Stock to get crushed in 2013

[The Rabbi]

I just finished a Ned Davis overview of the 2013 fiscal cliff. Tax increases and spending cuts will detract ~2.4% of GDP next year. So it is likely something will get done.

By something getting done you mean COmgress and the President will rescind the tax increases? I dont think so. If they can get elected then there is no reason to do so. The only chance will be Obamacare, all of it, getting tossed by the Supreme Court in June.

 

[Toro]

I'm worried about a fiscal contraction more than a hike on dividends. I think Luskin is almost certainly exaggerating for the following reasons.

First, the dividend discount model is mostly theoretical. I have listened to and read literally thousands of Wall Street reports and dividends as a valuation tool is minimal if nonexistent, unless they are stocks purchased primarily for dividends, ie utilities. Other valuation tools are far more important, such as multiples of earnings, cash flow, sales and even book value.

Second, half of all shares in America are held in tax free accounts. A tax increase won't matter to them.

Third, cash is distributed to shareholders mainly through stock buybacks. If taxes on dividends become too high, corporations will decrease dividend payments and increase stock buybacks.

There have been two other times when dividend tax rates have been raised, 1936 and 1954. Stocks continued to rise for the next 1-2 years before falling due to a general recession. In the 90s, when dividend taxes rose with general income taxes, stocks continued to rise.

Fifth, the dividend payout ratio for companies is at 30%, an all time low.

Sixth, cash on corporate balance sheets is at $2 trillion, an all time high also. Over $1 trillion is in the US. Both this and the prior point can support stocks.

Seventh, Treasury Yields are extremely low, and 40% of all large stocks pay a dividend yield above the T bond yield. It's unlikely stocks will be sold en masse to buy Treasuries.

I do think there is a risk of one more big leg down. And sclerosis in DC may be the catalyst. But, even though it would be a negative for stocks, it is highly unlikely to be caused by a hike in dividend tax rated.

 

[The Rabbi]

All excellent points.
But when the tax rate on diividends was lowered under Bush not only did more companies pay out dividends but the market in general went up. Further, with rising inflation Treasury yields will need to increase. And Luskin makes the point that higher taxes will tend to drive Treasuries up anyway.
He might be wrong about timing and extent, but I think the basic case is sound.

 

[NYcarbineer]

European stocks were up on the news of the French election, an outcome that was thought to be bad news.

Stocks going up on bad news is very bullish.

 

[zonly1]

European stocks were up on the news of the French election, an outcome that was thought to be bad news.

Stocks going up on bad news is very bullish.

and your pt is that liberalism is good for instant gratification. news is coming from the land of moronica...carbuncle on vacation again

 

[uscitizen]

The world ends this December, why worry about 2013?

 

[iamwhatiseem]

In all seriousness, predicting a crash in the near future on today's market is not exactly hard to do.
It is a matter of when, not if.
I have to hand it to the bubble builders...I never expected it to last this long. I believed it was going to crash last year. Volume is low, I suspect the only ones still in the market are clueless 401k holders, IRA's and then of course the sharks that are building/maintaining the bubble.