Of Monomania and the Laffer Curve January 4, 2006January 16, 2017 ARC – sell The smart person who recommended ARC just above $14 fifteen months ago no longer has confidence in the company’s eventual recovery, so I’ve sold the balance of my shares. Next to the total wipe-out of my Google puts, I think this is the worst one we’ve had (down about 30% after dividends if you didn’t lighten up along the way). Sorry. NTMD Suresh Sunku: ‘Thanks for NTMD. I may sell my June puts in the next 30 days as I may need money.’ ☞ Sell them immediately – puts are no place for money you might need. BOREF Robert: ‘I saw this posted on the Raging Bull Borealis thread recently. Perhaps you could comment?’ There will be no qualified product for installation in any class of commercial airliner before it is fully blessed and certified by the FAA. A process that will probably take the greater part of a decade . . . There is no way Borealis has the resources to fund the airframe qualification program the FAA requires. The company communications have long been wildly optimistic – constantly projecting far more than they achieve. This may be how management keep their spirits up for what is inevitably a long haul. Consider that TV was invented in 1926. It did catch on, eventually (you may have one yourself), and it made some people money. But it took 25 years to get going. My hope is that as progress continues to be made across Borealis’s various technologies – if it does continue – the company’s market value, $75 million today, will rise. We’ll see. As to the FAA certification process, my hunch is that a thing that drives the plane on the ground may not take a decade to approve. New engines or a new wing design might. But a new way to push the plane back from the gate? In any event, if the Chorus Motor can move a 767, it can probably move a forklift. Does the FAA have jurisdiction over forklifts? MONOMANIA John Leonarz: ‘The reader who criticized your monomania – obsession with a single subject – reminded me of this. As I recall, it’s from See Here, Private Hargrove, back around 1940, and the story goes that an Army draftee, much put out with the conditions of his military draft service, could say only ‘That’s not it.’ He was referred to one office after another. Each time, paying no attention to persons in the room, he would start rifling through all the papers in the office, and for each paper would glance at it, say ‘That’s not it. That’s not it.’ and throw it away. Office after office, always the same. Finally he is sent to the personnel office and they hand him a medical discharge. Triumphantly he yells, ‘THAT’S IT!” TAX CUTS DON’T INCREASE REVENUES Republicans love to say that cutting taxes on the richest Americans actually increases revenue. It’s the famous Laffer curve – and it’s true, up to a point. When the top bracket was 90% under Eisenhower, then 70% under Kennedy, Johnson, Nixon, Ford, and Carter, people jumped through hoops not to pay it. Even 50% in Reagan’s first term was too high. Lower the rate and you stimulate economic activity . . . you take much of the juice out of risky tax avoidance schemes . . . and you get investors to take more – taxable – profits. All that raises tax revenues. Swell. But Laffer recognized that at some point, what you gain from these effects is more than lost from simply collecting at a lower rate. (Imagine a rate of zero if you doubt this, and then work back up from there.) Just where that ‘some point’ is . . . well, it’s hard to know precisely. (One clue: At the 39.6% top rate we had under Clinton/Gore – 20% for long-term capital gains – revenues and economic activity were strong. It seemed to be a pretty good balance.) Now comes this column by Daniel Altman from Sunday’s New York Times. In most important part: EARLY last month, without much fanfare, the Congressional Budget Office released a paper called “Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates.” At a modest seven pages, it didn’t elicit the same sort of interest as the budget office’s budgetary and economic outlooks. Yet it may be one of the most important government publications in years. [. . .] [It] dismisses the idea that tax cuts may actually improve the government’s fiscal situation. Even in his most generous scenario, only 28 percent of lost tax revenue is recouped over a 10-year period. The United States, it seems, is firmly planted on the left side of the Laffer Curve. [The side on which tax cuts lower, not raise, tax revenue. – A.T.] Recent experience corroborates this prediction. In the second quarter of 2001, just before the first of President Bush’s tax cuts took effect, federal receipts from personal taxes accounted for 10.3 percent of the economy. By the end of the post-recession slump, receipts had dropped to 6.4 percent. But in the third quarter of 2005, with the economy booming, they were still under 7.5 percent – an enormous difference. In dollar terms, federal receipts from personal income taxes, at $802 billion in 2004, are still lower than they were in 1998 ($826 billion) and much lower than in 2001 ($994 billion). . . . Meanwhile, the interest we paid this past year on the National Debt was equivalent to about 40% of all the money we paid in personal income tax. And as the debt – and interest rates – rise further, the interest we pay will eat up an even higher percentage of tax revenues. That matters, because instead of using future tax revenue to meet urgent needs and strengthen our country, we will be paying it in interest to our friends the Chinese and Japanese and Saudis, from whom Presidents Reagan, Bush, and Bush have borrowed it on our behalf. That won’t hurt the wealthy. The Reagan-Bush-Bush era – under which 80% of our soon-to-be $10 trillion National Debt will have been borrowed by the time President Bush steps down – has been a grand time to be rich and powerful in America. But it will hurt the other 99% of Americans. And their kids.
How Do the Locusts Know? January 2, 2006March 3, 2017 You don’t want to miss the locusts. But first: 1. Happy New Year! 2. I flew home on a 37-seat commuter jet yesterday and walked past the nosewheel, where two (count ’em: two) humans were attaching a tow bar to the vehicle that would maneuver the plane out of the gate area. The flight attendant guessed we were about one-tenth the weight of a 767, so my guess is that it would take a Chorus Motor only the size of a grapefruit – not a watermelon – to run this thing around the tarmac like a golfcart. I am hoping one day we make some serious money from these grapefruits. Don’t sell your BOREF. 3. Don’t sell your puts, either: LEXINGTON, Mass. (AP) — Pharmaceutical company NitroMed Inc. said Thursday that its joint research program with medical device maker Boston Scientific Corp. studying its nitric oxide-enhancing technology will conclude on Dec. 31. A company spokeswoman said the agreement, which had been in place since November 2001, was scheduled to end. The deal contributed about $1.5 million to NitroMed’s revenue this year, and some $3 million over the term of the deal. The two firms were researching the use of the technology in connection with restenosis in balloon angioplasty. Restenosis is the closing or narrowing of an artery that was previously opened by a cardiac procedure such as angioplasty. NitroMed said it plans to continue to explore the use of its nitric oxide-enhancing technology in medical devices. NTMD ended 2005 at $13.95, down from $22 in July when those of us with money we could truly afford to lose bought puts, betting the stock would go down. Sales of BiDil – Nitromed’s only product – will almost surely continue to rise, but probably not by enough to make the company profitable. Why would an unprofitable company with a single product that combines two readily available, widely prescribed generic drugs sell for $420 million (30.5 million shares at $13.95 each) when a company with what may be a revolutionary electric motor is valued at $80 million (5 million shares at $16 each)? One never knows, but my bet is that it would make more sense if the market valuations were reversed . . . which would put NTMD at $2.75 and BOREF at $84. Needless to say, if that bet turns out to be anywhere close to right – as it may not! – 2006 will be a Happy New Year indeed. HOW DO THE LOCUSTS KNOW? They’re actually cicadas, they come every 17 years, and they do not coincide with the 17-year cycle of the U.S. stock and commodities markets. But wait – cicadas aside, is it possible there are 17-year cycles in the U.S. stock and commodities markets? (And how come the Jewish calendar has 7 leap months in every 19 years? Oy!) One of you sent me this: Commodities Stocks Years 1914-1930 -14% 159% 16 1930-1947 244% -30% 17 1947-1965 -18% 503% 18 1965-1981 123% 35%* 16 1981-1999 -9% 1054% 18 1999-2016 ? -? 17 Data source: CRB Index and S&P 500, from Globalfindata.com *Negative if adjusted for inflation. [The Dow closed at 874.12 on December 31, 1964; at 875.00 on on December 31, 1981 – up less than one point in 17 years. The table above shows a 35% gain in roughly the same cycle, but those figures include dividends (as they should). What they don’t include is inflation: that 35% gain would have been a sharp loss in real dollars.] Do you see a pattern here? Every 17 years or so something seems to switch and you have a period that’s great for stocks but bad for commodities (like soy beans and copper) . . . and then it switches back to a period that’s great for commodities but lousy for stocks. If you had started with $1,000 in stocks in 1914, then switched back and forth until the end of 1999, your $1,000 (ignoring taxes and inflation) would have grown to $1.7 million – versus $4923 – again, ignoring the ravages of inflation (you’d have had only about $40 in inflation-adjusted 1914 dollars) – if you had adopted the same switching strategy but gotten the cycles backwards. It’s possible all this is coincidence and silly. It’s possible that it’s not, but that whatever rational cause underlay the effect will have changed or been outweighed by other factors (or speeded up by the faster pace at which news and capital now flow). But assuming there’s something to it, the main thing to note is that some significant portion of the ‘effect’ for the current 17 years has already happened. Commodity prices have already jumped a bit since 1999 (oil comes to mind). And stocks have already disappointed. So it’s possible much of the effect of the 17 year cycle, if there is one, has already been felt. (In others words: why the hell didn’t I tell you all this in 1999?) And possible we ain’t seen nothin’ yet. The conclusions I would draw from the table above are: (a) As always, it would be prudent to live beneath your means and save as much as you can: you may not be able to count on stock market returns to balloon your retirement fund over the next decade. (b) It pays to diversify globally. (The figures above are for U.S. stocks.) (c) Our timber stock (symbol: PCL), up about 50% including dividends since first suggested here in 2003, could still have a bright long-term future. If you haven’t bought any, I think it’s worth a look. (d) As tempting as it is to take profits on oil stocks (APC is up 67%), I continue to think we should probably hold on. (e) None of this will have anything much to do with the success or failure of specific speculations like NTMD puts or BOREF shares – so one might still play with them, albeit (all together now:) ‘only with money you can truly afford to lose.’ (f) Nor will it likely diminish the edge you might get by using the ‘magic formula’ investing suggested here a few weeks ago. Coupling that with the power of dollar-cost averaging, you might be sitting pretty 10, let alone 20, years from now. (g) Vote Democrat. Historically, the stock market does better under Democratic Administrations. (Really. Look it up.) (h) There is more to life than money. This could be a tough year for the average American household – whose median income, unlike that of CEOs, did not go up 30% in 2004, but rather has been falling in inflation-adjusted dollars in each of the past five years. But if you can arrange things in such a way as to be comfortable, even if you have to scale back some dreams, then you might be pleasantly surprised. To begin with, this glum money outlook could prove entirely unfounded. And even if it’s not, you can have the astonishing fun of enjoying the good things that will come over the next decade, including spectacular sunsets and cool summer breezes; reruns of Seinfeld and new episodes of Boston Legal; amazing new inventions and friendships and children; and the progress that, let us hope, will lead to the better cycle that should begin peeking its hopeful little face through the curtain around 2015.