US Stocks Overpriced, Even With Fiscal Cliff Deal

Nov
29

By Charles Biderman

As the year winds down the stock market first went down and now has gone up recently all based on whether there is a deal on the fiscal cliff. As this is being recorded, if the recent sound bites from those corporate types supposedly in the know are legit, it does sound as if some sort of deal is likely. But who knows. It is a long way from here to there, wherever there is.

 

For the record, I approve any deal that minimizes tax increases. I also approve any deal that slashes future entitlements and current spending. That being said, I think the type of deal that does happen will not materially change anything.

 

Why? Without massive cuts in entitlements, which are not likely to happen in whatever deal the politicians come up with, the economy in 2013 will either continue to limp along or actually go into reverse depending upon how high taxes are raised.

 

Is a slow growth at best US economy worth a 15 times price earnings ratio for this stock market? I do not think so. While news of a deal might boost the stock market for a few days or even a week, longer term nothing has changed.

 

That is it. If there is a deal the most any deal could accomplish will be higher taxes and some cuts in entitlements, but nothing that will impact the pink elephant in the room that the administration keeps ignoring. The pink elephant is the $87 trillion present value of future entitlements, and that number is growing at $7 trillion a year in today’s dollars.

 

Without a deal taxes will grow by about $580 billion next year. With a deal, my bet is taxes would rise by about $200 billion. For those of you who care about the numbers, the details are in the text of this video on our blog site.

 

Meanwhile, real time data we look at is currently showing after tax income growing a bit faster then in October. My guess is that Sandy rebuilding is providing a boost to the US economy that could last through early 2013. Remember ,whenever a major weather catastrophe happens, America’s balance sheet takes a hit. However, incomes then go up as the devastated area gets rebuilt.

 

That being said, after tax income is likely now growing at an over $300 billion annual rate. With the deal I am guessing, after tax income growth slumps to $100 billion a year. Without a deal, after tax income will actually drop, decline by almost $300 billion next; How? Subtract from this year’s $300 billion in higher income, $580 billion higher taxes next year. That equals an economy contracting by almost $300 billion a year. So even if both a fiscal cliff deal and the Sandy boost continues, the US economy will be barely grow next year.

 

Future entitlements are bankrupting the US and no one seems to care, at least not enough to create a wave of support for massive cuts in future entitlements; something that really could make a difference.

 

FISCAL CLIFF INCOME TAX DETAILS.

 

Everybody seems to agree that the 2% 2010 payroll tax cut is gone and that will boost 2013 taxes by $120 billion. Higher tax rates on those making more than $500k would raise maybe $20 billion. Higher dividends and capital gains will boost collections by $20 to $30 billion. Then there is about $25 billion next year in higher taxes for Obama Care.

 

Tax cuts likely to be spared include those making less than $500K will save $180 billion. Corporate taxes will not go up by about $100 billion and keeping the Alternative Minimum Tax, will save another $100 billion.

 

My best guess if that if there is a deal taxes will go up by just under $200 billion instead of $580 billion without a deal.

 

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8 Responses to US Stocks Overpriced, Even With Fiscal Cliff Deal

  1. Gordon on November 30, 2012 at 1:56 am

    Mr. Biderman, your Crash call two days ago seems to be like the last one in July. Since I have been reading your blog this is the second Crash call you have made. I am wondering if now we should treat your calls like Goldman Sachs and just fade them. I thought you were more legitament than that.

    • Jack on November 30, 2012 at 3:03 pm

      Gordon, the spelling is “Legitimate”

      Go Long Gordon, Go Long.

  2. Cornel on December 1, 2012 at 8:04 am

    Charles, I used to submit my outlook on gold to the late Dan Dorfman and he published me on your site a few times. I would appeciate the opportunity to have a Blog on Trimtabs – even for just December 2012.

    I already know that a long term depression is coming and I can see it beginning in December 2012.

    The first sign of this profile should be seen by a market fall in the coming week.

    A rebound takes us to a danger point after which i’m expecting catastrophic failure.

    So Charles, you will be vindicated very soon and even Harry Dent will be smiling as his warnings of hard times ahead become reality.

    I have a good idea how 2013 will perform and the bad news is, it will travel in a downward spiral for no less than 6 months.

    Readers may scoff at this number, but I expect the Dow to head for 2000 points by about mid 2013.

    Get nervous when it reaches 9000 because it will whistle past that easily as 2013 progresses.

    If you get suckered into news that 9000 is a BUY opportunity, you will know soon enough that it isn’t.

    • Ed Hamilton on December 1, 2012 at 5:42 pm

      The past is soundly shown here:
      http://patrick.net/forum/?p=1219038

    • Katie on December 2, 2012 at 6:25 am

      Thanks for sharing. I don’t think the Dow will fall as low as 2000, but it will definitely lose 40 to 50% easily sometime in the next 6 months, by June 2013 especially after April 15.

  3. Test Post on December 1, 2012 at 6:48 pm

    Chicken Littles get to fly above the falling sky..

  4. Ed_B on December 4, 2012 at 7:05 am

    Unfortunately for all Americans, the current political paradigm works by robbing those who cannot vote (children and the unborn), so that current voters can wallow in the largess that their votes can buy. This does not seem changeable at this point. There are too many vested interests who are currently profiting from this insane system to mess with it. If it utterly bankrupts the nation, many seem not to care. I submit that this is because they have no clue how awful a complete economic collapse really is. For those folks who still remember the 1930s, telling them that those days, by comparison, will seem as the good old says is meaningful. To anyone younger than that, it will not seem real until it hits. It will be ugly, brutish, and devastating but probably not short. It could take a decade or two before a new system can be created to take the place of the one that is now failing. The interim period will not be fun for much of anyone, although those who are prepared for economic / financial disaster will do better than those who are not.

  5. Stocks…………. « Newsbeat1 on December 4, 2012 at 7:00 pm

    [...] Trim tabs [...]

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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