Individuals Directly Saved $274 Billion on Dividend Tax Cut, But Payback Time Is Coming
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I am estimating the qualified dividend tax cut savings from 2003 until year-end 2010 have saved direct individual owners of S&P 500 issues $140.70 billion
For the full universe of U.S. domestic common stocks I am estimating another $133.77 billion in savings, for a total of $274.47 billion over the 8 year period
In four months a series of temporary tax cuts initiated under former President Bush in 2003 will expire, resulting in tax rate increases for individuals for capital gains (holdings of at least one-year) and qualified dividends. The scheduled automatic increase for long term capital gains will increase from a maximum of 15% for individuals to a maximum of 20%, with the maximum dividend tax rate increasing from 15% for qualified dividends to 39.6% for all dividends. Starting in 2013 Medicare tax of 3.8% (brings the rate to 43.4%) will be added to high-income individuals. The U.S. Congress is planning on an expanded discussion on tax issues and rates when they return from their summer recess in September. However with major elections in November, and publicly announced plans varying widely, even within the same political party, a potential for no change exists, in which case rates automatically change at year-end. Complicating the situation are pay-as-you-rules, sixty vote requirements, and the possibility of a lame-duck post-election congress, all of which adds up to a situation more difficult to predict than the market.
Any large increase in capital gains could spur investors to sell stocks, therefore avoiding higher rates next year. Under current regulations investors could repurchase the shares they sold at a profit, if they wished, at the same time. The result would be a short-term gain for the U.S. Treasury via increased tax revenue, which is attractive to many in congress as they determine how to pay for existing and planned programs.
The much steeper dividend increase is of concern to investors. Higher dividend tax rates to individual investors would require investors to ‘rethink’ their net income alternatives. However, given the current low interest rate environment on bank certificates and fixed income instruments, the additional tax may not force many to change investment strategies. Corporations may also review their shareholder return policies, given that investors will keep less of what the company distributes as dividends, with additional share buybacks being a potential winner. Special dividends, especially tax differed stock distributions or those classified as a return of investment have been openly discussed, but little has occurred as of yet.
Several items come to mind:
Americans have shown a strong tendency for tax avoidance, therefore capital gain might need to rise more than the scheduled 20% to entice them to pay today for tomorrow’s gains. Brokers and advisers however will most likely (and should) crunch the numbers and present it to investors.
The change in tax rates is an excellent opportunity to review portfolios and make strategic changes; note that inheritance tax returns next year (die now or pay later).
The 39.6% dividend tax rate still leaves stocks competitive with CDs and treasuries, which leaves the investor with the same risk-reward tradeoff question, just at a different level.
With companies now issuing more debt (partially to refinance at lower rates, compared to maturity schedules), and investors ‘appearing’ to accept some risk, lower grade issues could become more attractive to income dependant investors – the very group which should be avoiding risk.
Buybacks are typically a short-term win-win situation. The added buying pushes the stock up (even if it is declining it should reduce the speed), earnings per share benefits almost immediately via the lower quarterly average share count, investors have a larger stake in the remaining company, and from a company’s views the company still owns the stock which can be reissued, compared to a dividend, where if you send me a check I will cash it and expect another one next quarter.
Taxes paid to protect built up profits may be viewed as ‘painless’ by congress.
Nothing is certain in politics and almost everything is up for grabs:
Grandfather capital gains rates if held from a specific time (ie: purchased prior to 9/2009)
Reduced tax rate for initial dividends, in addition to normal tax schedule based on income (ie: first $1,000 exempt or taxed to 15%)
Change in recognition of dividends enrolled in Dividend Reinvestment Program (this would defer taxes)
I would expect considerable discussion on tax policy, along with all the sound bits, political spin and posturing, both before and after the November election. Investors need to keep an eye on taxes, but focus on the specific investments; paying tax on a gain means you have made a profit, and earning 0.10% annual is better than taking a loss.
Original source for this article: Business Week
European Stocks Find Fans at U.S. Funds
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Despite a fiscal crisis in Europe that is dragging stocks lower day after day, European stocks are finding enthusiastic buyers among an unlikely group: American fund managers.
That’s the clear impression from the Morningstar Investment Conference, an annual gathering in Chicago of 1,350 financial advisors, fund managers and other investing pros.
On June 24, the second day of the three-day conference, the Dax Index, a measure of the German stock market, fell 1.4%, and the Euro Stoxx 50 index, covering 50 stocks from across Europe, dropped 2.2%, bringing its year-to-date losses to a negative 10.8%.
But also on June 24, managers of global stock funds were extolling the virtues of European equities in panel discussions.
The common theme for these investors: The problems in Europe are serious, but the stock market has overreacted and many European stocks are selling at terrific discounts.
“What’s happening in Europe is of great concern,” said Franklin Mutual Series portfolio manager Philippe Brugere-Trelat, “and that’s the main reason stock markets in Europe are so cheap.”
But, he said at a panel discussion on “stock picking across the globe”: Many companies headquartered in Europe are “not European at all” in the sense that a large portion of their sales and earnings come from outside the continent.
Furthermore, the weaker euro gives a big advantage to European companies selling outside Europe. “The euro at $1.20 is a very big cherry on the cake in terms of earnings and sales,” Brugere-Trelat said. The euro on June 24 was trading at $1.23, down 13.9% from the beginning of 2010.
At a different panel discussion, Artisan Partners portfolio manager Mark Yockey admitted he has a relatively high exposure to European stocks — especially to financial issues that could be most vulnerable to debt problems.
However, he said, many European banks are like his holding, ING, which is one of three main banks in the Netherlands. An oligopoly like that gives ING and other similarly situated banks extra strength and staying power. “We think once things settle down they’re going to grow their earnings,” he said.
Another speaker and manager of foreign stocks on the same panel, Janus Capital Management portfolio manager Brent Lynn, said he has a relatively lower exposure to Europe but that he’s ready to start buying.
“We have more compelling valuations in Europe than I’ve seen in a number of years,” he said. The sovereign debt problems make him “worried … but intrigued by the prospect of buying high quality companies” at cheap prices.
The deals are so good that Lynn said he was considering buying domestically oriented banks in Italy and Spain, two of the most indebted European nations. His targets are “franchises that we think will be survivors.”
If investors are convinced the Europe stock slide has gone too far, this could be a great time to buy. Extending that logic, the market’s continued slide means that European stocks could be an even better deal in the future.
Referring to this, Yockey won a laugh from his audience when he said: “The opportunities are getting better and better every day.”
Original source for this article: Business Week
Stock Decline: It’s Not Just About Greece
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As the Dow Jones industrial average plunged 9.2% today — the biggest intraday decline since Oct. 19, 1987 — cable news channels were showing protests in Athens. The video gave the impression that the stock decline and the Greek fiscal crisis were directly linked.
Not so fast. Many suspect there was some technical problem that spooked the markets and sent stocks diving, then dramatically rebounding this afternoon.
“We’re due for a correction, but nothing of this magnitude,” says Gary Wolfer, chief economist at Univest Wealth Management. “What occurred here is unfathomable and it must have been some technical problem.”
[UPDATE: Indeed, Bloomberg News is reporting that a NYSE Euronext spokesman says "there were a number of erroneous trades" during the market's steep drop.]
But even if there wasn’t, U.S. investors have reasons other than Greece to be skittish and so ready to sell. At its peak this year, the stock market “was very fully valued,” says Jerry Webman, chief economist at OppenheimerFunds. Stocks were priced to reflect an optimistic scenario. Investors know, Webman says, that “when people have underestimated bad news in the past, they got socked in the stomach.”
Indeed, stocks have been on the decline for two week. Even before today, the S&P 500 was down 7.3% since Apr. 23. Greece’s woes aren’t enough to be the only driving force behind this big market correction.
“Greece is not such a big share of the global economy to justify the concern,” says Michele Gambera, head of quantitative analysis at UBS Global Asset Management. Instead Greece is one contributor to a lot of uncertainty in fixed income markets. In the last year, Gambera says, there was a “dash for trash,” as investors bought up riskier assets in anticipation of a worldwide economic recovery.
“Maybe we are having a pause here, an assessment of [whether] we’ve gone too far into risky assets,” Gambera says.
By the logic of some market bulls, the Greek and European problems are just that — European problems. “The Euro problems are the Euro problems,” Wolfer says. Even if it spreads from Greece to other debt-ridden European nations, trouble in Europe might push more assets toward the safe haven of U.S. government debt. That could help stimulate the U.S. economy by keeping U.S. interest rates lower for longer.
Once bullish investors realized the stock market was crashing, they jumped in and started buying again. These are not the gloomy days of Fall 2008 or March 2009, when investors were so depressed that almost no one was buying stocks.
The danger, as always, is that market panic spreads, creating more market panic and spreading further. Fear creates fear. That’s how the 2008 financial crisis happened. Luckily, the vast majority of investors don’t yet believe Greece’s problems warrant that level of concern.
Original source for this article: Business Week
Dangers of Homes or Homebuilders as Investments
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On the New York Times’ Economix blog, Harvard economics professor Edward Glaeser points out that home values don’t necessarily increase. Like stocks,
Houses are assets, too, but it’s a mistake to expect them to offer a regular rise in price. Houses pay hefty dividends to their owners in the form of living space — that’s the real return on housing investment — and the basic economics of housing doesn’t point to perpetual price growth.
It’s a good analysis of a complex issue. Of course, your house — like any investment — has the potential to increase in value. There’s just no guarantee.
As on other assets, the return on a home depends on the details, especially local demographics, how much it costs you to maintain it, and what your renting alternatives are. Some contend that real estate can serve as a hedge against inflation.
If you would rather rent but are still looking for a way to invest in a housing sector rebound, you might buy homebuilder stocks.
Listen to the warnings of Stifel Nicolaus (SF) homebuilder analyst Michael Widner before you do so. In a sobering Apr. 6 report, he says:
• The hope that homebuilders will benefit in the future by buying up cheap land now is largely a pipe dream. There’s not enough cheap land, and there’s lots of competition from other buyers, he says.
• Builder won’t “return to normalized earnings levels” before 2014.
• Homebuilder stocks will be volatile, yet they are likely to provide an annual return of just 3% through 2013. “At current prices, we see little appeal for buy-and-hold investing,” he says.
If you “buy and hold” a house, at least you get to live in it.
Original source for this article: Business Week
Put your hand under the cash waterfall
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By Andrew Snyder, TodaysFinancialNews.com
Baltimore — (TFN): We all have a friend like him. For me it’s a guy named Greg. He has some great ideas and his entrepreneurial spirit runs deep, but for some reason, his plans never seem to make it to fruition. Somewhere from the drawing board to the production line, he runs into a debilitating snag.
Most of the time, it’s money.
He’s got great ideas but nary a penny to his name. That’s why I told him to ring up old Uncle Sam… collect. Washington’s handing out all sorts of dollars these days. He might as well put his hand under the waterfall.
According to the Wall Street Journal, the Department of Energy is handing out some $40 billion just to the so-called “clean energy” sector. Greg needs to paint a tree on his latest invention, call it organic and break into 21st century politics, er, business.
From here on out, it’s not what you know, it’s who you know. With Obama acting as economic maestro-in-chief, it’s a whole new world for us business folks.
Which brings me to a sore subject. You see, I recently told Hot Stock Confidential members to buy shares of a tiny little up-and-comer named Raser Technologies (NYSE:RZ).
Now, before I go any further, I don’t want to hear any complaining that I only talk about my winning plays in Notes, because this one was a loser. A big fat flop. Right now, we’re down 45%. It was one, if not the worst recommendations I made this year.
But I’m not selling. Even though I got plenty of heat from internal and external “forces,” I am still not ready to suck it in and lock in the loss.
I’m not holding out because the company’s got a breakthrough product or is about to get bought out. I’m holding on because Uncle Sam is ready to cut Raser a big ole’ check.
When I initially recommended the company in late August, headlines were abuzz with “green” spending. But then, just as suddenly as it started, it stopped. Congress switched gears to healthcare and Raser shareholders were left in the dust.
But Washington never stays in one place too long. It makes for an easy target. So once again, the clean energy industry is heating up. The article in today’s Journal proves it.
With Stimulus 2.0 ready to be released and the DOE spending like an eighteen-year-old who just unlocked his trust fund, this is a fantastic time for Raser and its geothermal electricity production.
After all, just last week it announced it was applying for a Treasury Department grant that could put $33 million into the company’s coffer.
For a firm with a market value of just $90 million, $30 million can do great things.
This play may not have followed a traditional route and is certainly a move that would make any financial advisor soil his suit, but in today’s financial environment, when the government acts as the lender of choice, traditional rules are out the window.
While fundamental investments still have long-term merits, for us short-term traders and especially us contrarians, some of the best investment opportunities can be uncovered by following the White House press pool.
*** Speaking of money, how about Exxon’s big deal today? For us contrarians, the $31 billion, all-stock deal proves the world’s largest oil producer believes its stock is overpriced and ready to fall.
If you’ve read my work for any length of time, you likely know that I am a big fan of signaling theory. According to the common-sense notion, Exxon’s unwillingness to use any of its massive pile of cash is a sign that company executives feel a $69 share of the company is worth less than $69 in cash.
It is no wonder we are watching shares drop by more than 4.7% today. In the long run, today’s news will boost Exxon’s performance. But in the short term, investors have an awful lot to think about.
By far, the biggest news surrounding this story is not what it will do for Exxon or XTO shareholders, but what it will do to the natural gas market.
It’s exciting stuff, especially for those of us that just racked up triple-digit gains thanks to the industry’s recent meanderings. I’m talking to you TFN Strategic Trader members.
Here’s what I wrote for the TFN site today:
“You don’t become one of the world’s largest and most profitable companies by making dumb moves. Exxon Mobil (NYSE:XOM) proves it once again.
“The Street is buzzing today thanks to news that Exxon is printing some $31 billion worth of new shares in order to purchase XTO Energy (NYSE:XTO), one of the nation’s natural gas producing giants. It’s a major deal that has hearts skipping across a variety of sectors.
“Of course, nobody is as excited as XTO shareholders. They woke up to news of a buyout worth a 17% premium to Friday’s closing price.
“Shares of the oil and gas producer slipped by double-digit proportions over the past few months as natural gas prices slide. But now that demand is rising and gas prices are following suit, Exxon officials saw it was time to make their move. With XTO prices reaching short-term lows, Exxon made its move.
“Now that a major non-conventional gas player is making headlines, investors have their eyes on all sorts of potential buyouts. It’s almost impossible to find a company in the energy industry not trading in higher territory today.
“Two stocks you will hear a lot about over the next couple of weeks are Chesapeake Energy (NYSE:CHK) and Range Resources (NYSE:RRC).
“So far today, Chesapeake is up by over 6%, with shares trading close to $25.50 each. The company, with major holdings in all of the popular shale regions, has been a long-term target of buyout rumors. Maybe this time the speculators will be right.
“But my money is on Range Resources. It is a major player in the Marcellus region that just happened to announce significant expansion in the area this morning. Coincidence? Doubt it. It looks more like advertising.
“Range is the right size for a buyout. With a current market value of $7 billion and another $3 billion or so in debt, a buyout could come with a price tag of just over a third of Exxon’s purchase. Whoever decides to grab the company (think Shell or BP) would automatically get more than 180 Mmcf of daily gas production out of the Marcellus region.
“Of course, this is a long-term play. With gas prices plunging to ultra-low territory in recent months, any company purchasing gas assets now has a long-term outlook. With non-conventional plays hotter than a barroom pistol, major producers like Exxon are flocking to the sector in hopes of finding larger profits than their current low-margin deepwater prospects.
“For all of you fans of deepwater drilling, that is bad news, even horrid.”
Read why here.
*** Hey, lookie there. Gold’s up today. With word that Congress is ready to budget yet another couple trillion bucks, the dollar’s a tad bit weaker today.
As I write, gold is up by $3.70 per ounce and the dollar’s down just $0.0019 against the euro. Doesn’t look like buyers of either asset have much conviction.
Today’s just a short-term turnaround in the recent trend. Expect more strength from the greenback and more weakness from the gold market. By the time we sing Auld Lang Syne in a couple of weeks, gold will be trading for $1050 per ounce. That’s when you should be a buyer again.
Original source for this article: Contrarian Profits
How do retail sales stack up in an atypical recovery?
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Rob Parenteau, currency and credit markets expert, and editor of The Richebacher letter, analyzes the current state of the economy, as represented by retail sales. Can retail really drive the recovery?
Rob Parenteau (The Daily Reckoning):
The U.S. consumer is bound to play only a lackluster role in this recovery. But this has not mattered to buyers of consumer discretionary stocks who are intent on using the typical business cycle recovery playbook in a recovery that is anything but typical.The year-over-year growth rate of October retail sales ex-gas is nearly flat from a year ago, while the overall retail sales momentum is still just shy of closing that gap. With comparisons so easy against a year ago, when the global economy was in free fall, this is not a terribly inspiring result. Excluding autos, the sequential gain in October came up short of expectations, with only a 0.2% advance… Caution is still ruling, and for good reason.
Perhaps the dollar levels of retail sales tell the story more clearly. So far, we at best have a shallow recovery in overall retail sales, while furniture and electrical appliance stores are barely scraping out a trough.
Click here for the rest of Mr. Parenteau’s article at The Daily Reckoning.
Original source for this article: Contrarian Profits
HY Markets Forex Broker
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Stock Option Valuation Part 3 of 5
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In this lesson we will cover how the strike price of an option affects its value.
**Concepts to Remember**
“Call options” increase in value when the underlying stock it’s attached to goes up in price, and decrease in value when the stock goes down in price.“Put options” increase in value when the underlying stock it’s attached to declines in price, and decrease in value when the stock goes up in price.
Strike Price
The strike/exercise price of an option is the “price” at which the stock will be bought or sold when the option is exercised.For example, an IBM May 50 Call has a strike price of $50 a share. When the option is exercised the owner of the option will buy (Call option) 100 shares of IBM stock for $50 a share.
In the previous lesson we revealed that the strike price is one of the factors that affect the options value, particularly its relation to the current market price of the stock.
The strike price is part of the option contract it does not change, however the stock price fluctuates on a daily basis.
There are three different terms for describing the stock price to strike price relationship:
- Out of the Money
- At the Money
- In the Money
Out of the Money (OTM)
A Call option is said to be out-of-the-money if the stock price is lower than the strike price of the option. For example, suppose the stock price is $40 and the strike price is $45. You would have the right to “buy” the stock at $45. If you exercised your right and bought the stock for $45, you would already be at a loss (out of the money) of $5.You wouldn’t want to exercise your option because you could buy the stock cheaper on the open market. It is out of the money, exercising it poses no benefit to you.
For Put options it’s the opposite. A Put option is out-of-the money if the stock price is higher than the strike price of the option. For example, suppose the stock price is $40 and the strike price is $35. You would have the right to “sell” the stock at $35. Why would someone want to buy a contract to sell a stock for $35 when they could just sell it for $40 on the open market?
At the Money (ATM)
A Call or Put option is at-the-money if the stock price and the strike price are the same. Or it’s the strike price closest to the current stock price. For example: Stock price $40, Strike Price $40 or Stock Price $40.98 and Strike Price $40.In the Money (ITM)
A Call option would be in-the-money if the stock price were trading above the strike price. For example, suppose the stock price is $40 and the strike price is $20. You would have the right to “buy” the stock at $20. If you exercised your right and bought the stock for $20, you could immediately sell it for $40 on the open market and make (be in the money) $20.Another way to explain it is that you could say your option is $20 in-the-money because you can exercise your option and buy the stock for $20 less than the current market price.
A Put option is in-the-money if the strike price is higher than the market price of the underlying stock.
How ITM, OTM, and ATM, Affect the Option Value
The more an option is in-the-money (ITM) the more expensive it will be, because it has more value to the holder. This value is called intrinsic value.The farther an option is out-of-the-Money (OTM), the cheaper it will be.
An at-the-Money (ATM) option, price wise, is in the middle and is slightly cheaper than an “ITM” option.
Your particular investment strategy will determine if you pick an ITM, ATM, or an OTM option.
That’s it for this lesson. I’ll be offline for a few weeks recovering from shoulder surgery so I will continue the series when I return.
Happy Trading, Travis
http://www.pursuingwealth.com/
If a traditional investment – such as Stocks, Bonds, ETFs, Proprieties, Precious Metals – is not for you then you should check our Foreign Exchange and High Yield Investment categories.
OMXS30 breaks 866 resistance and powers to new highs
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Monday’s -3% move lower and Wide Range Bearish Reversal after achieving post crash highs and a 38.2% retrace of all time highs @ 849, did not presage a multi-week reversal. Tuesday’s price action did not make new lows and respected bearish symmetry/hourly resistance at 866. On Thursday, the hourly close above 866 negated the bearish symmetry resistance from Monday’s powerful reversal and led to new highs on Friday.
Daily Trading Signals
The following signals were generated for 3 Aug:
The Low Breakout Continuation Setup requires that the preceding trading day’s low needs to be exceeded to confirm a change in trend direction. The signal seeks to take advantage of a pullback in the immediate daily trend.
Today’s daily pivot is 879.08, and the weekly pivot is 871.78. Price action above the daily pivot is bullish.
The OMXS30 normal trading range is projected to be between 875.53 – 888.57.
The OMXS30 extended trading range is projected to be 870.55 – 893.55.
Specific price levels and projections are discussed on the charts below.
Short term 15 & 60 Min
60 min Fib Projection of 883.69 was met on the break of 866.19 symmetry resistance. A 60 min close > 863.69 targets 892.91.
Daily
The daily oscillator is bullish. Daily symmetry support 836-37, 824. If 824 is exceeded 802.
Weekly
849 is the 38.2% retracement from the 1321 all time highs in Jul ’07 and the 566 Nov lows ’08. Even in very weak markets, minimal 38.2% to 50 % price retracements are expected. The OMX has finally reached a minimal typical bear market retracement. Continued closes above 849 mean a test of 939 -the 50% retrace of all time highs. The Weekly chart breaks down with a daily close <>
The Weekly oscillator is bullish.
Long Term, continued daily closes above > 767 is bullish.
Updated Hourly, Daily, Weekly charts with additional Fib support and projection levels are posted below.
If a traditional investment – such as Stocks, Bonds, ETFs, Proprieties, Precious Metals – is not for you then you should check our Foreign Exchange and High Yield Investment categories.
S&P AM Decline respects bullish symmetry
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The 13.8 pt decline from yesterday’s high is emotionally charged because of the proximity to the “magic” 1,000 level. But in reality the decline is no different than the several other 13 to 15 point declines since the 8 June low.When that pattern changes, then the bears may get the upper hand. Right now you still see a pattern of higher highs and higher lows on the 60 min charts. You don’t have to agree with the price action, but must respect its potential.
If a traditional investment – such as Stocks, Bonds, ETFs, Proprieties, Precious Metals – is not for you then you should check our Foreign Exchange and High Yield Investment categories.
