Alcoa kicked off earnings season last night, a time when corporate America presents its report card for the previous quarter and updates stock investors as to where earnings and hence stock prices might be heading in the future. Investors forecast stock prices from an analysis of company earnings and price-to-earnings multiples according to a simple formula: stock price equals earnings times multiple. Market bulls and bears always vigorously debate earnings and multiples and usually each side manages to draw from historical data and metrics to support their bullish and bearish outlooks.
However, in these unstable times, the major disparity in outlooks has less to do with assessments of foreseeable earnings and more to do with the down-the-road context for those earnings, which will be reflected in stock multiples; bulls seem to have a pre-crisis business-as-usual mindset and assume the financial crisis and its effects are either behind us, or far enough ahead in the future (and being kept at bay by global monetary easing) as to be irrelevant to near-term stock price forecasts. As a result, bulls’ forecasts readily use historical metrics and stock multiples; bears are less sanguine and fearful that fragile global economies and markets could crash once again and take investors appetite for risk with them, an outcome that could meaningfully reduce stock multiples for years to come.
The bulls claim this is just another in a long line of garden-variety financial crises that have wreaked havoc with the financial markets. Bears claim this crisis-recovery cycle is potentially more problematic and protracted than others, and point to many unprecedented events that are historically unique and took decades to culminate. First, the liquidity that has been pumped to restore health to global economies and markets is unprecedented in scale and scope, and while (temporarily) propping up financial markets, has largely failed to spur economic growth. Even optimists have to be worried that this heroic effort has largely failed thus far, and must wonder what can be done next if markets take a turn for the worse. Second, along the way, the credit-worthiness of the US Government, the fulcrum for financial markets for more than 60 years, was downgraded, and even the sanctity of FDIC insurance for US bank deposits has been called into question after the bank debacle in Cyprus. Third, global economic growth over the past several decades has been on the back of America’s willingness to borrow and consume beyond its means, a phenomena made possible by the US dollar’s dominance as a global reserve currency. Now the US dollar’s reserve currency status is in jeopardy, America’s ability to borrow has been severely limited by its enormous debt and interest rates are at historic lows, and can only rise in the future. Fourth, as bad off as America is right now, other major economies, including the Euro zone, Japan and China, are economically worse off, so as usual America will need to take the lead in solving this problem. Fifth, there is mounting evidence that the tepid global economic recovery is once again beginning to flat-line and falter as the list of global economic and financial woes seems to grow each day.
In view of the foregoing, adopting a business-as-usual approach in forecasting the future trajectory of stock prices seems naïve and near-sighted to say the least.
Tuesday, April 9, 2013
Friday, March 29, 2013
Online Retailers Should Collect Sales Tax
It was refreshing to see bi-partisan support by 75 senators to include a version of the Marketplace Fairness Act (MFA) legislation in the budget resolution. The legislation will enable state and local governments to collect sales taxes from online purchases. Opponents claim such legislation unfairly punishes online retailers for their success but, more likely, proponents assert that the legislation actually restores fairness by eliminating an unfair advantage enjoyed by online retailers over brick-and-mortar retailers for more than a decade.
Other opponent objections range from high-minded assertions of MFA violating the commerce clause of the US constitution to in-the-weeds observations of how the imposition of such a tax will cause an undue accounting and regulatory compliance burden on online retailers not shared by their brick-and mortar counterparts. Opponents also speculate that the imposition of sales taxes for sales occurring outside a government’s jurisdiction could lead to higher sales tax rates and the expansion of government authority generally, which small-government supporters oppose.
The recent super majority bi-partisan support is a testament to the palpable, practical and imminent need to amend current sales tax law, as compared with the philosophical, speculative and administrative objections raised in opposition to the new tax. Administrative and regulatory ease should be an obvious goal and is a legitimate concern for any new tax, but its apparent inconsistency with the US constitution should not be used as an expedient excuse for opposition. The ability to amend our constitution in accordance with our natural evolution as a nation is one of its most extraordinary features. Although constitutional amendments are few and infrequent, certainly even the founding fathers would have to admit that the internet and its profound and ubiquitous effect on our lives is a legitimate “game-changer” warranting special consideration, and comparable in scale and scope as the introduction of fire, the wheel and the printing press were to our ancestors.
The fact is that unless and until such time as we can live a virtual reality in cyberspace, we need to build and maintain our communities, and sales tax revenue is an important component of the funds available to meet those requirements. Sales tax and property tax revenue typically account evenly for approximately 70 percent of total state and local tax revenue. With the explosion in online retail sales in recent years and its continued growth trajectory, the prospect is limited for growth in brick-and-mortar sales tax and property tax revenue. Online retailers are at least partially responsible for the growing loss of state and local tax revenue already strained by our struggling economy. Taxing online sales seems like a natural solution to this urgent and growing problem.
Other opponent objections range from high-minded assertions of MFA violating the commerce clause of the US constitution to in-the-weeds observations of how the imposition of such a tax will cause an undue accounting and regulatory compliance burden on online retailers not shared by their brick-and mortar counterparts. Opponents also speculate that the imposition of sales taxes for sales occurring outside a government’s jurisdiction could lead to higher sales tax rates and the expansion of government authority generally, which small-government supporters oppose.
The recent super majority bi-partisan support is a testament to the palpable, practical and imminent need to amend current sales tax law, as compared with the philosophical, speculative and administrative objections raised in opposition to the new tax. Administrative and regulatory ease should be an obvious goal and is a legitimate concern for any new tax, but its apparent inconsistency with the US constitution should not be used as an expedient excuse for opposition. The ability to amend our constitution in accordance with our natural evolution as a nation is one of its most extraordinary features. Although constitutional amendments are few and infrequent, certainly even the founding fathers would have to admit that the internet and its profound and ubiquitous effect on our lives is a legitimate “game-changer” warranting special consideration, and comparable in scale and scope as the introduction of fire, the wheel and the printing press were to our ancestors.
The fact is that unless and until such time as we can live a virtual reality in cyberspace, we need to build and maintain our communities, and sales tax revenue is an important component of the funds available to meet those requirements. Sales tax and property tax revenue typically account evenly for approximately 70 percent of total state and local tax revenue. With the explosion in online retail sales in recent years and its continued growth trajectory, the prospect is limited for growth in brick-and-mortar sales tax and property tax revenue. Online retailers are at least partially responsible for the growing loss of state and local tax revenue already strained by our struggling economy. Taxing online sales seems like a natural solution to this urgent and growing problem.
Wednesday, February 13, 2013
Government Waste Reduction Would Ease the Need for Fiscal Sequestration
Democrats say that if republicans are so worried about the national debt and deficit they should be willing to raise taxes on the rich. Republicans say that if democrats are so interested in economic growth and putting Americans back to work, they should not propose tax increases. If the President and Congress are serious about spurring economic and employment growth and reducing the debt and deficit they need to at least agree that reducing government waste serves both partisan interests, as no one benefits by wasting precious tax revenue. Critics will say such an approach won’t go far enough, but no one can deny that making obvious if relatively small cuts are better than no cuts at all. Starting small may just be the wake-up call Washington politicians need to remind them they have a huge and unique responsibility as stewards of our hard earned tax dollars.
Moreover, if taxpayer perception of the magnitude of government waste turns out to be realistic, those obvious and easy spending cuts may be more than the politicians imagine. A 2011 Gallup poll found that Americans--young and old, regardless of political affiliation or level of education--generally believe the federal government wastes more than half of every dollar it spends. The government expects to spend nearly $3.8 Trillion this year, which means we the people believe that nearly $2 Trillion will be wasted. More than 40 cents of every spent dollar, more than $1.5 Trillion, will be borrowed money, which makes our financial situation even more outrageous and unsustainable. Even more shocking is the fact that more Americans, given their perception of waste, don’t seem more outraged and have not applied more pressure to political leaders to act swiftly and decisively on the matter.
The non-partisan Government Accountability Office recently released a report identifying billions in annual waste and potential cost savings available if only our political leaders would acknowledge and address the frightening big picture that our nation faces. The report highlights so much redundancy, overlap, fragmentation and operating inefficiencies attendant to so many government agencies and programs, one must question whether Congress, which funds all those programs and agencies, is paying any attention to the ongoing fiscal management of government at all.
Casual readers of that voluminous GAO report, or even mere reviewers of its table of contents, will fully appreciate the potential significant savings that could result from even a modest reduction in government waste. Capturing those savings would be an excellent first step or down payment on a comprehensive program to review, evaluate, reform and modernize a government budget that has been neglected and abused for far too long.
Moreover, if taxpayer perception of the magnitude of government waste turns out to be realistic, those obvious and easy spending cuts may be more than the politicians imagine. A 2011 Gallup poll found that Americans--young and old, regardless of political affiliation or level of education--generally believe the federal government wastes more than half of every dollar it spends. The government expects to spend nearly $3.8 Trillion this year, which means we the people believe that nearly $2 Trillion will be wasted. More than 40 cents of every spent dollar, more than $1.5 Trillion, will be borrowed money, which makes our financial situation even more outrageous and unsustainable. Even more shocking is the fact that more Americans, given their perception of waste, don’t seem more outraged and have not applied more pressure to political leaders to act swiftly and decisively on the matter.
The non-partisan Government Accountability Office recently released a report identifying billions in annual waste and potential cost savings available if only our political leaders would acknowledge and address the frightening big picture that our nation faces. The report highlights so much redundancy, overlap, fragmentation and operating inefficiencies attendant to so many government agencies and programs, one must question whether Congress, which funds all those programs and agencies, is paying any attention to the ongoing fiscal management of government at all.
Casual readers of that voluminous GAO report, or even mere reviewers of its table of contents, will fully appreciate the potential significant savings that could result from even a modest reduction in government waste. Capturing those savings would be an excellent first step or down payment on a comprehensive program to review, evaluate, reform and modernize a government budget that has been neglected and abused for far too long.
Monday, January 28, 2013
Stock Market Rally May Be a Sign of Irrational Exuberance
As the S&P 500 Index hits a five year high, many observers suspect that the long awaited rotation from bonds to equities is now underway and likely to propel the market to all time highs. The irony is that most evidence to support the bullish view is the direct result of an unprecedented Federal Reserve policy designed to prevent a stock market collapse and a deep and protracted global economic depression. The fact is that equities have never been so cheap compared to bonds and the housing and financial sectors of the economy seem to be recovering nicely in recent months. Bears know that the Fed’s commitment to keep interest rates near zero indefinitely has been a key factor in fueling the stock market rally and spurring the recovery in housing and bank asset prices.
Regardless of mindset, both bulls and bears know that a market attaining its current lofty level is ripe for a meaningful market correction and sooner rather than later. Additionally, bears know that most if not all of the many serious domestic and global challenges that caused the 2008 financial crisis still hang over us, even if the talking heads appear oblivious to them recently. Bears are skeptical and believe that the economic recovery might be illusory, especially considering that all major global economies—US, Euro Zone, China, and Japan—continue to face significant political, economic and financial headwinds. Consequently, it should be apparent to even the most optimistic observers that there is now far more downside risk than upside potential in the stock market, at least until there is some convincing evidence that the “powers that be” understand that measures to postpone dire circumstances may work in the short term but do not provide a permanent fix to the long term challenges we face.
Furthermore, bulls know that a recovering economy will prompt the Fed to take away the monetary punch bowl and let interest rates rise in an attempt to avoid overheating the economy and precipitating runaway inflation. History shows that the Fed does not often respond appropriately and in a timely manner and uncertainty about future Fed policy, in addition to the effectiveness of the policy itself, could easily cause a major stock market correction. Rising interest rates will surely weigh heavily on the stock market too as they reduce corporate earnings, exacerbate our national debt and deficit and hinder the finances of already struggling municipal and state governments.
Regardless of mindset, both bulls and bears know that a market attaining its current lofty level is ripe for a meaningful market correction and sooner rather than later. Additionally, bears know that most if not all of the many serious domestic and global challenges that caused the 2008 financial crisis still hang over us, even if the talking heads appear oblivious to them recently. Bears are skeptical and believe that the economic recovery might be illusory, especially considering that all major global economies—US, Euro Zone, China, and Japan—continue to face significant political, economic and financial headwinds. Consequently, it should be apparent to even the most optimistic observers that there is now far more downside risk than upside potential in the stock market, at least until there is some convincing evidence that the “powers that be” understand that measures to postpone dire circumstances may work in the short term but do not provide a permanent fix to the long term challenges we face.
Furthermore, bulls know that a recovering economy will prompt the Fed to take away the monetary punch bowl and let interest rates rise in an attempt to avoid overheating the economy and precipitating runaway inflation. History shows that the Fed does not often respond appropriately and in a timely manner and uncertainty about future Fed policy, in addition to the effectiveness of the policy itself, could easily cause a major stock market correction. Rising interest rates will surely weigh heavily on the stock market too as they reduce corporate earnings, exacerbate our national debt and deficit and hinder the finances of already struggling municipal and state governments.
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