Greetings – I am back in the Gulf…
My son and I hitched a ride from San Diego to Two Harbors on Catalina Island aboard Esperanza, a 59’ Mikelson Nomad. Perfect start for a great trip up the coast. I rode the bow a good bit looking at dolphins and trying to get really cold. I set a goal to shiver just once in 2010.
Did not happen, the weather was perfect all the way up. We were really roughin’ it… thank you again Dick!
My son and I then jumped a ferry to Long Beach and rented a convertible which he drove (top down) along the Pacific Coast Highway all the way toSan Francisco. There was much talk of the future, becoming a man, goals and dreams. I will miss him greatly. Great trip, would recommend it highly. We parted ways in Sacramento where he hooked up with his older sister and others who are volunteering their time for the rest of the summer up at Woodleaf, Young Life’s property in the Sierra Nevadas. I hopped a plane back home to Doha.
We had very pleasant weather up the coast (even a little chilly coming across the Golden Gate Bridge and driving up to Muir Woods) with the top down. Somewhere up there I finally did shiver… mission accomplished. That will not be happening in Doha…I arrived home at 11:30pm and the temp was “down to” 104F.
Russia is not enjoying cool weather either; enduring some very nasty heat which is killing crops and has global grain prices high and rising. Countries are not exporting in this environment in order to shore up their domestic food needs.
Regarding other commodities, I got asked a lot about gold on my trip to the US. “Not sure it offers much value here, might just offer risk…you can’t eat it…it pays no dividend or coupon…its expensive to store, but you should always have some around” was my typical response. The logical reason gold has risen is the alternatives…cash, Treasuries, dividend paying stocks. None of them offer much yield.
Stocks
Profits – Solid… but dropping weight to wrestle in a lower weigh class only works to a point and then you have an anorexic wrestler…it will be tough to keep a the bottom line growing with little/no top line growth, reduction in workers continues to sustain existing profitability/dividends.
Real final sales for Q1 were only 1.09%; so inventory growth was 71% of Q1 GDP. The Goldman Sachs Analyst Index fell 6.1 points to 55.4 in July, indicating less widespread economic growth than in June. This decline is consistent with recent weakness in other recent economic indicators. The GSAI now stands at its lowest level since November 2009.
Taxes – Storm brewing
Dividends – Rising seas…2011 Dividend tax goes from 15% up to 39.6% and then up to 44.4% in 2012.
Capital Gains – 2011 Capital gain tax jumps from 15% to 20%.
Investors – will need thrice the payout to achieve the same after tax cash flow from US corporate dividends next year. May opt to hit bids by year end and lock up 15% taxes rather than risk 20% taxes in 2011 and who knows what in future years.
Business owners – Mandatory health coverage, perceived future tax increases to pay existing deficits. Likely sideline capital formers who will be selling what they can by year’s end and likely remain in a “hunkered down” position. Hard for me to see the reason for much expansion (from an entrepreneurial point of view).
Stocks vs Gold - Was the low put in last Spring (2009)? If you put a gun to my head and told me I had to buy either stocks or gold I would answer “pull the trigger.” The ratio traded between 2 and 10 between 1972 and 1995. Perceptions of lower future deficits, lower taxes and less government spending (Reagan through Clinton - end of cold war/de-militarization/PAYGO) were good for the ratio from 1980 through to 9/11. As deficit spending again entered the policy arena PAYGO expired, 9/11 happened/war on terror, housing crisis, Lehman brothers…enough said by the lower graph. The transition will happen, those in power will have to decide if it will be because of them or in spite of them come November elections.
When the citizenry and their money are set free, it will again be more profitable to invest in companies than it is to store metal in a safe.
When gold was at $325 and the DJIA was at 13,000 it was easier to see stocks underperforming gold, however, with the headwinds of dividend andcapital gains taxes going up I can see lots of tacking and not much running. Much as I like to pick bottoms, I think we might see the sails luffin’ a bit here in both gold and stocks. Like Euros vs. Dollars. We are in a situation which begs the question, “where will I lose more?” Stocks are almost up to break even for the year
Summer went too fast. I hope you enjoy the rest of yours.
All the best,
Leon
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