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From "Buy The Presidential Election" To "Sell The Dividend Tax Hike"

Tyler Durden's picture


As so often happens, the conventional wisdom said to buy every day ahead of the election day because the S&P would surge and peak with the election. Conventional wisdom was wrong. Which is to be expected: in the New Normal one should take any technical signal or old trader wives tale, and do the opposite. Needless to say, the market now is unchanged from where it was two months ago, and from the day Barrons' came out with its latest top tick cover (as we said "here comes that patron saint of all contrarian indicators") page praising the "Teflon Market." So now that the "buy the election" meme is over and done with, what is there to look forward to for the rest of the year? According to Goldman, here comes the "sell ahead of the coming dividend and capital gains tax hike."

From Goldman's Kostin:

Capital gains and dividend taxes have garnered less attention than other parts of the Fiscal Cliff. However, with those taxes scheduled to rise at year-end based on current law, our conversations with clients show a renewed sense of urgency as the deadline  approaches.

What is the best case scenario:

Based on current law investment taxes will rise from their current 15% at year-end. The dividend tax rate would rise to 39.6%, the rate of ordinary income, and capital gains tax would rise to 20%. Each rate would also include a further 3.8% tax associated with the Affordable Care Act (ACA).


Our Washington, DC-based economist Alec Phillips believes a more likely outcome is for both capital gains and dividend taxes to rise to 20%, remain tied at the same rate, and include the ACA add-on for an all-in rate of about 24%. It is also possible those rates will be higher for upper income tax payers or that the two rates will de-couple.


We expect the capital gains tax rate to rise for upper income investors regardless of who wins the election. President Obama supports an increase in the tax rate and believes the current 15% is a historical anomaly relative to a maximum rate of 28-29% from 1987 -1996 and rates at or above the 23.8% potential 2013 rate from 1934 -1980. While investors believe Governor Romney is more likely to defend lower top rates, he has placed greater emphasis on eliminating capital gains taxes  for those making $200,000 or less as part of broader tax reform.

How about worst, or in this case, realistic:

The two primary concerns of investors are that (1) the dividend tax rate could rise to 43.4% as in the President’s February budget proposal and (2) high dividend stocks carry a premium valuation that will correct if taxes rise.


Dividend taxes could alter the mix of shareholder cash return. If the tax on dividends rises to 43.4% but capital gains taxes are below 25% it could impact investor, as well as corporate, preference for dividends vs. buybacks. In October, five S&P 500 companies announced special dividends and 23 stocks raised regular dividends by an average 14%. Our Equity Research colleagues have identified companies that may pay large special dividends before year-end to avoid the potentially higher tax rates.

Which means that...

Capital gains could drive year-end tax selling based on previous history. The capital gains tax rate is scheduled to rise to 23.8% from 15% based on current law. That increase would be similar in magnitude to the 9 pp rise starting in 1970 and the 8 pp rise in 1987. In both cases the S&P 500 posted negative returns in the December prior to implementation as investors locked-in the lower rate. The market fell 1.9% in Dec-69 and 2.8% in Dec-86 running counter to trend as December has the second highest average monthly return (1.5%) and a 75% hit rate since 1928.

Bottom line is that the net cash to dividend receivers can decline by up to 33% (from 15% tax rate to up to 43.4%). The implication is that with uncertainty about the cliff and the tax treatment of dividend and capital gains still prevalent, those who are unable to take advantage of offshore tax havens (so everyone but hedge funds) will wait until the last minute then pull a reverse E-Bay and dump into the bid. Because someone will surely be there propping the bid as the torrent of selling begins and investors seek to hedge ahead of a surge in stock-related taxes. Or maybe not.

Finally, Kostin still has a 1250 year end target on the SPX.


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Mon, 11/05/2012 - 12:26 | Link to Comment LMAOLORI
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Taxation is THEFT

Mon, 11/05/2012 - 12:29 | Link to Comment Joe Davola
Joe Davola's picture

Minitrue has replaced taxation with contribution.

Mon, 11/05/2012 - 12:39 | Link to Comment Orly
Orly's picture

Make a note of it, Winston.

Mon, 11/05/2012 - 14:36 | Link to Comment Fleecer
Fleecer's picture

Tax increase (div or cap gains) barely scratches surface of deficit prob. Theyll come up a bit, but not doomsday thru the roof. Rest (if we ever decide to attempt to fix the deficit) must come from inflation. Sucks, but it's the only way the math works.

Tax increase is the third rail to politicians, entitlement programs are too big and going exponentially higher. Only way to keep the debt fueled binge going is more debt (aka printing, aka inflation).

The USA budget deficit can't be solved by taxation (and won't be attempted under current, evenly split 2 party system). Same with entitlements... Won't change. Too unpopular to fuck with it... So only way is to "lock"the entitlements (get ready for Medicare vouchers and ss "defined contrib" ). rather than current inflation protected defined benefit.
Once those controls are in place, tptb will truly superglue the Ctrl P down on the keyboard.

Or, we will just keep going like we are until china one day doesnt let us anymore.

Mon, 11/05/2012 - 12:38 | Link to Comment Itch
Itch's picture

So is theft.

Mon, 11/05/2012 - 12:42 | Link to Comment firstdivision
firstdivision's picture

If that is the case, how would you get revenue to maintain infrastructure, be it Federal/State/County/City level?

Mon, 11/05/2012 - 12:55 | Link to Comment NotApplicable
NotApplicable's picture

Your infrastructure would be far more efficient if you weren't having to pay for all of those gangs that enforce territorial monopolies.

BTW, if you really want an answer to your question, there are lots, and lots, and LOTS of fine books that discuss a voluntary world in detail. This is one of the best ones ever written.

The Market for Liberty

Morris and Linda Tannehill

Mon, 11/05/2012 - 13:08 | Link to Comment firstdivision
firstdivision's picture

If the voluntary world worked so well, charities would be inundated with people wanting to help, and there would be a surplus of donations.  Human nature is to be greedy, and Americanism teaches on to be greedy and use debt to further your greed. 


For the record, I believe that over taxation is detrimental.  Our taxation system here in the US is screwed up at best, and definitely needs an overhaul.  At the sametime, I also know that taxation is needed to keep the infrastructure going when I need it.


 If it were up to me, the earned income tax rate would be lowered, while I would raise the capital gains tax.  To me income tax is revenue from goods/services actually being produced, and capital gains tax is mostly banks playing roulette every day.  It would encourage sustainable growth and put pressure on inflating bubbles of unsustainability.  It's not a perfect outlook, that I know, but to me its better than what is currently going on.

Mon, 11/05/2012 - 13:10 | Link to Comment alangreedspank
alangreedspank's picture

If human nature is to be greedy, then setting up a government won't change a thing as it will be controlled by humans. #basiclogicepicfail.

Mon, 11/05/2012 - 13:13 | Link to Comment firstdivision
firstdivision's picture

That is the negative feedback loop that is created.  That is what the election cycle is to help weed out, i.e. people would actually pay attention to what their elected official was doing, and vote them out if they were failing.  Thankfully, the American population has decided it is up to someone else to do that for them so that they don't have to interrupt their TV watching and learn something. 

Mon, 11/05/2012 - 13:23 | Link to Comment alangreedspank
alangreedspank's picture

Statist democracy is the sum of all individual logical fuckups like you just did, nothing more. Have fun trying to find your barking cat.

Mon, 11/05/2012 - 13:40 | Link to Comment firstdivision
firstdivision's picture

Says the barnyard animal fucker.

Mon, 11/05/2012 - 13:03 | Link to Comment alangreedspank
alangreedspank's picture

Bad dichotomy. Those ARE being currently financed through armed theft.

Mon, 11/05/2012 - 12:50 | Link to Comment LawsofPhysics
LawsofPhysics's picture

"Taxation is THEFT"

So is inflation motherfucker.  You want to discuss what earned income really looks like too?  Fucking bring it.


Mon, 11/05/2012 - 13:08 | Link to Comment alangreedspank
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What does have to do with the statement that tax is theft ?


Mon, 11/05/2012 - 13:52 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Please, wake the fuck up, why is one form of theft okay with you and not the other?


How do think you will do when your taxes are zero, but your currency won't purchase shit?

Mon, 11/05/2012 - 13:56 | Link to Comment alangreedspank
alangreedspank's picture

I don't know how you equate 'no taxation' to 'advocacy of inflation'.

Mon, 11/05/2012 - 14:18 | Link to Comment LawsofPhysics
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I see, you have a comprehension problem, BOTH taxation and inflation are theft, BOTH should be illegal. I am not advocating for either.

Mon, 11/05/2012 - 14:31 | Link to Comment Dr. Engali
Dr. Engali's picture

You certainly seem like you are advocating for taxation based on your previous commentary. Maybe that is your can't articulate your position.

Mon, 11/05/2012 - 14:33 | Link to Comment's picture

Folks are getting frazzled. You can feel it.

Mon, 11/05/2012 - 14:35 | Link to Comment alangreedspank
alangreedspank's picture

This is what I understood as well.

Mon, 11/05/2012 - 15:52 | Link to Comment LawsofPhysics
LawsofPhysics's picture

from my post above; "I am not advocating for either."

Try actually reading what is written.

unfortunately, it is pretty clear that regardless of who is "elected" the theft will continue until moral improves. Bank on that and go long black markets, I am.  the best part about selling your produce in a black market is no taxation.

Mon, 11/05/2012 - 13:30 | Link to Comment Dr. Engali
Dr. Engali's picture

After careful consideration I can only come to one conclusion ... You must have been bullied in school, because you have anger issues and the only way you know how to talk to people is by disrespecting them. We all know that inflation by printing is a stealth tax and therefore theft. Tell us something we don't know. That doesn't change the fact that a lot of people see the majority of the taxes being stolen from them as being wasted , and passed out to various corrupt special interest groups. You may enjoy funding the never ending wars and corruption but I know I sure don't.

Mon, 11/05/2012 - 13:56 | Link to Comment LawsofPhysics
LawsofPhysics's picture

No anger, just stating the obvious.  If you don't like the language, you can go fuck youself.

My point is that people are have the value of their labor stolen, via inflation.

you say you are against "corruption and theft".

which is it doc? you seem to be contradicting yourself.

Are you against all corruption and theft, or just the theft and corruption that affect others?  A simple yes or no will work.

Mon, 11/05/2012 - 14:08 | Link to Comment Dr. Engali
Dr. Engali's picture

Language doesn't bother me, swear all you want.I know I do on occassion. I'm just pointing out that you seem to be incapable of responding to one person's opinion without attacking them. Your anger is misplaced when you attack the commentator...they are not the enemy,it's TPTB who are.

And yes I am against all corruption and theft....but you knew that already. 

Mon, 11/05/2012 - 14:22 | Link to Comment LawsofPhysics
LawsofPhysics's picture

If the "language doesn't bother you" then why repond? Are you not a fan of liberty? Do you not realize you are free to click on another website? You could even go and be productive actully doing something else. Novel concept, I know.

Mon, 11/05/2012 - 14:33 | Link to Comment Dr. Engali
Dr. Engali's picture

Now you are just rambling, but thank you for proving my point.

Mon, 11/05/2012 - 13:04 | Link to Comment Stock Tips Inve...
Stock Tips Investment's picture

Raise taxes in the current economic situation is a disaster. In addition, the market would affect uselessly, affecting up to Bernanke's plan. We must insist on the idea that the government should lower their expenses. A clear sign of economic policy, would help to operate the high liquidity that currently exists.

Mon, 11/05/2012 - 14:16 | Link to Comment MeBizarro
MeBizarro's picture

Every human society has some form of taxation or social community contribution that allows the individual to stay as a member of the group.  Just a foolish comment that ignores basic human history. 

The argument is what kinds of taxation are necessary, what should be taxed, how much should be taxed, and whom should be taxed.  The comment above is something I would expect from my 4-old nephew.  'That's MINE!' 

Mon, 11/05/2012 - 14:44 | Link to Comment Dr. Engali
Dr. Engali's picture

Just because things have alaways been a certain way doesn't mean they have to remain that way.That sort of comment I would expext from a person with the lack of creative thinking, much like a Washington beuracrat.

Mon, 11/05/2012 - 12:28 | Link to Comment TeamDepends
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What will be your first course of action, President Goldman?

Mon, 11/05/2012 - 12:41 | Link to Comment buzzsaw99
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The Squid is everywhere. It is all around us. Even now, on this very blog. You can see it when you look out your window or when you turn on your television. You can feel it when you go to work, when you go to church, when you pay your taxes...

Mon, 11/05/2012 - 12:43 | Link to Comment TeamDepends
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Let's make calamari!!!

Mon, 11/05/2012 - 12:28 | Link to Comment overmedicatedun...
overmedicatedundersexed's picture

"I want to pay higher taxes " W buffet..C Munger..write a check then you simpleton lying freedom killing elite blood sucker.

Mon, 11/05/2012 - 13:21 | Link to Comment socalbeach
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Journalist Michelle Fields confronts millionaires lobbying for higher taxes on the wealthy, and tries to get them to make a donation to the Treasury on her laptop.  Ouch.

Patriotic Millionaires Higher Taxes Treasury Department

Mon, 11/05/2012 - 12:37 | Link to Comment Mercury
Mercury's picture

USA: accounting irregularities, decreasing market share and increasing overhead = SELL

Mon, 11/05/2012 - 12:32 | Link to Comment Dr. Engali
Dr. Engali's picture

1250 is just the next wave down on the way to S&P 400.

Mon, 11/05/2012 - 12:37 | Link to Comment Orly
Orly's picture

Rmoney said that when he wins, he would put the capital gains tax at zero.

Mon, 11/05/2012 - 14:25 | Link to Comment vix is for kids
vix is for kids's picture

If Rmoney wins, we'll have to go to school on Saturday. 

Mon, 11/05/2012 - 12:39 | Link to Comment Duke Dog
Duke Dog's picture

You guys aren't thinking right! Use Bitcoin for your portfolio transactions and taxes are a thing of the past. It has several layers of anonymity from what I understand :)

Mon, 11/05/2012 - 13:45 | Link to Comment CynicLaureate
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Guess again... BitCoin by itself has no anonymity.  The advantage of BitCoin is that you can combine it with other services that DO provide anonymity. You have to be smart about it to be anonymous.


Mon, 11/05/2012 - 14:27 | Link to Comment vix is for kids
vix is for kids's picture

My tenants are paying me with Bitcoins.

I'm beginning to think that they're playing me for a chump.

Mon, 11/05/2012 - 12:41 | Link to Comment's picture

"I gotta have more cowbell" ....  and so the Bernanke makes the crowd swoon by giving more cowbell...and all is well

Mon, 11/05/2012 - 12:41 | Link to Comment apberusdisvet
apberusdisvet's picture

Homebuilder stocks will swirl down the flush as there will be few middle class buyers left that will be able to meet mortgage ap requirements.  The banksters and the FED will own most real estate within 5 years; WTF do you think the $85 billion/month in MBS purchases is all about?

Mon, 11/05/2012 - 12:55 | Link to Comment firstdivision
firstdivision's picture

What is quite amusing this election cycle, are people complaining about the Bush Tax Cuts expiring, is that to say this country had zero economic growth prior to Bush Jr?   Seriously, people need to look at history before crying foul.  Hell, the God of the GOP, Regan, allowed the Capital Gains Tax to nearly double. 

Time to go long oil and identifiying stocks to short.  After tomorrow, oil up, up, up. 


Mon, 11/05/2012 - 12:58 | Link to Comment riphowardkatz
riphowardkatz's picture

if they raise taxes what is to say they wont just find new places to spend the mponey and not use it on debt?

Mon, 11/05/2012 - 13:04 | Link to Comment firstdivision
firstdivision's picture

I'm not arguing that there isn't rampant government waste, just making a point that it wouldn't be the end of the world if the capital gains tax went up. 

Mon, 11/05/2012 - 19:28 | Link to Comment John_Coltrane
John_Coltrane's picture

Any diversion/theft of private capital to government coffers is inefficient as government lacks:

1)The profit motive to maximize efficiency

2)Its other people's money (and no one cares about OPM) and results in malinvestment.

Government is a friction on the real economy.  Just as friction is potential work wasted as heat and thus must be minimized for efficiency, government needs to be minimized.  We can start by limiting it to less the 20% of GDP with a goal of less than 10-15%.  And it must be run on cash flow only-no borrowing against the future.


Mon, 11/05/2012 - 12:51 | Link to Comment richard in norway
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i dont undersstand how capital gains tax can be less tthan dividend tax. aint that subsising gambaling at the expence of work?

Mon, 11/05/2012 - 12:56 | Link to Comment riphowardkatz
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two wrongs dont make a right

Mon, 11/05/2012 - 12:58 | Link to Comment NotApplicable
NotApplicable's picture

Um... think criminal-justice system.

That help?

Mon, 11/05/2012 - 12:58 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Yes, but hey, < sarc on > it's worked out great so far hasn't it? < sarc off >

Mon, 11/05/2012 - 13:00 | Link to Comment HD
HD's picture

Is Goldman telling the truth to tell a lie to cover up the truth?  Can Kevin hold up the S&P or is it done for?  Will we go over the cliff and if so what's on the bottom?

Confused? You won't be after the next episode of "Soap"...

Mon, 11/05/2012 - 12:58 | Link to Comment Rathmullan
Rathmullan's picture

When obama loses tomorrow the qe junkies will panic about the the potential threat to their supply. Then they'll go into to denial and be comforted by the thought of statists billy duddly and glenn hubbard taking the reigns. But I'm not willing to sell Romney short just yet. He turned down the statists' pick of christy and rubio in favor of Paul Ryan. He may pleasantly surprise us.

Mon, 11/05/2012 - 13:01 | Link to Comment Schmuck Raker
Schmuck Raker's picture

Thank God there was no mention of curtailing government spending.

That just would not do. Don't even think about it...

Mon, 11/05/2012 - 13:04 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Don't sweat it, some things will fix themselve.  You can't collect what isn't there.

But I am sure another unfunded war will make it "all better".  See if you can guess who this war will be waged against...

Mon, 11/05/2012 - 13:09 | Link to Comment Quinvarius
Quinvarius's picture

Obama likes screwing old people who dared invest to live retirement outside of SS.  Looks like Buffet picked the wrong horse to ride telling everyone you need an investment that pays you and supporting Obama.  What is so great about dividends you can't keep?

Mon, 11/05/2012 - 13:41 | Link to Comment Bastiat
Bastiat's picture


Obama likes screwing old people who dared invest to live retirement outside of SS

Bernanke doesn't just like that, he loves it!  In fact he likes screwing people depending soley on SS even more.

Mon, 11/05/2012 - 14:11 | Link to Comment Quinvarius
Quinvarius's picture

Good point.

At least Obama did his SPR release to the refiners this time instead of the bankers.  Imagine that.  Gasoline prices actually drop with oil when you don't blow up refiner hedgers and leave them uncompensated.



Mon, 11/05/2012 - 13:26 | Link to Comment disabledvet
disabledvet's picture

So according to this logic "the market expected a Romney win...until today." as patently false as it is ridiculous. plus there is a lot of time between the election and "The Cliff."

Mon, 11/05/2012 - 13:28 | Link to Comment disabledvet
disabledvet's picture

Dem's could make their "too late we're already bankrupt" tax increase retroactive of course.

Mon, 11/05/2012 - 15:54 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Countries, like people, tend to go bankrupt slowly at first then all of a sudden "it's gone."

Mon, 11/05/2012 - 13:28 | Link to Comment tooriskytoinvest
tooriskytoinvest's picture

Springsteen: The First Debate Really Freaked Me Out

REPORT: Voting already a mess in Philly

We Are In Serious Financial Doom: Hong Kong, Vietnam and China Are On Verge Of Another 2008-Like Financial Crisis While The Euro Zone Locked Into Permanent-crisis Mode And The U.S. Is Bogged Down With Debt, Economic Stagnation And Political Paralysis

Mon, 11/05/2012 - 13:39 | Link to Comment Bastiat
Bastiat's picture

The State should own everything and give people stipends in the form of "credits" in their universal transaction account.  No one has any claim on any future credit: the state decides who gets what and when.  You don't need to worry about employment, just do what you're told.

Further instructions to be broadcast every hour by trucks with speakers on the roof.  As with on-board airline PA announcements, earplugs will be useless. 


Mon, 11/05/2012 - 14:07 | Link to Comment ItsDanger
ItsDanger's picture

On tax planning, investors have had plenty of time to prep for this change.  Captial gains rate is too low, dividends too high, IMO.  However, both are too high, if the govt cant get spending under control.

Mon, 11/05/2012 - 14:50 | Link to Comment flaunt
flaunt's picture

LMFAO who didn't see this coming?  ALWAYS another black swan just over the horizon.  Anyone with a modicum of intelligence knows they will "compromise" and taxes will not go up even if it has to be done retroactively.  How about "buy the stupidity, sell the idiocy?"

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