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I'm Sick of This Vicious Circle

By , Chief Investment Strategist, Money Morning • @ShahGilani_TW - • Print | Email

It's a fact. Financial services are a huge part of the economy.

Twenty years ago, financial services accounted for somewhere between 5% and 7% of U.S. gross domestic product, depending what you include in the definition of "financial services."

By the time markets peaked, and just before the mortgage bubble burst, that number had shot up to between 17% and 20%.

What's fascinating to me, and should be to you, is that shuffling paper for fun and outrageous earnings got as big as it did.

And just because some air in the bubble that drove a lot of those earnings gently escaped (not), that doesn't mean the financial services machinery isn't working overtime to pump up their earnings and profitability again. You know they're working at it all the time.

I could go on and on about what this all means, and how problematic it is for the long term future of America, but that's not the point of this message in a bottle.

The point is that we have become a nation of oligarchs (the powerful private interests of money men and oil men… same thing) running our government like a banana republic.

Let me show you what I mean…

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Is Apple Stock a “Buy”?

By , Money Morning - • Print | Email

The markets have been in a period of historically low volume with so much uncertainty swirling around the economy. There has even been speculation that the Apple iPhone 5 could add half a percentage point to GDP in the fourth quarter.

With all this power behind the Apple iPhone 5, does that make Apple (Nasdaq: AAPL) stock a definite "Buy" for investors?

Money Morning's Shah Gilani appeared on Fox Business' "Varney & Co." this morning to talk about investing in Apple stock. He also touched on the major macro events affecting the global economy and how they're shaping investor morale.

Gilani tells investors what to focus on with so much up in the air: Election 2012, China's growth issues, the European debt crisis, and the markets at multi-year highs.

Watch the accompanying video to see all of Gilani's analysis.

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Investing in Dividend ETFs: Want Super Yield? Try These

By , Money Morning - • Print | Email

With the U.S. Federal Reserve intent on keeping interest rates low until at least late 2014, investing in dividend ETFs (exchange-traded funds) is necessary for income investors who are all but forced to consider asset classes beyond money market accounts and U.S. Treasuries.

The interest rates on products are now so piddly that investors are all but preconditioned to view either equities or high-yield bonds as the most viable options for generating income.

By virtue of the anemic yields on CDs and Treasuries many investors are left thinking the yields on usual suspect blue chip dividend stocks are great. The 3.3% yield offered by consumer staples giant The Procter & Gamble Co. (NYSE: PG) is viewed as "good." These days, BP Plc (NYSE: BP) with its 4.6% dividend yield is considered "stellar."

They're just two examples, but BP and P&G prove the point that in today's market "decent" yields are viewed as "great." That is one reality of today's low interest rate environment.

Another reality is that the low yield story has been overdone. To borrow from baseball terminology, the low yield story is in the ninth inning.

On the other hand, the still unheralded super dividend theme is still in its infancy. The good news is investors can easily tap into the super dividend story with the following ETFs.

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Stock Market Today: This Stock Wins With or Without QE3

By , Money Morning - • Print | Email

The major headlines in the stock market today include the Fed's decision to implement QE3, increased producer prices, and higher jobless claims.

  • QE3 a 99% certainty?… Not quite– When the Federal Open Market Committee makes its statement at 12:30 p.m. EDT every investor will be waiting to hear if QE3 has finally arrived. After what seems like two years of speculation since QE2 was announced will we finally get QE3? According to Citigroup Inc. (NYSE: C) a gauge of indicators of market expectations for additional central bank stimulus rose to a record 99% in August. Yet many economists do not expect QE3 to be announced today for many reasons. If the Fed takes action it will be viewed as highly political coming just months before Election 2012. Even if the Fed announces QE3 but says it will delay QE3 purchases until after the election as it did with QE2, the political implications will still be there. Other reasons are the lack of progress the previous rounds of QE have had in turning around the economy – and not just the stock market. "The Fed continues to want the economy to grow faster and specifically, to grow more jobs, but the ability of QE to do that is extraordinarily limited," Catherine Mann, a finance professor at Brandeis and former Federal Reserve economist told CNN. "We know that QE reduced interest rates, but we also know that has not led to more construction, more mortgages, more business investment, or more lending. Since it hasn't done any of that, it probably hasn't created jobs either."
  • Producer prices rise most in three years- Wholesale prices, measured by the producer price index, climbed 1.7% in August – the most since June 2009 – due to higher gasoline and natural gas prices. This was a faster increase than the 0.3% reported in July and ahead of the median forecast for a gain of 1.3%. Food prices rose 0.9% due to a rise in dairy and egg prices. The core producer price index which excludes food and energy rose 0.2%, which was in line with expectations. Tomorrow's consumer price index will be a good indicator if higher wholesale prices have translated into increased consumer prices.

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Taxmageddon 2013 Hits Dividends Hard - Here's What to Do

By , Contributing Writer, Money Morning - • Print | Email

Every dividend investor loves the arrival of those quarterly distribution checks. But thanks to "Taxmageddon 2013" those checks could get a whole lot smaller.

As things currently stand – with higher tax brackets, no extension of the Bush-era tax cuts and the addition of new levies on higher-income payers to fund Obamacare – the tax bite on some dividend payments could rise from as little as 15% to as high as 43.4%.

That's dramatically higher than the possible hike in capital gains we discussed in Part One of our series on the 2013 tax outlook, which ran last Friday. By comparison, scheduled tax-law changes will increase taxes on long-term profits from 15% to 23.8% for some taxpayers.

Under the current tax laws, dividends received in 2012 are taxed in one of three ways:

  • Qualified dividend income – The concept of "qualified" dividends was created by the original Bush tax cuts. It allows dividends received from domestic U.S. companies and certain foreign corporations to be taxed at the recipient's long-term capital gains rate, which is capped at 15% in 2012.
  • Qualified dividends from funds – As an extension of the individual preference, qualified dividend income received by mutual funds and exchange-traded funds (ETFs), and passed on to fund shareholders, is also taxed at the individual's maximum long-term capital gains rate of 15%.
  • Ordinary dividend income – Non-qualified dividends are taxed as ordinary income to the recipient, meaning they will be taxed at marginal rates ranging from 10% to 35% in 2012.

In 2013, however, three things will – or at least could – substantially boost tax rates on dividends.

The Potential Consequences of Taxmageddon 2013

First, unless Congress acts before the end of the year to extend the Bush tax preferences, the concept of "qualified" dividends will disappear for both individual stock owners and holders of fund and ETF shares. That means all dividend income will again be taxed at ordinary income-tax rates.

Second, marginal tax rates for all individuals except those in the current 15% bracket (couples earning between $17,400 and $70,700 in 2012) will be increased in 2013. The lowest bracket will jump from 10% to 15%, and all other brackets will increase by 3% except for the top bracket (individuals or couples earning $388,350 or more), which will rise from 35% to 39.6%.

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AIG Stock Sale Doesn't Justify Bailout Package

By , Money Morning - • Print | Email

The U.S. government, for the first time since 2008, is officially a minority stakeholder in American International Group Inc. (NYSE: AIG), with an $18 billion stock sale that made money for taxpayers.

The AIG stock sale will reduce the government's stake in the insurance company to about 22% from 53%.

The U.S. Treasury Department announced Sunday it was selling a large chunk of shares in the bailed-out insurer. The government saved AIG in 2008 and 2009 with a bailout package that totaled around $182 billion.

Including Monday's sale and money from AIG, the Treasury claims it has recovered a total of $197.4 billion from AIG – a $15 billion profit for taxpayers.

It's not surprising the government is selling AIG shares. What is unexpected is that such a large chunk of AIG stock will be released into the market at once, instead of spaced out over time.

One reason to shed the stock faster than planned is to credit U.S. President Barack Obama with taxpayer profit ahead of a tight race for the White House.

White House Press Secretary Jay Carney said Monday, "We have been committed to exiting those investments as quickly as practicable. What it does demonstrate is an ongoing commitment to recover taxpayer money. It's safe to say the president is pleased with the progress being made as we wind down these investments."

But even with a multi-billion dollar profit, defending private-sector bailouts is an impossible sell to most voters.

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Facebook Stock Gains, But Rival Threatens Market Share

By , Contributing Writer, Money Morning - • Print | Email

Look out, Facebook: LinkedIn Corp. (NYSE: LNKD) is inching into your territory.

As Facebook stock (Nasdaq: FB) keeps climbing from its all-time low last week of $17.55 a share, business-oriented networking site LinkedIn has introduced some new features that resemble those of Facebook.

LinkedIn last week rolled out a new notification system and launched an update for its iPhone, iPad and Android apps. The updates now inform a member when someone likes or comments on one of their status updates – just like Facebook, the social networking leader.

In the past LinkedIn only sent notifications if someone sent a member a message or extended an invitation to become a connection.

In a statement, the company gushed, "You'll never miss a comment or update to an engaging discussion about a news article or trending topic on LinkedIn."

LinkedIn's head of mobile products Joff Redfern said in an interview that the update will also let a member peruse company pages and job postings on smartphones and tablets. According to Redfern, users requested the feature so they could covertly browse for jobs while at work.

The latest moves highlight how LinkedIn is morphing from a headhunting and career-networking site into something bigger. Facebook big.

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Stock Market Today: U.S. Credit Rating At Risk Again

By , Money Morning - • Print | Email

The major headlines in the stock market today (Tuesday) include Moody's warning it might lower America's AAA rating, the trade deficit and a financial shakeup:

  • U.S. Credit Rating at Risk– In a statement released Monday, ratings agency Moody's said the United States is in danger of losing its AAA credit rating if Congress cannot come up with a solid plan to lower the debt-to-GDP ratio. "If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable," Moody's said in an e-mailed statement. "If those negotiations fail to produce such policies, however, Moody's would expect to lower the rating, probably to Aa1."

    Currently Moody's rates the U.S. AAA credit rating with a negative outlook. Standard & Poor's last year downgraded the U.S. to AA+ which is the equivalent to Moody's Aa1. Both agencies cite the political bickering in Congress and inability to deal with fiscal situations as the main reasons for the downgrades. S&P has mentioned that those risks could lead to another downgrade. When President Obama updated his federal budget in August the debt-to-GDP ratio was projected to be 75% by 2022, currently it is just over 1.04%. If lawmakers decide to go off the fiscal cliff as a debt reduction measure Moody's said it will maintain its current rating and negative outlook and then wait to see results of the fiscal cliff before deciding to return to a stable outlook.

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National Conventions: It's My Party and I'll Lie If I Want To

By , Associate Editor, Money Morning • @DavidGZeiler - • Print | Email

Now that both the Republican and Democratic national conventions are over, one key question remains: Which side has the best liars?

If America's two major political parties have anything in common, it's the ability to fold, twist and mutilate the facts of any given subject.

Almost every speaker at both national conventions did their utmost to uphold this ignoble tradition of American politics.

When the media called several GOP speakers on their political lies, a pollster for GOP candidate Mitt Romney, Neil Newhouse, responded with what may have been the most truthful words spoken by any political figure over the past two weeks:

"We're not going to let our campaign be dictated by fact-checkers."

The Democrats, of course, gleefully pointed this out at their national convention a few days later even while committing transgressions of their own.

Hypocrisy, thy name is politics.

Since the American voter deserves better in Election 2012, here's a more accurate look at some the truth-challenged rhetoric uttered by the people who want us to trust them with running the country:

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Don't Let Fiscal Cliff 2013 Scare You from Dividend Stocks

By , Contributing Writer, Money Morning - • Print | Email

Amid all the talks of fiscal cliff 2013, which we'll hit Jan. 1 if Congress doesn't act, some analysts are warning of the impact on dividend stocks.

That's because some of the tax increases associated with the fiscal cliff could deliver a hefty tax hike to dividend income.

But the possibility of higher dividend taxes doesn't mean you should ignore the sector altogether.

History shows that dividend-paying stocks have outperformed non-dividend shares even at a time when taxes were much higher. For income-seeking investors, any pullback in dividend-paying stocks as the fiscal cliff approaches may just be a buying opportunity.

Investors early to the game will enjoy dividend payments and also benefit from these companies' healthy market performance.

Fiscal Cliff Effect on Dividends

If nothing is resolved before year-end and Congress fails to take action, dividends received will be taxed as ordinary income instead of the current maximum 15%. Ordinary income tax rates are scheduled to revert to pre-2003 levels, with a maximum of 39.6%.

In addition, a new 3.8% tax will be tacked on to help pay for the Affordable Care Act. For some taxpayers, dividend taxes would nearly triple.

But remember, before investors enjoyed the 2003 dividend tax breaks that put dividend taxes on par with capital gains taxes, payouts had been taxed for decades at ordinary income rates. For some, the tax was as much as 91% in the late 1950s and early 1960s, 70% in the 1970s and 50% in the early 1980s.

Despite those lofty tax rates, dividend stocks continued to maintain a prominent position in portfolios of income oriented investors, and these stocks continue to share their wealth with satisfied shareholders.

From the end of 1979 through July 2012, dividend-paying stocks in the Standard & Poor's 500 Index carried an annualized total return of 12.1%. That compares with a 10.7% return for nonpayers, according to data from research firm S&P Capital IQ.

MarketWatch did the math and calculated that an initial investment of $10,000 in the dividend bunch would have morphed to a whopping $408,000 over that time frame compared to $271,000 for the nonpaying group.

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