Mark Steyn of the National Review Online wrote a brilliant column recently. He noted that for more and more Americans the tax season has become a “spectator sport”. The Tax Policy Center says that for the 2009 tax year 47% of Americans will not pay a single penny of federal income tax. While they may pay state, property and FICA it still remains true that almost half the country is making a ZERO contribution to help pay for all the expensive services the federal government is providing.
Within a few years this percentage of ‘non-taxpayers’ is likely to handily exceed 50% of the population [not even taking into account illegal aliens who don't file tax returns anyway].
When you personally owe no federal income tax then every program is ‘free’ to you and you have no concerns over tax rates or wasteful spending since it never affects you except in determining what you are receiving. To these non-taxpayers every new entitlement is a good entitlement.
Our founding fathers knew better. Originally, only landowners voted as our founders understood that only the people that pay the bills should decide how to spend the money. Today with half the voters only on the receiving end we’ve gone completely the wrong way. Indeed, that was the entire 2008 presidential campaign in a nutshell… “Vote for me and I’ll only increase taxes on those making $250,000 and up. Everybody else will pay less than they do now.”
That big lie, in a time of extreme economic distress, was enough to swing the election. Unfortunately, to the detriment of our country.
In the latest tax year the top 10% of the population paid 75% of all federal taxes. In the less than 250 years since the American Revolution Mark Steyn notes that, for about half our population, it’s already gone from “no taxation without representation” to “representation without taxation”.
The heavy insider selling late last July turned out to be a false signal but the December signal was spot on in predicting January sell-off.
The April bearish indicator came almost exactly one week ahead of the YTD top for all four indices shown at the right.
The good news is that we’re clearly back in bullish territory based on this easy to understand, readily available chart.
The charts are from the May 31st issue of Barrons.
The new Bloomberg Businessweek notes that Google has hired a number of investment professionals to manage its $26.5 billion [and growing] corporate cash stash. Google has also set up its own trading floor. These top flight professionals are well paid by any standard but earn less than many Wall Street pros. Why? While Google may pay less than elsewhere this is offset by stability. Google is sure to be around and it’s known as a great place to work.
Compare this behavior of hiring in-house talent at reasonable compensation to what most government agencies are doing. Morgan Stanley is set to earn between $23 million and $135 million in fees for helping to sell the government’s stake in Citigroup. They’re going to get 0.3 cent per share for each electronically routed sale and an astonishing 1.75 cents per share for those traded through block sales. This is on top of a flat $500,000 fee just for taking on this less than taxing job. Will Morgan Stanley truly add millions of dollars of value to the straightforward multi-month sale of the government’s 7.7 billion shares? It’s highly likely a systematic dollar cost averaging technique could accomplish equal or better results without incurring any fees. Indeed, Citigroup itself was one of the companies seeking to handle the sale of shares. Had they done it in-house those hefty fees would not be reducing the value of the company.
Also, by pre-announcing their intention to sell their state, our leaders almost certainly cost taxpayers money. Any other greater than 5% owner would have sold what they could prior to filing the required disclosure of the sales that had already occurred. When the announcement was made on March 26th, Citi had closed at $4.31 /share. When the story broke on May 26th saying that 20% of the government’s position had been liquidated, Citi shares had fallen to close at $3.86.
Enigmatically this is how the story was reported by the AP…
“The Treasury Department said Wednesday it raised $6.2 billion from the sale of 1.5 billion shares of Citigroup stock it received as part of the government’s rescue of the bank.
The stock sold for an average price per share of around $4.33, Treasury said …”
By my calculations $6.2 billion divided by 1.5 billion shares equals $4.13333 /share. I wonder how they arrived at their $4.33 /share announced average price.
The trading is complete for the month of May 2010 and it wasn’t pretty. The DJIA was down 7.9%, the Nasdaq composite dropped 8.3%, the Standard & Poors 500 lost 8.2% and the Russell 1000 declined by 7.3%. That was the worst monthly performance since February of 2009 just before the nadir of the last bear market culminated on March 9, 2009.
Looked at another way, though, here are the YTD figures for those same indices…
Ø DJIA ……………………………………………………………………………….. (-2.8%)
Ø NDAQ Comp ………………………………………………………………….. (-0.5%)
Ø S & P 500 ……………………………………………………………………….. (-1.7%)
Ø Russell 1000 …………………………………………………………………… (-1.7%)
With the DJIA now about 10,137 a one-percent move equals a Delta of over 101 points. If you’d gone into a coma on New Year’s Eve and just awoken you’d be hard pressed to look at the YTD changes with anything but a yawn.
This is all the more reason to have been, and to continue to be, a writer of options where you can have ‘time decay’ working in your favor and today’s high volatility readings creating great options premiums for those willing to sell volatility.
If the market continues to move up and down readily without going anywhere you’ll be in fine shape at the end of the day.
Dr. Paul Price for OptionsProfits.com
May 29, 2010
Today’s Wall Street Journal and almost every major television network reported that the National Oceanic and Atmospheric Administration projected a 70% chance of 14 to 23 ‘named storms’ this season with a range of 8 – 14 growing into hurricanes. That would translate into a much worse than typical hurricane season if it proves correct.
Don’t bank on it though. In the previous eight years only two seasons saw the actual storms fall into the predicted ranges while the other six years saw results both way above (twice) and well below (4 times) the entire ranges that were projected by the ‘experts’.
This year, wanting desperately to avoid another embarrassment, the NOAA has issued its widest predicted range ever [from 8 – 14] while also hedging with its ‘70% chance’ qualifier. Make a big enough range and it gets much more likely to be correct. Give that expanded range a 70% probability ranking and then, if things don’t come out as predicted, you can merely remind us ‘non–experts’ that you said there was a 30% of the result being something else anyway.
It all reminded me of stock market predictions. Technical analysts tell us that they’d be bullish on the market “if it can hold above some level on the index” but that they’d have to turn bearish “if support was breached on the downside”. In others words they’re bullish if it keeps going up and bearish if it’s already gone down.
It’s really hard to be wrong when you cover all bases.
Our official national debt total is fast approaching a new milestone - $13 trillion – yes, trillion with a ‘T’. That’s such a big number that to most of us it’s incomprehensible.
On a more personal level it amounts to approximately $42,000 per man, woman and child in America. With about half of that amount coming due within a two-year period that makes our debt burden somewhat like “The Largest Adjustable Rate Mortgage” in the history of the world.
With short-term rates now near zero the interest burden does not appear too oppressive but imagine what we’ll owe as a nation when rates start ticking up. Is it any wonder why Uncle Ben Bernanke wants to keep Fed funds at low levels for as long as possible?
There’s big trouble just down the road when the interest payments on the national debt start reaching unsustainable levels in terms of their percentage of total GDP.
Automatic Data Processing, Inc. [ADP: $40.30] expects nearly $9 billion in revenues from approximately 570,000 clients. They are one of the world’s largest providers of business outsourcing solutions. ADP offers the widest range of HR, payroll, tax and benefits administration solutions from a single source. ADP is also a leading provider of integrated computing solutions to auto, truck, motorcycle, marine and recreational vehicle dealers throughout the world.
After decades of consistent growth ADP’s earnings have likely plateaued in the FY ending June 30th. As the largest provider of payroll and tax filing services to large businesses ADP has been hit with reduced demand tied to the absolute loss of jobs since the recession began in 2008. Despite that substantial headwind, ADP posted all-time record earnings of $2.39 /share in FY 2009. Zacks sees FY 2010 (ends June 30, 2010) coming in at the same $2.39 level with the year ahead forecast at $2.53.
Finances are solid with over $2 billion in treasury cash against total debt of only $41 million. Value Line gives ADP their highest rankings for both safety and financial strength. They also note that ADP falls into the top 1% (of all 1700 equities they cover) in terms of ‘stock price stability’ and ‘earnings predictability’.
Capital needs are minimal and dividends have been raised every year to sit today at $0.34 quarterly for a current yield of 3.37% - better than the interest on a 5-year U.S. Treasury note.
ADP is now offered for about 16.8x trailing and 15.9x year-ahead earnings versus its 10-year median multiple of 25x. 2009 and YTD 2010 have been the only years of the past sixteen that the P/E has averaged below 20x.
While it’s unlikely that ADP will command a historically high multiple soon I don’t think it’s farfetched to expect a bounce back to at least 18x forward earnings. That would take these shares back to $45.54 or about 13% above this afternoon’s quote. Standard and Poors reached a similar conclusion with a 12-month target price of $47 /share.
Add in the yield and you’ve got a top-quality, low-risk issue that could produce better than a 15% twelve-month total return. Not too bad in our present, near-zero interest rate world.
Want something more exciting with even lower risk? Consider this: