INVESTMENT STRATEGY
Strategic Insights
January 2013
Fiscal Cliff Update
Our thesis heading into 2013 was that greater transparency on the fiscal front would help unleash underlying cyclical momentum and spark a long-awaited reallocation of capital for both businesses and investors. The “baby grand” fiscal cliff deal passed by Congress on New Year’s day was a step in that direction, in our view. The next phase, which will be centered around the debt ceiling negotiations, should include spending cuts that are needed to help solve the longterm fiscal problem and create a more “balanced” grand bargain. Bouts of market volatility are likely to come and go as the debates continue. We would view downside volatility as an opportunity to increase exposure to our top investment themes throughout equities and real assets.
FISCAL CLIFF Q&A
What does the agreement to avert the fiscal cliff look like? What are some of the highlights?
The core of the 2012 Tax Act once again extends “most” of the so-called Bush tax cuts, but not all. The 2012 Tax Act will permanently extend existing taxable income tax rates for all single taxpayers with taxable incomes below $400,000 and married couples with incomes below $450,000. The top marginal income tax rate increases to 39.6% from 35% and the top marginal dividend and capital gain tax rates rise to 20% from 15% on investments held for more than one year. Adding in the 3.8% health care tax results in an even higher effective rate. Additionally, various tax deductions and credits phase out for individuals earning more than $250,000 and couples making more than $300,000. The agreement also extends unemployment benefits for one year, delays automatic spending cuts for two months, raises the estate tax rate to 40% from 35% with a $5 million exemption, indexes the Alternative Minimum Tax (AMT), extends accelerated depreciation allowances for businesses for another year, renews the research and development (R&D) tax credit and extends the “Doc Fix” (cuts in Medicare payments to doctors).
The Term Paper on Growth Rate Indonesia Population Year
Indonesia is located across the equator and stretch from Sumatra in the west to Iranian Jaya in the east, or from Sabang to Merauke (Dari Sabang Ke Merauke). Its geographic coordinates are 5 00 S, 120 00 E. The total area is 1, 919, 440 sq km. But interestingly only 20% consists of land, the rest is water.The number of islands in the Indonesian archipelago is disputed, but a commonly cited figure ...
What does all of this mean for the “fiscal drag” in 2013?
As it stands now, the fiscal drag should be about what we had expected, around 1.0% – 1.5%, with the most significant drag stemming from the expiration of the payroll tax holiday. Importantly, this federal fiscal drag should be offset by improvements in state and local government finances and accommodative monetary policy.
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The automatic spending cuts were only delayed for two months. What’s next in the “cliff debates”?
The election result sealed the deal on tax increases, but only spending reduction can solve the long-term problem. Studies of countries that have successfully reined in long-term deficit problems show that about $3 of spending reduction is generally required for every $1 of revenue raised. The catalyst for meaningful spending cuts (and potentially tax reform) should come from debt ceiling negotiations. Thus, we expect the next phase in “cliff debates” to be centered around the debt ceiling in late February or March (and any concerns coming from the ratings agencies), the two-month delay in the sequestration which expires in March and heated discussions around spending cuts that are needed to create a more “balanced” grand bargain eventually. All of this needs to be resolved by March 27 when the current continuing resolution that authorizes all government spending expires.
The Term Paper on The Awakening cliff notes 2585
The Relationship of The Awakening and Creole Society In The Awakening, Kate Chopin brings out the essence of through the characters of her novel. In this novel Edna Pontellier faces many problems because she is an outcast from society. As a result of her isolation from society she has to learn to fit in and deal with her problems. This situation causes her to go through a series of awakenings that ...
What are the market and strategy implications of recent fiscal cliff legislation?
In short, we are reaffirming our strategy laid out in our year-ahead Investment Strategy Overview, 2013: The Big Fix Begins. Bouts of market volatility are likely to come and go as the debates continue. We would use downside volatility as an opportunity to increase exposure to our top investment themes throughout equities and real assets. Our overweight to equities is based on five key themes: 1) Corporate profits are likely to reach another record level in 2013. We expect S&P operating earnings of $108. U.S. foreign profits should be bolstered by a competitive U.S. dollar, an uptick in U.S. exports owing to a rebound in global demand and more competitively-positioned U.S. businesses. Regarding the latter, thanks to the U.S. energy boom, U.S. electricity costs are 50% lower than Europe’s. Meanwhile, U.S. manufacturing wages are 75% of Germany’s. Valuation is still attractive on a forward basis at 13.4 times earnings. As mentioned, fiscal cliff policy transparency (The Big Fix Begins) becomes the new catalyst as monetary policy stimulus becomes part of the base which should increase stock market multiples. The housing recovery gathers further momentum. Global re-balancing accelerates as growth picks up in emerging markets again. The fiscal drag in the U.S. (roughly $150 – $200 billion) will be easily offset by rising personal consumption in the emerging markets. A 6% rise in personal consumption expenditures in the emerging markets (a conservative estimate) equates to $1 trillion in incremental output. Numerous U.S. multinationals are well positioned to tap this demand. The outlook for dividend-growing U.S. multinationals is better at the start of 2013 than the start of 2012.
2) 3) 4) 5)
On the back of the latest “cliff aversion” out of Washington we believe our emphasis on cyclical growth and sectors such as Technology, Materials and Energy is further reinforced with growth worries declining globally and the renewal of R&D tax credits and the extension of the 50% bonus depreciation on capital expenditures for businesses.
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Toyota is the largest global automotive manufacturer and has been successful targeting select markets. For success in the future, they have hired consultants to review its success. The experts will evaluate Toyota’s target market and market positioning in the global automotive industry. Target market will identify demographics, and geographics where they are successful and what changes can be ...
Does the fiscal cliff deal alter our strategy within fixed income?
We have recently articulated five themes for fixed income in 2013. 1) 2) 3) 4) 5) Gradually reduce interest rate risk. Actively manage portfolios to take advantage of market volatility. Expand investable universe to include non-traditional asset classes. Selectively increase exposure to lower quality credits in some sectors. Begin to plan for higher inflation.
The fiscal cliff deal passed by Congress on New Year’s Day does not change these themes, and may in fact strengthen them. Fixed income returns are likely to be lower in 2013 than they were in 2012, with the additional likelihood of increased interest rate volatility as we approach the deadline for raising the debt ceiling.
STRATEGIC INSIGHTS [2]
We do have one change in our thesis, and that is the fiscal cliff deal is good news for tax-exempt municipal bonds. • Despite fears articulated last month that sweeping tax reform would limit municipal bond tax exemption, the 11th hour ‘baby grand’ solution did not address municipal bonds at all. • We believe the pressures to limit municipal bond tax exemption were greatest in the lead-up to the fiscal cliff. However, the tax measures passed on January 1 did not include a framework for more sweeping tax reform to close so-called tax loopholes. • We believe future discussions to narrow the federal deficit will focus more on spending and less on additional changes to personal income taxes. Given the marginal tax-rate increases for taxable incomes above $400,000/$450,000 and the new 3.8% Medicare surtax on taxable investment income, the tax advantage of municipal bonds is now even greater than before. However, the ratio of municipal-to-Treasury yields are well above historical levels, and with a lower probability that municipal tax-exemption will be limited, it would appear that high quality munis could be significantly undervalued versus Treasuries.
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Executive Summary: The purpose of the report is to do an in-depth investigation, study and analysis on alternative investments. From the various alternative investments, our team of analyst chose commodities, variable annuities and hedge funds as our subject of interest for the study. Each financial product has its own aims as to cater to the different investment goals to meet the needs of ...
IN SUMMARY
The political debate “theatre” will continue in the coming weeks and months. But the private sector is moving forward. Although we expect downside volatility to come and go depending on the policy headline of the day, we believe the end result is a rise in long-term fiscal transparency through the year. This should be one of the main catalysts that kick-starts a large scale portfolio rotation across all investor segments. As this occurs, bond yields should drift higher and equity markets and real assets should follow. We believe the S&P 500, which is led by global economic growth more than U.S. domestic economic growth will likely hit new all-time highs this year. More importantly, greater fiscal transparency in 2013 coupled with further momentum in housing and a secular movement of on-shoring in the next business cycle should underpin our key investment themes for the next few years.
U.S. Trust Investment Strategy Committee January 3, 2012
STRATEGIC INSIGHTS [3]
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The Essay on Issued Bonds Investment Risk Return
CBO CBO's (collateralized bond obligation) are sometimes called CDO (D = debt) and look somewhat like CMO's (M = mortgage). This would be a private equity investment because we would own the equity of the issuer not the CBO issued bonds. We are talking about a vehicle that owns some underlying asset, such as investment grade bonds (some use high yield but I suggest only looking at investment ...
Other Important Information
Past performance is no guarantee of future results. Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. Investing in fixed income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some municipal security investors may be subject to Alternative Minimum Tax (AMT).
International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Treasury bills are less volatile than longer-term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. Government. Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time. Breakdown reflects ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. For additional information on ratings, please see www.standardandpoors.com, www.moodys.com, and/or www.fitchratings.com. This report may not be reproduced or distributed by any person for any purpose without prior written consent. STRATEGIC INSIGHTS © 2013Bank of America Corporation. All rights reserved. | AR249C4C l TEMP-07-11-0930.C | 01/2013 [4]
The Essay on Social Security Government Market Average
I. Nature of the Problem Social Security is not a problem right now; in fact, it runs a large surplus every year. However, Americans are living longer, and drawing more Social Security payments than they ever put in. Early in the next century, we will be paying out more than we take in, and Social Security will have to dip into its surplus, which is currently used by the federal government for ...
