Friday, December 14, 2012

Market Wavers; Investors Wait

Equity stock market seesawed in the week amid investors concern on fiscal cliff. Since market participants have been adjusting the portfolio a few weeks ago when market focus begins to shift to fiscal cliff, there is not much selling from market participants lately although investors weight on the fear for several weeks.

Day traders continue to execute trades based on progress in fiscal cliff negotiation. Investors have prepared for market reaction to a final outcome and are now waiting. Therefore trading volume drops and market oscillates in a tight range.

Market will remain relatively calm until the issue on fiscal cliff becomes clear. Market participants remain low confidence in short term but turn positive in long term because of improving economic data. Also rise in household wealth, approaching the peak before financial crisis, also boosts investor confidence. As mentioned in earlier post, the wealthy elite already surpass the peak in last year due to surging stock market as well as personal income. Average households lag in the race in wealth because of low equity stock exposure and a slower rise in income earning. Equity stock market should be the last to surpass the peak due to low investor confidence.

China wealth inequality at globally rare levels
China’s Gini coefficient has reached a shockingly high level as its wealth gap grows, a recent academic report said, calling attention to the equality indicator that the government hasn’t tracked for years.

The Gini coefficient measures the wealth gap on a scale of 0 to 1. The higher the figure, the greater the inequality. A reading above 0.4 usually marks strong inequality.

China’s figure was globally rare, the report says. However, it added that it is natural for a fast-developing economy to score high.

S&P: U.S. Companies Underinvest by Billions
U.S. corporations cut an estimated $175 billion in investment from 2009-2011, according to ratings agency Standard & Poor's, in a move that boosted the cash reserves that have helped them through the financial crisis, but could eventually harm their competitiveness.

The heavy cost-cutting that took place meant corporate cash flows continued to grow during the period that investment was put off, leading to U.S. nonfinancial companies holding a record $1.26 trillion in cash balances as of June 2012.

As a whole, the companies rated by S&P only returned to prerecession levels of investment, relative to revenues, in the first half of 2012—a development the ratings agency said could be reversed in 2013 due to worries over the so-called fiscal cliff and the European debt crisis.

That would be a bad move, according to S&P. "Cash flow-positive companies have two choices: expand their business either through investments or acquisitions or return the cash to their shareholders," the report said. "We believe the option many companies have chosen in recent years, preserving the cash, can only be a short-term solution."

Higher Taxes Will Create Jobs and Cut the Deficit: David Cay Johnston
President Obama hit the road this week to build national support for increasing taxes on wealthy Americans. On Monday the president addressed autoworkers in Redford, Mich., outlining his budget proposal and explaining why higher tax rates were necessary at this critical juncture.

"Our economic success has never come from the top down," Obama said. "It comes from the middle out; it comes from the bottom up."

David Cay Johnston, Pulitzer prize-winning journalist and author of The Fine Print: How Big Companies Use "Plain English" to Rob You Blind, says higher taxes can actually create jobs, not kill them. In an interview with The Daily Ticker, he argues that additional revenue collected from higher taxes could be spent on infrastructure repairs and construction, a win-win situation for the nation and workers.

Johnston also supports higher taxes on the rich and says empirical evidence on the impact of low tax rates on the economy are overwhelmingly in favor of the president's proposal.

"Government revenues are down and total income for the bottom 90% of Americans has fallen back to 1966 levels," he says. Wealthy Americans are paying a larger share of their incomes in taxes "but their incomes have grown much more significantly so their share of income going toward taxes has fallen," Johnston says. "Of all the income gains in this entire country in 2010, 37 percent of it went to 15,600 households out of 156 million."

Taxes will likely rise for all Americans if lawmakers are truly serious about tackling the deficit, according to Johnston.

"If you're concerned about deficits, you need to bring in more money," he says. The economy may be too "delicate" to let the Bush tax cuts expire for lower income individuals right now Johnston concedes, but "as the economy gets stronger, there will need to be adjustments."

Goldman Sachs: Stocks Are the New Bonds
Central bank quantitative easing programs have left little value in the credit markets, so Investors should be looking for returns in European equities rather than bonds, Peter Oppenheimer, chief global equity strategist at Goldman Sachs told CNBC.

The global economic crisis might have caused investors to park their money into perceived safe-haven assets such as German bunds and U.S. Treasurys with near-zero yields, but Oppenheimer said on Thursday that investors would see higher dividends in European equities. According to him, the STOXX Europe 600 could deliver annual returns of more than 7 percent - despite stagnation in the euro area.

"So far, there has been a net absence of net flows going into the equity market, particularly in Europe,so equities have become almost an orphan asset class.But as more liquidity comes into the global economy through central bank actions and there is little value left in fixed-income markets, and even credit,equities will benefit by default," he said on CNBC's "Worldwide Exchange".

"Next year, we do expect a recovery in the global which Europe's corporate sector is very well levered. It's that global recovery that allows margins to rise a little bit in the euro zone, gives some top-line growth and overall profit growth of around 9 percent."

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