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The Sandy Spring Way

April Observations

April 6th, 2012 | By Beau Mercer

The Beatles’ song Taxman, describes an April attitude: “If you drive a car, I’ll tax the street; if you try to sit, I’ll tax the seat; if you get too cold, I’ll tax the heat; if you take a walk, I’ll tax your feet.”
When the late George Harrison wrote the song, he described a debatable political philosophy that ignores the expense of making poor people less poor or sick people less sick. George may have been dismayed, like his namesake King George III (“taxation without representation works in the Colonies”), when he analyzed the differences between the Republican and Democratic Party budget proposals. How can the Republican Party budget proposal spend $5.3 trillion less over the next decade than President Obama’s plan? Numerous partisan commentators and a few taxpayers understand that on January 1, 2013, the US economy will face a significant financial drag caused by the expiration of the Bush tax incentives if the politicians fail to address the tax increase. Remember Lewis Carroll’s book, Through the Looking Glass, when Alice said, “Why, sometimes I’ve believed as many as six impossible things before breakfast.”

A recent New York Times article commented that the Masters Golf tournament takes place this week and that Tiger Woods is the favorite. Mr. Woods, who at one time had a spell over the renowned Augusta, Georgia links, lost his way, much like the stock market   three years ago. The 2012 first quarter results sent a signal that the stock market may be clawing its way back, just as Mr. Woods did when he recently won the Arnold Palmer Invitational on March 25.  But the signals are hard to decipher, much like a damaged Achilles tendon. Further if Mr. Woods does not win the tournament, have investors been advised to sit and watch the equity market from the sidelines?

The Dow finished the last week in March at 13,212, resulting in an 8.1% quarterly run. The Dow is only 952 points from the all-time high posted on October 9, 2007. Valuations based on price-to-earnings and dividend yield metrics are within the range of historical norms. At quarter end, the price-to-earnings ratio on S&P 500 companies (based on one year forward consensus earnings) was 13, versus a 10-year average of almost 15.The current dividend yield on the index is about 1.9%, or about in line with the 20-year average of 2.1%. If either continued earnings growth or a price-to-earnings expansion materializes, the equity market could climb. Given these factors, one must take into account that the market has moved a long way in a short period. But then again so has Tiger Woods!

Are high gas prices giving you road rage? Oil prices are the only commodity that we deal with directly: we are buffered from most commodity price swings by our relative wealth. Prices at the pump on April 2nd averaged $3.89 for a gallon of unleaded, up 30 cents in the last month. The price of oil is affected by hundreds of interrelated factors. President Obama is right when he comments that gasoline prices are set in world markets subject to upsets (for example, erratic production from Libya and Sudan) over which the United States has little control. Consequently short term prospects of lower gasoline prices are hard to predict. But the longer term is different and the United States now has the potential to be energy independent. Energy independence does not mean gas prices will fall precipitously and most likely will become one of the solutions to the burgeoning budget deficit. And as Bob Dylan has advised, “it will be a debate with little resolve for ‘the times they are a changing.’”

—Fred