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We were watching the President sign the tax cut today. Essentially we’ve cut taxes by 350 billion, and added 1 trillion to the national debt to pay for it. Hey somebody has to pay for it, why not the future children of America? We could let the national debt pay for it. The trouble is that the national debt can’t write a check, but the next generation can. During the 1980’s, President Reagan rolled up about 4 trillion of additional debt. The argument was that by spending on an arms race, he bankrupted the Soviet Union, thus eventually ending communism. Yours truly once asked Casper Weinberger (Secretary of Defense) at a meeting in Simi Valley, California during the opening of the Reagan Library, "Was that the plan, bankrupting the Soviet Union," we asked. "No buddy, it was pure luck was the honest response." What we are getting at is that for decades the Republicans were the only ones preaching fiscal responsibility. Today they blew deficits out the window. They now say deficits don’t matter. They call it the "Jobs & Growth Act". We are all in favor of cutting taxes by the way. We just don’t believe you do it by transferring the burden onto the next generation. Now we believe this country is overtaxed, very overtaxed. What you have to do is to CUT SPENDING first. That’s right, cut spending and then cut taxes across the boards. You just can’t cut taxes and say, never mind the spending. Of course the Republicans have done just that. One could argue that’s it’s pretty irresponsible for the only party with fiscally responsible people to add a trillion to the deficit. Now how can that be? The Democrats are yelling deficits matter. They haven’t chanted that in over seven decades. What it really comes down to is that politicians love to spend money, whether they are Democrats or Republicans. The one positive thing that deficits will do is put a ceiling on what politicians can spend. This year we have already added a trillion to the deficit. The spenders won’t be able to add another trillion to that ceiling this year. We will have to wait and see what the trickle down effects of this plan will be on actual spending. This economy was coming out of recession without this tax bill. The President does live in fear of going into a re-election attempt with a concurrent recession which is what his father went through. That recession in 1991-1992 cost the elder Bush, the election to Bill Clinton. If we keep finding houses and trucks in Iraq with billions of dollars in gold and currency in them, we can wipe this deficit out that way. As former Senator Dirksen use to say, "A billion here, a billion there, it starts to add up." Now for the market First things first, don’t argue with the market. Don’t try to say why it shouldn’t be at 8800, or why it should be at 10,000. Just go with the trend and the trend is up. In Wall Street, we say, THE TREND IS YOUR FRIEND. The market is where it is regardless of what you or us or anyone thinks. Go with the flow and the flow is higher. We want to make some general points that you must know to make informed investment decisions (don’t you love this term?), makes us sound brilliant. The bulls are overwhelming the bears on Wall Street. Sentiment is now almost 60% bullish. We haven’t seen numbers that strong in close to a dozen years. It’s actually bearish because if you are a bull, it means you have already committed money towards that position. Bull markets end when the last bear has committed his money to the bull side. In spite of the above statement, when we talk to institutions and money managers, we are telling you that they are bearish. This is probably the result of getting their heads handed to them over the last 3 years of a bear market environment. With the President signing a tax bill today favoring dividend income, the after tax dividend yield of stocks is now higher than the yield of 5 year Treasuries, since Treasuries are fully taxed for individuals. Folks, this hasn’t happened in 50 years. This by definition implies that stocks are now selling for their lowest valuations in half a century versus bonds. Pretty wild huh? Deflation is still a risk to many. We don’t see it. The Fed will print money 24 hours a day if it has to in order to prevent an inflationary resurgence. Stocks have always done best in a period of low inflation where there’s price stability. This is because businessmen can plan better in such an environment. So what do you do? You buy great stocks at decent prices and sell great stocks when they get somewhat expensive. Today we would sell great stocks where most of the money has already been made. Let’s look at a few. American Express AXP $41.69 This is a fabulous company with a fabulous franchise. We liked it at $31.49. We took ten points of cream out of this stock, up 33%. The stock currently earns about $2.26 this year and $2.50 coming next year. AXP is probably worth about $45 per share in this market. We’ve gotten to almost $42 per share. Do we really want to hang out here for another several quarters for those last three points? We don’t think so and neither should you. Take the profit and let someone else make those last three points. Next Cendant CD $16.55 Wonderful company, you could have owned it at $11.60 per share. It’s now $16.88, up 44%. Yes there’s more left in it. The problem is if this market chooses to tail off, we will lose the profit very quickly. This business is about making profits, not losing them. It’s tough enough as you know to find stocks that do go up. It’s plain stupid to let markets take those profits away. Tyco TYC $18.13 Tyco is a basket case. There are reasons for it to go up from here and reasons for it to go down. We are up 29 percent in this stock and we think you should take the profit. Now here are some bullet points. Cash flow is doing great and for Tyco, cash flow is the name of the game. They’ve got $750 million of dealer remarketable debt. It’s going to be put back to Tyco in June in our opinion. We think Tyco will be able to refinance it and stretch it out. It will probably lead to a $120 million in an earnings hit. We don’t like that. The SEC is still looking at this company. This investigation will probably close by the end of the third quarter. Who knows what the SEC is going to say and what the headlines will be? If really negative news comes out, the stock takes a hit on the downside. Do you want to be there for that? Still really cheap on a PE play, but the other issues may overwhelm the PE aspects of the valuation. We could see Tyco getting into the low $20’s; we just think we might be able to buy this one back cheaper. You know three points lower and a lot of these negative variables will be fully priced into the stock. That’s our thinking on Tyco. Foot Locker FL $12.98 This was and is a really great stock. With a 30 percent gain in it, it will look a lot better in someone else’s portfolio. Leave a dollar or two on the table for somebody else to make. Walk and take the profit. Here’s why. They were helped dramatically by foreign currency fluctuations. The dollar has gotten hammered as you know. A lot of this company’s earnings come from overseas. They benefited. Nike and Foot Locker are warring against one another. In the end both get hurt by this feeding frenzy. We think it takes at least several quarters for them to kiss and make up. A lot of this company’s improved bottom line is coming from cost cutting and efficiency improvements. That’s only going to take you so far. The stock is still cheap on a PE basis. We hope to buy this one back cheaper also. Friends, you will never ever lose money by taking a profit off the table. When you can, take the profit. More to come. Your Friends At StocksAtBottom.com JOIN NOW |
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