The latest Street.com column is up: “Employment Reality Lies Between Poles.” It is a pretty fair and balanced look at the structural job problems Bush inherited, as well as some of his policies which may have made the situation worse. For those of you without a subscription, its loosely based on recent comments such as What is the Employment Situation Really Like? and Employment Situation: Worse than it looks?
The concept I haven’t been hitting on much is the possible impact of the dividend tax cut as a negative factor on hiring. Here’s an excerpt:
“The other major corporate tax change worth exploring is the dividend tax cuts. By creating a new ultra-low rate for dividend income, tax policy has encouraged firms to raise their dividend payouts. However, we know that many insiders and managers are also large shareholders of their firms. When they raise dividend payouts, they also get to pay themselves — and at the very advantageous tax rate of 15% vs. the 50% or more their salaries are taxed at. As we saw in the 1990s, management often finds it easy to make short-term decisions from which they personally benefit.
The new dividend tax rule has created an incentive for corporations to transfer working capital outside of the firm, and into the hands of shareholders. That has reduced the pool of capital that otherwise would be used to build new plants, make more capital improvements, and yes, hire new workers.
Even worse, my calculations show that more than half of all dividend-paying stocks are held in nontaxable accounts — pension funds, endowments, foreign investors, and retirement accounts. So these increased dividend payouts simply sit in these tax-advantaged accounts, in some cases, for decades, and there is no multiplier effect, because the money is neither spent nor reinvested in the broader economy. So instead of stimulating the economy, these monies lay fallow.”
Here’s a fascinating compare and contrast analysis, sector by sector, of the impact of each candidate in the election from last week’s WSJ (You may have overlooked it, buried as it was in the Personal section). The Jornal observed: “The economy is at center stage ahead of the Nov. 2 presidential election. Job creation has picked up this year, but employers remain cautious about adding substantially to their payrolls, and employment levels remain below where they were four years ago.”
Thats the gross overview. Let’s get down to the nitty-gritty details:
With Election Day less than a month away, Wall Street has already staked out its own winners and losers.
In recent weeks, research analysts at the major brokerage houses have been churning out reports identifying what a Bush or Kerry administration would mean for investment strategies — and which sectors of the economy would undergo the biggest changes if there were a change in leadership. A recent report by equity analysts at Credit Suisse First Boston, for example, notes that with the start of the presidential debates, “we thought this was a good time to revisit the candidates’ health-care platforms and their significance for managed-care stocks.”
Lehman Brothers and investment-strategy firm ISI Group have created “presidential indexes.” The idea is to track the performance of stocks that are likely to be most affected under each administration. ISI’s “Bush Index” holds pharmaceuticals and energy stocks, among others, reflecting the belief those sectors would fare well under a second term for the president. ISI’s “Kerry Index” has short positions in health maintenance organizations and utilities. The indexes act as a proxy for what Wall Street is thinking will happen Nov. 2.”
I continue to hold the position that while the President matters less to the macro economy and the overall market than most people believe, they do have a large impact, on individual sectors. Thus, any change at the top will be significant (at least somewhat) to specific industries. Since its doubtful the House of Representatives will change — that makes the implications of a change in presidential leadership somewhat less significant than it might be otherwise.
Here is a breakdown, sector by sector: