The Homa Files

Reminder: I made my election predictions on November 3, 2008. OK, McCain didn’t eek out a win. But, I also predicted:

“If Obama wins, and the Dems fail to reach a 60 in the Senate, the Dow will close Wednesday below 9,000 — will hit 7,500 before the end of the year — will fight back to around 10,000 — and will hover around 10,000 for a long, long time.”

I didn’t foresee the election day rally, so the steep day-after drop didn’t quite push the market below 9,000.  But, in the week since, it has gone down 14%.

Note: My prediction stands that if the Dems win Georgia, Alaska, and Minnesota to get to 60 Senate seats, the market will drop 1,000 points faster than you can click your fingers.

Keep reading …

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Excerpted from WSJ, “A Barack Market”, November 13, 2008 

The voters may be full of hope about the looming Obama Presidency, but so far investors aren’t. No President-elect in the postwar era has been greeted with a more audible hiss from Wall Street. The Dow has lost 1,342 points, or about 14%, since the election

Much of this is due to hedge fund deleveraging, as well as dreadful corporate earnings reports and pessimism that the recession will be deeper than many had hoped. But there’s little doubt that uncertainty, and some fear, over Barack Obama’s economic agenda is also contributing to the downdraft.

The substance of what Mr. Obama has promised for the economy is bearish for stocks. The threat of higher tax rates, especially on capital gains and dividends, now may be getting priced into the market. Add that to investor doubts about Democratic policies on unions, health care and trade — and no wonder stocks are falling. Lower stock prices in turn reduce household net worth, thus slamming consumer confidence and contributing to what appears to be a consumer spending strike.

If Mr. Obama wants to reassure markets, he could announce that he won’t be raising taxes for the foreseeable future. This no-tax-hike declaration is a “stimulus” that would cost the U.S. Treasury nothing.

In the current market, there won’t be many capital gains and few companies will have surplus earnings to pay out in dividends. A higher tax rate on zero gains yields zero revenue, so what’s the point of raising rates?

What markets want to see from Mr. Obama is a sense that the seriousness of this downturn is causing him to rethink the worst of his antigrowth policies.

Full editorial:
http://online.wsj.com/article/SB122653625916922633.html

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Ken’s Take:

The editorial  advises the President-elect to reassure markets by announcing that he won’t be raising taxes for the foreseeable future.

I suggest a bolder stroke with more upside potential: reduce the capital gains rate to ZERO  for stocks bought between, say,  November 15, 2008 and December 31, 2010 that are held at least 12 months or until January 1, 2010 — whichever is longer.

This move would radically tilt the risk-return balance by eliminating the looming capital gains rate risk, and by increasing the after-tax rates of return for investors who step-up now when we need them. It would do more than reassure the markets.  It would pull cash in from the sidelines. Perhaps, a lot of cash.

And maybe, if the impact is grand enough, the program would be extended beyond 2010.  Imagine that.

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This entry was posted on November 14, 2008 at 7:59 am and is filed under Stock Market, Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.