Stock market on track to hit 18,000 by early 2014

Posted by Shyam Moondra

In 2011, I predicted that DJIA was headed to 18,000 (“We are in a secular bull market - DJIA headed to 18,000,” The Moondra Post, March 14, 2011) and it looks like we are on track to achieve that record high by early 2014. Given that the current bull market is now more than five years old, many prominent analysts are predicting that a market crash of 10-20% is imminent. However, I believe that the bull run is not yet over.

The following trends favor a continuing up move in the stock market at least through March, 2014:

• The stock valuation is high but the market is definitely not overpriced. The forward PE of 15 for the DJIA, as currently estimated by WSJ, is by no means excessive compared to the high 20’s at the recent market peaks of 2000 and 2007. The market would look pricey if PE were to get close to high-teens, given that we are currently in a low-growth environment compared to the go-go years of the early 2000’s.

• Corporate profits continue to be at record levels, thanks to a superb job done by the corporate world in managing their cost-structure through the great recession in the aftermath of the financial crisis of 2008. Given that economy is currently strengthening (3Q13 GDP growth rate revised upward to 3.6%), further gains in corporate profits are predicted for 2014. Accordingly, there is room for continuing expansion of the PE multiples of the stocks.

• The unemployment rate has steadily come down to 7% from double-digit numbers at the height of recession, which means consumer spending would continue to increase in the foreseeable future. Also, increases in the stock prices and recovery in real estate prices have pushed the household wealth to record levels which would also guarantee increased consumer spending. Since consumer spending accounts for 70% of the economy, the economic activity would continue to be in high gear which would lead to further reduction in the unemployment rate, creating a sustainable upward spiral in GDP.

• Interest rates and inflation continue to be at low levels that always favor the stock market. In the near- to mid-term, we might see a spike in interest rates from the current 2.8% to 3.5% (on 10-year treasuries), but historically we would still be at relatively low levels. Since the corporations have a record cash hoard of the tune of $4 trillion, they may not have a huge need to borrow to support their capital expansion plans and thus the impact of higher interest rates on the economy could be somewhat muted.

• Currently, there is too much cash lying around in money market accounts and the stock market lacks euphoria which is typically seen at the market peaks (that's when stock prices go up sharply with heavy volume). That means the stocks have not yet peaked and that we would see a continued upward move in the stock prices.

• Europe and emerging markets are showing early signs of recovery after unprecedented austerity measures (taken to reduce budget deficits) devastated their economies. The U.S. recovery combined with recovery in Europe and emerging markets would give a further boost to global trade which would increase the U.S. exports and corporate profits.

• Finally, much has been made of the impending Fed tapering of their monetary stimulus program, QE3, in which the Fed buys government securities at a rate of $85 billion a month. The Fed has said that when economy improves and unemployment rate falls to 6.5%, they will phaseout monetary stimulus. The recent GDP growth rate of 3.6% makes it likely that the Fed would start tapering QE3 in 1Q14. Theoretically, QE3 tapering would have some negative impact on the stock market, but there would be some offsetting factors as well. As the interest rates increase in the face of tapering, the bond bubble would finally burst and some of the bond money would end up in stocks. Also, the underlying economy would be stronger and that means corporate profits would remain healthy. Therefore, tapering may not necessarily be a bad news and the fears of market crash are overblown.

Given the above global economic trends, there is a possibility that the DJIA might even surpass the 19,000 mark some time in 2014.

Structural changes in both political parties causing dysfunction – moderate Republicans hold the key

Posted by Shyam Moondra

Dysfunction in the federal government began during the presidency of George W. Bush whose war in Iraq based on false intelligence led to distrust in the government among politicians as well as general public. The money spent on the war in Iraq, bank bailouts necessitated by Bush's lax regulations of the financial industry, and unnecessary tax cuts given to the rich at a time when the country was fighting two wars contributed to the huge budget deficit and national debt. Bush's successor, President Barack Obama, was forced to undertake large-scale stimulus spending to thwart severe recession caused by the financial crisis left behind by Bush, which led to even bigger increases in budget deficit and debt. Obama, at the urging of his liberal supporters, pushed through Affordable Care Act (or what is now termed as Obamacare) in both the House and Senate strictly on partisan basis. That gave birth to the Tea Party movement whose extremism worsened political polarization not just between Democrats and Republicans but also within the Republican Party. In 2011, House Speaker John Boehner, under intense pressure from Tea Party aligned conservatives, led the ugly debate on increasing debt ceiling, which crashed the financial markets, slowed economic recovery, and caused the first ever downgrade of the U.S. government debt from AAA to AA+ by the rating agency Standard & Poor. Subsequently, Republicans paid a price at the ballot box in 2012 when Obama easily won re-election and Republicans lost seats in the House and Senate. One would think that Republicans learned their lesson, but here we are, two years later, with Republicans playing the same game all over again with more serious implications than before - the government is currently shut down for eight days already and we are on the verge of first-ever default by the U.S. government on its debt. The Congress now has an approval rating of only 10%, which is a historic low, but that does not seem to bother Boehner and other Congressional Republicans at all.

In terms of the legislative agenda, the current 113th Congress is termed as the most unproductive Congress of modern times. The extent to which this Congress is polarized is summed up by the statement of Boehner in which he said that the success of the Republican-led House should be judged not based on how many new Bills they pass but based on how many existing Bills they repeal. With the emergence of Tea Party faction as a strong player among the conservative ranks of the Republican Party, Boehner has been forced to adopt their extreme ideologies to keep his job as the Speaker. The extremism propagated by Tea Party has become an obstacle in getting anything done in a split government that by necessity requires compromises. As a result, the Republican Party is badly divided between conservatives and moderates. Republican moderates, who fear reprisal in the form of primary challenges inspired by Tea Party if they oppose Tea Party's extreme ideologies, have chosen to remain silent and on the side-lines while Tea Party leaders such as Sen. Ted Cruz of Texas have taken on an oversize role in shaping the direction of the Republican Party. This has irked such iconic moderates as Sen. John McCain and others who have openly criticized the tactics advocated by Cruz. Nevertheless, to preserve unity, many moderate Republicans in the House and Senate have decided to grudgingly go along with the policies formulated by Cruz and other conservatives. These moderates have clearly been marginalized in this new political shuffle. A fractured Republican Party is not well positioned to win the Senate in 2014 or the White House in 2016. Cruz and others have openly advocated shutting down the government and even defaulting on government obligations as acceptable strategies to get what they want, namely, getting rid of Obamacare, reducing tax rates for businesses, and reforming the entitlement programs to reduce spending. They have gone even further by devising an unorthodox plan to get rid of Obamacare by de-funding it. Obamacare was approved by the Congress, signed into the law by Obama, and subsequently upheld by the U.S. Supreme Court as constitutional. Boehner tried over 40 times to repeal the law but failed. Obamacare was a major issue in the 2012 presidential and Congressional elections, but Obama and Democrats prevailed. Now Boehner, at the urging of Cruz and others, has chosen to shut down the government and is prepared to let the government default on its obligations unless Obama agrees to dismantle Obamacare, his signature program. This is, of course, an extreme tactic of blackmail, which Obama cannot and will not accept. The normal procedure for getting rid of a law is to have a new revised Bill passed by both the chambers and signed into law by the president; but Republicans are trying to kill the program by withholding funding for its implementation. This is certainly a novel approach but ultimately undemocratic and it cannot be allowed to succeed. Today, it's Obamacare, but tomorrow Republicans could try to de-fund other laws that they do not like, defying the checks and balances built into the constitution. Of course, not all Republicans subscribe to this extreme tactic.

On the other side of the isle, since the election of Obama as the president in 2008 and re-election for a second term in 2012, the Democratic Party has moved to the left of the political center. Obama strongly believed that Bush's pro-rich policies, especially his generous tax-cuts to the rich, widened the gap between the rich and poor and the middle class lost a lot of ground. Obama, with the help of ultra-liberal Nancy Pelosi, who was House Speaker at the time, moved the Democratic Party to the left, which was a sharp contrast to the previous Democratic President Bill Clinton, who ruled from the right of the center. Clinton dismantled the welfare programs and moved people from welfare rolls to work rolls, but Obama has consistently favored the poor and the middle class over the rich. Under Obama, there has been a huge growth in the food stamp program, disability benefits, and Medicaid expenditures. The liberal transformation of the Democratic Party under Obama has sidelined Clintonian conservatives and moderates within the Democratic Party that would have preferred to govern from the center on most economic issues. In spite of some disagreements between liberal and conservative Democrats, they have nevertheless steadfastly remained united in their opposition to Republican extremism.

While Republican Party has been radicalized by the Tea Partiers much to the discomfort of Republican moderates, Democratic Party has moved to the left much to the discomfort of Democratic conservatives and moderates. So, what we need is a rebalancing act in which moderate Republicans join forces with conservative and moderate Democrats to form a powerful block whose support would be essential to make progress on any particular issue. At least six moderate Republicans in the Senate would have to switch their Party affiliation and become Democrats; such a move will not only give Democrats a filibuster-proof majority, it will also keep liberal Democrats in check while rendering extremist Republicans such as Cruz powerless. There are many moderate senators such as John McCain, Susan Collins, Kelly Ayotte, Tom Coburn, Jim Inhofe, John Thune, Richard Burr, Ron Johnson, Rob Portman, and Lisa Murkowski, who could possibly become a part of this balancing act with an objective to move the country forward on important issues of tax reforms, entitlement reforms, infrastructure investment, education reforms, immigration, etc. In the House, 17 Republican moderates would need to switch to Democratic Party which would give the control of the House to Democrats while at the same time dilute the power of liberals within the Democratic Party. There are 23-26 House moderate Republicans who are willing to vote for clean CR and debt ceiling bills. Many of them also favor to proceed on immigration bill and some of them are even pro-choice, so they will fit right in within the Democratic Party. Obama and Democratic Congressional Leaders would need to make the case to the target Republicans for the switch by offering them prominent committee assignments and even leadership positions within the Democrat controlled House and Senate. These movements will instantly break the gridlock in Washington, DC and the Congress would finally resume its business of legislating and solving people's problems.

Republican self-destruction, Part 2

Posted by Shyam Moondra

On Friday, under the leadership of Speaker John Boehner, the House passed the Continuing Resolution (CR) bill that will fund the government through November but, at the same time, de-fund Obamacare. The vote was largely on party lines. The Senate Majority Leader, Harry Reid, said that this CR bill is "dead, dead" in the Senate. President Barack Obama has said that even if the Senate miraculously passes this bill, he will veto it. So the question is why would House Republicans push this bill, knowing full well that it could never become the law, and unnecessarily risk a possible government shutdown in ten days. Also, the House Republicans are refusing to increase the debt ceiling unless Obama agrees to additional spending cuts, setting the stage for the government to default on its debt. Last time, when Republicans tried this approach in 2011, the government debt got downgraded from AAA to AA+. Now we are on the verge of another downgrade from AA+ to AA, which will dramatically increase the interest payments due on national debt, and thus sharply increase the budget deficit. It is clear that the House Republicans have no strategy beyond passing the CR bill or refusing to increase the debt ceiling; they have not really thought through the consequences of their actions or figured out the endgame.

The Republican approach is so wrong at so many different levels:

• First, they want to reduce the budget deficit, but their actions would actually put upward pressure on interest rates and thus lead to higher deficit because of increased interest payments on debt. 

• Second, de-funding a program, which was approved by the Congress, signed into law by the president, and subsequently upheld by the USSC, is not the proper way to get rid of that program. If they really think that Obamacare is a bad idea, then the correct way to get rid off it is to offer amendments or an alternative health care proposal, get it passed in the House and Senate, and have the president sign it. That's how democracy works. You cannot threaten to shut down the government (which means military personnel fighting in Afghanistan will not get their paychecks and elderly people will be denied their monthly Social Security checks) unless you get what you want. Republicans cannot use blackmail as a tool to achieve their political goals. If this blackmail worked, could Republicans use it again to de-fund other programs such as Medicaid, Medicare, or any other program that they didn't like? What we will have then is not democracy but chaos.

• Third, the Congressional Republicans have an approval rating of only 12% compared with Obama's 45%; so the question is why would Republicans threaten to shut down the government and end up paying a huge price at the ballot box? Last time, when Republicans played this game in 2011, they failed to win the presidency and lost seats in House and Senate in the 2012 election - so why would Republicans play the same game and hope to achieve a different outcome in the 2014 election? The chances are that they will actually lose the control of the House in 2014.

• Fourth, in 2011, Republicans' threat to shut down government crashed the stock markets and reduced business confidence, which led to corporations putting their capital expansion plans on hold. These ramifications led to reduced job prospects and slower economic growth. If Republicans shut down government this time, the people, with their decimated 401(K) and IRA accounts, will again blame the Republicans for their losses.

On the question of increasing the debt ceiling, Obama is right in saying that Congress passed the spending appropriation bills and they alone are responsible for making sure that the United States does not become a dead beat on its debt. The Congress must pass a clean bill increasing the debt ceiling so the government does not default on its debt and become a laughing stock around the world. However, in the long-term, reducing budget deficit and debt is of paramount importance to preserve and enhance our prosperity for the future generations. Therefore, Democrats and Republicans must urgently work together to address the dislocations caused by unwise across-the-board cuts under sequestration and hammer out a balanced plan that would increase revenues via tax reforms and also cut spending through meaningful reforms of the entitlement programs. The voters desperately want the Congress and Obama to work together and reach a compromise on the issues of budget deficit and national debt.

Putin is dead wrong to question America's "exceptionalism"

Posted by Shyam Moondra 

Last week, President Barack Obama gave a press conference and also a televised speech to the nation on the Syrian crisis in which he explained why he thought the United States of America is exceptional. Obama said, “we have a core set of values that are enshrined in our Constitution, in our body of law, in our democratic practices, in our belief in free speech and equality, that, though imperfect, are exceptional…I see no contradiction between believing that America has a continued extraordinary role in leading the world towards peace and prosperity and recognizing that leadership is incumbent, depends on, our ability to create partnerships because we can’t solve these problems alone.” Last Wednesday, Russia's President Vladimir Putin penned an Op-Ed piece on The New York Times' website, which was highly critical of the U.S. foreign policy and it questioned Obama's claim of American "exceptionalism." Ironically, what is exceptional about all this is that a prominent American newspaper afforded Putin a platform for criticizing America, reflecting the cornerstone of our democratic principles – the freedom of press. In Russia, the critics of Putin either end up in jail on trumped-up charges or they mysteriously disappear or are found dead.

The article by Putin rankled many government officials. Speaker of the House, John Boehner, said that he felt "insulted." The Chairman of Senate Foreign Relations Committee, Robert Menendez, said that he felt like vomiting. Former Speaker of the House, Newt Gingrich, called Putin a "dictator" and a "thug." The remark by Putin that particularly incensed many in the U.S. was: "It is extremely dangerous to encourage people to see themselves as exceptional, whatever the motivation……we are all different, but when we ask for the Lord's blessings, we must not forget that God created us equal." It's interesting to note that those words came from the same man who recently approved an anti-gay law in Russia. While it's true that people are created equal, their capacity for greatness is determined by the environment in which they live. In Russia, the people lack basic human rights, there is no free press, the judiciary is a manipulative tool of the government, and government officials are corrupted to the hilt (Putin is rumored to have stashed away billions of dollars in secret bank accounts in western countries, even while he claims to be a "humble public servant" earning a meager $187,000 a year as President of Russia).

Below is a list of facts that do support Obama’s statement on why he thought America is exceptional:

• In the U.S., the basic human rights, including the right to pursue happiness, is ingrained in the constitution. In authoritative countries, such as Russia, the rights are preserved for the top elite in the government. The people in countries that are governed coercively can never achieve their full potential. The U.S. democratic institutions derive power from the consent of the people. Our core belief is best exemplified by President Ronald Reagan, who once said, "freedom is not the sole prerogative of a chosen few – it's the universal right of all God's children."

• The U.S. leadership was indispensable in fighting World Wars I and II. Americans sacrificed their lives in helping others to stand up against tyrants such as Adolph Hitler and against nationalist Serbians who engaged in ethnic cleansing by killing innocent Muslim minorities. On the other hand, Russia stood by tyrants in Serbia, Iraq, Syria, and elsewhere.

• The U.S. is the strongest country in the world not because it has homogeneous population but because of its diversity that makes the whole stronger than the piece parts. Today, minorities such as African Americans, Hispanics, Asians, Native Americans, and Pacific Islanders account for about 36% of the total population.

• Americans are the most hardworking people among the industrialized nations. The 40-hour week, adopted after the Great Depression, has stuck through decades. This is over 15% more than the average weekly hours for European countries. It is estimated that an average German worker puts in 394 hours less than an American worker per year.

• The U.S. is the greatest economic and military power in the world. The U.S. economy produces almost one-fourth of the world's wealth.

• The U.S. has produced 270 Nobel Laureates, which is the highest in the world (comparing with only 14 for Russia).

• In 1961, President John F. Kennedy challenged NASA to land a man on the moon before the end of decade (i.e., 1970). On July 20, 1969, Apollo 11 astronaut Neil Armstrong set foot on the moon and uttered the words, "That's one small step for a man, one giant leap for mankind." America is indeed a can-do country.

• NASA's breathtaking Voyager program, the longest continuously operating spacecraft in deep space that began in 1977 to explore the outer planets in our solar system, is one of the most significant technological achievements in the annals of the history of science. Recently, Voyager 1 entered the interstellar space after streaking through space for 35 years.

• The half of the world's 100 most reputable universities are located in the U.S. The U.S. universities are most favored by the foreign students for their higher studies. The U.S. scientists and engineers account for more than half of all patents issued in the last five years.

• The Internet, one of the world's greatest inventions ever, was first conceived in the labs of MIT in Boston, Massachusetts during the early 1960's.

• American social media technologies such as Facebook and Twitter helped spark the Arab Spring that brought democracy in Tunisia, Libya, and Egypt – the countries that were previously ruled by brutal dictators for decades.

• The U.S., as the largest contributor, pays almost 22% of the total budget of the United Nations Organization, even though Americans account for only about 4% of the total world population.

• The U.S. is the most generous country in the world, with an annual foreign aid budget of over $56 billion. We are almost always the biggest donor in case of natural disasters or humanitarian catastrophe created by conflicts around the world.

• Silicon Valley and other parts of the U.S. are full of immigrants who produced breathtaking technologies that continually change the ways we live and work, and these immigrants enriched themselves beyond their wildest dreams. A good example of such an immigrant is Google's co-founder and billionaire, Sergey Brin, who was born in Russia. His family emigrated to the U.S. in 1979 to escape Jewish persecution in their home country.

• American athletes ranked number one in terms of the total medal count at the last Summer Olympics held in London in 2012 (104 medals) and at the last Winter Olympics held in Vancouver, Canada in 2010 (37 medals).

• Hollywood movies, that personify Americanism, are loved by the people around the world. The movies produced by any other country don't even come close in terms of popularity enjoyed by the Hollywood movies. The annual Oscar award show is viewed by more than one billion people in over 200 countries.

• The U.S. brands rank among the most popular in the world. Names such as Apple, McDonald's, KFC, Coca-Cola, Google, Facebook, Twitter, Disney, Starbucks, FedEx, Avon, Microsoft, Intel, Cisco, Wal-Mart, Amazon, eBay, Gillette, Kraft, Kellogg's, Colgate, Nike, Pepsi, Visa, Boeing, Caterpillar, Yahoo, Johnson & Johnson, General Electric, and many more are everywhere around the globe. These American brands demonstrate the ingenuity of American entrepreneurship.

Does all of the above make America "exceptional"? You bet it does. Putin overshot his rhetoric in trying to shoot down America but in the process he brought focus on what’s terribly wrong with Russia.

To taper, or not to taper – that is the question

Posted by Shyam Moondra

The biggest uncertainty in the financial markets right now surrounds the question of when would Federal Reserve Board (Fed) start winding down (i.e., taper) the Quantitative Easing (QE) program in which the Fed buys treasuries and mortgage-based securities at a rate of $85 billion a month. This unprecedented monetary program was designed to keep the long-term interest rates low, which, in turn, would stimulate economy, especially the housing sector. The Fed was forced to undertake this aggressive approach because the Congress and President Barack Obama were deadlocked on providing stimulus to economy on the fiscal front. The QE has had some success in giving a boost to economy via housing boom and in bringing down the unemployment rate to 7.4% from the peak of 10% at the height of the 2008-2009 financial crisis. The critics of the QE program have argued that easy money would recreate bubbles (e.g., in the housing and bond markets) and also increase inflationary pressures. While low interest rates have created a bubble in the bond market and boosted interest-sensitive stocks such as utilities, inflation continues to be in check (in fact, some fear that we may be in a prolonged deflationary environment similar to the one that Japan had during the 1990's).

Ben Bernanke, the Fed Chairman, has indicated that the goal of the QE program is to bring down the unemployment rate to 6.5% at which time the program could be terminated. The low interest rates and low inflation have boosted the equity prices; DJIA as well as the broader index, S&P 500, have both set all-time records. However, the key question now is when would the Fed start tapering the QE program. The Fed is expected to first reduce their purchases from the current rate of $85 billion a month and then start selling what they already purchased to bring down their balance sheet to more traditional levels. The whole process of tapering and selling their holdings could take years to complete.

It is generally believed that when tapering begins, interest rates would go up and stock prices would go down. The financial markets are beginning to show increased volatility as the possible tapering moment gets closer. The increase in interest yields on bonds and decline in stock prices in the last week reflect the uncertainty as to exactly when the QE tapering would begin. Bernanke is on record saying that the Fed could begin tapering when the unemployment rate goes down to 7% (currently at 7.4%). Many investors believe that tapering decision could be made as early as next month when the Federal Open Market Committee (FOMC) would meet. However, given that unemployment is still not at the level the Fed desires (next unemployment report is due on September 6, 2013) and inflation continues to be within the Fed's target range, the FOMC may decide to defer the decision on tapering to their next meeting in December. If a decision is not announced after their September meeting, the stock markets could soar to new record high and long-term interest rates could get a reprieve from recent run-up.

Given how sensitive financial markers are to the timing of tapering, it may be better if the Fed pulls back from its recent policy of transparency and not be so open on what their plans are. Below are some principles that the Fed could adhere to:

• Tapering and unwinding of their balance sheet should be done in a very gradual fashion, spread over several years. This would minimize severe volatility in the financial markets.

• The Fed should bring their transparency down a notch and not talk about their plans publicly. They should not pre-announce when they would begin tapering and at what rate. If investors don't know, they wouldn't react and that will help minimize volatility and reduce chances of flash crashes in the financial markets. If the Fed tapers gradually without public fanfare, it's possible that it might have very little negative impact on economy, to the point that people might not even notice that taper has already begun.

• The Fed should give out information on tapering and unwinding of their holdings after the fact and only in less dramatic way (e.g., making a vague reference in their meeting notes rather than Bernanke talking about it prominently at a press conference). The less the information given out in a low-key fashion, the better it would be.

Regardless of what the Fed decides on unwinding QE, the long-term prospects for the stock markets continues to be positive. Yes, the interest rates would increase, but given we are so far down from the normal interest rate levels that existed prior to the financial crisis of 2008, one should exercise caution in not overstating the impact of rising interest rates. In any case, given record cash hoards on the corporate balance sheets, their capital expansion plans may not be negatively affected by higher interest rates. Second, the end of QE would also signify significant improvement in the job market, which means increased consumer spending. Since consumer spending accounts for two-thirds of economy, corporate profits would increase even more from their current record levels. Also, higher interest rates would finally burst the bond bubble and some of that money would end up in stocks. Therefore, the recent decline in the stock prices caused by uncertainty surrounding the timing of tapering, could in fact be a good buying opportunity for the long-term investors.

Boehner sure mastered the art of how to lower business confidence and delay robust economic recovery

Posted by Shyam Moondra

Republican Speaker of the House, John Boehner, never misses an opportunity to say something that would demolish business confidence, which, in return, would blunt economic recovery and prolong the misery of unemployed people.

The latest Wall Street Journal/NBC News opinion poll puts Congressional approval rating at record low of 12%. The Congress has been viewed very negatively by the American people for many years but this seems to have almost no effect on Republicans. It’s as if they consider this level of low rating as a badge of honor. In the last year’s election, Republicans lost seats in the Senate and House, and they also failed to win the presidency. One would then think that this might have taught them a lesson and they would behave differently, but no such luck.

Recently, Boehner said that the success of Congressional Republicans should be judged not based on how many bills they pass but based on how many bills they repeal. Next week, Republicans are planning to repeal Affordable Care Act (referred to as Obamacare by Republicans) the 40th time, but it will again be ignored by Democrat-controlled Senate. Some Republicans are even advocating a new tactic to undo the laws passed by the Congress but not favored by a majority of Republicans and that is to unfund those programs. This is a dangerous approach which amounts to making a mockery of the democratic system and is a form of political terrorism. Given the potential huge backlash from the voters just before the next year's elections, many moderate Republicans are not in favor of such an extreme precedent, which could also be exploited by Democrats when they are in control of the House.

House Republicans marvel on their failure to negotiate with the opponents on averting sequestration, which forced across-the-board spending cuts (some of which even Republicans view as harmful to economy). The Congressional Republicans are resolute in putting their rigid political ideology above what’s prudent or in the best interest of the country. Somehow, in their twisted way of thinking, they believe it’s good for their re-election, even in the face of evidence that suggests otherwise. The House Republicans are holding the country as a hostage and they are putting their countrymen through unnecessary pain and suffering by obstructing economic recovery.

Boehner also said that he would not increase the debt limit unless President Barack Obama and Congressional Democrats agreed to cut spending substantially beyond the multi-year cuts that have already been put in place. Last time, Republicans threatened to use the government shutdown as a political tactic on the question of increasing debt ceiling; that threat led to the downgrade of government bond rating from AAA+ to AAA, the first ever such downgrade in the history of the country. That ugly debate shook up the business confidence and put brakes on economic recovery. Republicans ultimately lost that debate and they were forced to give in on tax increases for the super rich. Republicans’ intransigence, however, led to their poor performance in the 2012 elections. Now they are threatening to make the same mistake again.

Recent reports show that the federal budget deficit will fall to $759 billion for the fiscal year that ends this September, a $214 billion improvement from the projection made just a few months ago. Bi-partisan agreements on spending cuts and tax increases for the rich combined with improving economy are having a positive impact on the budget deficit outlook. If these trends continue, the issue of spending cuts, strongly favored by Republicans, may lose traction among the voters. As Obama correctly articulated in his recent speech on economy, given that corporate profits have surged to the record levels and budget deficit is declining, the government focus should now be on reducing unemployment rate which is still too high. That means the government should formulate policies that foster growth rather than be obsessed with spending cuts.

Congressional Republicans should start thinking about positioning themselves for the next election cycle of 2014, which is not that far away. Below is a laundry list of what Republicans should do:

• Reform the tax code. There is sufficient bi-partisan support for simplifying the tax code (by eliminating the special-interest deductions and rebates) and bringing down the overall tax rate for businesses. A lower overall tax rate would be very conducive to economic growth.

• Revisit sequestration and come up with more balanced bi-partisan approaches to spending cuts and individual tax increases. Some of the spending cuts triggered by sequestration (e.g., defense and Head Start program) are actually harmful and should be reversed.

• Given the dire state of our bridges, tunnels, and highways, we need to spend more on infrastructure improvements. A majority of people would have no problem with a special surcharge on gasoline to pay for these infrastructure upgrades.

• Education has been on the decline for a few years now and we need to do more to stay competitive in global trade. We need to provide more funding for pre-school and technical vocational training programs as well as find ways to reduce the rate of increase in the cost of college education.

Republicans need to demonstrate that they can be trusted to govern by becoming a part of the solution rather than being identified as a part of the problem. The Washington, DC gridlock only works against Republicans. If they can work in a bi-partisan way, their position will only become stronger by the time of the 2014 election.

DJIA down 550 points – Hysterical reaction by investors to Federal Reserve policy creates a huge buying opportunity

Posted by Shyam Moondra

The DJIA has gone down by 550 points in just two days, the largest two-day decline this year. Last Wednesday, Federal Reserve announced that, for now, they would continue to buy mortgage-based securities and Treasuries at the rate of $85 billion a month; however, the Fed also said that they were prepared to phase-out the QE program later this year if the unemployment rate fell to around 7% from the current 7.6%. The Fed announcement also pushed the yield on 10-year Treasuries to 2.42%, the highest since 2011. The announcement was hardly a breaking-news; everybody understood that if economy strengthened, the Fed would phase-out QE to ensure that inflationary expectations did not get out of control. It's almost as if the investors had already decided to dump both stocks and bonds regardless of what the Fed said. The expiration of stock options this week may have also contributed to this unexpected market crash. Interestingly, gold, silver, and oil prices also crashed, suggesting a total panic among the investors. They would rather hold on to cash and earn close to zero interest or less than the inflation rate, thereby losing ground in terms of real value.

When faint-hearted investors panic, smart investors aggressively move in and start buying good quality stocks at fire-sale prices. The crowd is so much focused on the tapering of QE and rising interest rates that they are completely ignoring the reasons behind the Fed's QE policy. As the Fed Chairman Ben Bernanke explained in his press conference on Wednesday, if the Fed started to taper off QE it would be because of improving underlying fundamentals of economy. An improved economy means higher sales and profits for corporations and that, in turn, means higher stock prices. Since corporate balance sheets are the strongest ever (with the current cash hoard of $5 trillion), they don't really need to borrow much to support their capital investment programs and are thus relatively unaffected by higher interest rates. Also, as Bernanke pointed out at his press conference, increase in mortgage interest rates would not necessarily reduce the demand for housing because the increase in monthly payments would be relatively small. Let's not forget that the current levels of interest rates are no where near the normalized levels that existed before the 2008 financial crisis. Therefore, investors' worries over increasing interest rates are somewhat overblown.

The current stock valuations are very attractive. The WSJ reports that the current estimates of forward PE for DJIA is 13.62, S&P 500 is 14.88, and NASDAQ is 16.22. It's hard to imagine a huge selloff at such low PE ratios at a time when economy is strengthening. If economy continues to improve, as the Fed expects, corporate profits will also increase and these estimates of PE's could in fact prove to be too conservative. At previous market peaks, we have had PE ratios in the high 20's to low 30's range. While no one expects that we would get back to those levels any time soon, the current PE ratios are hardly excessive to have triggered a huge selloff.

This is the time to buy stocks of high quality companies that are positioned to experience growth in revenues and profits as the economy improves. The current market crash may have created one of those rare opportunities for the long-term investors who tend to buy and hold stocks. Also, as the interest rates rise, the bond bubble will finally burst and some of the bond money will end up in equity funds, creating one of the greatest rotations of recent times. In fact, the DJIA could very well hit 18,000 within a couple of years.

This is not the time to panic - this is the time to buy quality equities for the long-term.

Rapid economic recovery may be the nightmare scenario for Federal Reserve

Posted by Shyam Moondra

On May 22, 2013, in a congressional testimony, Federal Reserve Chairman Ben Bernanke talked about the possibility of winding down Quantitative Easing (QE) in the next few months which caused the stock market to crash by more than 250 points. This flash crash makes the Fed acutely aware that their biggest challenge now is to flawlessly execute on the question of when and how to end QE.

With the congressional gridlock preventing the government from taking effective actions on the fiscal front to stimulate economy, the Federal Reserve came up with the idea of increasing liquidity via the so-called QE program. On December 16, 2008, the Fed announced that it would purchase up to $600 billion worth of mortgage-backed securities (MBS) and agency debt. On March 18, 2009, the Fed expanded the program by additional $750 billion. The idea behind QE was to push the long-term interest rates down to give a boost to the housing recovery and steer the investors towards more risky investments such as stocks that were being shunned by investors in the aftermath of the financial crisis of 2008. The thinking was that if housing prices recovered and stock prices went up, the wealth effect would lead to higher consumer spending. Since consumer spending accounts for 70% of the U.S. economy, it was thought that asset appreciation would increase the pace of economic recovery. When the Fed started its unprecedented QE program, the biggest fear was that significant increase in money supply over a short period of time could fuel inflationary expectations and bring the economic recovery to scratching halt. Since such a daring experiment had never been undertaken before, no one really knew what unintended consequences might result from QE. However, given the gridlock in Washington, DC, the Fed had no other choice but to find a way to infuse large amounts of funds into the monetary system to stimulate economic growth.

After the initial QE, however, the pace of economic recovery continued to be sluggish. The Fed doubled down and initiated QE2, which involved the purchase of long-term Treasuries at the rate of $75 billion a month over the period from November, 2010 to June, 2011. In September, 2011, QE2 was followed by the Operation Twist, which involved the purchase of $400 billion (later expanded by additional $267 billion) worth of bonds with maturities of 6 to 30 years and to sell bonds with maturities of less than 3 years, thereby extending the average maturity of the Fed's own portfolio. This was an attempt to do what QE tried to do, without printing more money and without expanding the Fed's balance sheet, thereby hopefully avoiding the inflationary pressure associated with QE. On September 13, 2012, the Fed announced a third round of quantitative easing, QE3. This new round provided for an open-ended commitment to purchase $40 billion worth of MBS per month until the labor market improved "substantially". The amount was later increased to $85 billion per month ($40 billion worth of MBS and $45 billion worth of Treasuries). Massive infusion of funds by the Fed into the monetary system finally did have the intended effect; the housing industry started to recover and the stock market zoomed up. The economy grew at a rate of just over 2% which helped create new jobs, albeit at a slower pace than desired, and the unemployment rate came down from 10 percent in 2008 to 7.5% in April, 2013. To the surprise of many economists (including some of the hawkish members of the Fed), inflation remained in check in spite of significant increase in money supply. In addition, QE inspired economic expansion, coupled with higher tax rates for the rich agreed to by President Barack Obama and Congressional Republicans, increased the tax receipts beyond what was expected. Higher tax receipts, in return, reduced the budget deficit to $642 billion (or 4% of GDP), about $200 billion lower than what the CBO had projected only three months ago. It is estimated that sequestration (across-the-board spending cuts) and QE could eventually bring down deficit to the level of 2.5% of GDP which is not considered excessive. The unanticipated large reduction in projected budget deficit has completely changed the dynamics of the gridlock in the Congress on the question of deficit/debt. With the sequestration in effect and Fed’s QE improving economy, the pressure is off for doing a quick grand bargain. The Congress might now focus more on its long-term goal of reforming the tax code and entitlement programs.

The biggest challenge for the Fed now is to decide when and how fast to terminate QE. It’s clear that if economy strengthens to the level of 4% GDP growth rate, the continuation of QE at its present level would most likely increase the inflationary pressures and force the Fed to stop QE in a hurry which could trigger rapid increase in interest rates and destabilize the financial markets. On the other hand, if economy continues to expand at the slow pace of 2.5% to 3% (at a cost of sluggish reduction in unemployment rate, of course), the Fed could devise a plan to gradually reduce the QE amount and eventually start selling MBS and Treasuries to bring down its balance sheet to more traditional levels. The QE disengagement has to be done slowly over a period of couple of years to have minimum destabilization effect on the financial markets. Bernanke was right in refusing to give in on the demands by some conservatives in Congress to terminate QE immediately. If economy continues at its present trajectory, the Fed may still have at least six months before beginning the phase-out of QE and completely unwinding QE by the time GDP growth rate hits 4% rate or unemployment rate falls below 6%, whichever happens first.

Bernanke’s second term as the Chairman of Federal Reserve Board expires in January, 2014. I hope he stays on beyond January, 2014 to finish the job and to make sure that QE is phased-out at just the right time and at just the right pace to ensure soft landing.

Boston Marathon bombings - America shines

Posted by Shyam Moondra

On April 15, 2013, it was a bright sunny morning when the 117th running of the 16-mile long Boston Marathon began in good spirits with 27,000 runners from 96 countries participating. This world’s oldest marathon takes place every year on Patriots’ Day (a civic holiday commemorating the anniversary of the 1775 Battles of Lexington and Concord as part of the American Revolutionary War). At around 2:40 pm, when the first batch of runners started to arrive at the finish line on Boylston Street, a loud explosion took place causing thick plume of smoke. A few seconds later, a couple of blocks down the road, another explosion took place. Instantly, it became apparent that it was a coordinated terrorist attack. A day of fun quickly turned deadly and thousands of spectators started to run away in panic. When it was all over, three people were dead and more than 280 injured, many of them seriously with amputated limbs. Among the dead were Martin Richard, 8 (his picture holding a sign that said “No more hurting people. Peace” became a worldwide sensation); Krystle Campbell, 29; and a student from China, Lingzi Lu, 23. It was a senseless murder of three promising youngsters whose dreams were cowardly cut short.

On April 18th, the FBI released the pictures of the two suspects, Tamerlan Tsarnaev (26) and his younger brother Dzhokhar Tsarnaev (19), both Chechen-born immigrants. These pictures were taken by the surveillance cameras around the terror sites. As soon as the pictures were made public, tips from the people of Boston started to pour in and the suspects realized that the police would be knocking on their door shortly. So they took off with a cache of explosive devices, hand-made grenades, and guns in a carjacked Mercedes-Benz SUV. The owner of the carjacked car somehow managed to escape and alerted the police that the carjackers admitted to him that they were the marathon bombers. After a dramatic chase and shootout, which involved loud explosions, the elder suspect was dead and the younger suspect sped away and disappeared in dark. In the shootout, Officer Sean Collier (26) was also shot dead and another officer, Richard Donohue, Jr. (33), was seriously injured. This was followed by an unprecedented lock down of Boston and house-to-house search. The younger suspect, who ran away on foot, was ultimately found hiding in a boat parked in the backyard of a private home in Watertown, a suburb of Boston. As a side story, a Brown University student, Sunil Tripathi (22), whose picture vaguely resembled the picture of one of the suspects, was wrongly identified by someone on Tweeter as the younger suspect - that tweet quickly went viral on social media. Tripathi got extremely distressed and disappeared on April 16th; his body was found floating in the Providence River on April 23rd.

The younger suspect, Dzhokhar, became a U.S. citizen only last year and took the oath to protect the constitution of the U.S.; the elder suspect, Tamerlan, also applied for the citizenship but his application was rejected because of the 2011 FBI investigation done based on a tip from Russia that he could be an Islamic extremist. Both brothers, who lived in Cambridge, Massachusetts, were born in war-torn Islamic region of Russia. Why did they do this? Their uncle said simply: "they did it because they were losers.”

From this tragedy, several points emerge:

• The suspect brothers came to the U.S. with their parents, who requested political asylum because they wanted to get away from their war-torn homeland in Russia. They wanted to come to America for freedom and to live in peace. The U.S. was generous to only let them in but also provide financial assistance to the whole family, including the two suspects, through a variety of welfare programs. In fact, the elder suspect was receiving welfare assistance as recently as last year. It’s astounding how the suspects ungratefully cut the very hands that were extended to help them. It’s abundantly clear that there is no other country in the world that is so generous and that values humanity so much. America, the country of immigrants, is one of the the few countries where immigrants can come, work hard, and achieve big things for themselves and for their adopted country. The fact that they were Muslims (and the World Trade Center attackers were also Muslims) and yet the U.S. gave them political asylum so they could live in peace is a testament to the incredible American generosity and desire to help those who need help. This reflects profoundly positively on America’s moral fabric and character. A big win for the U.S.A.!

• Another shining star in this tragic episode is the law enforcement establishment. It’s amazing to see how well various local, state, and federal agencies worked together and apprehended the suspects so quickly. The overall performance of first responders, police, hospital staff, FBI, ATF, and others was incredibly efficient and effective, almost to the point of perfection. Within two days of the attack, the law enforcement identified the suspects and within five days they captured the suspects, dead or alive.

• The people of Boston also exhibited tremendous courage and discipline during and after the attacks. The help of Bostonians was paramount throughout this sad incident. The tip from the owner of the carjacked car was instrumental in putting the police on a hot trail of the suspects. The tip from the owner of the boat, where the younger suspect hid, led the police to capture him. The people sent smart phone pictures and videos to the police that helped investigators identify the suspects so quickly.

• The social media proved to be a positive force when Arab Spring broke out in Tunisia, Egypt, and Libya. Without Twitter or Facebook, it would have been impossible to mobilize the popular uprising against dictatorships and fuel the quest for democracy. In case of Tripathi, however, the uncontrollable mega force of social media proved to be fatal. The question to be pondered is how to check the uncheckable digital revolution that often is used as a platform to spread false rumors (e.g., recently, a false tweet on AP website led to flash crash of the market that wiped out billions of dollars of market cap in just a few seconds) or impinge on privacy rights.

The iconic singer, Neil Diamond, flew to Boston on Saturday, April 20th to personally appear at the first Red Sox ballgame after the terrorist attack and show his support for Bostonians. The spectators were not only surprised but genuinely thrilled to see him sing Red Sox’ signature song “Sweet Caroline.” Diamond, a New York native, wore a Red Sox cap and as he left the field, the fans chanted "U.S.A.! U.S.A.!" That said it all!

Bull market is alive and well – it has a long way to go

Posted by Shyam Moondra

The DJIA is ready to crack the 15,000 mark this week or next for the first time in history and short sellers are scratching their heads. Since the market hit a low of 6,443 in March of 2009 at the height of the financial crisis, it is now up by 130%, making it one of the strongest comebacks ever. The bears, who thought an impending crash was a sure bet, are totally confounded at the resilience of the market.

I have written about the unfolding market story and predicting a long-term bull market that will take us to the 18,000 mark on DJIA by the end of 2015 (“We are in a secular bull market – DJIA headed to 18,000,” March 4, 2011; “Market impediments dissolving – DJIA headed to 18,000,” February 21, 2012; “Analysts behind the curve – market entering a major bull phase,” March 16, 2012; and “Bull market continues – DJIA headed to record high,” January 1, 2013). The current market conditions only reinforce my prediction.

It’s worth noting the following trends:

• When market goes up big (100+ points) with heavy volume several days in a row, exhibiting "irrational exuberance" (a term coined by former FED Chairman Alan Greenspan), it is usually a sign that the market has peaked. However, this is not what is currently happening; the market has been going up sluggishly with light volume, which means that it has a long way to go before we see a major correction.

• The current market rally is unusual in the sense that “not-so-sexy” stocks (such as Pfizer, Merck, Microsoft, IBM, Verizon, Coca-Cola, etc.) are going up but many industrial and financial companies (e.g., Alcoa, Bank of America, Citigroup, Caterpillar, Exxon Mobil, Apple, Dow Chemical, etc.) have not yet participated in the rally. This unevenness actually sets the stage for rotation and a continued bull run in the near-term.

• The corporate earnings are at record levels, thanks to their masterful management of their cost-structures and cautious capital expansion, which, of course, explains a slow pace of improvement in the job market. The corporations have one of the strongest balance-sheets ever, with $4 trillion of cash pile that will fuel further capital expansion and job creation in the coming months and years.

• The housing comeback, healthy auto demand, and surprisingly strong energy sector are contributing to economic recovery.

• We continue to enjoy an environment of low interest rates and low inflation that is usually ideal for market rallies.

• Increasing housing prices and higher stock prices are creating the wealth effect which would encourage consumers to spend more and thus continue to fuel the economic recovery.

• Many analysts view impending winding down of FED’s QE 3 as a catalyst for the market crash. If the FED does this gradually, all in all, we will actually see a stronger market for two reasons: first, the stimulative effect of QE 3 is unleashing economic expansion which would easily absorb the gradual unwinding of QE 3 and, second, as the interest rates go higher, the bond bubble will finally burst and some of that money will move to equities and thus keep the stock market rally going.

• Finally, based on historical standards, the current stock valuation is very attractive. WSJ reports that the trailing PE ratios based on operating earnings (i.e., excluding one-time extraordinary items) are as follows: DJIA 13.05, S&P-500 14.10, and NASDAQ-100 15.00. These ratios are, by no means, excessive (at the last market peak, these ratios were in high-20’s to low 30’s). Given that the economic growth is slower now than in the past, we may not see that high PE ratios any time soon, but from current levels the market could easily go up by 20-30% before beginning to look pricey.

Yes, as the market goes up, there will be intermittent profit-taking which will cause small corrections along the way, but a major bear trend is not in the cards, as yet. In fact, in the current bull run, we could witness one of the strongest short squeezes we have ever seen.

Sequestration – the last opportunity for Republicans to redeem themselves

Posted by Shyam Moondra

During 1995 and 1996, Congressional Republicans, under the leadership of Speaker Newt Gingrich, passed bills that would have severely cut spending in such areas as education, Medicare, environment, and public health (areas favored by Democrats) to tame the run away budget deficit caused primarily by tax cuts enacted by Republican President Ronald Reagan as part of his so-called “trickle-down” economics. Those partisan budget actions forced Democratic President Bill Clinton to veto the bills that led to government shutdowns for several weeks in the late 1995 and again in early 1996. The twin government shutdowns resulted in interruption of essential services, causing delays and hardship to the citizens. The public’s outrage led to Clinton’s victory in his re-election bid in 1996. During his second term, Clinton managed to increase taxes for the rich to reduce budget deficit in return for agreeing to reform the welfare programs and subsequently the economy took-off. The stock market set new records and the unemployment rate fell to 4.5%, which is considered as the lowest possible "full employment" rate. By the end of his second-term, Clinton not only balanced the budget but he left the office with a small budget surplus. Many historians consider the Clinton era as one of the most prosperous periods in the nation’s history. After the poor showing of Republicans in the mid-term elections of 1998, Gingrich was forced to resign as the Speaker of the House. Ultimately, Republicans lost the control of the House and Senate to Democrats.

One would think that Republicans learned their lesson and would not make the same mistake again. But, a decade later, Republicans’ extreme tactics on budget issues are backfiring on them, once again. In 2011, Republicans waged an ugly debate on extending the debt limit which resulted in the historic downgrade by rating agencies of the U.S. government securities from AAA to AA+. Then came the “fiscal cliff” (convergence of expiration of Bush tax-cuts and mandated spending cuts), which was avoided only when Republicans, at the last minute, blinked and agreed to tax rate increases for the rich (those making more than $500,000 a year) to seal a deal with Democratic President Barack Obama. The public’s disapproval of Republican tactics led to the re-election of Obama in 2012 and a net loss of seats for Republicans in the Senate and House. Now, Republicans are again engaged in extreme budget tactics via sequestration that are highly unlikely to produce any better results for them than last time.

Sequestration, agreed to by both Democrats and Republicans in 2012 as a way to avoid making hard compromises on tax and spending issues during the election season, involves across-the-board cuts in discretionary federal spending (entitlement programs such as Social Security, Medicare, and Medicaid are unaffected) amounting to $85 billion between March 1 and September 30 of this year (if these cuts are continued over a period of ten years, they would reduce the budget deficit by over $1 trillion). Both Republicans and Democrats have mixed feelings about these automatic cuts – Republicans are happy that sequestration would finally force the government to slim-down but they are also unhappy that these cuts would hit the Defense Department the severest, thereby negatively affecting national security, and that the entitlement programs are off-limit; Democrats are happy that sequestration would reduce the bloated budget for the Pentagon that they have been trying to cut down for years, but they are also unhappy that these automatic cuts would negatively affect many of their favorite programs such as Head Start. At the time when sequestration was agreed to, it was thought that both sides would find parts of these automatic cuts so drastic that they would never dare to carry out these cuts and perhaps be more amenable to compromises.

Sequestration may not produce hardship to the citizens immediately, but over the coming months as these cuts start biting, the people would begin to feel the pain (reduced federal services, canceled contracts, military base closings, and job furloughs and layoffs). The government has estimated that as many as 700,000 jobs would be lost and these cuts would reduce the GDP growth by at least 0.5%. When that happens, as the recent polls show, Republicans would face the wreath of public anger over their intransigence. With the 2014 mid-term election season beginning soon, it’s smart politics for Republicans to back off from their uncompromising positions. Unless Republicans soften their rigid ideology of “no new taxes” and they embrace a balanced approach to spending cuts and new tax revenues, as Obama and Congressional Democrats are advocating, they may end up repeating history and losing the control of the House in 2014. Then Obama and Congressional Democrats, with a firm control of the White House, Senate, and House, would be free to aggressively pursue their agenda on fiscal matters in the last two years of Obama’s second term.

The deficit is too big (caused by Bush's two costly wars, unnecessary tax cuts to the rich, and bank bailouts that became necessary because of lax regulations under Bush) to be remedied by spending cuts alone; new tax revenues would have to be part of the solution. When special deductions and exclusions enable rich people like Mitt Romney and billionaire Warren Buffett to pay only 13-20% in taxes, it raises the question of fairness. When tax loopholes, added to the tax code over the years at the behest of lobbyists of special interest groups, enable rich companies like GE, Google, Apple and Goldman Sachs to pay only 0 -10% in taxes, that’s a problem. Clearly, rich individuals and corporations are not paying their fair share of taxes. Closing tax loopholes and eliminating tax giveaways is not the same thing as increasing taxes. This is more about cutting tax expenditures that we can’t afford.

If Republicans work cooperatively with Obama and Congressional Democrats in resolving the sequestration, they might improve their chances of winning the 2014 Congressional elections as well as the next presidential election in 2016. The sequestration, which no one likes, is the last opportunity for Republicans to repair their shattered image caused by their serial manufactured fiscal crises. Obama has already offered to put on the table entitlement reforms (that Republicans want) in return for higher tax revenues via tax reforms (that Democrats want). Several bipartisan groups, including the commission on deficit and debt led by Erskine B. Bowles and Alan K. Simpson, have called for one dollar of tax increase for every $2-3 of spending cuts. If Republicans and Democrats work together over the next few weeks and come up with a grand plan which would replace sequestration with a more balanced mix of spending cuts in discretionary as well as entitlement programs and fair tax reforms with a net increase in tax revenues, the country would be set for a sustained recovery for the long-term with millions of new jobs created. This is what an overwhelming majority of people want and this is what will restore the good image of the Grand Old Party.

If Republicans fail to seize this last opportunity that sequestration has presented to them for redeeming themselves, the consolation prize for the people would be that if the “fiscal cliff” and sequestration agreements on spending cuts and tax increases are carried out in full, the budget deficit would be reduced by about $4 trillion over ten years. This level of austerity would certainly cause some hardship in the near-term, but it would also be a big leap in improving the long-term fiscal health of the country. Of course, a grand plan, which includes entitlement reforms and tax revenues, would put us on a path of stronger recovery sooner and everybody would win, including the Republicans.

New Republican strategy - if can't win elections, just rig them

Posted by Shyam Moondra

Republicans have a grand plan for winning the presidential elections in the future - just rig them. Their newly minted plan, being considered by Republican-controlled states such as Virginia and Wisconsin, will allow a presidential candidate to win a state in terms of electoral votes, even if the candidate doesn't get the most popular votes.

Last November, in the state of Virginia, President Barack Obama won a majority of popular votes and thus won all of state's 13 electoral votes under the present winner-take-all rule. However, Virginia's Republican-controlled legislature is currently considering to adopt a new rule which will allocate electoral votes based on the number of congressional districts won (under this proposed rule,  Republican candidate, Gov. Mitt Romney, would have won 9 electoral votes and Obama would have gotten only 4 electoral votes). Other Republican-controlled states that are reportedly contemplating to adopt similar changes in their electoral vote allocation rules include Wisconsin, Pennsylvania, Ohio, and Michigan. If this new rule were in effect in these states in 2012, Romney could have won the election.

In effect, Republican states want to destroy the basic premise of democracy in which each person's vote counts. Under the proposed Virginian rule, urban areas with millions of voters with a heavy concentration of Democrats will carry relatively less weight than rural districts with far fewer people dominated by Republicans. Reince Priebus, the re-elected chairman of the Republican National Committee, lamented that the idea was "intriguing" and worthy of consideration. However, at the same time, Priebus also said that the Republican Party needs to broaden its appeal. So the question is, how does exactly this extreme undemocratic proposal being pursued by Virginia, Wisconsin and other red states help broaden support?

In addition, some Republican controlled states are trying to pass a law that if a woman undergoes the abortion procedure, she will be committing a felony of destroying the evidence. Evidence of what? Abortion is a legal right that the U.S. Supreme Court granted forty years ago (Roe vs Wade). Do these Republican states want to circumvent the law of the land? Again, how does this extreme tactic help broaden the appeal of the Republican brand, especially to the female voters?

As the disapproval rating of the Republican Party skyrockets, an increasing number of Republicans are beginning to behave like thugs, who would go to any extreme to get what they want even in the face of opposition by an overwhelming number of their constituents. One could expect something like that to happen in Putin's Russia, but not here in the land of freedom, liberty, and justice.

A small minority of extremist elements within the Republican Party are engaged in subversion of our democratic principles and destruction of our legal system. That can't be the basis of becoming a legitimate power entrusted to govern. After the last ugly debt-ceiling debate (that resulted in the downgrade of the rating of the U.S. securities from AAA to AA+) and their twisted and "stupid" statements on rape and abortion (as Republican Gov. Bobby Jindal of Louisiana characterized them), these new crude election strategies will prove to be the final act of self-destruction. The Republican brand is already damaged and their new desperate attempts will only make people to distrust them even more; their continuing "stupid" acts would only mean their guaranteed further losses in the up-coming mid-term elections of 2014.

Bull market continues – DJIA headed to record high this year

Posted by Shyam Moondra The stock market continued to go up while negotiations between the Republicans and Democrats on “fiscal cliff” were still in flux, which suggests that the investors correctly anticipated that a deal would eventually be struck to avert falling off the cliff. In 2011, Republicans led the ugly debate on increasing the debt ceiling, which resulted in the downgrade of U.S. securities from AAA to AA+, and for that they got punished by the voters in the 2012 presidential and congressional elections. Apparently, Republicans realized that their continued intransigence was a sure prescription for self-destruction and, therefore, they went for the best “fiscal cliff” deal they could get from the Democrats. A wise political recalculation would again pave the way for successful negotiations on extending the debt ceiling before the end of March, when the U.S. Treasury will run out of options for avoiding a historic default by the U.S. government on its debt, and enacting tax reforms as well as spending cuts to reduce budget deficit. Investors seem to believe that Republicans are highly unlikely to cause a default or use government shutdown as a political ploy to achieve leverage in negotiations with the Democrats on fiscal matters.

In addition to the marginally improved political climate in Washington, D.C., the following economic trends suggest that the stock market may be ready to go up to record levels this year and DJIA may even hit 18,000 by the end of 2015.

• The EU situation has stabilized and the recent painful austerity programs would yield positive results in the future. The weak Euro would also help the Euro Zone countries with their export business, which would be positive for the global economic recovery. In 2012, real GDP contracted by 0.3% in the EU and by 0.4% in the Euro Zone. In 2013, GDP is projected to increase by 0.4% in the EU and by 0.1% in the Euro Zone.

• After a slowdown in 2012, the recent data on manufacturing and real estate prices suggest that the Chinese economy may be poised to rebound this year. A higher rate of economic growth in China would be a big plus for the global economy.

• In the U.S., economy continues to grow, albeit at a tepid pace, and it continues to create new jobs. In the past month, economy added 155,000 new jobs (over 4 million new jobs created in the last 27 months). The automobile demand continues to be near record levels and the housing data for recent months suggest that a gradual recovery in the housing industry is afoot. The housing rebound could prove to be a strong catalyst for a rapid growth in the GDP. Higher housing prices would also create a wealth effect, boosting consumer confidence and spending. The stock market has also recovered from the crash of 2008. Higher stock prices have increased the wealth of individuals, which would further increase consumer spending. One other sector which is unexpectedly doing well is energy; this industry is not only creating new jobs, but it also has the promise of our achieving energy independence within the next decade. Such a milestone would be a big plus for domestic economic growth and for our enhanced competitiveness in global trade.

• Slow but sustained economic growth combined with superb management of costs by corporations would produce handsome profits going forward, thereby boosting the stock prices. The corporations are enjoying record profit-margins and they have accumulated over $4 trillion of cash on their balance sheets that would guarantee further capital expansion and more hiring in the coming months and years.

• As the economy recovers, FED will probably start raising interest rates as early as next year, at which time the bond bubble will burst and part of that money will end up in equities, giving the stock market a further boost. Also, the fear of rising interest rates will induce the potential home buyers to start buying homes, which will be good for the economy and corporate profits. Higher interest rates will increase the interest rate margins for the banks, thereby increasing their profits. In 2008, weak financial sector brought down the economy and the stock market; in 2013-2014, we would probably see a strong financial sector leading the stock prices higher.

• In the near-term, the devastation caused by Hurricane Sandy and Nor'easter storm in the North-East will lead to extensive rebuilding efforts that will add to the GDP growth and corporate profits.

• Finally, the current stock valuation looks very attractive relative to future growth potential, given the present low interest rate/low inflation environment. The WSJ reports the current price-earning ratios for the trailing twelve months as: DJIA 14.92, S&P 500 17.28, and NASDAQ 16.45. Based on the historical trends, these ratios could rise to low-20’s before the stocks begin to look pricey. Therefore, by the end of 2014, we could very well see DJIA hitting the 18,000 mark.