Luskin makes a case for a 30% stock market correction

  • Thread starter David S Meyers CFP
  • Start date

D

David S Meyers CFP

http://online.wsj.com/article/SB10001424052702304743704577381851218376744.html?mod=googlenews_wsj

Mainly, he argues that if Congress does nothing, then between the
expiration of the 15% dividends (and cap-gains) taxes, the increasing
rates on marginal income due to other expirations of Bush tax cuts, plus
the new ObamaCare tax on investment income, the taxes on dividends
received by the wealthiest will go from 15% to 43.4% -- and then he
argues that the effective after-tax yield on a dividend-paying stock
will go down a lot and therefore the stock price will have to go down
enough to bring that effective after-tax yield back up.

There are several holes in his logic, the biggest of which he
indicates himself - that not all investors are these tax-sensitive
high-income individuals. But he does argue that there are enough
of them and that they are the marginal investors who do set the
prices, that this should have an impact.

It's an interesting thesis, but the case is probably a lot stronger
that we'll have a significant equity market move due to larger
economic factors such as the ongoing European situation. (Just the
other day, Krugman was suggesting that a better solution in Europe
would have been if there were no unified currency and the various
countries could devalue their currencies and inflate their way out
of the crisis. That's dubious, of course, but given the direction
of fiscal policy in our own country, one has to wonder if that's
in our own future, too -- in which case dividend taxes are likely
to be much less the crisis than inflation would be - noting that
inflation has the same effect - lowering "real" yields and therefore
leading investors to require higher payout rates to compensate).
 
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D

dumbstruck

It's an interesting thesis, but the case is probably a lot stronger
that we'll have a significant equity market move due to larger
economic factors such as the ongoing European situation. (Just the
other day, Krugman was suggesting that a better solution in Europe
would have been if there were no unified currency and the various
countries could devalue their currencies and inflate their way out
of the crisis. That's dubious, of course, but given the direction
of fiscal policy in our own country, one has to wonder if that's
in our own future, too -- in which case dividend taxes are likely
to be much less the crisis than inflation would be - noting that
inflation has the same effect - lowering "real" yields and therefore
leading investors to require higher payout rates to compensate).
Dividend stuff is ominous, although there may be some chance of US rules easing. I had almost posted an article on a flood of people renouncing US citizenship for tax reasons. The Lugar primary suggests that conservatives may prefer to bicker rather than win and reform though. Maybe the only low tax investment will turn out to be flipping houses with whatever holding period where cap gains are waived (or does that trigger amt?).

India and Brazil are also sabotaging their economies natural vitality with populist rules, but other emerging economies look in promising shape. I think the unraveling of Europe is priced in, although as expected setbacks happen there will be temporary fears of even worse that will hit markets temporaily.

Surely Europe would do better by some spltting of currencies and central bank policies. Whichever Euro countries want to stick together need even stronger ties such as joint issued bonds, or else perverse incentives pull them apart.

John Lukacs said that Hitlers insight was that countries of the world gravitated to a hybrid of nationalsm and socialism starting in WW1, when workers united with their local aristocrats rather than cross border class brothers. Lenin's Russia was a rare temporary exception, until Stalin (and later Commies) effectively revived strong nationalism. In todays world of welfare states Europe tried to be the exception where their socialism spread beyond national boundaries, but under stress more localized nationalism revives and cries out for painful realignment.
 
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T

Tad Borek

argues that the effective after-tax yield on a dividend-paying stock
will go down a lot and therefore the stock price will have to go down
enough to bring that effective after-tax yield back up.
Well it is on the opinion page of the WSJ, a spot that is somewhat
notorious for having an political point of view. It looks more like a
talking point for extending the 15% rate than an investing theme.

I wonder if Mr. Luskin was watching high-dividend stocks and stocks
generally when the QDI and 0%/15% gains rate was first introduced. I
was, and there have been some more comprehensive studies of them since.
They didn't jump in price in the way his theory suggests they would
have, and it's easy to come up with a half-dozen reasons why that was
the case (David you listed many of them).

Taxes can definitely affect the pricing of an investment but not in this
way - there are too many investors not affected by it, and companies can
respond. When that isn't the case, it's more of an issue. One area that
comes to mind is energy trusts or MLPs, where tax treatment is a big
motivation for holding them. Munis, possibly. Demand should drop if you
strip away the tax preference. But even for these, you can see other
investors stepping in well before the pricing adjusted to that implied
for a high-bracket, taxable, US investor.

-Tad
 

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