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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: American Spirit who wrote (11191)	1/7/2003 7:39:57 PM
From: stockman_scott	Respond to of 89467

Markets See Risks in Bush Stimulus Package Tuesday, January 07, 2003 NEW YORK — Investors and strategists said on Tuesday that the Bush administration's $670 billion stimulus package aimed at kick-starting U.S. growth was likely to trigger a stock market spurt, but that risks dogging the world's biggest economy may rein in the rally. President George W. Bush unveiled the economic plan, which calls for the elimination of taxes shareholders pay on dividends, accelerated tax cuts, immediate tax relief for married couples and families with children, and bigger incentives for businesses to invest in new equipment. "Any fiscal stimulus will be positive in the short term, but there are still problems coming down the line," Stephen Docherty, head of global equities at Aberdeen Asset Management which oversees about $36 billion worldwide, said. In all, the White House says it will give 92 million taxpayers an average tax cut of $1,083 this year. Up to 35 million people who get income from dividends could benefit. The administration said its package would provide $1,100 in tax relief this year to a typical family of four with two wage earners making a combined income of $39,000. A White House fact sheet outlining the plan said Bush's Council of Economic Advisers projected the package will help the economy create 2.1 million jobs over the next three years. Administration officials also believe cutting dividend taxes could boost stock prices by 10 percent or more. Shares gained two percent across the board in New York on Monday, bolstered by hopes that the plan could end three straight years of decline. "Clearly it is going to be a positive influence on the market, but it is hard to put a specific number on it," Ian Scott, a London-based global portfolio strategist at U.S. investment bank Lehman Brothers, said. "The evolution of the economy is far more important than potential changes in taxation policy," he said. Fund managers say domestic risks of ballooning budget and current account deficits, sagging consumer confidence and sickly business investment are compounded by a slowing European economy and fears of war with Iraq. The nagging worry is that things are worse than government officials are prepared to admit, with the most bearish saying a new stimulus package merely confirms that last year's tax giveaway and interest rates at 40-year lows have failed to revive the economy. "Clearly there is a risk, given the failure of monetary stimulus, of more fiscal stimulus. The danger signs would be that we don't see the imbalances being corrected and real recovery coming through," the head of global investment strategy at one British fund firm, who declined to be identified, said. Many fund managers say the Dow Jones industrial average is already expensive at its present 8,745 level. Adding almost 900 points to the Dow would only make it less attractive. Some analysts also wonder how much extra dividend firms will be able to pay if they start to show executive share options as expenses in their accounts -- ratings agency Moody's reckons it would have slashed aggregate net income by 16 percent on the Standard & Poor's 100 Composite firms in 2001. Investors may buy dividend-paying stocks to benefit from the tax break, but with risks looming large over the economy, money managers are likely to pay for them by rotating out of those that don't deliver dividends rather than committing fresh funds. The net effect could be marginal at best, some managers say. Optimists argue that additional fiscal stimulus would come at exactly the right time. Paul Markowski, president of New York-based Global New World Strategies Inc, expects $1.5 trillion to be added to household wealth in 2003 as profits recover, translating into $50-$75 billion of additional spending in the economy. "The multiplier effects of increased consumption and the accelerator impact of investment incentives will prove strongly beneficial to the economy," he said in a note to clients. Abhijit Chakrabortti, equity strategist at JP Morgan in London, reckons a change of policy on dividends tax could generate additional spending of as much as $90 billion. "But whether (corporations) are going to swing into spending mode so quickly after getting through restructuring is a key question," he said. Reuters and the Associated Press contributed to this report

To: American Spirit who wrote (11191)	1/7/2003 10:16:17 PM
From: stockman_scott	Read Replies (1) \| Respond to of 89467

The Real Effect of Tax-Free Dividends January 7, 2002 The biggest news of the day is the buzz behind President Bush's economic stimulus plan. While the plan itself is multi-faceted, the part we're most interested in is the potential repeal of dividend taxes. On the surface this sounds like a great benefit to stocks. However, experience has taught many of us that hype is a powerful, yet short-lived, market force. A closer look is warranted. The theory is that investor's bottom lines would be increased in when more of their investment income would stay in their pocket rather than get paid out in taxes. And when investors have more money in their pocket, they are more likely to spend it, and thus stimulate the economy. All of this is true. Unfortunately, it's also true is that most investment income is derived from capital gains, which will still be taxed at their current rate (as of the most current plan). On average, only about 5 percent of personal income is created by dividends. On top of that, much of that 5% is earned in tax-free retirement accounts already. So the immediate impact of a dividend tax repeal may be minimal, if even noticeable. That issue could be somewhat helped if more companies started paying dividends, which many investors think will happen. But the tax benefit is currently only extended to the individuals who receive dividends. The companies who pay them are still going to be taxed as usual. In fact, it's a lose/lose situation for most corporations - not only would these companies sacrifice tax-free resources that could be used in research, development, and business growth, they would subject themselves to taxation just by paying shareholders. Knowing this, it's not likely that many companies will now opt to pay dividends if they haven't already. So, the issue now becomes one of finding companies that DO pay dividends. Ultimately, though, the issue becomes one of how much shares are yielding (paying) on a percentage basis. The current average yield on stocks is about 1.5 percent, but that can go as high as 6.0. Let's say for the sake of argument that yields are about 5 percent. That means that if a share is $20, then the annual dividend is $1. Although most dividend paying companies earn slightly more than they actually pay out, let's assume that profits and the dividend are equal. If the demand for these shares goes up causing the per-share price to go to $40, how much will the company be able to earn and payout per share? Not $2...the earnings are only determined by how well the company performs. The price of these shares, and therefore the yield, are determined only by investors who buy and sell these shares. If you pay $40 for a stock, you still can't make the company do any better than the $1 per share they were earning. With your yield now at 2.5 percent, owning that stock doesn't seem as attractive. This is not to say that the entire stimulus package is a bust. In fact, there are some great features of the plan that are going to put a lot of money back in the pockets of taxpayers. And even the dividend tax repeal is a boost. It's just important that we understand the real impact of dividend taxation removal, and not overestimate what the long-term and short-term effect will be. There's a lot of hype about today's announcement. I encourage all of us to consider it logically, and not get swept up in the frenzy. from: Price Headley's Daily Trend Watch