Fiscal Confusion from Sea to Shining SeaNov 29, 2012
Just as a full moon brings out all of the wierdos, the looming Fiscal Cliff has done the same. Market dislocations are here to stay. Quit complaining and start profiting.
Tired of Fiscal Cliff talk? Join the club.
From a pure behavioral perspective, the threat of $600 billion in automatic tax hikes and spending cuts by the U.S. government (AKA, Fiscal Cliff) has brought out both the best and worst in people everywhere.
Group one are the people completely unaware of the issue, living their daily lives, unfettered by anything – except maybe the fact that Starbucks (NasdaqGS:SBUX) now sells a $7 cup of coffee.
Group two denies the existence of “the Cliff.” (See Paul Krugman, Mr. Keynesian extraordinaire) As true financial atheists, this group also denies the existence of budget deficits, bankrupt entitlement programs – and depending on the day – grown up concepts like financial accountability.
And what can be said of Wall Street’s titans? (No, not the ones being indicted for insider trading, but the other ones.)
No less in the very same week, we just witnessed Warren “Op-ed” Buffett suggest a minimum 30% tax on anyone earning over $500,000 annually along with endorsing Jamie Dimon as the next U.S. Treasury! (Read it here: Buffett Backs Dimon for Treasury) I know my memory is failing me, but isn't Dimon the same CEO who characterized JPMorgan's $5 billion trading blunder as a "tempest in a teapot?"
What do Berkshire Hathaway’s “wealthy” shareholders (NYSE:BRK-A) think about Buffett’s antics? Do they approve? And if Jamie Dimon is such a financial visionary, why doesn’t Buffett hire him to work at one of his portfolio companies like Wells Fargo (NYSE:WFC)? And since he knows so much about taxes, maybe Warren can become the next IRS Commissioner.
Then there’s group three - Wall Street. What do they think about all of this?
“World Economy in Best Shape Since 2011” – Bloomberg
“Why the Fiscal Cliff is Bullish” – MarketWatch
“Wall Street Increasing Bullish about 2013” – NBC News
The latter bullhorn had this to say:
“Even the bears are bullish for 2013, a year in which virtually every Wall Street expert believes the market will overcome its many headwinds and post a positive year. While retail investors have been preoccupied with worries over fiscal Armageddon, an election that is now past and a global economy nearing stall speed, strategists have been busy with projections that see sizeable stock gains. Their reasons: A U.S. economy that is on the mend due to the nascent housing recovery and an expected surge in earnings, more cheap money from the Federal Reserve, and a general feeling that none of the various-worst scenarios out there will come to fruition.”
“Even the bears are bullish for 2013?”
Interestingly, no confirmed “bears” were even interviewed in the article. Presumably, they weren’t available for comment because they were too busy preparing their parachutes for “the Cliff.” Meanwhile, the bullish “Cult of Equities” is acting – well, very cult-like (NYSEARCA:SPY).
Fiscal Cliff or not – we’re surrounded by market dislocations. A $7 cup of coffee costing more than a $5 draft beer should be proof enough, but in case it isn’t, consider this:
• Income investors are getting slaughtered by low rates, which the Fed has pledged to keep through 2015;
• 15% of the U.S. or 22.4 million households are on food stamps;
• Nationwide unemployment rate is still too high, 14.6% (U-6 figure);
• Artificial interest rates are triggering a new round of reckless borrowing; (See BATS raising $300b to pay a special dividend along with profit challenged Amazon.com raising $3 billion in the bond market for the first time in 15 years.)
America’s aging population is another onerous problem, which the October edition of the ETF Profit Strategy Newsletter thoroughly analyzed. Our aging demographic of 50+ years old people has a lower tolerance for risk, a higher need for income, and a shorter distance to reach their financial goals.
Higher taxes will hit this group hard.
For dividend dependent investors (NYSEARCA:DVY) – a tax increase on dividend income from 15% to a top rate of 39.6% is the one-two punch below the belt. (BernanQE’s low rates is the other) Don’t be fooled: The acceleration of dividend payments by corporate America ahead of 12/31 is just a short-term fix. Beyond that, income investors will be on their own. They’ll have to come up with something better than chasing penny stocks and illiquid bonds yielding 15%.
The anti-income investor world we live in requires an aggressive but unconventional touch.
To that end, our $100,000 all ETF IncomeMix Portfolio has generated just over $9,400 in monthly income year-to-date by combining both dividend income and money from covered calls. Our strategies even generate cash flow on non-income producing assets like gold (NYSEARCA:GLD).
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