Well, it’s not everyday that a piece of sell-side research is on the top of the Drudge Report, so obviously we were pretty curious when we saw the screamer:
DELAYING TAX VOTE COULD CRASH STOCK MARKET’ STARTING 12/15
That headline comes from Paul Bedard at US News who cites this report warning that their could be some negative impact on stocks if the Bush Tax Cuts (.pdf) aren’t fully extended, or if the debate goes on too long.
What’s the idea? It’s not that unreasonable really. It basically boils down to: There will be aggressive capital gains selling ahead of a tax hike, and the failure to extend the cuts will renew the double dip debate.
If we don't get a 'patch' for the Alternative Minimum Tax -- a tax flaw that would ensnare more and more taxpayers if it doesn't get properly indexed -- then that will prompt massive tax hit to 25 million taxpayers. Not good.
The last time it was telegraphed that the capital gains rate would be hiked, in 86, selling picked up noticeably ahead of that. Their clients say they'd have to know by December 15 that the lower cap gains rate will be held, or they will begin to sell.
The connection between consumption and the stock market is robust, and any tax hike on workers would result in lower consumption. Fairly straightforward point there.
What's interesting is that they're not really that bearish. For example, they're pretty optimistic about state budgets.
'Last week we showed the state and local budget situation has improved significantly in
2010 with state and local governments holding an aggregate $50bn surplus in their
operating budgets (3Q, SAAR). The most common kickback we get from clients is that
once the federal aid fades in 2011, the situation will deteriorate again. Some clients have
gone one step further and suggested the forward looking CDS market sees this aid loss
as a major impediment and is pricing in trouble (even before the unfunded liabilities
problems hit). But the facts don't bear this out. We are often told that state and local
governments will lose $135bn of aid starting in 2011. This explains the confusion --
$135bn was allocated for more than two years of aid but has been running at a $60bn
annualized rate ($40bn at the state level, $20bn at the local level). But even this is
overstated as new aid was extended through the first half of 2011. In sum, states will lose
$20bn in the second half of CY 2011 (i.e. one year from now). After cutting spending
by $75bn over the past two years, and with tax revenues now growing, states are
earning their way through the loss of federal aid. For frame of reference, the federal
government provided state governments $30bn of discretionary aid in 2003 and there
was no indication that the loss of federal aid hurt the states. A growing economy helped
states earn through the loss of aid, just as is the case now. '
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