Thursday, August 23, 2012

Romney's Tax Returns/Added 100 EXG at $8.91/Sold 40 ZBRPC at $26.62/MDT, Cascades

The upcoming presidential election will be close. If Romney released his tax returns for several years, he would at a minimum increase his chances of losing. Republicans support Romney's non-disclosure knowing that it would likely cost them the election, not due to any concerns about the relevance or importance of this information. Why not release five or ten years of tax returns? Romney has released only his 2010 return after receiving serious pressure from other republican candidates during the primaries and has promised to release his 2011 return by October 15, 2012. Reuters He is not going to release returns prior to 2010, end of story. Even that one year provided fodder for his critics. 

What is by far the most dominant economic theme of the Modern Day GOP? Simply put, rich people and large corporations ("Job Creators") need more tax breaks in order to create jobs for the common folk. GOP's Trickle Down Economics and the Middle Class Those Job Creators generously give to republicans running for office and to "conservative" PACs who have never been able to make a truthful statement in a campaign advertisement. Those donations, running well into the hundreds of millions, have absolutely nothing to do with the GOP's tax policies of course.  

As shown in the Ryan budget proposals, the GOP will favor the rich with tax breaks while slashing programs for the middle class and the poor. They are generally oblivious to how such program cuts will hurt the demand for products that corporations and the wealthy need to sell in order to generate more profits. That would require some degree of foresight and deep thinking beyond immediate self-interest however.  

The most recent GOP budget plan, passed in the House with no Democrat votes, is described in this NYT article. (see also analysis at Chairman Ryan Gets 62 Percent of His Huge Budget Cuts from Programs for Lower-Income Americans

Needless to say, Romney is rich and earns a lot of money every year now with no job other than running for political office. His tax rate has probably been below that of a factory worker for a very long time. An article in Vanity Fair noted that his tax rate was below 15% for the total amount of income earned in 2010-11, notwithstanding $42.5 million in income. Mitt Romney Made $42 Million, Paid Less Than 14 Percent in taxes - ABC News

How does he manage to accomplish that result? How do the wealthy manage to pay less than 15%in taxes when the marginal tax rate is currently 35%? Why do we need to cut the marginal rate for them, which the GOP will do once they have the power to do so? For someone like Romney, the 15% maximum rate on dividends and long term capital gains would be important. I suspect that he has made use of the carried interest loophole that transforms   ordinary income compensation earned by a hedge fund manager into long term capital gains taxed at 15%. (see discussion of this tax loophole for the wealthy at which mentions Romney's use of this loophole)

As noted in the Vanity Fair article, the 2010 return released by Romney shows the use of offshore tax havens and foreign bank accounts. 

These are issues relevant to the current campaign. Romney's returns will at a minimum show how the wealthy avoid, possibly in a legal manner, paying taxes anything close to the highest marginal rate. 

As shown by the recent release of formerly secret Swiss bank accounts, a very large number of rich citizens were avoiding their tax obligations illegally by not declaring income. Remember what happened when the government gained access to formerly secret bank accounts at just one Swiss bank, UBS? There were 52,000 Americans hiding, just at that one bank, at least $14.8 billion from the tax man. IRS unlocks UBS vault hiding Americans evading taxes - And, guess what? Those law abiding "Job Creators" checked the box on the IRS form that they had no foreign bank accounts. Those people did not even want to pay a 15% tax rate on dividends and long term capital gains.  

More importantly, Romney's returns may show something else other than legal tax avoidance. Romney has a retirement account that may be valued up to $102 million generated during his years at Bain between 1984 to 1999. How is that even possible when the maximum annual contribution during those years was $2,000 for an IRA and $30,000 for a Keogh. 

An article in the WSJ, written by Mark Maremont and published last March, contains one possible explanation. When Bain acquired a company, the firm would create two classes of shares called "A" and "L". The "A" shares were riskier and the Bain executives would place those shares in their retirement account. But how would they be valued? Was an unreasonably low valuation  placed on them, in order to fit within the maximum limit per share, which could not survive an independent and unbiased examination? That would be a relevant issue in this campaign, and Romney would never want to answer questions about such a matter for obvious reasons. Actual disclosure could easily raise questions that Romney pushed the envelope and then some. If a legitimate issue was raised on this kind of point, he would lose the election without question.

The foregoing discussion is connected to the GOP's trickle down economic theory. Can the GOP answer two simple questions? Did the Bush tax cuts, which primarily benefited the wealthy, create jobs and improve the balance sheets of the average middle class family? Or did they merely widen the growing wealth gap in the U.S. between the top 10%, and particularly the top 1%, and everyone else?

It can not be questioned that Bush had the worse job creation record than any modern American President going back to WWII. Bush On Jobs: The Worst Track Record On Record - Real Time Economics - WSJ That would at least call into question the GOP thesis, but they lack the ability to question any of their core beliefs with reliable evidence. It is impossible for them and always will be.

I took the Labor Department's data and modified it by Presidential term. I did not credit Bush with the job losses during his first year which seems reasonable to me.  Bush was inaugurated during a recession and the economy would be shedding jobs irrespective of the newly elected President's policies.

After debiting the job data for Bush's first year, I credited him with the jobs data occurring for one year after he left office for the same reason. The GOP of course want to credit Obama with the hideous losses that were occurring when he first became President.

I found that there was a net job loss in the U.S. of 184,000 over the eight Bush years using the Labor Department's data with the foregoing described adjustment. (introduction sections: Stocks, Bonds & Politics and Bush Tax Cuts and Jobs) Does any of the foregoing cause GOP tribe members to question "trickle down" economic theory, and the short answer is no. And, they never will.

Without that adjustment, there would be Bush would be credited with 3 million jobs over 8 years. Most of those jobs would be connected with the housing bubble rather than anything relating to tax cuts for the wealthy.

It really riles a GOP tribe member to point out that 10.5 million jobs were created during the 4 years of the much despised administration of Jimmy Carter or 23.1 million under the loathed Bill Clinton. I have done that a few times and they dismiss the data. It can not possibly be true they say. If asked, they will even assert that Carter was so bad that there had to be job losses during his four year administration, just a form of reality creation common among those tribe members to justify a preexisting belief system.

A GOP tribe member's hatred for Clinton and Obama, or any Democrat President, really has nothing to do with facts anyway. It really does not matter how many jobs were created, or how well the stock market did, or whether the nation avoided an unnecessary war. The disdain and hatred are guttural, not based on anything resembling a thoughtful analysis of reliable evidence. Obama is not really an American anyway, probably a secret Muslim,  and most definitely  a "socialist" who wants to take away our guns, or some other tag which justifies their disdain.

Another way to get them riled up is to ask how the stock market fared under Bush Junior, when the GOP controlled Congress for 6 out of the 8 years and then to compare that performance with the 8 years of Clinton and almost 4 years under Obama?

Bush 8 Years = Negative 40% on the S & P 500/S & P Starting Value on 1/20/2001 at 1,342.55 and Ending Value on 1/20/2009 at 805.22. So how did those tax cuts work their magic exactly?

The Modern Day GOP has done a magnificent job convincing middle class voters that the GOP's tax policies are somehow designed for their benefit, even though nothing could be further from the truth.

The middle class has a tax problem that originates partly from federal taxes but more importantly from taxes and fees levied by state and local governments. And that could be seen on a case-by-case basis by simply adding up all of the taxes paid to those governments and then comparing them with the total federal income paid exclusive of the social security tax. Those families are being squeezed by state income taxes, sales taxes, property taxes and assorted other fees and taxes levied by state and local government plus rising costs for health and other insurance, energy and food.

According to the 2011 tax table, a couple with a net income of $40,000 after all deductions and exemptions, would owe $5,296 in federal income tax or 13.24%, close to the same rate as Mitt Romney paid on $42 million. ‎ That kind of tax amount ($5,000 for 30 years) would not be sufficient to cover the future Medicare benefits provided to a husband and wife. The CBO currently estimates that the government will be paying $7,900 per person in Medicare benefits in 2022.

{If the couple had significant long term capital gains and qualified dividend, the actual tax obligation using a schedule D worksheet would be lower than that computed using the tax table provided there is income above the 15% tax level. In 2011, the 25% marginal rate applies to taxable income of $34,500-$83,600 for singles; and $69,000-$139,500 for married filing jointly}

Whatever that middle class family is paying in federal income tax, it is not likely to appreciably change irrespective of who wins this November. For most of those families, their state and local taxes will far exceed their federal tax obligation number. If voting strictly their economic self interest, they should be voting for people Scott Walker, the GOP governor from Wisconsin, for local and state offices and Obama for President. The Democrats will be doing more for them on a national level. Possibly, they need to join with Obama and ask Romney to pay more than 14% on $45 million in income. Wasn't the U.S. tax system supposed to be progressive and how did it retrogress to one where the super rich have lower tax rates than the middle class?

1. Cascades (own 1 senior 2017 bond: Junk Bond Ladder Strategy): This bond is currently rated Ba3 by Moody's and B+ by S & P. Cascades is a Canadian company whose common shares are listed on the Toronto exchange. Cascades Inc. (CAS- TOR)

Cascades produces and markets packaging and tissue products composed of recycled fibres.

Cascades reported second quarter earnings of 8 cents per share on revenues of 944 million CADs. At the end of the quarter, debt was at 1.585 billion CADs including 134 million in non-recourse debt. The press release announcing second quarter earnings is filed with the SEC as part of Form 6-K: Quarterly Report for Second Quarter Results

Bought 1 Cascades 7.75% Senior Bond Maturing on 12/15/2017 at 96.5 (September 2011).

According to FINRA, there is $500M outstanding of this 2017 bond. There is also $250M outstanding of a 7.875% coupon bond maturing in 2020. The maturities of the long term debt are shown in note 6 at page 49, Quarterly Report for Second Quarter Results. The debt includes 423 million CADs in a revolving credit facility.

2. Sold 40 ZBPRC at $26.62 Last Monday (see Disclaimer): ZBPRC has a run its course in my opinion. It is a high cost equity preferred stock that is likely to be redeemed at its $25 par value as soon as Zions can do so. ZBPRC pays 9.5% on a $25 par value. This security may be redeemed on or after 9/15/2013 at par value plus accrued dividends. Prospectus Supplement It is highly likely that Zion will redeem it at the first opportunity. I receive more dollars by selling now at $26.62 than waiting another year for a par value redemption. My gain was long term:

2012 ZBPRC 40 Shares +$40.47
Prior trades yielded good percentage returns. A chicken buy of 30 shares, bought at $18.4, netted a long term gain of $226.13 on a $560 investment plus dividends. Another small lot trade netted a total of $208.63 plus dividends.

2011 Taxable Account +208.63 ST/$226.63 LT
Earlier this year, Zions redeemed another high cost equity preferred, ZBPRE. Zions Bancorporation Announces the Redemption of 11% Series E Preferred Shares The redemption of that preferred stock occurred on 6/15/12, the first day permitted by the prospectus. Final Prospectus Supplement

ZB-PC: 26.74 +0.09 (+0.34%)

3. ADDED 100 of the Buy-Write Stock CEF EXG at $8.9091-Regular IRA (see Disclaimer): I will buy, hold and trade a few high yielding stock CEFs in retirement accounts. EXG is the only one currently owned where I am reinvesting the dividend to buy additional shares. I also own 100 shares in the ROTH IRA where I am taking the dividends in cash.

The prior 100 share purchase was over a year ago at $10.61 in Regular IRA. Since that time, I have received and reinvested $112.52 in dividends, so I have a net total loss on those shares of close to $100.

SEC Filed Shareholder Report for the period ending 4/30/12: SEC Form N-CSR

EXG Page at the Closed-End Fund Association

The fund is currently rated 4 stars by Morningstar. As shown at the Morningstar page, the dividend is supported by a return of capital.  The only way for the fund to earn the dividend is by harvesting more capital gains.  The return of capital issue is not material from a tax perspective when the security is held in a retirement account.

Eaton Vance recently declared a quarterly dividend for this fund of $.244 per share. The fund was ex dividend yesterday. This fund is owned only in retirement accounts.

On 8/20/12, the net asset value per share was $10.25. Based on a closing price of $8.91 that day, the discount to net asset value per share was -13.07%. Adjusted for the $.244 dividend, which went ex dividend on 8/22, the discount was -13.35 on 8/22 based on a net asset value of $10.04.

This is a world stock fund. Consequently, its allocation to European companies has restrained its recent performance. It has significant holdings in European financial institutions, including Santander, that have been shellacked by the market, but have share price recovery potential.

EXG: 8.67 +0.03 (+0.39%)

4. Medtronic (own): For its first fiscal quarter, Medtronic reported net income of $864M or 83 cents per diluted share on 4 billion in revenues. SEC Filed Press Release Adjusted net income was 85 cents in line with estimates. Revenues increased 5% on a constant currency basis. Free cash flow was $1.2B. The company reiterated its fiscal 2013 guidance of $3.62-$3.7 which implies E.P.S. growth of 5 to 7%.

MDT: 40.69 -0.45 (-1.11%) 

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