Friday April 23 2021

Let’s Kill the Golden Goose

Stocks dropped on news reports that President Biden is considering nearly doubling the capital gains taxes on the wealthy.

Gains Tax Talk Hits Stocks, WSJ today

The tale has given rise to the idiom 'killing the goose that lays the golden eggs', which refers to the short-sighted destruction of a valuable resource, or to an unprofitable action motivated by greed.

The Goose That Laid the Golden Eggs

Congress sees a group making what it considers exorbitant profits. It quickly passes legislation to confiscate those profits, of course knowing better how to spend other people’s money. This invariably happens near the end of mania in some asset category. And then, surprise, the legislation never collects the taxes that were envisioned.

Okay what mania does that paragraph describe? It could be the current record stock market but instead I am thinking of the 1980 Windfall Profit Tax Act. In fact the illusory windfall was due to the oil companies literally selling all their inventory during the Second Embargo. The oldest inventory was at the very oldest prices, known as LIFO treatment, below the first embargo prices of 1972.

The effect on the Permian Basin was near immediate. Oil prices peaked in 1981. Positive social mood caused the First National Bank of Midland to block off Wall Street for a year to add ten stories to its downtown office building. Quietly Exxon and Amoco both closed their large office buildings in Andrews. By 1986 the oil price had fallen from   the mid thirties to twelve dollars. Real Estate prices collapsed along with the Savings and Loan Industry. First National of Midland went bust and was taken over by NCNB, later dubbed No Cash for Nobody. But that is the way manias usually end.

This tax grab is another historic indicator that the market rally is on borrowed time. We still expect a top this summer.

The number of new stock price highs takes nine columns while new lows account for just one. A front page article describes how three out of work photographers attempted to make a fortune trading stocks on line. Again the social mood clues abound.

Business is recovering air travel is resuming, and positive economic predictions abound. One result of the pandemic has been the work from home dynamic now adopted by many businesses. The result is an explosion in For Sale, For Lease signs for commercial office property. The same thing is happening there that occurred with enclosed shopping malls.

Crude oil remains above $60. As demand increases, WTIC may well hit $70 + this summer.

Friday April 23, 221

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Friday April 16 2021

Enjoy the Mania While it Lasts

Dogecoin is up 400% this past week. The IPO of Coin base renders its CEO an instant $17 billion, now that’s some coin! Robinhood brokerage is unable to process all the client crypto trades. Goldman and Morgan handily beat earnings estimates. Crude oil nears $64 on expectations of greater demand as more venture out from the Covid Lockdown. The high-flying NASD 100 doubles in one year.   The pullback the last two months resets the index for more gains.

The ‘hemline indicator’ posits that fashions are more revealing during stock market manias. Indeed even mainstream Yahoo.com has featured Elizabeth Hurley and Salma Hayek in their skimpiest bikinis. And positive sentiment, hello Buzz Lightyear, extends to infinity and beyond. Richard Branson is planning consumer space travel. SpaceX boss Elon Musk has said the next major flight test of the Mars bound Starship craft will take place next week. The Pentagon confirms photos of ‘unidentified aerial phenomena’ captured in 2019. This is an echo of American landing on the moon subsequent to the DJIA reaching 1,000 for the first time in 1966. The movie 2001 A Space Odyssey suggested lunar travel, much as is being discussed today.

Mathematically speaking, a rally might be arithmetic with a slope of 1.5x. A mania exhibits a geometric scope, the slope is raised to a power, not just a multiplier.   Such events are rare. The first in modern times was Tulipmania in Holland in 1636. The South Sea Bubble occurred in England in 1720.   The United States has endured numerous ups and downs such as the Panic of 1907 and the Roaring 20s followed by the Crash of 1929.

Ralph Elliott postulated that markets move in a three step one-way, two step the other fashion. Both the NASD and the NDX appear to be in their fifth wave up. That suggests a top in the next few months.   Parabolic increases usually collapse in a near vertical move down, a mirror of the move up. Last week I suggested several potential worries but all that is over looked as the markets celebrate Coming out of Covid.

Add to the list Russia incursion on the Ukraine and China’s continued expansion into the South China Sea. A retired admiral just published a book titled 2034 predicting a war between China and the US.

As commodity prices boom, bond prices advanced yesterday the opposite of what one might think. Expect a bond rally for some weeks retracing the first quarter rise in interest rates.

Or as Hal Holbrook remarked to Charlie Sheen in Wall Street , enjoy it while it lasts, cause it never does.