The cross currents in the markets and the economy and especially in the political world are swarming faster than ever. As always, it’s crucial to step back and get some perspective on what is dominating the headlines. Deciphering what matters from hype is one of the most important keys to staying in front of the cycles and trends.
First, take a look at the three headlines dominating my favorite financial news site (and my publishing partner) Marketwatch.
I want to remain bullish and continue to ride this ongoing stock market bubble that we positioned ourselves for years ago. But headlines like this keep from me wanting to get too much exposure. Buy when there’s panic in the headlines. Sell when there’s euphoria. What do you see in the headlines above? Trim down some and wait for the next big pitch.
You’re trying to maximize your gains and minimize your risks over the next 10,000-20,000 days of your life. And in the big picture, it never pays to lock your money into stocks after the markets have just doubled and tripled in the last handful of years.
And speaking of the next 20,000 days (about 50 years), another key to investment success is knowing that long-term, easily observable birth-death/age-demographic trends are part of the cycles that we have to ride with our money. This headline caught my eye this morning – Never call a baby boomer ‘old’. Sorry, but, uh, baby boomers are getting old. And did you know that since the baby boomers came into power, the nation’s debt load has exploded and interest rates have been steadily and artificially forced ever lower, keeping the pain of that debt from hitting. How in the world will we service what will soon be $20 trillion of recognized debt and hundreds of trillions in unfunded obligations while lending trillions of dollars to Too Big To Fail banks at 0% interest and borrowing that same money back at 3-4% rates that have no where to go but up? (See: Bond Yields Begin To Ease Back.)
Continuing on that line of thought then, did you know that the companies in the S&P 500 will report more than $1 trillion in profits this year? And that they will only pay about $100 billion, or 10%, taxes on those profits? Most profitable small businesses easily pay 30% or more in taxes on their profits and if the S&P 500 were held to the same standard and forced to forego all their subsidies and loopholes and write-offs and other forms of corporate welfare, we’d instantly have another $200 billion a year in tax revenue. Flipside of that would be to cut taxes for every business to 10% of profits and hope that the resulting wealth increase in the nation would someday result in paying off all that debt before the interest rates spike.
And when will the cycle end? It can get worse (bubble can get bigger) before it gets better (before the bubble pops and the excesses are washed out), did you ever think you’d actually see an ad for food that goes like this?
Yup, that’s a real ad. Now, I tend to think that when something smells so strong your eyes can actually smell it, it’s NOT a good thing. Like, it’s gross. But that’s just me and I was a veterinarian’s kennel boy to my father growing up and maybe I’m just weird. Well, I know I’m weird and I’m proud of that, but that’s beside the point. The point is that I really do think McDonald’s has just about as bubblicious (get it?) a stock as there is out there right now. McDonald’s pays more in annual dividends last year than they do in annual taxes.
Think of it this way, right now profits and profit margins in the S&P 500 are higher than they’ve ever been while real tax rates and real interest rates are lower than they’ve ever been. I suppose this could be a “new normal” and/or this trend could play out for a long time to come, but I sure expect that at some point, there will be some serious regression to the mean of the typical, cyclical S&P 500 business model and that we’ll want to be ready to ride that cycle on the downside when it finally gets here. Dogma is for losers.
And another big concern of mine over the weekend is just how big the coming fall out of the government spying programs will be on some of our biggest and longest-held tech winners. This article sums it up nicely. Kiss (US-served) cloud computing good-bye!
Once I became an anchor on Fox News, in the News Corp empire of all things, and I was forced on a daily basis to comment on politics for a living, I kissed my own privacy good-bye. I figured saying things like “Republican-Democrat Fascist Regime” and having Paul Stanley, Gene Simmons, and other rock stars read the teleprompter to introduce my “Illuminati Alert” reports on a national TV news show pretty much guaranteed a long time ago that the FBI, NSA and who knows who else have files on me. Even I am shocked at the true extent of the PRISM and other surveillance/spying programs that our own government is using against its people. And I do think there’s a good chance that Google and Facebook and Microsoft and Apple have done permanent damage to the planet’s people’s trust and that could really hurt them if they don’t fix it by standing up and taking action on our behalf rather than just putting out half-hearted denials of complicity. Every day that goes by without a major rebellion by these corporations is another day that pushes people like you and me to other services.
I told you guys before about how my old anti-partisan social network, SpokeUp.com, was getting 2-3% of its daily traffic from WhiteHouse.gov IP addresses and that soon after I told my viewers that fact that the site was forever forced offline by viruses and denial of service attacks. We all now beyond a shadow (get it?) of a doubt who was responsible for destroying that completely open and free platform I’d created.
The upshot of all this is to try to show just how far away we’ve gotten from being able to just find great companies to invest in rather than being forced to game the policies of the government. With taxpayer largesse the primary driver of health care companies, education companies, banks and with a 66,000 page IRS tax code and endless new targeted subsidies and assistance for giant corporations driving S&P 500 earnings rather than innovation, marketing and private capital, the impact of the government policy is now the primary driver of our portfolios.
We will need to turn bearish and get ready for some serious return to normalcy at some point. Unfortunately, it’s a matter of when, not if. There will be a lot of publicly-traded companies filing for bankruptcy when the cycle turns down. And we will of course look to ride some of those losers to their end and then flip to the long side and trade their stock after the bankruptcy filing. On that note, take a look at Exide (stock symbol: XIDE) which filed for bankruptcy last week and has been trading near 20 cents a share since then. The stock chart shows it traded down at 13 cents a share after the filing, but I don’t know anyone who was able to get in this trade for less than 18 cents a share. I’m trying to buy a little bit of this one at less than 25 cents a share for a VERY SMALL and VERY RISKY trade. Here’s the logic behind what we call these “Bankruptcy Flip It Trades” (see: Trade Alert – Alternative Energy Bankruptcy Flip for more):
here’s the deal with buying a stock the day it files for bankruptcy, as taught to me by my old mentor, James Altucher:
Buying Bankrupt companies
The day a company declares bankruptcy is often a great buying opportunity. Generally, all the selling is over. When the trading halt is lifted, everyone tries to cover their shorts forcing the stock up. These stocks can be rocket ships, doubling or tripling in the next several days.
And some more background on the trade’s concept:
James: Typically, when a company declares bankruptcy, the stock is halted by the exchanges so the company has time to disseminate the news of their downfall. Note that it’s NEVER a surprise when a company declares bankruptcy. It’s not like Worldcom was a $50 stock and then they whipped out a Chapter 11 filing while everyone was asleep. By that point Worldcom was the subject of dozens of lawsuits, headlines every day about corruption, all executives being fired, and the debt was trading for pennies on the dollar. The stock itself was around 10 cents on bankruptcy day.
Everyone who was going to bet on this bankruptcy was already short the stock. Not only were they short, but probably almost every executive was short the stock in order to hedge their worthless shares. And everyone who was long the stock as an investment had already most likely sold the stock by this point. Certainly all mutual funds were out of it by this time (they never hold a 10 cent stock).
So what happens, when a stock declares bankruptcy, it’s halted, and then the halt is lifted later that day. Well, nobody is selling (because they all already sold) and everyone is covering their shorts (the worst has already happened and it’s not going to get any worse). So these stocks tend to double or triple in value within 2-3 days, as happened in the case of Worldcom, Enron, FAO Schwartz, and countless other mega-cap bankruptcies.
Do not put much money in this trade. It’s very high risk and short-term oriented and the Bankruptcy Trades don’t always work out.
In my most recent latest positions update, Sandisk was my largest stock position, and I’ve still got some $50 strike price calls we bought a long time ago for less than $2 that are now trading for nearly $12. I’m going to sell most of those calls now and trim this position down a bit more.
Stay flexible in your trading, your analysis and with your body too.