Thursday, December 23, 2010

the new tax law

After weeks of heated Congressional negotiations on Capitol Hill, President Obama has signed the tax bill into law. The new law temporarily extends the 2001 and 2003 federal income tax rate cuts, extends unemployment insurance for 13 months, provides new payroll tax breaks, reinstates the estate tax, and more.

The good news: The new law will give taxpayers a bit of clarity—and an opportunity to plan with relative confidence knowing that the playing field won’t change dramatically, at least for two years. But beyond that, an increase in the Medicare tax for upper-income Americans is slated for 2013. And more changes are likely in the future, given the pressure to raise revenues to reduce the deficit, and talk of sweeping tax reform.

Cramer says Dow 13,365

People do a lot of top down analysis at this time of the year, trying to figure out how much the Dow and the S&P could go up--or down--in the coming year. That's not my style. As someone who is a stock picker, I like a bottoms up approach, analyzing each Dow component to come up with what I think the most visible index will deliver in 2011.

Here's my annual analysis, case by case, that adds up to a target of 13,365 for the Dow Jones next year -- a 16% gain from current levels and a bountiful return -- based on a prognostication of the performance of the individual members of the venerable index.

stocks still look cheap

corporations are sitting on a cash pile worth $1.9 trillion -- the largest, as a percentage of total assets, since 1959. Slowly, the money is finding its way into stocks. Without getting technical, the reason is simple: Stocks are offering a higher earnings yield -- a higher implied return -- than bonds.

For most of the past 30 years, the equity risk premium has been negative. This is because stocks offer the potential for capital gains and have built-in inflation protection. Bonds don't.

But now that's changed, and bond yields are lower than equity yields. So it makes sense to borrow cheaply (via corporate bonds) and invest. After all, stocks haven't offered this kind of premium since 1980, when Kenny Rogers topped the charts and "Star Wars V: The Empire Strikes Back" first hit theaters. By other measures, such as free cash flow yield versus corporate bond yields, stocks haven't been priced so attractively compared to bonds since the early 1960s.

Friday, December 17, 2010

11 Core Themes for US Investors in 2011

"You see, most blokes will be playing at 10. You're on 10, all the way up, all the way up...Where can you go from there? Nowhere. What we do, is if we need that extra push over the cliff...Eleven. One louder." ---Nigel Tufnel, Spinal Tap.

Our New Year gift to you: 11 brief themes that we see driving next year's markets. The three main theme groups are: Growth, Pricing Power and Business Model Changes.

Our macro backdrop has the world already moving into the Second Phase of the Bull Market. The global industrial cycle is re-accelerating again after an autumn dip, and the resulting upswing in IP should drive global equity markets higher in 2011. The recovery is poised to move from rebound to expansion as easier policy conditions support broader-based growth. The Capital Goods sector is well positioned to benefit from this bounce.

Among our Growth themes, we think in 2011 we will see the first growth market for Technology in over a decade. The main drivers of this shift will be both secular and structural including Cloud and Bandwidth Consumption. If Technology once again grows faster than nominal GDP, then watch out for an upward re-rating of that sector's valuation multiples.

In Pricing Power, we see inflation as a positive for certain retailers. Bring on Inflation for those oligopolistic sectors like supermarkets, home improvement and pet supply. In more competitive sectors like apparel & footwear it is the strength of
the brand that will determine the inflation pass-through ability.

And among the world's changing business models, we think the media and internet sectors may be severely impacted by Over-the-Top video. As internet-delivered video gains ground fast next year, those companies reliant on the value of their cable networks will likely feel a real squeeze.

[from Credit Suisse]

Monday, December 06, 2010

Bush tax cuts extended

Barack Obama is bowing to Republican demands to extend a deep tax cut for wealthier Americans, to the fury of some of the president's allies who say he has succumbed to "blackmail".

In a bruising political battle that appears to set the tone for Obama's dealings with the Republicans in Congress following their victories in last month's midterm elections, the president had sought to extend a tax cut for middle-class Americans introduced by the Bush administration seven years ago which expires at the end of this month. But he wanted to see a return to pre-cut rates for households with an income above $250,000 a year, on the grounds that wealthier Americans could afford to pay more. The move would generate trillions of dollars for the financially-strapped treasury over the next decade.

The Democratic leadership believed that provided the middle class was looked after, the Republicans would find it difficult to justify tax cuts for the wealthy. The House of Representatives, still controlled by Democrats until the new Congress is sworn in next month, passed Obama's plan by a clear majority last week. But Republicans blocked the legislation in the Senate at the weekend and said they would rather see everyone's taxes rise than agree to scrapping the cuts for the wealthy.

Some Democrats called on Obama to stand firm and let the Republicans carry the blame for the inevitable middle-class backlash. But leading Democrats say the president is backing down and has agreed to extend tax cuts for everyone. In return, the White House appears to have extracted an agreement to extend benefits for the long-term unemployed.

Today Obama said that his priority is to "prevent the middle-class tax increase" that would have come about if there was no agreement. "There's some serious debates that are still taking place. Republicans want to make permanent the tax cuts for the wealthiest Americans.

"I have argued that we can't afford it right now. But what I've also said, we have to find consensus here because a middle-class tax hike would be very tough not only on working families, it would also be a drag on our economy at this moment," he said. "We've got to make sure we're coming up with a solution, even if it's not 100% of what I want or what the Republicans want."

***

[12/17/10] WASHINGTON (AP) - President Barack Obama signed into law Friday a massive tax package that frayed his relations with liberals, caused him to abandon a pledge not to extend tax cuts to the rich and heralded a new balance of power in Washington.

Dramatic both as an economic and a political accomplishment, the agreement sets the stage for Obama's new relationship with Republicans, who as of January will have a majority in the House and will have narrowed the Democrats' majority in the Senate.

With the benefits of the package expiring in two years, the law also places taxes at the center of the political debate ahead of the 2012 U.S. presidential elections.

Displaying a new style of compromise, Obama invited Democrats and Republicans alike to the White House for the signing of the bill that will cost $858 billion over two years and that contains provisions to address the concerns of both parties.

"It's a good deal for the American people; this is progress and that's what they sent us here to achieve," Obama said as a rare bipartisan assembly of lawmakers looked on.

The bill was the result of a deal hashed out just 10 days earlier in order to avert a scheduled Jan. 1 tax increase and renew jobless benefits. To strike the bargain, Obama had to set aside his vow to extend tax cuts only for middle and working class Americans, and enact an estate tax that is more generous to the wealthy than he initially had sought.

Failure to pass the bill would have resulted in tax hikes for most Americans as cuts approved under the administration of former President George W. Bush were set to expire.

On Thursday, liberal House Democrats threatened to torpedo the bill forcing a delay and the House battled over the measure late into the night before passing the bill 277-148 at about midnight. The Senate on Wednesday passed it by an overwhelming 83-15 margin.

Supporters say the package, which included additional reductions in payroll taxes, could help stimulate the U.S. economy. But it will also add to a growing deficit that has become a big concern among many voters.

A number of conservative Republicans joined some liberal Democrats in opposing the bill for that reason.