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Obama's Plan to Tax Dividends is Wrong, It's Time to End Double Taxation
President Obama is outraged again.
These days he's bothered by the fact that dividends are taxed at only 15%.
And to make people like Warren Buffett happy he wants to make dividends fully taxable at a top rate of 39.6% (plus state and local taxes.)
At the same time, he's also talking about reducing the top corporate tax rate from 35% to 28%.
As dividend-earning shareholders, that means we must unite and also demand an end to subsidizing corporate fat cats by having our dividends taxed twice!
Even if the corporate tax rate is reduced to 28%, our dividends – if subjected to the full income tax – will be taxed at a much higher rate than any other form of income.
First at 28% on the corporate level, then at another 39.6% for individuals, making the total tax rate on dividends 1-(0.72×0.604) or 56.5%!
That's ridiculous, and totally unfair.
The Double Taxation of Dividends is Wrong
It's also very damaging to our economic system-even though modern financial theory has downgraded the importance of dividends.
In reality, this "theory" is quite wrong.
That's because the return on our investments is based on the streams of cash corporations can be made to pay. In a business that is not liquidating itself, most of that cash comes in the form of dividends.
Companies that do not pay them can defer their shareholders' returns ad infinitum.
For their investors, the buying and selling of these shares in the market is simply a series of attempts to profit from the "greater fool theory."
Take Apple Inc. (Nasdaq: AAPL) for example.
What you don't know is that Apple's $100 billion in cash is actually doing a great disservice to its shareholders.
After all, study after study has confirmed what Harvard professor Mike Jensen told us in 1986: A pile of cash is damaging to the company that has it.
It's counter-intuitive but it's true.
The Hunt for Higher Yield: Investors Pour into Emerging Market Debt
The never-ending hunt for higher yield is leading investors to bet record amounts on emerging market debt.
In just the first two weeks of 2012, governments of undeveloped economies from Asia to Africa sold more than $30.6 billion in dollar-denominated bonds according to Bloomberg News.
That's up from roughly $19.9 billion in the same period last year and the most since 1999, when Bloomberg began collecting data.
Typically, investors shun emerging market bonds during times of uncertainty in favor of "safer" assets like gold and U.S. Treasuries.
But that has started to change.
The Big Move Into Emerging Market Debt
In fact, investor demand is overwhelming supplies as orders have outstripped the amount of bonds being sold.
During a recent auction, the Philippines received $12.5 billion of orders for $1.5 billion of 25-year bonds, pushing the yield down to a record-low 5%. Indonesia sold 30-year bonds at a record-low yield of 5.375% and Colombia sold $1.5 billion of 29-year bonds at 4.964%.
Analysts say the debt crisis in Europe, along with record low yields on U.S Treasuries, has investors on the hunt.
They are now buying the debt of undeveloped nations like Indonesia, Mexico and Brazil, even though credit-rating firms rank them as more risky than their European counterparts
"What we're seeing is a re-evaluation of sovereign-credit risk, increasingly being driven more by fundamentals than by classifications," Eric Stein, a portfolio manager at Eaton Vance Corp. (NYSE: EV) told The Wall Street Journal.
According to the J.P. Morgan Emerging Markets Bond Index, investment-grade sovereign emerging-market bonds are yielding an average of 4.7%.
By contrast, Italian 30-year debt yields 7%, while Spanish 30-year debt yields 6.1%.
One reason emerging market bonds are attracting interest is…
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Why Mark Mobius is Betting Millions on this Acronym
You may be surprised to learn that some of the world's best investors are buying heavily right now – not because they think we've hit a bottom, or even the bottom, but because they're setting themselves up for the next big run.
Take Mark Mobius, for example.
Long regarded an emerging markets pioneer, Mobius is in charge of more than $50 billion worth of assets on behalf of Franklin Templeton. Lately, he's snapping up Romanian real estate, Nigerian banks, Kazakhstani oil companies and more.
Why?
There are many reasons, but basically it comes down to this: Despite the fact that emerging markets returned almost 250% from 2001 to 2010, the old playbook no longer works.
And I have to be careful when I say that because many investors will blithely assume that emerging markets are dead. They're not – it's just time to redraw the map because the best opportunities are no longer where you'd expect.
It's no longer about the BRICs (Brazil, Russia, India, and China), for example. Sure these countries remain great places to stake your claims on the wealth of newly found purchasing power and consumerism, but it's the so-called MINTs (Mexico, Indonesia, Nigeria, and Turkey) that may offer a faster route to riches.
Or the Next 11, or N-11, as Jim O'Neill, the economist who coined the term "BRICs" a decade ago, calls them. The N-11 is basically the MINTs plus Bangladesh, the Philippines, and Pakistan plus a few more countries on the fringe of "civilized" thinking.
Then there's the VISTA (Vietnam, Indonesia, South Africa, Turkey, and Argentina) nations and the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa).
Seriously?
Yes. For the first time in modern history, emerging markets are no longer completely dependent on Western economies nor demand, a point you've heard me make repeatedly in the past. At the risk of sounding like a broken record, this gives them an unprecedented range of options largely independent of the political, financial, and economic swamp the developed markets have become.
This is not the kind of thing you're going to pick up on in the mass media, but every single one of those nations is set for a runaway investment boom because they are advancing faster than almost everybody expects.
In fact, many of the big investing houses like Goldman Sachs Group Inc. (NYSE: GS), Fidelity, HSBC Holdings PLC (NYSE ADR: HBC) and others feel the same way I do – that the MINTs and N-11 have the potential to be every bit as profitable over the next 10 years as the BRICs were over the past 10 years.
China Fears Much Ado About Nothing
Markets in Hong Kong, Vietnam, Taiwan and Korea were closed last week as people across Asia celebrated Moon Festival, one of the culture's most beloved holidays along with Chinese New Year. Moon Festival's origins center around a husband (Houyi) and wife (Chang'e), who were sentenced to live eternally separated on the sun and the moon.
Chang'e, representing "Yin," lives on the moon and Houyi, representing "Yang," lives on the sun. Once a year, on the night of the Mid-Autumn Festival, Houyi visits his wife and that is the reason why the full moon burns brightly on this night.
For many, the yin and the yang illustrate the importance of having balance in life. Investors must find the right risk/reward balance. Businesses must find the right capital spending/revenues balance. And, we all must strive to find the right work/life balance.
China's Economy Finds Balance
Balance is also a crucial goal for China's economy – the economy must not grow too quickly or risk a sharp correction. Just this year, China has weathered an epic battle with inflation, drought and floods, poor global macroeconomic conditions, massive accounting/corruption scandals and a tragic accident on one of its marquee achievements-the country's high speed rail system.
We've discussed the tremendous build-out of China's high-speed rail system before. And earlier this month, I was lucky enough to see what traveling at the speed of China feels like firsthand. I was on a train that averaged 185 miles per hour during the 923-mile trip from Shanghai to Beijing. I've traveled to all corners of the world and have seen many things during my travels, but viewing China's explosive growth as it flies by you is something I will never forget.
China remains the beacon of hope for the global economy, the largest and, many times, the "sole engine of the world economy," BCA Research says. China's real gross domestic product (GDP) is forecasted to grow 8.9% in 2011 and 7.8% in 2012, according to ISI Group. This is a slower rate of growth compared to recent years but "doesn't look like an economy struggling under tighter credit conditions," GaveKal research says.
The key to China's economic growth isn't "how fast?" or "how much?" The most critical question is "what's driving it?"
The Dollar Is DONE: Four Ways To Profit As the U.S. Dollar Dies
As a young British banker in the inflation-ridden 1970s, I got used to carrying large amounts of German deutsche marks, Swiss francs and Japanese yen in my wallet – to have some security against the lousy performance of the British pound sterling.
While paying for a pizza in London with this foreign cash was difficult, having those "safe-haven" currencies in hand helped me sleep at night.
We've reached that point again. In light of the debt-ceiling debacle in Washington, the U.S. credit-rating downgrade by Standard & Poor's, and the likelihood that a long stretch of dollar-killing stagflation is headed our way, it's time to take refuge in today's safe-haven currencies.
And I'm going to show you the safest of those safe havens.
Investing Icons Weigh In On U.S. Credit Downgrade
The market's verdict on the Standard & Poor's (S&P) U.S. credit downgrade is in – and it isn't good.
In direct response to the U.S. credit downgrade, the Dow Jones Industrial Average plunged more than 631 points, or 5.52%, yesterday (Monday), after falling 6% last week.
No question, we're in the midst of a free-fall. And there's no doubt about the role Washington played in creating this dangerous situation. But U.S. policymakers aren't the only ones to blame.
Some of Wall Street's heaviest hitters, including Warren Buffett and Bill Miller, have zeroed in on S&P for perhaps being a little too overzealous in its approach.
"I don't get it. It doesn't make sense. In Omaha, the U.S. is still triple-A rated," Buffett told Fox Business Network. "And if there were a quadruple-A, I'd give it to the U.S."
Buffett and fellow S&P critics said the agency made a hasty move that scared investors and clobbered markets.
Buffett: "I Don't Get It"
Buffett said the U.S. debt downgrade would not deter him from investing in U.S. Treasuries.
"If anything, it may change my opinion on S&P," Buffett said.
Echoing Buffett's disbelief was Legg Mason Inc.'s (NYSE: LM) Chief Investment Officer Bill Miller.
Miller said S&P "rushed to judgment" and took a "precipitous, wrong and dangerous" action.
For Rational Investors, Market Uncertainty Equals Profits
There's no question that the Washington fiasco, more commonly referred to as the debt-ceiling crisis, has injected a huge amount of uncertainty to financial markets.
That's bad news for the U.S. economy – which Friday's lousy second-quarter gross-domestic-product (GDP) report demonstrates was already suffering from bad fiscal policy, bad monetary policy and a gross excess of new regulations. This deal didn't really solve any long-term problems, won't head off a federal credit-rating downgrade and all in all only adds to the market uncertainty.
But here's the good news. Uncertainty breeds opportunity – especially for savvy, rational investors.
And with the dark clouds of uncertainty that continue to build over the U.S. economy, we can turn this situation to our advantage in a big way.
Let's take a closer look so that I can show you what I mean …
When Investors Are Certain … But Not Rational
There's an irony about investing that's not lost on savvy, rational investors – even at the retail level: If a market lacks uncertainty, it's awful tough for us to analyze and then invest with confidence.
Just consider the capital markets of the late 1990s. Back then, stocks seemed to be on a steady upward march, posting double-digit gains each year.
The fact that the investing masses believed there was a complete lack of market uncertainty made it very difficult for "rational investors" to invest. Those "rational" players understood that the markets were getting frothy, or speculative – in fact, the warning signs were there as early as the middle of 1996 (six months before U.S. Federal Reserve Chairman Alan Greenspan denounced "irrational exuberance").
The whole tech sector really demonstrated the pervasive belief that stock prices could only go up. After its August 1995 initial public stock offering (IPO), Internet-browser pioneer Netscape Communications Corp. saw its shares double on its first day of trading. And I'm sure we all remember how tech companies in general – and particularly companies with "dot-com" in their title – saw their valuations soar well beyond any rational expectations.
For rational investors, that apparent market "certainty" made it almost impossible to invest with any degree of confidence – short or long.
The market was clearly too high, especially in the tech sector, so buying made no sense. It was impossible-to-gauge euphoric speculation that was driving stock prices – not easy-to-quantify fundamentals. If you bought, you were just hoping that the "Greater Fool Theory" would bail you out with a sale to someone else at a higher price.
Selling the market "short" wasn't the answer, either. Expecting an irrational trend to correct itself is a sucker's bet. And a bullish trend like this one that doesn't correct for five years is an expensive misstep – one that will send stock-market bears straight to the poorhouse.
There was very little un-certainty in the market – the United States was the best economy in the best of all possible worlds and the federal budget was swinging into surplus.
In fact, the only uncertainty to be found was situated far away from U.S. shores. I'm talking, of course, about the Asian economies going into crisis in the summer of 1997 and Russia defaulting in August 1998.
Now there was some market uncertainty that would have let you make some real money.
Amp Up Your Income with Comphania Energetica de Minas Gerais (NYSE ADR: CIG)
You may never have heard of Comphania Energetica de Minas Gerais (NYSE ADR: CIG).
But this Brazil-based electric utilities company could be your key to unlocking profits – and income – at a time when much of the developed world is mired in stagflation.
So let's buy Comphania Energetica de Minas Gerais (**).
It's not a difficult decision when you look at the global market and see that there aren't many trustworthy investments in the United States and Europe.
The non-stop news flow out of Europe has wrecked investor confidence. The market now is pricing in haircuts on European sovereign debt. And this process has driven down yields in Western developed nations, as investors fear government default.
You only have to look at what bond yields are in the United States and Germany, compared to other nations like Ireland or Greece, to see the real fear that exists in the world today. Two-year Greek debt is trading with a 35% yield — not that long ago it was below 10%.
Still, that doesn't exactly make the dollar a safe-haven.
With so much acrimony over the debt ceiling, the U.S. is threatening a temporary default on its debt payments. The U.S. Federal Reserve meanwhile is keeping interest rates at artificially low levels in an effort to stimulate economic growth. That means the U.S. central bank is essentially punishing people who are retired and need to live off the cash flow from their savings and retirement funds.
Indeed, millions of retired people who rely on such fixed-income investments have been hurt by the actions taken by central banks – not just in the United States, but Japan and Europe, as well.
Of course, that's not to say all investors have been punished.
There are global investors – with an eye toward maintaining their cash flow from investments – that have figured out how to meet their cash flow needs and escape from the real negative rates offered in the developed markets.
Investing in Steel: Nine Ways to Strengthen Your Portfolio
Global steel producers were prolific in 2010, with worldwide output reaching a record 1,414 million metric tons (mmt). According to the World Steel Association (WSA), that represented an average production increase of more than 15% from 2009, when the poor global economy had pushed steel demand down to levels not seen since before the turn of the century.
And, based on recent economic and industry forecasts, both production and demand are expected to continue rising for all of 2011 – which bodes well for investors looking to turn hard metals into solid profits.
The WSA forecasts finished steel consumption in 2011 will rise 5.3% to nearly 1,340 mmt – in spite of the fact that steel prices have reached near-record levels in recent months, climbing in January to more than $800 per ton of hot-rolled coil steel, the industry's base product unit.
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