- Long term interest rates will go up significantly while short term rates will stay low (i.e. a very steep yield curve). One of the reasons is because of all the debt the U.S. government will have to issue over the next few years. Currently, the 30 year bond is yielding 3.66%. Warren Buffett got 10% yield on his preferred interest on his investment in Goldman Sachs. The Chinese, with their massive dollar reserves, will be financing this, like it or not. They will not accept a 3.66% return on their money if Buffet is getting close to 10%. The yield on a 30 year bond will be hitting 8% over the next year or so in order to pay for the TARP program and whatever else Congress dumps on us.
- If we are looking at a 8% 30 year bond rate, the stock market will drop to a level relative to this. If we assume a 3% dividend yield (a bit on the hight side) to make the math earlier and a 30% risk premium, the S&P combined earnings and dividend yield (i.e. dividend yield plus the inverse of P/E) should be roughly 13%. That implies an earnings yield of 10% or a P/E of roughly 10. S&P 500 earnings will likely drop by about 30%, so that gives an implied index level of 450 as the bottom - so a worse case scenario of a 40% + drop. Mind you, that is a worse case scenario, but I can see it dropping down below 600.
- Commodity prices will continue on a short term downtrend, and will start back on an upward swing once the markets start to recover from their bottom.
- There will be another major bank failure in the next year.
Saturday, November 22, 2008
After being to a few investment symposiums (one of the benefits of having the CFA charter) and doing my own overview of the markets, here are a few things I think are probable:
Saturday, November 08, 2008
I have talked to CPAs who are advising this already. The consensus that taxes are going to go up a lot starting in 2009. The tax planning for anticipated rate hikes is the 180 degree opposite of traditional tax planning, which are:
- Make any anticipated capital asset sales now while the 15% capital gains tax rate is still around.
- If you have a C corp, and are anticipating distributing Earnings & Profits - make the dividend now while 15% dividend tax rate will be around.
- Accelerate all revenue streams (i.e. complete contracts, etc) to have as much in 2008.
- Exercise any employee stock options now - it might be better with 15% tax rate in a crappy market than 25% in a good market. Then again, we don't know where the dividend rates are going, they might go back to the top marginal rate.
- Accelerate your gifts for 2008 and consider electing to pay gift tax. Minimize the estate and gift out as much in anticipations to changes to gift and estate taxes.
This is some of the things that people are doing right now. Miami Dolphins owner Wayne Huizenga has already said that he will now attempt to sell his remaining 50% interest in the team in 2008 rather than in risk substantially higher promised future capital gains tax hikes by the democrats. Huizenga said " He wants to double the capital gains tax, or almost double it. I'd rather give it to charity than to him."
Remember, this is generally one of the reasons why increase in marginal tax rates don't work - people with the means to plan accordingly, do so. Hint to the Democrats - if you really want to raise revenue, expand the base and lower the rate. But then again, Obama has said that he will forego revenue in the name of "fairness".
Well, the bright side is that CPA's like myself will continue to be employed and see additional work as people try to figure out the inevitable tax changes that are being anticipated.
Monday, November 03, 2008
It has been almost 25 years since Trudeau left 24 Sussex drive, and we are still dealing with the wreckage of his policies (Constitution, NEP, welfare state). Their lives are parallel in many ways. Check out the wiki post on PET. Ignore the Liberal hagiography of his political accomplishments - ask any Albertan about the NEP.
America, you've been forewarned.