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Cadinha Blog



The second calendar quarter blew through the investment world like a tornado, leaving a trail of ruin and damage for most investors. The U.S. stock market turned in a “ballpark” -10% return for the three months ending June 30. Of course the more astute American investors (almost everyone) swooned into believing that their life savings were safer in foreign stock markets, suffered even greater damage as most foreign currencies lost value in addition to respective stock market declines. China, the world’s economic dynamo, showed decent economic growth, but the Chinese stock market declined twice as much as its American counterpart.

Then there were the PIIGS (Portugal, Italy, Ireland, Greece and Spain), facing financial slaughter, bringing down the entire “House of Europe”. Greece, of course, was the real culprit causing European wealth to “evaporate” as the Euro plunged in value.

The quarter also featured an exhibition of “witless” policy decisions by the global ruling elite. It’s as if all the leaders entered a contest to determine who amongst them could come up with the worst and most harmful economic policy move.

In Europe, the head of the Central Bank opted to “print money” in order to stave off a decline in the European Currency triggered by Greek defaults. This, of course, undermined any remaining confidence in the Euro. It wasn’t until the bank cried “no mas” and promised to take back the printed money over time that the currency stabilized.

In Japan, a proposal to increase taxes proved to be nothing more than a one-way ticket out of town for the Prime Minister. The succeeding head of state changed direction (albeit very slowly) and offered up a corporate tax cut instead.

Australian Prime Minister Kevin Rudd suffered a similar fate. After proposing a special 45% tax on natural resource profits, he found himself looking for a job and his successor was last seen trying to negotiate a peaceful settlement over the issue.

In a grand meeting dubbed the G-20, the leaders representing the 20 largest nations met to decide what to do about the plight of the world’s economies. Our very own President, Barack Obama, attended with a well-rehearsed sales pitch on the virtues of more stimulus, financed with further borrowings. Fortunately, the world’s leaders did not buy into the idea, remembering that it was this sort of thinking that got them into trouble in the first place. Instead, they opted for an old-fashioned dose of austerity combined with tax hikes. The austerity part may be a step in the right direction, but the tax hikes only assure them slower economic growth and lower tax revenues than they expect and need. Well…at least they got it half right.

At home, the “spend in order to tax” juggernaut rolls on. Our Senate passed a budget resolution to increase the individual tax rate on corporate dividends from 15% to 39.6% in 2011 and then to 43.4% in 2012 (courtesy of the healthcare tax of 3.8%). Thanks to PAYGO rules, a lower tax rate would require an offsetting tax increase on something else or a spending cut, (heaven forbid).

The tax on capital gains is also scheduled to be increased next year from 15% to 20% and then to 23.4%.

As if these weren’t enough to send the stock market into a tailspin, our leaders agreed to allow the upper individual tax rates to increase next year; the highest going from 35% to 39.6% and then 43.4% in 2012. At last look, deductions, however, can only be offset against a 28% tax level. In other words, income earners above the 28% bracket will be forced to pay taxes at the higher rates, but only deduct expenses at the lower 28% rate.

Corporations didn’t escape the budget or extender discussions either. Proposals to tax foreign earnings on U.S. multinationals threatened to increase taxes by as much as 50% on the likes of IBM, Coca-Cola, and Procter and Gamble, to name a few.

Is it any wonder why our stock markets were mauled this quarter? True to form, our political leaders are planning to run the government without a budget for a couple of months, so the ugly tax details need not be discussed prior to the November election. Their excuse?…to wait for the closing of the commission on the deficit which is likely to recommend another tax…the Value Added Tax.

With so many impediments to disposable income, corporate cash flow, and growth in general, the recent drop in consumer confidence comes as no surprise. Likewise, the stashing of cash in corporate coffers (now $1.5 trillion) leads us to conclude that cash is King and a double dip recession scenario an increasing possibility. Deflation, anyone?

Unfortunately, our politics still has center stage. The unfolding drama features a government determined on growing by 50%, making investor’s lives more difficult and providing us with an adequate number of challenges.

We still want to avoid investments in sectors of the market that are being attacked by government or already in control by government. Your portfolio of stocks already reflects much of this thinking. We continue to believe that ownership in companies that are well managed, well financed and projecting a healthy growth outlook represents the best asset class for investors. Finding these companies has become more difficult mainly because the outlook for growth has diminished, and government interference is clearly more pronounced. Nevertheless, we plod on, attempting to preserve your wealth while we work our way through this convoluted environment. I now understand why the great investment sage, Gerald M. Loeb, best described our process as “The Battle for Investment Survival.”

About the Author

Harlan J. Cadinha
Founder, Chairman and Chief Strategist




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