Jim'sMoneyBlog

Financial Opinion and Insights

Politicians Seek to Keep Their Jobs While Americans Try To Find One

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

 

The political season is here.  You can tell, because an administration made up of people who have never owned a business or made a payroll are now talking about small business job development through the use of one-time tax credits. 

What they still don’t get, of course, is that businesses won’t take on long-term obligations to achieve a short-term benefit. 

Businesses are not only in the dark about the tax landscape after the elections – when the lame-duck congress will be in session – but, they’re really concerned about the ultimate cost of the health care plan, most of which won’t kick-in until 2013 and beyond.  Businesses see that as another tax shoe that just hasn’t dropped yet… and no one knows just how bad that one will be. 

If you can’t do business, do deals. 

Earnings are up and interest rates are down.  You’d think that would be a perfect scenario for huge market gains!  But, with the tax uncertainties cited above, companies are hoarding cash and some – particularly in health care – are even raising prices now in anticipation of the increased costs that are coming.  

When companies have huge cash surpluses in a low interest rate environment – and are afraid to commit to future questionable growth investment subject to political whims, there’s only one way left:  Mergers and acquisitions.   During recessions, M&A takeover targets abound and companies with cash are in a great position to pick-up equity positions at bargain prices – a lesson small investors might benefit from with a caveat:  Buying ownership in companies – which is what buying stocks is a smaller version of – does require some preparation in the form of both education and homework. 

Example:  As I’m writing this, the S&P index is up only about 6% over the last 12 months, while Caterpillar (CAT) is up 49% for the same period!   I don’t know if  all the `shovel-ready’ rhetoric coupled with all the money voted to the states (remember the bill no one read but still passed?) had anything to do with it – and CAT CAT, like many, has become global; but strong companies can often benefit, supporting the notion that we may now be in a `stock pickers’ market, much like the 70s, where management can become even more important. 

What makes investors like Warren Buffett so successful, in my opinion, is a simple formula:  Homework + Education + Patience = Success.  The same holds true for most of life, don’t you think? 

Since most investors have the bulk of their holdings in mutual funds, we’ve prepared a report, Understanding Mutual Funds, that’s available by request.  Just go to the Request Info tab on the IFG website.