Gallup Poll Highlights Divergence Between Republicans and Democrats

I know a number of people who have immigrated to the U.S. from former Soviet republics. They lived under socialism and communism in authoritarian countries. They say they came here for freedom, democracy, and capitalism. They often complain that there was little or no incentive to work hard in their home countries because everyone got paid the same. Recall that it was Karl Marx, a proponent of socialism and author of "The Communist Manifesto," who came up with the slogan, "From each according to his ability, to each according to his need."

This morning I heard an interview on National Public Radio (yes, I do listen to NPR) with Frank Newport, Editor in Chief at Gallup. The interview was about a poll Gallup conducted to see how Americans react to certain words. Gallup went a step further. They segmented the results based on political affiliation. The good news is that both Republicans and Democrats had overwhelmingly positive reactions to the terms, "small business," "free enterprise," and "entrepreneurs" with Republicans having a slightly more positive reaction to each.

Here is the worrying part. Republicans had a much stronger positive reaction than Democrats did to the words "capitalism" and "big business," but Democrats had a much stronger positive reaction to the words "federal government" and "socialism." Indeed, three-fourths of Democrats had a positive reaction to "federal government" and more than half had a positive reaction to "socialism." No doubt this comes as a shock to all those immigrants who came to the U.S. to escape the Soviet Union's version of socialism. Click here to see the full Gallup report.

The Rush for Special Dividends

With fiscal cliff negotiations still going on, one thing is certain. Tax rates on dividends and capital gains will be going up. The only question is by how much. The highest tax rate on qualified dividends is currently 15%, but in 2013, it could jump to as high as 43.4% for the highest income individuals. As a result, even the most anti-tax advocates are willing to settle for a smaller increase. A 20% tax rate on dividends is starting to look pretty good right now.

Yet 20% is still a third higher than the current rate. This is why, in anticipation of higher rates, many companies are announcing special dividends. Special dividends are dividends in addition to regular dividends. However, unlike regular dividends, special dividends are not recurring. The most recently announced special dividend comes from Costco, which said today that it would dole out $7 per share by year-end to stockholders of record December 10. That's in addition to the regular quarterly dividend of 27.5 cents per share. This is a huge payout for a company that is expected to earn about $4.50 per share this fiscal year. There is no doubt that Costco is doing what it can to help its shareholders avoid higher expected taxes in the future.  

Costco is not the only company to announce a special dividend. Others include Brown-Forman, Las Vegas Sands, Carnival, Tyson Foods, and Movado. Of course, the elephants in the room are Apple and Microsoft. Both companies sit on vast cash hoards and a lot of people are betting that they, too, will announce a special dividend before long. Higher taxes can be avoided as long as these dividends are paid before year-end. Even though they will taxed at just 15%, the payouts will produce windfall revenues for the government this year. 

The Norquist Pledge

Contrary to popular belief, the much ballyhooed anti-tax pledge signed by almost all Republicans in Congress, does not begin with the line, "I pledge allegiance to Grover Norquist." Instead, the pledge is a simple document that states that the signer will oppose efforts to increase marginal tax rates and efforts to eliminate deductions or credits that are not matched by decreases in tax rates. Simple enough; yet Norquist and his pledge are being blamed for a failure (so far) to reach agreement on the fiscal cliff. At one time it was thought impossible for a Republican to get elected (or reelected) if he or she refused to sign the pledge or violated the pledge.

It now appears that the tide has turned. Opinion polls strongly suggest Republicans will get the blame if a resolution to the fiscal cliff is not reached. The recent presidential election proved that Republicans were not very good at interpreting polls. They are trying to get better. Several have already said they will not be bound by the pledge. Norquist's stock is falling fast, but only time will tell if these Republicans can get reelected.

By the way, here is a link to my Fox Business interview on the fiscal cliff: The Fiscal Cliff and Your Portfolio

Some Observations

Everyone is holding their breath, hoping Democrats and Republicans reach an agreement on the fiscal cliff. Today we saw an unusual sight: The majority and minority leaders of both Houses speaking to reporters in a conciliatory manner. It looks like we are getting close to an agreement. Get ready for a big rally when a credible deal is announced.

That's the good news. Here's the bad:

Hurricane Sandy has had a huge negative impact on the economy. It caused a large spike in initial jobless claims and a sharp drop in industrial production. Sandy raises the risk of another recession.

Twinkies are no more. Some of you would say that's good news. After all, there is no nutritional value to those delicious cupcake-like treats. No doubt, Twinkies are the last thing an obese country needs. Hostess, the company that makes Twinkies and other bad-for-you treats, is going out of business. Before you cheer, keep in mind that Hostess runs 33 plants around the country that employ almost 20,000 Americans. Goodbye Twinkies. Goodbye jobs.

Shares of Apple keep plummeting. The company has lost about a quarter of its market capitalization since its September peak. Is this a buying opportunity? It's hard to say no.

America's military leadership is in turmoil; but not because of battles gone wrong. The culprit is sex. Imagine that.

The Middle East is in turmoil. While many in the West celebrated the so-called Arab Spring, Israel's leaders worried more about the instability that it could produce. Indeed, Islamists have gained power and they are proving their credentials by attacking Israel. The bombs are flying and things will likely get worse. How will the Obama administration react? It's still trying to figure out exactly what happened in Benghazi.

Stop Posturing and Cut a Deal Now!

It is difficult to point this out without sounding partisan, but U.S. stocks have been sinking ever since Election Day. The selling has been across the board. The Dow Jones Industrial Average and the S&P 500 Index are both down 5.1%. The NASDAQ Composite Index is down 5.5%. The Russell 2000, a small-cap index, is down 6.4%. Apple Inc., which had already suffered a large sell-off prior to the election, has given up another 7.9% since President Obama was reelected. Only the most die-hard Democrats (and left-leaning journalists) can fail to notice how poorly investors have greeted Obama's second term.

The selling today was particularly disappointing. After all, stocks began the day on the upside. The futures markets were pointing strongly higher as investors cheered Cisco's earnings, which came out after yesterday's close. They also applauded Staples' report, which was released before the open today. Both companies reported better-than-expected results and their stocks rallied strongly in pre-market trading. Unfortunately, things began to sour soon after the markets opened. The thinking is that investors are beginning to fear the prospect of higher tax rates next year. In order to minimize the tax burden, they are trying to realize gains before 2012 comes to an end.

Minutes before the president was to speak at a press conference at 1:30 pm today, stocks put in a bit of a rally. Investors were hoping to hear some conciliatory words about cutting a deal with Republicans and avoiding the dreaded fiscal cliff; but it was not to be. The selling took on steam soon after the president approached the podium and began his address. It quickly became clear that Obama views his reelection as a mandate to raise taxes on the rich. Investors sensed that this was not a man who seemed willing to compromise. By the end of the day, the Dow was almost 200 points lower.

How much lower can the markets go? That truly depends on the politicians. Each day brings us one step closer to disaster, yet I am holding my breath. I find it inconceivable that our elected officials would not cut a deal. It would be incredibly irresponsible of them not to. A failure to compromise will take both the economy and the stock market over the edge. My expectation is that a deal will be struck. However, for stocks to rally, it has to be a genuine deal. Increases in tax revenues must be met with spending cuts, and there has to be meaningful reform to the tax code. There is no question that the election results strengthen President Obama's hand, but he won't like what will happen to the markets if investors become convinced that he is simply riding roughshod over the Republicans.

Immigration, One Reason Why Romney Lost

The election is over and the analysts are trying to explain the results. Of course, there are many reasons why Barack Obama won and Mitt Romney lost. Yet one thing is clear. The Democrats did an excellent job of defining the candidates. They defined Mitt Romney as Old America and Barack Obama as New America. They defined Romney as a successful, wealthy, white businessman, as if these are attributes to be ashamed of. Of course, Obama is successful, too, yet he is less wealthy and less white. Best of all from their perspective, Obama never ran a business. Instead, Obama made his money by telling his story in books. We have somehow reached a point in America where becoming rich by writing books is okay, but making money through business is not. Furthermore, you might think that as a Mormon, Romney was the quintessential outsider in this race. Yet Democrats managed to convince voters that Romney was the ultimate insider. You could almost imagine a President Romney cutting secret deals in smoked-filled rooms that enriched his friends. Ironically, Obama is the one who smokes.

In a recent article, Steve Forbes lists Five Reasons Why Romney Lost. He specifically names Romney's failure to define his own message. Nothing illustrates this better than the issue of immigration.

Other than Native Americans, every citizen of this country is either an immigrant or the descendant of an immigrant. I am an immigrant myself and, of course, I strongly favor immigration. I also know a lot of Republicans, yet for the life of me, I can't name one who is opposed to immigration. Republicans favor immigration because they know that immigration is the lifeblood of the economy. So how is it that they got labeled as the anti-immigrant party? It is because they allowed Democrats to define their message. While Republicans favor legal immigration, they are strongly opposed to illegal immigration. You might think this is common sense. Yet, Democrats managed to turn the issue around. You may have noticed that Democrats never  use the word "illegal" when describing people who came here or stayed here in violation of the law. Instead, they call these people "undocumented." That makes it sound like it is not their fault. It makes it sound like some government official simply forgot to give these poor people the right papers.

Republicans oppose illegal immigration for a number of reasons. National security is the most obvious one. Ever since 9/11, national security has become more important than ever. For national security reasons, we must be able to screen and track immigrants. We must make sure we are not allowing terrorists to get in. Yet, there is another critical reason as well. Illegal immigration is simply unfair to the millions of people around the world who are trying to come to this country through the proper channels. People from Africa, Asia, and Europe can't simply cross a border in the middle of the night. These people often travel long distances just to get to the nearest American embassy in order to properly apply for the right to immigrate to this country. These people sometimes wait years before that right is granted, if it is ever granted. Granting asylum to the millions of illegal immigrants who are already here is a slap in the face to the millions of aspiring Americans all over the world. What's worse, it sends the wrong message: "If you really want to come to America, figure out some way to sneak across the border."

Immigration is a critical issue and it must be resolved. The election results demonstrate that Americans won't tolerate a solution as simple as deporting everyone who is here illegally. There has to be another way. This will be one of the greatest challenges in President Obama's second term. He must find a way to work with Republicans to find an acceptable solution.

The Fallacy of Gasoline Rationing

If you haven't heard, the lines at the gas stations in New York City and other areas affected by Hurricane Sandy have been very long. In response, New York City is following New Jersey's lead and introducing a rationing system based on license plate numbers. Referred to as odd-even, you can buy gasoline only every other day. If your license plate ends in an odd number, you must buy on odd numbered days. If it ends in an even number, you must buy on even numbered days.

This morning I heard a commentator on the radio claim that this will reduce demand. In fact, he said it would reduce demand by half every day. This is nonsense. Rationing does not reduce demand. Think of it this way. Suppose you drive your car 100 miles per day and get 20 miles per gallon. If you fill up your car every day, you will buy five gallons per day. Under the rationing system, you will buy 10 gallons every other day. In other words, demand hasn't changed. What has changed is how frequently you visit a gas station.

So, yes, odd-even rationing can help alleviate the long lines at the gas stations. It won't, however, reduce demand. In the short run, the only thing that will reduce demand is if people drive less. Unless rationing causes more people to rely on public transportation or prompts them to car pool, it will have no effect on demand.

Fiscal Cliff Fears Founder the Market

The post-election sell-off is becoming a serious concern. The S&P 500 is down 3.6% in just the two days following the election. This is a clear indication that investors are not happy with the election results. President Obama remains in the White House, the Senate continues to be dominated by Democrats, and Republicans control the House. In other words, nothing has changed. This recipe did not do the economy much good during the past four years. Right now, there is no reason to believe that the next four years will be any better. There is a real fear among investors that politicians will fail to reach a resolution on the fiscal cliff. The sell-off in the market is not the vote of confidence President Obama and his team in the White House were hoping for.

Today, the S&P 500 closed below its 200-day moving average. Those who follow such technical factors would consider this is an extremely bearish signal. Another bearish signal is the sell-off in Apple, the largest company by market capitalization in the S&P 500 and one of the hottest stocks in recent years. Apple is the bellwether stock of today's economy. Unfortunately, Apple is down 23% since hitting its closing high on September 19!

I explained on this blog back in March why I wasn't buying Apple. At the time, the stock was already above $600 per share. However, I said sentiment could take it even higher. It did. Yet the recent sell-off in Apple demonstrates how a simple turn in sentiment can devastate a stock. There is no change in the fundamentals. Apple still makes great products and it is still expected to generate tremendous sales growth. Some investors are actually justifying the sell-off by saying that since Steve Jobs passed away, Apple is just not the same company it once was. But Jobs died over a year ago. I can't believe investors suddenly woke up to this news.

Thanks to the sell-off, Apple is becoming very attractive. By most measures, it is not an expensive stock. On the contrary, it offers great value. Based on my conservative discounted cash flow analysis, I would value Apple at about $600 per share. On a more realistic basis, it is worth closer to $700 per share. Even so, negative sentiment could drive both Apple and the market lower.

At this point, however, I think there is a good chance for an upside surprise in the markets. Politicians on both sides of the aisle seem to have discovered a new sense of urgency to resolve the fiscal cliff. I am even sensing that the Republicans will relent on some tax increases in exchange for tax simplification. I once told Steve Forbes I would be willing to pay a little more in taxes if I could fill out and file my own return in half an hour. The market will rally even if there is no concrete agreement signed before January 1. All it will take is for investors to believe that a real resolution is in the works.

Obama Wins, Stock Futures Turn Red

The elections are over. President Obama gets another four years in the White House. This means Ben Bernanke remains at the Fed. Tim Geithner will remain at Treasury if Obama insists, but Geithner has made clear his preference to step down. Analysts are speculating about who might replace him. Chances are, however, that Geithner will remain at least until some compromise is reached on the fiscal cliff, the most important immediate issue facing the government.

As for stocks, the Obama victory means that the Fed's easy money policy will continue indefinitely. The effect is already wearing thin, but this policy could fuel the rally in stocks and commodities a little longer. Over the long term, however, it runs the risk of fueling inflation. The Obama victory is bad news for medical device manufacturers who are facing a 2.3% excise tax on the price of their products. This is a tax that will come right off the top line. It's also bad news for for-profit education companies and financial companies, both of which will face more regulatory hurdles. Obama's victory is good news for alternative fuel companies, especially those working in the solar and wind industries. It's bad, however, for traditional carbon-based energy companies. It means less drilling for oil and gas than we would have seen under a Mitt Romney presidency. Obama's victory also means that Obama Care will not be tweaked. As a result, healthcare insurance companies should see more customers even though profit margins could decline.

The stock market rallied strongly on Tuesday. Perhaps investors, who tend to favor Republican policies on the economy, thought Mitt Romney might actually pull off a victory. Or perhaps they were just happy that the uncertainty was about to end. Whatever the case, investors seem to be suffering from a morning-after hangover. As of early Wednesday morning, stock futures are decidedly in the red.

Markets Weaken as Election and Fiscal Cliff Loom Ahead

I'm happy to report that our power is back. Electricity was restored to my neighborhood on Saturday afternoon. We were in the dark for a full five days. I don't want to sound too gleeful because there are still many people less than a mile from us who remain without power. And one of my cousins in Long Island was told that it could be two weeks or longer before the power is restored in her area. The past week has given me a new found appreciation for the flashlight. When you don't have electricity, you begin to think that the flashlight is man's greatest technological innovation.

Now that the crisis is over for my family, I can focus once again on economic issues. For the most part, the economic data that came out last week was better than expected. The gain in nonfarm payrolls for the month of October was 171,000, well above the 125,000 expectation. More importantly, the August and July estimates were revised upward. In addition, initial jobless claims of 363,000 beat the consensus estimate. Another encouraging sign was the ISM Index of 51.7, which points to expansion in the manufacturing sector (albeit at very weak levels).

While the latest economic figures bode well for President Obama's reelection efforts, the stock market shrugged it all off. Gold also sold off, dipping well below $1,700 per ounce. The election, of course, is on everyone's mind. It's not yet clear how the aftermath of Hurricane Sandy will affect the voting. Real Clear Politics, which aggregates results from the major polls, is currently showing Obama and Romney in a statistical dead heat. Obama looks much stronger on electoral votes.

The winner will have to contend with a looming crisis: the fiscal cliff. It remains to be seen if politicians can put aside their differences before the January 1 deadline. Economic indicators may be improving on the margin, yet the markets don't seem to be going along. Another positive economic number I should mention is China's better-than-expected purchasing managers' index. With a crisis in Europe and a looming crisis in the United States, investors are hoping China can pull the world out of its doldrums. Because China is so important, I thought I'd give a shout out to Lynn Harrison. Lynn was a guest on this MoneyMasters video shot in 2007! His comments about China are just as relevant today. Lynn and his wife were kind enough to give my family shelter on Friday night when we were still without power or heat.