With ongoing grateful thanks to the Wall Street Journal for kindly providing such a neat summary, and so – for Saturday July 24th 2010 – here’s what was hot during the past week, and what……wasn’t;
I’m pleased to bring you another edition of Cumberland Advisors Market Commentary by David R. Kotok. For newcomers and regular readers alike, please head over to Cumberland’s Introduction and Biographies page which can be found here. To sign up for their free newsletter yourself, please point your browser at: http://www.cumber.com/signup.aspx. Now, let’s get right in to this edition:
We have a little technical correction on our recent piece (July 22) about taxes and dividends and capital gains. See: www.cumber.com.
This year the long-term cap gains federal tax rate is 15%. The debate over what the cap gains tax will be is unlikely to be resolved until after the November election. Geithner has said the Obama administration will seek a rate of 20%.
Many other influences determine the net cap gain a taxpayer can pay. Here is one example.
Last night Tim Geithner had a one hour conversation with Charlie Rose. Good stuff!
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I’m pleased to bring you another edition of Cumberland Advisors Market Commentary by David R. Kotok. For newcomers and regular readers alike, please head over to Cumberland’s Introduction and Biographies page which can be found here. To sign up for their free newsletter yourself, please point your browser at: http://www.cumber.com/signup.aspx. Now, let’s get right in to this edition:
If you want less of something, tax it. If you want more of something, do not tax it.
We ask the next question with that principle in mind. Could the two-month stock market malaise be due to the forthcoming hikes in the income tax rates on dividends? Or on capital gains? Or both?
The capital gains debate is simple. The rate on long-term gains will be 15% for 2010. Twenty percent may be the rate if the Geithner comments become a reality. Alternatively, it could become anything else, depending on Congress.
The capital gains debate is simple. The rate on long-term gains will be 15% for 2010. Twenty percent may be the rate if the Geithner comments become a reality. Alternatively, it could become anything else, depending on Congress.
Geithner has said the White House will let the Bush tax cuts expire. He also said the Obama administration wants a 20% tax rate on dividends and on long-term cap gains. Therefore, the tax fight will be conducted in the lame duck session that follows the November election.
During the American Revolution, the Continental Congress adopts a resolution stating that “the flag of the United States be thirteen alternate stripes red and white” and that “the Union be thirteen stars, white in a blue field, representing a new Constellation.” The national flag, which became known as the “Stars and Stripes,” was based on the “Grand Union” flag, a banner carried by the Continental Army in 1776 that also consisted of 13 red and white stripes. According to legend, Philadelphia seamstress Betsy Ross designed the new canton for the Stars and Stripes, which consisted of a circle of 13 stars and a blue background, at the request of General George Washington. Historians have been unable to conclusively prove or disprove this legend.
With the entrance of new states into the United States after independence, new stripes and stars were added to represent new additions to the Union. In 1818, however, Congress enacted a law stipulating that the 13 original stripes be restored and that only stars be added to represent new states.
On June 14, 1877, the first Flag Day observance was held on the 100th anniversary of the adoption of the Stars and Stripes. As instructed by Congress, the U.S. flag was flown from all public buildings across the country. In the years after the first Flag Day, several states continued to observe the anniversary, and in 1949 Congress officially designated June 14 as Flag Day, a national day of observance.
Today, Europe has 27 member states. Of those, fully 10 former communist states, (plus the former DDR) with a combined population of almost 107 million people have joined the European Union. The lives of the citizens of those member states have improved beyond mere measure, and they no longer have the yoke of oppression imposed by the mindless brutality of the old Communist system.
On June 12th 1987, then President Ronald Reagan delivered a speech at the Brandenburg Gate, in what was then West Berlin. The Brandenburg gate site was selected to emphasize President Reagan’s personal conviction that Western democracy offered the best hope to reopen the Berlin Wall. The speech he gave focused on a series of political initiatives to achieve this end. The (now) famous “tear down this wall” phrase was intended as the logical conclusion of the president’s proposals. President Reagan’s staff felt that the phrase was too confrontational, and one (Chief of Staff Howard Baker) even went to far as to say that he felt it to be “unpresidential”. Reagan prevailed, and the phrase remained in the speech.
“[...] We welcome change and openness; for we believe that freedom and security go together, that the advance of human liberty can only strengthen the cause of world peace. There is one sign the Soviets can make that would be unmistakable, that would advance dramatically the cause of freedom and peace. General Secretary Gorbachev, if you seek peace, if you seek prosperity for the Soviet Union and eastern Europe, if you seek liberalization, come here to this gate. Mr. Gorbachev, open this gate. Mr. Gorbachev, tear down this wall!”
Interestingly, at the time the speech received little in the way of media coverage. Communists were -- predictably -- unimpressed. TASS went so far as to accuse Reagan of giving “an openly provocative, war mongering speech”.
29 months later, in November of 1989, the Politburo announced that East Germans were permitted to move freely into West Germany. Tens of thousands flocked to the Berlin Wall and proceeded to “tear down this wall”. Border Guards, with no clear orders took a wise course and allowed citizens of East Germany to stream across the border. On October 3rd 1990 East Germany joined the Federal Republic of Germany. German reunification was -- at long last -- a reality.
Thanks to YouTube, we can view that historic speech, which was delivered 23 years ago today;
With ongoing grateful thanks to the Wall Street Journal for kindly providing such a neat summary, and so – for Saturday May 8th 2010 – here’s what was hot during the past week, and what……wasn’t;
Anyone who has ever taken even a basic finance or economics course is well aware of the term; “counterparty”
As a refresher…
Counterparty:
The other party that participates in a financial transaction. Every transaction must have a counterparty in order for the transaction to go through. More specifically, every buyer of an asset must be paired up with a seller that is willing to sell and vice versa.
Further explanation
All trades require some sort of counterparty. For example, the counterparty to the option buyer would be the option writer. One of the risks involved in any transaction is counterparty risk, which is the risk that the counterparty will be unable to fulfill his or her duties. However, in many financial transactions the counterparty is unknown.
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Then we have the term “contagion”.
In the context of the problems the Mediterranean nations are experiencing at the moment, this term has been widely used by Mainstream Media
As a refresher…
Contagion:
The likelihood of significant economic changes in one country spreading to other countries. This can refer to either economic booms or economic crises.
Further explanation
An infamous example is the “Asian Contagion” that occurred in 1997 and started in Thailand. The economic crisis in Thailand spread to bordering southeast Asian countries and then eventually spilled over to Latin America.
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Which leads us, inexorably, towards the fusion term; “Counterparty contagion”
Let’s see if we can construct a definition. Jorion & Zhang contend that;
Standard credit risk models cannot explain the observed clustering of default, sometimes described as “credit contagion”
Ah, there’s a hint here of where this might be going, so let’s look a little more closely. Jorion & Zhang continue;
On average, creditors experience severe negative abnormal equity returns and increases in CDS
spreads. In addition, creditors are more likely to suffer from financial distress later.
These effects are stronger for industrial creditors than financials. Simulations calibrated
to these results indicate that counterparty risk can potentially explain the observed excess
clustering of defaults. This suggests that counterparty risk is an important additional
channel of credit contagion and that current portfolio credit risk models understate the
likelihood of large losses.
OK, maybe we have enough to construct a reasonable “working definition” of our lovely new buzzword “Counterparty contagion”
“In a credit derivatives market dominated by too few banks, a crisis affecting one affects many (all?) of the counterparties, because of the complex interlayered relationships between the counterparties themselves. Hence an “outbreak” of counterparty risk default by one, produces a knock on effect of all participants in assuming counterparty risk on a synthetic derivative”
As a definition, it sucks. It’s not pedantic, nor is it (sufficiently) anal retentive. Then again to be fair, I took 15 minutes to think about this. I didn’t write a peer-reviewed paper, and didn’t submit a draft to a thesis adviser for early commentary and/or theoretical guidance either. Thus my definition IS [ahem] BY definition, NOT a definition at all.
Thank you, you’ve been a lovely audience. Good Night.
I’m pleased bring you another “Outside The Box” special edition newsletter from John Mauldin. For newcomers and regular readers alike, please read John’s introduction, bio, and subscription information here
From my friend George Friedman, founder & CEO of STRATFOR, here’s my newest favorite quote concerning economic recessions: “Like forest fires, they are painful when they occur, yet without them, the forest could not survive. They impose discipline, punishing the reckless, rewarding the cautious.” The thin line of where risky becomes reckless is something I’d like to focus us on today. No matter the risk-level of your portfolio, if you are reading this you are probably smart enough to know that when you play with fire you may get burned. You have to know how to look for smoke, or signs of a potential catastrophe, so you know not to grab the doorknob with both hands.
I’m including George’s discussion of the contributing facets of a recession, its inevitability and the idea of risk. As if the title won’t intrigue you to begin with, take my advice and give “The Global Crisis of Legitimacy” a read. STRATFOR uses its signature analytic approach to decipher today’s issues, applying historical context ranging from Adam Smith to the Lehman Brothers. Also, join their mailing list to receive two weekly intelligence pieces, and find that fire before your next investment opportunity comes along.
John Mauldin
Editor, Outside the Box
The Global Crisis of Legitimacy
By George Friedman
Financial panics are an integral part of capitalism. So are economic recessions. The system generates them and it becomes stronger because of them. Like forest fires, they are painful when they occur, yet without them, the forest could not survive. They impose discipline, punishing the reckless, rewarding the cautious. They do so imperfectly, of course, as at times the reckless are rewarded and the cautious penalized. Political crises – as opposed to normal financial panics – emerge when the reckless appear to be the beneficiaries of the crisis they have caused, while the rest of society bears the burdens of their recklessness. At that point, the crisis ceases to be financial or economic. It becomes political.
The financial and economic systems are subsystems of the broader political system. More precisely, think of nations as consisting of three basic systems: political, economic and military. Each of these systems has elites that manage it. The three systems are constantly interacting – and in a healthy polity, balancing each other, compensating for failures in one as well as taking advantage of success. Every nation has a different configuration within and between these systems. The relative weight of each system differs, as does the importance of its elites. But each nation contains these systems, and no system exists without the other two.
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