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Navellier: Lock and Load
11/07/2003 12:00 am EST
I specifically saved this optimistic commentary from Louis Navellier to conclude this two-part report from The San Francisco Money Show. It is an exceptionally clear and well reasoned assessment of the market's prospects, the importance of dividend tax rate cuts, and the presidential election cycle.
" What caused the previous exodus from Wall Street and why has that reversed? The market hit its peak in March of 2000, but really everything hit the fan in November–the month we couldn’t pick a president. That was a bad month–one of the worst in history. We might have been amused by the debacle; it was good TV and interesting to watch. But I can tell you that foreign investors were not amused. I manage a lot of foreign money, and I saw that they didn’t like that at all. The dollar got very weak, and many foreign investors fled. Foreign investors went from 18% of our market to 6% in several months. They started the massive, relentless exodus out of our markets. Believe it or not, that election debacle really hurt the market.
"That exodus continued and in July of 2003 over $50 billion left the market. We had what I call a capitulation month. But then something happened that was good. On July 24th , a lot of big flagship companies–Coke, Gillette, Proctor & Gamble–came out and said they were going to buy their stocks back. This was the first bottom. There was a big wave of corporate buybacks being implemented and this marked the first low. Eventually, these buybacks ceased, and the market returned to its lows on October 9th. After bouncing off these lows, the market again set a low in March 2003, at a time when there was a lot of anxiety over the war in Iraq. So we had a July 24th low, an October 9th low, and March 10th low. Over this extended period, the market just bumped along the bottom and outflows ceased.
"Then the market exploded. Why? Because of dividend relief. This is a huge deal–probably the most bullish event in my lifetime. Over 1,100 companies have initially declared or increased their dividends so far this year. This shows no sign of stopping and it is having a profound consequence on investing. Let me give you an example. When a company earns money, it has to pay Federal taxes and then state taxes. Here in California, you have the highest corporate taxes in the country. Then if you get a dividend, you have to pay federal taxes and state taxes. The dividend now has been taxed four times, and due to California’s high taxes, this could reach 80% taxation. So guess what? Nobody paid any dividends.
"But this is gone now. Dividends have been cut to the lowest levels since 1916. And it changes corporate behavior. Today, if you are a corporate executive and you want to enrich yourself, all you have to do is declare a dividend. The only trick is that you have to enrich all the other shareholders along the way. And that is precisely what it was designed to do. And it’s working. So this has been a big deal. Now we have the lowest dividend taxes since 1916. Capital gains taxes were also cut, and are now at their lowest rates since 1933. There has never been a capital gains cut in history that didn’t help the market. Consumer spending has taken off. And after being dead for three years, business spending has taken off.
"Based on the discount model–which compares corporate earnings to Treasury yields–the market was 48% undervalued prior to the dividend relief. Adjusting for cuts in dividend tax rates, this discount is even greater. That’s why the market has exploded since April. Investors put $18 billion into the stock market in April via mutual funds, $12 billion in May, $18 billion in June, $21 billion in July, and $20 billion in August. This is unbelievable and it has me very excited. Money is pouring back into the market and with record cash still on the sidelines, this can continue to do so for 12 or 18 months.
"There are some other reasons I am excited. There is an odd anomaly on Wall Street called the Election Cycle. Since 1934, from the low of the second year of a presidential election term to the high of the third year, the S&P 500 has bounced, on average, 51%. This suggests that we have another 18% or 19% to go this year in order to match this average. Why does this cycle exist? Administrations begin to prime the pump about 18 months ahead of an election. The economy is getting better out there and it will get better each and every month from now until the election next November. The third year of a presidential election term is always the best in the stock market. The second best year in the cycle is the election year itself. Then we elect somebody, and everything cools off. But that’s another issue….
"For now, I am very, very excited about stocks. It looks like smooth sailing. We have the presidential election cycle, a record amount of cash on the sidelines, and I’m excited that as bond yields go higher it will cause relentless redemption of bonds, which will lead to more money going into the stock market. The market is now looking at fundamentals and, as a result, fundamentally-superior stocks are starting to rule Wall Street. The cream is rising to the top. It’s lock and load time for growth stocks."