US Federal receipts.

Interesting chart from Zero Hedge showing past and projected individual and corporate federal receipts. Looks like either the economy is going to boom, or individual taxes are going up, A LOT.



Raising taxes (or interest rates for that matter) will dampen any incipient recovery. Well, looks like we're already headed there. From WSJ: Small Business Faces Big Bite.

The House bill would place new taxes on the wealthiest people to help expand insurance coverage to the nation's 46 million uninsured people. The legislation calls for a 5.4% surtax on those with annual gross incomes exceeding $1 million.

Households with annual income between $500,000 a year and $1 million would be hit with a 1.5% surtax, and those earning between $350,000 and $500,000 would face a 1% surtax. Those rates could eventually increase to 3% and 2%, respectively, if the government doesn't achieve certain health-cost savings.

Greg Mankiw reports that once sales tax is factored in, the top earner would be facing a marginal tax rate of 55%.

Why is this important for markets? The bull market of the 1980s and 1990s coincided with tax reforms and tax cuts. Taxes, instead of being a tailwind, will actually hamper profitability and economic growth going forward. (I'm not suggesting that raising taxes is a wrong idea. I realize higher taxes is the price we have to pay for the excesses of the past few years.) Taxes are a very important determinant of market sentiment and the economy. Apart from healthcare, the cost of cap and trade is effectively a tax. Corporate taxes should be headed higher as well. (For instance, by taxing employer health insurance, removing the deduction of expenses from foreign operations, etc). This Economist article has more.

I don't think the markets have priced this in yet. Definitely not great news going forward.

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Market commentary by Citigroup’s chief strategist.

I saw this interesting interview of Tobias Levkovich on CNBC last week. He shared some good points:

• Market Valuations: His price target is 1550(S&P 500), based on valuations, sentiment, and implied earnings growth. Predicts flattish earnings(~$86) in 2008 and 2009 for S&P500. Energy and materials will underperform in 2009 (because of declines in the commodities sector). This would be offset by outperformance in the financials and the consumer discretionary. Refused to discuss specific valuations. Valuations need to be discussed based on risk premiums, historical context, and bond yields; and not in a vacuum. Pointed out that homebuilders looked deceptively cheap in 2005.
  
  
• Commodities: Cyclical conditions will effect the commodity trade severely. To put it simply, commodity prices do go down in a recession. (Note: I discuss this in my post here). A similar thing happened during the inflationary 1970s recession. Agriculture, fertilizers and the chemicals look like the dot-coms.
  
  
• Savings rate: This is going to get worse in the next 5-10 years because of demographics. Retiring baby boomers would be using their savings. (This would be worldwide.) Not really a problem because wealth is growing enormously. Implication: Savings rate isn't a useful metric anymore. This could potentially have negative implications for the markets?
  


• Elections: Current year would be the first time since 1928 that sitting President or VP isn't up for reelection. So the administration doesn't have the motivation for election year stimulus that normally happens. Conclusion: Historically, election years have been good for the stock markets. May not be true this year.



• Asia: Asian companies have really low return on equities (ROEs), even though asset turnover is at a 16 year high. Whenever this turnover goes low, the ROEs will collapse. Don't want to be there when that happens. Not sure where this data point came from, but this is interesting if true. (Note: To understand the DuPont ROE breakdown, refer to this entry)
  


• Real estate: Real Estate bubble and appreciation are far worse outside the US. So you cannot point to the US selectively. I agree. Except the problems in the US are not just about house price appreciation, but caused primarily due to negligent and fraudulent lending practices.



• Post-elections: Critical issue for the post election year is this: are we moving towards more protectionism? Will we abrogate on tax treaties? What about tariffs/ protection quotas? Could be very devastating for markets. Asserts that taxes will go up across the board regardless of who gets elected. This is because they will look to fix AMT before they extend the Bush tax cuts.



• Markets: He talked of a W shaped pattern in the markets. Things will get worse before they get better. The worsening credit conditions effect the economy with a 9 month lag. Hence mid-year to year end, we'll still have problems and will see a slowdown in the industrial side of the economy. Earning estimates for the year end are still too high. Note that there has been some chatter about a double-dip recession. See this and this. Double dip is essentially a W pattern.



• Industrial sector: Talked about an industrial sector slowdown. Even though people talk of resilience in the US exports and the BRICs, two thirds of the “international” for US companies is in Europe. This could hence slow down.

Disclosure: None.

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