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July 23, 2010, 08:00 EST		 Dr. Joe Duarte's Market I.Q.


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The Tax Fight Is Well Under Way
What's Hot Today:

U.S. stock index futures were higher on Friday. Earnings season continues to give stock prices a lift as does the potential for a big fight over tax policy in the U.S.

Today's Economic Calendar



News For Thought

Hungary ditches IMF. According to The Washington Post: "Nearly two years into a program combining International Monetary Fund loans with promises of government belt-tightening, the country's governing Fidesz party has all but called off further cooperation with the agency -- pushing ahead with a disputed bank tax and saying it felt no urgency to resume stalled talks with the IMF." The report adds: "It's the most direct challenge yet to the IMF's call for European governments to curb their high levels of debt. Countries like Greece and Spain are only in the beginning stages of deficit-cutting, while others like Latvia have hewed closely to IMF guidelines since appealing for help early in the recent economic crisis."

Here's the take home message: "the turn of events in Hungary may expose the limits of the process in Europe's topsy-turvy political landscape. The continent's socialist parties have become the chief deficit hawks in several countries -- and in Hungary's case were ousted by a center-right leader, Fidesz Prime Minister Viktor Orban, who wants to impose a stiff tax on banks and to slow down spending cuts. It's a gamble -- that Hungary's economy will be considered strong enough for investors to continue lending money after the IMF program lapses in October. But it's a calculated one, taken with one eye on upcoming elections and another on the fact that the IMF program was in its latter stages anyway."

Rangel will be "tried" by Congress on ethics charges. According to The Washington Post: "A House ethics subcommittee announced Thursday that it found Charles B. Rangel, the powerful Democratic congressman from New York, violated congressional ethics rules and that it will prepare for an ethics trial, likely beginning in September. The committee said it will make the details of his alleged violations public on Thursday of next week." Mr. Rangel was the chief tax writer in the House of Representatives and may eventually be found to have been a tax evader or manipulator. Mr. Rangel is presumed innocent until proven guilty.

Yet, he faces serious charges. According to The Post: "Rangel has been under the ethics committee's microscope since early 2008, regarding reports and evidence that he may have used his House position to benefit his personal financial interests. Two of the most serious probes have focused on Rangel's failure to declare $239,000 to $831,000 in assets on his disclosure forms, and his effort to fundraise for a private center named after him at City College of New York using his congressional letterhead."

The Tax Fight Is Well Under Way
Geithner Pushes Back On Bush Tax Cut Extension
Republicans and some Democrats are pushing for an extension of the Bush tax cuts. Fed Chairman Bernanke gave the notion of extension some tepid support during his House testimony on Friday. But the White House seems to be standing firm against such a move.

Over the last few days, the real fight over taxes has begun to take shape. The White House has given in on keeping the tax rate on dividends at its current rate. But on Thursday, Treasury Secretary Timothy Geithner made it clear that the Bush tax cuts on top earners will expire, and will return to the 39.6 rates from the Clinton years. Those affected will be anyone who makes more than $373, 650 per year, whose rate will jump from the current 35%.

According to the Journal "Mr. Geithner said the White House would allow taxes on top earners to increase in 2011 as part of an effort to bring down the U.S. budget deficit. He said the White House plans to extend expiring tax cuts for middle- and lower-income Americans, and expects to undertake a broader revision of the tax code next year." Another tax cut that will expire will be that on inheritances, also known as the "death tax," another controversial tax related issue for many owners of small and middle sized businesses.

What's interesting is that Republicans seem to have some support from a small, but vocal number of Democrats. Among them are Sen. Kent Conrad (D., N.D.), Sen. Ben Nelson (D., Neb.), and Sen. Evan Bayh (D., Ind.). Bayh is not seeking re-election, so he can pretty much speak his mind these days. But the other two are likely to seek re-election. And since they come from fairly conservative states, their stance makes political sense. But they're not alone. According to The Journal: 'Sen. Joseph Lieberman, a Connecticut independent, added his voice on Thursday, saying through a spokesman that he was "concerned about the impact of allowing the tax cuts to expire during our fragile economic recovery."' Lieberman represents Connecticut, the state where big insurance executives and hedge fund managers live, thus his joining of the chorus also makes sense.

In the House, there is also some action in this front. According to The Journal, Rep. Gerry Connolly (D., Va.) is among those joining the "keep the Bush tax cuts in place for now" chorus. The Journal quoted Connolly as saying that there have been '"lots of conversations going on sotto voce" among House Democrats over whether to extend current tax levels for all earners, not just the middle class."

Here is the bottom line: "All the Bush-era tax cuts are set to expire at the end of this year, meaning Congress must act if it wants to avoid raising taxes across the board. Political strategists said that could give Republicans an edge, since they could essentially hold the entire package hostage unless Democrats agree to extend the cuts for high-income earners."

The fight is just beginning, but the divide is big. According to The Journal: "The administration estimates that allowing tax cuts to expire for upper-income earners would increase U.S. revenue by more than $800 billion over the next 10 years. It also plans to push to reinstate the estate tax to the 2009 level of 45%."

Conclusion

The end game is near. Aside from changing the political direction of the country, the real fight will be about taxes. It always is. And that's where political battles are won or lost.

Obama and the Democrats want higher taxes. The Republicans want lower taxes. Lower taxes usually win unless there is economic strength to offset the higher taxes. The Clinton year tax hikes, no matter what anyone says were not responsible for the balanced budgets of his terms by themselves.

They had lots of help. For one thing, Clinton cut military spending signficantly, as well as moving millions off of the welfare rolls. At the same time the Internet boom was creating jobs by the millions and expanding wealth through investment at a record pace.

If people are making ridiculous amounts of money they don't notice a bigger tax bite. In the current environment, spending cuts won't be popular. And neither will be higher taxes.

That means that without some kind of significant economic recovery, higher taxes for Obama will bring the same result in 2012 that Bush I had in 1992, one term in office.

The markets are currently struggling with this scenario, which is why volatility will likely remain high for the foreseeable future.

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 a detailed trading plan in your pocket. Read Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for All Seasons. Also Available As Kindle Books.

 

Market Moves - Stock Of The Day
SPDR Gold Trust ETF (NYSE: GLD) Fails To Answer Call
The recent rally in the Euro has made it difficult for the SPDR Gold Trust ETF (NYSE: GLD) to rally in the face of a weak dollar.



Chart Courtesy of StockCharts.com


It used to be that a weak dollar led to a rally in gold. But now, it's not so simple as the Euro's recent strength is making the dollar/gold relationship murky.

Gold is a quirky market under normal circumstances. But if you throw in too many variables, it becomes nearly impossible to trade. And that's what's happening at the moment.

Gold had a nice rally for a fairly long period of time with GLD topping out near 122 multiple times over teh April-June period. Since then GLD has broken below its 20 and 50 day moving averages. And the 20-day average is ready to cross below the 50-day, which is a very negative development.

There is clearly a lot of selling pressure in the gold market. And if the dollar regains strength, as we think it may, that would be another reason for gold to stay very quiet.

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