What I’m Watching This Week – 25 February 2013

Earnings and Taxes

As we get closer to finishing out Q4 2012 earnings we’ve seen a pattern of growth, can that be sustained into Q1 2013?  With 429 S&P 500 companies reporting for the fourth quarter, 72% have reported earnings above estimates, which places them marginally above the average of 69% recorded over the past four quarters.  In regards of revenues, 66% of companies have reported sales above estimates which are well above the average of 50% recorded over the past four quarters.  There’s growth there and the increase in the growth rate can primarily be credited to upside earnings surprises reported by companies in multiple sectors.  This week the blended earnings growth rate for Q4 2012 is 4.2%, nicely above last week’s growth rate of 3.6%.  For perspective, on December 31, the earnings growth rate for the index was 2.6%.  Looking forward at Q1 2013 earnings, analysts and corporations are lowering earnings expectations unfortunately.  The fantastic performance we saw in January looks to have been made irrelevant as February has kicked the market and the overall economy in the shins, with help for our stellar Government performance. Some 72 companies have issued negative earnings per share (EPS) guidance for Q1 2013, while 23 companies have issued positive EPS guidance.  That gives me reason to pause and take a deep breath.  A collection of analysts have taken down their EPS estimates also, as the estimated earnings growth for Q1 2013 has dropped to -0.2% from an expectation of 2.4% on December 31.  The Doom and Gloom crowd are queuing up behind the proverbial velvet ropes, waiting for the party to begin.

The due date for 2012 federal income tax returns is April 15, 2013 so you’ll want to start dragging things together a.s.a.p. that includes collecting a copy of last year’s tax return, W-2s, 1099s, and deduction records.  If you’re unable to file your federal income tax return by the due date, file for an extension.  Filing this extension gives you until October 15, 2013 to file your return.

You have until April 15 to make contributions to either a Roth IRA or a traditional IRA for the 2012 tax year. Up to $5,000 ($6,000 if you’re age 50 or older) in one of these retirement savings vehicles is worth considering, since contributing to an IRA can have an immediate tax benefit. That benefit comes in the form of a potential tax deduction–with a traditional IRA, if you’re not covered by a 401(k) or another employer-sponsored retirement plan (if your spouse is covered by an employer plan, you’re considered to be covered as well), you can generally deduct the full amount of your contribution. (If you’re covered by an employer-sponsored retirement plan, whether or not you can deduct some or all of your traditional IRA contribution depends on your filing status and income.)  With a Roth IRA; if you qualify to make contributions to a Roth IRA (whether you can contribute depends on your filing status and income), the contributions you make aren’t deductible, so there’s no effect on your 2012 taxes. Nonetheless, a Roth IRA may be worth considering as qualified Roth distributions you take in the future are completely free from federal income tax.  In all cases, contact your tax advisor for complete guidance.

I remain optimistic.  February has been a very interesting month and I suspect that the remainder of the week will hold further drama from the economic calendar (housing, consumer confidence, unemployment rate and jobless claims) and Capitol Hill.  Caution continues to rule the day with a heavy dose of skepticism that our elected leaders will discover the definition of compromise. Have a wonderful week.

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What I’m Watching This Week – 19 February 2013

Sequester = Correction

The economic data continues to be generally positive across most sectors except manufacturing and industrial production, where it remains weak but improving.  To the Doom and Gloom crowd that’s confirmation that the sky is falling.  Apologies to those in Russia, where the sky actually did kind of fall unexpectedly when that little meteor slipped under the radar (brilliant YouTube videos are there for those who missed it).  The U.S. markets added a seventh consecutive week of gains overall, although the Dow Jones and NASDAQ dipped slightly from uninspiring trading situations.  Initial jobless claims continue to record lower than forecast, and January retail sales were slightly positive. Housing inventory is down 16% year over year and also showing higher prices in many states across the Nation.  I won’t call it as continued bouncing along the bottom, but optimism right now increases the plausibility that we are on the verge of a nice uptick. The Global markets ended the week mixed, with Germany showing some continuing weakness, which humbled the other European countries ability to perform.  The markets are looking a bit exhausted but the pullback I had expected hasn’t arrived yet, which is a remarkable circumstance.  I do expect it to arrive and I have a feeling that our sincere politicians are about to lend a hand towards more than just a 3% pullback.

I was mad the other evening when my friend’s dog passed gas in my living room and stunk up the whole house.  My buddy admitted that his dog is actually a U.S. politician. Like them, he’s expert at fouling up the place.  The sad reality is that we get the government we deserve.   The Sequester is coming.  The elected mongrels voted to go into recess until February 25th; the Sequestration is to begin on the 1st of March.  If you’re expecting another eleventh hour reprieve from self-destruction, might as well stop now.  For all the positive attributes we have experienced this year, I’m convinced that these clowns are so entranced in their sophomoric visions, that they could largely care less what happens to the economy as a whole.  It’s about appealing to the narrowest, most ignorant, myopic electoral base they can, as proof that, they too have manure for brains and that no acknowledgement of responsibility needs to be taken to avoid our ruin.  The only people who can clean this house are those that want to clean house and the only way to do that is to vote out the idiots and destroy their good old boy network of organized crime.  It does no good to replace one piece of excrement with another.

I am optimistic in the market’s ability to recover from the utter absurdity of our elected morons.  Optimistic that the real acumen is held not in Washington D.C. but with the voting electorate.; they go to work day in and day out, striving for a better life for themselves and their families.  There’s no need for them to appease the Neanderthal Collective that piles lobbying cash and favors on the desks of our elected miscreants.  What Washington needs is an old-fashioned, medieval walloping.  A pox on all of their houses, I don’t discriminate, I’m an equal opportunity hater right now.  I believe in the American public, that’s what continues my optimism.

 

 

 

 

What I’m Watching This Week – 11 February 2013

Politics and government, have they both gone mad?

It’s Earning Season and I’m getting the sense that the Doom and Gloom crowd aren’t as enthusiastic is some others may be.  Of the 334 companies that have reported to date for the fourth quarter (Q4 2012), 72% have reported earnings above estimates.  This percentage remains above the average of 69% recorded over the past four quarters.  After reporting a decline in earnings growth in Q3 (-1%), we are currently seeing reporting companies earnings growth of 3.0% for Q4.  So what does that intrinsically mean in the big picture?

The good news, the nonpartisan Congressional Budget Office believes the U.S. budget deficit as a percentage of the economy, will shrink in 2013 for the fourth consecutive year.  The estimated $845 billion deficit would come in at less than $1 trillion for the first time in five years, and symbolize 5.3% of GDP, approximately half of 2009’s numbers.  That’s outstanding news and it is a clear indicator of growth for the U.S. economy.  But wait for it…there is bad news.  Without (reasonable and necessary) tax and spending modifications, the CBO said that the total national debt will be at 77% of Gross Domestic Product in 10 years, largely because of escalating health-care costs and interest payments on federal debt.  And how do we achieve tax and spending reforms in our era of injudicious government?

That, unfortunately, depends upon the U.S. Congress and by the way, Congress is about to go on an extended “President’s Day Recess” starting Friday.  While some of our esteemed elected officials seem more than willing to allow the sequestration provisions to take effect,  the Budget Control Act of 2011, created by these same congressional persons, will basically use a chainsaw instead of a scalpel to resolve some of our over the horizon fiscal issues.  What’s really very important here to understand is that the automatic cuts will reduce expected economic growth by at least 0.7% according to the Congressional Budget Office.  That may not seem like much, but when you drill down into what will be most affected by this, 0.7% is very significant.  Per the Office of Management and Budget, the 2013 sequestration would impose cuts of 9.4% in nonexempt defense discretionary funding and 8.2% in nonexempt, nondefense discretionary funding.  A 2 % cut would hit Medicare providers, 7.6% would affect other nonexempt nondefense mandatory programs, and 10% would be applied to nonexempt defense mandatory programs.  Sequestration would emasculate investments vital to economic growth; compromise the safety and security of the American people; and wreak havoc on programs that benefit the middle-class, seniors and children.  And after 2013 what are we facing then?  The required defense funding cut of $54.7 billion in each year from 2014 through 2021 will require reductions in the annual statutory caps on defense funding that the Budget Control Act sets for each of those years if sequestration is triggered.  Queue the cheering section of the Doom and Gloom horde.

I remain optimistic.  We have been hearing about Jobs, Jobs, and Jobs for years now; the economy is growing and we are obviously in an expansion phase.  No, we’re not out of the fiscal depths to ensure rapid growth, but we are getting there.  Unfortunately, to me, we have a government that appears to thrive on chaos.  24/7/365 it’s all you hear and see.  The Chaos Theory hypothesizes that everything that happens affects everything that happens afterwards.  With the blunt force of the Sequestration, it would be a good time to reexamine just what it is that our Government is trying to accomplish.  The Congress and the White House are in deadlock as America’s watches in disbelief, with Obama in campaign mode and Republicans scrambling for some iota of leverage, James Madison, our fourth president and father of the constitution must be rolling over in his grave.  I remain cautiously optimistic.

What I’m Watching This Week – 4 February 2013

What rhymes with Sequester?

Here it is, February 2013, yes, February. Time flies, when you’re having fun, right?  New month and guess what, the next self-created fiasco is upon us, the Sequester.  Why do we keep doing this to ourselves, again and again?   Maybe the Congress is actually composed of sadists and fetish lovers, who have some sort of bizarre need to inflict a festering wound at every opportunity.  Long story, short, the Budget Control Act of 2011 authorized an increase in the debt ceiling in exchange for $2.4 trillion in deficit reduction over the following ten years.  $1.2 trillion cuts in the spending for some specifically identified areas (defense and entitlements cuts that are currently in place now) and $1.2 trillion that are to be determined by a congressional super committee (super dysfunctional, more likely).  Sequestration is meant to reduce spending across the board (affecting all departments and programs by an equal percentage.  Failure of the Super Committee to propose and for Congress to put in place a plan to reduce the U.S. Federal Budget by $1.2 trillion, the Act sets into motion automatic cuts for core government functions and deep cuts to the national security apparatus. We just witnessed, last week, the effect reduced defense spending had on Q4 GDP, a -0.1% growth estimate.  Raise your hand, if you’ve seen this before. Do we really want to stare a recession in the face again?

Not to be outdone the stock market is sending, in my view, very obvious signals that implies a pullback of between 2 to 5% over the next few weeks or so, ironically leading right up to the March 1st deadline before the Sequester goes into effect.  Some savvy, individual investors are already preparing for this market action by shifting out of the stock market (approximately $400 billion during this current bull market) while others are, to me, unfortunately buying at the current top.  It looks oversold to me, but conversely, markets that are in theory, overbought, can stay that way for some time.  It’s a tough call and I’ll defer to caution right now.  January gave us a fantastic run of nearly 6%, practically half of what the S&P 500 returned in all of 2012 and basically 80% of what the Dow Jones returned in 2012, it’s okay to take some money off the table and disengage the cruise control.

I remain optimistic.  Q4 earnings reports continue to beat on both the top and bottom lines. Employment continues to improve, housing continues to show consistent growth and personal income is showing some encouraging progression (albeit significantly weak historically).  All considered things are getting better on the whole; the world economy isn’t in free-fall either.  Globally it’s a slow growth period.  Yes, there’s the potential for it all to reverse, all the more reason to use caution, reassess your equity positions and move some profits to the sidelines at least until we get more clarity of the Sequestration. Call me the polyester sequester investor this month, I’m not willing to allow anything to stick to me while I remain cautiously optimistic.