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Novum Alpha - Daily Analysis 23 April 2021 (10-Minute Read)

A tax, a tax be upon your house - the White House that is, as investors rue the proposed tax hike of the Biden administration that effectively doubles capital gains taxes and punishes the wealthy of America. 

A fabulous Friday to you as markets take a turn for the better.   
In brief (TL:DR)
  • U.S. stocks reversed gains on Wednesday with the S&P 500 (-0.92%), tech-centric Nasdaq Composite (-0.94%) and blue-chip Dow Jones Industrial Average (-0.94%) all correcting sharply after the Biden administration announced proposed tax hikes.  
  • Asian stocks weakened in early trading Friday following broad-based declines in U.S. benchmarks as investors mulled a proposal for higher taxes on the wealthy to help pay for U.S. President Joe Biden’s social and fiscal stimulus plan.
  • The U.S. 10-year Treasury yield rose a basis point to 1.55% (yields rise when bond prices fall). 
  • The dollar was steady in Asia's morning trading session. 
  • Oil rose with May 2021 contracts for WTI Crude Oil (Nymex) (+0.42%) at US$61.69.
  • Gold inched upwards with June 2021 contracts for Gold (Comex) (+0.33%) at US$1,787.90.
  • Bitcoin (-4.97%) fell to US$51,435 with inflows to exchanges continuing to lead outflows and technical indicators suggesting even further weakness in the benchmark cryptocurrency (inflows suggest that investors are looking to sell Bitcoin in anticipation of falling prices).



In today's issue...

  1. Biden Takes from the Rich to Give to the Poor
  2. Fat Valuations & Tech Seen at Risk from Biden's Tax Hikes  
  3. Bitcoin Bombs on Tax Hike 

Market Overview

A tax, a tax be upon your house - the White House that is, as investors rue the proposed tax hike of the Biden administration that effectively doubles capital gains taxes and punishes the wealthy of America. 
In Asia, markets were mixed in the morning session with Tokyo's Nikkei 225 (-0.65%) and Sydney’s ASX 200 (-0.10%) down, while Seoul's Kospi Index (+0.19%) and Hong Kong's Hang Seng Index (+0.15%) were in the green. 

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1. Biden Takes from the Rich to Give to the Poor

  • Americans earning over US$1 million would pay 39.6% tax and an Obamacare levy
  • Total taxes for New Yorkers, Californians, could top 50% because of state taxes 
Like a real life Bane, U.S. President Joe Biden is taking the money and giving it to the people. 
Biden has proposed almost doubling the capital gains tax rate for wealthy individuals to 39.6% to help pay for a raft of social spending that addresses long-standing inequality and to fund ambitious infrastructure plans. 
For those earning US$1 million or more, the new top rate, coupled with an existing surtax on investment income, means that federal tax rates for wealthy investors could go as high as 43.4%.
The new marginal 39.6% rate would be an increase from the current base rate of 20%.
A 3.8% tax on investment income that funds Obamacare would be kept in place, pushing the tax rate on returns on financial assets higher than rates on some wage and salary income.
When asked about the capital-gains plan at a press briefing Thursday, White House Press Secretary Jen Psaki, said,
“We’re still finalizing what the pay-fors look like.”
Biden is expected to release the proposal next week as part of the tax increases to fund social spending in the forthcoming “American Families Plan.”
The Plan is set to include a wave of new spending on children and education, including a temporary extension of an expanded child tax credit that would give parents up to US$300 a month for young children or US$250 for those six and older.
Republicans have insisted on retaining the 2017 tax cuts implemented by former President Donald Trump, and argued that the current capital-gains framework encourages saving and promotes future economic growth.

Did you miss us at the World Family Office Forum? Watch it here...



2. Fat Valuations & Tech Seen at Risk from Biden's Tax Hikes

  • Capital gains tax hike could cut S&P 500 valuations by as much as 8% according to analysts from UBS (-0.54%)
  • Goldman Sachs (-1.32%) warns that history shows momentum lags before capital gains tax increase 
Stocks buckled in the immediate aftermath reports that the Biden administration planned to nearly double the capital gains taxes on the wealthy, with the S&P 500 falling as much as 1.2% before clawing back some losses.
Still, the decline was minor next to the index’s 85% return over the last 13 months, and most institutional investors said they’d wait to see how the bill progressed before doing anything rash.
News of Biden's proposed tax hikes really shouldn’t have been a surprise on Wall Street - it’s the same increase laid out in platforms released during the presidential campaign, and copious analysis had already been published prior to Thursday.
At Goldman Sachs, strategists led by David Kostin wrote as early as October that raising the tax rate would be a “minor speed bump for the upward trajectory of stock prices” that would shortly give way to fresh gains, 
“History shows stock prices fall, equity allocations decline, and momentum underperforms ahead of increases in the capital gains tax rate.”
“However, any potential equity selling will be short-lived and reversed in subsequent quarters.”
Logically, Goldman Sachs says, stocks that have gained the most may get hit hardest in the short-term drawdown and would include companies like Tesla (-3.28%) with its 400% gain in the past year, along with the FAANG block of megacap tech shares that carried the market off the pandemic lows.
Goldman Sachs estimated in October that the top 1% of households have around US$1 trillion of unrealized capital gains.
In 2013, that cohort sold “1% of equity, their starting equity assets, which would equate to around US$100 billion of selling in current terms,” according to the Goldman Sachs strategists wrote.
The group then turned around and bought the equivalent of 4% of holdings once the tax took effect in 2013, Goldman Sachs said, more than offsetting the selling.
Regardless, momentum stocks could still feel the brunt of any major tax hike, just as they did in 1986, when the tax rate on long-term capital gains rose to 28% from 20%. 

3. Bitcoin Bombs on Tax Hike

  • Largest cryptocurrency by market cap falls for sixth time in seven trading sessions 
  • Other cryptocurrencies sitting on large gains are potential targets for selling 
Bitcoin declined for the sixth time in seven days, extending losses after U.S. President Joe Biden to proposed almost doubling the capital-gains tax for the wealthy, which would also include gains realized from the purchase and sale of cryptocurrencies. 
The slide pushed Bitcoin down as much as 8% to about US$50,500, sending it below the low of US$51,707 reached Sunday.
The benchmark cryptocurrency had tumbled as much as 15% over the weekend in the wake of a false report from an anonymous Twitter (-4.49%) account that the U.S. Treasury was cracking down on cryptocurrency money laundering, highlighting just how susceptible the asset is to conjecture and rumormongering. 
U.S. investors in the digital asset, which has advanced about 80% since December, already face a capital-gains tax if they sell the cryptocurrency after holding it for more than a year.
Regardless the Bitcoin continues to be one of the best-performing assets in recent years - anyone who bought a year ago is sitting on a 625% gain. For investors who bought in April 2019, that gain equals roughly 860%.
The IRS has stepped up enforcement of tax collection on cryptocurrency sales.
The agency which began asking cryptocurrency users to disclose transactions on their 2019 individual tax returns now  asks taxpayers whether they “received, sold, sent, exchanged or otherwise acquired any financial interest in any digital currency.”

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Apr 23, 2021

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