing for the long-term health of our economy. It is simply a tiny band aid on a festering wound. It feels better now but it does nothing to stop the internal bleeding.

The bigger problem is looming: the fight over the deficit and increasing the debt ceiling. And this time, the Republicans in Congress hold the power. Mr. Obama is going to have to negotiate legitimate spending cuts in Social Security, Medicare/Medicaid and other sacred cows whether he wants to or not. I don’t think there’s really any way to avoid it much longer. It’s time to take the medicine. It’s past time for America to tighten its collective belt and start living within its means. As anyone who runs a household or a business implicitly understands, you simply cannot spend more than you earn, going deeper and deeper into debt. Eventually, you either go bankrupt or someone breaks your kneecaps. I believe the national debt is now approximately $17 trillion, give or take a trillion. It’s time to start to reducing this of our own volition before our creditors force Greece-like austerity measures down the road.

But before we get to the debt ceiling drama, let’s see what the Fiscal Cliff agreement means to you and your money. First of all, if you make less than $400,000 (or $450,000 as a couple), you should be pretty happy. The only real change for you is your payroll taxes will rise 2%. The dividend and capital gains taxes remain at 15% and your income tax levels remain where they are. For those high income citizens, you will face the same 2% payroll tax increase, plus you’ll be subject to a higher tax bracket and capital gains and dividend taxes of 20%. None of this is end-of-the-world stuff. The estate tax exemption remains at $5 million which is good news for everyone. So, in the end, this really isn’t a horrible agreement; it could have been much worse. But the flip side is that while it isn’t bad for people, it’s bad for the government as it actually reduces its long-term tax receipts. Hence the looming fight over the deficit.

And what does all of this mean for our investments? The agreement on the capital gains and dividend tax rates are a plus for the stock market. The higher estate exemption is also good for the market. Any increase in payroll taxes, or income taxes, is a net negative, but it really isn’t a huge problem. So for now, we’re ok. We just need to listen to the rhetoric about the deficit and pay close attention to what kind of spending cuts are forthcoming because that will directly affect the economy, which will immediately impact the stock market. So stay tuned.

Thanks and Happy New Year

For my final entry of the year I thought I’d simply share with you what I wrote today to all of my clients. I think the message is applicable to everyone.

It is just before 2:00pm on the final day of 2012. Fortunately the Mayans were wrong and we’re all still here to be thankful that 2012 is about to pass into history. I, for one, am looking forward to welcoming the new year and saying a (not quite so fond) goodbye to this one. This year has been a very difficult one on so many levels: politically, economically and climatologically. We marveled at the Arab Spring where much of the Middle East saw political upheavals. We watched the European Union rush to the brink of collapse, yet somehow manage to remain solvent for another year. In this country we survived an interminable political process that culminated in the reelection of President Obama. We struggled all year with a stagnant economy and a withering march towards the Fiscal Cliff. We endured a number of catastrophic weather events around the world, including right here in the New York area as Sandy ravaged our coastal communities. Most recently we also watched in horror at the news of another deadly rampage leaving many innocent lives lost to senseless violence. 

Yet through it all, we survived to raise a glass tonight to toast our friends and loved ones and to appreciate all the blessings that we have as citizens of the United States. Notwithstanding all of the troubles I’ve listed above, and the hundreds of daily problems and inconveniences that we all struggle with, we are all blessed to live here, in the country that affords us the greatest freedoms and opportunities on this planet. We must always remember to not only appreciate how fortunate we are, but to never take it for granted. 

Personally, I have so much to be thankful for, not the least of which is the continued faith and support of each of my wonderful clients. I’ve been in business for over 15 years now and I could not have done it without each and every one of [them]. I never take for granted the trust that [they] place with me and I appreciate it very much. And while I approach every year with a certain amount of caution, and next year is no different, I am growing more and more optimistic about the future. While we may have another few years of choppy times ahead of us, and we will certainly deal with at least one recession before things really turn around, I think we’re headed again toward a period of unprecedented change and prosperity. I’m not sure exactly when that time will begin, but I am sure that it will occur. Within a few more years we will start to benefit from advances in medicine and technology that we can barely conceive of today. Cures will be found for disease, people will live longer and better, there will be tremendous advances in communications, advances in biotechnology and nanotechnology will create businesses and riches that cannot yet be imagined. Trust me, it will be an exciting time to be alive and we will benefit from the journey.

For now though, we will continue to be vigilant and prudent. We will continue to work together to ensure that your financial goals and aspirations can be met. So thank you again for working with me for another year. I very much look forward to serving you again for years to come. 

So, for those of you who are not my clients (and why aren’t you??), I extend the same message and wishes to you. Cherish your friends and loved ones, and remember to never take your many blessings for granted. Happy New Year and best wishes for a happy and healthy 2013.

Musings on Death and Taxes

Last night my family enjoyed our blended holiday celebration. We shared gifts, laughter and hugs and kisses just days after an entire community was devastated by the horrific act of a madman and less than two months after Superstorm Sandy cut a path of devastation through much of the New York/New Jersey area. There are 27 families in Newton, CT who will not be celebrating the holidays this year as they mourn the loss of their children or siblings or parents. And there are likely hundreds of additional families still homeless or trying to piece their shattered lives back together. It truly makes you appreciate life’s blessings and reminds you to never take them, or your loved ones, for granted.

This random act of senseless violence in the Newton massacre once again brings the issue of gun control front and center. It’s hard to understand how any logical, sane person can oppose the idea of keeping automatic and semi-automatic weapons of mass destruction out of private hands. The Founding Fathers, when they crafted the 2nd Amendment to the Constitution, never envisioned weapons such as these. There is simply no place for them in civilized society. Period. I challenge any gun advocate to reply with a cogent reason why those types of weapons should not be banned. It’s time for our politicians to stand up to the NRA, and the rest of the gun lobby, and loudly proclaim that enough is enough; that they will not be bullied any longer and that’s it’s time for a national debate on what weapons can and cannot be owned by private citizens. President Obama, if you’re reading this, since you are not up for re-election, it’s your job to take a stand and get something done.

And Mr. President, while I have your attention, it’s time to get a deal done on the Fiscal Cliff. Enough is enough. Both sides MUST stop the posturing, eliminate all the partisan BS and craft a compromise that the entire country can live with. It shouldn’t be that difficult. You all have to agree that taxes will go up on many, if not all Americans. And those tax increases will likely be tilted towards those Americans who make the most money. Republicans, just accept it and move on. And at the same time, the government must spend less. There is simply no alternative. Democrats, deal with it and move on. So lock yourselves in a room until an agreement is reached. Because if you can’t get this deal done, then as a nation we are truly screwed because the bigger debate is forthcoming.

What nobody is talking about is that the Cliff negotiations are just the first act in what will be a much more contentious debate over the big issues of what to do with Medicare and Medicaid and Social Security. Those expenditures represent about 41% of the entire federal budget. Throw in another 15% or so for the military and you see that those three programs account for a staggering 56% of the entire $3.5 trillion spent by our government. Cutting a billion here or a billion there is simply noise. We, as a nation, must accept that we have been living well beyond our means for far too long. That unless we want to leave our massive debts for our children and grandchildren to deal with, leaving them with far diminished prospects and lives to that which we’ve enjoyed for so long, we must all make sacrifices for the common good. As a society, are we ready to do that? We’ll find out. And in the meantime, let’s talk about it. Write to me and let me know what you think.

 

Prepare For Year-End, Not the Fiscal Cliff

There are three weeks left in the year and the world won’t be coming to an end, literally or figuratively, regardless of what the various doomsday prognosticators have to say. It’s impossible to turn on the television or open a newspaper without being assaulted with dire warnings about the impending disaster that is the “Fiscal Cliff”. It’s gotten to the point where I can only watch CNBC is when it’s on mute.

For those of you who’ve been living under a rock, the Cliff is the December 31st deadline after which substantial tax increases and mandatory spending cuts will take effect. The tax increases are largely from legislation passed by President Obama to pay for his health care program along with the end of the Bush tax cuts. The spending cuts were mandated during the last failed deficit negotiations. It’s been estimated that should all of these tax increases and spending cuts come to pass, it will shave 4%-5% from GDP growth, sending the country into a deep recession.

While I’m growing more and more angry and frustrated (if that’s even possible) at the intransigence emanating from both parties in Washington, I honestly don’t think the looming fiscal cliff is really the nightmare everyone is saying it will be. It is HIGHLY UNLIKELY that every tax increase and spending cut will, in fact, come to pass. Some compromises will certainly be made by our leaders in Washington, despite the radical bleatings of the far right and far left.

Whether the deal is brokered in the next two weeks or the next two months, I’m confident a deal will be made that will leave both sides less than happy but will stave off the worst result, which would be simply doing nothing. It is truly in the best interests of everyone, other than perhaps that fiscal terrorist Grover Norquist, to get a deal done. There is simply too much self-interest in Washington, especially in the House of Representatives, where they must stand for re-election every two years, to allow a fiscal calamity to happen on their watch. That’s a great way to get thrown out of office by a pissed off electorate.

So if we’re able to drown out the noise about the cliff, what should you be truly focused on between now and the end of the year? Given all of the current uncertainly, there are no simple answers, but here are a few suggestions for you to ponder:

  1. If you have large unrealized gains, consider realizing some of them this year to take advantage of the low capital gains tax rate, which is likely to rise next year.
  2. If future capital gains taxes aren’t really an issue, don’t forget to match gains with losses where possible to minimize your tax bill this year.
  3. Check your portfolio to see if your holdings need to be re-balanced. Avoid having any one position be too large a percentage of your overall holdings. I generally like using 10% as a maximum position size. Similarly, either add to, or get rid of, positions that are simply too small to make a difference.
  4. If you have a large estate, consider making gifts of up to $5.1 million before year-end to take advantage of the large estate tax credit that expires this year. Unless a compromise is reached, it reverts back to $1 million next year.
  5. Speak with your adviser to make sure your investments are suitable for your financial objectives and risk tolerances. Times and conditions often change, and our investment approaches sometimes must change as well.
  6. If you don’t have a will; write one. If you have a will, but haven’t updated it in more than five years, it’s probably time to look at it again.
  7. If you haven’t already done so, consider giving some of your time and/or money to a worthwhile charity. There are so many organizations out there that desperately need your help, especially during the holidays. So open your heart and your wallet and make a difference for those in need.

Post Election Traumatic Stress Disorder

This is an excerpt from my latest newsletter.

About the only good news these days is that the election is FINALLY over. In my Fearless Forecast edition back in January I said “I believe President Obama will defeat Mitt Romney in a relatively close election as a divided GOP is unable to coalesce behind Romney. The Tea Party is marginalized and the Senate remains in Republican control. Fiscal austerity, job creation and tax policy are the main debate points.” I’d say I nailed that one right on the head. Now, Obama and the lame duck Congress MUST figure out a way to avoid pushing this country over the “fiscal cliff”. Should every possible tax increase and spending cut go through, the 4-5% reduction in GDP would push the United States into a deep recession. But I believe that the self-preservation instincts of our politicians won’t allow that to actually happen. Somehow they will figure out how to avoid the cliff. It’s likely that they’ll compromise on some easy tax increase wins and entitlement cuts then push the harder decisions into next year to let the next Congress fight it out. And the sooner they do this, the better for the stock market, which hates uncertainty.

At the end of the day, I don’t think the results of the election will change things very much. We still have a left-leaning president with no real mandate and a divided Congress with a weakened Tea Party. That’s a great prescription for more of the same where there’s lots of talk and very little real action. I think the best we can hope for, in the short run, is some modest compromise and lots of procrastination. Looking longer term, I truly hope the President looks to his legacy and makes a real effort to articulate a tax and spending policy that makes sense. If he does, the Republicans will be forced to the table and maybe a plan that can save us from becoming Greece and Spain can be shaped. Or not.

What is really sad is how little confidence I, and so many people I talk to, have that our leaders will really work together to shape an intelligent policy that will hurt everyone a little in the short run but help us all in the long run. There will have to be tax increases. There will have to be spending cuts. There will have to be reductions in entitlement programs. Many good programs will have to be cut back or eliminated. People will lose their jobs, especially those in the government.

Unfortunately, standing in the way of what must be done are the special interests and the lobbyists, the ones with the real money and power. These groups have too strong a voice in what happens in this country. It really is no longer about “we the people”; it’s “we with influence”. Maybe someone in Washington will show some courage and leadership and prove me wrong and do what’s right, even if it isn’t what’s popular. I hope so, but I’m not hopeful.