Well Raymond, there's always dividend derivatives when the options game goes stale........
prudentbear.com
King Report
Stocks rallied and bonds fell on Bush's reported fiscal initiatives. The $600B stimulation package is abhorrent to bonds. Whether it will meaningfully benefit
the economy or stocks is moot in the short term because declining bonds produce a Pavlovian response to buy stocks by operators.
Yesterday's $ decline suggests the long-term implications of W's plan are not favorable. There is still too much capacity, too much debt, and an
over-consumption hangover. How is more intoxication and stimulation beneficial? Will buggy whip or optic fiber manufacturing increase?..Bush said he
wants to encourage investment. The problem is over-investment and over-capacity. Then W said it's not the role of government to manage the economy – a
big lie.
The people that dominate stock activity are not dividend conscious. The market has been bereft of fundamentals for years; speculation and professional
trading is de rigueur. Anyone buying LU or Tyco is not interested in 5% tax free…Stocks need to fall precipitously for dividends to be salient. Investment grade
buyers will appear when after tax valuations make sense.
Repealing the dividend tax will not provide much economic or market impact (Where did the significant market gains come from the past two decades?), but
it will stimulate wise guys to employ tax arbitrage techniques that will turn short-term capital gains and interest into tax-free dividends. Anyone paying a
short-term capital gain tax or interest income tax, unless restricted by law, would be a sap. Here's how it works, and it's been going on for years: Buy a basket
of high paying dividend stocks concurrently with a derivative that hedges market risk. Derivatives adjust for dividends and interest so the derivative on
dividends will produce a capital gain to compensate for the dividend that would be lost to the holder of the underlying vehicle. So, the entity that owns the
basket of dividend paying stocks with a derivate that hedges against market risk would receive the dividends and a commensurate capital gain loss,
adjusted for the prevailing short-term interest rate. The short-term capital loss offsets short-term capital gains. If one has a $5m short-term capital gain to be
taxed at 38%, it could be turned into $5m of dividend income at no tax – the capital gain and loss offset, the commission is the cost for saving $1.9m in taxes.
A similar strategy could morph interest income into dividends. As we have stated, derivatives allow short term to become long term, capital gains can
become dividends or interest and vice versa…Wall Street will create vehicles for investors and corporations that will exploit the probable tax-free dividend
loophole. It's tax-arb time for The Street, and anytime tax arbitrage becomes pre-eminent, the economy stagnates or suffers. You can look it up. This is all so
‘70ish.
Tax-free dividends will foster great revenue lose for the US Treasury as Wall Street creates various derivatives that convert income and capital gains to
dividends. For instance tech companies gave stock options in lieu of cash, now tech companies or any corporations will structure compensation so that key
execs get high-paying dividend stock. Let's say MSFT or Bill Gates wants to increase remuneration for him or key execs. In the past, they got stock and
options and then the company would boost share prices via repurchases. Gates should declare a huge dividend so he and other MSFT holders would get
the benefit tax-free…Dividends must be paid in real cash not pro forma crap…Why would a company repurchase shares if dividends were tax free?…Multiple
classes of stock could appear, which would de-democratize investors…Creative corporate financiers and tax attorneys should be ecstatic. |
