Archive for Government

2016 Election and the Stock Market

People have been calling me and cornering me at social events asking:

“What will happen to the stock market after the election”? In the short run of a day or a week there may be a bit of an adjustment. The real issue is the next four years.

Avoiding any political statements I address this strictly from an economic stand point and as a business owner. Unfortunately, I find most Americans cannot connect the dots when economic policies are presented.

Let’s examine things in light of Economics 101. What moves stock prices? Answer: Earnings (or some call it profits). As a simple example lets say we want to buy a “pizza shop.” The present owner has been earning (making a profit) of $100,000 per year. Lets say the profit equates to “cash profit.” Assume there are 100,000 shares outstanding so the pizza shop’s earnings per share are $1 each ($100,000 profit divided by 100,000 shares). A general rule of thumb is that one would pay about 4 – 5 times earnings (or profits) for a small business like the pizza shop. This is known as the PE ratio or the price earnings ratio. In our case that would equate to a selling price of $400,000 – $500,000. Thus, without changing anything and earning the same $100,000 per year, we, as the next owners, could get a return on investment in 4 – 5 years, or, in other words we are demanding a 20% – 25% annual return (simply divide the selling price $400,000 – $500,000 by the $100,000 profit to get the return number). The present owner would be selling each of the 100,000 shares to us at $4 – $5 per share ($400,000 – $500,000 sale price divided by 100,000 shares).

Now let’s assume after we buy the pizza shop we institute some changes, i.e., getting discounts for buying in larger quantities, teaching employees to be more productive or adding technology so we are able to now earn $200,000 in profit after tax in the next year.

What are some of the outcomes of our changes and hard work: (1) With higher profits more in taxes now go to the government. We see the need to begin advertising since we can now handle more business so the advertising company hires more people (who pay income taxes) to handle our account. We also hire more people to handle the anticipated new business (and the new employees pay income taxes). We ask for more products from our vendors they do the same and so forth and so on. This is known as the multiplier effect. By the way I am not advocating a love of taxes but rather showing the outcome of a growing business and economy. So, with Adam Smith’s “Invisible Hand” principal more people are working, which means they are off the Government dole, more taxes are flowing into the Treasury and more of our new customers are happy.

As a side bar, since our business is now making $200,000 per year (or $2 per share on 100,000 shares) the next buyer would be willing to pay us between $800,000 and $1 million or $8 – $10 per share under the classic 4 – 5 times price earnings multiplier. If we decide to sell the business we would owe taxes on the difference between the selling price of $1 million and what we paid originally of $500,000. So, it is the INCREASE IN EARNINGS that push up the stock prices. By the way the P/E ratio for the S&P 500 has averaged around 12 – 13 times since large companies are more stable and you would demand lower rates of return. I am using a small business example to explain the concepts. Keep in mind the companies that make up the stock market act similarly in concept to this small pizza shop.

Here is a major input to help you understand companies and the stock market. If you took all the companies in the U.S. from the small pizza shops, to grocery stores to Apple computer and added up their profits, the average profit for all the companies in the U.S. comes out around 4.8% (before tax). Yes, it is not the gigantic number people think exists. Grocery stores work on 1% profit while the “sin” companies like alcohol, tobacco etc. have much higher profit margins.

As any business owner, just like any employee, I want to maintain my income (earnings) and lifestyle. Let’s say we are able to maintain the earnings or income of $200,000 per year (or $2 per share) as noted above.

Next, let’s say my expenses skyrocket overnight because the government imposes higher income taxes on our profits, imposes costly new regulations and forces me to buy expensive health care insurance for employees. So, without any change in sales, expenses have gone up and my profits drop back down to the original $100,000. Please keep in mind it is not just our pizza shop that is hit this way. The advertising agency and all of our vendors are hit the same way plus all the other companies in the U.S.

So to maintain our lifestyles we have 3 options: (1) Raise prices, which will make us uncompetitive and is purely inflationary. (2) Cut costs by laying off employees which will restore our profits and lifestyle and make our employees miserable, or, (3) shut down the business. In all 3 options the Government will lose tax revenue and many people lose their jobs who now become a burden on society again by going back on the Government dole. How about selling the business? Well at $100,000 in profits we might get our original money back of $400,000 to $500,000 but the new potential owner has looked at our books and seen profits dropping plus costs going up, so I doubt we can get our money back in a sale.

Who loses here: The Government, employees and entrepreneurs.

Remember small businesses produce 70% of all new jobs created in the U.S. In the past year, for the first time in U.S. history, more small business are shutting down each month than are opening. Tragic!!
Small businesses are just a reflection of large businesses that make up the stock market.

Are you connecting the dots yet?

I hope you have the answer after this long winded explanation of what will happen to your wealth in the stock market after the election.

One candidate wants to (1) lower taxes on business (we have the highest corporate tax rate in the world. That is why many companies are leaving the U.S. and we lose jobs). Every time the Government reduces tax rates more tax revenue is generated. (2) This same candidate wants to reduce costly regulations that stifle the ability to start and maintain a business. (3) This same candidate wants to revamp the out of control costs to business of Obamacare. If this candidate can do this, it will lead to an explosion upward in business growth, employment, tax revenue and the stock market going through the roof which means your wealth will skyrocket.

Who wins here: The Government, employees, entrepreneurs and society as a whole.

The other candidate wants to increase taxes, regulations and health care costs.

This simple article has only covered a few policies that are on the table that separate the candidates. My desire was to answer the question on what will happen to the stock market.

Well, I hope you now can calculate and understand where the stock market will be in the next 1 – 4 years based on who wins the election.

In the great words of Mayor Daly……

“Vote early and vote often.”

Gold Looking Forward

The halcyon days for gold in the late 1970s were distinguished by soaring inflation and double-digit interest rates, both of which are conspicuously absent. Geopolitical upheaval around the globe is an obvious analog to that period, but now it has had the effect of pushing the dollar higher-ironic, given the low esteem in which the U.S. is held in much of the world.

Massive Fed money printing has totally failed to produce the inflation that was widely predicted. In fact, Ed Yardeni Research, posits that QE ironically has had a deflationary, rather than inflationary, impact.

Much of the abundant, cheap Fed-created credit has gone to finance projects to expand supply, not just demand. For instance, expectations of booming demand for commodities, in part from China, spurred expansion of supplies. In addition, opportunities in U.S. oil production made possible by hydraulic fracturing and easily available financing in the junk-bond market, helped spur the shale boom. Along with globalization, these supply-side boosts have kept a cap on prices of tradable goods.

At the same time, the Fed’s simulative policies were supposed to mean an inevitable rise in interest rates. But nearly six years after the Bernanke Fed cut its key short-term rate to virtually zero, it’s still there. The near-universal prediction is that the liftoff will take place next year.

The Treasury securities market doesn’t see signs of inflation. Each time the Fed talks about raising short-term rates, the inflation premium in long-term government bond yields comes down.

Long-term bond yields should remain low as a result, which should underpin the stock market. Lower-risk stocks that act like bonds, such as utilities and health care, should do best, with lower bond yields, rather than market expectations of higher future earnings.
Based on our recent history, a period of low inflation, near-zero interest rates, and sluggish growth would seem an incongruous time for gold to shine. Gold, after all, is supposed to be an inflation hedge.

But there is a precedent for the metal to act well in a disinflationary or deflationary period: the 1930s, when countries devalued to gain global markets. So, with central banks printing money like never before, maybe it really isn’t so different this time.

Disability Payments For Those That Are Not Disabled

The present administration continue to advocate taking from the “haves” and giving to the “have-nots”. Over the past 6 years the labor participation rate (the number of people working full time divided by the number of people available to work) dropped from 95% in the 1970’s to around 88% today. This is the lowest in U.S. history.

At the same time unemployment benefits were extended six years ago from 26 weeks up to 99 weeks now. Basically, there are not any incentives to go to work if one is being paid for 2 years to do nothing. As these 99 weeks of benefits ended the present administration lowered the requirements to receive lifetime “disability” payments.

Presently, the average monthly disability payment to an individual seems to be about the same as the monthly full-time minimum wage. Hence, the 40 hour work week is competing against the zero (0) hour work week for the same pay.

In addition, a person deemed “disabled” can qualify for FREE health insurance, food stamps, public housing, transportation services, free education and student loan forgiveness. It should not take anyone too long to figure out why so many people are applying for and receiving disability benefits.

True, there are people in our society that are truly disabled and need and deserve our help. But, these “freeloaders” are going to ruin it for those that really need the help.

Contact your representatives and let them know how you feel.

Gathering Debt Storm

The Congressional Budget Office (CBO) keeps warning that the nation’s debt is building so the fiscal ship is going to hit an iceberg.

The warning cited a similar crisis in Argentina, Ireland and Greece as examples. The crisis is not imminent so politicians will not address the issue since it will happen after they leave office.

Federal debt held by the public is at 74% of GDP and set to rise dramatically over the next 10 years to 180% and climb from there. The next 10 years will be the calm before the storm. In 10 years, the baby boomers cohort will be age 62 to 80. Combine that with a slow expansion of the working age population and grim demographics are baked in the cake.

Add to this, the growth of federal spending for Social Security, Medicare, Medicaid, CHIPS and Obamacare and it is evident that federal spending will swamp revenue.

The government will need to keep borrowing, which creates the “crowding out effect”. As the government borrows more, it crowds out savings available for investment into capital goods, which makes workers more productive. Wages are primarily determined by workers productivity, thus reducing wages.

Also, with the huge amount of debt, the government will not be able to use borrowing to respond to financial crisis.
As the debt continues to grow, the public will be less willing to lend to the government thus pushing rates higher.

What to expect: I have mentioned many times in this blog that the long term plan of the “spend and tax” politicians is to raise taxes to 60% for those making $50,000 to $100,000 per year. Just look at the facts. In 1980, the top 10% of income earners paid 49% of all taxes. In 2011, the 10%, those with AGI above $120,000, paid 68% of all personal income taxes.

We are here to help you develop tax free income sources that will never be taxed. Forewarned is forearmed.

Government Accounting

Government Accounting (GA) is an oxymoron like… jumbo shrimp and water landing. The Government is so huge that it can manipulate the numbers and who among us has the resources to “take them on.” Oh yes, the true numbers are there but they are buried in back page foot notes. See the 2013 Financial Reports of the U.S Government for reference to this article.

The budget deficit and debt are substantially higher than the politicians tell us.

In truth, our country’s existing legal obligation exceeds $90 Trillion which is WAY above the advertised $17 Trillion of debt, and, 6 times our GDP (Gross Domestic Product) Go ahead say it… we are Greece many times over! The deficit claimed in 2012 was $1.1 Trillion, in real accounting it was close to $5.8 Trillion… a mere $4.7 Trillion oversight.

If you add in all costs associated with our Social Insurance program to the amount shown in the Financial reports, well, over the past decade the Feds spent $88 Trillion. Tax and fee revenue coming in was only $22 Trillion. So, a $66 Trillion overspending. Again, it is not that taxes are too low, rather, spending is too high – Duh! As long as the voters promise to vote them in, then, the politicians will continue to fill the pig trough for them to eat.
Take heed! Hedge your dollar investments, prepare for inflation and move money quickly into investments that will not be taxed ever!