Day 344: What Are You Waiting For?


Mother's Little Helper portfolio was DOWN today -$6,836.84 (-0.82%).

Overall GAIN YTD: +$242,116.55 (+41.47%).

Our benchmark index, the S&P 500 is up +17.45% Year To Date.

http://money.cnn.com/data/markets/sandp/

I grew up with six brothers.

That's how I learned to dance - waiting for the bathroom.

― Bob Hope

Sell Already!

The past week or so has been hard on the portfolio with a number of external factors and one technical, internal factor impacting our returns. All told we've slipped from a tad over 49% down to a year-to-date increase of 'only' +41.47%. The knee jerk reaction would be to sell and capture those big profits. The problem with that theory is that we all have lives apart from watching the stock market. How many of you even looked at this blog the day we were over 49% year to date? Nope, I'm holding the portfolio to the end of the year and then we'll sell and see how we did. The internal factor is related to Google Finance portfolios. The portfolio was created in Google Finance and back in April Copart, Inc initiated a 2 for 1 stock split. This means that we received 2 shares of Copart for every 1 share we owned. However Google did the split twice turning our 233 shares in 932 shares. But let's don't feel too bad, Copart is still up over 56% YTD. Thank you to blog subscriber Mikael Rudolfsen for finding that error. Yes the rest of the portfolio was checked for errors.

We contend that for a nation to try to tax itself into prosperity

is like a man standing in a bucket and trying to lift himself up by the handle.” ― Winston S. Churchill

What's Causing All The Ruckus?

The tax bill proposed and approved by the House and the version from the Senate are both causing rotations in the market. Make no mistake these are not rally's, just rotations. All that means is that investors are selling stocks in sectors they perceive will do poorly under the new tax plan and buying those that they think will do well. Or more to the point, they are selling big winners and buying future winners. All this buying in unloved parts of the market (value stocks like retail and energy) and selling of stocks that have surged over the past year (growth stocks like technology) has helped to introduce volatility. Or so that's the mantra in the financial news.

I'm calling bull shit

A 300 point drop in the DOW index that's at 24,000 is not the same as a 300 point drop in the DOW when it was at 10,000. Moves of this magnitude in the DOW, S&P 500 and NASDAQ will all look huge but in reality they are typical, normal and frankly needed to clean up valuations. What do I mean by clean up valuations? Many stocks have risen in prices beyond what the fundamental financial picture says they should be. Investors expect a stock to rise in value, but many companies are being bought today at prices that reflect what they will be in a year, or two. That's the very definition of paying up. There are still lots of values to be found in the stock market and that's why a rotation is taking place, out of the higher priced stocks and into the value investments. Sit back, relax and enjoy the ride, it will be exciting.

Geopolitical events like North Korea lobbing missiles at Japan don't seem to startle investors anymore, and most of these events shouldn't. McDonald's isn't going to make fewer Big Macs because Kim Jong Un launched a missile. What startles me is that investors are making decisions to buy and sell stocks based on a tax plan that isn't finalized and we have yet to hear a date when the most important aspects of the plan will occur on. Will the carried interest provision be included? If it is, then a portfolio like this will need to hold stocks for three years instead of just one year in order to obtain more favorable tax treatment. Will a lower corporate tax rate start in 2018, 2019 or get phased in? We don't know yet. And let's not forget overseas cash repatriation. That's a patriotic way of saying, the government is going to seize a portion of your overseas earnings by taxing it regardless of weather or not you bring that money home. This will effect technology and healthcare companies the most. If the money corporations are holding overseas from overseas business is going to get taxed anyway the they might as well bring a portion of it home and invest it here or give it back to the shareholders. If the US Government can do that, then why can't the European Union? Oh yeah, they're trying this too.

How about more localized issues like deducting mortgage interest and state and local taxes (SALT)? Home builders like Toll Brothers and others are already feeling the pinch as their stock prices drop in reaction to this news. The theory being that home sales will drop because home buyers won't be able to deduct the interest they pay on their mortgage. That theory rings hollow with me, I don't think people buy homes because of the interest deduction, if anything more people will pay off their mortgage faster and more homes will be bought with cash simply because there's no advantage to holding onto the loan. It's the lender who will loose in this deal when loans are paid off faster; I predict more home loans will have a early pay off penalty in the future.

Then there is the deduction for state and local taxes, which at its core is a subsidy and subsidies are rarely good economics. Today, tax payers can write off state and local taxes on their federal tax return (the federal government is giving you a subsidy with another tax payers money). The question is, why should a tax payer in Oklahoma, Minnesota or Iowa send money to the Federal government so that the Fed can subsidize a tax payer in California or New York? Why should anyone anywhere be subsidizing another persons taxes? Recall that 50% of tax payers pay 97.3% of all taxes; that's a pretty nice subsidy too. According to the Pew Research Center those earning between $200K-$500K paid 58.9% of all federal taxes, add in their state taxes and the number gets mind boggling.

Maybe the better question is, did the SALT tax policy really do anything positive for individuals and businesses? Did it promote business across state lines? No, but Amazon and other eCommerce companies did. Did it narrow the inequality of rich and poor by redistributing wealth? No, the gap is wide and getting wider. Did it help rural states by receiving funds from richer states? Yes, it probably did help a little, but I can't find a way to measure that. What it did mostly was run up the federal deficit and encourage state lawmakers to increase taxes because through the deduction the taxes in California 13.3%, Oregon 9.9%, Minnesota 9.85%, Iowa 8.98%, New Jersey 8.97% and New York 8.82% didn't feel so bad. By removing this deduction the long term effect may be that state lawmakers will need to better justify existing and new taxes and might even have to come up with ways to stop spending so much in order to provide tax policy that keeps their wealthy residents and tax paying businesses. California can ill afford to have an exodus of wealth to Nevada, Florida and other states with no personal income tax.

This is a question too difficult for a mathematician.

It should be asked of a philosopher"

(when asked about completing his income tax form)” ― Albert Einstein

When the debate over reducing taxes is over maybe we can have a debate about spending. No matter what you think about the new tax bill one thing is for certain, these tax cuts will force a reduction in spending.

Stay Invested

Clay Baker

Disclosure: I am personally invested long in these stocks that appear in the MLH portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks that do not appear in the MLH portfolio: BA, BRK.B, CELG, CSCO, CTXS, CVX, DOW, DVAX, FB, IBM, NTES, NVDA, OMER, PFE, PG, RDHL, SCHW, TBT, THO, TWX, VEEV, VZ, XLNX, XOM

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

© 2016 by Clay Baker all rights reserved