Reaping Dividends

All our times have come
Here, but now there, gone
--Blue Oyster Cult

Borrowed the chart below from this article. The graph suggests the dominant influence of dividends on stock performance over time.

Since 1871, dividends account for more than half the nominal gains in the S&P 500 Index. Today many folks shun dividends in search of capital gains. Over time, however, capital gains have accounted for less than 2% of the 8.8% annual return.

Parenthetically, note that there was no inflation prior to the mid 1910's. The Federal Reserve Act was passed in 1913.

Before running out and loading up on dividend paying stocks right here, keep in mind that average dividend yields rest at the low end of historical benchmarks. Current yield on the SPX is about 2%. Historical buying opportunities in stocks have typically corresponded to aggregate yields in the 5-6% range or higher.

While there may be special situations here or there that are paying outsized dividends, I'm trying to remain patient for much higher dividend yields in aggregate before 'buying the list.'

position in SPX

Charade of Independence

"Everyone's trying to get out of Washington, and we're the only schmucks trying to get in."
--Julius Levinson (Independence Day)

John Mauldin opines that we likely won't see Weimar-style hyperinflation in the US because the 'independence' of the Federal Reserve from government reduces the chance that bureaucrats will be willing to destroy the currency in order to pay down debt.

Fed governors have families and communities like the rest of us, JM, reasons. Thus they will be reluctant to turn the dollar to confetti for political gain.

Perhaps we will not get Weimar-like hyperinflation. But if we don't, it will not be because of the Fed's celebrated independence.

It is a charade to view the Fed as an independant agency. The Fed chair is appointed by the president and routinely meets with and reports to politicians in Washington. Moreover, the Fed reflects a type of government structure that is the enemy of a republic, one shared by most of the agencies that report to the president. These people are appointed rather than elected, yet have direct responsibility for developing and implementing policy.

No matter how poorly these bureaucrats do their job, voters cannot 'vote the rascals out. This amounts to oligarchy rather than republic.

Ask youself this question. If the Fed was a truly an indepedent agency, then who does this agency work for? Precisely whose interests do the actions of the Fed protect? Where do the Fed's resources come from? Who is the Fed accountable to?

Check the evidence. Since the Fed's creation, the dollar has lost about 98% of its purchasing power (in the 100 yrs prior to the Fed's creation, the dollar actually strengthened). Easy credit offered by the Fed has driven massive debt and leveraged speculation.

Now, as the artificially inflated mountain of credit begins tumbling down, the Fed's actions get more extreme. Short rates effectively at zero. Monetizing debt by buying $trillions in govt and private debt securities.

If things don't turn around, is it reasonable to believe that the Fed will pack their toolbox and go home? Or, given the trajectory toward increasingly extreme action, will the Fed dig deep into the box for tools of desperation (a la Weimar)?

Were the US Treasury in charge of monetary policy, it is difficult to imagine that Treasury would be acting any more recklessly that the Federal Reserve.

position in USD, SPX

The Folly of Partial Freedom

All for freedom and of pleasure
Nothing ever lasts forever
Everybody wants to rule the world
--Tears for Fears

Judge N suggests that while the Occupy Wall Street types seem to espouse some types of freedom such as freedom of speech, they appear ignore others, such as freedom of contract.

This raises broader questions. Can a person live in a state of partial freedom? Where do those freedoms deemed valid come from? Who grants them? Who takes them away?

There are many who espouse so called 'social freedoms' but not 'economic freedoms.' I have yet to hear a reasonable defense of why some freedoms but not others. And why one should reasonable expect that a set of partial freedoms to endure--as opposed to them being constantly eroded by government force.

Any state of partial freedom seems a ruse.

Minding the Gap

Should I stay or should I go now?
If I go there will be trouble
If I stay there will be double
--The Clash

Bought some DBC early last week when prices were falling into the abyss. My thought was that if markets reversed higher, then this might be good for a trade up to about $28.

Why $28? Because once prices broke below that level last month, $28 defines a formidable resistance level. In the context of technical analysis, resistance defines a price level likely to retard further price advances due to the presence of latent supply--such as all those people who bought around $28 early last month and are now trying to get out at a price that lets them come close to break even. Short sellers may also lean on this level and sell come shares short with tight defined risk (i.e., if prices go north of $28, then shorts consider that as an indicator that this was a bad trade, and subsequently stop themselves out).

Moreover, gaps similar to the one that reflected the price breakdown in mid Sept often serve as magnets if/when prices retrace. Indeed, there's a saying among technicians that 'all gaps are meant to be filled.'

To add one more tidbit of rationale to my DBC sale, short term stochastics (e.g., the MACD shown above) were looking pretty toppy, suggesting an 'overbought' condition in the near term. Markets tend to ebb and flow between optimism and pessimism on multiple time frames; presently we may be approaching an excess of optimism in the near term.

As such, when DBC lifted into the gap area today, it was time for me to go.

no positions

Rothbard's Eye Opener

I sit by and watch the river flow
I sit by and watch the traffic go
Imagine something of your very own
Something you can have and hold
I'd build a road in gold
--Blondie

Anyone who studies the 1920s and 1930s with open eyes will reach similar conclusions to those reached here. The Great Depression was not caused by 'capitalism' but by a credit bubble--a bubble that was induced by a hyperactive State. And by not letting markets clear, that same hyperactive State prolonged the Depression.

Parallels to today are almost stunning--right down to presidential succession. In both cases, we have an interventionary, borrow-and-spend Republican president followed by a Democrat whose liberal policies redefine what intervention, spending, and borrowing mean.

Rothbard's (1963) work was one of the first to challenge conventional wisdom on the causes of the Great Depression. Anyone seeking wisdom about this period is well advised to crack it open.

Personally, am indebted to MR for opening my eyes here.

References

Rothbard, M.N. 1963. America's Great Depression. Princeton: D Van Nostrand & Co.

The Coup D'etat of the Democratic Party

"You leave public opinion to me. Now, Joe, I think you better go back into the Senate and keep those senators lined up."
--James Taylor (Mr Smith Goes to Washington)

One of the notable ironies in United States political history is the transformation of the Democratic Party. Founded as the Democratic Republican Party by Jefferson and Madison from Antifederalist roots, the party was grounded in a natural distrust of big government. 'That government is best that governs least,' said Jefferson. Democrats preferred politics at the local level were people could remain more engaged and politicians could be monitored.

By the mid 1800s, the primary opposing party was the Republican Party. Combining Whig political philosophies with pietist belief that government was a valid instrument in saving mankind, Republicans pushed for ever larger government to enact the party platform. Democrats were thus engaged in a near continuous struggle to keep Republican initiatives within the confines of the Constitution.

Republicans liked to label themselves 'the party of great moral ideas' while Democrats declared themselves 'the party of personal liberty.'

As Rothbard observes, the libertarian heart of the Democratic party was extracted in the late 1800s. The factors that drove the transformation included the following:

Recognition by high level Republicans in the 1890s that current trends were likely to reduce Republican Party membership to a durable minority.

Movement toward pietism in Southern and Mountain state Democratic circles.

Many blamed the Grover Cleveland administration for the Panic of 1893, which subsequently led to a 2010esque rout in the 1894 elections.

Many sectors with strong Democratic Party ties, such as farmers, were drowning in debt inside in the midst of the economic slump that followed the 1893 panic. Replacing the gold standard w/ silver (the late 1800s equivalent of the monetary printing press), a proposal that was getting loud among some Democratic factions such as 1896 presidential hopeful William Jennings Bryan, was music to the ears of debtors.

Although Rothbard does not mention it, we should also note the influence of Lincoln, the first notable Republican president, in shifting the balance of power from the states to the federal government during his administration in a durable manner.

Sensing opportunity, Republican leadership approached influential Democrats who remained firmly committed to a gold standard with this proposal: If you support the Republican presidential nominee in 1896 (McKinley), then we will guarantee you that the gold standard will be preserved.

A goodly number of hard money Democrats took the bait and switched sides. This left a power vacuum in in the Democratic Party that was filled by Big Government populists led by Bryant at the Democratic National Convention in 1896.

Presto, the hard money, small government core of the Democratic Party was no more. Divide and conquer. An American coup d'etat.

Thus, for over one hundred years, the political ideals of the Party of Jefferson have been relegated to the backwaters of American politicals.

Efforts of the Tea Party are perhaps changing that.

Holding the Line

It's not in the way you've been treating my friends
It's not in the way that you've stayed till the end
--Toto

The steep rally that we've been experiencing was repelled in an assualt of SPX 1220ish today. This resistance has been a line of serious upside contention over the past 2-3 months (just as 1120 had been on the downside).

Best case for the bulls would be to do work underneath resistance for a few days--both to work off overbought conditions and to chew through latent supply.

I for one have started building a short side hedge again and added to it near 1220. I plan to increase this hedge as well as make some sales in CSCO should the stock continue to trade higher. Would prefer to get more balanced here.

Gun to head has me thinking they go higher from here, but given the macro state of the world, the opposite would not surprise me.

position in CSCO, SPX

Out of Place

"Some of your fingers are out of place. I have to push them back. If I do not do this, there's a chance that you may never use them again."
--Arthur Castus (King Arthur)

A protest group collectively labeled Occupy Wall Street has been gathering in lower Manhattan over the past few weeks. The headlines suggest that the theme of the protest relates to 'greedy bankers' and to a lesser extent to the bankers' government ties.

As with any gathering of this type, however, the true message of the group is difficult to discern. It appears that nearly all political and economic viewpoints are represented--from Communists to Libertarians.

Let's assume for a moment that the headlines are correct, and that the primary complaint of the protesters relates to Wall Street's cozy relationship with government. Such a relationship can be filed under the heading of corporatism.

Corporatism involves the division of people in society into groups based on common interests, and the actions of those groups to employ government to satisfy those interests by political means.

The corporatism label seems somewhat unfortunate as it implies that the groups in question are limited to large, for-profit corporations (which seems to be the focus of many OWS protesters). But in its general sense corporate groups consist of any group seeking to tilt government influence in their direction. In addition to for-profit corporations, SIGs include non-profit organizations, unions, environmentalists,...any group seeking a distribution of resources from the State.

Corporatism, therefore, reflects the world of special interest groups (SIGs). SIGs trade in the market for political favor. They get special privileges from politicians in exchange for votes, campaign contributions, etc.

Protesting the actions a particular SIG seems akin to the doctor who treats the symptom of an illness rather than the cause. A general axiom of human behavior is that people prefer leisure to labor, and that they seek to satisfy needs with minimal effort.

As such, when the scope of government is broadened to include the power to redistribute resources by force, then a market for political favor is established. Like night follows day, SIGs will materialize to employ government to redistribute resources in their direction--to acquire resources by political rather than by economic means. Bankers will do this as will unions, etc because it is human nature to do so.

Stopping SIG activity means limiting government's scope to the protection of property (broadly construed to mean life, liberty, and property). This was the intent of the founders as expressed by the Constitution. Of course, government stepped past its Constitutional boundaries long ago.

The Occupy Wall Street gathering therefore seems misplaced. If the OWS crowd is truly for a return to limited government, then they should be surrounding the US Capitol.

Resistance Movement

Been a long time since I rock and rolled
Been a long time since I did the stroll
--Led Zepellin

Since last Tuesday's late day reversal, stock markets have been on fire, with the SPX rallying about 120 handles from last week's lows.

Cisco (CSCO) has been showing good relative strength during the rally. It is now facing an importantly level technically as it is challenging the intermediate downtrend line. A break out here suggests a measured move into the $18-19 area.

A bullish factor in CSCO's favor is the reverse head and shoulders pattern that has been tracing out over the past few months. Price is currently trying to puncture the neckline at $17ish which, ironically, defines the downtrend resistance as well.

Next few days should provide some insight on whether CSCO can power over the hump.

position in CSCO, SPX

Tax Facts

Should five percent appear too small
Be thankful I don't take it all
--The Beatles

Tax data can be sliced and diced in myriad ways, and sometimes its hard to fact from misinformation. This article presents data from 2008 tax info that support some generalizations when it comes to tax payments.

AGI / %AGI paid in income tax
$1+ million / 23.3%
$100K- $200K / 12.7%
$30K - $50K / 7.2%

This is the essence of a 'progressive' tax code. In 2008, those earning $30-50K (such as Warren Buffet's infamous 'secretary') paid taxes at less than one third of the rate paid by millionaires.

As the data suggest, generalizations proposed by Buffet and subsequently President Obama that lower income brackets pay higher tax rates than rich people is just plain nonsense.

Parenthetically, Buffet's argument leads a reasoned person to conclude that the solution to any differential tax rate paid is a flat tax system where all pay the same rate.

Buffet's analysis would have been more transparent if he had more explicitly dealt with the taxation of capital gains and dividends, from which the wealth derive the bulk of their income. Benefits from capital gains and dividends depend on corporate profits, which are taxed at the corporate levels before they are further taxed when reported on individual 1040s. The double taxing of incomes here means that total taxes paid on capital gains and dividends is much higher than Buffet's analysis suggests.

Finally, let's look at the overall share of federal income tax revenues:

top 1% of income earners / 38% of total federal income tax paid
top 10% of earners / 70% of taxes paid
top 50% of earners / 97% of taxes paid

By inference, the bottom 50% pay 3% of total federal taxes on individual income.

Higher standard of living demands increased productivity. Increased productivity requires capital investment. Capital investment requires savings. Savings requires putting aside some income rather than consuming it.

In a country where savingsa are already scarce, these tax policies paint a sober picture of tomorrow.