Let’s Get Takeout

Over the years some dining stocks have provided stellar long term returns. For example, McDonalds (in red) and Wendy’s have returned ~1500% and ~1400% respectively over the past 24 years as you can see in the chart below.  I do have to admit the last time I ate at either establishment I was in college and made a friend a bet I could eat a McDonalds regular hamburger in one bite.  Yah, I won the bet and have never returned. Not because the whole ordeal left a bad taste in my mouth (pun intended) but rather, I became much pickier about what I eat and unfortunately for me neither of these make the cut.

When I look at its chart I wonder why it has done so well. Is it because of great management? Worldwide expansion? Or their apple pies? The chart below likely tells a significant part of the story.

Does anyone think this trend will be changing any time soon? Me neither. As such it’s important to remember that finding those long term trends and riding them can be a very profitable investment strategy.

Oops

Up almost 1400% in 3 years, Netflix (NFLX) has been a stock juggernaut. And to think in 2000, Blockbuster refused to buy Netflix for $50M. Today, Blockbuster doesn't exist and NFLX is worth a paltry $43B

And I thought my Betamax VCR purchase was a bad decision

Don't Fear the Reaper

The emotional scars from the past financial crisis still run deep and never really seem to go away.  This past week I received an email asking – “Will you protect me in the next bear market?” I am asked this so often that I should take a moment to comment.

When we lose money in any endeavor, including investing in the markets, it is not easily forgotten. Over the years, we all have taken our fair share of beatings in the market including me and 2008 still haunts. However, over time and, in spite of those past failures, I have figured out a way to move past it, carry on and get better.

Without risk, there is no reward. That’s the bottom line. While none of us will be able to reach the point that everything we do in the market is correct. Or, discover the holy grail of investing since no such thing exists. We can do some things that increase our ability to be successful. In my experience, it comes down to taking advantage of as many opportunities available while managing the risk properly to help us overcome when we are wrong.  Being wrong is ok, staying wrong is not.

Ten years from now, there will be many investors who will be filled with incredible regret - being hurt in the prior financial crisis and selling out and abandoning sound long-term investment strategies. Including failing to take full advantage of one of the greatest bull markets we may see in our entire lifetime. This cycle never seems to change. It’s those human fears and emotions which are our biggest obstacles to investment success.

It still saddens me greatly how many succumb to their emotions. Those who allow their feelings of fear and mistrust, prevent them from seeing opportunities that are right in front of them. Far too much money has been lost by people preparing for and fearing the worst, than simply focusing on what is actually happening. How do I know this?  Because some years back, that was me.

Without a doubt, things will change at some point and the bears will come to rule Wall Street once again. I am actually looking forward to that day, as I know all too well how to profit from such a bearish scenario. And when it comes the decline will happen very, very fast.  It always does.  But, until that next day arrives, my job is to focus on the market that lay right in front of us, right now in the present day. To learn from past mistakes and to focus on opportunities right now. If there is one thing you must do to do succeed in the markets, it is this.

Once you learn how to do that, you will be far ahead of those who are constantly expecting and looking for the reaper to come and ruin their life and take all of their money away. Remember, scared money never makes money and fortune favors the bold. This will always be true no matter what the market does next!

The Most Hated

At the end of a client portfolio review last week I ended the discussion with what I expected from the markets for the balance of the year. In summary what I said was based upon today’s current market trend and year end seasonal patterns my intermediate term expectations are bullish but I anticipate we will see a correction, maybe something as large as 10-20% in the short term.  I said this not because I was trying to predict the future but rather set expectation based upon probabilities of the fact it has been well beyond the average period between bear corrections. Like a rubber band the further you stretch it out, the harder it is to stretch it further and eventually it finally snaps.  Without taking a breath my client said “isn’t this what you said last year?”, and I immediately quipped “yes, and the year before that too”.  In all honesty these past few years have been very frustrating but have taught me to 1) accept the fact no one can predict the market’s future direction and 2) make sure you have an investment plan that works no matter what the market gives you. A couple of days after my meeting I read an article where  Ralph Acampora, the “Godfather of Technical Analysis”, was interviewed. Ralph is a pioneer in the development of market analytics and has a global reputation as a market historian and a technical analyst. He is a published author, popular lecturer and a leading international expert, consulted by prominent financial experts and journalists worldwide. He was asked about this current market and told the following story (which made me feel a lot better after reading it) …

I love to tell this story; in fact I have a picture of the man I’m talking about. The year is 1970; the man I’m talking to is Ken Ward. He worked for an old firm called Hayden Stone—you might remember that name.  He was a technical guru in his day.  I’m sitting next to him at this dinner and it’s like I’m sitting next to Joe DiMaggio. I was so excited.  By the way, he was 80 years old in 1970. That means he lived through every bull and bear market in the 20th Century up to that date and wrote about it. So I lean across the table and I say, “Mr. Ward, what was the most difficult market you ever had to experience?”  And then I said, “Oh, forgive me Mr. Ward, that’s a silly question, it has got to be the crash of 1929.” With a gravelly voice the old man says, “No. The most difficult market was the early sixties.”  I said, “But Mr. Ward, it went up.”  He said, “It sure did. We were all looking for a correction and it just kept going, climbing and climbing.” Sound familiar? ...

Here I am, 50 years later and I now understand what the man was talking about. The last year and a half for me has been very, very difficult because I haven’t seen a market like this. This is the most hated market I’ve ever seen and it’s persistent on the upside. I’ll gladly wait for a correction. But what we have in common with the early 1960s is low inflation and low interest rates. That’s the fertile ground that secular bull markets live in. I have a picture of him and me sitting there. I was 29 years old and I show that picture to everybody and I tell that story over and over again.

US Taxes Returning to Economy-Killing Level

I have written about him many times and posted some of his free work on this blog in the past but this week’s post by Tom McClellan is very enlightening. Tom, one of the fathers of technical analysis, takes on US taxes, US debt, US economy and the US stock market and how they are all interrelated in one fell swoop.  I have copied his insightful look below but I encourage anyone who I wants to stay tuned into the market to check in with him regularly here  

US Taxes Returning to Economy-Killing Level

The April 15 income tax filing deadline came this week, and so taxes are on the minds of a lot of Americans.  As Arthur Laffer noted 3 decades ago, it really is possible to set tax rates too high such that it actually hurts the economy.  We appear to be in such a condition now.

I wrote about this topic back in January, when lawmakers were contemplating raising the tax on gasoline.  But it is worth revisiting as we see total federal receipts creeping up toward 18% of GDP.  Whenever total federal tax receipts have exceeded 18% of GDP, the result has always been a recession for the U.S. economy.  And sometimes we can see that effect from a total federal take at less than 18%. 

The current number is 17.5%, based on total federal receipts for the 12 months from April 2014 through March 2015, and based on projected GDP for Q1 of 2015.  That is very close to the 17.7% reading we saw in 2007, just before the financial market collapse.  It is still some distance away from the all-time high reading of 19.8% seen in early 2001, and because of that some economists argue that we can safely go back to those higher levels and have the same strong economy that we saw in the late 1990s. 

There are two problems with that hypothesis.  The first is that economy of the late 1990s was not as strong as the revisionist historians would like us to believe.  The high taxation then pretty effectively killed the technology boom.  Total stock listings on the Nasdaq actually peaked in late 1996, and were in a genuine free-fall long before the bubble peak of the Nasdaq Composite Index in 2000.  That peak came about because a few large tech stocks were hogging up all of the available liquidity, and crowding out the smaller players, sort of like the biggest hippos taking up the last remaining water hole on the Serengeti during a drought.  Unemployment rates also bottomed out in early 2000 and then started upward.

The second problem with that hypothesis is that we don’t have the same demographic conditions now.  In 1999, the members of the Baby Boom generation (born 1946 to 1964) were between 35 and 53 years old, in the peak of their entrepreneurial years.  They were working hard, building companies, and pushing the economy faster than it would normally go.  Now, they are 51 to 69 years old, and are more interested in playing with their grandchildren than in starting a new company and hiring people.

The children of the Baby Boom generation make up what is known as the “Echo Boom”, which peaked in the birth year of 1990.  Those 1990 babies are now just 24 to 25 years old, and many are just now moving out from their parents’ homes.  So they are not quite at their peak of hard work and entrepreneurialism, and even when they do reach that point, their numbers are just a shadow of their parents’ generation.  So the Echo Boomers cannot absorb the same degree of a repressive tax burden that the Baby Boom generation could. 

This 18% recession phenomenon is not new.  It has worked going all the way back to World War II.  Here is the same comparison for the years 1944 to 1980:

[taxes as percentage of GDP 1944-1980]

Federal receipts got all the way up to 19.8% of GDP in late 1945, as Congress was trying to pay for WWII and pay off all of those war bonds.  And in case anyone fondly remembers the strong war-time economy then, we should remember that an economy which requires price-fixing and rationing is not a strong economy.  When people cannot find a place to live because of lumber shortages, and have to grow “Victory Gardens” to have produce, that is not a strong economy.  The effects of that taxation repression finally showed up in stock prices during the late 1940s, and only when taxes dropped back down to a less onerous level did the stock market finally start to rebound again. 

When the federal government takes a smaller portion of GDP as taxes, that leaves more money in the actual economy for real people to spend on what they want, and to spread around employing other people.  Growth is the result.  When the federal government takes too much out, it is like a farmer eating his own seed corn; he does not have as much to plant next year. 

Meanwhile, federal government spending for the latest 12 months equals 20.4% of GDP, almost 3 percentage points higher than receipts.  I keep hoping that someday we will get some leaders who realize that in order to pay off $18 trillion of debt, we have to get the spending number underneath the receipts number, and leave it there for a long time.

And we need to keep the federal receipts number well below 18% if we are to avoid the next recession, and its associated downturn in stock prices.  We may already be too late in that regard.