Pump & Dump

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Pump & Dump

Written by Charles Biderman, published in THE MARKET on the 27th of December, 2020

New government funding is likely to bubble up stocks further. That means the risk of a market crash in the coming year is rising. Investors should be especially careful in the month of April when several hundred billion Dollars in capital gains taxes are due.


Stocks are likely to keep bubbling ever higher due to the typical start of the year flood of new money into equities. The government stimulus package in the amount of $600 per person could boost stock prices even more.

While no one knows how much of this eventual government bounty will end up in stocks, my guess based upon the prior money give-away is that 15% to 20% of the new direct coronavirus-relief payments – $25 to $33 billion on the basis of the upcoming $600 stimulus check per person – will go to buy stocks and options.

Add any government stimulus to the typical start of the year flood of new money into equities and who knows how high stocks can trade in January. Historically, January and February have the biggest monthly inflows into stocks of the year averaging around $20-$30 billion monthly in the past. This January 2021, 2020 bonuses, annual investing programs plus reinvesting of money realized from tax-oriented December selling could blow up the US stock market to unbelievable highs.

As I have written in prior missives, individual investors firmly believe that they cannot lose money in this stock market. After all, there is now no cost investing and online apps that encourage gambling in stocks by people who have no idea what an income statement or balance sheet looks like. Therefore, with no downside risk, individuals believe any dip in stock prices is now a reason to buy. When told that the stock market is likely to crash sometime soon, they say they are not worried because «long term» the market always goes up.

I no longer call those buying stocks and options investors, they are gamblers. Most have no idea about the investment fundamentals of the companies they are buying into. That is particularly true of the 235 SPACs (Special Acquisition Companies) that went public this year raising hundreds of billions. Remember, a SPAC in essence gives management a blank check to do whatever they want with your money.

Historically almost all the indicators are bearish other than new year end money. Most important, companies are selling many more new shares than they are buying for the first time since 2009. From 2011 through 2019, US companies reduced the amount of shares held by the public by $6 trillion.

That means companies via buybacks and cash acquisitions of already public companies, have bought back $6 trillion of existing shares greater than all the new shares sold, whether initial public offerings, secondaries and insider selling. A $6 trillion float shrink and the overall market cap rose by close to $30 trillion over a decade.

However, there is only one medium term reason to be bullish – the Federal Reserve keeps creating new money each month. A portion of that money has been ending up in the stock market. Except for Fed money printing, everything else seems very toppy to me.





Beware the «Ides of April»

Approaching year end 2020, the market value of all US stocks is up by $17 trillion since the March low, at around $45 trillion. The new Biden administration has publicly stated it intends to raise capital gains taxes in 2021. While no one knows if they will be able to get a tax hike bill through the split Congress; my bet is many investors since the market peaked December 17 have been taking profits to beat a potential tax hike.

Two points about all the recent pre-Christmas tax-based profit taking. One is that tax selling dries up after Christmas and therefore stock prices should resume soaring as the New Year approaches. Second is that capital gains taxes on 2020 stock trading profits will be due April 15.

According to Mark Booth who retired as the head of tax revenue forecasting at the Congressional Budget Office and is now blogging at taxtracking.com, (the only reliable source of withholding and capital gains activity) in April 2020 $199 billion in capital gains taxes were paid on about $1 trillion in gains after the market rose 18% in 2019. A key question is how much in capital gains will be due this year; after stocks soared 75%, $17 trillion since the March 2020 market low.

If $199 billion capital gains taxes resulted from $1 trillion in 2019 profits, my guess is capital gains due this coming April has to be much higher.

Remember 2000? At year end 1999 I had been predicting that the US stock market had to crash due to supply and demand of new shares and new money. Back then, I estimated that 1998-99 new offerings had at least $70 billion of new unlocking shares wanting to be sold monthly in 2000 by insiders.

At that point in time, $30 billion per month of new money was available to buy stocks. Therefore, $70 billion of new shares dwarfed the $30 billion of new monthly money in January to February, and I predicted a market crash likely starting at the end of January 2000.

I was wrong. What I missed was individual investors borrowed $100 billion on margin during the first quarter of 2000 with which to buy more stocks.

But then, again according to Mark Booth at taxtracking.com, in April 2000 $120 billion capital gains taxes had to be paid. Given that the market had soared from a weak 1999 year end (due to Y2K computer fears) through early April, it appears that many shareholders were reluctant to sell stock to pay taxes until they had to.

What was the end result? The NASDAQ Composite Index started plummeting early in April 2000 and crashed as margin calls sent prices lower. For example, Amazon dropped over 85% in 2000. Yes, it has come back. But if you had margined to buy, you were wiped out.

Will there be an April 2021 stock market crash as stocks have to be sold to pay several hundred billion in capital gains taxes? My guess is that will happen. We will soon find out.


Charles Biderman