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By Charles Biderman

In an April 30 video I said that income tax collections have been surging this year due to higher taxes, both from higher tax rates and capital gains payments resulting from sale of assets prior to 2013′s higher rates. The facts I reported April 30 are now coming to light three weeks later. The bullish twist on the news, that deficit reduction means we must have economic lift off has become an overnight feel good phenomena for those fully 100 percent long stocks.

If the drop in the deficit is a trend that will continue due to underlying economic improvement, that means that the bulls no longer have to worry about an impending stock market crash when the Fed stops printing.

If only it were the true that we are in a sustainable recovery. The actual numbers tell a different story, a tale of three one off items, masking a continuing slow growth economy.

So far this year through the middle of May, all income tax collections are up $141 billion year over year, or 14 percent. Add whatever Fannie and Freddie are giving back and Treasury revenues are up around $200 billion year over year in just four and a half months. That obviously means that the deficit is $200 billion less then last year, or a 20 percent decline. That decline has to mean the overall economy is improving.

Sorry. Not so. First, only $61 billion of the $141 billion tax collection gain came from higher withheld income and employment tax payments sent in my all employers of the 135 million US workers subject to withholding. Unfortunately only a small percentage of the increase in tax collections is the result of growth in wages and salaries. The bulk of the year-over- year pop in withholding is due to higher taxes rates. In other words, so far this year, wages and salaries before higher tax rates are growing minimally, particularly after inflation.

Second, what no one other than me has been reporting is that the bulk of the higher taxes collected this year was not due to higher tax rates, but rather to capital gains paid this year for asset sold last year to avoid this year’s higher taxes. For example, the category the US Treasury calls, Other Than Withheld Income and Employment Taxes includes all amounts paid directly by individuals to the IRS. My guess is that capital gains taxes paid this year on last year’s asset sales boosted payments by almost 30 percent, or $64 billion. That $64 billion was more then the $61 billion in higher withholding.

Third, the housing twins Fannie and Freddie benefiting from their monopoly position in the mortgage is kicking back $60 billion.

So combined higher taxes and a cash transfer is reducing the deficit by $200 billion. Unfortunately most of this is due to the one time items.

There is a bit of good new. Yes, over the past three weeks wage and salary growth has indeed picked up. But just a tad. Even at this faster growth rate wages and salaries are growing by about $300 billion or so annualized. At a combined 25 percent income and employment tax rate, $300 billion generates $85 billion a year in higher taxes, or about $30 billion of the $200 billion year to date deficit reduction..

I know this might be too many numbers for some of you. So to summarize: The budget deficit has dropped by about $200 billion so far this year and maybe $30 billion of that deficit reduction is due to income growth.

Bottom line, no sign of sustainable growth that I can see.

What is going on in the other side of ledger, government spending is also interesting. So far this fiscal year, US government spending is actually down a tad, $11 billion 0.3 percent of the $3.5 trillion budget. However, while total government spending might be down, Social Security, Medicare and Medicaid spending grew by $65 billion or almost 8 percent. As of right now social security, medicare and medicade is equal to 43 percent of the entire US government budget, and their growth rate is accelerating.

Think about it. Although overall government spending dropped a tad, entitlement costs spiked $65 billion so far this year, an amount greater then this year’s entire increase in withheld income and employment taxes even after a big spike in employment tax rates.

Look, I have been saying since the start of this year that as long as the Fed keeps creating phony money with which to buy financial assets; and as long as corporate America is not printing and selling huge amounts of new shares, stocks should keep rising.

However, that does not mean that a bull run in stock prices and a one-off decline in the budget deficit equals a sustainably growing US economy.

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By Charles Biderman

Alan Abelson, former Barron’s Editor and my mentor, passed away last week.

The first time I ever spoke with Alan was February 1970 when I was an MBA student at the Harvard Business School and he answered a collect call from me. Digital Equipment was a Wall Street darling at the time, but I had heard that DEC for the first time was inventorying mini-computers instead of shipping current production.

At that time, Alan’s Up and Down Wall Street column was the most influential on Wall Street. I had called him on a whim because I and several other students had bought out-of-the money DEC puts. He thanked me, and as anyone who has ever talked to Alan over the phone knows, he hung up without saying goodbye. The story ran the following week. DEC stock dropped and our puts were in the money.

I got to meet Alan two months later when he spoke at the Harvard Business School Finance Club. That meeting and a few phone calls eventually led to a summer job as Alan’s assistant.

My first story assignment was a News & Views company story on Woolworth. Alan told me to make an appointment and interview either the CEO or the CFO but never the PR guy, and then write the story. I said okay, did the interview, wrote up the story and handed it in. Years later I learned that Alan was impressed by the fact that I followed his orders and got the story without asking him any questions. What Alan didn’t know was that I was so ignorant about journalism that I didn’t even know what questions to ask.

All of the above is my way of saying Alan took a shot on me and I paid off for him. Alan made many other unusual journalism hires of people who went on to become stars in their own firmaments. Barton Biggs, who preceded me, went from Barron’s staffer to head of Morgan Stanley research and then his own hedge fund. After me Alan hired Jim Grant, of Grants Interest Rate Observer, and Diana Henriques and Floyd Norris of the New York Times, among others.

And then there is the Barron’s Round Table. Several current and former Round Table members have told me they owed Alan a great deal. Not that he made them great money managers, rather Alan’s support took some of them from barely relevant to big time operators. Very few know that Alan over the years had several job offers to leave journalism to become head of research at top Wall Street firms.

About five years ago I asked Alan for permission to write his biography. He declined and that was the last time I spoke with him. What I really wanted to say was that in his time Alan was the real world top cop on Wall Street. And after Alan stepped down as Barron’s editor, no one, repeat no one has picked up his mantle.

Alan stepped down as Barron’s editor in the mid 1990s but continued doing his column until three months before he died. Alan’s Up and Down Wall Street column for many years was the most influential on Wall Street. The late Danny Dorfman even at his peak acknowledged to me that Alan was his better. So, why was Alan’s column so powerful?

First Alan was obviously smart enough to understand and explain in simple terms the most complex financial frauds. Moreover, Alan never quit once he was on the chase of a big time Wall Street con.

One example: Back in 1972 Alan got a tip from the top gold and silver trading house at the time, Mocatta Metals, that an up and coming commodity option shop, Goldstein Samuelson, was a ponzi scheme. I got assigned to check it out and in doing so became friends with both Dr. Henry Jarecki, then Mocatta’s chairman, and Thomas Peterffy, who was among the first to use volatility analysis to trade commodity options. Parenthetically, Thomas went on to use volatility analysis to trade stock options and that led to where Thomas is today–founder and chairman of Interactive Brokers.

With Alan’s backstopping me, I learned everything I needed to know about the pricing of commodity options and why the ultra cheap commodity straddles that Goldstein Samuelson was peddling had to be a Ponzi scheme. My story ultimately exposed the fraud and the fraudsters ended up serving time. For what it is worth, I was told Alan nominated me for a Pulitzer Prize.

Unfortunately, by the early 1990′s Alan was constantly bickering with Dow Jones management who objected to his truth seeking and cared more about short term profits. In 1992, when I was recommending short positions at Market TrimTabs, I recommended shorting Dow Jones. The reason was that Dow Jones had squandered a highly profitable monopoly position as the major purveyor of Wall Street research and news. As everyone knows, Dow Jones today is a minor subsidiary of Fox. I loved that Alan not only posted the TrimTabs Dow Jones short sale recommendation on the bulletin board outside his office but that he kept it there until he left as Barron’s editor in 1994.

With Alan gone, there literally is no one on Wall Street who is willing to take on and expose the fraudsters. Today’s Barron’s applauds itself for the being the first to question Madoff’s credibility. However, I have no doubt that if Alan were in charge of Barron’s at that time, Madoff would have been exposed, saving investors billions.

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By Charles Biderman

Warren Buffet says bonds are a horrible investment because prices are artificially high due to the Fed creating phony money. And at some point, says Buffet the Fed will stop. To my way of thinking, that also makes stocks a horrible investment.

So, if stocks are just as vulnerable as bonds to the Fed withdrawing the narcotic known as free money, why does Mr. Buffet say stock prices are reasonable? To me, logic says stocks are just as overpriced as bonds.

Let us look at what really is happening in the money creation world. The US government is running a current deficit of around $900 billion year, down from $1.1 trillion last year, still enormous. At the same time, the Federal Reserve Bank buys bonds and pays for them by creating a credit in the seller bank’s checking account.

In other words, the Fed is buying up the entire US Government deficit and then some. That means there is lots of extra cash floating around the financial markets bidding up the prices of not just bonds but stocks as well. So while I agree with Mr. Buffet that at some point bond prices have to drop significantly, so do stocks.

Meanwhile I guess I should comment about last week’s very bullish Bureau of Labor Statistics April jobs number, which at 165,000 is more then double our 70,000 job estimate at TrimTabs. In a perfect world, I would ignore the BLS initial monthly nonsense and so would everyone else. However, since the markets move big when the jobs number moves big, it is important to understand the BLS initial report is widely inaccurate.

The BLS surveys only 145,000 employers monthly out of millions, mostly big companies and virtually all government entities. Believe it or not, it takes three months for each monthly survey to be returned – just over half comes in the first month. So each month based upon a survey of less than 100,000 employers, the BLS makes nothing more than a guess as to how many jobs were created.

Then once a year at the end of March the BLS adjusts the prior year’s survey with actual job numbers obtained from state quarterly unemployment insurance filings. Lo and behold, our initial monthly job estimate ends up being much closer to the annually revised final number then the initial monthly BLS garbage. In other words, the BLS initial monthly jobs number is just a guess and a wild guess at that.

For those who care here is how we create our monthly job estimate: First, we track withheld income and employment taxes paid by all employers and reported daily by the US Treasury. Currently actual withholding tax payments are up by just under 11% year over year over the past month or so. But that doesn’t mean that pretax wages and salaries are growing by 11%. The recent employment and income rate tax boost accounts of 8 percent. Therefore, pretax wages and salaries are growing by just under 3 percent before inflation when you subtract the 8 percent in higher taxes.

Wage and salary growth of just under 3% before inflation is consistent with new job creation of about 70,000 new jobs.

Jim Bianco says that Q2 and Q3 expected year over year sales and earnings of US public companies are dropping towards zero and below. To me, that is also consistent with wages and salaries barely growing after inflation.

In my opinion, the global economy grew rapidly as a result of broadband internet linking the world starting in the early years of this new century. However, starting from 2007 through today broadband is now virtually universal. China is more than built out and emerging markets are not growing nowhere near as fast as they did five years ago.

Combine slower growth world massive amounts of government intervention, and you get a world looks exactly like this.

The post Mr. Buffet – If Bonds Overpriced So Are Stocks appeared first on Biderman's Money Blog.

As central banks in the U.S., Europe, and Japan are simultaneously engaged in unprecedented quantitative easing, investors are accepting lower yields on risky assets. Consider the equity market. Since the Federal Reserve started QE1 more than four years ago, the dividend yield on broad-market stock benchmarks has been cut in half to 1.9%. Meanwhile, the yields on companies with high dividend payouts fell by two-thirds to 3.2%. A high dividend stock strategy offers investors just 1.3% in additional yield over broad-market benchmarks. In 2007 and 2008, the additional yield averaged 3.0%.

Source: Bloomberg

The yield spread between companies with high dividends and companies engaged in large stock buybacks has also shrunk significantly. Now high dividend strategies earn only 2.2% over the yield on buyback strategies and 1.3% over the yield on broad-market benchmarks. These spreads are the narrowest in the past six years.

Source: Bloomberg

From 2007 through 2012, buyback strategies, broad-market stock benchmarks, and high dividend strategies had annualized total returns of 3.9%, 2.3%, and 1.3%, respectively. In the graph below, we break the total returns into two components: price change and reinvested dividends. For example, buyback strategies gained 3.0% per year from price change and 0.9% from reinvested dividends. By contrast, the annualized price change of high dividend strategies was -2.2%, but the 3.5% yield from reinvested dividends made the total return positive.

Returns look much rosier if we consider only the period since quantitative easing was implemented. From 2009 through 2012, buyback strategies sported an annualized total return of 17.9% (16.8% from price change and 0.9% from reinvested dividends). High dividend strategies delivered an annualized total return of 13.3% (9.7% from price change and 3.3% from reinvested dividends).

Source: Bloomberg

Past performance is not indicative of future results

Two trends persisted in both of these periods. First, the return from reinvested dividends decreased for the benchmarks and high dividend strategies. Second, buyback strategies outperformed the benchmarks, which in turn outperformed high dividend strategies.

The real question is whether it makes sense to forego 5% in price appreciation for a 2% higher dividend yield. High dividend strategies did outperform buyback strategies in 2008 by 1.8%, but they underperformed in each of the other five years from 2007 to 2012. Massive share repurchases drove the performance of buyback strategies. In the past seven years, dividend payouts from U.S. companies were half of the amount spent on stock buybacks.

The European Central Bank recently cut its benchmark interest rates, while the Fed and the Bank of Japan continue to deploy massive monetary easing. All three central banks are fighting low growth, so we expect bond yields to remain depressed. U.S. companies are sitting on record levels of cash, and they are under great pressure to return some of this money to investors (Apple is the most recent example). If corporate borrowing costs remain low and economic growth remains sluggish, investors can expect buybacks to play a bigger role in supporting share prices.

Minyi Chen
Portfolio Manager
TrimTabs Float Shrink ETF (TTFS)

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By Charles Biderman

April income tax payments sent in by individuals are surging, up by more than $50 billion over April 2012 and higher by $63 billion year to date. That means to me that year end 2012 income from asset sales and bonuses had to have spiked by around $300 billion to generate that $63 billion in bigger tax payments. I know, this is a lot of numbers and some of you should read the transcript instead of this video. To go back, in other words anticipation of this year’s higher taxes created a one time 10 percent pop in income over those few months the $300 billion became income!

And all you GDP watchers out there will never see that pop. Why? The US Bureau of Economic Analysis, which puts the garbage in garbage out GDP number, in its infinite wisdom ignores capital gains as well as any and all real time data. Why? Who knows. You ask them, they won’t answer me.

So no wonder the economy looked great to start this year. The $300 billion income spike created a very rosy glow particularly since none but us at TrimTabs were saying that the year pop in income was a one time event. Checking my year end videos I was guessing $100 to maybe $200 billion in higher income, not $300 billion.

Right now, over the past three weeks, wage and salary growth has slowed to less then 3 percent year over year, and that is before inflation. In other words, anticipation of higher taxes boosted economic activity at the end of last year and to start this year. Now that all the new money has been spent, the US economy is back to no growth.

I love watching those on CNBC who worship at the church of what works trying to defend record stock prices with the argument that the economy has to be improving or else stocks would not be going up.

Really? These guys obviously do not understand that all there is in the stock market are shares of stock and money. There is no earnings or interest rates in the stock market. Just shares of stock and money. So when the Federal Reserves is creating $85 billion in phony money each month to buy financial assets for the foreseeable future, what difference does it make what earnings or the economy is doing?

That is as long as companies are not selling huge amounts of new shares. And announced corporate buying has been exceeding all visual corporate and insider share sales since February of this year. Indeed, Apple’s $50 billion new buyback underlines that trend.

Therefore, more money mostly from government printing is greater then any growth of shares available. For as long as that continues, stocks will keep going up, regardless of what the economy does.

So to summarize, since the perpetual QE was announced in last September, the market value of US stocks is up by $2.4 trillion, or 13%, and wages and salaries are now growing by about $200 billion a year, or just under 3%.

To get to where we are now, $2 trillion of phony money a year is being created, $1 trill by the Fed and $1 trill by the Government. That $2 trillion is equal to $30% of the $7 trillion in after tax income for everybody who pays taxes. So it takes adding 30% of phony money to grow stocks by 13% and take home pay by 3 percent.

In the history of this planet money printing as a long term solution always works initially but then results in government bankruptcy.

How will it end this time? My guess is that initially at some point in the next few months the Japanese currency will plunge to 200 to the dollar, much more then the Japanese Central Bank wants. That will create financial panic in the Japanese consensus based society. After that the Euro will be next then followed the US dollar, forcing all three economies into a sort of bankruptcy.

But after the governments get out of the way the incredibly robust online world will flourish creating an unprecedented global prosperity.

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