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@theMarket: Play it Again, Sam
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It was a week of tension. Markets rose and fell on every word uttered by party leaders, who jockeyed for position and the national spotlight around the Fiscal Cliff. It was Washington at its worst. Get used to it because this deal is going to go down to the wire.
Remember last year's Greek debt negotiations? It was a game of he said, she said that dragged on for months. We are playing the same song once again only on this side of the pond. I guess the best that can be said for this American version is that if nothing happens before Jan. 1 we all think we know the outcome.
But unlike Greece, where the country either received a bail-out or went bankrupt, this U.S. event would not be as dramatic, at least at first. If for some reason the politicians miss the deadline, it would take several days and even weeks before we feel the tax bite. As for the spending cuts, those draconian measures will be enacted piecemeal and over several years. Why is this important?
Well, the stock markets are acting like January first is a do or die event. It's not. Politicians can continue to agree to disagree; delay a compromise and either extend the deadline or let the country fall off the cliff (really a ditch) temporarily. They would still have time to come up with a solution sometime in 2013 without much impact to the economy.
But that kind of scenario would sell fewer newspapers and reduce the ratings on business shows. Brokers would have less to talk about and retirees, rather than being pinned to their televisions, could actually go out and do something productive like exercise or read a good book.
If you are in that stressed-out category, remember this. How much did all that angst over Greece help you? In the end, Greece did get a bail-out, their market is up 25 percent since then and the U.S. market is up substantially as well. So relax, will you?
Warren Buffet may not be right about everything but one reason I believe he is so successful and still in the business is because he takes a long-term view. Sure, time has become compressed. Fortunes have been made and lost in years rather than decades and it has become fashionable to “trade” the markets. I am as guilty as the next person, but only to a point.
In the past, we've had to refuse clients because we didn't see eye to eye when it came to investment style. They insisted we sell every down move in the market before it occurred and jump back in "at the right time," which for them, was before the markets moved back up.
"If I could do that," I explained. "I wouldn’t need to work. I could simply sit home, trade my own account and make a couple billion dollars a year."
Here's my take. The anxiety over this Fiscal Cliff is overblown. Focus instead on the increasingly positive economic data in the United States. In addition, I expect the Fed may announce further stimulus moves in the coming month. The stock market, which is trading around 13 times earnings, is fairly valued given a modest growth scenario. We may be underestimating that growth and prospects for a better 2013 than most people expect. Buy the dips.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Let the Lobbying Begin
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The Fiscal Cliff commands center stage. The nation's news media is dutifully reporting every syllable uttered by anyone even remotely connected to the negotiations. But what really matters is what is said behind closed doors between Washington's lobbyists and our elected officials.
Now that the elections are over, the debate (and agreement) among voters and parties that taxes should be raised and spending cuts must necessarily come down to the details. Those details and the devils that represent them (called special interest groups) are assaulting congressional offices with convincing arguments on why their constituencies should be excluded from either tax increases or spending cuts.
It is an old story. Theoretically, in America, I may agree that we should all suffer for the greater good of the country and the economy, as long as in reality "all" doesn't include me. In Washington, that concept prevails everywhere. A corporate coalition, for example, is lobbying to kill any tax increases in the dividend rate. That rate, currently at 15 percent, could go as high as 35 percent or more. They argue that raising the dividend tax will hurt seniors who depend on dividends as part of their retirement savings.
Of course, they neglect to add that the vast majority of Americans (low-and middle class investors) who own dividend stocks, own them in their retirement accounts, which are excluded from dividend taxes. I suspect that raising taxes on dividends will predominantly impact the 1 percent of America's most wealthy, but that's not part of their argument.
Readers, by now, are fully aware that the sticking point between Republicans and Democrats, as far as extending the Bush tax cuts, centers upon those earning $250,000 or more annually. The Democrats do not want to extend the Bush-era tax cuts to that group, while Republicans do. Instead, the GOP would like to focus on eliminating certain individual tax loopholes, arguing that they would be less harmful to businesses, jobs and the economy.
One loophole being discussed is the tax deductibility of home mortgages for either first or second home owners or both. There is some talk about capping that deduction, although to do so would impact many middle-class Americans as well as the wealthy, argues the homebuilding industry. Their lobby won't tolerate even a minor change in the mortgage interest deduction.
They contend that home ownership has taken the brunt of the decline in the nation's economy and is now only beginning to recover. Monkeying with mortgage deductions would throw housing back into a tailspin and with it the majority of homeowners in this country, according to housing advocates.
AARP, the top lobbyist for retirees, is also dead set against any spending cuts to Medicare and Social Security. Even minor changes such as slowing the cost-of-living formula for Social Security recipients or extending the age of Medicare eligibility is anathema to their constituency, retirees.
Wherever you look, from charitable contributions to energy depletion allowances, some group or another has a reason, sometimes rational, sometimes not, for why the axe should be spared in their case. It appears that where individual interests are concerned, posterity is taking a backseat among America's lobbyists and the populations and professions they represent. I suspect that if we expect our elected officials to compromise and avoid the Fiscal Cliff; Americans should first look at their own attitude toward compromise where our individual interests are concerned.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Fiscal Cliff or Shallow Ditch?
 And you tell me Over and over and over again, my friend Ah, you don't believe We're on the eve of destruction.  — Barry Mcquire, "Eve of Destruction"
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Panic has once again descended upon Wall Street. This time investors are gnashing their teeth over whether our political parties will be able to strike a tax and spending deal before Jan. 1. If not, so the story goes, we will plunge, like lemmings, over the so-called Fiscal Cliff never to return. Why am I not impressed?
We have had a number of these dramatic binary events over the last few years. They always make great theater, but none have turned out nearly as bad as the media predicted. If you had panicked and sold on their advice you would be much poorer today. This particular cliff-hanger reminds me of another end-of-the-year event that was predicted to cause horror and dismemberment among the world's institutions, Y2K.
The Year 2000 was a problem for both digital (computer-related) and non-digital documentation and data storage situations that resulted from the practice of abbreviating a four-digit year to two digits. Would the world's computers be able to recognize and accommodate a year that began with "2" instead of "1?"
At the time, we were assaulted for months with stories that spelled out what could, would or should happen if the world was not prepared for this digital disaster. But predicting the end of the world is a zero-sum gain. If someone gets it right, (and no one has thus far) there won't be anyone left around to brag about it. As for Y2K, it turned out to be, in the words of Shakespeare "Much Ado about Nothing."
In this case, investors, who have known about the Fiscal Cliff for months, are assuming what happens before it will happen again. Readers may recall that last year, both Republicans and Democrats could not agree on how to address our growing deficit. The Republicans used the nation's debt limit, which was fast approaching a ceiling, as a bargaining chip to force a series of spending cuts on the White House and Senate. Both sides refused to back down. At the 11th hour, it was agreed to kick the can down the road until after the elections by temporarily raising the debt ceiling in exchange for implementing a series of tax hikes and spending cuts that would be implemented automatically at the beginning of 2013.If there is no compromise, pundits and even the president have predicted that the combination of tax rises and spending cuts will drive us back into a recession, the gains in employment will evaporate and the United States will quickly join Europe in vying for the worst economy of 2013. No one wins. Everyone loses.
What's wrong with that picture?
Well, for starters, everyone knows it and politicians hate to lose. Americans have also conveniently forgotten that the parties did compromise last year. They agreed to disagree, but still raised the debt ceiling at the height of partisan politics. Today, less than two weeks after the elections, President Obama was re-elected with a mandate to lead but also to compromise. That seems clear when you look at the results in Congress. Republicans were re-elected and maintain their majority in the House while the Democrats control the Senate. It seems to me that voters want compromise from all their elected officials and both parties know it. Last year there was no such message; in fact, if anything, both sides felt it was their way or the highway and still they compromised.
So far, both sides have said they are willing to do just that. In politics (as in real life) you go into negotiations with your strongest suit. Otherwise, you have nothing to give in exchange for another card. I believe there is a new willingness in Washington to compromise but, for Americans, it will have to be one of those "show me" moments. As such, patience and a cool head are required until then.
We only have 14 or 15 working days on Capitol Hill in order to get a deal done before this "Eve of Destruction." Just about everyone assumes both sides will not budge and negotiations have not even started.
In the meantime, there is an old saying on Wall Stree: "Don't fight the tape." It means that regardless of whether the direction of the market is right or wrong, don't fight the flow. Right now, panic prevails, the markets are in a waterfall decline and investors are all going down like lemmings together. Don't get caught up in this crowd psychology. In my opinion, sentiment and the markets will reverse as soon as it becomes apparent that this black chasm in front of us is simply one more shallow ditch.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Insult to Injury
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Of course, those who just had their power restored in places like Long Island and the battered New Jersey sea coast were plunged back into despair at this new power outage. But damage is minor compared to the estimates that Sandy has wrought. The price tag is now ranging from $30 to $50 billion, but that is only a guesstimate. Losses that are insured by private companies could amount to $20 billion or more. Additional losses covered by the National Flood Insurance Program, plus uninsured losses, could boost the total to the $50 billion mark.
Normally, the estimates of property damage are usually revised upward, while those losses incurred as a result of lost business activity are revised downward. That is because businesses usually find a way to make up for lost activity. In the case of Sandy, regaining lost business activity depends on when the power is restored. In many areas, power is still not fully restored and won't be soon, thanks to yesterday's storm.
Damage totals would put the cost of Sandy far above recent hurricanes and at least equal the cost of the four hurricanes the United States suffered in 2004. But the losses are still well below the $100 billion price tag of Hurricane Katrina, although it could beat the next largest storm, Hurricane Andrew in 1992 ($46 billion in inflation-adjusted losses).
There are a lot of misunderstandings about weather-related destruction. I have read a number of articles that seem to suggest that storm damages could actually be good for the economy. Pundits like to point out that although the damage will cause a dip in economic activity in the impacted region over the short-term, the economic reconstruction involved in rebuilding infrastructure (roads, bridges, subways, railways, etc.), plant and equipment (factories, stores, housing), and goods and services could actually act as a stimulus to the economy while creating new employment.
Some of the depressed consumer spending, they argue, will simply be postponed. For example, Hurricane Sandy was responsible for a 20 percent drop in retail sales last week in the mid-Atlantic and Northeast regions amounting to $4 billion. Although some of that will surely be recouped in the weeks and months ahead because of Thanksgiving and the Christmas season, not all of it will be recouped.
What many are forgetting is that natural disasters are destroyers, not creators, of wealth. The opportunity cost that we forego in natural disasters is immense. Think of what the victims could have done with the time, money and effort they now have to spend on rebuilding. No longer can businesses, homeowners and even the government make the purchases and investments on other more productive pursuits that could have generated more jobs and a better business environment if the disaster had not occurred.
Sure, the re-building process may result in a better structure or highway than before but the costs are replacement costs, not new investment. And what value will we place on the 100-plus lives that were lost or the pain and suffering of those that are now homeless or without jobs? What about their opportunity costs?
Sandy was a hurricane, a destructive one, but there was nothing super about it. It will take those in the Northeast a long time to recover from its impact and there are precious few silver linings in this disaster no matter how deeply you look.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Twenty-First Century Capitalism
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Companies have been forced to get bigger just to compete successfully on a global basis. In this new big dogs-eat-little-dog's arena, governments have had to adjust rules and regulations accordingly. "Too big to fail" makes sense when you are competing globally and our government, in an effort to protect our own across a wide spectrum of sectors, has bent the rules to insure U.S. corporations' competitive position among foreign competitors.
It has also had the unintended consequences of solidifying the status quo. Competition may have heated up abroad, but by necessity, it has fallen domestically among our companies. As a result of this three-decadelong worldwide transformation, there is no such thing as a free market anywhere (if there ever was one) and capitalism, as we understand it historically, is about as different today as Dorothy's Kansas is to Oz.
For the last few years, I have been railing about the excesses in our financial markets. Those excesses, I now believe, are a direct result of this 21st Century brand of capitalism. In the old days, capitalism was about accountability, the rule of law, fair and competitive markets and compensation appropriate to the value created for society. Nowhere do we see that today.
Instead, we see a growing list of inequities wherever we turn. From immunity from the criminal justice system to the near melt-down of the entire financial system, capitalism has run amuck. An opportunity, the yellow brick road of a laissez-faire society, has plummeted. Last year, just 8 percent of students at America's elite universities (where future contacts and allies are made) come from households in the bottom 50 percent of income. Since education provides an avenue to equal opportunity there is something radically wrong with that statistic.
Just ask any small-business owner how hard it is to get a loan today, yet, Wall Street banks and big corporations can borrow as much as they want with just a phone call. If the access to capital has changed, how can would-be capitalists become capitalists? Yet, the answer, if we listen to those learned men and women to the right is much, much more of the same.
A growing chorus of voices demands we embrace this 21st century "laissez-faire" theology. They paint a picture of an economic environment in which transactions between private parties are free from tariffs, government subsidies and enforced monopolies, with only enough government regulations sufficient to protect property rights against theft and aggression. The markets, they say, will sort out distribution on its own.
I fear that direction will result in more and more wealth ending up in fewer and fewer hands. And wealth begets power in 21st-century capitalism. This kind of crony capitalism has already transformed what was once a vibrant free-market economy with a conscience into something that is far closer to the Robber Barons' duopoly or oligopoly of old.
In order to address these new realities, we must first acknowledge that we are not in Kansas anymore: a hard thing for Americans to admit. The tripe we serve ourselves that some mythical form of capitalistic free-market system still prevails in this country must be squarely and honestly refuted. The idea that markets, left to their own devices, are perfect and can perfectly balance supply and demand is a bunch of hogwash. Economists might insist on that point in a theoretical world, but in the real world, markets have always been imperfect and will continue to be long after those ivory towers are smoking ruins.
George Soros, one of the premier capitalists of our age, recently wrote a shocking condemnation of capitalism in the Atlantic Monthly titled "The Capitalist Threat." In the article, Soros argues that "By taking the conditions of supply and demand as given and declaring government intervention the ultimate evil, laissez-faire ideology has effectively banished income or wealth redistribution."
He believes America's laissez-faire argument relies on the same tacit appeal to perfection as communism:
"It claims that if redistribution causes inefficiencies and distortions, the problem can be solved by eliminating redistribution — just as the Communists claimed that the duplication involved in competition is wasteful, and therefore we should have a centrally planned economy."
Soros points out that the laissez-faire argument against income redistribution invokes the doctrine of the survival of the fittest. That argument, he points out, is undercut by the fact that wealth is passed on by inheritance, and the second generation is rarely as fit as the first.
Besides, both Soros and I agree that there's something radically wrong with using the survival of the fittest, which is an outmoded theory of evolution called Social Darwinism, as the guiding principal of any civilized society, much less by the leader of the free world and the world's foremost democracy. America, wake up for God's sake!
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
