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$900 Billion Stimulus for 2011, straight to consumers hands.

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December 13, 2010 – Comments (7) | RELATED TICKERS: SPY , QQQ , TECL

Unlike the 2009 $800 Billion Stimulus, next year's Mega $900 Billion is going straight to the hands of the consumers.

 

Why the Tax Deal Could Be Obama's Salvation

By Rick Newman

Posted: December 8, 2010

 

The "tax compromise" reached by President Obama and Congressional Republicans has left liberal Democrats feeling gypped. But it could end up being a stealth consolation prize for the Democrats after the drubbing they took in the 2010 midterms—and might even pave the way for Obama's reelection in 2012.

[See 12 ways to stop America's decline.]

Many Democrats are outraged that Obama agreed to an extension of the Bush-era tax cuts for America's wealthiest earners, which is a top Republican priority. And opposition to the top-tier tax cut could still scuttle the deal in Congress, where lawmakers have to turn the broad framework into a set of laws able to get enough votes to pass the House and Senate. But by blinking on the tax cut, Obama got a long list of concessions from Republicans on other White House priorities, securing an economic "stimulus" program far bigger than most analysts thought possible in Washington's vitriolic climate.

The irony is startling. The $800 billion stimulus program Obama championed in 2009 turned into a political albatross for Democrats, with many voters feeling (mistakenly) that it drained the Treasury while doing nothing for the economy. That was one cause of the Democratic downfall in the midterms. Yet Obama has now negotiated an even bigger stimulus package. The price tag for the tax deal is about $900 billion over two years, which means money that would have been collected by the government will instead go into consumers' pockets, to spend as they see fit. It's borrowed money, of course, so it adds to the huge pile of debt that we'll all have to pay down sooner or later. But many economists, including Federal Reserve Chairman Ben Bernanke, have argued that the weak economy needs exactly this type of boost, since it would put the economy on stronger footing for the inevitable day of reckoning over the debt.

With Stimulus II now on the table, 2011 is already looking better. In a note to clients, Bank of America Merrill Lynch highlighted several positives. The plan could boost GDP growth from 2.3 percent or so in 2011 to as high as 2.9 percent, the bank predicted. It could also boost stock prices and reduce the odds of more "quantitative easing" by the Federal Reserve, which has made investors nervous about runaway inflation down the road and even spooked some insiders at the Fed. After three years of economic gloom, hopeful notes from Wall Street advisers about "upside risks"—rather than downside ones—could itself improve confidence in the stock markets and the economy.

[See 4 reasons jobs remain so scarce.]

Obama's compromise would also secure more than a year's worth of aid for the long-term unemployed, giving some predictability to a group of down-on-their-luck Americans who have felt captive to political sideshows in Washington. One unhappy legacy of the Great Recession is an epidemic of long-term unemployment, with about 6.3 million Americans out of work for 27 weeks or longer, and another 1.3 million so discouraged that they've stopped looking for work altogether. Congress has stepped in to augment their unemployment benefits at least seven times since 2008, providing more than $100 billion in aid that has almost entirely been spent, boosting the economy. But those extensions usually last for only a few months before Congress needs to renew them, and concerns over the cost have made passage harder and harder. The new tax deal would lock in the extended aid for 13 months, providing a predictable lifeline for some of the nation's neediest consumers.

The deal would also alleviate the "uncertainty" that business leaders have complained about, which is hard to quantify but counts as an important psychological factor affecting the economy. The fate of the Bush tax cuts has been a concern for every American who pays attention to their finances, since a basic requirement of financial planning is a clear idea of your tax liability in any given year. So consumers now have more clarity about their finances in 2011 and 2012. The tax deal wouldn't affect corporate tax rates, but it would have an optimal short-term impact on practically every business leader, since their tax rates will remain steady instead of going up. And a better feeling about the economy at home translates into a better feeling in the boardroom.

[See 4 fears about Washington wrecking the economy.]

A variety of other tax cuts included in the plan, such as a temporary reduction in payroll taxes paid by workers, tax credits for low-income families, and accelerated tax writeoffs for business investments, would plow a pile of stimulative measures into one huge bill. For investors hoping Washington will help the economy, that's a lot better than a bunch of smaller bills that would each have to make it through Washington's legislative sawmill. Given concerns about political gridlock, a huge stimulus program prior to the Republican takeover of the House in January would greatly reduce the economic to-do list of a divided Congress.

If the deal passes—and there are no ugly economic surprises—the economy will almost certainly grow more than previously expected over the next two years. And the prime political beneficiary would be Obama, as he campaigns for a second term. Moody's Analytics predicts that the boost to economic growth from $900 billion worth of stimulus would create an additional 1.6 million jobs in 2011, enough to bring the unemployment rate down from about 10 percent at the end of next year—where it would be without any additional stimulus—to about 8.5 percent. "In all likelihood, the recovery would have made it through next year without backtracking into recession," writes Moody's economist Mark Zandi. "But this deal improves those odds significantly." And the trend would continue right through 2012, since it's a two-year plan.

[See 3 ways to spot small-government phonies.]

Until now, the biggest question about the 2012 elections has been whether the economy will be improving enough by then to make voters feel optimistic—which would obviously benefit Obama and other incumbents—or whether an impotent recovery will perpetuate a sense of gloom and decline. Steady job creation and a marked improvement in the unemployment rate by 2012 would enhance job security for those working, and probably boost incomes, since pay rises as demand for workers goes up. And it would obviously help some people at the margins, since the ranks of the unemployed would decline. That may be all the wind an incumbent president needs. Score one for Obama.

If he wins in 2012, of course, the post-election drama could be even more tense than it is now. If a two-year extension of the Bush tax cuts passes this year, it will expire at the end of 2012, which means politicians then will be howling about "tax increases" just as they are now. And by 2012, there may be no choice but to swallow hard and absorb them. The other huge issue in 2012 will be the national debt, which is also topical now, of course, but is unlikely to be seriously addressed before the next presidential election. So if Obama does ride tax cuts to victory in 2012, he may end up riding tax hikes and deep spending cuts to the end of his second term, in 2016. Still, Democrats could do a lot worse.

Twitter: @rickjnewman

 

7 Comments – Post Your Own

#1) On December 13, 2010 at 3:36 PM, IBDvalueinvestin (99.64) wrote:

Marketmail Monday, December 13, 2010

Small Stocks Soar on Tax Bill & Bond Collapse
By Louis Navellier

The stock market celebrated the extension of the Bush-era tax cuts last week. The Dow was fairly flat, but most other indexes reached new 2010 highs. The S&P 500 rose 1.28% last week, reaching its highest level since September 19, 2008, just after the Lehman Brothers collapse. Small stocks fared even better, as the "January Effect" seems to start earlier each year. Last week, the S&P Small Cap index and Russell 2000 rose 2.51% and 2.70%, respectively. Some of the new tax code provisions - namely breaks for business investment and a $120 billion payroll tax holiday - are expected to spark new economic growth, causing many economists to revise their 2011 GDP forecasts upward, to as high as 3.5%.

Stat of the Week: Consumer Confidence Hits 18-Month High

There was another "avalanche of good news" released late last week, pushing the market up to new 2010 highs. First, on Thursday, the Labor Department reported that new claims for unemployment benefits fell to 421,000. Even better, the closely-watched four-week average of new claims fell 4,000 to 427,500, the lowest level since August 2008, providing new hope that the job market is slowly but steadily improving.

My candidate for Stat of the Week involves the consumer. On Friday, the Reuters/University of Michigan consumer sentiment index rose to 74.2 from 71.6, reaching its highest level in 18 months. Since the U.S. consumer is still the strongest economic engine in the world, the re-emergence of the U.S. consumer is an incredibly positive development for both U.S. and global growth. On Friday, the market had its best day of the week, so consumer confidence is my candidate for "Stat of the Week" last week.

Another piece of positive news impacting GDP forecasts was released on Friday, when the Commerce Department announced that the trade deficit in October shrank 13.2% to the lowest level since January, as exports rose 3.2% to $158.72 billion - their highest level since August 2008 - and imports fell 0.5% to $197.44 billion. Exports of goods rose 4.2% to $112.3 billion, which is very encouraging, while the export of U.S. services reached an all time record of $46.42 billion, which is also great news.

There is no doubt that high crop prices have helped to boost the value of U.S. exports, since agricultural exports also reached a new record high. Since the trade deficit has a major impact on GDP growth, it is likely that more economists may want to revise their fourth quarter GDP estimates substantially higher! Overall, as consumer optimism returns, the U.S. and world economy appear to be steadily improving.

Treasury Bond-Market Collapse Fuels a Continuing Stock Surge

My favorite economist, Ed Yardini, recently pointed out that the Fed's first round of quantitative easing was designed to encourage investors to buy bonds. However, Yardini pointed out that the Fed's second round of quantitative easing now appears to be pushing investors out of bonds and into stocks. Yardini was in London last week, reporting that Europe is now jumping on the quantitative easing bandwagon.

The Bank of England, the Bank of Japan, the European Central Bank - as well as the Federal Reserve - are all pumping money into their respective bond markets via quantitative easing and are willing to do "whatever it takes" to shore up their respective economies. This money is definitely spilling over into the stock market as the risk of rising bond yields (falling bond prices) is pushing investors out of government bonds and into other assets. Since the stock market is typically the first choice of investors running from bonds, we are in a very bullish environment for stocks, especially as GDP estimates are revised higher.

Opponents of the recent tax bill say that it will add another $1 trillion to the federal budget deficit in the next two years, on top of the already-huge (and growing) monthly budget deficits in recent months. On Friday, the Treasury Department announced that November's federal budget deficit hit a record $150.4 billion. November was the 26th straight monthly deficit and, worse yet, it came in $45 billion higher than November of 2009, so the U.S. budget deficit is spinning out of control - with or without a new tax bill.

Whether the tax bill passes now or later, investors realize that $1+ trillion dollar annual deficits are now a permanent fixture for as far as anyone can see (even the White House is forecasting a $1.416 trillion deficit for fiscal 2011). Despite the Fed's QE-2 policy of buying $600 billion in Treasury debt, Treasury bonds had their worst weekly performance this year as yields rose dramatically last week. The 10-year Treasury bond yield is now up to 3.32%, almost 1% above its October low of 2.41%. Meanwhile, 10-year bond yields in Britain, Germany and Japan have also risen 18% to 29% in the last five weeks.

As long-term bond yields rise and bond principal erodes, the move out of bonds and into stocks should continue. Consumer confidence and stronger GDP growth will also help to inspire confidence in the U.S. economy and the stock market. One thing I have learned in the past 30+ years in this business is that sometimes you have to wait patiently for inflection points. Now that many investors are fleeing bonds and moving into stocks, this could be a strong inflection point, sparking a long and strong stock market rally.

The Federal Reserve Has a "Blind Spot" for Surging Inflation

Tomorrow, the November Producer Price Index (PPI) will be released, followed by the Consumer Price Index (CPI) on Wednesday. In his recent "60 Minutes" appearance, Fed Chairman Ben Bernanke re-iterated his belief that the inflation risk remains low. In a technical sense, he's right, since approximately 40% of the CPI is "Owner's Equivalent Rent," a theoretical number based on the market prices for hotel rooms, apartments and home prices, so the chronic downward pressure from deflationary real estate prices is artificially suppressing the CPI. Zillow, a firm that calculates home price data, said last week that it expects home values to decline by more than $1.7 trillion this year, due to high foreclosure activity, so this continual decline in housing prices has kept the CPI from rising significantly over the last year.

However, most people don't buy a new home each month, so we would get a better idea about real-world inflation if we stripped away real estate prices. Look at this chart, for instance. Despite the U.S. dollar's recent recovery, commodity prices are continuing to soar. In fact, crude oil prices cracked $90 per barrel on Tuesday, clearly signaling that commodity price inflation is being "baked into" the price pipeline.

Click on chart to expand or print

One reason that commodity prices are rising is due to the anticipation of accelerating global GDP growth. For example, on Friday, China announced that its exports rose 35% in November, up substantially from October's 23% annual pace. (Economists only expected China's exports to rise 22.4% in November, so this 35% export surge caught them by surprise.) On top of that stunning statistic, China's import growth surged 37.7% in November (up from 25.3% in October), exceeding its export growth rate, thereby bringing China's trade surplus down to $22.9 billion in November, down from $27.1 billion in October.

As a result of its booming domestic growth and brewing inflation, China raised the amount of reserves that commercial banks must maintain, to try to cool inflation fears. Specifically, China's central bank lifted reserve requirements for commercial banks by 0.5%, the sixth time this year that it has used this policy tool to drain liquidity from the financial system in an effort to slow its booming economic growth. Now, if only our Federal Reserve could see the real inflation brewing in the U.S. and global economy! In the meantime, business-friendly tax changes and a switch from bonds to stocks should keep stocks rising.


Marketmail gets updated on Mondays.

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Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you.

Although information has been obtained from and is based upon sources Navellier believes to be reliable, we do not guarantee its accuracy and the information may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date of the report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security.

Past performance is no indication of future results.

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#2) On December 13, 2010 at 4:01 PM, rofgile (99.33) wrote:

The problem is that the stimulus spending was for things like food stamps, unemployment benefits, infrastructure.  Those are all things which are truly stimulative to the economy (local, or industry).

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Giving a tax break (which is already present) only to the rich making more than 250k/year is going to be stimulative.. how?  It'll only make the rich richer through higher returns on asset sales in investing and higher paychecks which will be saved or used to buy luxury goods, gold, and land.

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It would have been far better to not have the only rich tax cut of those making greater than 250k.  We would all have gotten an equal tax rate on earnings less than 250k, rich or poor.  That would have been fair.

 -Rof 

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#3) On December 13, 2010 at 4:25 PM, IBDvalueinvestin (99.64) wrote:

rofgile, based on your post you must not have read the entire Tax cut plans in its entirety.

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#4) On December 13, 2010 at 4:40 PM, JobSlasher (< 20) wrote:

The real issue is whether this move, blowing the deficit wide open with little regard to the consequences, will deflate the dollar and force the price of food and fuel up leaving less and less to other areas of the economy leading to massive job losses.

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#5) On December 13, 2010 at 6:02 PM, RaiseMyDiv (63.34) wrote:

I think the biggest argument against the Tax Compromise is that we have had these low tax rates on the rich for 8 years and we still have 9% unemployment.

 

I would like to see the cuts for the middle class made permanent and no longer linked with the cuts for the rich. This compromise only adds to the deficit and pushes the issue off for two years. 

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#6) On December 13, 2010 at 6:02 PM, JobSlasher (< 20) wrote:

My guess is as more and more go to food and fuel, there will be a lot less for healthcare.

CHICAGO – In Illinois, a pharmacist closes his business because of late Medicaid payments. In Arizona, a young father's liver transplant is canceled because Medicaid suddenly won't pay for it. In California, dentists pull teeth that could be saved because Medicaid doesn't pay for root canals.

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