To Tax or Not to Tax?

The burning question in Washington, currently, is about the Bush-era tax cuts. Some say continue for all, others say continue for all but the rich, and others say don’t continue any of the cuts. We are spending about $1.2 trillion a year more than the federal government is taking in from taxes. I may not have my calculations correct, but I believe that, by letting the Bush tax cuts expire, we will generate about $200 billion of added revenue each year. That still leaves us will a $1 trillion shortfall, which suggests that spending must be cut substantially as well. The reason we hear most often for not allowing the tax cuts to expire is that spending by consumers would be cut (less money to spend) and the economy could slow down. The same rationale is given for extending the federal job loss benefits for an additional 13 months, which is another big expense. Recent studies have pointed out that some of the increasing joblessness is caused by the continued extension of jobless benefits, which has allowed people to hold off getting a job for a lengthy period of time, and during that time, their job skills erode. As I look at the substantial sacrifices that the people in Greece, Ireland, Spain, and Portugal are having to make to get their countries back to financial stability, I keep thinking that we need to move quickly to avoid taking draconian measures later! None of us likes taxes or cutbacks on entitlements, but without financial stability, life as we know it in the U.S. will change significantly. In looking at the suggestions of the bipartisan deficit reduction committee that was established by President Obama, it seemed to me the entire document should be adopted! My burning question is: can the politicians put politics aside and do what is necessary for the long-term economic health of our country? Our founding fathers sacrificed to put us on the road to greatness. Let’s not exit that road now. Ed Mallon

Gratitude!

I was looking at the last section of the Wall Street Journal this morning and on the front page of section D they had an article about Grateful People. They indicated that grateful people are happier and healthier. Further it indicated that they have more energy, are more optimistic, less likely to be depressed, earn more money, sleep soundly and have greater resistance to viral infections. Wow! First, it made me stop and think of the past two years. In November of 2008 it seemed like the world was in a melt down and everything was off track. By November of 2009 things had improved and we didn’t have that feeling of panic of the prior year but were still very worried and troubled. This November it seems people are finally coming out of their shells, looking around and feeling a bit more normal. It seems “normal” has changed though. People are more careful with their spending and don’t want to take on more debt. Many people are still out of work and for them it is difficult to feel grateful. What I think we all can feel this Thanksgiving is gratitude. Gratitude for living in this country, having friends and family, for the food we eat, for the roof over our head and the clothing we wear. Sometimes we get carried away and think that what we “want” is what we “need”. The vast majority of us can be grateful that our daily needs are met. If we stay away from envy and desire we can truly be grateful for what we have. We can show gratitude by sharing what we do have with others and that too will make us happy. Thanksgiving to me is about gratitude and sharing. I am grateful for all of my family, friends and clients. Thank you all for letting me be a part of your lives. Happy Thanksgiving! Ed Mallon

Correction!

It appears to me at this time that a correction in the stock market is imminent. The condition I believe we are seeing is similar to the mid-March to mid-April period this year. At that time, the market seemed to be overbought and ahead of where it should have been. That correction, in hindsight, appears to have been a mid-bull-market correction, which is usually a correction of 10% or more, as was that correction. It also lasted about four months. The coming type of correction is usually more of a modest correction of 2% to 5%. I would not be surprised to see the S&P 500 drop to the 1160 range. It should be short-lived. This is a healthy event for the market, as the correction should lead to a longer-term healthy market advance in an ongoing bull market. All and all the skeptics are still worried about the direction of the economy, but it seems to me to be advancing, though modestly. Ed Mallon

It's a Fright!

Yes, it's that time of year when the ghosts and goblins come out and scare us. You turn on the TV and there they are, looking right out at you with terrifying faces. The scary stuff you get in the mail isn't so bad because you can just look at it, know what it is and throw it out. Underlying all of this are people who are likely quite ordinary, and in normal times are probably not that scary. But here we are with a week until election day and the airwaves and mail is dominated by negative ads. As a nation, we have historically been optimists, looking forward to good things in the future. If you really believe all the negative ads, then none of the candidates for any office is any good! Have we become such pessimists with negative attitudes that we have brought this frightful development on ourselves? I don't know, but I assume the negative ads work to bring in votes. Early on, I decided personally that if a candidate did negative advertising, I would just not vote for them! Well, if I stuck to my decision, I would not be able to vote for anyone who is running. To me, it is scary that election day is only two days after Halloween. Could a candidate win public office by simply stating their position on issues? A friend of mine ran for public office a couple of years ago. His advertising was positive, explaining why he was running and for what he stood. He did not attack his opponent and spent a great deal of time going out and meeting the people. Near the election, I received an attack ad against my friend’s opponent in the mail. I was surprised and asked him about it. He had not seen the ad but had several calls about the ad. Apparently, the state party under which he was running did the ad. Because it is not legal to coordinate such advertising with the candidate, they just did the negative ad and sent it out. He called his opponent and apologized, but the damage was done. For the record, I don't like nasty and would like it stopped! Ed Mallon

News from the Front

Today was the big day when the U.S. jobs report for September came out. Rampant speculation led up to today on the level of job creation or lack thereof in the economy. As part of the report, the Labor Department reported that they had overstated the jobs created from April 2009 through March of 2010 by 366,000. This is a remarkable admission in itself, because even with these numbers, job creation looked dismal. The consensus leading up to the announcement was that, net, no new jobs would have been created. The report indicated that for the fourth month in a row, the economy shed jobs. While this is not good, much is to be blamed on federal and local governments that shed 159,000 jobs, about 77,000 of which were temporary jobs for the decennial census. The good news to me was the fact that the private services sector employment figures rose by 86,000 after rising 83,000 in August. In addition, temporary help services, a good gauge of permanent hiring, rose 16,900 after a rise in August of 17,700. On another front yesterday, the Labor Department announced that the initial claims figure for state unemployment benefits was 445,000, a drop of 11,000 from the previous week. The four-week average of new jobless claims fell 3,000 to 455,750. The trend here is good, with new claims under 450,000, but the four-week average is still over 450,000, and that needs to drop. Clearly, the major issue facing the U.S. at this time is jobs. This is not a harbinger of good things for the Democrats in the House or Senate. Lack of jobs means more pain and less consumer confidence. The Federal Reserve, because of the jobs report, will likely begin a stimulus program of their own. Back in December of 2008, the Fed dropped the overnight interest rate to near zero. Since then, it has pumped about $1.7 trillion into the economy by buying mortgage-related and government bonds. It seems likely now that they will add an addition $500 billion of purchases. The Fed next meets on Election Day, strange as that may seem. It appears that the idea of stimulus from the Fed sits well with Wall Street and has been driving the stock market up for the last number of weeks. Had the jobs report been better, the Fed would not be likely to increase the stimulus and the market would have retreated. Like Alice might see in Wonderland, a good jobs report is bad and a bad jobs report is good! I think we are moving up a long hill, even if it is slowly. Ed Mallon

The BK Index

Shock…that is all I felt when I saw the BK index soar last week. As background, I must remind you that the government indicated last week that, during the month of August, “core inflation” (accounting by the U.S. Government that does not include food or energy costs, but is used to calculate the COLA benefits for things like Social Security) was flat during the month. They did indicate that the “inflation rate” went up by 0.3% for an annualized rate of 3.6%. At the time, I didn’t think much about the statement because everything I had been reading indicated that inflation was “under control” and the worry was about possible deflation. Now back to the BK Index. I am a creature of habit, as my wife will tell anyone. When I leave my Denver office to come home I always stop at a Burger King on the way to the airport. I always buy a Whopper Junior with cheese, no pickle, at this same Burger King where they give me a free soda (no age disclosure). The cost of this meal has always been $1.35 ($1.25 for the meal plus 10 cents tax). Last week I went into my Burger King, ordered my Whopper Junior with cheese and was told my bill was $1.72! What? There must be a mistake! No mistake, I was told. The week before, prices had been raised at BK, and the Whopper Junior, which had been a mere $1 meal, was now $1.29, to add cheese was now 30 cents instead of 25 cents, and to make matters worse, the tax on my meal had gone up from 10 cents to 13 cents! As you read this I know what you are thinking: it’s only a burger and it’s only an additional 37 cents and he is still getting his free soda. True enough, but it is an increase of 27%. For the state of Colorado, it is an increase of 30%. I was truly shocked and began to wonder if something was happening in September that was being missed by everyone else. To go to the other end of the spectrum, I looked at the MB Index (Mercedes Benz) and discovered that the price on their bread and butter E 350 had gone up by 3.3% for the 2011 model year. Finally, in desperation, I checked the BB Index (Brooks Brothers). They always send me 25% off coupons to buy at their outlet store in Kittery, Maine. Not so for the latest coupons, which are only 15% off. That means the dress shirt that was $37.50 before would now cost me $42.50 or an increase of 13%. So I ask you, is inflation beginning to creep up on us, or am I being too selective? Personally, I think it is time for the Federal Reserve to signal that they are going to start inching up the Fed Funds rate 0.25% at each of their next meetings and get it up to at least 1%. Being careful and signaling what they are doing will have a mild effect on the economy, but will help them be in a better position if inflation heats up. Ed Mallon

Hey, Wait for Me!

You might be wondering where the stock market is going these days. As of the close on September 13th, the DJIA had gained 5.3% since August 31st while the S&P 500 was up 7% and the NASDAQ was up 8.1%. My, what is going on? Let's start by understanding that August was a very poor month for the market. To put it in perspective, the S&P 500 was down 6.8% in August. What we have seen, therefore, is a move back to where the market was at the beginning of August. This is not a bad thing; it’s just that you need to remember we don't have a runaway train on our hands! The news has been good. The private sector added about 67,000 new jobs in August. New unemployment claims last week were 451,000 vs. 472,000 the week before (we are looking for that number to go below 450,000 and will be happier at 400,000 or lower). The economy appears to have grown by about 2.85% from the end of September 2009, which is not great, but it is growth. Today, retail sales were reported to be up, which was totally unexpected. In addition, the winds of positive tax reform appear to be blowing in the right direction. The possible large increase in taxes in 2011 has weighed heavily on the markets. The idea of 100% write-off of new plant and equipment investment through next year sits well with me. I think its biggest impact is on large corporations that have lots of surplus cash to spend. The trickle down of this to smaller businesses, which will manufacture all or parts of the plant and equipment, is good. The one bone of contention seems to be taxes on those who earn more than $250,000 each year. The implication is that these are the "fat cats" but history shows us the "fat cats" can always figure a way out of paying taxes. The real burden of this measure once again falls on small business owners who have been massacred during this downturn with little or no help from the government. All in all, the economy is looking better, consumer confidence may be gaining, and the likelihood of a "double dip" is looking far less likely. So how do I feel about the market? Short term, I think it is too high. September is notoriously a bad month for the stock market as investors start to worry about the all-important third quarter earnings. I think that, between now and the middle of October, we may hit a rough spot or two. Looking out to the mid term and long term, I think we are still in a bull market that is going through a correction. Ed Mallon