The New Taxation

November 9, 2009

Good morning. It was a very strong week for the market last week, with the SPY making up most of the previous week’s sell-off. The SPY closed at 107.13, up 3.4% from the previous week’s close of 103.56 and almost equal to the 108.08 close of the week before. Even more of interest is the dramatic drop in the VIX last week, down to 24.19 from the last Friday close of 30.69, or a whopping 27%. Not only is the market advancing, but also the collective “worry” about market risk is plummeting. In fact, the volatility, or so-called “worry” levels, is approaching a level where we may consider some long premium positions. As to why the market is hanging in here, and in fact approaching the top tick of the S&P future of 1099 a couple of weeks ago, it is some combination of stimulus having some effect, dollar going down (and the new dynamic that a falling dollar and rising raw material prices are somehow good for the market), and the growing realization that a lot of companies have serious pricing power even in bad economic times (both in pricing of products and control over labor costs).

We heard a lot last week, even with the employment numbers coming in worse than expected, about increasing labor efficiency driving the market and ultimately the recovery. I guess if your world only revolves around the health of the 200 or so largest companies that would be a good thing. Add to that the idea that in this situation we should not only let, but also encourage, mergers among competitors to increase this concentrated power even more (such as the Stanley Tool/Black and Decker merger last week costing an estimated 5,000 jobs). Funny, but when I learned about labor efficiency labor was a co-beneficiary, not a victim. In this new world we love it when companies combine to increase market power, lay off people, and squeeze more out of the remaining employees. As long as it is not one of us, those people are always the “fat,” and everyone knows it is good to trim the “fat.” I wonder what percentage of people that go to work every day (except maybe governmental workers), do something when they get there, actually maybe stress about doing a good job, consider themselves part of the “fat.” More about that maybe next week.

What I really wanted to talk about this week, before getting sidetracked by the new dichotomy between perceived market health vs. economic health, is taxation policy vs. the current public policy. The center example of this “new taxation” is the behavior of the large banks over the last several weeks, especially in light of the recent passage of the Credit Card Act. For those who do not remember, the Credit Card Act was signed into law by our illustrious President on May 22, 2009. The bill banned certain practices, and after intense lobbying extending the date, gave credit card holders until Feb. 1 of next year to implement all the changes. It is of note, however, that none of these changes was an out and out usury law prohibiting outrageous interest rates, mostly it dealt with notifications and rules on how the “mostly banks” could go about their incredible gouging. As most of the cynical among us might have predicted, the credit card holders have been in a furious rush to do exactly what the bill prohibits before next Feb, to the point where Congress is attempting to step in again. In other words, the bill will end up being almost worthless, as anyone who has had his or her rates recently raised without reason can attest.

Okay, what is the point? The point is that how many governmental agendas are presently competing with each other. Maybe, just maybe, there are some members of Congress who care about their constituency enough to not want to see the relentless gouging of those caught with credit card debt. If you are Tim Geithner or some companion architect of the absurd bail-out of companies with taxpayer money, all you care about is whether these companies can pay back in a timely manner so your correction policy will look like the New Deal and you like Roosevelt (and most of the shallow thinkers will forget your roles in causing the mess in the first place). In addition, we have a President who must be acutely aware (or has advisors to tell him) that the government is beyond broke and raising taxes into the mid term elections would be suicidal to his future political agenda and place in history. So how can we get around this little mess in a way where we can all be heroes? Let’s redefine taxation in light of the fact that we are now owners of some places large enough to steal money on a scale that can only be defined as taxation.

What am I talking about? Have I finally gone mad trying to keep up with the absurd leadership we have on all levels? Or are they really smarter than we give them credit for, but in a sneaky and unscrupulous manner? A few statistics (just a few). The average household in this country makes roughly $50,000, and I am going to assume that the household we are talking about has four people (you remember, husband, smiling wife, well behaved son and daughter). Despite tremendous complaints about the “official” federal tax levy (not including Social Security and Medicare, and surely not including the absurd State tax amounts) the actual federal tax levy is roughly $966 for this average household. That’s right, even though all the taxes paid by this hypothetical family probably approach $20,000 (property, sales, etc.), the actual Federal Income Tax after all deductions is probably less than $1,000. That same family (78% of American households) probably has a credit card or cards. The average credit card debt per household at the end of 2008 was $10,679, ($8,329 if you count all households). If you “allow” your partners (big Banks given government bailouts) to increase their rates an average of 23% (the number cited by a Pew Charitable Trust study for increases between Dec. 2008 and July 2009) you essentially increase their “tax” on those same households significantly (plus whatever you can steal in increased fees and whatever). Since credit card rates were probably 18% to start with for many, the 23% increase means an additional charge of 4-5%, or close to $500 per year. Is this anything else but a tax increase through our governments new “partners”, at least until the debt is paid off? If it works, and it looks like it could, everyone in the administration is a hero, bail out to save the world, everyone paid back, bonuses to the sleaze bags who caused the problem and make political contributions, and no “real” tax increase. Can we be collectively that stupid? Of course, if anyone mentioned a Federal tax increase in the range of 50% he or she would never be elected to rodent control, but this little end run, genius. Even the bankers, who will bear the brunt of some public and Congressional heat, can suck it up for the money they are making.

So, what about the market, and how do we profit? I think you need to lean a little long, while keeping the downside protection. The S&P level of 1100 (1099 reached a couple of weeks ago) is still intact, but maybe with another test coming soon. I still have an issue with the falling dollar/rising stock model taken to an extreme, and am beginning to feel that a trading range might be the scenario for a while. The falling VIX certainly means that we should be looking for some long premium positions, and maybe an expiration back spread if we have the nerve. I still have a problem, given the size of the stimulus and the inevitable give back someday; in judging whether the feeble recovery we are seeing is “good enough” or “large enough” given the size of the push. My instinct tells me it is not anywhere near what we should be seeing, but the market (or the amount of money heading for the market for various reasons) seems to be disagreeing with me, at least for the moment. I will certainly try to stay ahead of it.