SUMMER TIME AND POLITICAL INEPTITUDE HAVE combined to create a difficult few weeks for domestic equities. By the numbers, for the two weeks ended Friday, August 5, 2011, the Dow Jones Industrial Average closed at 11,444, down 1237 points, or 9.6%. The Standard & Poor’s 500 closed at 1199, down 146 points, or 10.9%, and the NASDAQ Composite closed at 2532, down 326 points, or 11.4%.
The last two weeks have been challenging in the publicly traded equity markets, and there is almost no escaping the news. Whether it’s around the clock cable, email alerts, the car radio, or something as simple as hitting a news report while channel surfing, bad news seems to abound. Part of that is pure business – bad news brings viewers and listeners, and sells advertising. Another piece of it seems to be our need for white noise in the background of our lives.
So what happens if you escape to silence? What are you talking to yourself about? What does life look like? Do you ever think about what you think about, or is the noise of life so constant that the idea to do so has never crossed your mind?
Congress reached an agreement on the debt limit, and Standard & Poor’s downgraded the U.S. credit rating, from AAA to AA+. The U.S. credit rating now joins the ranks of China and Spain. Netflix, one of the companies to challenge Blockbuster, is now having challenges of its own. Between a change to their pricing model, and competitors who provide streaming video, Netflix is giving up customers, and the related recurring revenue.
Many U.S. companies are having new hires agree to a social media background check, as part of the hiring process. This gives employers a more rounded view of the behaviour of potential hires, as Facebook, Youtube, and other social media outlets have a strong personal use component, and many can’t resist posting far too many tidbits about their personal lives.
ExxonMobil’s earnings of $2.18 a share for the second quarter missed analyst’s estimates of $2.30, apparently due to their natural gas exposure. The CBOE volatility index, or VIX, almost doubled in the last week, and is on its way to a 52 week high. Bank of New York Mellon is telling its best customers, those with more than $50 million on deposit, that they will start paying for the privilege of leaving those funds on deposit. Effectively, a negative interest rate?
America’s largest companies continue to show solid profits, and continue to hold large cash positions. No doubt this will remain the case until our federal politicians and their employees can articulate certainty about how they will interact with us from a tax and regulatory standpoint.
Speaking of uncertainty as fostered by the federales, the U.S. Treasury Dept appears ready to audit GM’s quarterly results. Perhaps the government should have left GM alone to start with.
On the economic front, it’s more of the same. There were new hires, but not enough to meet the demand for jobs. Consumers are paying down debt, instead of spending, which is a positive. Many consumer goods companies continue to be profitable worldwide, in spite of the domestic spending slowdown.
The Budget Control Act of 2011, the recently passed legislation that allowed the government to continue to function, will result in the formation of a bipartisan joint committee. This committee’s responsibility will be to propose tax changes to be voted on before year end, which will raise $1.5 trillion over ten years. At this point, it is unknown what tax changes may take place to raise this $1.5 trillion.
It is foolish to speculate on what Congress may do regarding taxes. The White House has long been a fan of higher income taxes for those individuals and families above the $200K/$250K annual AGI mark. Other ways to raise funds include making the value of employer provided health benefits taxable as income to the employee, eliminating the AMT, or changing the tax calculations on capital gains.
Congress could also restrict “tax expenditures” – that which the rest of us consider income. This could include restricting or eliminating deductions for property, sales or state income taxes, mortgage interest, charitable contributions, and a number of miscellaneous itemized deductions. This could also include health insurance costs above the 7.5% limit, and perhaps even above the line deductions such as tuition deductions, and deductions for self-employment taxes and health insurance. Tax credits such as the child tax credit and the unearned income credit are also up for consideration.
Keep in mind that, under the Act just passed, Congress must vote on these changes before year end. Any changes may, and most likely will, alter the extension of the current tax regime that took place in December of 2010.
In a summary attributable to Dave Ramsey, he describes the U.S. as a family, with a household income of $58,000, annual spending of $75,000, and $327,000 in credit card debt. The recent Budget Control Act would reduce spending to $72,000.
Quote of the week:
“A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement – and shall not take from the mouth of labor the bread it has earned – this is the sum of good government”.
Thomas Jefferson
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