Fed Meeting Today: Are You Ready for QE3?
Investors have prepared for the Federal Open Market Committee (FOMC) meeting today and tomorrow to end with the announcement of a third round of quantitative easing (QE3) – and that's a good bet to make.
Today's Fed meeting will likely end with more of the same information we've been hearing for months from U.S. Federal Reserve Chairman Ben Bernanke. It's been a year and a half since Bernanke first announced that short-term interest rates would remain near zero "for an extended period." That language will likely stay the same tomorrow, and the policy timelines could be drawn out even longer.
There is also no doubt that QE3 or some other meaningful economic stimulus measure is on its way.
Maury Harris, an analyst with UBS, declared in a recent note to clients that, "We now anticipate an announcement of another round of quantitative easing at the FOMC meeting on September 13th. We expect the easing will take the form of a six-month program of at least $500 billion, primarily focused on Treasuries."
Harris also added that, "We also expect the FOMC extends their rate guidance into 2015."
Enjoy the Rally While it Lasts, Super Mario Draghi’s Bazooka is a Dud
Not too long ago I mentioned that whatever European Central Bank President "Super Mario" Draghi delivers, it had better be big.
Because the only way he could hope to shore up the beleaguered e uro, wrest control of interest rates from the modern day financial pirates that dominate credit default swaps and break the impasse between skittish investors was with a monetary "bazooka."
We certainly got one yesterday when he announced an unlimited bond purchase program designed to do exactly this.
The S&P 500 shot up 26.13 points while the Dow and Nasdaq both tacked on 216.01 and 62.80 points respectively. European markets also moved sharply higher on the news as well while Spanish and Italian yields tumbled at maturities of every length suggesting traders relaxed their risk aversion stance considerably.
Under Draghi's plan, the ECB will be buying unlimited amounts of short-term sovereign debt while also sterilizing that debt– ostensibly to stave off concerns about hyperinflation and further money printing.
Up to now, the ECB has only purchased troubled EU bank bonds as a buyer of last resort. So this is a big change now that Draghi is talking about stepping up as a sovereign debt buyer, albeit also of last resort.
Draghi noted interestingly that the ECB will retain exclusive decision making on when to engage in purchases, the amounts purchased and when to stop. This effectively puts the politicians on notice that further bickering will not be tolerated.
Further, Draghi did not rule out purchases of Greek, Portuguese and Irish bonds when those countries regain practical access to the bond markets.
There are a couple of things that stand out here…
A Cause for Fear-Not Celebration
First, things are so bad that insiders are using euphemisms to describe Draghi's plan which is officially referred to as a "blueprint" and called "Monetary Outright Transactions."
I don't know about you but if it smells like a duck, walks like a duck and quacks like one, too…odds are pretty good it's a duck.
It doesn't matter whether you are talking quantitative easing or bond purchasing. The fact that things are so bad that central banks – first the BOJ, then the Fed, now the ECB – have to wade in as lenders of last resort should be a cause for fear rather than celebration.
If not now, then a few years from now, when it all comes back to roost.
Taxmageddon 2013: How to Prepare for Looming Tax Law Changes
It's often said the only things certain in life are death and taxes – but this year, even taxes aren't a certainty.
At least not the specifics, thanks to Election 2012 and Taxmageddon 2013. Investors are left with more questions than answers.
Will the so-called Bush tax cuts expire as scheduled – or be extended? Will levies designed to help implement and pay for Obamacare go into effect – or will Republicans finally succeed in repealing the new healthcare program?
Will President Barack Obama view his re-election as a mandate to impose more new taxes to expand social programs, or will a newly-elected President Mitt Romney cut taxes in a bid to encourage renewed economic growth?
That's why it's important for investors to look at the range of possibilities relative to their current financial holdings and take precautionary actions where appropriate.
This special Money Morning series will examine a number of upcoming or proposed changes in tax laws and rates and suggest strategies to minimize their impact on your investments. Or better yet, take advantage of them if possible.
With Taxmageddon, Rates are Set to Rise
As it stands, there are more than two dozen tax-law changes scheduled to take effect in 2013. Some of them target nearly every single taxpayer while others are more narrowly focused on individuals, such as small business stockholders and home sellers.
Of most immediate concern to investors is the scheduled increase in tax rates on capital gains. Currently, the federal government recognizes three types of capital gains:
- Short-term gains – Profits from assets held for less than one full year. These gains are taxed as ordinary income at a rate based on your total personal income, with percentages now ranging from 10% to 35%.
- Ordinary long-term gains – Profits from assets held for more than one year, now taxed at a maximum rate of 15%, regardless of income from other sources. (Note: Individual taxpayers in the 10% and 15% brackets now pay no tax on long-term capital gains but merely include them with other taxable income. However, in 2013 these taxpayers will be subject to a 10% tax on long-term gains.)
- Qualified long-term gains – Profits from assets purchased after the 2000 tax year and held for a minimum of five years. Qualified gains are currently taxed at a maximum 15% rate.
This relatively simple structure will become more complicated in 2013, for several reasons…
One of the Decade's Biggest Examples of Wasteful Government Spending
In February we told you that despite nearing $15 trillion in debt – now close to $16 trillion – the U.S. government decided to spend $592,000 last year to figure out why chimpanzees throw poop.
Now we've discovered yet another example of wasteful government spending that has burned up more than $1.5 billion of your tax dollars – with nothing to show for it.
We're talking about the fruitless pursuit of a biofuel known as cellulosic ethanol, surely one of the greatest government boondoggles of the past decade.
Cellulosic Ethanol Production: What You're Paying For
Both Republican and Democratic administrations have showered companies with grants and loan subsidies with the goal of turning materials like wood chips and switch grass into an ethanol fuel that could be used in automobiles.
Where Would The Markets Be Without the Fed?
We've arrived. We're exactly in the middle between here and there.
The problem with being here is the "there" part.
I'm talking about where the markets are and where they're going next. Is "there" backwards or forwards? Are we coming or going from here?
Before I give you my own forecast, and recommendation, let me say this about that…
Here are the two best forecasts I've ever heard:
- "It will fluctuate," which was what J.P. Morgan famously answered when asked what the market would do, and
- "I cannot forecast to you the action… It is a riddle, wrapped in a mystery, inside an enigma," which is what Winston Churchill famously said, not about the market, but about Russia. (The full first line is, "I cannot forecast to you the action of Russia.") But you get the picture.
American markets are touching their highs. It's as if everything is clear and sunny. It's as if forecasting is as simple as looking out the window and calling out what you see.
It's clear and sunny. Haven't you looked outside? If only it was that easy…
But when you do look outside, let's say, through a window, you only see in one direction. The question can then be asked, is the weather you're looking at coming or going, or is it here to stay?
America, and indeed the global financial markets, came to the precipice of a cliff and barely caught their balance before plummeting into an abyss so deep and black that no one knows where it would have taken us. But my guess is to Hell.
The rope that held us from going over was stimulus, massive stimulus.
That stimulus was never mopped up. It's been left out there like water on everything after the fire has been doused; and there's more coming.
The Federal Reserve, which isn't playing just 18 holes, but seems like it's playing a marathon round of swinging hard and gently, but constantly swinging, is teeing up another ball with some little marking that reads QEsquared, or something like that.
Here's my guess on what the Fed is going to do…
Ryancare vs. Obamacare: The Future of Medicare is at Stake
When Mitt Romney named Paul Ryan as his vice-presidential nominee, the Medicare battle jumped to the front and center of election 2012.
First introduced in 2010, "The Ryan Budget" is a bold plan that attempts to reduce the deficit by drastically cutting spending-which some claim will "cripple" Medicare.
So what is the truth?….
Ryancare vs Obamacare
Though the plans differ in ideology, Obamacare and Ryancare actually have some similarities.
In Ryan's plan, new enrollees after 2022 would have to choose between a private insurance plan and Medicare, making Medicare the "public option" that was so opposed in Obamacare.
Ryan's plan gives Medicare enrollees vouchers to choose from competing private insurance plans offered on a Medicare exchange. These exchanges closely resemble the exchanges in Obamacare that some Republican governors have refused to participate in.
And both plans basically "cut" the program by over $700 billion and set a growth cap on Medicare spending at GDP levels plus 0.5%.
The difference in the plans is how these cuts are made and why.
As Ezra Klein of the Washington Post says, "Democrats believe the best way to reform Medicare is to leave the program intact but vastly strengthen its ability to pay for quality. Republicans believe the best way to reform Medicare is to fracture the system between private plans and traditional Medicare and let competition do its work."
The only problem is that neither of these plans may do enough to fix Medicare.
The biggest misconception with Ryan's plan is that current senior citizens will be faced with outrageous healthcare costs.
That is simply not true.
Election 2012: Obama's Odds Are Pretty Good if You Ask Mr. Market
If you want to know who's going to win Election 2012, just ask Mr. Market. He has a knack for picking presidential winners.
As it happens, stock market performance in the years and months leading up to a presidential election is one of the most reliable indicators of who will win and who will lose.
And the way things look at the moment, Mr. Market really likes the President Barack Obama reelection odds.
"It's suggesting that Obama's got a better chance than people think," Jeff Hirsch of Stock Trader's Almanac told Yahoo's Breakout last week. "Incumbent victories are accompanied by much larger gains in the stock market. The Dow Jones has been up significantly higher in election years when incumbents win. And it looks like the track that we're on here."
Hirsch's data shows that since 1901, election years in which the incumbent wins enjoy a Dow Jones Industrial Average rise of 6% by August and 12% by Election Day.
So far this year, the Dow is up nearly 8.5% — comfortably in re-election territory for President Obama.
Why a Strategic Petroleum Reserve Release Won't Help Oil Prices or President Obama
With oil prices showing no signs of retreat during the final months of the U.S. presidential campaign, beltway insiders are turning to one misguided solution to combat rising oil prices.
Releasing oil from the Strategic Petroleum Reserve (SPR).
Trial balloons floated all over Washington during the past few days. The only reason politicians didn't move on this sooner (say a few months ago) was the price level.
Until the last month or so, both oil and gasoline prices were heading in the other direction. Near-month futures contracts for West Texas Intermediate (WTI), the crude oil benchmark traded on the NYMEX, were below $78 a barrel in intraday trade toward the end of June, while the same futures for RBOB (the NYMEX traded gasoline contract) were at $2.55 a gallon.
At the time, all the sage pundits predicted that oil would fall below $60 a barrel; some even suggested that prices could approach $40. On the gasoline side, these same wise guys were proclaiming we may see prices at the pump breach $3.
Everything has changed quickly.
Yesterday morning the markets opened with WTI 23% higher than late June and RBOB up by more than 20%. Oil stands at more than $96 a barrel in New York, while Brent has exceeded $116 a barrel in London. And retail gas prices are once again approaching $4 a gallon.
Recently, I discussed why oil prices are moving up. But for some politicians, including the fellow running for reelection at 1600 Pennsylvania Avenue, those prices are becoming a job liability.
So it's back to hitting the SPR.
But there are four reasons why tapping the SPR won't make oil prices any cheaper in the end.
Maybe you should let your Congressman know about them…
What Investors Love About the Romney Tax Plan
With Election 2012 less than one hundred days away the verbal slingshots between the two candidates have picked up in negativity. Tax returns and tax policies have been the subject of the latest round of insults and political maneuvers.
The nonpartisan Tax Policy Center released a report claiming Mitt Romney's tax plan would "provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers."
President Obama responded by calling the Romney tax plan a Robin Hood reversal and dubbed the former governor's plan "Romney Hood."
Romney responded with a childish quip of his own calling the president's remarks "Obamaloney."
But if you want to take a step back from the negative tone of campaigning, one tax plan clearly stands out as a winner for investors.