Hey Subscriber,

Well, judging by the traffic and commentary in the TR Discord trading room today, more than a few of our subscribers are a wee worried about paying 39% tax on your prodigious 200%-300% capital gains in our stocks.

Well first off, you would have to be making $one million in adjusted gross income in 2021, ok?

Second trust me--after 25 years in DC/NYC and 15 years covering economic legislation for Fox News/Fox Business, I know one thing on this issue for sure: This is just round one--to get 50 Senators to vote there needs to be a LOT of negotiation--starting with the definition of short term and long term capital gains by asset class --how they are phased in--and how does this apply to equity in small businesses vs. stocks/bonds/real estate, etc. 

We stock market investors of course want everything our way. After trillions of dollars of government spending pushed markets to record after record in the first part of the year, now we get the bill. No one should be surprised--this was the plan laid out in the POTUS election in 2020. 

And YES if the plan is enacted as proposed, it only applies to the relative handful of American taxpayers who earn >$1M in AGI and are selling investments with capital gains in 2022. Even Old Joe Biden knows that IF this plan is presented as effective retroactively to Jan 2, 2021, a 40% capital gains tax after a 12-year bull market would, at the $1M income set, would make them the new marginal seller of stocks and provoke pre-emptive selling, cut stock valuations and slow down the rally in the biggest winners in the stock market aka Tesla and digital platforms + our old friends AMD/NVDA and other 5-10-20X winners (one trader today reminded me that he bought our AMD recommendation at our original price of $2.50 and now owns 10,000 shares at $82--almost a 40-bagger!). 

How many American households earn $1M+ in adjusted gross income? About 1% out of 122 million households or 1.2 million households. But when it comes to who OWNS stocks, in 2019 the top 1 percent of Americans in wealth controlled about 38 percent of the value of financial accounts holding stocks.

Widen the focus to include the top 10 percent, and they own 84 percent of all of Wall Street portfolios' value but the average household income of the top 10 percent of US households is only $158,000.

Two points: #1 the top 1% in wealth is much different than the 1% of American households aka the 1.2 million households that earn $1 million per year in AGI, ok?  

Non-tax-paying institutional investors will of course wait to see how the bill progressed before doing anything rash. But my Goldman trading desk sent me this note aftermarket: “History shows stock prices fall, equity allocations decline, and momentum underperforms ahead of increases in the capital gains tax rate,” Goldman strategists wrote. “However, any potential equity selling will be short-lived and reversed in subsequent quarters.”

Logically, Goldman says, stocks that have gained the most may get hit hardest in the short-term drawdown. That would include Tesla Inc. and its 400% gain in the past year, along with the FAANG block of mega-cap tech shares that carried the market off the pandemic lows.

When capital gains were last raised under the Obama administration, in 2013, the wealthiest 1% “unsurprisingly” were the biggest stock sellers, Goldman said. Still, if investors were penalized by that hike, it didn’t show in overall returns. The S&P 500 rose 30% that year, its best gain in almost a decade.

Goldman estimated in October that the top 1% holds around $1 trillion of unrealized capital gains. In 2013, that cohort sold “1% of equity their starting equity assets, which would equate to around $100 billion of selling in current terms,” the strategists wrote. The group then turned around and bought the equivalent of 4% of holdings once the tax took effect in 2013, Goldman said, more than offsetting the selling.

The capital gains tax rate is a variable in a model tracked by Keith Parker, who’s the head of U.S. equity strategy at Goldman. Historically, when the tax rate changes, so does the multiple on the S&P 500, all else equal. The new proposal could mean a 7% hit to the PE multiple. That’s because a higher rate could dull sentiment toward stocks, with investors less willing to pay up for earnings.

Source: UBS

Key Point: It IS logical to assume that IF this law gets passed as proposed, the market-leading momentum stocks with large embedded capital gains could feel the brunt of the tax savings impact, just as they did in 1986 when the tax rate on long-term capital gains rose to 28% from 20%.

Action to Take: Don't panic--we should assume the horsetrading goes on till Fall. We are about 70% in our Ultra Income plays and 30% in Ultra Growth--that still feels right as the 7% GDP tsunami in Q2 and Q3 explodes higher. 

As we get close to a vote and see the terms, we will hedge appropriately. But at the same time as cap gains get debated, we have Biden declaring "America will cut carbon emissions by 50 PERCENT by 2030--8.5 years from now. Europe same timetable--California by 2035--even China in the game.

Action to Take: We will be adjusting our Ultra Growth to more reflect the Decarbonization ecosystem trade, technology company transformations (like IBM, Oracle, and Teradata), will buy the Global Digital Platform and Chip Monopolies (FB AMD NVDA APPL GOOG MSFT) and semiconductor equipment plays on pullbacks, and let our Ultra Income portfolio give us 45%+ income and capital gains in 2021 with monthly and quarterly yields averaging 24%.

Final point: I have beaten to death the point that after we jumped back into stocks starting March 26, 2020, almost EVERY DAY our portfolios were green--sometimes whopping green like 20% up in a DAY!

That sure was fun...but that was a once-a-generation event. My advice to you is to FORGET 2020 and the feeling that every day you were getting richer and richer that many many of our subscribers retired and so on--its' not realistic and it damages your nerve to buy great growth and income stocks on red days in the market.  

We will continue to beat the overall stock market by 6-8-10X simply because we run a mixed portfolio of high income and high growth--but 2020 is in the rear mirror. We are getting positioned to extract the most wealth possible out of the NEW post-pandemic world that evolves in whatever form it takes. 

PS--we added a new public set of charts for our fave Ultra Growth stocks. Our All-Access folks loved the set of charts. IF we get enough people to get the portfolio sent to you via email, we will add the Ultra Income stocks as well. 

We will also add support and resistance graphics that show technical overbought and oversold conditions--that knowledge we will use to beef up our option buying and selling for our All-Access members. 

Here is that link to the Ultra Growth stock charts: https://stockcharts.com/public/1514448/tenpp/1

And here are our Ultra Growth and Income Portfolios with buy-under prices

https://transformityresearch.com/ultra-income-portfolio

https://transformityresearch.com/ultra-growth-portfolio

Let us know how you like the chart list--it is a work in progress! Email to subscriber@transformityresearch.com or from the bottom of this email.