Notes From Underground: Markets Still On Holiday and Equities Party On

Many nations were still out today on banking holidays. The equity markets resumed their rally as U.S. investors clamored for stocks, especially for the high-quality, high-dividend yielders. Investors were caught off guard by the tax compromise between Obama and the Republicans. In the third quarter, many investors sold off the high-dividend-paying stocks as there was legitimate fear that Obama’s team would prevail in increasing the tax on dividends to 35-plus percent. When the Republicans gained control of the House and Obama looked for compromise with the new majority, the Pelosi crowd was forced to swallow their disdain for all things capital and fall in line with a chastened Obama economic team.

There has been a two-month effort to rebuild stock portfolios as the yield on U.S. Treasuries is just not enticing enough. The need for yield is forcing investors to buy quality dividend yields, providing the impetus for the success for Bernanke’s portfolio balance channel. Readers of NOTES FROM UNDERGROUND are aware that I am a big proponent of dividends, so much so that I fervently believe that the Obama administration made a big mistake by not pushing for a ZERO tax rate on dividends for the next two years.

The White House complains that U.S. corporations are hoarding too much cash. Well, a zero tax rate on dividends would cause shareholders to push for a major dividend distribution policy. The result would be an enormous stimulus as shareholders would have a large pool of ready cash. What the policy makers in Washington fail to realize is that many of these shareholders are the same pensioners and retirees that have been so badly abused by the FED‘s effort to lower interest rates to bail out WALL STREET.

I also believe that Wall Street disdains dividends as the M&A players love it when corporates are cash rich as it results in buyouts for the aggrandizement of egotistical CEO‘s–and let’s not forget the use of cash for share buybacks. Also, PRIVATE EQUITY groups are always searching to take cash-rich firms private so as to be able to grab the cash and issue DEBT. Good for the few but job destructive for the many. Just think of the positive benefits of a ZERO TAX RATE DIVIDEND POLICY!

As I was watching the global DEBT markets today, the 2-year note markets seemed so badly mispriced. The U.S. 2-YEAR TREASURY has a very low yield of 60 basis points. It is unbelievable that any investor can find any value in this instrument especially when compared to the higher yields offered by many countries with far better economic fundamentals:







The comparative global 2-year rates remind me of when I used to watch SESAME STREET with my children. One of these things is not like the other, one of these things doesn’t belong. That thing that doesn’t belong is the U.S. 2-year NOTE in anybody’s portfolio. An instrument that has a negative yield in an out-of-control budget situation. DIVIDENDS ANYONE?????????


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5 Responses to “Notes From Underground: Markets Still On Holiday and Equities Party On”

  1. Arthur Says:

    Great post… By the way, “China promises to buy Spanish bonds” (FT), again!!!

  2. jeff Says:

    been saying the same thing on dividends for months now. the interesting thing to watch will be that companies recognized revenue early this year b/c of tax uncertainty.

    they have a bigger hurdle than normal to beat earnings this yr.

  3. yra Says:

    Jeff –goood catch on that.We shall see if management awakes and returns money to shareholders or go on spending sprees that make the Board feel good but wind up destroying value and of course jobs which certain people fail to recognize.Nothing more dangerous then a CEO with a pile of cash and a giant ego.

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