Beating Buffett

The new issue of Barron’s spotlights two articles giving exactly opposite options.

Now you have to decide which to believe.

Not everyone seems aware of how big an impact government transfer payments (food stamps, unemployment compensation, welfare checks etc.) have had on the “recovery”. There has never been a time in America’s history when so many people were ‘on the take’ as opposed to contributing to the general good of society.

Global Economic Intersection estimates in “Personal Transfer Payments and GDP,” the accumulated value of “extra” transfer payments Americans received from 2008 to 2010 — that is, the amount over and above the long-term trend — worked out to about $569 billion.

The The push has been towards layering on more and more taxes on the productive segment of society in order to fund the living expenses of those that live long-term on the efforts of others.

Almost 50% of all American’s now pay zero or less than zero (adjusted for refundable tax credits) in Federal Income taxes. If you are on the receiving end, all government expenditures are just fine (or desired) as they are ‘free’ to you.

Civil servants at all levels (e.g. police, firemen, teachers and bureaucrats, while gainfully employed are fiscally raping the general taxpayer population with their overly generous pensions. In my area (Chester County, Pennsylvania) teachers routinely retire right now with over $78,000 in annual pension payments (after 30 years and age 62) on top of their social security. Due to the state retirement system’s rules they actually ‘earn’ more per year in retirement than they averaged during their working years.

Cities, states and the Federal government are all going bankrupt to support transfer payments to those who either don’t work or are done working. This cannot continue without collapsing under its own weight.

Comrade Obama’s now deferred tax rate increase on the enemy (America’s most productive citizens) will be a great source of debate in the next presidential campaign. ‘Tax Fairness’ resides only in the eye of the beholder.

The espoused reason for raising taxes on high earners is to collect more revenue to reduce budget deficits. Liberals who champion such policies ignore the entire history of past collection rates over decades of wildly varied top marginal income tax rates.

Here are charts showing the varying top marginal rates and the actual federal tax collections as a percentage of GDP…

Excepting the period prior to 1920, 1929 marked the lowest of the top-end rates at 24% while 1944-45 saw the highest confiscatory rate capped at 90% of ‘statutory net income’. You can imagine the huge disincentive anyone had to go to work with the prospect of keeping just ten cents on the dollar (less state and local taxes) for their extra efforts.

Did high marginal rates bring in more tax revenues as those who pushed these de-motivating ‘social justice’ enforcers theorize? No. Did lower marginal rates decrease the revenues as a percentage of GDP? No again. See the chart below to see how narrow a range federal tax collection has fallen into over the past seventy years.

The only constant that predictably increased nominal tax collections was a higher actual GDP. Growing the overall economy is the only chance America has to work its way out of our debt crisis.

The state of Maryland instituted a ‘millionaire tax’ in 2008. Since then, roughly one-third of the state’s millionaire households have disappeared from their tax rolls. Oregon’s state legislature tried a similar high-end tax grab in 2009 when they passed a new law subjecting joint filers with $250,000 - $500,000 incomes to a 10.8% tax rate. They added a top 11% state bracket for joint incomes above $500,000. They also applied punitive rates to businesses in January of 2010.

Because the tax law was changed in June, 2009 but was retroactive to January 1, 2009 it managed to snare some increased tax collections because it blindsided tax-planning experts who had no time to anticipate the changes. Oregon’s tax receipts of $180 million are expected to decrease to $130 million as the previous 38,000 households that fell into the highest brackets has dropped to about 28,000. This represents a combination of high earners leaving the state as well as the changing face of revenue recognition deferment by Oregonians smart enough to change their behavior when the tax laws changed.

Oregon’s Eugene Register-Guard newspaper reported that “income tax and other revenue collections began plunging so steeply [after the tax was raised] that any gains from the two measures seemed trivial.” The state’s Revenue Office has adjusted its tax collection projections for the first three years after implementation of the higher rates downward by about 33%.

Capital gains taxes, which come entirely at the discretion of the investor, have been especially hard hit. From $3.5 billion of reported net gains in 2009 it appears that only $2 billion of net gains will be taxed in 2010. Not surprisingly most of those ‘missing’ capital gains were deferred by those dastardly people who would have paid them if rates hadn’t been placed at such punitive levels.

Oregon’s unemployment rate is above the national average at 10.8%. The state’s high individual and business tax rates are certainly not an inducement to anybody with aspirations of making good money to move to, stay in or start a business within Oregon’s borders.

The recent census data showed Texas and Florida as big net population gainers. Both states impose much more attractive 0% income tax rates. Coincidence? I think not.

Every morning and evening I get a free e-mail from SmarTrend, a market information service, with a few snippets of information meant to be a teaser for their paid subscription service.

This morning [Dec. 23] I got this one as part of my AM edition…

They noted yesterday’s huge volume spike on a 0.4% move up while noting that this often signifies a potential turning point. SmartTrend promised to continue monitoring XLNX to see if the bullish momentum would continue.

Here is a short-term chart of XLNX’s action (source: MorningStar):

What’s noteworthy is that Wednesday’s highest volume came in the opening minutes as the shares got pummeled (down 6.3%) to $26.60. The rest of the day was spent in recovery bringing the closing quote to an almost 1% daily gain.

A similar 1-day trading pattern was seen in XLNX’s major competitor Altera…

ALTR showed the same high-volume sell-off followed by a much lower volume recovery to finish in positive territory for the day.

Knowing what really happened intra-day might make you wonder about the conclusions drawn by SmartTrend. What’s certain is that if you waited to hear from them you absolutely missed your chance to buy shares or sell puts when the prices were really good – right at the open.

I had previously written up both XLNX and ALTR here on Options Profits as good plays so I was more than willing to sell some more puts at great prices. Here are the trades I actually put on yesterday morning when XLNX was $26.90…

If you know what you like and the price gets good you need to be able to pounce on the opportunity. Waiting for after the fact reporting and possibly inaccurate conclusions, will only reduce your chances of placing winning trades.

Disclosure:                Long XLNX shares and short XLNX options

It’s been about 6.5 months since the original write-up and we’re close to doubling the broad market’s gains for the same time period.

See the June 8, 2010 entry for all the details posted back then. Only the 50 cent special dividend from Stein Mart has been figured into the portfolio returns.

I still own shares (and am short puts) in all seven of the indicated stocks.

Martek Biosciences closed yesterday at $23.36 /share and has accepted a buyout at $31.50. Based on its prior trading history even this take-over price seems cheap (at 14.6x forward earnings) compared with its old historical valuation range.