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

http://blog.lifecourse.com/2010/02/californias-fourth-turning/

“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 –

http://link.brightcove.com/services/player/bcpid1886260998?bctid=104611069001

“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.

http://www.governing.com/columns/public-money/Generational-Battle-Brews-Over.html

“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.”

http://www.slate.com/blogs/blogs/kausfiles/archive/2010/02/16/does-the-uaw-even-want-more-members.aspx

“(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.

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.



Financials
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.




Retail
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.



Technology
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.


Homebuilders
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.

Commodities
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.

Another Big Decision

I’m going to make this real simple. The markets have the potential of topping right here, with the S&P at 1,106

The top could be a pause for a day or two and then a breakout above this trading range, or it could be a high that sets up a retest of the 1,040 lows.

The other option is that price clears blast through this 1,106 range.



You can see how important 6/14 is on this chart. Upside resistance above 1,106 are 1,128 1,143 1,173 and 1,260

Downside support is 1,040 1,010 960 and 910

One way or the other, when price breaks out of this range, there is a heck of a lot of money to be made. The Bulls have their shot right here to make things happen. If they fail, then the Bears will get another crack at it.

There is really nothing to predict. All you can do is watch what is happening, anticipate potential outcomes and react to them.

It's Still All About The Euro

The last trading days, the Euro has been rallying. It has now touched the old breakdown point at about 1.215

The Euro has that classic reversal pattern on the hourly chart, so a reversal down from here would not be unexpected.

Let’s see what The Euro does in the morning, because it has controlled the course of risky assets since it started to implode in April. A break above 1.215 that sticks and the lows for the correction may be confirmed.

I am by no means suggesting that The Euro is out of the woods. It has a lot of work to do to undo all the damage it has sustained.

New $50 Billion "Stimulus"

Back on May 26th, Larry Summers (Senior Economic Advisors to Obama) started to talk about the need for a $200 billion “Second Stimulus”. This package would be specifically designed as a gift to states so that they would not have to go through a massive round of public employee (think unions) layoffs to balance their budgets.

Yesterday –

“President Obama urged reluctant lawmakers Saturday to quickly approve nearly $50 billion in emergency aid to state and local governments, saying the money is needed to avoid "massive layoffs of teachers, police and firefighters" and to support the still-fragile economic recovery.”

http://www.washingtonpost.com/wp-dyn/content/article/2010/06/12/AR2010061204152.html

I am assuming that this will not be a bad thing for Municipal Bonds, but I am wondering if they have already priced this in.

This new money should allow the Unemployment Rate to remain artificially low into the election and help Democrats for the time being. The game of borrow from your kids to maintain your lifestyle of excess continues. Keynes may be dead in Europe, but he is alive and well in Washington…

Here is the chart that best shows what the Fed, the NYFRB and Washington are doing with our money. It shows who borrowed how much new money in Q1 2010 (annualized). You can see that the big borrowing has been done by the Federal Government. They borrowed an extra $1.446 trillion, while the banking sector saw its borrowing shrink by $1.336 trillion.

The Federal Government is stepping into to fill in the whole left as Wall Street deleverages (risk passed from bank shareholder to taxpayer). The two numbers show you that the Government is more concerned about holding the status quo than seeing massive economic expansion. Obama begging for $50 billion to prop up the payrolls of the states is simply a mechanism for maintaining employment, rather than actually creating productive new jobs. Think of this as Corporate Welfare, where Government is the Corporation.

Clearly Obama was terrified by the horrible Employment Report from a few days ago.

A Potential Double Bottom or Wash Out

I keep looking at the Line of Death charts and recognize that the markets are at a very key level. Yesterday, the SPX touched 1,042 held (actually it went up 1.53% in about 30 minutes). Somebody (the FED?) is defending price right there.

The line at 1,060 is important, because it gives you a visual reference for where the equilibrium is between buyers and sellers. One camp will win out and the markets will make their next big move, either up or down.

SPX 1,040 is important because it was the low of February and the low for the November 2009 rally.

SPX 1,100 is important because it is where the 200-day average is and this is the average that drives the decisions of so many market timers (price above = buy and hold, price below = sell and hold cash). The powers that be understand that a move below 1,040 forces still more money in these models out of stocks and into cash.

This is only my opinion, but as long as the lows of May hold, prices have a chance at bottoming here. If the lows fail, then I become focused on the 38% retracement level (SPX 1,010) and the 50% retracement level (SPX 960). I think the markets will either find their footing here and rally or fail here and find their footing at either of these two lower levels.



So I have to treat this as if it may be a bottom. The old saying goes – you have to buy a bottom, because you are not certain as to whether or not it will turn into THE bottom. If the markets do bottom here and I miss putting some money to work then I will be forced to chase it and make emotional decisions. If they fail here, then I run the potential of taking a small loss and trying again at lower levels.

Nobody can tell the future, but they can prepare to look for bottoming patterns at obvious support levels. This is potentially one of them. There is a time cycle next week around June 14 – 16. The markets have been very technical, so I will be on alert for any plunges or reversals up.

Equal Weight, Mid Cap and Small Cap have been holding up the best. They will be my areas of focus. The great thing about corrections is that they let you sell what is failing and move your money into leadership.



Here is a chart of how potentially volatile the current markets are. This is the Reverse Symmetric Triangle pattern. It is one of the best potential reversal patterns. This chart is the Large US Energy stock ETF (symbol XLE). The trigger is a close above the high of the low day, but that would have gotten you in at $54, so the trade was not taken.

XLE has been consolidating for 14 days in a triangle. It can break up or down. I don’t know the direction of the break. I only know that I expect it to be a violent move on way or the other. My entry point today was a move above the 20-day near $53.30. Price failed to get there, telling me that the big boys were not yet ready to move the price of XLE out of the consolidation.

If XLE breaks down from here, then I look for another potential entry at lower levels.



Financials (XLF) are extremely important to the markets. You can see that $13.90 has been tested three times in the past few weeks and a break below will probably test support at $13.50. That $13.50 level had better hold, for if it breached, then prices had better snap back above it very quickly, or the markets will probably be in very deep trouble.



Semiconductors (SMH) need to hold $26. It has held here on numerous occasions since the beginning of May. Semiconductors lead, they do not follow and if they fail here, that just adds to the evidence that the Economy is in big trouble.



Prices aren’t all at risk of breaking support, the US Treasury 7-10 year ETF (IEF) is on the verge of breaking out to new highs. Or it may be setting up a double top.



Natural Gas (UNG) may have finally found a bottom, with Crude now on the Government’s hit list.



Here is an energy company that is actually on the brink of new highs! VQ doesn’t have much volume, but it is in the IBD Top 100. Just be ready for the potential of a 40% drop in about three weeks. I am not recommending anybody buy it, I am simply showing a pretty picture.



Here is a Gold stock that looks like a Cup & Handle. Again, I think it is a pretty picture and I am not recommending you do anything with it.



So, the next few days may see a resumption of a violent trend. The only question is will the trend be up or down?

One last thing. I want to show the charts of some High Yield bond funds. They have pulled back with stocks and may be an early warning of a reversal or validate any future weakness. I will be watching them closely.