New york sees a US borrowing bane in the tax cut

Washington may be the capital of democracy, but New York is America's imperial city: bristling with towers, hard-edged, somewhat patronizing toward its brother on the Potomac. So it should come as no surprise that the money men of Wall Street have mixed emotions about the progress of President Reagan's tax cuts.

They think Mr. Reagan is moving the country in the right direction. But despite presidential complaints about "narrow vision," they continue to worry about the inflationary effect of cutting the Treasury's revenue.

"most investors are very encouraged by the program. But what I find in the market- place is still a lot of skepticism," says Dr. Edward Yardeni, chief economist of E. F. Hutton.

The skepticism was written in the numbers on the Big Board. Thursday, the day after Reagan reduced Democratic opponents of his tax bill to a panting, defeated rabble, the Dow Jones posted a modest gain of 7.71 points. Analysts attributed the rise, not to the Republican victory, but to a drop in the federal funds rate and a reduction in Irving Trust Company's broker loan fee.

"If Reagan had come on TV Monday and said, 'My surprise is that I'm calling off the tax cuts,' the market would have been up a hundred points," says Larry Wachtel, first vice-president at Bache Halsey Stuart Shields Inc.

Because the Reagan tax package would reduce revenues by some $730 billion between now and 1986, many on Wall Street do not believe the US budget will be balanced by 1984.

"It means the Treasury will be drowning us again" with government borrowing, Mr. Wachtel says.

Analysts say the long-term outlook is rosy. But they're concerned about what might happen before the weather clears.

"There's a perception that before you get to the promised land you're going to get some real problems here," says Dr. Yardeni.

"The immediate perception is [the bill] with lower corporate profits and raise interest rates. Most equity investors are mesmerized" by this thought, says Burt Siegel, a senior vice-president at Drexel Burnham Lambert.

For the short term, pessimists paint this scenario:

The Treasury might force private borrowers right out of the credit markets. The Federal Reserve would have to hold on to the money supply for dear life. Interest rates could stay high, unbalancing an economy that is once again teetering near recession.

"The economy is close enough to the edge of recession that some unexpected shock could push it over the edge," says the latest Citibank economic newsletter.

And analysts say the tax cut, like a tool with no one to use it, won't have much effect if the economy isn't going anywhere.

So, much of Wall Street is waiting to read good news in the economic indicators before cheering.

"There's a lot of 'show me, I'm from Missouri' attitude out there," Siegal says.

While reserving judgment on the macroeconomic effect of the tax bill, Wall Street is quite fond of several "ornaments" hung on it to attract votes.

The reduction in the top tax rate on investment income from 70 to 50 percent is one. A Securities Industry Association study has concluded that this ornament will be 20 times as efficient in generating new business investment than income tax reductions.

"We're very, very, happy" with the tax bill, says Edward O'Brien, president of the association.

Another is a provision in the House version of the bill which would reduce the holding period for long-term capital gains or losses to six months, from a year. Financial industry lobbyists are lobbying hard to get this amendment accepted by the House-Senate conference which is piecing together the final bill.

"We think it's important," says Eliot Fried, director of institutional services at Shearson Loeb Rhoades.

Mr. Fried estimates that 80 percent of the tax cut money will go to individuals, and 20 percent directly to business. He believes consumers will spend most of their windfall -- so consumer-oriented stocks, which have been flat, would be likely to do well.

Fried is also sanguine about the long- term effect of the bill on the Big Board.

"I sincerely believe that disinflation is going to occur," he says. "As that happens, the stock market will become the place to be."

Even though many big investors stayed on the sidelines last week, the stock market tried hard to break out of its slump.

While generally finishing on the upside, Wall Street may do better this week since the Federal Reserve reported no change in the nation's money supply in the latest week.

The stabilizing of the money supply combined with the tax cut legislation, may have helped the Dow Jones industrial average, which had skidded 22.16 points the week before, to rebound 15.60 points, to 952.34.

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