Tuesday, November 18, 2014

Playing the "STUPID" Card...

The tax on high-end employer provided health benefits (a.k.a. the Cadillac tax) is the same tax that is at the heart of the comments made by Jonathan Gruber that some are using to suggest that American's were lied to.  Yet, the discussion about changing the tax code to reflect the bias treatment of employment compensation has been debated many times before (see article link below).

There is often a big difference between who legally pays a tax (who the tax code imposes the tax on) and who "economically" pays the tax.  Hence, Gruber's newly surfaced comments at conferences and class lectures about how the tax would be shifted in part to everyone in the market is basic microeconomics albeit not that well understood.  I agree his choice of words was poor, but if the point about the economic incidence of the tax was made explicit, as Gruber stated, the bill wouldn't have passed and we would still have millions of uninsured people.

Based on the "current" conservative line of logic, all FICA taxes are a "lie" because taxes legally  levied on your employer for their Social Security and Medicare contribution of your behalf are actually born partially out of your wages depending on the wage sensitivity in the labor market.  The tax on cigarette manufacturers is a lie because the tax is economically born by smokers who are very insensitive to price (little decrease in consumption) when it goes up because of the tax.

The conservative media is turning this basic economic reality into a farce.  They appear to be very sensitive to being called stupid yet by making the whole argument about a "lie" appear to be, well, actually stupid.

Check out this article from the Houston Chronicle from 1/28/2007.  It is the very same tax, the "Cadillac Tax", being proposed by the Bush Administration in 2007.  This is not a new concept for conservative policy makers.  They know all about this tax and know this economic concept.  What they are really doing is playing the "stupid" card, literally and figuratively, on their conservative base.  So let me ask, who's really stupid here?

Friday, October 17, 2014

The Inequality Trifecta by Mohamed A. El-Erian - Project Syndicate

The Inequality Trifecta by Mohamed A. El-Erian - Project Syndicate

What Markets Will... Krugman 10/16/14 NYT

From Economist's View: Thoughts on high priced textbooks

The article discusses the principle-agent problem and its application to the textbook market.  Knowing that many of my students are opting to not buy textbooks despite the potential that it might result in lower grades, I've been talking to publishers about price discounts and have been successful negotiating price discounts, especially for principles textbooks.

Thursday, October 9, 2014

Root for a Correction

by Matt Malick and Ben Atwater
Root for a Correction

In market parlance, the textbook definition of a correction is a drop of greater than 10%, but less than 20%.  Any fall of 20% or more is considered a bear market.

Commentators often talk about a correction as a healthy phenomenon.  But, when one happens, it feels terrible – like it is never going to end.

It has been so long since we have had a correction - April 29, 2011 through October 3, 2011, when the market fell just over 19% on a closing basis - we almost forget how torturous they really are.

Presently, the Standard and Poor’s 500 has declined, as of yesterday’s close, 3.77% from its recent all-time closing high on September 18th.  This is far from a correction, but painful enough, especially given the dramatic underperformance of small-cap (Russell 2000) and international equities (ACWX) relative to the S&P 500.

However, a correction can be beneficial as long as investors don’t panic and make poor decisions.  If we are in the process of one, it would serve to make valuations more reasonable, dampen investor sentiment and provide a potential catalyst for a move to new highs following a successful earnings season.

As we approach earnings season, analysts are expecting S&P 500 companies to earn $29.69 per share in third quarter profits, which would leave the S&P 500 with trailing twelve month earnings of $108.27.  If the market were to correct in the meantime and fall 10% from its closing high to 1810.22, the price-to-earnings ratio on the market would fall to 16.71.  Although this valuation is not dirt cheap, it is close to the long-term average P/E and highly attractive when we compare bonds, real estate and various other asset classes to stocks.

Furthermore, when the market falls, investors almost universally get more pessimistic about the prospects for future returns.  And sentiment is a contrarian indicator.  If a correction shakes some of the fickle money from the market, then the market’s foundation is stronger when it begins to rise again.

As you well know, we believe excess valuations and sentiment are generally the preconditions for a bear market and corrections help dampen both.

Finally, if the market does continue to fall here, then a positive earnings season could be a catalyst to spur the market to new highs.  After all, if earnings meet or exceed estimates, we will then have back-to-back quarters of 9%-plus earnings growth, a seemingly bullish happening.