Merry Christmas & Happy New Year to you and your family! You are my hero, and who I aspire to be. Be well and see you in 2024!
Sincerely,
Wilson
Mill Valley, CA
“Large round numbers in the market act as rusty doors and sometimes need several swings before you can get through,” said Sam Stovall of CFRA Research.
Global Market Comments
February 15, 2024
Fiat Lux
Featured Trade:
(SPECIAL INCOME TAX ISSUE)
(THE TAX RATE FALLACY)
(THANK GOODNESS I DON’T LIVE IN SWEDEN)
(EWD)
While you are all diligently beavering away from getting your 2023 tax returns done in time for the April 15 deadline, I thought I’d correct some fundamental misperceptions about our nation’s tax system.
When anyone starts lecturing you that the US has the highest tax rate in the industrialized world, just turn around, walk away, and pretend you never heard them.
This person is either ignorant about this country's taxation system or is deliberately trying to deceive you.
According to a report released by the Internal Revenue Service for the 2022 tax year, the most recent for which figures are available, the top 400 individual tax returns filed in 2014 reported an average tax rate of only 22%.
This explains why Warren Buffet pays a much lower tax rate than his secretary. It really is true that in America, only the poor people pay taxes.
Look at any international comparison of taxes to GDP, and one can always find the United States at the bottom of the table.
Low American taxes are one of the main reasons why I moved my company here from England 30 years ago.
Take a look at the Fortune 500, where one-third of the largest companies pay no tax at all, and many that dominate the top of the list, like the oil majors and technology companies, pay only token amounts.
However, if any politician wants to pander to voters during election time on a tax-cutting platform, he will only bluster on about “high tax rates”, not actual taxes paid.
What the US has that other countries lack is the 77,000 pages of the Internal Revenue Code.
It is a 100-year accumulation of deductions, accelerated depreciation rates, tax credits, and other tax breaks that are the end product of intensive lobbying efforts and bribes by special interest groups, corporations, unions, and even religious groups.
If you do have a big tax bill, you need to hire a new accountant.
Take a look at the oil industry again. The oil depletion allowance permits drillers to deduct the cost of a new well in the first year.
When I first got into the oil and gas business 15 years ago, after reading the relevant sections of the tax code, I couldn't understand why everyone wasn't drilling for Texas tea.
The total value of this one tax break to the industry is estimated at $55 billion a year. This explains why we have had three presidents from Texas in the last 50 years.
Some of this money ends up in campaign donations. And this is all happening when the markets are absolutely flooded with oil. So, we’re subsidizing oil production?
I have a very simple solution to the country's budget deficit problem. Hit the reset button.
Eliminate the Internal Revenue Code. Just set it on fire or send it to the recycling bin. Keep the existing progressive, hockey stick tax rates on income, but eliminate all deductions.
And I mean everything; deductions for dependents, home mortgage interest, medical expenses, charitable contributions, the works.
The oil depletion allowance and other corporate loopholes are worth at least many hundreds of billions a year in lost federal revenues. There are no sacred cows.
My revised Form 1040 would be much like the original 1913 return, a postcard that would have only five lines on it:
Name
Social Security number
Income
Tax Rate
Tax Due
The budget deficit would disappear overnight. Government spending would shrink dramatically because you could ditch most of the 100,000 who work for the IRS.
Some 1.3 million auditors, CPAs, tax attorneys, and bookkeepers would have to hit the road in search of new work too.
The amount of money that is wasted on tax collection in this country is truly staggering. This is not some pie-in-the-sky concept. This is how taxation already works in most countries, and they seem to get along just fine.
In fact, the whole scheme might even pay for itself.
I Don't See Any Jobs for Former IRS Agents, Do You?
I recently found the chart below showing world tax rates as a percentage of GDP for the past 40 years. Sweden suffers the world's heaviest tax burden at 51%, compared to only 27% in the US.
The US has among the world's lowest tax burdens in terms of actual taxes paid, which has been falling for the last 20 years. Listening to TV pundits, you would think we had the world's highest tax rates, which are about to leap much higher.
Germany, home to some of the world's best run and most profitable companies which make the Fatherland a major exporter, has one of the lowest tax bills. Iceland sits at the bottom and is now bankrupt, thanks to an overdose of free market deregulatory philosophy.
Americans historically have had a very strong resistance to taxation, which you can trace back to the libertarian foundations of the country. The Revolutionary War, in which 17 of my known ancestors fought, was primarily about taxes.
The top end of the distribution is packed with European nations, but you never hear them complain about high tax rates. Most believe the cost of the social safety net is worth it. Those that don't, move to the US, Monte Carlo, Lichtenstein, or the British Virgin Islands.
Of course, having once been a part owner of a fashion model agency in Stockholm, I can certainly vouch for the advantages of living in the world's most taxed domicile. Suffice it to say, you spend a lot of time indoors in the home of the Vikings.
Well, Maybe It's Not So Bad After All
Global Market Comments
February 14, 2024
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, FEBRUARY 16 OPTIONS EXPIRATION),
(MSFT), (AMZN), (V), (PANW), (CCJ)
Followers of the Mad Hedge Fund Trader alert service have the good fortune to own five deep-in-the-money options positions that expire on Friday, February 16 and I just want to explain to the newbies how to best maximize their profits.
This involves the:
Current Capital at Risk
Risk On
(MSFT) 2/$330-$340 call spread 10.00%
(AMZN) 2/$130-$135 call spread 10.00%
(V) 2/$240-$250 call spread 10.00%
(PANW) 2/$260-$270 call spread 10.00%
(CCJ) 2/$38-$41 call spread 10.00%
Risk Off
NO POSITIONS
Total Net Position 50.00%
Total Aggregate Position 50.00%
I’ll do the math for you on our deepest in-the-money position, the Amazon (AMZN) 2/$130-$135 call spread which I will almost certainly run into expiration.
Provided that we don’t have another monster move down in the market in two trading days, this position should expire at its maximum profit point.
So far, so good.
Your profit can be calculated as follows:
Profit: $5.00 expiration value - $4.30 cost = $0.70 net profit
(25 contracts X 100 contracts per option X $0.70 profit per option)
= $1,750 or 16.28% in 27 trading days.
Many of you have already emailed me asking what to do with these winning positions.
The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.
You don’t have to do anything.
Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning February 19 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, occasionally machines do make mistakes. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen, when a security has only hours, or minutes until expiration on Friday. So, if you plan to exit, do so well before the final expiration at the Friday market close.
This is known in the trade as the “expiration risk.”
One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.
I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.
I’m looking to cherry-pick my new positions going into the next quarter's end.
Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.
Well done, and on to the next trade.
You Can’t Do Enough Research
“Of course, you never go broke taking a profit, but you never get rich either, because a good portion of what you make goes to taxes,” said legendary value investor Ron Baron.
Global Market Comments
February 13, 2024
Fiat Lux
Featured Trade:
(WHAT THE ECONOMIST BIG MAC INDEX IS TELLING US NOW),
(FXF), (FXE), (FXA), (CYB)
The Swiss franc is wildly overvalued, as are the Norwegian kroner and the Uruguayan peso. On the other hand, the Venezuelan bolivar, UAE dirham, and the Brazilian real off real value.
Who has the cheapest currency in the world? The Ukrainian hryvnia, which at 25 cents to the US dollar offers the cheapest Big Mac in the world. I had one in October, and they taste just the same, but is a bargain at $5.00. That explains the proliferation of McDonald's hamburger stands in the capital city of Kiev. They are always packed.
With interest rates and inflation the urgent topics of the day, everyone has their favorite inflation indicator. The Fed has money supply growth, you have yours, and well, I have mine.
My former employer, The Economist, once the ever-tolerant editor of my flabby, disjointed, and juvenile prose (Thanks Peter and Marjorie), released its “Big Mac” index of international currency valuations in 1987.
Although initially launched as a joke, I have followed it religiously and found it an amazingly accurate predictor of future economic success. The heart attack on a plate costs $5.69 in most of the US.
The Economist index counts the cost of McDonald’s (MCD) premium sandwiches around the world, ranging from 142% the cost of an American Big Mac in Switzerland to only 84.5% in Brazil, and comes up with a measure of currency under and overvaluation.
I couldn’t agree more with many of these conclusions. It’s as if the August weekly publication was tapping The Diary of the Mad Hedge Fund Trader for ideas.
I am no longer the frequent consumer of Big Macs that I once was, as my metabolism has slowed to such an extent that in eating one, you might as well tape it directly to my middle. Better to use it as an economic forecasting tool, than a speedy lunch.
Having followed this index religiously for 37 years, I am able to make some astute long-term observations. For a start, the US dollar has been at the top of the range for most of its life. This is because the US has had the best major economic growth rate over the last four decades, averaging a real 3.0%.
Another factor is that America has also had the world’s highest large economy interest rates, thanks to a very tough inflation-fighting Federal Reserve. I doubt Jay Powell eats Big Macs. He’s too thin.
You will also find that the cheap end of the range is always populated by the same countries year in and year out. These are poorly governed, money-printing, economically chaotic countries with little regard for their currencies. Don’t cry for me Argentina and throw in Venezuela. They will always be cheap. Invest there at your peril.
And yes, making your currency calls based on the price of hamburgers has its risks. But it does give me a wonderful excuse to travel around the world taking pictures of fast-food stands.
The Big Mac in Swiss francs is Definitely Not a Buy
But it’s the Deal of the Century in Kiev