Tax Deal

by Larry Levin

Tuesday’s big news was the announced “tax deal” by president Obama in his afternoon press conference.  There were several announced goodies to make both sides of the isle happy, including a 2-yr extension of the Bush tax cuts and another 13-month extension of unemployment benefits.

Some people hate the tax cut extension and others are saying that unemployment insurance has morphed into unemployment welfare.  What people are not talking about, however, is what isn’t in the package: a “Build America Bond” (BAB) extension.

According to Investopedia the BAB is - Build America Bonds (BABs), which were included in the American Recovery and Reinvestment Act signed into law by President Obama on February 17, 2009, made their debut in April of the same year.

BABs, like municipal bonds, are debt securities issued by a state, municipality or county to finance capital expenditures. Unlike municipal bonds, the income they generate is taxable. There are two general types of BABs.

In the first version, BAB issuers receive a subsidy from the federal government that permits government entities to issue bonds that pay interest rates that are competitive with the rates paid by corporations. California's massive issue in early 2009, for example, offered an interest rate of 7.4% to investors. The state, courtesy of the tax break, had to pay only 4.8% of that interest, with the federal government picking up the tab for the rest.

In the second version, BAB holders receive a tax credit from the federal government equal to 35% of the interest on the bond each year. If the bondholder's tax liability is insufficient to use the entire credit, it can be carried forward to future years.

Said another way, this was how the Federal government would bribe investors to buy the junk bonds of bankrupt States like; Illinois, New York, Michigan, California, Arizona, Florida…ok, all of them.

Without this extension, the State’s in the worst financial conditions could be paying interest rates north of 7% to finance their own Fed-Lite Ponzi schemes.  When this happens, the States will have to do something radical to keep the lights on.

Of course a “free market” in State debt will not be allowed; either this program will be reinstated, or The Ben Bernank will conjure up a fresh $600-billion of QE3 funny money and buy State IOUs.

Bank on it.

.

Trade Date: 12/7/10
E-Mini S&P Trades*
(before fees and commissions):

1. No Secret’s trades filled today.
2.  Algorithm positions (9)
   
3.  “Reading the Tape” positions (9) …combined Secret’s, Algo, & “Reading the Tape” total… +2.00

Sign up as an AvidTrader Member to receive "The Technician" Value Area's each day. The market then has an 80% chance of filling the Value Area. Many traders familiar with the Value Area and the techniques that go along with it use it to help them decide what trades to do each day. Join and see how this technique can help you trade more successfully!