01/26/2013 Rotation, and note on position sizes

Small Portfolio	XLU & IAU	19.69%
Sector	XLU	31.86%
Secular	IAU	7.53%
Large Portfolio	Date	Return	Days
RIMM	7/16/2012	141.93%	194
SEAC	9/25/2012	35.37%	123
CAJ	9/25/2012	7.56%	123
DDAIF	9/25/2012	13.70%	123
CFI	10/31/2012	41.17%	87
RE	11/26/2012	9.86%	61
CGX	12/12/2012	10.59%	45
OKE	12/28/2012	12.48%	29
HTSI	1/14/2013	12.16%	12
STRA	1/22/2013	1.19%	4
S&P	Annualized	6.91%
Small Portfolio	Annualized	11.44%
Sector Model	Annualized	18.14%
Large Portfolio	Annualized	38.21%

 

Rotation: selling STRA; buying NSC

This change is somewhat bullish, since NSC is in the railroad industry, and may indicate a pickup in transportation.

One caveat is the fact that the sector model is in XLU, which has a slight negative bias for the market.  Utilities could be responding to a search for dividend yields as an alternative to bonds.

There’s no way to know.  The market is wildly overbought, but such moves can last a while, and timing is almost a useless exercise for most folks now that Bernanke is pushing yet another round of QE through the end of this year.

My gut tells me to jump and run, but part of this open test is to see the performance of the model in all market environments – which will include a bear market whenever it does come.

So far the model is doing well, but doing well in a bull market is the easy part.  Holding your own against a bear is quite another.  We’ll find out one of these days.

Quick note on position sizes and holding periods.  The model is designed for positions no smaller than 2000 dollars in a taxable account, or 1000 dollars in an IRA.  Those are the EXTREME low ends for a position to withstand trading costs in short term trades.  Any position of lesser value should be held long term – and we have not yet found the endpoint on long positions, so it could be as long as two years a trade.

Tim

 

01/25/2013 AAPL

Apple is all the buzz at the moment.  Is it a buy or a sell?

Fundamentally it would be a buy, but the industry it is in is not cheap enough for my model.

So, it's on watch, but not yet a buy.

01/24/2013 Conclusion -- and a proposal for both parties

A recent article about the Automate 2013 trade show addressed the question of whether robots are taking our jobs.

The answer was “yes and no.”  That’s been the answer since the dawn of time.  First animals and watermills took our jobs, then automation, and now robotics.  And each time we found better jobs that were easier to do and more rewarding.

But still – the ultimate what-if scenario would be if artificial intelligence ever took over ALL industrial capacity.  How much should we tax corporations that used robots instead of people?

The answer is in my original post on capital gains rates: 35%.

That post assumed no change in investor behavior between 0% and 100% taxation.  Since a robot “behaves” as it’s programmed to behave, the behavior-neutral model applies.  Government revenue peaks at 35%.

The robots don’t produce an end product from nothing, but from raw materials that have to be supplied to the manufacturer.  If the robot has no raw material, the robot itself becomes “unemployed.”  Taxation beyond 35% reduces the amount of raw material purchasing power to the point that the government loses revenue.

So much for robots.  What about humans?

The original form of the “Laffer curve” shows 0% revenues at 0% tax rates, and 0% revenues at 100% tax rates.  The Conservative argument is that people will lose incentive at 100% taxation and stop working.

The Conservatives are wrong.  People work even at 100% tax rates, as we see in Israeli communal Kibbutzim and the old Soviet Union.  In the Israeli Kibbutzim there is peer pressure and the threat of expulsion.  In the old Soviet Union a person who didn’t work didn’t eat – and the gulag was an added incentive.

Here’s the difference: Capitalism rewards work, while Communism punishes idleness.

So, Communism does not have welfare, but Capitalism won’t execute you for being lazy.

Capitalism is the carrot.

Communism is the stick.

Either one will motivate you to work.  The lazy will work harder in Communism and the greedy will work harder in Capitalism… giving Capitalism the edge in total productivity.

But having an edge and cornering the entire market are two different things.  The true Laffer curve does NOT fall to zero.

There’s another reason for the Laffer curve to stall above zero: the bleed from the official market to the black market goes BOTH ways.  A person might make something for his own consumption or for the black market, and that product can relieve the need for something in the open market – but leave the opportunity to buy something else on the open market instead.

In numerical terms, the original Laffer curve would require a behavior drag that would shift the maximum “robotic” (i.e. behavior neutral) curve peak from 35% to 24%.

Turns out humans worked just as hard at 94% tax rates as they did at 35% rates.  They lost productive capacity, but they did not intentionally avoid work.

Taxes become the backdrop against which we work.  We don’t work for the government’s benefit: we work for our own benefit and will try to make the best life we can no matter how ridiculous the government becomes.

In terms of taxes, there is NO DIFFERENCE between humans and robots.  Therefore, NEITHER should ever be taxed more than 35%.

That goes for “entities” like corporations, too.  The total effect of Federal, State, and Local taxes should NEVER exceed 35% in the American economy.

Now, the “Affordable Care Act” does throw a monkey wrench into the equation, though.  Is it a tax or not?  Regardless of the rhetoric, what is it really?

Truth is, I have no idea.  It’s a mandate to buy health insurance, but not an effective one.  It will certainly create a bureaucratic drag, but no one knows by how much.  Everything outside of that bureaucratic drag SHOULD be a wash in the tax equation.

So, I’ll conclude with this:

A PROPOSAL

 

1) Freeze all Federal taxes but one – the income tax

2) Freeze all State taxes but one – (let each state pick what they want)

3) Allow the unfrozen tax to float based on actual revenue data (see below)

Here’s how you float that last tax – MEASURE the inflation adjusted per capita revenues as I’ve done in this series of posts.  Set the rate at the historical peak.  If 35% begins to underperform, the graph will AUTOMATICALLY shift to either 34% or 36%.  If one of those underperforms it will continue to shift.

The shift will be slow, but based on empirical evidence.  There will be no sudden shocks, and everyone will know that the government is trying to maximize revenues (at least until we pay off the 16 trillion debt).

The rate will simply and automatically gravitate to WHATEVER WORKS BEST.  And if some other bogus tax / non-tax like Obamacare is thrown in, the measures will self-adjust in a short period of time.

Liberals think they’ll get more money at higher rates.

Conservatives think they’ll get more money at lower rates.

Let them BOTH put their money where their mouth is and agree to this automated optimizing proposal and get to the real world task they really need to do next: find a way to SPEND LESS than they take in.

Tim

 

 

 

01/23/2013 Civil War -- first shot cuts states by 20%

So far we’ve been looking at the effect of Federal tax rates on Federal revenues.

For some people it’s a hard sell – even if you give them all the source data and invite them to figure out a way it doesn’t fall as I’ve demonstrated.

Now for something simpler: the states.

If the Federal government raises rates, what happens to STATE revenues?

It’s not pretty:

(source list)

The true size of government isn’t measured by how much of your life it can control, but in how many real dollars it can raise.

By reaching too far, our government will starve itself and the states from the very power it is trying to seize.

The states will respond by raising their own rates in a tax war with only one target: us.

The red line is a clearer picture of the economy as well, since it shows the raw effect of the Federal power grab.

Some states COULD, in theory, just ride it out.  But as Nate Silver commented recently, states have their own unfunded liability problem, with pensions growing in size faster than the working population.  On the total government spending chart Nate provides, we have now passed the critical threshold of 35% GNP.

It’s mathematically impossible for a government to grow after it passes 35% of GNP.  It can go all the way to 100% and it will get smaller in total wealth the entire way.

In theory, states can put up a good fight.  Federal spending has risen to 25% of GNP and the states to 15%.  That means that a state hike of 5% will only have the economic impact of a 3% hike for the Federal rates.

The bad news is that they have more to make up for.  The Federal rate hike from 35% to 43.8% was a 20% rate hike.  The states will get a 20% revenue cut.  To make that up they will try to raise state taxes by 20% at first, which will further depress their economies and revenue by an additional 4%, which means that states will not be able to stop until after they have raised rates by more than 25%.

But the worst news for the states is that their wealth is more mobile than wealth under Federal jurisdiction.  A person can leave one state for another without having to pay a penalty, and he won’t continue to be taxed like an American living abroad would be taxed on the Federal level.  The most vulnerable states – typically the “blue” states – will be far more damaged than less progressive “red” states.

The first cannon of a civil tax war has been fired.

It’s not over by a long shot.

And we’re all in the crosshairs.

Tim

 

 

01/22/2013 Milestone -- outperformance by more than 30%

Small Portfolio	XLU & IAU	19.73%
Sector	XLU	29.86%
Secular	IAU	9.59%
Large Portfolio	Date	Return	Days
RIMM	7/16/2012	146.90%	190
SEAC	9/25/2012	31.21%	119
CAJ	9/25/2012	5.73%	119
DDAIF	9/25/2012	10.52%	119
CFI	10/31/2012	41.84%	83
RE	11/26/2012	9.42%	57
CGX	12/12/2012	10.06%	41
OKE	12/28/2012	11.81%	25
HTSI	1/14/2013	6.91%	8
STRA	1/22/2013	-0.40%	0
S&P	Annualized	6.51%
Small Portfolio	Annualized	11.54%
Sector Model	Annualized	17.18%
Large Portfolio	Annualized	37.52%
S&P	Total	10.95%
Small Portfolio	Total	19.73%
Sector Model	Total	29.86%
Large Portfolio	Total	69.05%
Small Portfolio	Advantage	5.03%
Sector Model	Advantage	10.67%
Large Portfolio	Advantage	31.01%

 

Milestone.  May not last, but as of today the annualized return rate on the Mousetrap is outperforming the S&P 500 index by over 30%.

 

 

01/22/2013 State Source Data

		In Constant (FY2005 Dollars)	Addendum:
Fiscal Year	Federal Max Tax Rate	State Tax Receipts	Composite Deflator	State Deflated	Population	State per capita receipts
1950	91.0%	7.9	0.1064	75	152.27	0.5
1951	91.0%	8.9	0.1047	85	154.88	0.6
1952	92.0%	9.9	0.1041	95	157.55	0.6
1953	92.0%	10.6	0.1124	94	160.18	0.6
1954	91.0%	11.1	0.1163	95	163.03	0.6
1955	91.0%	11.6	0.1203	96	165.93	0.6
1956	91.0%	13.4	0.1263	106	168.90	0.6
1957	91.0%	14.5	0.1327	110	171.98	0.6
1958	91.0%	14.9	0.1405	106	174.88	0.6
1959	91.0%	15.8	0.1460	109	177.83	0.6
1960	91.0%	18.0	0.1466	123	180.67	0.7
1961	91.0%	19.1	0.1507	126	183.69	0.7
1962	91.0%	20.6	0.1511	136	186.54	0.7
1963	77.0%	22.1	0.1579	140	189.24	0.7
1964	70.0%	24.2	0.1599	152	191.89	0.8
1965	70.0%	26.1	0.1620	161	194.30	0.8
1966	70.0%	29.4	0.1658	177	196.56	0.9
1967	70.0%	31.9	0.1700	188	198.71	0.9
1968	70.0%	36.4	0.1765	206	200.71	1.0
1969	70.0%	41.9	0.1881	223	202.68	1.1
1970	70.0%	48.0	0.1991	241	205.05	1.2
1971	70.0%	51.5	0.2133	242	207.66	1.2
1972	70.0%	59.9	0.2283	262	209.90	1.2
1973	70.0%	68.1	0.2412	282	211.91	1.3
1974	70.0%	74.2	0.2621	283	213.85	1.3
1975	70.0%	80.2	0.2889	277	215.97	1.3
1976	70.0%	89.3	0.3117	286	218.03	1.3
1977	70.0%	101.1	0.3371	300	222.59	1.3
1978	70.0%	113.3	0.3588	316	225.06	1.4
1979	70.0%	124.9	0.3902	320	227.22	1.4
1980	70.0%	137.1	0.4318	317	229.47	1.4
1981	50.0%	149.7	0.4789	313	231.66	1.3
1982	50.0%	162.6	0.5136	317	233.79	1.4
1983	50.0%	171.4	0.5393	318	235.82	1.3
1984	50.0%	196.8	0.5675	347	237.92	1.5
1985	50.0%	215.9	0.5868	368	240.13	1.5
1986	50.0%	228.1	0.6020	379	242.29	1.6
1987	38.5%	246.5	0.6210	397	244.50	1.6
1988	28.0%	264.1	0.6398	413	246.82	1.7
1989	28.0%	284.4	0.6634	429	249.62	1.7
1990	28.0%	300.5	0.6840	439	252.98	1.7
1991	31.0%	310.6	0.7162	434	256.51	1.7
1992	31.0%	331.2	0.7436	445	259.92	1.7
1993	39.6%	353.8	0.7637	463	263.13	1.8
1994	39.6%	373.3	0.7780	480	266.28	1.8
1995	39.6%	399.1	0.7992	499	269.39	1.9
1996	39.6%	418.4	0.8184	511	272.65	1.9
1997	39.6%	444.2	0.8356	532	275.85	1.9
1998	39.6%	473.1	0.8436	561	279.04	2.0
1999	39.6%	499.9	0.8554	584	282.16	2.1
2000	39.6%	539.7	0.8767	616	284.97	2.2
2001	39.1%	559.7	0.8988	623	287.62	2.2
2002	38.6%	535.2	0.9135	586	290.11	2.0
2003	35.0%	549.0	0.9375	586	292.81	2.0
2004	35.0%	591.8	0.9644	614	295.52	2.1
2005	35.0%	650.6	1.0000	651	298.38	2.2
2006	35.0%	716.0	1.0356	691	301.23	2.3
2007	35.0%	757.5	1.0638	712	304.09	2.3
2008	35.0%	779.7	1.1031	707	306.77	2.3
2009	35.0%	714.0	1.1085	644	309.33	2.1
2010	35.0%	701.6	1.1218	625	311.59	2.0
2011	35.0%	757.3	1.1525	657	313.85	2.1

 

Sources:

 

United States Population

http://www.multpl.com/united-states-population/table   

 

2005 CPI deflator

http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200  

 

Maximum Tax Rate by Year

http://taxfoundation.org/article/us-federal-individual-income-tax-rates-history-1913-2011-nominal-and-inflation-adjusted-brackets  

 

Total US State by State Tax Receipts

http://www.census.gov/govs/statetax/historical_data.html  

See also the comparable Federal data from 1940-2011:
http://market-mousetrap.blogspot.com/2013/01/01152013-source-data_2926.html  

 

I have used the deflator used in the Federal data to list the State receipts in 2005 dollars.

The only added column is the receipts per capita, which is the receipts in 2005 dollars divided by the population.