Capital Ideas Newsletters


Good Cheer

November/December 2012

According to the Investment Company Institute, assets in retirement plans have reached a level of $18.5 trillion. The prospective tax on these funds is a huge receivable held by the U.S. Government. As baby boomers retire, the tax revenues from this pool of money will help with the nation’s deficit.

It is a disgrace that Congress cannot get its act together to serve the American people, but it is also disappointing that our President cannot lead the two sides to a compromise. Cliff or no cliff, this whole situation speaks to the need for reforming our federal budget process as well as federal election laws.

If all the shenanigans in D.C. result in higher taxes and lower government spending, we believe that interest rates could move lower (the ten year note could go down in yield!). If rates do fall, it will support the rate refinancing boom. In this event, consumers will have additional disposable income.

To the extent that BRIC countries (Brazil, Russia, India and China) are slowing, it could put a dent in world growth. Furthermore, if the fiscal cliff is not averted, the impact could be a 2-4% drag on the U.S. economy.

As we move toward year end, weakening corporate revenue is a new concern for investors. As a group, the S&P 500 companies experienced a revenue decline of 0.8% in the third quarter. Earnings of these companies, however, were still slightly better than expected.

Do dividends matter? Over 200 years, from 1802 to 2002, Barclays reports that U.S. equities delivered a compound annual nominal return of over 7%. Of this, a full 5% came in the return from dividends, 1.4% from inflation, 0.8% from real dividend growth and only 0.6% from revaluation of equities over the period.

Online holiday shopping is off to a brisk pace. It seems that Christmas shopping starts earlier every year. Promotions are bountiful and our expectation is for a reasonably good retail season. We are, however, concerned about the first quarter of 2013 as a likely higher tax environment may slow consumer spending.

All this does not present a pretty picture, but what it does do is get everyone’s attention on dealing with the problems—the time is now. The good news for the markets is that there is so much money around and big corporations are generally flush with cash, such that a resolution of these issues could have a very positive impact.

Hurricane Sandy walloped not only the environment, but took a nice bite out of the economy. The boomerang effect is that roughly $60 billion will be required to put “humpty dumpty” back together again. The good news is that these dollars will fuel economic growth next year.

What the “frack” is happening in the oil business? Could it really be that the U.S. is destined to be energy-independent by 2020, only eight years from now? Speaking of oil, the Arab spring is gushing chaos. Hopefully the U.S. will be able to exert enough influence to keep a lid on it, but our guess is that more chaos is going to follow.

Asset allocation will be critical next year. You should discuss your financial needs and objectives with your advisors in order to be prepared for the volatility, which we believe will be prevalent.

We end the year with a beautiful quote by Eleanor Roosevelt who said: “A mature person is one who does not think only in absolutes, who is able to be objective even when deeply stirred emotionally, who has learned that there is both good and bad in all people and all things, and who walks humbly and deals charitably with the circumstances of life, knowing that in this world no one is all knowing and therefore all of us need both love and charity.”

Let this wisdom govern our actions in the coming year.

May you be blessed with good health, joy and peace of mind.

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