Figured this would be a good repeat from over 2 years ago;
As the market ebbs and flows 400 points here, 500 points there, I am often asked by friends:
"When is the market going to bottom?"
And I find it interesting that people are even buying right now, because as far as I'm concerned there's absolutely no reason to buy stocks until after the presidential election. When I tell my friends this, they say,
"Well why wait till then? Couldn't stock prices have gone up by then and you missed out of a great buying opportunity?"
Which indicates to me we all need a basic lesson in "Barack Economics."
You see, there are two things that drive the price of a stock; the profits the corporation makes and the capital gain one receives when they sell the stock.
First, let's start with profits. Profits are nothing more than what a company or corporation has left over when it pays for all of its expenses. Profits typically make people happy because that's how we not only enrich ourselves, but, frankly, live.
But hold on there now! You don't get to keep all of those profits. No no no. You see, since you own part of a corporation, the corporation has to pay on average a 40% tax rate in the US (though the effective rate for some is around 32%). This is taken out of your profits (pre-tax profits) before sending them along to you.
But with Obamanomuks this tax rate will go up. Nobody knows for sure how much, but 50%, 70%, maybe even 90%. Regardless, when it's all said and done, there won't be a lot of your profits left;
What profits do remain, however, can be passed along to you in the form of dividends.
But, UH OH!!! That was a transaction, and even though you own part of the corporation, since it is a separate legal entity, you get to pay taxes on the DIVIDENDS, typically between 5-15%. This is called "double taxation." It may not make you happy, but it makes lots of government freeloaders happy.
I know you may be upset that you get to pay taxes twice, but with the cutting edge of Barackian Economics, you will get to pay an even higher dividend tax! Don't worry, according to Joe Biden it's patriotic to pay more in taxes leaving you with even less.
Well how does this affect the stock market and stock prices? Well, it's very simple. Although if you go to any major corporation's web site and they make it seem like pursuing green policies is what gives them value, in reality they're just doing that so you are foolish enough to buy their products without guilt. No, the truth is what really gives stocks value is the underlying profits those firm generate. You see, if a firm doesn't make a profit, why would anybody forfeit their money to invest in it? I don't invest in stocks so they can sell green products or be socially responsible. I invest in a corporation so it makes money. And the less money I see after all the expenses and taxes are taken out, the less value that firm has to me and thus the lower the stock price.
But profits are not the only thing that drive the value of the stock (well, technically they are, but we won't go into that right now). There is also a "capital gains" ie-how much money you make when you sell the stock. Say you buy a stock for $10, and it goes up to $100. Why, that's an impressive profit of $90, and you are happy!
But hold on there little buckaroo! Uncle Sam wants some of that and you get to pay a capital gains "tax" on it. This tax can be anywhere from 0-35%.
But with Obamanomuks this rate will go up even more, leaving you with even less.
The relationship between the amount you get to keep and the value of the stock is the same. If you get to keep more, then the value of the stock is worth more and therefore prices go up. But if capital gains are increased, then the value of those stocks go down.
"But isn't it the rich that only own stock? And shouldn't we hate the rich by the fact they're rich, even though they may have actually worked for it and have never done anything to us?"
Although a common misconception, it's not just the rich that own stock in the US. Most everybody in the US, rich, poor, short or tall, own stock in one way or another. Most commonly this is done through our 401k, 403b and other retirement programs. We buy mutual funds which are nothing more than groups of stock which we hold in these retirement accounts. Also, pensions pay for your retirement by investing in stocks and mutual funds. So if you have a pension or you have a retirement program, YOU OWN STOCK!
Ergo, it is profits that drive the value of stocks which in turn determines the wealth of the people of the entire nation.
But with Obamanomuks there will be no profit, and therefore no stocks, and therefore no retirement.
All you'll be left with is;
And that's why the Captain is waiting to see if Barack Obama and the democrats take a supermajority in Washington before he invests his money in the stock market.
OH! AND REMEMBER TO BUY MY BOOK!