Stock Smarts: Tax Cut Rally!

The stock market had an immediate run-up on President Bush’s plan to cut taxes, highlighted by a provision to make stock dividends tax-free to investors.

But there is a long way to go before the proposal becomes law. Is the move higher justified no matter what kind of tax cut we eventually get?

Charles Payne of Wall Street Strategies says he thinks the market move was justified.  He points to an old saying on Wall Street: “It’s great when the Fed’s on your side.”  And says Wall Street knows that President Bush is on its side. He says the stimulus package is focused on the stock market and its relationship to the wealth effect and that’s good for stocks.

Hilary Kramer of Montgomery Asset Management says the Fed helped keep the real estate market strong with interest rate cuts, and with this new stimulus package she says we should see the stock market go up. It will put more money in consumers’ hands.

Jonas Max Ferris of Maxfunds.com does not believe the President’s plan is the right one for the economy or the market.  He points to last week’s negative jobs report and says this economy needs a stimulus package not “investor welfare.”  He says IRA and 401(k) investors are not going to benefit from any dividend tax cut, and this package is not going to generate job growth and has no effect at the corporate level at all.  He says the market may go up only because money is coming out of other asset classes and going into a certain group of stocks and that’s not going to create jobs.

Wayne Rogers of Wayne Rogers & Co. says it’s a complex plan.  We don’t know what this tax-free dividend will do to the Municipal Bond market or how it will impact 401(k) plans which may still suffer a double tax even if the plan goes through. Add the “deemed dividend” aspect of this plan to the mix and he says you have too many unknowns to be convinced at this point that this plan is the right one for the market.
 
Jonathan Hoenig of Capitalistpig Asset Management agrees the plan is complicated but he says he applauds President Bush for once again raising the question: “Are we entitled to the money that we earn and invest!”  Jonathan says he thinks President Bush started an important discussion in this country about the nature of taxation.  But his concern for U.S. stocks is still a weakening dollar.

Tax Cut Winners!

What are the stocks that could win big if the President’s tax cut becomes law? Members of the panel offered up some potential tax cut winners.

Hilary's Tax Cut Winner: Clear Channel (CCU)
52-week high: $54.90
52-week low: $20.00
Friday's close (1-10-03): $42.30

Charles likes the pick.  He says it’s a play on the economy improving.  Jonathan says this stock could suffer from a weak U.S. dollar. Wayne likes CCU whether the President’s tax plan goes through or not.

Charles' Tax Cut Winner: Oracle (ORCL) dialogue
52-week high: $17.50
52-week low: $7.25
Friday's close (1-10-03): $13.07

Once again, Wayne says he doesn’t care whether the President’s tax plan goes through or not, he loves Oracle and he owns plenty of it.   Jonathan says he views Oracle more as a trading stock right now though he wouldn’t bet against it.

Wayne's Tax Cut Winner: Lehman Brothers 5.67 percent Series D Preferred
52-week high: $49.75
52-week low: $39.34
Friday's close (1-10-03): $49.50

Charles says this play is too conservative for him right now.  Hilary likes the pick. Jonathan does not.

Jon's Tax Cut Winner: Nuveen Senior Income (NSL)
52-week high: $8.11
52-week low: $5.83
Friday's close (1-10-03): $7.44

Hilary likes the pick. Charles says it’s a conservative place to be, but he would be more aggressive right now.  Wayne likes the stock if the President’s plan goes through, but he thinks that’s a very big “if”!

Mutual Fund Face-Off: Best Biotech Fund

Big losers last year – but some smart money is betting on biotech in 2003. The risk is high and it’s hard to find the right company. So if you want in, a fund may be your best bet. But which one? Dagen and Jonas came up with some potential winners.

Dagen – T. Rowe Price Health Sciences Fund (PRHSX)
2002: Down 27.7 percent
Year-to-date (as of 1-10-03): Up 2.3 percent
Minimum Investment: $2,500
Expenses: $10.20 for every $1,000 invested

Jonas – Exeter Life Sciences Fund (EXLSX)
2002: Down 20.0 percent
Year-to-date (as of 1-10-03): Up 1.9 percent
Minimum Investment: $2,000
Expenses: $11.40 for every $1,000 invested

Money Mail

Wayne, Dagen and Jonathan capped off the show by answering some of your questions.

Question: “I own a ton of DOW Chemical (DOW). With war pending, what can we expect from cyclicals like DOW?”

Wayne says Dow is 65 percent owned by institutions and is trading right now in the low 30’s. He doesn’t see Dow getting above the mid 30’s, but says that since the company does pay a 4.5 percent dividend there is chance that if the President’s plan goes through the stock will receive some support.  But he says the company has recently changed CEO’s and is going through some changes and it’s not his favorite.  Jonathan says it’s not a good idea to own “a lot” of any one stock and this viewer should diversify more. “It’s never good for one stock to dominate your entire portfolio.”  Dagen likes the stock for the income since it pays more than the 10-year Treasury right now.

Question: “Will the President's plan to cut taxes on dividends apply to REITs?”

Dagen says no, REITs will not benefit.  Since they don’t pay income taxes at the corporate level there is no double taxation here.  REITs may in fact get hurt by this plan if investors abandon them for stocks that with dividends that will qualify for tax-free status. Jonathan still likes REITs for their income.

Question: “Jonathan, you mentioned that you might be shorting Pfizer (PFE). Why? I am a big holder of PFE, and I value your opinion.”

Pfizer is trading right around where it was five years ago and he thinks people who have loved and supported the stock are going to start to realize how much they are losing and sell, but he’s not shorting yet.  He will consider shorting PFE if it breaks below $30.  Dagen says Pfizer has a great line-up of blockbuster drugs and it’s inexpensive. She likes it. 

Question: “All the financial gurus tell us to look for a strong balance sheet before investing. How do we know if the numbers are REAL?”

Wayne says the only thing you can do is rely on the auditors and hope they are honest and capable.  Dagen says diversify because you can’t ever know for sure.  Jonathan says forget the numbers, look at the charts.  “The charts never lie!”

Transcripts

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