Look out: Capital gains taxes going up
Beware of market declines as the end of the year gets closer.
Now that the election is over, everyone is talking about the elephant in the room. Our deficit and debt levels are outrageous and are causing the rest of the world to question our integrity as a nation. Although the U.S. dollar continues to be the reserve currency of choice for safe haven investors, many people wonder just how safe Treasury bonds can be when the United States continues to rack up trillions of dollars of new debt on what seems like an endless basis.
With President Barack Obama back in office everyone expects some level of higher taxes and lower spending, but no one wants to see the fiscal cliff.
Touted by the media, the fiscal cliff has brought eyeballs to newspapers, financial websites, and business journals, but this coined phrase is not nearly as black and white as it may seem to the passive eye. Some people actually believe that if we avert the fiscal cliff everything will be fine, but many of those people are also forgetting about the elephant in the room. The fiscal cliff is a combination of higher taxes and lower government spending, we all know that, but the negotiations that might help us avert going over that cliff are also entertaining the same two economic headwinds.
In order to reach an agreement to avert the fiscal cliff, our government must reach an agreement on higher taxes and lower spending. These are each material economic headwinds that are coming very soon, whether we go over the fiscal cliff or not. In fact, I will go so far as to tell you that capital gains taxes will be going up next year. That alone should be reason to worry.
Of course, I also believe that other taxes will increase; I know government spending will also decline, but it is the capital gains tax that actually might be most important to us as investors in the stock market. Although buy-and-hold investors are still underwater from where they were in 2007 and even 2000 for that matter, proactive traders or other lucky investors who got in nearer the lows are holding significant capital gains. If capital gains taxes were to revert to normal income taxes the difference in actual after-tax performance would be significant.
For example, for every $100 million invested that is carrying a 30% gain, or $30 million in unrealized profits, the difference between selling at the end of 2012 versus any time afterwards would prevent an effectual doubling up on income tax. In this example, selling in 2012 could save about $6 million in taxes.
Unless you feel the economy is good enough to allow the stock market to continue to increase beyond these multiyear highs, a reasonable investment professional will seriously consider securing gains before the end of the year. Not all investors would do this, but enough investors are worried about it to rationalize lower market levels in the months ahead.
With that understood and in line with my macroeconomic work (The Investment Rate), which is much more dire than merely what the higher taxes-lower spending headwinds might suggest, I continue to advise all people to move their entire 401(k) positions to cash, sell all buy-and-hold investments, and for now we are still close enough to relative market highs to make short positions OK. Right before I wrote this article, I ran a real time filter for longer-term short ideas using the Long-Term Trading Filter Tool on Stock Traders Daily, and four stocks appeared prominent at the list: the Financial Sector SPDR (XLF), International Paper (IP), Cardinal Health (CAH) and PepsiCo (PEP).
If you follow these, use integrated risk controls because the technical patterns of the market tell us a short-term bounce can come. But the declines from longer-term resistance towards longer-term support have already begun, so increases from here will likely be short lived and the economic headwinds that are coming will change the sentiment on the street considerably.
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Its disappointing to see Democrats and Republicans resort to rancor so quickly after promising to work together. Both are wrong, however the President nees to set the example, he needs to stay patient and learn to be wise and not just lash out like a petulant child. The republicans should reach out and when the Prsident does not lead they should then start it rolling with some sort of concession, Maybe if all of sent messages to the both parties telling them to knock it off and get to work??
The market has been down, down, down since the election.
The hedge fund guys may be doing fine, but the rest are not.
Need to MAKE money to pay gains.
15% of nothing is still nothing as noted in the J. Buffett song.
23.8% of nothing is still nothing.
Wow, I guess corporate raiders like Romney might have to pay a little taxes.Let`s have a
collection for him.
This "fiscal cliff" talk is a bunch of baloney. America has been on a fiscal cliff for a very long time and it keeps getting worse. What, all of a sudden it's a big deal? This has been going on for decades. I don't know why everyone is getting worked up about this - they'll just do what they always do - print more money, keep spending what they don't have and kick the can further down the road. No big deal - it's life in America as usual.
As for capital gains taxes going up - who cares? Take your chances in the stock market or put your money safely in the bank earning <1%. Either way we're all screwed so what does it matter?
America will never balance it's budget because that is what America is all about - spending more than you have and living above your means. Just turn on your T.V. to see what I mean - you can have everything now and you don't have to worry about paying for it.
“In the Long Run We Are All Dead”.
The bottom 50% of Americans have been in recession for 30 years, they have next to no capital gains thus any tax increase to cap gains does not hurt them.
The 50 to 25% range have some cap gains but if Obama's first $250,000 of the cap gains staying at a lower rate was passed it would affect them very little.
The 26 to 10% would be affected sorry but you can afford it. Again Obama's first $250,000 of cap gains staying at the lower rate would help ease the pain.
The top 10%....................... kiss my ****.
Have we considered a cap on allowable low capital gains/dividends income taxed at low rate.
Say 250K or 500K per year taxed at 10% and anything over at individual income earned tax rate.
I think only people opposed would be very top executives that have figured out how to structure pay as almost all capital gains or hedge fund manages that do the same.
Most giant money is made on a capital gains tax of only 15%. This is insane unless you are a wall street billionaire with no values. The capital gains tax should be doubled immediately.
Banks, wall street, hedge funds, insurance companies and commodities speculators all have much in common: They produce nothing and take mountains. Also, they own most of our government and have a license to steal. Most of their loot is made under capital gains rates.
Our big banks with trillions in assets have been getting billions in 0% loans. These giant pigs are driving up the price of gas and other essentials by manipulating the commodities market. Goldman Sachs, Morgan Stanly and on other control 80% of the oil futures trades. Every one knows that we are being robbed with our own money and nothing is done to stop it.
Also, our big corporations are making record profits from slave labor and paying low to no taxes. Our government gives them special treaties and tax breaks for outsourcing. We are in bad need of a government to represent the people. If we don't force real change we will shortly be in depression and chaos. We need to force our public owned corporations to pay our minimum wages wherever they go. This would show a little respect for workers and bring back many jobs.
When the CEO of Disney made 600 million in salary he had children working in Haiti for 12 cents an hour. This is the cold blooded evil that will destroy America.
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All hail the bull market, which ended the week with a big rally. But it also is starting to look a little like 1987, which suffered an epic blow-out.
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