NEWS,08.12.2012

US 'fiscal cliff' fear may push investors to sell

Investors typically sell stocks to cut their losses at year end. But worries about the 'fiscal cliff' and the possibility of higher taxes in 2013 - may act as the greatest incentive to sell both winners and losers by December 31.The $US600 billion of automatic tax increases and spending cuts scheduled for the beginning of next year includes higher rates for capital gains, making tax-loss selling even more appealing than usual.Tax-related selling may be behind the weaker trend in the shares of market leader Apple, analysts said. The stock is down 20% for the quarter, but it's still up nearly 32% for the year.Apple dropped 8.9% in this past week alone. For a stock that gained more than 25% a year for four consecutive years, the embedded capital gains suddenly look like a selling opportunity if one's tax bill is going to jump sharply just because the calendar changes."Tax-loss selling is always a factor but  tax-gains selling has been a factor this year," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont."You have a lot of high-net-worth individuals in taxable accounts, and that could be what's affecting stocks like Apple. If you look at the stocks that people have their largest gains in, they seem to be under a little bit more pressure here than usual."Of this year's top 20 performers in the S&P 1500 index, which includes large, small and mid-cap stocks, all but four have lost ground in the last five trading sessions.The rush to avoid higher taxes on portfolio gains could cause additional weakness.The S&P 500 ended the week up just 0.1% after another week of trading largely tied to fiscal cliff negotiation news, which has pushed the market in both directions.Next week's Federal Reserve meeting could offer some relief if policymakers announce further plans to help the lackluster US economy. The Federal Open Market Committee will meet on Wednesday and Thursday.The policy statement is expected on Thursday after the conclusion of the meeting - the Fed's last one for the year.The jobs report showing non-farm payrolls added 146,000 jobs in November eased worries that Superstorm Sandy had hit the labor market hard."After the FOMC meeting, I think it's going to be downhill from there as worries about the fiscal cliff really take center stage and prospects of a deal become less and less likely," said Mohannad Aama, managing director of Beam Capital Management LLC in New York."I think we are likely to see an escalation in profit-taking ahead of tax rates going up next year," he said.Volume could increase as investors try to shift positions before year end, some analysts said.While most of that would be in stocks, some of the extra trading volume could spill over into options, said J.J. Kinahan, TD Ameritrade's chief derivatives strategist.Volatility could pick up as well, and some of that is already being seen in Apple's stock."The actual volatility in Apple has been very high while the market itself has been calm. I expect Apple's volatility to carry over into the market volatility," said Enis Taner, global macro editor at RiskReversal.com, an options trading firm in New York.Shares of Apple, the largest US company by market value, registered their worst week since May 2010. In another bearish sign, the stock's 50-day moving average fell to $US599.52 - below its 200-day moving average at $US601.38."There's a lot of tax-related selling happening now, and it will continue to happen. Apple is an example, even (though) there are other factors involved with Apple," Aama said.While investors may be selling stocks to avoid higher taxes in 2013, companies may continue to announce special and accelerated dividend payments before year end.To be sure, the big sell-off in stocks following the November 6 election was likely related to tax selling, making it hard to judge how much more is to come.Bruce Zaro, chief technical strategist at Delta Global Asset Management in Boston, said there's a decent chance that the market could rally before year end."Even with little or spotty news that one would put in the positive bucket regarding the cliff negotiations, the market has basically hung in there, and I think it's hung in there in anticipation of something coming," he said.

Jobless Benefits Should Be Included In Fiscal Cliff Deal, Democrats Say

 

Hovering in the background of the "fiscal cliff" debate is the prospect of 2 million people losing their unemployment benefits four days after Christmas."This is the real cliff," said Sen. Jack Reed, D-R.I. He's been leading the effort to include another extension of benefits for the long-term unemployed in any deal to avert looming tax increases and massive spending cuts in January."Many of these people are struggling to pay mortgages, to provide education for their children," Reed said this past week as President Barack Obama and House Speaker John Boehner, R-Ohio, rejected each other's opening offers for a deficit deal.Emergency jobless benefits for about 2.1 million people out of work more than six months will cease Dec. 29, and 1 million more will lose them over the next three months if Congress doesn't extend the assistance again.Since the collapse of the economy in 2008, the government has poured $520 billion an amount equal to about half its annual deficit in recent years into unemployment benefit extensions.White House officials have assured Democrats that Obama is committed to extending them another year, at a cost of about $30 billion, as part of an agreement for sidestepping the fiscal cliff and reducing the size of annual increases in the federal debt."The White House has made it clear that it wants an extension," said Michigan Rep. Sander Levin, the top Democrat on the House Ways and Means Committee.Republicans have been relatively quiet on the issue lately. They demanded and won savings elsewhere to offset the cost of this year's extension, requiring the government to sell some of its broadcasting airwaves and making newly hired federal workers contribute more toward their pensions.Boehner did not include jobless benefits in his counteroffer response this past week to Obama's call for $1.6 trillion in new taxes over the next decade, including raising the top marginal rates for the highest-paid 2 percent.Long-term unemployment remains a persistent problem. About 5 million people have been out of work for six months or more, according to the Bureau of labor Statistics. That's about 40 percent of all unemployed workers.The Labor Department said Friday that the unemployment rate fell to 7.7 percent from 7.9 percent, the lowest in nearly four years. But much of the decline was due to people so discouraged about finding a job that they quit looking for one.Democrats have tried to keep a flame burning under the issue. Ending the extended benefits would "deal a devastating blow to our economy," 42 Democratic senators wrote Senate Majority Leader Harry Reid, D-Nev., this past week.The Congressional Budget Office said in a study last month that extending the current level of long-term unemployment benefits another year would add 300,000 jobs to the economy. The average benefit of about $300 a week tends to get spent quickly for food, rent and other basic necessities, the report said, stimulating the economy.The liberal-leaning Economic Policy Institute found that extended unemployment benefits lifted 2.3 million Americans out of poverty last year, including 600,000 children.States provide the first 20 weeks to 26 weeks of unemployment benefits for eligible workers who are seeking jobs. When those are exhausted, federal benefits kick in for up to 47 more weeks, depending on the state's unemployment rate.The higher a state's unemployment rate, the longer state residents can qualify for additional weeks of federal unemployment benefits. Only seven states with jobless rates of 9 percent or more now qualify for all 47 weeks.Congress already cut back federal jobless benefits this year. Taken together with what states offer, the benefits could last up to 99 weeks. Cutting the maximum to 73 weeks has already cut off benefits to about 500,000 people.Opponents of benefit extensions argue that they can be a disincentive for taking a job."Prolonged benefits lead some unemployed workers to spend too much time looking for jobs that they would prefer to find, rather than focusing on jobs that they are more likely to find," said James Sherk, a labor policy analyst at the conservative Heritage Foundation.But Sen. Tom Harkin, D-Iowa, noted that unemployment checks add up to about $15,000 a year. "That's poverty level," he said. "This is not something people just want to continue on, they want to get jobs."

Berlusconi in comeback bid

Billionaire media baron Silvio Berlusconi, who resigned in disgrace with Italy tottering through the European debt crisis, announced on Saturday he was making a comeback and running for a fourth term as premier.Berlusconi, 76, reluctantly stepped down last year after pressure from international financial markets. He was later convicted of tax fraud and is on trial in Milan for alleged sexual misconduct and abuse of power when he was premier.An unelected government of technocrats, led by widely respected economist Mario Monti, was appointed to replace him. Opinion polls have seen the popularity of Berlusconi's Freedom People Party plunge to far below that of Italy's other large political force, the center-left Democratic Party.But Berlusconi professed confidence he can achieve victory."I'm running to win," Berlusconi told reporters outside the training facilities of his soccer team AC Milan.One of Monti's biggest backers in Parliament, centrist leader Pier Ferdinando Casini, bemoaned Berlusconi's bid to return to office."It has been a year that Italians are seriously sacrificing to try to avoid Greece's abyss, and, today, there's the re-emergence of Berlusconi, who wants to bring us back five years," Casini said on state TV.Since Monti took office, the retirement age for Italy's generous pensions has been raised, sales taxes have been hiked and a property tax on primary residences abolished by Berlusconi to fulfill one of his own campaign promises - has been reinstated.But while opinion polls of prospective voters find slumping support for Berlusconi's party, to lower than 15%, the media mogul might be betting on public impatience with those sacrifices.No date has been set for elections, linked to the end of Parliament's term in late April. But Berlusconi's decision earlier in the week to withdraw the support of his party Parliament's largest for Monti's anti-crisis government increased the likelihood that Italy's president would dissolve the legislature weeks early and elections ahead of schedule."It seems to me that 10 March has been indicated" as a possible date for early elections, "and that seems a date that's fine with me," Berlusconi said.Monti headed back from a conference in France for a meeting on Saturday evening at the presidential palace to take the pulse of political tensions. President Giorgio Napolitano has made clear he wants Parliament to at least pass a vital budget law later this month and avoid a "precipitous" demise amid mounting political uncertainty.When pressure from international financial markets forced Berlusconi to reluctantly step down in November 2011 at the height of sovereign debt worries, many pundits dismissed any prospects for a comeback bid for the combative businessman-turned-politician, who has led Italy's conservatives for nearly 20 years.Since Berlusconi resigned 18 months short of the end of his third stint in the premiership, he has been convicted of tax fraud. He is appealing, and in Italy, convictions don't become definitive until after two levels of appeals are exhausted.He is also on trial in Milan for allegedly having sex with an underage prostitute and using his office when premier to try to cover it up, charges he has denied. The young woman has also denied having sex with the then-premier. Berlusconi, whose convictions in previous trials on charges linked to his media empire's dealings have either been overturned or thrown out when statute of limitations expired, claims he is the victim of prosecutors he contends sympathize with the left.With financial markets rattled over the prospect that Monti might see his tenure in the premiership end before May if early elections are called, the premier insisted that the political crisis was "manageable." Monti contended his government, with its austerity agenda of spending cuts, higher taxes and pension reform, spared Italy and with it, other nations in the eurozone from succumbing to financial disaster.Standard & Poor's rating agency on Friday indicated it could lower Italy's rating if the recession endures well into 2013, and it cited "uncertainty" the next Italian government can stay the tough course of austerity Monti's nonpartisan government managed to move through Parliament, thanks to the wide support.Berlusconi declared "the campaign is already on" and insisted he's running "out of a sense of responsibility" toward recession-plagued Italy. For months, he had been coy about whether he would run again. But on Saturday he claimed that a search for a new leader, like the one he was when he burst into politics in the early 1990s, failed, and so "out of desperation" for lack of alternative, he was jumping into the race.Italian media have reported that Berlusconi was particularly irked by Monti's Cabinet approval, earlier in the week, of a measure that would ban from running for office anyone sentenced to more than two years in prison after convictions are definitely upheld in cases of terrorism, organized crime and offenses in public office, including corruption.Berlusconi's tax fraud conviction in October carries a four-year sentence, but the case could be dismissed if the statute of limitations runs out before all appeals are exhausted.Critics have contended that Berlusconi expended much of his efforts as premier to push through legislation tailor-made to help him in his legal woes, and any new term in the premier's office could offer a similar opportunity.Since his last election bid, in 2008, Berlusconi has lost the key support of its biggest coalition partner, the Northern League, which refused to support Monti's government. But the League, whose founder, Umberto Bossi, has been tarnished by scandal, hasn't ruled out forging a new election alliance with Berlusconi.