Since today is Tax Day (ugh), I wanted to give you something to
think about. Here's a quote from a speech Calvin Coolidge
(the 30th President of the United States) gave back on February 12,
1924 where he discussed his proposed bill to slash certain taxes
that was pending before Congress.
But this Cabot Wealth Advisory isn't about the politics of cutting
tax rates--the speech really gave insight into the relationships of
tax rates, the economy and Federal revenues. As a disclaimer,
this is NOT a political talking point on my end; it's a reasoned
economic argument that rarely gets mentioned these days. I
hope you enjoy it!
"In taxation, like all else, it is necessary to test a theory by
practical results. The first object of taxation is to secure
revenue. When the taxation of large incomes is approached
with that in view, the problem is to find a rate that will produce
the largest returns. Experience does not show that the higher
rate produces larger revenue. Experience is all in the other
"When the surtax on incomes of $300,000 and over was but 10%, the
revenue was about the same as when it was at 65%.
[Note: $300,000 back in 1924 is the equivalent of $3.8
million today.] There is no escaping the fact that when
taxation of large incomes is excessive, they tend to
disappear. In 1916 there were 206 incomes of $1 million or
more; then the high rate went into effect. The next year
there were only 141, and in 1918, but 67. In 1919, the number
declined to 65. In 1920 it fell to 33 and the next year it
was reduced further to 21.
"I am not making the argument with the man who believes that 55%
ought to be taken away from the man with $1 million income, or 68%
from a $5 million income; but when it is considered that in the
effort to get these amounts we are rapidly approaching the point of
getting nothing at all, it is necessary to look for a more
"I agree perfectly with those who wish to relieve the small
taxpayer by getting the largest possible contribution from the
people with large incomes. But if the rates on large incomes
are so high that they disappear, the small taxpayer will be left to
bear the entire burden. If, on the other hand, the tax rates
are placed where they will get the most revenue from large incomes,
then the small taxpayer will be relieved."
I like this speech because it's based on facts and figures and
experience, not on political talking points. Incidentally,
Congress did pass Coolidge's tax bill, reducing the top tax rate to
25%, and the economy and people's incomes indeed boomed during the
roaring 1920s, before the Great Depression took hold. Just
something to chew on!
Now let's move on to my real passion, the stock market. We're about
six to eight weeks from the point where the market confirmed its
latest rally, depending on the method you use. At this point
in the current intermediate-term rally, most of the best leading
stocks have already lifted off, hit new price highs and made good
advances. That doesn't preclude new leaders from emerging
during earnings season (some always do), or some slow-to-get-going
stocks from also gapping on earnings.
But for the most part, the leaders are extended from proper buy
points. If you bought some of these names during early- to
mid-March, you're likely sitting on solid gains. And yet
you're also wondering what to do next--with earnings coming up, and
with your stock extended to the upside, should you be booking your
For guidance, I defer to another giant from history, Jesse
Livermore. Technically, this isn't a quote, per se, as it
comes from a fictional biography, "Reminiscences of a Stock
Operator," but this is probably the most famous passage from that
book, which is itself probably the most famous investment book ever
written (and my personal favorite).
It comes just after a friend's chat with a trader nicknamed Turkey,
who, despite the friend's efforts to get him to sell his stock and
buy it back on weakness, was insistent on sitting tight with his
shares. The reason he gave for such a decision? "Well
... it's a bull market!" And that's where we pick up:
"I think it was a long step forward in my trading education when I
realized at last that when old Mr. Partridge kept telling other
customers, 'Well you know this is a bull market!' he really meant
to tell them that the big money was not in the individual
fluctuations but in the main movements--that is, not in reading the
tape but in sizing up the entire market and its trend.
"And right here let me say one thing: After spending many
years in Wall Street and after making and losing millions of
dollars I want to tell you this: It was never my thinking
that made the big money for me. It always was my
sitting. Got that? My sitting tight! I've known
many men who were right at exactly the right time, and began buying
or selling stocks when prices were at the very level which should
show the greatest profit. And their experience invariably
matched mine--that is, they made no real money out of it. Men
who can both be right and sit tight are uncommon. I found it
one of the hardest things to learn. But it is only after a
stock operator has firmly grasped this that he can make big money.
"This is about all I have learned--to study general conditions, to
take a position and stick to it. I can wait without a twinge
of impatience. I can see a setback without being shaken,
knowing that it is only temporary. I have been short one
hundred thousand shares and I have seen a big rally coming. I
have figured--and figured correctly--that such a rally as I felt
was inevitable, and even wholesome, would make a difference of one
million dollars in my paper profits.
"And I nevertheless stood pat and seen half my paper profit wiped
out, without once considering the advisability of covering my
shorts to put them out again on the rally. I knew that if I
did I might lose my position and with it the certainty of a big
killing. It is the big swing that makes the big money for
Now, I can't say that I adhere to this line of thinking in full; I
personally do like to take a few chips off the table every once in
a while, especially if a stock has become greatly extended above
its moving averages, and looks out of trend on the upside.
Some stocks look like that today, in fact.
However, reading this quote is something I advise doing from time
to time--it reminds you of the importance of trying to hit a few
homeruns when things are going our way, as they are today.
As for the current environment, we are seeing amazing strength in
the marketplace. In fact, on Wednesday, when the Dow rallied
more than 100 points, the number of stocks hitting new 52-week
highs totaled 611. That was slightly higher than the 601
figure seen in mid-March and the highest in many years!
I've written about this before, but here's what such a strong
reading usually means. In the short-term, it's a
negative--the flood of new highs tells you that enthusiasm is
reaching a crescendo, and that most investors who want to buy in
have already done so. In fact, after the prior 600-plus
reading in March, stocks basically meandered for two and a half
weeks before spurting higher in April.
My guess is that, with earnings season getting underway, a pullback
from this point is likely. And I think some pain will be
dished out--the market is not a one-way street, and with investors
having bought hand over fist for about two months now, you should
prepare for some pullbacks.
But that's a good thing! Why? Because the odds are that
many of the true leaders of this advance--the stocks that have made
big moves and that have terrific growth prospects--are generally
too extended to the upside to safely buy here. But I'm
betting that a few of them will consolidate for two, three or even
four weeks and allow their 50-day moving averages to catch up.
What are some names to consider? Many have been mentioned in
these Cabot Wealth Advisories during the past few weeks.
Names like Baidu (
), Cliffs Natural Resources (
), Priceline.com (
), Apple (
), Lululemon (
), Cree Inc. (
) and Las Vegas Sands (
) could present good buy points on 5% to 10% retreats.
But I want to write about Amazon.com (
), which has not been a leader during this advance--the stock is
just now testing its peaks from December. However, for all
the talk about Apple's iPad possibly killing Amazon's Kindle
e-reader, business at Amazon seems to be doing great. Nearly
all retail firms are benefiting of late, and Amazon, even before
the latest pickup in the economy, was forecast to grow its bottom
line 40% this year and another 30% in 2011.
Thus, when Amazon reports earnings next Thursday (April 22) after
the closing bell, I'll be watching to see if it can react strongly
and thrust to new highs; the bigger the upmove the better. I
think buying a small (only small!) position here is OK, with the
idea of buying more if the stock's first-quarter report brings the
type of gap I'm hoping for.
Until next time,
For Cabot Wealth Advisory