Chart: US Manufacturing as a Percentage of GDP and Income Inequality

Posted by David Hunkar on 25 May 2016, 3:31 am

The Manufacturing industry has been declining for many years now. While in the past an average American with a high school diploma could get a well-paid job in a local factory and settle down by raising a family, today’s average American with the same diploma might be lucky to find a job flipping burgers at minimum wage at a fast food restaurant. In today’s US a college degree is mandatory even to get a half-way decent job, if one can find one. The decline in manufacturing has forced millions of Americans into the service sector which tend to have poorly paid jobs with no benefits.

The hollowing out of US manufacturing over the years by outsourcing those jobs has led to a decline in standard of living for average Americans. For example, whites and blacks alike lost out when factories to Mexico and other countries after NAFTA was implemented. What jobs were left within the country such as those in construction and farming, were also taken over by illegal Hispanics leaving average-educated Americans fight for other jobs. Dramatic social and cultural changes are already occurring among whites and non-Hispanics. Some of such changes include higher suicides rates, mental issues, graduated college college students staying with mom and dad, etc.

The following chart shows US manufacturing as a % of GDP since 1997:

Click to enlarge

One of the consequences of lack of decent jobs and wage growth is the rising inequality among the population. As the entire system is set up to benefit the rich get richer and poor become poorer income inequality continues to rise year after after. Hence on the one hand the country is a super power with fabulous wealth and awesome military and on the other hand millions of people survive on food stamps and charities or basically survive working multiple minimum wage jobs. This shocking dichotomy makes the country look like a cross between Switzerland and Somalia to those who can look beyond the brainwashing by the media.

The following chart shows income inequality since 1913:

Source: Not all that it seems?, Barclays

Three Reasons To Consider German Stocks

Posted by David Hunkar on 24 May 2016, 4:47 am

German stocks have performed worse so far this year relative to other developed markets. For instance, the FTSE 100 is down just 1.38% compared to the DAX’s decline of 7.70%. The actual loss is even more since the DAX returns includes dividends when other indices do not.

From a May 20th article in the WSJ on this topic:

Despite the German economy gathering pace, its stock market has had a dismal year.

The headline DAX index has fallen fast this year, and stripping out dividends the performance looks even worse.

Unlike other indexes, from Britain’s FTSE 100 to the French CAC 40, the DAX measures gains on a “total return” basis. So instead of just taking into account changes in the prices of its stocks, this index includes dividends paid out by its component companies and assumes they are reinvested in the same stock. Another index that works like this is the American S&P 500.

This means the DAX tends to look better when compared with its neighbors.

Not this year. Even with dividends, the DAX is still down 8.8% year-to-date.

Other eurozone indexes haven’t fared well either. The CAC 40 has dropped 6.7% this year, the Spanish IBEX 35 is down 8.3% and the Italian FTSE MIB is down roughly 17.2%.

Strip out dividends and the DAX looks even worse, having lost 11.2% of its value.

Source: The German DAX’s Bad Year Is Even Worse Than It Looks, WSJ, May 20, 2016

Though the DAX has performed poorly this year, investors may still want to consider adding German equities in a phased manner at current levels. Listed below are three reasons on why investors should buy German equities:

1.No country consistently ranks as the top performer year after after as shown in the chart below:

Click to enlarge

2.German stocks are cheap based on forward P/E ratio:

3.US stocks are expensive based on Shiller P/E ratio while German stocks are cheaper:

Shiller P/E (also known as cyclically adjusted P/E” or CAPE,) is a more accurate measure of predicting long-term returns.

Note: The above chart shows data as of May 7, 2016

Source: The Case for More Overseas Stock Exposure—and Where, WSJ, May 8, 2016

The easiest way to gain exposure to German stocks is via the iShares MSCI Germany ETF (EWG). It holds 55 large and mid-sized firms and currently has an asset base of over $4.2 billion.

Investors interested in individual stocks can consider the following for further research:

1.Company: BASF SE (BASFY)
Current Dividend Yield: 4.45%
Sector:Chemicals

2.Company: Henkel AG & Co (HENKY)
Current Dividend Yield: 1.61%
Sector: Household Products

3.Company: Siemens AG (SIEGY)
Current Dividend Yield:3.56%
Sector:Industrial Conglomerates

4.Company: adidas AG (ADDYY)
Current Dividend Yield: 1.44%
Sector:Textiles, Apparel & Luxury Goods

5.Company: Fresenius Medical Care AG & Co (FMS)
Current Dividend Yield: 1.08%
Sector: Health Care Providers & Services

Note: Dividend yields noted above are as of May 20, 2016. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: No Positions

Foreign Taxes Paid: How To Claim in U.S. Tax Returns

Posted by David Hunkar on 24 May 2016, 3:57 am

Investing in foreign stocks involves many costs. One of the costs is the taxes paid to foreign governments on dividends earned by US investors. Such dividend withholding taxes can be huge for some countries such as Switzerland and while others such as Singapore do not withhold taxes.

While paying a substantial portion of dividends earned as taxes to a foreign state, it is possible to claim some or all of the taxes paid in US tax returns. An investor may be either to claim a credit or itemize as deductions. However taxes paid for stocks in certain qualified retirement accounts cannot be claimed at all. Hence it is wise to hold foreign stocks especially ones that are high dividend payers in taxable accounts.

Many investors may wonder whether to take a deduction or credit for the taxes paid to foreign countries. An article by Rande Spiegelman at Charles Schwab explains the ways to claim foreign taxes paid. From the article:

Deduction or credit?

Once you have verified the amount you’ve paid in foreign taxes, you’ll want to make sure to claim it on your U.S. taxes. The key question is whether to take an itemized deduction for the foreign taxes you paid or a tax credit. Each has its advantages and disadvantages, depending on how you approach your tax filing.

Deduction. If you already make itemized deductions using Schedule A of Form 1040—for example, by deducting mortgage interest or charitable contributions—then taking a deduction for foreign tax payments might be the easier way to go. An itemized deduction can reduce your tax bill by lowering your taxable income.

Credit. Claiming a tax credit for foreign taxes can give you more bang for your buck by providing a dollar-for-dollar reduction of your actual tax bill. Consider that hypothetical $200 in foreign taxes again. A credit could reduce your U.S. tax liability by the full $200, assuming you’re eligible for the entire amount. Taking a tax credit seems like the obvious choice, right?

Unfortunately, the foreign tax credit has a few limitations. First of all, if you pay more than $300 for the year in foreign taxes (or $600 if married and filing jointly) and you want to claim a tax credit, in general you must fill out Form 1116. The form can be complicated, although most mutual funds and brokers include the necessary information in their year-end tax statements.

You could also face a cap on the size of your credit depending on how your foreign income and taxes stack up against your U.S. income and taxes. In short, your foreign tax credit cannot be larger than your total U.S. tax liability.

For example, imagine you earned $1,000 from your foreign investments and paid $350 in taxes overseas. Now let’s assume that the U.S. tax bill on the same income would have been $250. Your maximum credit would be $250.

Source: Lost in Translation, Charles Schwab

The entire article worth a read for investors who are new to international investing.

Here are a few points to remember regarding foreign dividend withholding taxes:

UK does not deduct withholding taxes for US investors. However dividends from UK REITs will be subject to taxes.
Canadian stocks are best held in retirement accounts as dividends are waived for such accounts.
Dividends paid out by Canadian REITs are subject to withholding taxes.
Investors should not hold dividend stocks from countries such as Switzerland, Germany, France, etc. in retirement accounts as all the taxes paid cannot be recovered in any way.
While a few emerging countries like India do not charge taxes on dividends paid out to foreign investors, most others like Chile, Brazil, Colombia, etc. withhold taxes on dividends.

P/E Ratio is Not a Predictor of Future Equity Returns

Posted by David Hunkar on 24 May 2016, 3:21 am

The Price/Earnings ratio (P/E) is sometimes used by investors to identify if equities are cheap or expensive and if getting in when the ratio is lower means higher returns in the future. However an article by Lord Abbett notes that P/E ratio alone is not a good indicator of future market returns.

From the article:

History shows, however, that, in the short run, the P/E ratio has not been a reliable predictor of future market returns. In the past 20 years, for example, the S&P 500 has traded at its current level of approximately 18.7 times trailing earnings twice—once in January 1996 and again in June 2004. What happened over the next five years in each case? The results were very different. Cumulative returns five years out from 1996 reached triple digits; after 2004, returns were negative (see Chart 1).

If P/Es haven’t been reliable predictors of short-term market returns, what about other commonly cited metrics? We’ve looked at a number of them—including the Shiller CAPE ratio, EPS growth, earnings growth, dividend yield, the U.S. Federal Reserve (Fed) model, and U.S. gross domestic product—to assess how well they predict the next 12 months of stock returns. The answer: Not well at all.

Moreover, over the long term, market timing takes a toll on equity fund returns. As a previous blog reported, a Morningstar study in 2014 depicted significant shortfalls over a 10-year period across seven major fund categories caused by poor market timing.

If popular metrics tell us very little about the near-term direction of the stock market, then that should speak to the difficulty of market timing.

Source: Stocks: Put Time on Your Side, Lord Abbett

So the key takeaway for investors is that the P/E ratio alone should not be the deciding factor when making investment decisions. Rather the ratio must be used together with other factors and invest for the long-term.