Fear Of Tax Hike Causes More Selling

Equity stock market extends the fall from previous week. The fear of fiscal cliff is so widely spread that some wealthy investors are afraid of tax hike for their properties. As a consequence, there is a wave of disposal of equity stocks for cash or equivalent among wealthy investors in which a large proportion is long term investor.

In previous post, it is anticipated that selling would stop after day traders sold out the holdings. But the relay of selling from wealthy investors extends market drop in this week. It appears that the second wave of selling has finished. But market may come up with another selling event. There are plenty of possible news that can drive market lower, such as earnings miss, European debt crisis, US rating downgrade, etc. Therefore although the room for further market drop is not much, there is still uncertainty whether market will decline for the third week.

As mentioned in earlier post, long term investors are most likely the dominant sellers in coming sell-off events. Institutional and individual investors, besides very rich households, are waiting for market bottom. There is symptom that smart investors are beginning to accumulate shares. Market may rebound strongly when selling from wealthy investors ends and cash on the sideline begins to enter market. Nevertheless, market participants should be aware of news that can drive long term investors to dump stocks again.



Why Investors Are Dumping Dividend Stocks
The fear of higher taxes has put a chill on dividend-paying stocks, in what some analysts say could be an overreaction to the "fiscal cliff."

The Bush-era tax cuts on dividends and capital gains, to 15 percent, are in the cross hairs, as congressional leaders and President Barack Obama this week start work on reshaping the tax and spending components of the so-called fiscal cliff.

"If an investor wants yield, and they also want an investment vehicle linked to growth, then dividend stocks would still seem to be a good place to be," said John Stoltzfus, chief market strategist at Oppenheimer Asset Management. "In an environment where a market continues to be fairly prone to move from 'risk on' to 'risk off,' it's nice to have an investment to pay you while you wait."

Why Muni Bonds Are Suddenly So Popular
Investors are barreling into municipal bonds, driving yields to record lows and hoping for a safe hiding place at a time when taxes are almost certain to rise.

The charge by investors into the tax-free securities has been creating a surge in demand that is not quite being met by supply and is causing some to question whether the muni bond market could be heading for a bubble.

One trader described the muni market as being at a "high-water mark" for momentum, where this new hunt for tax free investments coincided with typical year-end buying, though some of the insurers and hedge funds appear to be less active. "Mutual funds are getting a lot of money in. That positive cash flow needs to be spent, so I don't believe we're creating a bubble. This isn't speculative money. It's real money chasing after it," he said.

Condon also sees no sign of a bubble, but he is concerned that investors at some point will find themselves overly invested in bonds in general. The ratio of the 10-year triple-A-rated muni Tuesday was 97 percent, meaning that security was paying 97 percent of the equivalent Treasury, well above the long-term average in the low to mid 80s.

U.S. credit rating could again take hit in 2013
In 2011, the United States emerged from a damaging budget battle with a downgrade of its pristine triple-A rating for the first time in history. In 2013, it could be dealt even a bigger blow.

Should that happen, it could have a detrimental effect on the country's cost of borrowing and could also shift some investment away from the United States, though the country's big markets and attractiveness as a safe haven are likely to limit those effects.

When S&P cut the United States last year, markets reacted badly. The benchmark S&P 500 index  slumped the Monday following, falling 6.7 percent to an 11-month low.

Paradoxically, U.S. Treasury yields plunged as spooked investors stampeded to safe havens. The yield on the benchmark 10-year note fell to 2.32 percent on August 8 from 2.56 percent on August 5 - and is now around 1.6 percent.

That same knee-jerk response could be repeated.

"Investors need to hold billions and billions of dollars," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. "Where else are they going to go? Noise out of a rating agency is not going to change that."