2011Jan23 "...reduce the burden on private income..."

2011Jan23 "...reduce the burden on private income..."

"The final and best means of strengthening demand among consumers and business is to reduce the burden on private income and the deterrence to private initiative which are imposed by our present tax system: And this administration pledged itself last summer to an across the board top to bottom cut in personal and corporate income taxes…” John F. Kennedy: Speech to the Economic Club of NY, December 14, 1962

 

 

Economy:

No one argues that a high level of unemployment is bad for the economy. Recent improvement in government data is partially due to a decline in the participation rate which has fallen to levels not experienced since the early 80s. The decline in 20-25 year olds, the leading edge of the Y-Gens, probably decided to return to school. For men 25 to 50, the odds are that they have given up looking for work.
 
Employment data is a lagging indicator of economic health. We have anecdotal evidence from peers that the head hunter business is showing signs of improvement. Also, some families have reported back to advisors in our network that their children or grandchildren are being hired before college graduation. Hopefully both of these events continue throughout the next several years.
 
Even so, improving employment data will be an uphill battle this year as austerity measures begin impacting civil servants. Reports are rolling in from cities and states that have been the most profligate spenders. Few communities are going to be spared from austerity measures. At some point in time, the use of debt to pay recurring expenses must end. Everything works when you are borrowing, until you can’t.
 
Detroit is struggling with a proposal to close ½ of the public schools due to insufficient funds. For the same reason, Newark, the crime capital of the US, is reducing its police force with a corresponding spike in crime. Large tax increase proposals are the preferred resolution for Illinois and Connecticut. We expect people with mobility and businesses to move out of those states exacerbating the states’ problems. There is no easy fix that will avoid more personnel cuts.
 
Real Estate:
While the most impacted areas are coastal states, price declines are not over. As we have warned for years, the problem is, and will continue to be, a lack of buyers. Home construction has been a foundation of our employment. It supports the building trades as well as suppliers, providers of appliances and interior furnishings. New permits in Florida, a basket case, have declined more than 80% since the recession began.
 
We expect next year will show signs of improvement in the starter home market. The leading edge of the Y generation is entering the first time home buyer age. They will find prices and financing attractive to accommodate their newly formed families.
 
Stock Market:
Signs that the market has reached a short term peak occurred this week for the S&P-500, The S&P-400 Mid Cap Index and the Dow Jones Transportation Index. These follow recent signs in both the gold and silver indices. This is not a firm indicator that the upward bias has ended. Rather, it is likely that lower prices will occur in coming weeks allowing patient investors to invest cash at lower prices.
The final arbiter of market direction is the presence of buyers and sellers. Currently, our data indicates that buyers are still dominant in most areas of the global markets.
 
News headlines intentionally create concern because readership justifies advertising rates. Headlines, however, are generally retrospective justification for stock price movement rather than the cause.
 
To what extent federal budget problems and the debt ceiling are already factored into stock prices is speculation. Additional funding for Social Security is another challenge for Congressional budget committees.
 
The vast majority of 53 million Social Security recipients are fully dependent on their monthly check. The “trust account” was expected to have adequate funding through 2018. Actually, it was $75 million short of covering obligations last year. This is the first year Boomers turn 65. The short fall is not going away any time soon. The market impact is unknown. The city of Prichard, AL has dealt with this. It discontinued sending pension checks! That is an unlikely solution for Congress.
 
Bond Market:
Since Meredith warned on 60 Minutes of impending municipal bond defaults, war has raged between the believers and the doubters. We have previously commented on the City of Vallejo’s bankruptcy. The exit plan has the City’s unsecured creditors (i.e. general obligation bond holders) receiving 5% to 20% of their due. Union Bank will get a 40% discount. Needless to say, litigation is blossoming as parties fight for better treatment.
 
The counterargument is that the problems are mostly with non-governmental projects that qualified for tax free financing. Also, municipalities should loathe the probability of alienating their source of funds which has become individual investors within their own state. Maybe so, but what happens when tax revenues continue to fall? Politicians are just as loathe to cutting budgets. Aren’t you glad you aren’t an elected official with this dilemma?
 
While cities and counties have bankruptcy as an option for restructuring budgets, states do not. Legislation in Congress, if passed and signed into law, will change that.
 
“When the facts change, I change my mind. What do you do, sir?”  - John Maynard Keynes
 
Our plan is “the plan will change.” What is your plan?
 
Relative strength measures the price performance of a stock against a market average, a selected universe of stocks or a single alternative holding. Relative strength improves if it rises faster in an uptrend, or falls less in a downtrend. It is easily applied to individual positions in your portfolio and to sectors and asset classes.
 

If you would like a free relative strength analysis of your portfolio’s asset allocation, sectors and positions, call us at 800-317-9119. The call is free. The report is free.