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As the election nears, and just as we predicted here on
July 7th, the Obama administration is starting to backpedal on its expected
tax policy, just as the Federal Reserve is starting to re-explore ways
to reboot the flailing recovery.
It's probably not a coincidence that as the polls are starting to show that Mr.
Obama's support among independents is falling rapidly, Treasury Secretary Geithner
told CNBC's Larry Kudlow, the low tax cheerleader of the world, in an on camera
interview, that capital gain and dividend taxes aren't going up. To us, it seems
as if that's the first salvo, especially when the market rallied in a big way
after Dallas Federal Reserve Bank Richard Fischer, also in a speech noted that
Congressional policy is leading to uncertainty for businesses who want to create
jobs.
Yup, pandering season is here, and that means that anything is now possible as
the handout spigot is about to open. The question that should be uppermost for
investors is "what's the catch?" The Obama adminstration has done little to earn
the trust of the business community or anyone who actually works for a living
and pays the taxes from which their salaries are derived. So any potential handouts,
or backing off in policy, is likely to come with very large conditions attached.
It's those conditions that will rule the day.
And here's the catch. If Congress and the president start to backpedal, and tax
hikes are delayed, say maybe for a year or two, the economy could get a boost.
But if there is no movement from the Democrats along this front, beyond the capital
gains action described by Geithner, the potential for a persistently slow economy
is likely to remain in place, as well as the riks of the famed double dip. The
Federal Reserve gets that concept, and is becoming a bit more active. According
to The Washington Post: "With Congress tied in political knots over whether to
take further action to boost the economy, Fed leaders are weighing modest steps
that could offer more support for economic activity while their target for short-term
interest rates is already near zero. They are still resistant to calls to pull
out their big guns -- massive infusions of cash, such as those undertaken during
the depths of the financial crisis -- but would reconsider if conditions worsen."
In fact, according to the Post: "weak economic reports, the debt crisis in Europe
and faltering financial markets have led them to conclude that the risks of the
recovery losing steam have increased. After months of focusing on how to exit
from extreme efforts to support the economy, they are looking at tools that might
strengthen growth." In other words, the Fed is sending the message to Congress
and the President that if they don't get their act together, the Federal Reserve
is ready to take the initiative and in a sense grab some power away from Congress
and the President by becoming more aggressive in its quest to keep the economy
from collapsing.
One Federal Reserve branch president, Dallas' Richard Fisher told CNBC on Wednesday
that "Congress and the government have inhibited growth by creating uncertainty
about business costs." According to the report: "Questions about healthcare expenses,
for instance, have kept businesses from hiring new workers, said Fisher, because
executives don't know how much it will cost them. Businesses also have concerns
about other costs, such as whether a VAT [value-added tax] will be imposed."
But Fisher thinks that the central bank has "done enough" already and is not
proposing lowering interest rates or further dramatic action.
On the other side, others in the Fed are willing to be more aggressive. The Washington
Post reported the following: '"If the economic situation changes, policy should
react," James Bullard, president of the Federal Reserve Bank of St. Louis, said
in an interview Wednesday. "You shouldn't sit on your hands. . . . I think there's
plenty more we could do if we had to."'
The Fed, according to the report, is willing to do some interesting things, such
as being more specific in its language as well as considering a "cut the interest
rate paid to banks for extra money they keep on reserve at the Fed from 0.25
percent to zero. That would give banks slightly more incentive to lend money
to customers rather than park it at the Fed, although it also could cause technical
problems in the functioning of certain credit markets." The Fed would also consider
buying "enough new mortgage securities to replace those on the Fed balance sheet
that are paid off as people take advantage of low interest rates to refinance."
Conclusion
It's pandering season, and the White House seems to have started its bid to keep
the Democrat majority in Congress as Mr. Geithner has given Wall Street something,
the promise that capital gain taxes won't rise further.
But, that's not going to be enough. Most people need jobs at this point, not
capital gains, since many have tapped into investment money and 401-k plans just
to live day to day. That's why the Fed, who can see that the economy is starting
to buckle is getting more aggressive.
In fact, what we're seeing now is the beginning of an important divide, the Fed
and perhaps the Treasury may be starting to move against the political machine
in The White House and Congress.
That's significant, especially since the election is about five months away.
If the economic data continues to show that weakness is increasing, expect the
Fed to become very active. If the White House doesn't get it, there could be
some major political consequences this fall.
We'll be on Twitter
some time today before the market closes with some updated comments.
Know when to sell and how to make money when the market falls. Get
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Chart Courtesy of StockCharts.com
The S & P 500 SPDR ETF (NYSE: SPY) rallied nicely on
Wednesday, but the Russell 2000 Trust ETF (NYSE: IWM) moved
a whole lot less.
Chart Courtesy of StockCharts.com
Wednesday's rally was nice, unless you were short the market
and got stopped out. In fact, a whole lot of what happened
on Wednesday was likely to be due to short covering. And
that's no suprrise, the market had fallen for nine of the
last ten days prior to the bounce.
Still, we did get a bounce, and most of our short positions were taken out, so
we are mostly in cash at this point, which is fine, especially if this is the
start of a good rally that lasts several weeks.
The S & P 500 is still below its 20, 50, and 200-day moving averages, which
are all trending down, a negative. That means that this market has some work
to do. Usually it takes about 3-5 days after the first rally to get a follow
through day, which confirms that the trend has reversed.
That means that we watch, we look closely at the technical developments, and
we make our shopping list, as we wait for next week's developments which will
tell us more about what the next few weeks may hold.
Follow Dr. Duarte on Twitter |
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