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By Jason Stipp and Jeremy Glaser | 12-20-2012 04:00 PM

5 Gifts We'd Like for Investors

We're only asking for more concrete steps in Europe, a stable tax regime here at home, productive corporate cash deployment, more jobs, and mild inflation.

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Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five. The stock market has actually been pretty good to investors this year, but we won't let that keep us from making a wish list for 2013. Here to offer the rundown on that list is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Happy Holidays, Jason.

Stipp: So what do you have for The Friday Five this week? What gifts do you want to receive in 2013?

Glaser: We want to see gifts from Europe, in the tax world, in corporate cash piles, in jobs, and finally, inflation.

Stipp: I feel like we've gotten a little gift on the European front recently because it hasn't been in the headlines, but that doesn't mean that situation has been resolved over there. What do we need to see next year?

Glaser: The biggest gift we got from Europe this year was from Mario Draghi, who this summer said that he was going to do everything in his power, everything possible, in order to keep the euro together. And this really has soothed investors' fears a lot. There were some worries that maybe the ECB wasn't going to step in, that the euro was going to break up imminently, and this was something that had the markets pretty worried.

But since then, things really have calmed down. And we've seen the beginning of the steps that are going to need to be taken in order to restore competitiveness in the peripheral countries, create some way to have those transfers from some of the stronger countries like Germany to places like Greece in order to keep them going. But more still needs to be done. This is not something that's going to happen overnight. It could take a decade or more before we really see those imbalances corrected.

In Greece, for example, we saw them write down some more bonds, do another bond swap, but more is going to need to be done to get that debt load even remotely manageable if you want to see Greece remain in the eurozone. I think 2013 could be a particularly treacherous year on the political front. We have big elections in Germany, in Italy, and I think those political parties are going to all have to agree that no matter who's in power over the next decade, everyone is committed to keeping the eurozone together.

I think that kind of commitment and seeing more of those concrete steps to really solve some of these issues, would be a huge present for investors and take a huge amount of uncertainty and worry off the table.

Stipp: Back here at home, the wrangling continues over the so-called fiscal cliff, the debt and deficits, and the tax code. We may get a short-term patch here, but that really won't be the gift that keeps on giving if it's only a short-term solution.

Glaser: A really stable tax regime would be a wonderful gift for investors next year.

We've heard from so many people who are just worried about what to do with their portfolios right now, how to think about planning 30-40 years in the future if they have no idea what the tax rates are going to look like, if you are going to be able to take deductions, should you buy a house if the mortgage deduction is potentially on the chopping block--a lot of questions like that.

I think if Congress is able to come up with some amount of tax reform that would give people and investors a really clear picture of exactly what the landscape is going to look like, give them the rules of the game and then let them play the game, … it [would] instill a lot of confidence and it's going to allow people to make really informed decisions instead of just … trying to make educated guesses as to what's going to happen.

It's important to keep those investment considerations first, and possibly those tax consideration second, but they are obviously important, and having those stable rules certainly would be a relief.

Stipp: Despite all the clouds on the horizon this year, and all the uncertainty, consumers have held in pretty well and continue to spend, but someone who's been much more Scrooge-like is corporate America. There is cash building up on the balance sheets there. Is there a possible gift for the economy or for investors in the good deployment of that cash?

Glaser: This has been one of the big stories since the height of the financial crisis. Corporations were scared when they saw their access to financing get cut off somewhat suddenly for some firms. So in response they really shored up their balance sheets.

Now, some of this was absolutely necessary. A lot of companies were undercapitalized. So by going out and maybe raising equity, going on to the debt market (which has been very friendly to corporations over the last few years, particularly), keeping earnings, [corporations have been] really growing that cash pile.

Some of that cash pile is abroad and might be difficult to deploy in the United States, but we've seen these really big cash piles, and management teams just don't really know what to do with them.

I think if we saw some better plans in 2013 for how to handle this excess cash, that would be a real gift for investors. It could be in the form of dividends, it could be share buybacks, it could be investing in high-return businesses, high-return growth opportunities--all those things potentially could be very accretive and something that management teams should consider: Get out of that crisis mode and start thinking about growth again.

Stipp: The employment market has been a mild gift-giver in 2012. What kind of gifts would you like to see on the jobs front next year?

Glaser: I think that we'd all love to see really robust job growth. It's something that may not be in the cards necessarily. There are still a lot of headwinds to employment getting much, much better, but I think there are still opportunities for jobs to be added over 2013.

Bob Johnson has talked a lot about this, but particularly in the construction sector, in residential housing, as the housing market continues to rebound, there's going to be a lot of potential jobs there. We talked about those corporations maybe investing some of that cash. There could be some jobs to be found on that front.

And this is crucial, not only for the recovery to get money into people's hands, to get people working again to bring down that unemployment rate and to bring down the number of workers looking for work, but also it helps to solve some of this long-term unemployed problem. If people have been out of work for six months, a year or two years, it's that much harder to get them reintegrated into the workforce. The sooner that happens, the stronger the competitiveness of the economy is going to be, and that's good for the long term as well.

Stipp: One lump of coal we don't want next year is a higher inflation rate. How important is the gift of tame inflation going to be in 2013?

Glaser: Tame inflation has been incredibly important. When you think about the Federal Reserve's policy, in particular, inflation is a key thing that they are looking at.

They have a dual mandate. The first is that they keep inflation low, and the second is that they are focused on full employment, and because inflation has been so tame, they've really been able to have the focus of their policy efforts on that full employment. You see them continuing with the bond-buying programs, continuing to keep rates extremely low in an effort to stimulate the economy and to get everything back to the potential that the economy could produce.

If inflation rears its ugly head again, they are not going to be able to fulfill those plans. They are going to have to exit out of some of these very low rate interest rate policies probably sooner than they'd want. That could really throttle the recovery; it could potentially slow us down considerably.

I think inflation is something that nobody wants, and hopefully that is not something that people will be finding under the tree in 2013.

Stipp: Jeremy, The Friday Five is always a gift for investors. Thanks for joining me again this week.

Glaser: You're welcome, Jason.

Stipp: Happy Holidays to you. I'm Jason Stipp for Morningstar. Thanks for watching.

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