What Will Obama's Tax Deal Do for Investors?

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What Will Obama's Compromise Tax Deal Do For Investors?The biggest question many investors are asking about President Obama's compromise tax cut deal is how it will benefit the economy. But if those investors are hoping for a consensus answer from the watchers at Wall Street's securities firms, they won't be getting one any time soon: So far, there is little agreement about what the stimulative effects of the deal will be, or which parts of the compromise should get the credit if GDP growth improves.

Bernie Williams, a money manager at USAA Funds, says the payroll tax cut announced by Obama, lowering the Social Security tax from 6.2% to 4.2% for a year, was a surprise development that could boost the economy as much as last year's $800 billion stimulus package.

"I think it will provide some support for stocks," Williams says. "I think GDP forecasts are going to go up and if you think growth is going to be a little bit higher, that will have an earnings impact and a multiple impact."

David Resler, chief U.S. economist for securities house Nomura International, says investors should be happy mainly because extension of the tax cuts for all income classes averted a likely reduction in GDP growth.

"They should be cheering that we dodged a bullet, they shouldn't be cheering because of the payroll tax holiday or the unemployment insurance extension," Resler says. In his view, the extension of the tax cuts across the board "averted a calamity."

Bullishness From Goldman Sachs, Pimco


Stephen Stanley, chief economist for Pierpont Securities in Stamford, Conn., estimates the boost to GDP from the Obama tax package will be only 0.2% in fiscal year 2011 and just 0.1% in 2012.

Resler thinks GDP will go up 0.3% more in in the next four quarters, but expects that the longer-term effects of the package will cause growth to be reduced by the same amount in 2012.

Goldman Sachs, on the other hand, is quite bullish on the deal, saying that the Obama plan will boost growth by between 0.5% and 1% next year, "a substantial upside relative to our current forecast."

Bond manager Pimco is even more bullish. It raised its GDP growth forecast for 2011 from between 2% and 2.5% to between 3% and 3.5%, a full percentage point of additional growth. But Mohammed El-Erian, Pimco's chief executive officer, told reporters that he thinks most of that growth will come from the Federal Reserve's big stimulus program of asset buying known as quantitative easing.

Swimming Against a Tide of Local Government Budget Cuts


The stock market has moved only marginally higher since Obama's announcement, gaining about 20 points on the Dow Jones Industrial average, a rise of about 0.2%.

Williams says the lack of a bigger response was because the stock market had already priced in the expectation that Obama would agree to extend all the Bush tax cuts, and also find a way to convince Republicans to extend unemployment benefits.
"It is incrementally positive, it's not earth-shattering or anything," he says.

He added that while the tax cuts will have a stimulus effect, investors must also to take into account the fact that the states and local governments are still cutting back, laying off teachers, police and other employees, and putting off needed repairs. That will have a negative impact on the economy, he says.

Resler forecasts unemployment will come down from the current 9.8% to about 9.1% at the end of 2011 thanks to the tax package and Fed's stimulus. But he doesn't expect it to decline further for a while: At the end of 2012, he expects the unemployment rate to still be 9.1%.

From that viewpoint, expect that there will be very little wealth effect for investors to capitalize on next year. Stocks might rise for other reasons -- they always do in the third year of a presidential term -- but the tax cuts won't be the reason.

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GEORGE

Now this tax plan most likely will pass even if it creates more government debt.. Nothing was said about the many tax loopholes business and investors use that should be ended. Democrats would gain back some respect if they brought these tax loopholes to the publics attention and ended them.

See full article from DailyFinance: http://srph.it/f1GhuL

December 14 2010 at 8:33 AM Report abuse -1 rate up rate down Reply
2 replies to GEORGE's comment
mcwhomper

george you hit the nail on the head the rich already have so many loop holes and tax shelters that the republicans demanding they get the same as the poor and middle class will kick thier collective asses in the polls next election they don;t want to create jobs they are downsizing to make sure they can keep up thier life styles i say screw them all

December 14 2010 at 11:28 PM Report abuse rate up rate down Reply
wesxauto

George the democrats and the republicans do have reform plans to address the tax loopholes in 2011.

December 15 2010 at 10:48 AM Report abuse rate up rate down Reply
bayconnect

pjpilot We vote for people that are just like ourselves! This is what we voted for!

December 13 2010 at 11:18 PM Report abuse rate up rate down Reply
Mike

They are all corrupt...democrats and republicans. Extending the tax cuts for the wealthy is insane, especially with the deficit the way it is. This is supposed to create lot's of jobs...BULL!! They have been getting tax cuts for over 8 years now, so where are all the jobs? These rich ceo's have been outsourcing good jobs for years and have been getting tax cuts to do it. Now congress wants to give illegal immigrants amnesty when they are here illegally in the first place. The system is broken! Pork here, pork there, pork everywhere. I will never vote again because they are all corrupt! None of them are worthy.

December 13 2010 at 5:32 PM Report abuse +1 rate up rate down Reply
2 replies to Mike's comment
wahoofishing2

Ah ! The rich get richer and the poor get credit cards.

December 13 2010 at 6:05 PM Report abuse rate up rate down Reply
chaza511

Good for you Mike, you are right on the money, This country needs some serious work to get back to what the United States of America was, and should be. Its a shame what the supposed elected officials have sold out to, for there own personel benefit.

December 14 2010 at 12:49 PM Report abuse rate up rate down Reply
wahoofishing2

INDI Hypnotized himself staring in the mirror to long,he could starve to death being stuck in his own trance ,,,,,,,,,lol.......That would be horrible.

December 13 2010 at 4:25 PM Report abuse +1 rate up rate down Reply
ajgorm

Who does the Federal Reserve buy treasuries from? When the Treasury creates new bonds (T-bills) how do these T-bills end up in the Federal Reserve's hands, i.e. what are the channels of distribution. I have heard that the Federal Reserve buys them on the "open market", which usually means Goldman Sachs comes in to the Treasury, buys a large chunk of these bonds, then resells them to investors around the world, the Federal Reserve included - every process along the way peppered with "transaction fees". Is this how it works?

December 13 2010 at 3:51 PM Report abuse rate up rate down Reply
2 replies to ajgorm's comment
ajgorm

Fascism !

December 13 2010 at 3:55 PM Report abuse +3 rate up rate down Reply
ajgorm

One might wonder if the fed and banks are owned by the same people//

December 13 2010 at 4:02 PM Report abuse +3 rate up rate down Reply
ajgorm

indisposed99999 Does the Fed purchase treasuries and HOW !

December 13 2010 at 3:45 PM Report abuse rate up rate down Reply
1 reply to ajgorm's comment
ajgorm

indisposed99999 2:48 PM Dec 13, 2010 •(0) vote this comment up •(0) vote this comment down • He is talking about M2 (currency plus bank reserves), not M1...actual currency. No one disputes M2 has increased dramatically. And no, the fed can't purchase treasuries from itself....thats why they need the fed

December 13 2010 at 3:49 PM Report abuse rate up rate down Reply
ajgorm

The Federal Reserve will buy an additional $600 billion of Treasuries through June, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation. Policy makers, setting a pace of about $75 billion of purchases a month, “will adjust the program as needed,” the Fed’s Open Market Committee said today in a statement in Washington. The central bank left unchanged its pledge to keep interest rates low for an “extended period” after Chairman Ben S. Bernanke said it could be modified in some way.

December 13 2010 at 3:38 PM Report abuse +1 rate up rate down Reply
4 replies to ajgorm's comment
wahoofishing2

Indy there's a Ron Paul blog going on daily financial concerning the Fed ,your know it all presence is begging for it's attendance.(Seven ways Ron Paul is wrong about the Fed.) This is better than feeding chicken to alligators.......:))

December 13 2010 at 2:38 PM Report abuse -1 rate up rate down Reply
3 replies to wahoofishing2's comment
pjpilot

This tax deal will not help because it is ill conceived! It is only an extension of tax rates for TWO YEARS. No investor will take any long term risk based on a TWO YEAR EXTENSION!! We need politicians that are smarter than this!

December 13 2010 at 2:38 PM Report abuse +4 rate up rate down Reply
ajgorm

Just how much money is the U.S. government printing to meet its debts? Steven Horwitz, professor at St. Lawrence University, and co-author of The Austrian Economists blog, explains that the amount of money printed in the past few months since the October economic crisis, has been absolutely unprecedented in U.S. history. “Since September, the 'monetary base,' which is the measure of currency plus bank reserves, has doubled from about $850 billion to $1.7 trillion, about $600 billion of which is in the form of bank reserves,” he says. Ron is not alone Indi !

December 13 2010 at 2:34 PM Report abuse rate up rate down Reply
4 replies to ajgorm's comment