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The Lindsey Report September 2012


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Please reference your quarterly statements for updated account values.  September marked the end of the third quarter (Q3) of 2012 and equities, as measured by the S&P 500, posted a solid month and quarter (up 2.4% and 8.4%, respectively).  While numbers are not yet available for Q3 GDP (Gross Domestic Product), indications are that the economy sputtered along:  neither gaining much traction nor losing much.

The fact that equities continued to do well, while the economy only plodded along may seem a little contradictory: it does to me.  However, stock prices “should be” a reflection of profitability and the strength of the business.  Throughout this sluggish recovery, S&P 500 companies have continued to produce healthy profits and excellent balance sheets. Of course, the fact that the Fed has driven interest rates so low helps (but this piece seems artificial and unsustainable).

Therefore, in order for stock prices to maintain their current levels, and/or move higher, companies likely need to continue producing healthy profits.  They also need to continue re-investing in their businesses, which in turn should lead to higher employment.  Clearly all this would be made easier if the economy was stronger and there was less uncertainty.

Regarding uncertainty, there are issues in Europe, the Middle East, etc…, but at home we have a major one that is hanging over our heads, affecting our economy: the “fiscal cliff”.  CNBC published an article 9/27/12 titled “Corporate America Sweats as US Nears ‘Fiscal Cliff’.   The article suggests that companies are postponing major investments and hiring due to uncertainty.

Briefly, what is the “fiscal cliff”?  It is a term being used to describe automatic spending cuts and tax increases (both corporate and personal), starting in 2013.  Bloomberg indicates the spending cuts are approximately $600 billion and tax increases another $536 billion.  Combined that would be almost 8% of GD – removing that much from the economy could be a major drain.

Concerning personal taxes, Bloomberg estimates that about 88% of households would see a tax increase. They indicate the average tax-rate would increase 5% and that the average household would pay $3446 more in Fed taxes: where a middle-income household with earnings of $40k – $60k would see an increase of about $2000.  Let’s hope for compromise, as this is a cliff.

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