Explanation On Why Market Could Tank By July 2013

Before and since President Obama won reelection a little over a week ago, the market has been sharply down just about every day. Is this cause for concern? Yes it is, and I will explain why in this write-up.

The first factor for the current market sell-off has to do with the possibility of sequestration, aka, "the fiscal cliff." If both parties in DC cannot compromise to find a solution to avert this, austerity for everyone will be the rule of the day. Personally, I do believe at the very least, both parties will find a way to "kick the can down the road," so investors and traders should not be overly afraid of this issue.

Another factor, likely more the cause is early end of the year tax selling. This year has higher emphasis on tax selling because it's likely long term cap gain taxes will be going up. Most institutions are long term mutual and hedge funds, so locking down profits at the current rate of 15% is a large factor for the current market downturn. The prospect of 30% or higher long term cap gains also discourages  re-investment at this time.

The latest threat of war in the middle east is certainly weighing heavy on the market, with the distinct possibility that Israel will attack Iran in the near future. If this does occur, the market will absolutely shave another 25% from here.

The most important long term factor that is likely to cause unemployment over 12% is Obama care - here is why:

According to http://www.obamacarewatch.org,

ObamaCare’s employer mandate is among the new laws most anti-growth provisions. When implemented, it will force most American businesses to offer government-approved health insurance to their employees or else pay new federal taxes for not doing so. This costly new requirement will make it more expensive for firms to hire workers in the future. Consequently, it will destroy jobs, and many firms are likely to slow down on hiring in anticipation of its implementation.

“Free-Rider” Provision

ObamaCare does not impose a straight-forward requirement that employers offer health insurance to workers. Proponents of the new law wanted to avoid the charge that the new law was directly imposing new costs on American business. So, instead, they created a back-door mandate, what they call the “free-rider” provision.

If a firm with at least 50 workers has a full-time employee who is getting federally-subsided insurance through an ”exchange,” then that employer must pay a penalty for failing to offer that worker acceptable insurance on the job. (Workers that are offered qualified coverage by an employer are ineligible for the new insurance subsidies provided in the exchanges.)

The tax is scheduled to begin in 2014 and the Congressional Budget Office estimates it will bring in approximately $10 billion in annual revenue once it’s fully implemented.

Penalties For Failure To Insure

For firms which do not offer insurance any insurance, have more than 50 employees, and have at least one employee receiving insurance subsidies, they must pay a tax of $2000 per subsidized employee. The tax is applied to all of a firm’s employees (after excluding the first 30), not just those that are subsidized. For example a firm with 51 employees would pay $42,000 in new annual taxes, and an additional $2,000 tax for every new hire.

For firms that do offer insurance, the penalty is the lesser of $2,000 for every employee (after exempting the first 30) or $3,000) for every employee receiving a subsidy.

The National Federation of Independent Business has a clear and informative table which examines the taxes assessed under different scenarios here.

Disincentives to Hire

ObamaCare’s employer mandate will discourage business development and growth. Small firms with 50 or fewer workers will have very strong disincentives to expand. These businesses can avoid the new penalties by staying small; growth will simply add new costs and burdens. Many businesses with low profit margins are unable to pay the substantial cost of providing comprehensive insurance to all of their employees or the new taxes under ObamaCare’s employer mandate. Once companies reach 50 employees, they are likely to turn to contractors and outsource work to evade the new mandate, even if such arrangements are less efficient than directly hiring new workers.

Part-Time and Seasonal Employees

Fines to employers under the employer mandate also are imposed on workers who are not full-time employees, where a combination of employees working 120 hours per month (around 30 hours per week) count as one employee. This provision in the bill especially hurts seasonal businesses, where it is frequently not cost effective to provide insurance benefits to an employee who will only be with the firm for a short period of time.

Penalizing Low Income Households

ObamaCare provides strong incentives for firms to avoid hiring workers from low-income households. Eligibility for subsidized insurance in the exchanges is based on household income, and firms can be penalized if one of their workers gets subsidized coverage in an exchange. Thus, firms have a strong incentive to find workers who won’t qualify for subsidized coverage, which may also lead to invasions of privacy. For instance, a restaurant might find it better to hire young waiters from upper-income neighborhoods, as opposed to low-income areas, because they would be less likely to qualify for subsidized insurance in the exchanges. ObamaCare therefore is penalizing the very households it was supposedly passed to help.

Well-meaning Liberals are about to learn a very damaging lesson between what should be, and what is -- Many businesses with 50 to 55 employees will cut 6 employees in order to avoid extra taxes penalties for not carrying the insurance mandated under Obama care that will kick into effect in 2014. I also expect more "under the table" hiring of illegal aliens to occur for many businesses to avoid these tax penalties. Business people in general are "bottom line" minded - profits. While I would agree in principle with many liberals about offering affordable health care to employees as being the right thing to do, it's simply not the reality of what many businesses will do. You can't force morals and ideals down people's throats. Liberals hate it when the Christian right engages in these things, and I maintain this is the inverse same.

What is likely to happen here as mentioned prior, unemployment will rise to 12%, markets lose 50% capitalization from this point, causing even more "cut backs"  which will cause unemployment to rise over 15%, in turn, causing more market selling -- even more lay-offs.

The State of California under liberal policies, has racked up $93B in deficit over the years, so we would think people would learn from this. Sadly, the poor like to feel better about being poor - this is why Obama appeals to them. Even Under the best conservative policies, things would not get much better for them either -- but still better. However, under what Obama seeks to do, I can guarantee their lots in life will become much worse.

I am not trying to get political here per se, and I believe Obama thinks he is doing the right thing, but also believe he is clueless when it comes to business and what really spurs employment, and what will avoid higher unemployment. Furthermore, another stimulus package along with his regulatory policies this will only serve to cause even more an abundance of liquidity in the system without a productive investment demand for it.

It's the same as stock dilution, you need more demand on a stock with excessive dilution for the price to appreciate -- without this, a stock price will falter. Obama's answer is basically a polar opposite to Republican policies -- we have gone from one extreme to another and it's not the answer-- middle of the road politics is the answer where people put aside excessive ideology in favor of logic and reason.

I believe Obama suffers from blinding ideology and theoretical principle, much in the inverse similar manner that the ultra right wing Christians suffer from -- both are living in a paper box.

Obama care needs to be reworked before it's too late. It is anti pro growth and potentially devastating for everyone. If Markets crash, people will lose jobs, the rich won't invest, and will remove their money from America at record rates - and if you think taxing the rich more is a solution, it's not. The tax code is written by both Republicans and Democrats to favor the ultra rich -- they will use loopholes to pay less and invest in emerging foreign markets, leaving Americans  "holding the bag" - so to speak.

Those who make between 250k and 1M will be flipping a lot of the bill. I am included in this group just barely, and I don't mind paying a little bit more and because I save my money, am single with no kids, and really do not spend much so I will be OK. However, many in this group are married with kids, will spend less money on higher ticket retail items -- refraining from spending as much = less demand = even less jobs = the poor will become even more destitute, and crime rates will likely go up -- protests and riots can also be expected. Don't believe me? Have you been paying attention to what is going on in the southern EU Zone?

Traders need to be looking at short selling the market over the next year. While short selling is something I rarely engage in, I did engage in quite a bit of it in 2008, and will do so again here shortly. There will be good long side trade opportunities as well, don't get me wrong, some companies will see stock price appreciation. However, in general most stocks will correlate trade to the downside -- a slow bleed over time. The markets will go into " a frog in boiling water" mode. Put a frog in room temp water, heat it up slowly over time until it boils -- frog will not jump out and will boil to death.  This is what we can expect in the next year in not only the market, but the global economy as well. Be prepared now for it and be wise!

 

 

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7 thoughts on “Explanation On Why Market Could Tank By July 2013

  1. Thanks Scott. I like this piece. I knew right away the problems that Obamacare would have on business. It’s a no-brainer. I expect another 20-30 million to be on welfare by the end of Obama’s term. Unless the fiscal cliff prevents funding.

    P.S. Didn’t understand your sentence, “Liberals hate when the Christian right do it, and I maintain this is the inverse same.” Can you reword it to make some sense. Maybe “Christian-right does”. Thanks.

  2. We’ve had the broad sense that the middle class is shrinking, and the current trend has a few of the old middle class becoming richer and a lot more slipping down the ladder. In other words, increased stratification; a sharper division between rich and poor, rather than a broad continuum. As Scott describes it, I see something like the same framework being imposed upon businesses. That is, we’re moving towards a nation of small businesses and huge businesses, but it will be harder to exist anywhere in the middle. The small businesses can go somewhat under the radar, as long as they stay small. But there is a glass ceiling holding them in place. We’ve seen how the big businesses become “too big to fail”…which basically means they do what the government tells them and they’re protected. Sort of like organized crime, or maybe the business side of national socialism.

    As far as Obamacare itself goes, I figure the law was designed with intent to fail exactly as Scott describes. Because when it begins to decimate the already-struggling economy, you can predict what happens next: The Democrats will argue that the government must “save” businesses by picking up the bill itself; i.e., a “single payer” system. Then they’ll kick in some new taxes and controls that will supposedly pay for it all. That will solve our problems once and for all. Fine in theory, but hell in practice.

    This may sound strange, but I actually prefer to pay for my own health care as much as possible. The reason is because, generally speaking, the guy that pays is in the driver’s seat. I don’t want to go begging to government bureaucrats for whatever care I think I need when they think I don’t. Especially when I’m sure I’ll be paying more than my fair share of the burden. Also, I’m thrifty in managing my own affairs, whereas the government is anything but. I’m proud to pay taxes when I feel I’m contributing to the public good; sadly these days I feel I’m mostly being exploited by cronies that feed at the public trough. It doesn’t help that people who raise questions like mine are accused by prominent politicians of having extreme moral failings (e.g., racist, greedy, selfish, uncaring, etc.). Our government regards productive citizens as chickens with eggs to be harvested, or perhaps as cows to be slaughtered. The government no longer exists to serve the people; rather the people exist to serve the government. How did we fall to this point?

  3. Very gloomy predictions Scott, but I do follow the thread in your story. Do you mind writing a piece on what you think may be some of the possible good long-side opportunities that you mention when you get a chance?

    Thanks in advance.

  4. People have a natural inclination to find reasons for things. In fact, most begin with their bias and build from there. However, we ‘enlightened’ traders know that the tape is all that counts. Biases only serve to confuse. Although every media source spends time trying to explain the recent market action often with the reasons outlined above, I think it really has less to do with those reasons than we’d think. If you go to Yahoo Finance and pull up a $SPY chart and overlay it with the Euorozone ETF $VGK. You’ll find the charts are the same..Yet Europe has no ObamaCare or Election issues. So what gives? Maybe they just reflect the souring of our economy? Overlay the Asia ETF $PEK. So China should be mirroring our market ills. After all, we are their greatest debtor and trading partner. Whoops! Not at all the same. IMO, we’re just seeing a worldwide general market decline irrespective of the US’s issues. Check it here : http://bit.ly/SxR6Ua

    1. Ok, and you can see similar chart in 2008. If you assume the same bounce as 2011, you will be mistaken; situations change. This is what I do best, forecast macro markets. I said last year that the markets would be fine, that we would see a nice year end bounce into the following year. This year we might see a bounce, but a crash in mid 2013 due to different reasons that are not related to the eu issues of last year, but far more troubling. Simply refering to chart moves and placing bets on those alone cost many their rolls in 2008. So how did I know the market would crash then, but not last year? — it’s what I do, and I am good at it 🙂

  5. As far as the market tanking goes…as Scott says, it seems more realistic to expect that businesses will struggle, which means their values are more likely to fall than rise. On the other hand, with high liquidity and extremely low interest rates, bonds have no appeal except as a place of refuge. And considering that the excess of dollars will eventually cause depreciation (i.e., inflation), long-term bonds seem an especially bad idea. A flight from stocks to bonds would push the interest rates even lower. Would this happen? At least a functional business has some real collateral behind it, and might hold value if the currency depreciates. Unlike bonds.

    Strange days we have here. I can’t imagine a healthy economic recovery, but I can certainly imagine contradictory scenarios of economic turbulence. Inflation, deflation, stagflation, rising gold, falling gold, cash as wastepaper, cash as king…I just don’t know.

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