How The Fate Of The Equity Market Lies In A $8,000 Tax Credit
It is a curious state of affairs when the continuity of the stock market rally, and in fact the validity of its 60% run up to date, lies in the hands of politicians. Yet this is precisely the case with the housing equivalent of the Cash For Clunkers subsidy in the form of the extended or expanded $8,000 housing credit. The expiration of this freebie in November has spooked numerous pundits into proclaiming that it would be sheer lunacy for the government to not continue its communist ways. In fact, very amusingly, none other than the chief equity market strategist overseeing Federated Investors' $400 billion in AUM is putting his career on the line, assuming a continuation of the massive government subsidy:
“I can’t believe the Congress will be so stupid in
allowing those programs to expire”, said Philip Orlando, who
helps oversee $400 billion as chief equity market strategist at
Federated Investors Inc. in New York. “If the government
suddenly eliminates the stimulus program in the housing market,
that will begin to call into risk the sustainability of the
recovery at some point during 2010. I think that program will be
not only extended, but expanded.”
And there you have a demonstration of what programmed, brain-washed group-think is all about: the fate of American Capitalist Corporate Communism will be determined by an $8,000 stimulus check. The market can only sustain its overbought levels compliments of taxpayers' generous subsidies to those who believe that renting is some form of inhuman cruelty banned by the Geneva convention. But then you still have those hundreds of billions in FHA losses that are yet to be "uncovered."
Rosie summarizes this idiocy best: "Are we supposed to go when the fundamentals deteriorate because Uncle Sam will come to the rescue? We are confused. If state capitalism works, shouldn’t we be investing heavily in Venezuela?" Yet the adage "good news is good news, and bad news is good news" only works when Obama's Moral Hazard doctrine is fully accepted by all market players as the prevailing trading paradigm. It is simply moronic to assume that Congress would be "so stupid" as to let natural supply and demand find their intersection points. If that were to happen, the US economy would crater so fast it would make Usain Bolt seem slower than Art Cashin.
Yet, it may be prudent to not bet it all on black (or green as the case may be) just yet. In a report issued yesterday by Deutsche Bank, analyst Nishu Sood seems to be less certain on the outcome of the stimulus fiasco, and is in fact betting on the "stupid" outcome dreaded by Philip Orlando:
Our view on a tax credit extension differs from that of the market – we don’t think it will be extended in the near-term. While it is always difficult to project political outcomes, the experience of the last few years argues that government acts on housing only when the situation is plainly deteriorating. With the economy and housing apparently on the mend, we think this good news may sap the political momentum needed to extend the tax credit. If, as we expect, housing conditions deteriorate again that might propel a renewal of the purchase tax credit.
So there you have it: up is down, good is bad, etc, etc. We now have the equivalent of a banana economy, let alone republic. Yet this is precisely what nearly 90% of investors are not only OK with, but factor into their "fundamental models."
86% of investors surveyed expect the credit to live on in some form, but most of these investors (61%) expect a simple extension for 6 months. Other possibilities include a 12 month extension (13%) or an extension and expansion of the credit (12%). The credit could be expanded by removing the first-time buyer or income cap restrictions or by simply increasing the amount. Proposed amounts have reached as high as $15,000. Only a small proportion of investors think that the credit will be allowed to expire (11%).
It is very unlikely that Obama learned his lesson with CARS: the adverse impact of that particular subsidy will likely plague automakers for many quarters, precisely at a time when they should have been able to budget and project demand, even if it meant slower growth curves. Now all bets are off, as nobody has any idea what inventory, labor or products to budget. Which is why it is only likely that a CFC 2.0 is not far off in the making. In the meantime, while we would like to believe Mr. Sood, his conviction is based on the assumption that at some point in its tenure, the administration will do what is in the best interest of capitalism, efficient markets, and not the Wall Street oligarchy. Based on empirical evidence, this assumption is flawed at its core.