Bah, Humbug Tax Cuts?

Tuesday, May 27, 2003 | 11:25 AM

Bah, Humbug? The Market typically greets all tax cuts with unfettered joy; Even more so for Wall Street targeted cuts such as capital gains or dividends. Tax rate reductions simply provide that much more manna to feed the beast. “Hey, let the Bond Ghouls worry about deficits” is the typical attitude from equities.

That makes Mr. Market’s muted reaction last week to the $800 Billion plus set of cuts (true cost) enacted last week rather intriguing. One expected a sharp move up off of that news, as the size and scope of the cuts was not baked into the market yet; Perhaps a few issues are worth looking out to figure out why this hasn’t happened – yet:

· Weakening Dollar: As the chart (at right) makes clear, Trade Imbalances lead to a falling dollar. The gentle slide we’ve enjoyed becomes a much greater concern when the dollar starts to get jerked lower in a more violent fashion;
· Burgeoning Deficits: As the WSJ noted last week, the actual cost of the recent tax cut is $810 Billion, not the $350B advertised. The lower number assumes sunset provisions will allow the tax cuts to lapse – something most political observers put as rather unlikely.
· Anemic Economy: Signs of recovery are still AWOL; This week has a lot more data points to look at, as opposed to last weeks quiet economic news.

Perhaps it’s a matter of timing – the cuts came as the market was pausing after a healthy run up. Regardless, the lack of response to giant tax cuts is surprising.

Contrary Indicators, part II ?
Bob Pisani (CNBC) had a fascinating report Friday: Several pension funds are conducting studies regarding lowering their equity exposure as part of a broader asset allocation review. Holding over 21% of all U.S. equities, a pension fund shift in allocation could have broad repercussions for the markets. The $24B Colorado PERA has recently lowered its equity exposure to 45% from 55%; Currently reviewing their asset allocations are the Pennsylvania SERS ($20B), Arizona’s SRP ($17B), and Ohio’s SERS ($6.5).

With Bonds yields at a 45 yr lows, and equities down 50 - 75% after a 3 year Bear Market, perhaps this discussion might have been more timely several years ago. Do the Investment Committees who manage these funds reflect the general population broadly enough to make this a reliable contrary indicator? . . . Its unknown at this time, but its certainly worth watching.

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