I'm worried about this market. We are at the point where it's not about fundamentals per se but about perception and about confidence or lack thereof. But there is a legitimate concern about the macro condition of the domestic economy and the global economy. There is a legitimate concern about political and economic turmoil in Europe. There is legitimate concern about our elections this fall and whether Americans ditch their (previously) cherished notion of self-made success and determination or decide achievement only happens via a collective and somehow we must pay homage to sidewalks.
You know I can understand why primitive societies once worshiped and feared active volcanoes, but we are being told to pay for sidewalks over and over again and to sacrifice our paychecks in the future as tribute.
Legitimate red flags from the market yesterday came from all angles.
Transportation stocks got crushed with names like Kansas City Southern (KSU) and Union Pacific (UNP) down big with tons of volume. The Dow Jones Transportation Average really took it on the chin, off 3.18% for the session. The index is nearing a very pivotal support point.
Apple (AAPL) is collapsing when it could have become a safe haven; it's simply entered into a freefall.
Tech stocks in general are getting hammered even ahead of the much-hyped Facebook initial public offering. It is really remarkable that FB has no coattails whatsoever.
Advanced Auto Parts (AAP) issued a warning and took down names that have firing on all cylinders for a few years. In fact, AAP, Auto Zone (AZO), and O'Reilly (ORLY) have been perfect recession investments. Man it would be great if people were not going to those locations because they were buying new cars, but that may not be the case. Furthermore, high-end retailers Macy's (M), Nordstrom's (JWN), Saks (SKS), and Abercrombie and Fitch (ANF) have been crushed, but yesterday one of the top dollar stores took a kidney punch on earnings.
Then there's the record low yield on 10 year treasuries. That is the biggest red flag concerning confidence among deep-pocketed investors. The yield of 1.7% doesn't even keep up with inflation and yet billions continue to pour in. It's a statement that says less about the greatness of America and more about the weakness in the rest of the world. The dollar is soaring because the Euro is the Euro. But you must know that when they get a chance, and when there's a legitimate alternative the dollar and treasuries, investors will dump them with both hands.
For now, the influx is a reminder of how great we have been in the past and how great we could be in the future. But to accept such a paltry return speaks volumes about uncertainty.
Having said all of these things, good stocks are being taken to the woodshed with bad stocks as if someone yelled "fire" in a crowded theater. This is what makes being an investor challenging. The swoons are seen as a reason to take losses rather an opportunity to become owner of great businesses on the cheap. The problem is the market is hyper-sensitive, and panic is beginning to creep into the mix. This is a tough period, and I'm concerned. I'm more worried, about investors making mistakes they will regret a month, six months, or even a year from now.
The administration scares me a lot more than corporate America. This week we have witnessed the game plan expedited to the point where the money grab moves to lower income brackets. I felt a second term would see an aggressive attempt to redefine rich below a triple-digit annual income. In Maryland, that tax hike on people earning $100,000 will go to pay for union raises of 2%—an incentive to get the vote out even as schools remain closed, and the state will surely lose lots of talented folks. That's the price to be paid as out of control spending means higher taxes, and to be honest, there aren't enough rich people, really rich or $100,000 rich, to go around.
Another example that many people missed is the proposal to go after Eduardo Saverin of Facebook who gave up his citizenship in part to avoid paying more than $60.0 million in taxes. While I think these capital gains taxes are egregious, I don't like the wham-bam-thank-you ma'am style of Saverin who originally hails from Brazil. But for me, the real story is hidden in the fine print. This proposal is looking to punish expatriates that earned more than $148,000 over the years. That is not rich, although the effort to target this income bracket is rich in hubris.
Schumer and Casey's proposal is called the Ex-PATRIOT Act ("Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy" Act).
Under the proposal, any expatriate with either a net worth of $2 million or an average income tax liability of at least $148,000 over the last five years will be presumed to have renounced their citizenship for tax avoidance purposes.
The individual will then have an opportunity to demonstrate otherwise to the IRS by meeting specific IRS requirements. If the individual has a legitimate reason for renouncing his or her citizenship, no penalties will apply. But if the IRS finds that an individual gave up their passport for substantial tax purposes, then it will prospectively impose a tax on the individual's future investment gains, no matter where he or she resides. This would eliminate any tax benefit and financial incentive from renouncing one's citizenship. The rate of this capital gains tax will be 30 percent, in keeping with the rate that is already applied on non-resident aliens for dividends and interest earnings.
So, while the economy struggles, the war on success continues to seek more casualties. By the way, this is the main reason the economy is struggling. Yes, I'm worried about the market and the economy but I think it's a mistake to sell great companies in a huff. In fact my greatest fear is too many investors giving in to their fears - founded and unfounded.
When will the coast be completely clear? I'm not sure, but don't put your head in the sand and don't become too discouraged.
By the way, even though AAP got hit, AZO got an upgrade this morning at Credit Suisse and even though the rails got smacked KSU (my favorite) got an upgrade at Oppenheimer. These are smart upgrades, which isn't always the case on the Street which is often very late. Our economy isn't dead nor has it peaked; only faith in those that could and have attempted to derail and loot success. Again, a great reason for concern, but I don't think they'll win in the long run. As for the spark look for action real soon out of Europe with the ECB taking action to prop banks. Greece is belligerent and is trying to pull a fast one—not only not paying money they've borrowed and squandered but demanding more.
There could be big (positive) news over the weekend. In the meantime it's all about Facebook today, and I don't know how to play it other than to say it might be best to watch from afar unless you have the ability to watch and trade all session long.
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