A Great Idea That Might Never Fly

by Mitchell Clark, B. Comm.

A lot of smaller capitalized companies are just reporting their 2008 fourth quarter and year-end financial results, and there’s a common theme with a lot of them. Guidance is getting worse for the first half and for fiscal year 2009. This is no surprise by the way, but it does make the prospects for a recovery in stock prices seem less probable, because earnings continue to decelerate.

One of the reasons why small-cap earnings are so vulnerable in this particular recession is still the continuing credit crunch in the small business landscape. It’s an unusual circumstance, because borrowing costs are so low. The reality out there is that bank lending institutions are still very reticent to lend businesses money. Revolving credit facilities are much more difficult now for businesses. It isn’t as easy to borrow money to purchase a new piece of equipment or to cover a payroll. When the money dries up, small companies are particularly vulnerable.

The stock market has been bouncing back lately, largely because it was oversold. There were economic data that surpassed consensus estimates, but that doesn’t mean that things have turned around. I think the S&P 500 Index looks vulnerable for another 10% drop from current levels; retesting its latest low.

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The price of oil has been acting predictably in recent weeks, trading on the movement in stock prices. Surprising to me is the lack of action in gold prices. Speculators have let the spot price of gold trickle back down to around the $900.00-per-ounce level and I think this undervalues the commodity. Not even the risk of bankruptcy by automakers has moved gold prices.

All this action leads me to believe that investors are becoming frozen again because of the uncertainty in the marketplace. There is an enormous amount of money still sitting on the sidelines, but it isn’t being put to work to the degree that you think it would with stock prices down like they are. There is still a lot of fear in capital markets and this isn’t going to change anytime soon.

As I wrote previously, I’m a strong advocate of substantial restructuring by industry to get things turned around as quickly as possible. Enough with the bailouts. Government can be there to regulate industries and help workers as needed. It’s time now for corporations to be accountable for their operations. I would even go so far as to advocate a major restructuring in tax policy for corporations and individuals as a way to jump-start the economy. Clearly, super-reduced interest rates aren’t working.

It might never be politically correct, but a flat tax would go a long way to leveling the playing field for individuals and represent just the kind of restructuring that the economy needs right now. I think a flat tax for all income, with little to no deductions, is a great idea. In addition, government could further tax consumption, but at the same time lessen the tax burden on savings and investment. I don’t think this kind of policy would ever fly, but I think it’s just the kind of bold action we need now to get this ship turned around. Clearly, monetary policy isn’t working fast enough, if at all.