Tabell’s Market Letter – August 22, 1986

Tabell’s Market Letter – August 22, 1986

Tabell's Market Letter - August 22, 1986
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11& ISUE n..n… s Iil1iI&RMIEII n..1EIIIIIER 600 ALEXANDER ROAD, PRINCETON, NEW JERSEY 08540 MEMBER NEW YORK STOCK EXCHANGE, INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 987-2300 – August 22. 1986 Just about the entire media industry has spent the last week or so bombarding its readers hlp with analysis and commentary on the tax reform bill. We are, nonetheless. in our modest-circulation sheet. not embarrassed…..tothrow JrL.9J!..owntwo-cnts \!rt,spcia11y-'jnce !ax polic. and financial market-,s'-. ,I are not unrelated.' Herewith, then. a few comments… — — …. -… .. – .. – -…. .. – It will, first of all, not surprise our readers to know that we agree with the multitudes of our peers who assess the bill 85 one of the most important and far-reaching pieces of legislation to come along In years. One reason and one reason only. is necessary to compel us to that assessment—Iower margmal tax rates—the magic 28. The purists who carp about the effect. equality or logic of this or that feature totally fail, it seems to us to appreciate the importance of the single essential one. Having been life-long commentators on markets, we perforce admire them and cannot help but applaud legIslation which, by allowing each and every American citIzen his own control over the deployment of at least 72 cents of each dollar he earns, returns a huge dose of major economic decision-making to the market place. The retreat from the use of the tax code for economic and social engineering, is, in our view, to be applauded. the major recent results of such attempts having been, as far as we can see. capped oil wells. vacant office buildmgs. and bankrupt farmers. Even the most apparently successful of these tax-manipulation attempts, the 40-year effort to encourage owner-occupied, single-family housing. so politically sacrosanct that it had to be left in the new tax code, is beginning to show a few warts, it having come to the attention of numerous observers that a new generation finds itself unable to afford housing equal to that obtainable by their parents at the same age. Nonetheless, the new bill takes a long step in returning taxation to what should properly be Its single function–revenue raising. Having gotten the above off our chest, we can now return to the specific area we are supposed to know somethmg about and look at those provisions of the new code which specifICally affect the stock market. The first and most obvious of these is caPItal gains, and the purists referred to above are, of course, bemoaning the rise in the rate from 20 to 28. A simple-minded comment on this is that. in our 32 years in the business, we have been subject during most of them to a capital gams rate in the general area of 28 and occaSionally higher. We seem to remember. during those years, some pretty 1I good stock markets. It.is suggested in- various quarters that venture capital will imme(jiately disappear and entrepreneurship cease to eXIst. Bemg personatIy acquaInted wIth a few venture capitalists. we are skeptical of this arguement. Not surprisingly, these gentlemen would prefer to see their profits taxed at 20 (they would prefer 0 even more). but they are, by and large, simply attuned to assuming unusual risk in order to obtain unusual reward. We doubt that they mtend immedIately to transmogrify themselves into investors in government bonds. Our own purist's view IS, of course, that capital gams should not be taxed at all. but the problem WIth tax law has always been in defining precisely what constitutes capital gain. It has never been enough to say simply that it is the profit arising from the purchase of an asset at one price and its sale at another price. Such a transaction involving a can of soup by the A &; P has never been regarded as anything but mcome. On the other hand. retention of a financial asset for a protracted period of time has always been thought to be a different breed of cat, for reasons that can be discussed at length. American law has always emphasized a compromISe. the length of time held, as the criterion for duferentiating between capital gams and income, that length most often having been six months. although we recently underwent a short experiment with one year. It is one of those principals that has lasted a long time because it has, more or less, worked, but we would be reluctant to try to contruct a phllosophical arguement for it. In any case. one of the most signifIcant features of the new law is that the time test is going away. Capital gains are synonomous WIth income for holdmg periods rangmg from 30 seconds to inflmty. This will, we think, have some interesting effects. one of which will be more active trading startmg in 1988, an mcrease WhICh will. however. be mitigated by the large entent to which current stock holdings (i. e. pension fund positions) are not taxable in the first place. Short-term, as many analysts have pointed-out, we should see 8 pressure to take profits before the end of 1986. The other major aspect affecting the stock market. of course. is the corporate tax which. overall. will be mcreased to pay for the cuts that the majority of voters will be receiving. We cannot. however, view this WIth alarm. The corporate tax had. in recent years. become an incredible melange, largely due to additional social engineering attempts based on the thought that-the -useful life of an — asset could be legislated. The result was a huge list of major companies paying little or no tax at all made this ObVIOUS. On the other hand. a uniformly-applied 34 tax may make economic sense. The conventIonal wisdom has long bemoaned the low rate of U.S. saVIngs. Many stUdies have suggested that the corporate tax eventUally becomes, in large part, a pass-through and. thus. a consumption tax. It could therefore. provide a savings stimulus more effective than the ones which notably have failed to date. In a political environment. the new law was obviously forced to make trade-offs for the ultimate goal of lower marginal rates. In our view these trade-offs were eminently worth the result. AWTvfl ANTHONY W. TAB ELL DELAFIELD. HARVEY. TABELL. INC. Dow Jones Industrials 1880.76 S & P 500 250.40 CumulatIve Index (August 21. 1986) 3135.62 No statement or eypreSSlon ot Opinion or any other mailer herein contained IS or Is to be deemed to be directly or Indirectly an otfer or the solicllatlon of an offer to buyor sell any security relerred lOOt mentioned The matter IS presented merely lor Ihe convenlonce ollhosubsctlber Whlle ….e believe Ihe sources of our tnformallon 10 be reliable, we In noway represent or guarantee the accuracy thereal no\ 01 the slatements made herein Any action to be taken by tho subscriber should be based on hiS own In..esllgallon and tnformatlon Delafield Harvey, Tabell Inc, as a corporation and liS olflcers or employees may now Ilaye or may lalOr take posljlons or trades In respcct to any securities men\loned In thiS or any future Issue, and such pOSition may be dillcrcnllrom any views nowor Ilelcaller eyprcssed tn 11115 or any other Issue Delafield Har.ey labell Inc whiCh IS registered With the SEC as an Investment adVisor mav give adVICe 10 tis Investment advlsorv and other customers Independently 01 any stalomenls made In thl5 or In any other Issue Further mforma\!on on any security mentioned l1ereln IS avallabte on reQuest

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