[In spite of the continuing ascent of the stock market] we are not in a perfectly bullish scenario because a major concern going forward is whether or not the Bush tax cuts will be extended. I am of the opinion that they will be, because if they are not, then the markets will have a very ugly December. Words: 767
So says* Mycroft Psaras (freecashflowanalyst.com)[A major decline in the stock market] will happen because those with large capital gains (multi-year/multi-generational) may choose to book their capital gains in 2010, locking in a 15% tax, instead of having to pay a 20% next year if the Bush tax cuts are not extended. There are millions of investors waiting patiently to act based on if the Bush Tax cuts are allowed to expire or not.
Why a Multi-national Company Stock Investment Strategy is Recommended
A sound strategy to deal with such a scenario with the stock market is to practice capital appreciation through capital preservation. [This means] keeping a 40% buffer in cash and then going long in the stock of a well diversified list of U.S. multi-national companies. I am recommending this stock investment strategy to my clients for the simple reason that the USA money supply is increasing substantially and as we know, when there is oversupply and little demand in anything that prices fall – and the “price” we are talking about here is that of the U.S. dollar.
As the dollar falls, U.S. companies that do business abroad get an artificial bump up in earnings, when they report, because they repatriate their foreign revenues into more dollars, by converting the strong foreign currencies they earn abroad into a weak domestic one which will have a positive effect on their stock prices. On the opposite extreme small businesses and companies that do business exclusively in the USA will suffer as the weaker U.S. dollar will make the raw materials that they need to run their businesses a lot more expensive, [their profits less and cause their stock prices to decline]. Thus the stock of multi-nationals will thrive and the stock of those who are not will suffer.
Consequences of Bush Tax Cuts Not Being Extended
The Federal Reserve is taking a major gamble here in pumping so much money into treasuries [as they intend to do with their recent $600 billion quantitative easing], because if the Bush tax cuts are not extended, then every American will suffer because:
1. taxes will go up
2. prices of everything they buy will also become more expensive as their dollar will buy less
3. companies that do business just in the USA (small businesses) will get crushed
4. interest rates will go down to historic low levels, but since the raw materials that go into building a house will rise and
5. wages will be worth less (weaker dollar buying power) no one will be able to afford houses and thus
6. existing real estate prices will go down even further in value
7. builders will stop building houses, as they will never be able to compete with the ton of foreclosures that will be coming to the market.
Investments in CD’s and the money markets will be a big mistake [because] in such a scenario, with inflation going up and interest rates going down, investors in such instruments will actually be getting negative real interest rate returns when they put their money in the bank…
If the Bush Tax cuts are not extended then the stock markets will surely drop as year-end tax selling will be huge. [As such,] a large cash position will give the long term investor a unique opportunity to buy multi-nation company stock when everyone else will surely be selling. The stock prices of multi-national companies will do well regardless and if there is year-end tax selling then [the stock of such multi-national companies] may fall to the point where they can be bought… If they are extended fully then all bets are off and an over-weighted position can be made in…
The stock of multi-national growth companies is the only game in town.