California
Interview: SKBA Capital Management--Bischel, Andrew---President
>> california had its credit rating cut one level by moody’s investor service, that on concern a budget approved last week leaves the state with a chronic budget deficit. they cut the rating on $29 billion of general obligation bonds, a rating of a 3 from a previous a 2, four levels above a junk rating. standard & poor’s last month cut the rating from bbb to, i should say from bbb to bbb from a, i should say, two levels lower than neighborhoody’s rating after today’s downgrade. treasuries rose today in new york as investors said a surge in yields since mid june may have overstated prospects for faster growth and higher inflation. but are bonds now at a good level to get in? what impact if any will this have on stocks . andy bish el is president and chief investment officer at skbak capital management and he comes tous live from san francisco with his views on the market. thanks for being on the program.
>> sure thirngs bob.
>> i want to begin with these news that you haven’t been prepped too well on. it’s live television. california had its credit rating cut one level by moody’s investor service we just reported. what does this mean to you?
>> well, california is obviously some of the worst financial circumstances of state finances of any state in the nation. there doesn’t seem to be a quick resolution of that. i’m not surprised the rating agencies have gotten concerned again.
>> wanted to show the viewers the intraday chart of the s&p 500 and have you comment. we saw stocks moving strongly down in the early part of the session, if ki get my yellow pen moving here. then around 10:30 started moving back up again and then ended up moving back down again with a modest two-point gain on the s&p. the nasdaq finished lower. is this summertime low volume brown in motion going on in the markets or is there some sort of meeting we can infer from the activity we are seeing in the volitility?
>> i don’t think there is a lot that you can infer about what’s going on in the short-term right now. we believe that most of the move up, almost all of the move up since the march lows. was associated with the tax cuts we saw and the upward reevaluation you would expect to come out of that. now we are in a period of time when we think there is consolidation and the market is moving sideways in a pause that we don’t think will last forever and we’ll be back up by the end of summer.
>> you mention today tax cut. i read you feel the tax cut will be stimulative to the economy. i guess i wanted to ask you about the numbers there. it’s a $330 billion tax cut over 10 years. if you divide that equally, i believe it’s more loaded toward the later end of the 10-year span, if you divide it equally it’s $33 billion. we have a nine trillion economy, breaking down to 4/10 of 1 percent of our economy represented by the tax cut. how is this stimulative?
>> well, it’s stimulative not because of the static measures of the revenue changs or the reduction in tax collected. it’s really the function of what happens to tax rates. with the top marginal bracket just a couple of years ago being 39.6% on dividends now, that’s a drop from that level to 15%. if you are a taxable investor, that’s a 40% increase in the after tax return that you have had from receiving dividend payments from companies. on the capital gains side it’s gone from 20% to 15%, a 6% increase. the combination of those two is a very powerful incentive effect for the stock market to go higher, and for increase incentives to invest, save, work all the things that are going to create economic activity. so it’s the rate changes and the incentive effects associated with those that are important, not the dollar magnitude of the cuts.
>> we’ve been watching bonds fall for about six weeks now, until the last couple of sessions when treasuries have found strength. i wanted to find out if you think this is an inflection point in which we are now going to move forward; that in a sense investors have bet that inflation will rise faster than it really will and we’ll see something of a little bit of a bond rally here.
