'God bless the United State of America' is how many a politician speeches have ended. And indeed, God certainly must be blessing us, just look at the stock market. Right now, surprisingly, everything seems to be coming up roses, particularly those key metrics that determine what is really going on.
The first surprise is that corporate buying has picked up dramatically. I had thought that net corporate selling would continue and surge into February. Instead, there has been almost $40 billion of new corporate buying announced over the past week, led by the $20 billion Dell (NASDAQ:DELL) leveraged buy out. The second related surprise is that corporate selling remains lighter then we had thought.
Therefore recent corporate activity has been extremely bullish. Is this spike in buying a one-off event? Could be. The Dell deal has been worked on for quite some time. But then again, there have been at least three other billion-dollar cash takeovers.
I am also surprised that we are still seeing positive inflows into both mutual and exchange traded U.S. equity funds. My opinion had been that inflows were boosted directly and indirectly as a result of higher 2013 tax rates and would stop by the end of January. Instead, February equity flows still are positive, although nowhere near the huge inflows of January
Lastly and perhaps the biggest surprise, at least to me, is that withheld income and employment tax payments were still up over 6% year over year the past two weeks, through early February.
Those of you who have been regular followers of my blogs know that I had been expecting wage and salary growth to be slumping by now as a result of higher 2013 tax rates pushing lots of taxable income into 2012. I also had been saying that higher employment taxes this year would lower take home pay. Well, despite higher taxes and 2013 income being recognized in 2012, wage and salary growth is not slowing. Why? I have no idea. I called my favorite official senior Washington economist, who has been a friend and confidential source since the late 1990's. He also has no answer as to why there has been no slowdown in wage and salary growth.
Remember, there are always inadvertent consequences to major government actions such as boosting top bracket income and capital gains tax rates for 2013. In anticipation of the year end rate hikes, over $100 billion in extra income poured into the economy late last year. That boosted what normally comes in during December by about 20%. The spike in income means that tax collections have also surged. It is no surprise that the U.S. government can now tout that the deficit could be less than $1 trillion this year. Of course for that to happen, wage and salary growth needs to stabilize at these high levels, something I think is unlikely, but then again, we are in uncharted territory.
One possible reason for the current spike in wages and salaries could be another inadvertent consequence of the tax hike. And that is that the year end income surge has had a ripple effect on the economy. Another possible reason for the gain is that business owners decided to take in 2012 more than just regularly scheduled income, bonuses and dividends. They also may have raided the cash from their business balance sheets, assuming that higher rates are here to stay.
I've discussed before how the new mantra in the financial markets is that central bank money creation is all good, and the belief that, therefore, nothing bad can happen anytime soon to the global financial markets. Add to that the strengthening of the U.S. economy.
The results? It seems likely stock prices will keep going up over the near term.
The bigger question is not whether reality has been suspended forever, but for how long? Take home pay right now is growing by about $400 billion annually. How can the U.S. keep creating $1 trillion a year to pay our bills. The current U.S. deficit will be $17 trillion soon, not counting Federal Reserve debts of $3 trillion. The Fed will supposedly sell its bonds in the market place after the economy picks up. Where will a U.S. economy that generates $7.5 trillion in after tax income get enough money to not only pay off Fed holdings, but $17 trillion in government debt?
Despite all this bullishness, those of you who subscribe to Biderman's Market Picks know that at least our model portfolio is still above water while we wait out this insanity.