U.S. Political Theatre Set to Mercifully End – For Now
Toronto’s main index closed this week down 57.65 points, or 0.47%, at 12,316.12. It edged down 0.6% for the week and is now up only a touch over 1% year-to-date – basically a flat 2012.
The political circus that is U.S. politics continued this week sending jitters throughout the lightly-traded holiday shortened week.
Late Friday, there are reports that the end game may be close hand, as the White House and Senate leaders took a final stab at compromise to prevent middle-class tax increases from taking effect at the turn of the New Year and possibly prevent sweeping spending cuts as well.
“I’m optimistic, we may still be able to reach an agreement that can pass both houses in time,” President Barack Obama said at the White House after meeting for more than an hour with congressional leaders.
Surprisingly, after weeks of postelection gridlock, Senate leaders sounded even more bullish.
The Republican Leader, Sen. Mitch McConnell of Kentucky, said he was “hopeful and optimistic” of a deal, adding he hoped a compromise could be presented to rank-and-file lawmakers as early as Sunday, a little more than 24 hours before the year-end deadline
The core issue is the same as it has been for more than a year, Obama’s demand for tax rates to rise on upper incomes while remaining at current levels for most Americans. He made the proposal central to his successful campaign for re-election, when he said incomes above $200,000 for individuals and $250,000 for couples should rise to 39.6% from the current 35%.
In the end however, we believe the “tax the rich” mantra is misguided. While we agree the wealth should pay their fair share, in this case, the hike will do little to stem the debt tide that continues to mount and handcuff the U.S. economy.
Three issues which could have a significant impact on reducing the deficit are tax reform (closing loopholes in this current system), entitlement cuts, and a federal sales tax. Sadly, the later is not even part of the conversation. This type of tax, if implemented correctly with exemptions on certain essential items, can go a long way towards a balanced budget overtime and impacts those who spend the most.
For Canadian markets, with consumer debt levels reaching highs never seen before and deleveraging becoming a must at home and abroad, we expect the broader returns to be flat. This does not mean we cannot make money in 2013. In fact, we remain selectively excited as our “Cash is King” theme continues to reign supreme in this stock pickers market.
Heading into 2012, which we expected to be a relatively flat market overall for Canadian stocks, we identified two themes that would be paramount to success in the Small-Cap segment. In our January 2012 Outlook Commentary, Keystone detailed the first of those themes as our bias towards growth companies who managed their cash flows effective enough to paid decent dividends with low payout ratios – essentially dividend growth stocks.
The second trend we focussed on heading into 2012, which will continue into 2013, is the reign of the balance sheet. Companies with strong balance sheets, including zero or manageable debt, solid cash positions, good working capital, and good cash generation, garner the most attention. This attention can come from good to premium multiples or in the case of 7 companies from our 2012 Cash Rich, Profitable Small-Cap Report, premium takeover bids.
Both can lead to superior returns for investors.
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