Tags: Luskin | Stocks | Plunge

Trend Macrolytics CEO Luskin: Stocks May Plunge 30% Next Year

Monday, 07 May 2012 07:05 AM

Trend Macrolytics CEO Donald Luskin says unless current law is amended before year-end, the stock market has to fall by at least 30 in 2013.

The United States is headed toward the edge of a "fiscal cliff" at the end of the year, as the Bush tax cuts are set to expire while automatic spending cuts are set to kick in, a combination that could suck hundreds of billions of dollars out of the economy.

"It's all about how dividends are taxed — and the reality that we are facing the biggest single hike in dividend tax rates in history," Luskin writes in The Wall Street Journal. "The market sets the price of a dividend-paying stock so that it will pay the after-tax yield required to attract capital."

"When the tax rate on dividends goes up, the after-tax yield necessarily goes down — to restore the after-tax yield to its required level, the stock price has to fall."

Editor's Note: Sept. 18 Cover-Up Is a Final Turning for America

After year-end, under current law, the top dividend tax rate will rise to 43.4 percent from 15 percent, Luskin explains.

“That's not only because the temporary low 15 percent rate granted under the 2001 Bush tax cuts will revert to the prior rate of 39.6 percent,” he says. “In addition, a provision of ObamaCare slaps a 3.8 percent surtax on all forms of investment income, including dividends — the resulting total is 43.4 percent.”

So on January 1, an investor won't keep $8.50 of a $10.00 dividend but will pay a 43.4 percent tax, keeping only $5.66. Suddenly, a stock that yielded 8.5 percent now yields only 5.66 percent.

“If there's a bargaining failure and the scheduled tax hikes on dividends aren't stopped, we'll be sorry we're spending so much political energy now debating about the ‘1 percent’ and their supposed privileges,” says Luskin.

“It's the 30 percent down in the stock market we ought be worrying about.”

Other experts have said the cliff represents a buying opportunity.

"We do not see the doomsday scenario playing out: policymakers are unlikely to drive the U.S. economy off the fiscal cliff," says JPMorgan Chase economist Michael Feroli, according to CNBC.

"Nonetheless, fiscal policy will continue to be a drag on the economy next year."

Other see a buying opportunity.

"We anticipate the market will show a smaller-amplitude reaction to the political drama developing around the U.S. fiscal cliff," says Thomas J. Lee, JPMorgan's chief market strategist, CNBC adds.

"The fiscal cliff is enormous...but there is sufficient common ground to expect much of this to be delayed."

Editor's Note: Sept. 18 Cover-Up Is a Final Turning for America

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Monday, 07 May 2012 07:05 AM
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