Weekday Commentary from Jim Puplava
Home
|
On December 16, 1773, patriots said, "No more taxes!" in answer to The Tea Act of 1773. What is known as The Boston Tea Party served to spark the fight for independence. What will it take today?
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2.73
88.36%|
|
Market WrapUp for the Week
Monday l Tuesday l Wednesday l Thursday l Friday
Wednesday's Stock Market WrapUp
Taxes, taxes, and more taxes
During this holiday week the country celebrates and remembers its roots of independence more than two centuries ago. The birth of this Nation was founded on the principles of freedom, individual liberty and equality for all. The Nation began its fight for independence over the issue of the tyranny of taxes. The issue of taxes became a central theme and rallying point that motivated our founding fathers in their struggle to gain independence from Great Britain. Like it or not, taxes have played a major role throughout history in the rise and fall of great nations. Some of our earliest records of civilization are about taxes, from Sumerian clay tablets to the Rosetta Stone. Great leaders come and go, but the taxes they impose remain with us, often times long after they have gone. The high tax rates imposed by the Roosevelt Administration during the Great Depression remained with us until the 1980’s. The prosperity as well as the decline of nations has a tax element associated with it.
In his book, "For Good and Evil," author Charles Adams warns of the consequences of high taxes, showing throughout history that angry taxpayers can be a lethal threat to government as King George found out when he tried to raise taxes unjustly on the American colonies. Adams writes that, "Taxpayers instinctively rebel: the first warning phase of rebellion is rampant tax evasion and a flight to avoid tax; the second phase produces riots; and the third phase is violence. Life ultimately can be catastrophic for any government that pushes its taxpayers too far… The first casualty of what we call "dumb taxation" has always been liberty; the second casualty has been wealth and the strength of a nation." 1
That is where we are today in the U.S. Taxes as a percentage of the economy haven’t been this high since World War II. We have already reached phase one where taxpayers are resorting to tax evasion and tax flight as many wealthy citizens of this Nation and companies are exiting the U.S. More companies are choosing to locate their domicile outside the United States even though Congress is attempting to block their exit. Exiting the U.S. still means these companies will have to pay taxes on their U.S. profits. However, their foreign taxes will remain outside the jurisdiction of U.S. tax authorities.
Wealthy citizens are taking steps to do the same by giving up their U.S. citizenship. The top 5% of the nation’s income earners pay 52% of the taxes. When you add up a federal tax rate of 39.6%, a Medicare tax rate of 2.9%, and then add state taxes like California, which are as high as 9.3 percent, you can understand why they are leaving. The combined marginal tax rate can range from 45-50%. For wealthy individuals the government can take half of what they earn.
What is surprising as we celebrate this Independence is a movement in this land to raise taxes even more. If that happens, or if Gephart gets his wish and becomes Speaker of the House after the November elections, he is calling for raising taxes even higher. He wants to raise capital gains taxes, income taxes, and possibly estate taxes. If that happens the U.S. will enter phase two of the tax revolt. The last tax revolt was at the ballot box in 1994 after Clinton and a Democratically controlled Congress raised taxes on income and social security in 1993. The result was a tax revolt, which gave control of Congress to the Republicans. When they no longer held on to their principles, they lost their majority in the Senate.
This week I’ve covered the move to raise taxes around this country, from raising taxes on cigarettes 20-fold in New York City to the move in California to punish owners of automobiles, and especially SUV’s. In other states such as New Jersey and Tennessee, there are tax revolts in the making. It is ironic that a Nation founded on liberty and freedom and as a revolt against the tyranny of taxes should now be moving in the other direction. A final quote from Adams’ book is appropriate as we reflect on what freedoms remain this Independence Day. "Taxes are what we pay for a civilized society." Reading the words of Oliver Wendell Holmes inscribed over the entrance to the Internal Revenue Service building in Washington D.C., "…but how we tax and spend determines, to a great extent, whether we are prosperous or poor, free or enslaved, and most important, good or evil." 1
Today’s Market
The markets rose for the first time in three days on Wednesday. Battered technology stocks led the recovery in stock prices. The chip sector led the rally in technology despite warnings from AMD. AMD warned that it might miss estimates by 3-16%. The news didn’t seem to faze traders who were looking at a reason to buy stocks. Speculators and day traders moved into Internet, hardware and software issues. Investors didn’t seem to care about additional warnings coming from other technology companies. Speculators figure if there is a summer rally, it will be led by the technology groups which has suffered the most this year. The Nasdaq is down 29.24% this year. Traders believe that when the rally occurs, this is where the biggest gains will be because of oversold conditions. The rally could begin as soon as next week, providing this July 4th turns out to be uneventful. Speculators have been reluctant to go long over the holiday-shortened week.
In other news, investors and traders may be hoping for a summer rally and we are close to getting there. But we still haven’t seen back-to-back days of heavy selling with big point drops. Despite the Dow loosing close to 1,000 points in a month, the average investor is still hanging in there, hoping things will turn out better this fall.
More Problems to Surface
But this fall there may be more problems that surface as a result of more companies coming clean with their books. According to a review of company reports by the SEC, the agency found that over 25% public companies make mistakes in the filing of their reports. According to the agency, most of those mistakes turn out to be significant and material enough to affect the price of the stock when the company is forced to amend their statements. According to the study, there are many more potential Enron’s, Global Crossing’s, and WorldCom’s waiting to surface. Because so many of these types of problems are surfacing, the SEC plans on auditing every Fortune 500 firm this year. This will mean we are likely to see a lot more accounting issues begin to surface this fall. CEO’s should be less reluctant to use accounting legerdemain in an effort to meet Wall Street estimates, especially now that regulators will be watching like hawks for any discrepancies. Companies will be more forthright in reporting their numbers.
Despite a growing trend to correct accounting scandals and elevate investor confidence in the financial system, another problem the markets will have to contend with this fall is the growing debt problems of corporations and consumers. The number of companies filing for bankruptcy is headed for another record year. Last year according to Bloomberg 255, public companies, led by Enron, put $260 billion in assets into bankruptcy protection. That was triple the record that stood for more than a decade. This year is shaping up to be another record breaker. Already 113 companies representing $149 billion in assets have filed for court protection. WorldCom, with $103.8 billion in assets, could be the next major company to file. Analysts seem to be letting up in bankruptcy filings this year, a trend that is expected to last for the next two years. Edward Altman, a professor of finance at New York’s Stern School of Business, predicts default rates on junk bonds this year will rise to 12%. The accounting firm of PricewaterhouseCoopers believes the number of companies filing this year will exceeded over 200.
So far we have been talking about corporations. The consumer is the same bad straights. Delinquency rates are up and so are credit card defaults. Many Americans are only two to three paychecks away from bankruptcy. The high levels of mortgage debt, installment debt, and credit card debt are making it difficult for many households to make ends meet. Problems arise when one spouse loses their job, or if downsized they can’t find a replacement job that pays as well.
These are the factors making our recovery so shaky. The ability of consumers to spend and take on more debt is reaching a limit in the same way as the ability of corporations to service their debt payments. The next shoe to fall will be the consumer. The consumer is already on edge due to the hemorrhaging of their investment portfolios and the constant threat of terrorism.
Wall Street is still perplexed as to why the markets haven’t recovered given the spate of good economic news. Most economists and analysts attribute the poor performance of the markets to corporate governance issues and terrorism. That may be part of it. However, the real issue stocks haven’t come back is very simple: its called valuation. The real P/E multiples for the S&P 500 are 40, and not 20 as most investors are told. The 20 P/E ratio is a pro forma ratio. Dividend yields are also miniscule, below 2% on the S&P 500 and around 2% for the Dow. Nobody in their right mind is going to buy sticks again at 100-200 times earnings. The mania is over, but not its conclusion. Not until stock prices, dividend yields, and P/E ratios approach the bargain levels will we ever get a rally, much less a new bull market that is sustainable. This is what economist and analysts don’t understand. There is no going back to the good old days; those days are gone forever and nothing said or done by Washington and Wall Street are going to bring them back. The only thing that Washington is capable of doing is making things worse.
Meanwhile the next edition of the earnings game is just about to begin. Relax, sit back, and enjoy the show; it promises to be entertaining. You will see companies begin to miraculously beat estimates while they lose money, or their business conditions deteriorate. It will be similar to a mystery novel with investors playing the part of detectives trying to find the real earnings numbers. They won’t be available to until 45 days later when they are filed with the SEC. The most important information coming out this quarter won’t be the second quarter numbers, but what companies are saying about the second half of the year. Wall Street has some pretty loony profit projections for the third and fourth quarter. This is where the real danger is with companies trying to meet those estimates. In my opinion, it isn’t going to happen. When that reality sets in, it should take us into the next phase of the bear market, or the capitulation phase, especially if there is a war with Iraq or if there are more WorldCom’s and Enron’s that surface.
Higher volume levels supported today’s rally in the markets. Volume on the NYSE was 1.5 billion shares and for the Nasdaq it was 2.5 billion, with 1 billion of that amount coming from trading in shares of WorldCom. Market breadth was positive by 19 to 12 on the big board and 19 to 15 on the Nasdaq.
Overseas Markets
European markets dropped sharply Wednesday afternoon, amid renewed concerns about company debt ratings. All eight major European markets were down during today’s trading. Asian stocks rose solidly Wednesday, again breaking from the plunging U.S. markets. The tech-fueled Nikkei 225 index lifted 1.79% to 10,812.30.
Treasury Markets
In the bond market, Treasury prices turned slightly lower. The benchmark 10-year note dropped 8/32 yielding 4.76% and the 30-year government bond fell 7/32 to yield 5.45%.
© Copyright Jim Puplava, July 3, 2002