Question of the Week

It's clear the IRS was used as a political weapon what's not clear if is it was directly order to do so or trying to impress the chain of command. The agency is too powerful - so what should be done? If you have other ideas let me know. I would like to get the conversation going.

Flat or fair tax
Abolish income taxes
Better internal controls and accountability

"Fear is inevitable, I have to accept that, but I cannot allow it to paralyze me." Isabel Allende

We've heard all the clichés and famous words on the topic of fear, from it being "the enemy" to the notion "danger is inevitable fear is a choice" yet it's the number one driver of emotions when it comes to investing in the stock market.

There is fear of losing it all to fear of missing the rally, the former much more prevalent, after tough sledding over the past dozen years. There was a time when people invested in stocks knowing there would be good returns for years.

Interestingly for those with the wherewithal and patience to stay invested and to keep buying, the reward has been a gusher of money as the Dow and S&P are near all-time highs. The need to get in and out simply reflects a reality of lost confidence that goes beyond the stock market.

Too bad as each day passes there are fewer and fewer people that fit that description. After the next pullback there will be even fewer yet I can't wait for the pullback to happen. There are a lot of companies trading with stocks that don't nearly reflect their current or future value but I wouldn't mind them getting even cheaper. My worry is just how many people will see the shenanigans of trading and think it's an accurate symbol for all stocks that make up a market. They will write it all off just as they need to be invested more than ever.

On that note, I do not see the Fed tapering this year; the economy isn't near 6.5% (real) unemployment, and 2.0% GDP growth with an accommodative backdrop is actually the biggest S.O.S imaginable. But, I would love to see the market pull back on the Fed cutting back to $35.0 billion a month in asset buying - the bigger the pullback the better. I'm just not sure it's going to happen this year. Sure, there could be a pullback but it would have to come in the normal course of buying and selling and probably not mindless fear associated with shifting Fed policy.

I agree with George that the longer the Fed waits to do the inevitable the more dangerous such a move would become for the economy and stock market. But investors must remember they should be looking to buy rather than to panic - like fear, both are choices.

When I Took the Hit

We moved around a lot growing up so I went to schools in many different places including fifth grade in Texas. On the first day of class our teacher explained that he had a large paddle and would use it on disruptive students. Well, I was the first student to feel the wrath from that paddle not too long after. I'm sure my classmates heard me screaming from the bathroom. The thing is the paddling didn't hurt but the fear had been built up so much over the course of a couple of weeks I was wailing not from actual impact but what I thought the impact was.

By the end of the year I was an old pro and would take my licks trying my best to hold back from laughing.

Maybe I'd gotten a tougher bum, but the reality was it was fear of the paddle more than the paddle that kept students in line, which explains why I had to take that walk so often with my teacher, which even he seemed to find amusing by the end of the year.

The market is bracing for the paddle but investors shouldn't scream in fear or head for the hills. Quantitative easing isn't working. It would have a better impact if there was positive fiscal policy but right now it's a dud so let's pull the plug sooner rather than later - and get the whaling out of the way.

Hawk Speaks

Esther L. George, President and Chief Executive Officer at Federal Reserve Bank of Kansas City made comments yesterday that brought forth the notion that sooner or later the machines have to be turned off. I guess. At this point it's beginning to feel more like the Matrix and could go on forever if everyone plays along. In prepared remarks George made the case for an improving economy (not too convincing since she talked about 2% growth this year and 3% next year and pointed to corporate profits as a pure reflection of US economy).

All her comments were well taken and actually underscored by the market reaction - knee jerk sell off. It's clear the Fed has already boxed itself in with respect to markets and expectations for unlimited accommodation. I don't buy George's assessment of the economy but the training wheels must come off sooner rather than later.

Despite Surge Lot of Angst beneath Surface During this period, the FOMC has engaged in an experiment of aggressive monetary policy easing. For the most part, these policy actions have few precedents, and therefore, no simple formula exists to direct policymakers on how to eventually return monetary policy to more-normal settings. Because of this, considerable judgment that is informed by history and experience will be important for guiding future policy choices.

Like others, I want to see the U.S. economy grow with healthy job creation. Without question, more progress is needed in our labor market. While monetary policy affects inflation and financial stability and influences employment, it cannot singlehandedly fix today's high unemployment. That will take additional time. In maintaining its present course, the FOMC must consider other possible unintended consequences. For example, Will continuing with current policy and the creation of even greater excess reserves in the banking system result in more lending and economic growth or merely invite asset misallocation?

Are we creating a path to stable long-term growth or fostering uncertainty about the impact to the economy when the Federal Reserve must unwind its balance sheet? Given these dynamics, and in light of improving economic conditions, I support slowing the pace of asset purchases as an appropriate next step for monetary policy. Moreover, such actions would not constitute an outright tightening of monetary policy, but rather, it would slow policy easing.

History suggests that waiting too long to acknowledge the economy's progress and prepare markets for more-normal policy settings carries no less risk than tightening too soon.

Message of Market

People are spending money and companies that attract the most buyers will see their shareholders rewarded. Yesterday, G-III Apparel (GIII) a company started by a Holocaust survivor posted great earnings and saw its shares rally 21%. I wasn't in the stock although it's on my radar, but the point is that had nothing to do with the Federal Reserve and everything to do with demand and execution. My question - have you purchased any of these clothing brands in the past year: Calvin Klein, Tommy Hilfiger, Sean John, Nine West, Kenneth Cole, Ivanka Trump, Cole Hann or Guess?

Well, if you liked what you bought just imagine if you also bought stock in the company, too.

After the bell there were positive reactions to earnings from Mattress Firm (MFRM) and Shuffle Master (SHFL), again the street reacting positively to earnings from retail or consumer news.

There's value in the market and business goes on, which means some companies are taking market share and doing it a little better than the rest.

Comments

There is only one solution to the power of the IRS, create a flat tax, although this would hurt me as a retired person, and do away with the bulk of the IRS,there is no other REAL solution.The only way to curb power is to get rid of it. tom wayne on 6/5/2013 9:59:15 AM

The Flat or Fair Tax proposals are NOT the only way to go, but IMO, are the best way to go. Almost as good is the "Romney Approach", i.e. tax simplification: Eliminate Charitable Deductions & Mortgage Deductions & Medical Deductions for Corps and Indiv's, replace with much larger Medical Saving Accts. and much lower Corp taxes and Indiv. Taxes. Paul on 6/5/2013 10:09:01 AM

back when the conquistadors entered South America and decimated the Incas(influenza helped) they had a flat tax. each person had to work for the government for 1 month each year; they worked building roads, building grain storage facilities in case there was a disaster somewhere and also responding to disasters. The stipulation was that even if you were rich you could not hire some one to work for you, you had to do the work. So this tax amounted to about 8.25% of your time. Flat tax, sounds fair to me. Made sure that every person had some skin in the game, the exact same amount of skin; all geared towards helping the nation as a whole. What I have come to realize is that if a situation can be abused, it will be. If a law can be abused it will be. Congress and our past two presidents have passed some very scary laws that they have promised not to abuse; they will be abused, just like the not political IRS was used for political gain. It seems that too many Federal agencies have way too much power and no accountability; again, I say it will be abused. David Huber on 6/5/2013 11:20:14 AM

Charles: I believe people take their lead from their leaders. This adminstration has no ethics and will do anything to hold power. I vote for a flat tax. Frances Wiggins on 6/5/2013 12:10:58 PM

The choice you give of whether orders came from the top or if the workers were just trying to do what they thought the top wanted has 2 problems. First, does it really make any difference? If the workers believe that abusing the system and the citizens is what is desired, the effect is the same. It is easy to stop if it were direct orders from the top by firing those in charge who decided to commit the crimes. If no orders came directly from the top, then it means the corruption is throughout the system and ALL the middle managers must go to clean it up. Otherwise, they will believe it is still the way the top wants it even though the top can say that out in the open. Second, your question assumes there is a top to give orders. The evidence is mounting that this is not the case under the Obama administration. Obama rode into office via the political machinations of Chicago "smoky back room" politics applied at a national level. They trade support for influential appointments. I suggest that there is no functional top in the current administration. There are massive appointments of untrustworthy individuals throughout the administration, each operating in their own political interests without regard for the law, the rights of others, or anyone in authority above them. Such happens naturally when the premise of the administration is that individual citizens do not know what is best and must be told how to live. The groups that Obama made deals with have radical agendas and no concern for the rights of anyone who disagrees with them, including Congress. They are fascist in approach and will do anything they can to suppress open discussion of the issues. They use their political appointments to further their personal values withiut restraint or ANY concern for the law or due process, because they hold those privste agenda with the same zeal as any other terrorist. Bob G on 6/5/2013 12:55:41 PM

Why not go back to the system in the Constitution before the 16th Amendment? Congress determines the monetary need to finance the Federal budget for the year and this is then apportioned to the states based on population. Then each state determines how it will raise its share by taxing its citizens. The individual states through their Senators and Representatives would exercise greater influence over runaway Federal spending as state Governors exerted their influence to control Federal budgets. And, as an added bonus, the individual states are better able to determine local needs for public expenditures. No more overseers in Washington out of touch with reality or used for political agendas! William Dana MBA CPA on 6/5/2013 1:36:29 PM

No, the WH ie: Obama didn't have to say "go get..." they all know how he leans. Just like Hitler, he didn't have to say "kill all jews". His followers knew is leanings. That way the leaders hands don't get dirty, but everyone knows what's expected... The IRS is only one of MANY organizations used and abused to silence the opposition, which is exactly the agenda. Gail on 6/5/2013 6:28:59 PM

If we had a flat tax would all of the undocumented aliens sign up to pay their fair share? At least now they mostly pay taxes, albeit under a bogus SSN. Those who don't pay taxes under a bogus SSN are getting a free ride. Since there are 13M of them, don't let anyone tell you it is a wash! If we had a nationwide sales tax then, perhaps, all of the "cash" earned by the under the table crowd (including probably most of those currently on unemployment!) would at least kick into the pot. There is no easy answer but the current IRS question (who knew what, when) has to be answered. It is yet another cancer on the presidency. Shame on you! Congress should issue subpoenas to everyone in Ms. Lerner's chain of command. Someone will talk! Kathy B on 6/7/2013 4:11:48 PM

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