Payroll Tax Hike: Apple, Best Buy, Amazon try to ride it out

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Well, on Friday my first check of 2013 arrived. It took me a couple of minutes to take in how much smaller it was. I checked, doubled checked and then I realized: it's the payroll tax hike.

To bring you folks up to speed, the payroll tax hike comes as a part of the fiscal cliff deal last week.  The deal allowed the 2010 reduction in social security withholding to expire, meaning that with the start of 2013 more is taken out for every single person having social security deducted from their paycheck. An average worker saw $32 more withdrawn from their check on Friday and a higher wage worker had an average of $83 more withdrawn from their check.

It sounds like a small amount, I know, but you have to think of it in the aggregate. Taken together, there are 154.4 million people working in the United States. So multiply that average number and you'll see that in 2013 there will be $4,940,800,000 fewer dollars in paychecks every two weeks. For the year, that becomes a staggering $128,460,800,000. It's a shock to the economy to have that money no longer in circulation.

It hurts in two ways. First, of course, the average citizen has fewer dollars to spend. That means businesses will make fewer sales and make less money. For you and I, that means the stocks we buy will be worth less. Second, that means fewer dollars to actually buy equities. That means there will be less demand for the equities we already have and therefore less pressure forcing them higher. Double ouch.

My guess is that the main impact will be on some of the consumer stocks. Not the basics. People are still going to buy soap, and cereal and such. Here's a few that I think will feel some downward pressure on their prices as 2013 goes along.

Apple (NASDAQ: AAPL): Apple makes great gear. They truly do. But the firm's stock has already seen significant decline this year, dropping from a high of $705.07 to Friday's close of $520.30. That's a drop of more than 25% since September. Having fewer disposable dollars in the economy on a regular basis is only going to bring down demand for their good, but pricey, devices. Expect to see Apple's stock go down even more, perhaps as low as $450.   What can Apple do to avoid this?  They might already be doing it if the rumors about a $100 iPhone are true.  Apple's trying to defend market share against Android by finally going cheaper on the price.  If it happens, look for the lower cost to bring growth to Apple's beginning-to-stall user base and therefore higher profits despite lower margins.

Best Buy (NYSE: BBY): Best Buy is a fine store caught in a rough situation. They face considerable pressure from other retailers, but are aggressively trying to establish their niche as the place for tablet computers. Unfortunately, the stuff they sell is all higher-cost. In short, they sell items that people can live without. Over the last year, Best Buy's stock has dropped from $24.76 to $14.21. Now it will face ever further downward pressure as available dollars tail off. I think it's a fine firm but still, one on the wrong side in the short-term.  The are rumors that Richard Schulze will lead a group buying out the shares to take the company private again.  If so, a play now, while it's down, could lead to some quick profits.  Otherwise, watch them continue to struggle until the economy really starts humming again.

Amazon (NASDAQ: AMZN): Amazon is the classic disposable income stock. There are very few staples people purchase from Amazon. Even a shrinkage of the average order of 10% could place a serious hit on Amazon.  CEO Jeff Bezos is one sharp guy, but a lessening of demand for the firm's stock is likely. The smartest move Amazon can make is committing to its content providing such as Amazon Prime for streaming movies and kindle books.  Watch for the firm to put a real push into products that cost them no unit costs to handle, ship or provide.  That's how Amazon can get through a tighter market.

Those are three that I think will suffer from lowered disposable incomes. Here are two that I think will hold value very well.

General Mills (NYSE: GIS): General Mills is another one of those boring stocks I've mentioned in the past. They'll never be flashy … no one's every going to go nuts about them on cable television. In a difficult time, investors shouldn't want flashy. GIS is a stock that avoids downturns fairly well.  Higher raw materials costs have challenged the firm but still, in December it announced that year-over-year earnings were up 22% in Q2. The foods and other grocery products that General Mills provides aren't going to go away. People are still going to wake up and eat cereal and such. The stock is slightly up for the last year and I expect that to continue.

American Electric Power (NYSE: AEP): Households, no matter how tight money gets, are going to keep the lights on. I've liked American Electric Power for a long time. AEP and its subsidiaries provide power through a swath of the country from Louisiana, up through Tennessee and Ohio to Virginia. The interesting thing about AEP is that they have to apply to Commissions to raise their rates.  They're doing that, likely to fend off some potentially harder times.  The firm has also tried to get buy-in on solar projects to expand its generating capacity.  The firm's stock had some ups and downs. In the last year it's been in a range of $36.97 – $45.41. I think it'll do fine.

Hmm. Went on longer than I thought this time. Well, it's an important topic, how to keep your money safe. Just know that I'm with you on the paycheck shock these days. Good luck!

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