Understanding the stock market: Follow the Dolphins

Wayne Huizenga gives a pretty good demonstration of what will happen to the stock market over the next couple of months if Barack Obama gets elected next Tuesday.  Huizenga released a statement this week insisting that he will sell his half-interest in the Miami Dolphins to avoid the capital-gains tax-rate increases that will undoubtedly pass with an Obama administration in the White House.  And if you think he’s the only investor making that decision, you haven’t paid attention to history:

Don’t think tax rates matter to business decisions? Ask H. Wayne Huizenga, the owner of the Miami Dolphins, who declared earlier this week that he intends to sell up to half his ownership in the NFL franchise before next year. Why? Because as he told a Florida newspaper, Barack Obama “wants to double the capital gains tax, or almost double it. I’d rather give it to charity than to him.” …

We saw a similar tax effect in 1992 when Bill Clinton raised tax rates. The Wall Street crowd accelerated income, bonuses and stock sales to pay the 31% rate, not the expected higher rate. One of those who cashed out in 1992 was Robert Rubin, who would soon join the Clinton Administration.

One economist who observed this tax avoidance was Austan Goolsbee, of the University of Chicago, who is now a top Barack Obama adviser. In a 1999 paper, “What Happens When You Tax the Rich?,” Mr. Goolsbee wrote that “the higher marginal rates of 1993 led to a significant decline in taxable income.” Many of the superrich were able to change the timing of compensation to avoid paying the higher rates. Mr. Goolsbee concluded this was merely “a short term shift,” but it did cost the Treasury revenue it had been anticipating.

Most people don’t care who owns the Miami Dolphins.  In fact, getting Huizenga to sell may even gain Obama a couple of points among Dolphins fans, who still wonder when Dan Marino will come out of retirement.  This isn’t about NFL football, though, but the valuation of assets in the marketplace.

The value of the Miami Dolphins varies on several factors, but a forced sale always lowers the price.  If buyers know that Huizenga has to sell before December 31st, they can wait him out and pressure the price lower.  Huizenga will lose potential value.  Anyone who has had to sell a residence because of a job relocation has gone through the exact same process.

Now take that dynamic and apply it to the entire market.  Anyone who thinks they will have to cash out their holdings over the next couple of years will now want to do it in this tax year, rather than risk the significantly higher rates — perhaps twice as high as they are today, as Obama has suggested returning to the 28% rate under Bill Clinton.  If everyone tries to sell at once, buyers will become so scarce as to be non-existent — and we will see yet more free-fall.

That’s not the only pressure, either.  Democrats want to end tax breaks on 401(k) retirement plans and replace it with Social Security II.  People will want to bail out of the investments quickly, anticipating the huge flight of capital that will result from 401(k) demolition.  When the dust settles, anyone still left in the market will be lucky to see the DJIA at 1500.

Some have suggested that the markets have begun building that into their valuations already, which is the reason why we’ve seen the markets drop dramatically this fall.  Huizenga and others like him haven’t begun to move their money in earnest, though.  When they do, this last month will feel like a speed bump compared to what’s ahead.

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