For the week of Dec. 6, 2010, the week traded relatively flat, with the Standard & Poor’s 500 Index closing up 0.68% on Thursday, Dec. 9, 2010. The Dow Jones Industrial Average closed down 0.11%; the NASDAQ was up 0.97%, and the Russell 2000 was up 1.48%. We believe the market is in a holding pattern until a final resolution is reached on extending the Bush tax cuts.
Federal Reserve Chairman Ben Bernanke appeared on “60 Minutes” early in the week to say he does not believe our economy will fall into a double-dip recession. He also boldly said he had “100%” confidence he could prevent runaway inflation. We certainly hope he is correct. However, we got the impression that he is more concerned about deflation, noting the prospect of continued high unemployment was the primary source of risk that we might have another slowdown in the economy. Overall, Bernanke feels confident that the tools he will use to control the economy will work. We are on his side, and hope it does work.
Internationally, European Union leaders met in Brussels and decided on a €750 billion rescue fund, which translates to about $1.01 trillion. Ireland will likely qualify for about €67.5 billion in aid by passing a budget that will cut €6 billion across all sectors of society. Investors are having a hard time believing the euro will not be diluted after the rescue package is implemented. Also fanning the flame is the uncertainty whether Portugal, Spain and Italy will need rescue packages.
In earnings news, Costco Wholesale Corporation (NASDAQ: COST) reported earnings rose 18% and total sales jumped 11% as a result of higher gasoline prices and strong international growth. Same-store sales jumped 7%. The stocks’ earnings per share of $0.71 beat analysts’ expectations.
McDonald’s Corporation (NYSE: MCD) shares fell 2% on Wednesday after they announced their November same-store sales of 4.8% fell short of analysts’ expectations.
Atlanta-based The Home Depot, Inc. (NYSE: HD) raised its full-year earnings forecast to $1.97 a share, and expects earnings per share to rise between 7% and 9%, excluding any impact from share buybacks. Home Depot also targeted $2.5 billion in buybacks.
Citigroup Inc. (NYSE: C) was up 3.8% on Tuesday on the news that the Treasury sold its remaining common shares in a $10.5 billion offering. The Treasury has not completely exited its Citigroup stake, as it holds warrants for the bank’s common stock and is eligible for another $800 million in trust-preferred securities tied to government guarantees on Citigroup’s debt.
American International Group, Inc. (NYSE: AIG) was experiencing a similar situation on Thursday, as company management began talking about the money they are gaining from selling some of their foreign-centered insurance companies. The stock was up near 5.5% on the news that the company has a plan to pay off its debt to the U.S. government. AIG has repaid more than $60 billion of their debt.
The news that gave hope to the market for the week was Monday’s announcement that President Obama and the Republican leaders came to an agreement on a broad tax deal that extends the Bush income tax cuts for two years, lowers worker payroll taxes for a year and gives favorable treatment to business investments. While the deal is far from settled, the main points include extending the current tax rates for all taxpayers, with the top rate remaining at 35%. Both current rates on dividends and capital gains would be extended for two years. For estate taxes, they are discussing an exemption of $5 million per individual with a top rate of 35% for estates over $5 million for 2011 and 2012.
A patch for the Alternative Minimum Tax is also being negotiated for 2010 and 2011 that should keep the AMT exemption at or near current levels. Without a patch, 21 million additional taxpayers would owe AMT for 2010.
The Social Security tax levied on employees’ wages would be decreased to 4.2% from the current 6.2%, meaning those making $50,000 a year would take home an extra $1,000 in 2011.Employers’ half of the tax would remain at 6.2%.
Unemployment insurance benefits would be extended at their current level for 13 months through 2011, which could mean an individual could be unemployed for three full years. Unfortunately, we see this as a disincentive for some to seek a job. We maintain our opinion that those who are unemployed should take the opportunity to better their skills to increase their value in the workforce. We feel that those who are unemployed could be better served by a work program rather than extending unemployment benefits.
We suspect that this tax deal will continue to dominate headlines and the markets’ performance through next week, but remain hopeful that a resolution will be reached before year-end.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
