clown du jour...anybody have money burning a hole in their pocket, aching to throw it clown long?
Three key bullish factors to consider
Commentary: Fear factor cash is likely to come back in
By Louis G. Navellier
Last Update: 12:05 AM ET March 3, 2003
(Louis G. Navellier is CEO and President of Navellier & Associates, Inc., and Navellier Management, Inc., located in Reno, Nevada. He is editor of the MPT Review and The Blue Chip Growth stock newsletters)
RENO (CBS.MW) -- There's a lot of money sitting on the sidelines burning a hole in investors' pockets. The average investor is simply frozen in fear and afraid to return to the stock market even though fourth-quarter earnings were up more than 15 percent -- the strongest growth in more than two years.
The biggest worry hanging over the market is the impending war with Iraq, which is causing tremendous anxiety among consumers, businesses and investors. Nevertheless, I believe there will be a series of events that will drive the market higher by causing much of the cash on the sidelines to pour back into the market.
The first event that will stimulate the stock market will be when the tension and uncertainty surrounding Iraq is resolved.
Ideally, Saddam Hussein will go into exile, but that isn't likely. As a result, Saddam Hussein will likely have to be ousted through military action. Unfortunately, the U.N. has yet to issue a second resolution deciding how it wants to enforce the previous resolution ordering Saddam to disarm.
Under international law, the U.S. desperately needs a second resolution from the U.N. to proceed with disarming Iraq. Furthermore, if the U.N. issues a second resolution to disarm Iraq through military force, The Wall Street Journal recently reported that the U.S. will be able to pump Iraq's oil to help rebuild the country.
The second event that will stimulate the stock market will be when bond yields resume rising. The 10-year Treasury bond yield bottomed on Oct. 9 at 3.56 percent and subsequently shot up to over 4.2 percent.
Panicked bond investors, fearful of watching their principal erode, started shifting money into stocks in the weeks after Oct. 9.
However, due to concerns over Iraq, there has been a flight to quality that has caused the 10-year Treasury bond yield to fall back to 3.85 percent. As a result, nervous bond investors have settled down and now have no desire to leave the security of Treasury bonds until yields resume rising.
I expect that Treasury bond yields will rise soon due to recent news that wholesale inflation is rising, and the federal budget deficit is growing. Nothing makes an investor feel sillier than losing money on bonds when interest rates rise.
Last year, corporate bond yields rose and created major losses for many insurance companies and other big bond investors. Most experts expect that Treasury bond yields will rise soon, which will unleash a flood of new money that will pour into the stock market.
Finally, the last and most bullish event that will stimulate the stock market will be when the double taxation of dividends is eliminated. In my opinion, this will be the most bullish event in my lifetime. Impending dividend relief will represent a dam break that will cause yield-hungry investors to return to the stock market seeking tax-free dividends. Even better, companies with strong cash flows, such as Oracle (ORCL: news, chart, profile), will likely declare dividends.
Due to double taxation, in some high-tax states like California, currently more than 70 percent of dividend proceeds end up being taxed. However, if the double taxation of dividends is removed, companies would likely be much more generous with their dividend payments.
Corporate insiders will soon figure out that 0 percent taxes to individual shareholders is better than 20 percent capital gains taxes. In fact, I expect that insider selling will dry up at cash-rich companies, because corporate insiders will simply declare tax-free dividends for themselves.
The elimination of double taxation recently got a big boost when Federal Reserve Chairman Alan Greenspan reaffirmed his desire to end this unfair system. Although Greenspan doesn't like rising budget deficits, he said that by eliminating double taxation, it would increase the wealth effect by helping the stock market. This would boost consumer, business and investor confidence.
Since Greenspan's recent congressional testimony, the opposition to President Bush's dividend tax relief plan is starting to falter. Leading academics from Harvard and other liberal bastions are more obsessed with defeating the elimination of estate taxes and the acceleration of income tax cuts.
So far the biggest argument against the elimination of the double taxation of dividends is that many people only hold stocks in their pension accounts, so their dividends aren't taxed anyway. However, this also works against that argument because it's not as expensive as some of President Bush's other tax plans.
Since the Federal Reserve has basically done almost all it can to help spark the economy, it's now time for the Bush administration and Congress to stimulate the stock market.
Fortunately, President Bush appears to be just as obsessed with stimulating the economy as he is with Iraq. The big question is, how much of President Bush's stimulus plan will Congress pass?
As far as the stock market is concerned, dividend tax relief should provide immediate relief, since it will cause yield-hungry investors to return to the stock market.
If the Bush administration's proposed dividend tax relief is unconstrained by Congress, strong-cash-flow companies will declare new or additional dividends, since both corporate insiders and investors will be clamoring for their tax-free dividends.
The Bush administration continues to appeal directly to senior citizens to back their proposals. Seniors definitely want dividend tax relief, especially after the Clinton administration decided to tax 85 percent of their Social Security payments.
Hopefully, due to the demands of senior citizens (the most powerful voting block in the U.S.), Congress will have no choice but to eliminate the double taxation of dividends.
In summary, there will be a series of events-higher bond yields, dividend tax relief and a resolution in Iraq-that will stimulate the stock market. I expect that the stock market will respond positively to all of these events.
The current environment is best described as the quiet before the storm. The stock market is so obsessed with Iraq that it forgot to focus on fundamentals. There's a massive amount of money on the sidelines that will find its way into the stock market as the uncertainty diminishes.
I strongly recommend that both conservative and aggressive investors jump back into the stock market. The best buying opportunity in my lifetime is about to unfold. |
