Smart Investing

 

September 21, 2012

January 31, 2014


Standing on the edge of the fiscal cliff

I have often quoted the great investor Peter Lynch: Investors have lost more money trying to avoid corrections than they have from the corrections themselves.

Many investors have stayed on the sidelines this year in fear of another big correction; in the meantime the S&P 500 has climbed more than 15 percent in 2012.

The next big fear on investors’ minds is the fiscal cliff. Coverage in the mainstream media has created big worries for investors that this is going to wipe out our economy and the markets will tank.

My opinion is that this will not happen. As I have said many times, when we face problems like this, something will change. It won’t be as bad as how it is portrayed in the media, or what people may think, nor will it be as good as investors would like it to be.

The big fear is that without new legislation at the end of 2012, the Bush tax cuts, the payroll tax cut and extended unemployment benefits will expire, and this will happen as a higher Medicare tax kicks in and then the discretionary spending cuts agreed to last August take effect.

No matter who is elected president, it seems to be for certain that extended unemployment benefits are done.

Now, before you get all worked up and think about the poor people who will have no income, I will encourage you to think about the freeloaders who say, "Why should I work when I can get free money for doing nothing?"

The benefit here is that we should see unemployment drop by a full percentage point by summer 2013. Be warned — the media will be running segments of the poor Joe and Jane Blow who are going to lose this or that. These types of stories are the ones that produce higher ratings and, in return, more advertising dollars.

I would put the increase in Medicare tax at a 50/50 chance of taking effect. It depends on who is in office and what happens in the Senate. I don’t believe this will have much of an effect on company earnings or the stock market either way.

When it comes to spending cuts, I think there is only a 25 percent chance that both rounds will be implemented. The worst case here is, with a divided government, both rounds will go through and we may have four more years of the same thing. This could be the hardest scenario on company earnings, and investor returns better than bonds or CDs over the next four years will not be easy to come by.

There was something strange when I looked at the deficits going forward, whether we have a Democratic or Republican president, or even a split government, the projected deficit is expected to drop each year until 2018. At that point in time the Congressional Budget Office predicts that deficits start increasing again after hitting a low deficit of $79 billion, well below 2012's $1.128 trillion.

Some of you may remember the high deficits from the recession and defense buildup in the early 1980s. However, from the mid 1980s to the year 2000, the stock market did well and the economy only had one recession during that time frame. By 2009 the deficit had climbed to $1.416 trillion, which was 10.1 percent of GDP. As of 2012 the debt to GDP has fallen to 7.3 percent. If we can reduce the deficit some and grow GDP some we could get this debt to GDP down to 4 percent and at this level the GDP should grow faster than the debt.

I also think a good possibility is that nothing happens and the whole scenario gets kicked down the road until 2013. This would mean that once again some investors would do nothing, and in the meantime some good companies earn more profits, pay more dividends, see an increase in their equity value and maybe see a little increase in their stock price from Jan. 1, 2013 to Dec. 31, 2013.

So, I'm going to stick my neck out, as I always do, and say we will have no fiscal cliff; instead we may fall off a smaller ridge.

So go out and research some good quality companies to invest in, be careful to find the strongest companies trading at good valuations, and think where you will be three to four years, not three to four months.

Have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com.



Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


 

September 21, 2012

January 31, 2014

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