Traderbill's Financial Markets Weblog

…continuing on our theme of the economy…stupid…this week, TB did some research, readily available on google comparing tax rates, income,etc. for 2005 (latest available) with 1980. He touched on some of this in the past but you have too look at it in detail to get the problem of the wealth gap.

Total Returns 132.6M	2005	1980	$ Change
Top 1% (1.32M returns):	>$364,657/23.1%	>$80,580/34.5%	4.5x
Top 5% (6.63M):	>$145,283/20.8%	>$43,792/21.7%	3.3x
Top 10% (13.36M)	>$103,912/18.6%	>$35,070/23.5%	3.0x
Top 25% (33.2M)	>$62,066/15.9%	>$23,6606/19.7%	2.6x
Top 50% (66.3M)	>$30,881/13.8%	>$12,936/17.3%	2.4X

Note: in 1987 tax law changes altered computation of AGI. Also, each bracket grew by 1.4x over this period.

Here are some more factoids from a NY Times article on 3/29/07, according to IAIA:

*The top 300k tax filers made as much as the bottom 150m

*The top 1% earned 21.8% of all US income, double the number in 1980 (peak 1928 @ 23.9%!)

*The top 1/10 of 1% and top 1% saw their earnings increase by 20% in one year in 2005.

The median income in the US averaged $44,473 2002-2004, New Hampshire top at $57,352, California $49,894. 14 states were under $40k while 12 were more than $50k.

The proposed temporary increase of conforming mortgages eligible for purchase by FNMA/FHLMC to 125% of the median home price in an area for the next 12 mos…to a max of $729,750 from $417,750 is already being opposed by Republican lawmakers. A quick look at the above data indicates that it is necessary unless we want to see home prices plunge nationally by another 25%. This is the insidious side of unscrupulous lending practices, shoddy if not fraudulent appraisals, and ignorant buyers creating a bad brew of debt. Then Wall Street jumped in securitizing everything in sight converting a $250 billion subprime problem to a $500 billion problem (the derivative problem is just starting to pop up and will increase due to problems at monoline insurers and excess leverage), in a $46 trillion dollar asset class, the largest there is and one of far more significance to the top 10% of taxpayers.

No wonder Cleveland is bulldozing foreclosed property to help stabilize the market and free up police from monitoring them for illegal activities. Oakland, CA has 1400 foreclosures and drug dealers are constantly being run out of them by the police. Gangs are migrating to the outer suburbs where prices have plummeted and are squatting further driving down prices and developers are undercutting the very people who bought their homes to clear their own inventories. TB believes the housing rally yesterday was due to the higher conforming mortgages but can the buyers qualify? Look at these median home prices as of Q3 2007 so already overstated: US $220,800 (5 times median income); Western States $338,100; California $530,000 (10.6x median income); Los Angeles metropolitan area $588,400; San Diego $589,300  …and dropping like a stone; San Francisco/Oakland/Fremont $825,400. The emphasis on California is not because TB lives here but because we have had the highest percentage of subprime loans in the past two years…and would be the fifth largest economy in the world.

The poverty level has been unchanged since 2004 at $20,650 for the 48 states, $25,820 in Hawaii, and $23,750 in Alaska. The reason is that they changed the computation of inflation to incorporate substitution effects…you know steak to chicken to Spam to dog food. Even fast food is expensive now.

In California for a family of four owning a home the income required just to cover non-discretionary expenses is $36,000   …forget that trip to Disneyland kids. 

Now for the really bad news: appraised property values after rising for years are declining rapidly. In Solano County, hit hard due to overbuilding, assessments will drop by 20% next year per the tax assessor. This means big budget cuts at the state and more importantly local level. So what will the state try to do? Raise taxes…but that makes us uncompetitive with other states in attracting new business, and many will relocate, taking their higher paid employees with them. It is Art Laffer (cocktail napkin creator of supply side economics) recently moved himself and his entire company to Tennessee (he has also decided we are in a recession leaving his pal Kudlow standing alone). His corporate tax rate in California was 8.84% plus 10.3% personal tax (and no capital gains either). Tennessee is ranked #5 in competitiveness to attract business while California is #41, while Utah is #1, New York #49 and Vermont is in last place. Like the subprime problem we have not even begun to understand the economic problems we face. So? We will just borrow our way out of it…sorry but we did that for the past 25 years so the only solution is to retrench and that will be painful…very painful…even globally. 

The other problem is what constitutes a tax increase? Rescinding a temporary cut apparently does per the GOP. So we cut taxes again and since we can’t raise those we cut again in the next slowdown and the next…pretty soon you are at zero…and the rich get richer. The GOP wants those checks to go out with more to the wealthy…they are a pittance to them  …some could spend the entire check on a dinner out. Doesn’t anyone know what fiscal stimulus means? Apparently not inside the beltway.

So the stock market is down, housing is down, and even hedge funds are down.  According to an article on hedge funds today posted on the Times Online (London):

You do remember 1998, don’t you? The Asian/Russian crisis that brought about the collapse of LTCM. Wait a minute…isn’t volatility supposed to be good for traders? TB thought so but perhaps leverage hurts. Funny, with no uptick rule TB would have thought they would have sold positions and then shorted and shorted and…shorted. But perhaps that was the problem. The late selloff that began on Dec. 26 was of huge magnitude and no one expected the year to start off so negatively (remember TB’s advice: don’t ruin you entire year in the first month).

TB highly recommends the article by James Montier of SocGen (not related to the current scandal) in John Mauldin’s Outside the Box sent out yesterday. If you want to read it…and you should…go to www.frontline.com. While it is 18 pages it is full of charts that very well explain why stocks are not cheap here despite all those who tell you over the next ten years all will be well. Hold cash and wait.

Dubya couldn’t help himself last night…nope, have to make those current tax cuts permanent. Also, don’t you dare put any earmarks in there or he will veto it…why did he start doing that when the Dems took charge after signing anything shoved under his nose for the first six years? Also, there have been fewer earmarks according to the Lehrer Report under the Dems than when the GOP was in control.

See people plan ahead so tax cuts expiring in three years will curtail investing. Please! We have CEO’s running companies for quarterly earnings not for the long run. According to Montier the average holding period of a stock is nine months (about the same as the desired turnaround for taking a company private), and that folks is the lowest in history. TB would suggest that any investment today would have a turnaround of well less than three years or it would not be done. If stocks are so cheap (which they aren’t), who cares what happens three years from now. Stocks not cheap? Oh, they are in Wall Street terms which measure the p/e off expected earnings…and even current earnings are inflated after record earnings for four years and massive stock buybacks (bet the shareholders wish they had paid dividends instead). Montier points to Benjamin Graham’s work which argued you should use no less than FIVE years of trailing earnings to calculate the P/E. Using that criteria, stocks, while cheap relative to 2000, are still at the highest multiples since…drum roll please…1930! This article is a must read.

TB reiterates…don’t do anything in the market this week…what looks cheap may be expensive and what looks expensive may look even more expensive…by Friday! Too much information on the way (TMI).

As an old bond geek friend used to say: “Don’t buy…wait… you’ll get a better rate!”