Wall Street Perspective

 Wall Street Perspective

As Financial Farmers we must be wary of svengalis constantly whispering doom and gloom, because it is vital to have a long-term Wall Street perspective and remember all finance is behavioral finance.

First, why is it vital to have a long-term Wall Street perspective? Over a long enough time period, as Zero Hedge has popularly quipped, we're all dead. BUT, a counterpoint to this morbid fact, is that innovation over time has propelled the economy and society to greater productivity. And the stock market has been along for the ride.

The second reason to question a svengali is that behavioral finance drives a LOT (most?) of the market's near-term volatility, trading, and returns. Sustained movements are the result of earnings, growth, innovation and major societal changes.

At this point in the economic cycle (most likely we're either in or on the cusp of a recession), the corporate picture isn't exactly bright. We've witnessed massive selloffs in tech companies and the only winners seem to be "boring" consumer staples anchored by a dividend. A lot of money has flowed out of the market into cash. Or real estate. So the bloom is off the rose for the time being.

For those entering the market, opportunity abounds. With multiple companies well off their highs and solidly into bear market territory. Many have been completely vaporized and sit some 60%, 70%, 80% or more off of their  highs from just a couple months ago. For those who have been long-term holders, the past six months has been horrific, watching gains for the past two years getting destroyed. Even "blue chip" companies haven't been spared. Carnage is everywhere.

What's an investor to do? Stay focused on what matters; earnings, branding, growth, innovation, integrity, and cash flow. Have emergency cash on the sidelines. Look for opportunities and be patient. The last bit is perhaps the hardest. Many older investors in the stock market don't think they'll live to see a Bull Market again. But it is hard to believe that this great country, which has weathered so much in the past, could be permanently hobbled by inept leadership today for very long. So we're in a waiting game now.

Similar to economic cycles, the political pendulum swings and very few Presidents or political parties survive recessions intact. New blood focused on innovation, growth, and stability rises to the moment. Remember dear readers, the business of America is business. In the meantime, a fallow field presents many, many opportunities for a farmer with a keen eye.

Biden Bonds

 Biden Bonds

It was the best of times, it was the worst of times. Record low unemployment. Free healthcare for all. Open borders. Employment unionization. Limited law enforcement. And 9.62% I Bonds! Who could ask for more?

As CNBC proudly touts, the Series I Bonds available all this month are "virtually risk-free." Hmmm...let's ponder that fellow financial farmers. Why are the Series I Bonds pricing at 9.62% in the first place? Wouldn't that imply raging inflation? Why yes dear reader it would. And what is the I Bond's inflation component based on? Ahhh...CPI. Now what if the average American doesn't consume tons of soybeans or compute data in terabytes, but actually EATS and DRIVES on a daily basis? Might that skew CPI even higher?

To the shill writers at CNBC who are apparently fully endorsed by a government not-so-quite-on-the-level, obviously there is tremendous risk in the sense that you potentially are LOSING purchasing power due to inflation. How much? This author estimates Americans are losing approximately 2% PER MONTH (assuming you eat food and drive using a..gasp...fossil fuel car!)

Let me slide my Nobel Prize in Economics aside and grab my dusty calculator behind it....OK so 2% per month is like...hmm...24% annually! Wow. Maybe that 9.62% isn't such a good deal after all? Where is all that money going? Hint: Free ain't cheap.

One of my heroes, and an American statesman par excellence, Art Laffer wrote this AM in the WSJ: "The current 8.5% inflation rate is the highest in 40 years. But few policy makers or Federal Reserve governors seem to have learned the lessons from the last bout of surging prices--how it started, the economic wreckage it caused, and how to get out of it. We wince when we hear investment gurus arguing that because inflation often means rising consumer demand, it is good for the economy and stock market."

Quite the opposite is true. Both investors and workers care about REAL returns, ie stripping out inflation and seeing nominal growth...when purchasing power collapses (think high gas prices, high healthcare costs if you pay for healthcare, high education costs, high housing costs, high food costs, etc. etc.) larceny at a grand scale is occurring via inflation. Hence the worst of times.

So as investors back up the truck on Biden Bonds, consider for a moment WHY Series I Bonds are yielding 9.62% and pray that the limit isn't raised from $10K per person to $100K. It would mean the utter collapse of capitalism and the government would become all. Because, really why take the risk of getting out of bed in the morning if you can get a juicy 9.62% from Uncle Joe?

Let Freedom Tweet!

Let Freedom Tweet!

What an amazing day in America, as Elon Musk purchased Twitter and vowed to help restore free speech in the United States. 

There are several truly shocking angles to this story, one of which of course is that it took a South African to champion the ideal of democracy in America! Another is that our elected leadership corralled and silenced literally millions of citizens using big tech as their Gestapo.

It took one billionaire with cajones to do what is morally right. Bravo Elon, bravo!

 

DCA Primetime

 DCA Primetime

Imagine investing for a lifetime. Not for a moment, not just early in your career, but rather for a lifetime. Consistent, disciplined buys made over decades. Many long-term investors like the curmudgeon Warren Buffett swear by it. But why?

The stock market will generally go up over time. In fact, something like 53% time on a daily basis the Dow Jones Industrial Average ends the day in the green. Granted, that's only slightly better than a coin flip, but that small spread adds up significantly over time. Wall Street is pretty much the opposite of a casino actually; the longer, more regularly you invest in the stock market the higher percentage chance you have of winning. 

Dollar Cost Averaging (DCA) is an investment strategy wherein an investor buys stocks, or an index even, on a regular basis with the same dollar amount over an extended period of time, ideally forever.  This results in purchasing more shares of an index for example when the price is LOW and fewer shares when the price is HIGH.

In a listless Bear Market with violent swings in daily prices with no discernible end in sight, this strategy makes plenty of sense. When no man, or even computer, can call a bottom buying in fixed intervals offers an investor the ability to circle around a low with higher conviction rather than investing a massive lump sum at a singular point. Think of it this way: Would you rather have 50 small darts to hit the bullseye of a moving target or one big dart?

The greatest risk of the DCA strategy is when investors abandon it, either by cashing out or no longer making periodic investments. Once that occurs they are fully at the whim of the market's volatility, which as we have painfully learned again this year can whipsaw violently, leaving investors who were punch drunk only months ago on the euphoria of a winning cycle easily down double digits in a short, brutal period of time.

Civic Duty

 Civic Duty

On this most hallowed day of Civic Duty, did you get a call at the crack of dawn from your Congressman profusely thanking you for paying your "fair share?" No? Hmmm. I'm getting the distinct feeling that we (taxpayers) are getting the taxation without the representation. This brings me to a serious and singular question for you my dear readers: Would you pay income taxes if there was no threat to your personal liberty?

Reimagine a Republic where income taxes are voluntary. Citizens pay of their own accord, with no threat to personal liberty. What would happen? First, from an administrative standpoint the IRS would largely cease to exist. How much does is cost to actually run the IRS? As usual, nobody really knows. Estimates are in the $10-20B range or 35 cents per $100 collected. But that seems woefully low. I doubt the IRS is more efficient than PayPal's piggish 3% vig on every transition. Regardless, the vast majority of this cost goes away without enforcement.

A cursory knowledge of the Laffer Curve (which differs significantly from the current Gaffer Curve) reveals that productivity will explode with less taxation. Keep in mind, a large volume of Americans will still pay income taxes. Probably on the order of at least 40% based on their personal desire to support true civic utility, ie the proverbial collective defense, infrastructure, and benefits that this country has established. But the net effect of voluntary taxation will be the honing of budgets, collapse in corruption, and laser accountability of public funds because "representatives" will now be truly beholden to citizens, rather than corporations.

"It's dangerous to be an honest man," quips Michael Corleone in Godfather III. When there is rampant corruption and no trust, personal liberty needs to be threatened to pay taxes, otherwise no rational person would pay taxes. Representatives, do your duty to your true constituents or resign.

Let's reimagine this Civic Duty as one that aligns with our highest ideals as a nation. Participation is voluntary. Personal liberty is no longer threatened. Civic Duty becomes one of pride, not fear or indignation, and check images proudly sent to the IRS circulate like viral Twitter cat videos.

Half Pay All

 Half Pay All

To the half of all eligible taxpayers who pay for it all, I salute you! Sadly, not one of you will even get a cursory phone call from your elected "representative" on this hallowed day...regardless of how much of your income earned with blood, sweat, and tears is sent to the U.S. Treasury to be squandered by our politicians. And that fellow financial farmers is a true travesty...taxation without representation!

In a Republic everyone should have skin in the game, and today we have serious leakage at both the top and bottom...corporations are skirting income taxes by nefarious means protected by the politicians true constituents (corporations) and at the bottom it is is a free-for-all (literally and figuratively) as this country no longer has borders. The net result of both of these scenarios is the value of citizenship is diluted.

Diluted citizenship ultimately breaks the back of a Republic because it cannot function anymore without a rule of law. Oscar Wilde once quipped that taxation is the price of a civilized society. And he was right. But taxation cannot be increasingly borne by the middle class. The truly wealthy have achieved escape velocity. They have the ability to regulate income flow, or even employ the classic "Buy, Borrow, Die" strategy of owning assets, borrowing from them, and then when they die passing those assets to heirs who can then employ the same strategy. Effectively it is possible for multiple generations to not only to never pay income taxes, but to also pass those very assets to their heirs for generations to come.

For those wanting a better life and coming to America the pastures seem green indeed. Simply walk across the southern border into Texas and not only will you get a free iPhone and airfare to a destination of your choice, but more importantly, access to a myriad of services. But all is not what it seems. The America of today without laws, borders, or political leadership is simply replenishing the working class poor for the next generation of serfdom. Just like citizenship, "free" dilutes the value of goods and services to nothing. Free schools. Free housing. Free healthcare. Look at what "free" buys and it looks a lot like horse manure.

We know HOW this is happening. But WHY? Click the chart below and it should reveal some interesting statistics:

As of 2022, approximately 150,000,000 taxpayers filed returns. The United States has a population of about 330,000,000. So 45% of the total population filed a return. Of that 45%, only about 50% paid any taxes at all. So 50% of 45% comes to about 75M people. That essentially is the sum total of the remaining Middle Class. It effectively keeps the entire country running. Dear readers, let's call it what it is.  These 75M people pay "protection money" not to be ensnared in legal troubles, lose their passports, or go to jail. Who would actually pay taxes voluntarily without threats to their personal liberty? Civic duty my a$$.

Yet when we look for holes in the system, corporate taxation is oddly missing at levels commensurate with their respective profitability. And that's the rub. Big corporate earners now valued in the hundreds of billions of dollars and a handful in the trillions are largely avoiding taxation. 

Corporate scofflaws own the elected representatives in this country. How else could they pay only $360B in taxes (as estimated by the CBO in 2021), yet have a collective valuation of approximately $53T? A simple "back of the envelop" measurement indicates that some 99.4% of their valuation is retained on corporate balance sheets rather than in the US Treasury every year. Put another way, literally TRILLIONS are missing from the Republic's coffers. 

What's good for the goose should be good for the gander. The problem is the 16th Amendment permanently handicapped the human citizen, and empowered the corporation. Representatives listen and act for those who pay them. Today that is largely the corporation. Granted they get a "little" pocket cash in terms of salary and pension and healthcare from citizens, but the corporations keep them in power. The gravy train will continue until there is a significant legal schism that once again empowers people over corporations.

 

Splitsville

 Splitsville

How does a stock split typically affect stock performance? It depends. In principle, a stock split does not add any intrinsic value. A stock split simply increases the number of existing shares while simultaneously reducing the corresponding price point. So on the surface a stock split is a neutral event at best. So why would a company bother?

There are several important reasons to consider doing a stock split, some are purely aesthetic while others have significant value. First, from an aesthetic standpoint who doesn't like having MORE of something? Shareholders generally like the idea of having MORE shares. High flying stock prices make significant share volume purchases pricey, so companies feel that increasing the number of shares via a split will attract a larger base of potential investors (similar to the pricing of IPOs...rarely, if ever, do you see an IPO issue in the hundred dollar plus column; issuers want to generate enthusiasm for a deal by pricing MANY shares in the teens rather then far few shares in the hundreds of dollars.)

A second aesthetic reason for splitting a stock is to smooth the chart. Stocks that have literally gone through the roof have a parabolic chart that often suspiciously looks like it will collapse. Hence, we see splits to help smooth this 3, 5, 10-year chart to something approximating a ramp rather than a rocket ship launch.

The third aesthetic reason, but also a practical one, is the ability with greater volume of stock to better hedge positions via Covered Calls or Puts. Contracts are traded in 100 share units, thus for several big tech companies an investor would have to own several hundred thousand dollars worth of the stock just to have enough shares for a single options contract.

Aesthetic reasons aside, several large tech companies have announced share splits that will effectively transform their shares from several thousand dollars each into several hundred dollars each. Why does this matter? Potential inclusion into the Dow Jones Industrial Average hinges on share price rather than market cap. Currently three large tech companies come to mind that are NOT included in the DJIA. Significant splits make the eligible.

In summary, stocks split for many reasons. It has often been a litmus test of a company's success as to whether they do split or not. One of my favorite websites is: www.stocksplithistory.com

Here a financial farmer can input a ticker symbol and get the historical stock split history of a company, resulting shares, and it also provides recent 10-year data of the hypothetical $10K invested in a company. Great financial tool!

April's Fool

April's Fool

Citizens must always be vigilant against their governments, because tyranny never sleeps. Consider legislation tucked into the "American Rescue Plan Act of 2021" which will generate a 1099-K on a cumulative total of $600 in annual transactions....that's right $600. Over a year.

The IRS (and whatever political party that controls them) will now be collecting ALL transactions done with a credit or debit card or such peer-to-peer services such as Venmo or PayPal. Readers of this blog should be concerned, very concerned. 

As the Wall Street Journal reports, "...millions of taxpayers who have never seen a Form 1099-K will be receiving them. While no one knows how many Americans will be getting these forms, tax lobbyists estimate the number at as high as 20 million."

20 million? Ha! Assume nearly EVERY Venmo, PayPal, eBay, Etsy, Facebook, and Amazon seller will be getting a 1099-K. This essentially provides the Government with complete financial surveillance on every American, destroys the fundamental rights of privacy, and moves us closer to a 1984 scenario. We're getting to the point where citizens can't even THINK too loudly.

How did this happen? Thank your "representative" in Congress and the former Senior Senator from Delaware. Joe Biden most assuredly did this. But the true betrayal began as this blog has long lamented even earlier, by John Roberts acquiescence to the Wayfair Decision. 

In a landmark 5-4 decision, the Supreme Court ruled that essentially all internet transactions were taxable. This author believes that this decision is the most consequential judicial ruling in a generation, yet it has been quietly (except for the regulators) swept under the rug. Make no mistake, innovation, commerce, nigh the entire American way of life was impacted.

It is hard to believe prior to 1913 there was no income tax. Ironically, for some 57% of Americans in 2021 there STILL was no income tax! Substantial tax reform is almost impossible given that the majority of Americans pay no income tax, while the "meat & potatoes" of society (ie the dying Middle Class) pays nearly all of it.

As financial farmers this blog typically suggests voting for change. But that is a joke. The lobbyists control Washington, your local Congressman(en) is bought & paid for, and even if you do vote, what is the purpose? The non-payers far outnumber the payers.

With the passage of the freedom-torching "American Rescue Plan Act of 2021" financial farmers need to go back to the old ways of doing business.  Yes I'm talking cash.