Wednesday, July 27, 2011

Snail Mail or E-File?

EQUITY MARKETS HAVE BEEN BOTH up and down over the last three weeks, yet this volatility has done little but create more uncertainty. By the numbers, for the three weeks ended Friday, July 22, 2011, the Dow Jones Industrial Average closed at 12,681, up 99 points, or 0.7%. The Standard & Poor’s 500 closed at 1345, up 6 points or 0.4%, and the NASDAQ Composite closed at 2858, up 42 points, or 1.5%.

Apple completed its finest quarter ever, reporting revenue of $28.57 billion, and income of $7.31 billion, for gross margins of 41%. This compares to $15.7 billion in income and $3.25 billion in profits for the same period a year ago. Results were driven in large part by the sale of more than 20 million iPhones and 9 million iPads during the quarter.

New wireless technology may make it easier to provide WiFi coverage in even the most crowded spaces, including sports stadiums. Look for new wireless promotions at a stadium or sporting venue near you.

The Swiss Parliament is expected to begin discussion this year of a gold franc, a parallel currency to the Swiss franc. This initiative is part of “Healthy Currency”, a campaign endorsed by politicians from the Swiss People’s Party, a conservative group, and the country’s largest political party. These discussions in Switzerland are part of a larger global question about the place and value of national currency that is backed by nothing more than the taxing or printing authority of the issuing entity. With the “full faith and credit” that supports most currencies in doubt, and the obvious inability of any elected official to make meaningful financial decisions, it is time for discussions about the meaning of currency and the value of federal reserve notes, regardless of who issues them.

The smile on JK Rowling’s face is permanent, though her place on the Forbes 400 list will vary, depending in part on her ability to manage her new found wealth. “Deathly Hallows Part 2”, the latest, and apparently the last, Potter film, brought in an estimated $43.5 million on its opening day, setting a revenue record, according to Hollywood.com.

Though Las Vegas real estate has had a tough couple of years, it appears that Las Vegas could be the best place to own residential rental property; this according to HomeVestors of America. The employment outlook remains flat, as businesses continue to find ways to be profitable without adding new hires. We expect this to continue, as long as uncertainty remains in Washington. Some analysts are suggesting an official unemployment rate of more than 10% before year end. We will soon find out. Where do you think unemployment will be at year end?

Gold has continued to climb, breaking the $1600 per ounce barrier. Silver has climbed even faster. The gold/silver ratio currently stands at 40, whereas at the end of 2010, this ratio was 46. The gold/silver ratio was set at 15 in 1792, with passage of the First Coinage Act. Since the late 19th century, the ratio has ranged from the low teens to nearly 100, with the average between 47 and 50. Historically, the ratio has dropped during precious metals/commodities bull markets.

Express Scripts is buying Medco for $29.1 billion in stock and cash, combining two of the largest pharmacy benefit managers. My grandma would have a difficult time believing or understanding the debt foolishness going on in Washington. During the seven years between my grandfather’s death and her death, she saved enough from a $350 monthly social security check to pay for her own funeral.

On the economic front, government spending in 2011 will reach about $3 trillion, with 40% of that federal spending, and 60% attributable to state and local jurisdictions. Both the Consumer Price Index and the Producer Price Index declined in June, according to the Labor Dept. Initial jobless claims remain above 400,000, and housing starts remain at about 35% of 2006 levels.

In our last commentary, we noted that debt as a function of GDP in the U.S. was approaching 350%. This number includes official debt, as well as an estimate of a number of off-balance sheet items. Official debt as a function of GDP is 99% in the U.S., with 31% of this debt foreign-owned. By comparison, Japan’s ratio is 204%, with 7% owned by foreigners, and Greece’s ratio is 137%, with 75% owned by foreigners. This offers no comfort, as both Greece and Japan are in difficult situations.

According to some economists, if the U.S. economy grows by 3.9% annually over the next decade, our debt to GDP ratio drops to 83%. If economic growth averages 1.8%, our ratio comes in at 144%. Historically, the solution to economic growth has been legislative and regulatory certainty, combined with a favorable tax climate for the accumulation and deployment of capital.

Last year, two out of three Americans filed tax returns electronically. Some state and local governments are mandating electronic filing of certain returns. The New York Dept of Taxation and Finance mandates e-filing of sales tax returns, and they want taxpayers’ phone numbers and Social Security numbers.

Generally, this is no problem – unless you are Amish. The Watertown Daily Times, in an area that’s home to the Swartzentruber and Heuvelten Amish clans, reports some challenges with compliance among the Amish business owners. The Amish furniture makers and shopkeepers aren’t intentionally trying to be difficult. It’s just that they don’t have electricity, or phones, or social security numbers. Some of these shopkeepers have received letters suggesting a $50 penalty for every return not filed electronically, though the Dept. of Taxation and Finance says it wants to be helpful. This doesn’t include their discussions with bureaucrats over photo ID’s, and other requirements that don’t gel with the Amish lifestyle. What’s your opinion on the issue? Should we let the Amish maintain their way of life, or force them to comply?

Quote of the week:

“He is no fool who gives up what he cannot keep, to gain what he cannot lose.”
                                                                                                   -Jim Eliot

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