Die Meinung

Beware the Ides of April!

Over 360 billion dollars in non-withheld income taxes will have to be paid to the US Treasury this April. That's around one third more than last year and could get the bull market in big trouble.

Charles Biderman

Deutsche Version

My estimate is that over $360 billion in non-withheld income taxes will be paid to the US Treasury this April; approximately $86 billion or one third more than the $278 billion non-withheld receipts in April 2018. Since much of this money is likely still in the stock market, the bull market could be in big trouble.

Charles Biderman

Charles Biderman is the founder of TrimTabs Investment Research, a data service that analyzes daily liquidity flows on U.S. stock exchanges and derives investment recommendations from them. On this basis, he also launched an Exchange Traded Fund in 2011. The current version is listed as TrimTabs Free Cash Flow ETF. Biderman is regularly interviewed in the US financial media and began his career with the investor magazine «Barron's». He lives in Hawaii and in his spare time is intensively occupied with ontology, the philosophy of being.
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April 15, 2019 is Tax Day when all 2018 income taxes not withheld by employers, including capital gains, are due. The amount due this year could be stock market decimating: Not only are capital gains taxes likely to be well over $50 billion more than the about $179 billion paid last year; but that doesn’t include an estimated $20 to $40 billion in underwitholding as a result of changes to the income tax withholding tables after the 2018 tax cut.

Where I get these numbers in part is due to recent conversations with Mark Booth who for 30 years was at the Congressional Budget Office and was their guru on income tax collections. Mark retired last year, so I can now report that since I befriended Mark in 2000, he was «my favorite Washington Economist» whom I referred to frequently with questions about income taxes but never used his name in print or on the air. Mark now runs Booth Financial Consulting, and is the most knowledgeable economist anywhere as to US income tax collections.

This April won’t be the first time that capital gains tax payments crashed the market. Remember 2000? At the end of January 2000, I had turned bearish while running TrimTabs Investment Research – assuming that after the usual big year end inflow into equities, stocks had to sell off. Why? Between insiders selling an estimated $80 billion monthly in unlocking internet IPOs sold in 1998-1999 and option conversions, the long-term bull market would collapse because there was not enough new money to buy those shares.

Well, I was too early. Investors borrowed over $100 billion in margin debt in the first quarter of 2000 and that kept stock prices elevated. However, the Nasdaq highflyers made a decade long peak the first week of April 2000. Why? $130 billion in capital gains were due that April and the sale of stock to pay taxes crashed the market.

Capital gains tax payments are estimated by the Congressional Budget Office to grow some $20 billion this year from 2018, presumably much occurring in April. I think the gain could be as much as $55 billion more - and maybe even lots more. Here’s why:

  • In 2018, there were $500 billion more in new share buybacks plus cash takeovers than the prior year. If the profit on that $500 billion was 30%, or $150 billion, and if 40% was taxable (at least half of all equities are held in tax exempt accounts such as pension funds, etc.), then 2019 capital gains taxes due at a 20% tax rate would be at least $12 billion more than the prior year.
  • US stocks dropped $5 trillion in Q4 of last year. Given a four to five leverage factor on both the up and downside for new money: If $1 trillion of stocks were sold in Q4 and if 40% were in taxable accounts and again 30% was profit at a 20% tax rates at least $24 billion in extra capital gains taxes are due.
  • The US stock market this year has recovered about $3 trillion of the Q4 2018 plunge. That means to me that much of the tax money owed has been put back into stocks.

TrimTabs' liquidity theory says all there is in the stock market are shares of stock. Money moves in and out of the checking accounts of investors. A bull market is defined as more money chasing relatively fewer shares. On the other hand, a bear market is defined as more shares chasing less money. Liquidity theory has been virtually bullish ever since the start of 2011.

Nevertheless, many of you who have seen me or my work over the years probably have been left with the impression that I am a long-term bear. Perhaps that is because whenever I have been on TV or in other news, my key point was that the market would keep going up only as long as more money was chasing relatively fewer shares. However, when less money starts chasing more shares, a major bear market would result.

It’s well known that the decade long global rise of stock market capitalizations has been in lock step with the growth in central bank balance sheets that resulted from money printing, euphemistically called Quantitative Easing. Central bank balance sheets started growing in 2009.

Well, guess what? central bank balance sheets stopped growing and began shrinking in August 2018. The US Federal Reserve has not only stopped printing but also has been shrinking its balance sheet. The European Central Bank also stopped printing new money last year. That leaves only the Bank of Japan as still being a money printer.

I personally sold all my individual stock position by the end of September 2018. Mainly due to central bank cessation of new money creation.

The last bearish point about liquidity – and perhaps most important – this March 2019 is the first month that new offerings of stocks and convertible bonds were greater than new stock buybacks.

Why that’s key: Since 2011, companies returned more than $6 trillion to shareholders via stock buybacks and cash mergers net of all new share sales, whether IPOs, secondaries and insider selling. Since there was literally no net inflow into stocks by the public, the only source of new money was from float shrink. However, with Lyft, Uber, Airbnb and many other unicorns lining up to sell billions in new shares to the public, where will the money come from to buy those shares?