On the back of Quantitative Easing 2 comes Stimulus 2... Komrade Obama struck a deal with Republicans last night to extend all Bush-era tax cuts for two years and reduce worker payroll taxes for one year. In total, the cuts will cost around $900 billion... financed entirely by adding to the national debt. Not raising taxes is a good thing for the economy, but not when you couple it with money-printing (to which there is no end in sight) and increased government spending.
Here are the details...
The package reduces the 6.2% Social Security payroll tax on all wage earners by two percentage points for one year. For a family earning $50,000 a year, that amounts to a $1,000 savings. For a worker paying the maximum tax, $6,622 on income of $106,800 or more in 2011, the savings is $2,136. But how will families spend this money? Flat screens made in Asia? A Ford truck? Or will they pay down debts? Either way... it's not going to spur corporations to hire.
Capital gains and dividend taxes will remain constant. Of course, what really infuriated the Democrats was a change in the most absurd tax in existence... the estate tax. The estate tax exemption was set to expire on December 31, whereby individuals with a minimum $1 million net worth would be taxed at a maximum rate of 55% upon death. While it's not certain, Komrade Obama will likely increase the exemption to $5 million and lower the maximum tax rate to 35%.
The major concession by Republicans was extending unemployment benefits for the long unemployed (those without a job for 99 weeks) by an additional 13 months. That's right... You can now collect money for nothing for nearly three years. If reducing unemployment really is the government's main goal, this is not the way to do it. Three years paid leave doesn't sound like an incentive to start looking for a job.
NOT included in the tax compromise deal was the Build America Bond (BAB) program, which expires December 31, 2010. BABs were the municipal bond market bailout. The muni bond market was moribund in early 2009 when the government created the BAB program. The program lowers borrowing costs for cities, states, and towns in the U.S. through a federal interest-rate subsidy. More than $150 billion of Build America Bonds have been sold. How adding more debt on top of existing debt will do anything but make the ultimate reckoning uglier is beyond my understanding.
With municipalities across the country in serious trouble, it was expected the program might be extended. But the word in the press is the new Republican-controlled Congress doesn't like the subsidy.
The municipal bond market is worth nearly $3 trillion. Individual investors hold about two-thirds of those bonds, a little less than $2 trillion worth. Mom and pop see muni bonds as a safe haven and a way to invest in the local community or their home state. When mom and pop get spooked, markets tank hard. In just one week in November, investors withdrew $3 billion from municipal bond funds. Can you imagine how mom and pop will react when the excrement really starts hitting the fan? Just look at the iShares S&P National AMT-Free Muni Bond Fund (MUB) today. Dollars (Treasurys) have fallen in value while gold and silver have risen. That's inflation, plain and simple....
Aside from the end of the Build America Bond program, there's also a move afoot to eliminate the tax-free status of municipal bonds. Aside from safety (which is certainly not there anymore), favorable tax treatment is the main reason investors settle for such miserably low yields on muni bonds.
Without safety and tax-free status, I seriously doubt mom and pop will keep their money in munis. This selloff is just the beginning.
I'm afraid most people don't understand the federal government is in no better shape than America's cities, states, and towns. Nobody made a big deal about it, but over the weekend, Komrade Obama passed an emergency funding bill for $50 billion, to keep the U.S. government from shutting down. It seems the end of the government's fiscal year came and went on September 30, without anyone agreeing on how they were going to keep the bills paid.
But the federal government has something the states, cities, and towns don't have: a printing press...
If you don't yet believe we're in the midst of a massive inflation, you have more explaining to do than ever... Prices everywhere are rising. Gold goes for more than $1,400 an ounce. Silver broke $30. Copper is at an all-time high. Crude oil passed $90 a barrel today. Trillions of new dollars are being pumped into the global economy to buy government bonds. And all of that extra liquidity is flowing into commodities. For the best pro-inflation argument we've seen, just take a look at this chart...
Some day, high commodity prices will have attracted way too much additional capital into mining companies and other commodity-producing operations. They'll make more than the world wants, and we'll see a huge rout. I have little doubt the Fed will create a commodity bubble and it'll pop one day. But both those events are still in the future.
Right now, I'm more concerned with the bond market bubble...
Investors fell head over heels in love with bonds this year. The Investment Company Institute says $59 billion flowed out of U.S. equity mutual funds in the first nine months of 2010, while $243 billion flowed into bond funds.
Today is like 1999 turned upside down. Back then, investors sold bonds and bought stocks. According to the Fed's historical flow of funds data, in 1999, $136 billion flowed into U.S. equity mutual funds and $25.9 billion flowed out of Treasurys and corporate/foreign bond funds. In 2000 – the year stocks peaked – $193.1 billion flowed into equity mutual funds and $19.6 billion flowed out of munis and corporate/foreign bonds.
Mom and pop sold their munis and other bonds in 2000... and put the money into equities. Right now, according to the Investment Company Institute, mom and pop are selling stocks and buying bonds.
The tide might have turned recently in the bond market. ICI also says money flowed out of bond mutual funds in the two weeks through November 23 for the first time since December 2008 – the moment I've been calling for the past year as "the blowoff top" of the multidecade bull market in bonds that started in 1981.
Fixed income is the worst place to be right now. Bond prices are near all-time highs (with yields near all-time lows), promising tiny returns to investors who buy today. And the Fed is doing everything it can to erode the present value of fixed-income streams. The muni bond market is cracking. Be very, very careful out there.
If there was one thing I could engrain in the minds of all investors, it's the idea of "present value." It's simple: $1 paid in the future isn't worth as much as $1 paid right now. For example, if you discount at 9%, $1 paid one year from today is worth around $0.92 right now. The same dollar paid 10 years from now is worth around $0.43 right now. The only difference is time. If you increase the interest rate from 9% to 10%, that $1 delivered 10 years from now is worth about $0.39.
Now imagine what higher interest rates do to 10-year, 20-year, and 30-year bonds. It's devastating. That's why higher interest rates kill bond prices. Because it lowers the present value of those future fixed payments. Investors who understand how time hurts present value aren't buying bonds today. You shouldn't be buying them, either.
We wrote it; did you buy it?...
We believe the sell off in Sprint (S) is overdone following its quarterly results. Like Take-Two (TTWO) a few months ago, shares fell 25% on speculation Carl Icahn was selling his stake in the company (he is actually adding as of last quarter). If you bought Take-Two on this news, you would have made a killing. Sprint is following a similar pattern. The company is adding subscribers. It's also well ahead of the competition in terms of 4G. I believe shares will bounce back just like Take-Two. That's why I am raising my buy-up-to price to $4. – Frank Curzio, Penny Stock Specialist, November 2010
Shares of Sprint jumped more than 8% to $4.25 after hedge-fund manager David Einhorn said on CNBC yesterday that he's been buying shares of the wireless carrier. Einhorn is one of the best stock pickers in the world. His fund, Greenlight Capital, has returned more than 20% annually over the past 14 years.
Einhorn believes Sprint "is in a good spot for a turnaround." He highlighted Sprint's competitive advantage in controlling more spectrum than Verizon, AT&T, and T-Mobile. He also said the company is in a much better place based on churn, customer service, and reputation.
Frank still believes Sprint has plenty of upside. He says the stock will trade for more than $6 in next 12 months. That's more than 40% higher than the current price. To see what else Frank is recommending, click here...
Altius Minerals (ALS.TO), Cenovus Energy (CVE), Denison Mines (DNN), Fronteer Gold (FRG), Market Vectors Gold Miners (GDX), Keyera Facilities Income Trust (KEY-UN.TO), MAG Silver (MVG), Silver Wheaton (SLW), Silver Standard Resources (SSRI), Virginia Gold Mines (VGQ.TO), Arch Coal (ACI), Penn Virginia Resource Partners (PVR), CARBO Ceramics (CRR), Barrick Gold (ABX), HMS Holdings (HMSY), iShares Silver (SLV), BLADEX (BLX), ConocoPhillips (COP), EV Energy Partners (EVEP), Hatteras Financial (HTS), Take-Two Interactive (TTWO), Alexander & Baldwin (ALEX).
In the mailbag... a few more subscribers take their shots at the medical "industry." Send your comments to feedback@stansberryresearch.com.
"'I can tell you quite honestly going to a doctor has NEVER benefited me in any way, besides getting access to antibiotics and pain meds, which is something I shouldn't need a doctor for in any case.'
"I second that. The health industry is not so different than Federal Reserve. The FDA makes decisions based on money that will benefit their cronies. And many of the doctors just follow what they were taught never questioning the logic of chemicals for everything.
"Babies and children grow from nutrition but pharma chemical drugs are better? How many people who take pharma drugs get well?
"P.S I don't even go to the doctor for antibiotics I use. 'Grapefruit seed extract' commonly available. Australian aborigine used it to purify their water. It will kill a tooth ache and any other infection I've come across." – Anonymous
"You've got it spot on re the medical industry (I long ago stopped thinking of it as a profession). Canada is no better. And the unholy alliance between the AMA, FDA and Big Pharma has cost the US public billions and billions of wasted dollars. Not to mention the number of iatrogenic deaths! Add, then, those errors which did not cause death, but further injury, pain and upset. The med industry, along with the US gubmint, loves to tout the US as having 'the best medical system in the world.' In fact, numerous charts put the US at about No. 17 worldwide. What it IS No. 1 in is cost.
"Worse yet, the industry is fully armed and ready to defend itself against any intrusion into healing such as alternative therapies. They have a long a dishonorable record of attempting to suppress anything which does not fall into their control. (They finally admitted to trying, over decades, to destroy the chiropratic industry.)" – Paid-up subscriber Eric Barnes
"I understand the defensive responses from a number of doctors about Porter's comments and I don't think all doctors are bad, but as a person that works in the consulting (i.e. service) industry living in Los Angeles, I am continually horrified at the poor service we receive from doctors, their medical staff and office people.
"If I provide poor service, my clients can fire me and I lose money; I am incentivized to provide great service and keep my customers happy... yet where are the disincentives for poor service in the medical community? There are none... providers get paid through insurance or the government the same regardless of the level of service they provide.
"But as an action oriented consumer there is something you can do.... use online services like Yelp or Facebook and rate your medical provider, dentist, etc. to expose the bad service providers and praise the people who actually care and do a good job... those bad providers might start to care once they receive less patients and see what people actually think of them. One more thing a person can do... take better care of yourself so you don't have to see a doctor." – Paid-up subscriber Michael Menerey
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
December 7, 2010