Friday, July 2, 2010

Social Security “Means Test” and "Two-Tiered" Pensions

“The very political coalitions that tend to prosper during (expansion) - those which win by outbidding the others on how much they can distribute pleasure, borrow from the future, and undermine institutional barriers—guarantee that the whole system has to be smashed to smithereens before it can be rebuilt. Right now, we have politicians in power whose entire political careers have been built around the wrong logic for a (crisis).”

Here is a recent interview of House Minority Leader John Boehner –

“I think raising the retirement age, going out 20 years – not affecting anyone close to retirement, and eventually getting the Retirement Age close to 70 is a step that needs to be taken.

I think secondly, instead of using the Wage Inflator, that increases in Social Security should be based on the CPI (Consumer Price Index). I think it is a more accurate reflection. Over time, it will have a significant impact on the “actuarial soundness” of the program.

And thirdly, I think we need to look at the American People and explain to them that we are broke and that if you have substantial non-Social Security income while you are retired (pause) why are “we paying you” at a time when we are broke? “

This guy is the Republican leader? No wonder the stock markets are tanking...

We all know that the CPI was altered in 1994 and is now a bogus measure of the Cost of Living, designed to significantly underperform inflation, thus keeping the annual COLA lower than it should be to maintain the purchasing power of your Social Security check.

For younger Americans who have to pay into Social Security every month, but know that we will never see a penny of the money, the natural question to ask of Boehner is “if the system is by definition broke, then why the hell are we being made to pay into it?”

Everybody has to sacrifice except for a few select social cows – think AARP and Public Employee Unions.

I’m going write this for the millionth time, at some point society will choose to finance the needs of the youth over the needs of the old – the needs of the future student over the needs of the retired teacher. We clearly haven’t reached that stage yet, but the battle lines are being drawn and the old are going to lose, because society ALWAYS sides with the youth.

If you are retired, then your benefits are going to get cut. Period. You will have to rely more on self-financing more of your retirement than you thought you would have to be.

“Generation X and Gen Y are getting fed up and might not take much more. That's what I'm hearing from a number of younger public employees who responded to my column last month on the incumbent employee conundrum. The gist of their feedback was this: They don't appreciate bearing the brunt of pay cuts and benefits reductions -- the ones imposed by employers who try to balance the books on their pension and retiree medical plans by slashing compensation for younger employees and new hires. They'd like to see their elders share in the pain -- or at least pay their share.”

“Senior public employees who are vested in the retirement plans with ten or more years of service tend to consider themselves untouchable. So if Baby Boomer benefits can't be cut, the conventional approach to benefit rollbacks is to "tier" the retirement plan with reductions for new hires. This line of thinking leaves the next generation to pay for the mistakes and delusional thinking the Baby Boom negotiators -- on both sides of the collective bargaining table -- have had in the past decade.

There's no question that public-sector retirement benefits need reform, and in many cases this will mean a rollback that trims the benefits for new hires -- and thus younger workers -- disproportionately. But unless the burdens are shared more equally, a backlash could start to brew. We'll likely see it first in union halls: Younger workers will demand more seats on the bargaining committees and reject contracts that fail to share burdens of benefits reform more fairly.”

“(T)he UAW has basically cut a deal with GM that protects its existing members in their $28 an hour (plus benefits) jobs, but give new, future hires a much worse deal: $15 an hour jobs. If those new workers are UAW members, they will be able to lobby within the union (and, more significantly, vote) to equalize the pay of the old-timers and newcomers at some intermediate level-- say $22 an hour. Why would existing UAW members want that? Better to keep the newbies out and exploit them for all they are worth in order to subsidize the cushy, unsustainable deal the UAW veterans enjoy. ... It would almost be as if the existing UAW members had become the profit-seeking owners of the company!”

“The union becomes just another quasi-shareholder representing a limited number of old-time members. Eventually, as those members retire and expire, the union ceases to exist.”

The battle lines are being drawn between the haves of the have-nots of the benefits wealth-distribution gravy train. Obamacare was simply a rouse to get the Taxpayer to pick up the healthcare benefit that was promised to union workers (both private and public), but whose funds were never set aside. But Obamacare will never end up being funded and may simply be the last great promise before Social Contracts are rewritten en masse.

Promised future pensions are so large that they have bankrupted the airlines and the auto makers and are now in the process of bankrupting states and municipalities (do you own any Municipal Bonds?).

Eventually, states and municipalities will be ruled by voters who do not benefit in any way from these pensions and they will change the payouts. They will either go to court and argue that the rights of the taxpayer were never represented in the negotiation of these benefits or they will put massive excise taxes on pension incomes. Either way, the pensioner will see a significant decrease in their take-home pension check and this will take a tremendous burden off the rest of the economy.

The Great 2011 Tax Hike

Marginal Income Tax Rate will rise -

The 10% bracket rises to an expanded 15%
The 25% bracket rises to 28%
The 28% bracket rises to 31%
The 33% bracket rises to 36%
The 35% bracket rises to 39.6%

The “Marriage Penalty” will return.

The “Child Tax Credit” will be cut in half.

The “Death Tax” will reset to up to 55% and the exclusion will return to $1,000,000 per person.

The Capital Gains tax rate will rise from 15% to 20% and the Dividends will be taxed at your Ordinary Income rate, instead of 15%. Both of these will rise another 3.8% in 2013.

The number of families who will fall under the AMT (Alternate Minimum Tax) calculation will rise from 4 million to 28 million next year!

There are many more taxes that are going up and deductions that are going down.

I'm am certain this is having an impact on stocks.

Tuesday, June 29, 2010

Have the markets been putting in a big 9-month top?

This is starting to look more and more like a broad-based Bear Market. Rallies are failing into the 50-day or 200-day averages and key leadership groups like Financials, Retail, Consumer Staples and Transports are getting blasted.

The markets are on their second Follow Through Day in as many months and there is a lot of distribution. You have never had a Bull Market without a Follow Through Day, but not all Follow Through Days lead to Bull Markets. Failures are indicative of Institutions selling into strength and are not a Bullish trait.

This feels more like the topping process of 2008 and less like the basing process of 2005-2007. That is no doubt a result of the fact that taxes policies and economic policies were much more pro-growth in 2005-2007 than they are today.

Critical support is obvious.

A couple weeks ago, I wrote about how Financials were at critical support and needed to see the big boys come in and buy them, or they were going to take the rest of the markets down with them.

The Regional Banks ETF (RKH) and General Electric (GE) are at critical support (GE just broke it this morning). GE had better make a stand soon, because so many Mutual Funds, ETFs and Indexes of many industries have significant holdings in GE. New 52-week lows were recently seen in Blackrock (BLK), Morgan Stanley (MS), Charles Schwab (SCHW) and Ameritrade (AMTD). Many others look horrible. Remember, Financials led the way lower in the last Bear Market, topping in 2006. I will be watching them closely here.


The Retail ETF (RTH) blew right threw the 200-day.

The Consumer Discretionary Index (XLY) just broke a triple bottom and the 200-day.

Walmart (WMT) has broken down on a rally into the 200-day.
Amazon (AMZN) has broken key support.

Target (TGT), Macy’s (M), Bed Bath and Beyond (BBBY) and Tiffany’s (TIF) have broken triple bottoms and are now below their 200-day averages.

Remember how so many were saying that the high-end consumer was holding up? With Tiffany’s blowing through support, the rich may be putting their wallets back in their pockets.

I am not making predictions on anything, I am simply showing you what is going on in the Retail Sector and it is clear that the big boys have been selling retail. Last week, lot of these companies are at levels where the big boys were historically willing to come in and defend price. They are now selling with abandon.

Tech has been a leader, but you have to wonder where things are going when you see key stocks like Cisco, Microsoft and Google breaking long term support.

Some are holding on for dear life (NVR, Beazer (BZH)) while others have been blasted (Ryland (RYL), Pulte (PHM), KB Homes (KBH)).

Home Depot (HD) and Lowes (LOW) are now both trading below their 200-day averages. That puts them into Bear Markets.

This weakness is clearly a result of the ending of the housing tax credit. Housing never bottomed. It was simply propped up by a temporary government subsidy. If housing prices start to go lower again, then the consumer will feel a lot more pressure.

Commodity-based economies like Australia (EWA) and Brazil (EWZ) have wedged up into their 200-day averages. That is a very Bearish setup. The reversal pattern I noted a few weeks ago may have played itself out.

Crude Oil (OIL) has wedged up into the old breakdown point and the 50-day average. Again, this is very Bearish.

Energy stocks as measured by the ETFs OIH and XLE are now in a Bear Market.

Agriculture stocks MOO (think Fertilizer and land movers) are now in a Bear Market.

EAFE is now in a Bear Market. EAFE represents non-US Developed markets. That is bad news…

These are a lot of ugly charts. These are very important sectors and stocks. This is how markets top, with key leadership groups breaking down first. I am not saying that we are in a Bear Market, but at best we are now in a split market where there are winners and losers. So at a minimum, you need to be very selective.