An Unreliable Technical Indicator

 
An Unreliable Technical Indicator

Readers Respond to Tax Rant

In Case You Missed It

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Today I want to start off with a word about a certain technical indicator you've probably heard a lot about this week. It's a prediction that gets made every year at this time by Punxsutawney Phil, a Pennsylvania groundhog, who sticks his head out of the ground on February 2 to predict whether winter is here to stay or if spring will come early.

As you've probably heard, the resident rodent saw his shadow, meaning that we're in for six more weeks of winter.

In Massachusetts, where Cabot is located, this comes as no surprise. Truth be told, whether or not the furry creature saw his shadow, we'd be in for six more weeks of cold, snow and wool sweaters. Heck, it even snowed on my birthday (which is in May) once in the Northeast and that is far more than six weeks from now.

As a child, I really believed in the power of the groundhog to forecast the weather. I waited each year as we were told whether to expect flowers in March or May. But soon I caught on to the false hope being doled out by old Phil and realized that no matter what this furry forecaster predicted, it would probably be winter here for at least six more weeks.

But I was still curious about how or why we started relying on a groundhog to play soothsayer so I did a little research.  Here's what I found ...

German settler tradition says that if a hibernating animal casts a shadow on February 2--the Christian holiday of Candlemas--winter would last another six weeks. If no shadow was seen, legend said spring would come early.

Since 1887, the Pennsylvania groundhog has seen his shadow 97 times, hasn't seen it 15 times and there are no records for nine years, according to the Punxsutawney Groundhog Club.

There's even been a movie, starring Bill Murray as a reporter covering this riveting event, which apparently helped to boost the hype around Groundhog Day festivities.

In any event, I'm not putting much stock in old Phil to forecast the seasons or anything else. We don't do predictions here at Cabot, we watch the market and use our disciplined market timing indicators to stay on the right side of the trends.

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On a more investment-related topic, Michael Cintolo wrote a great Cabot Wealth Advisory earlier this week about restrictions on tax credits. His piece generated a lot of great comments on our blog, some of which I'm going to share with you below. I invite you to go to http://www.iconoclast-investor.com to share your opinion--you might even see it end up in one of our issues.

"You make a valid point about the differences in living costs. However, I'm not enthusiastic about tax cuts at all. They may not get spent. Only a small portion of the last tax rebate was spent.

"How about a national gift card with an expiration date of six months or so? The card would be issued to all regardless of income and spent for any purpose within the time prescribed time limit. The idea was inspired by comments made by Martin Feldstein, although it was not his proposal."

B.G.

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"Many thanks for the plain talk demonstrating that not everyone in the U.S. has lost reality! You've hit the center of the target. Or, maybe, you're standing on the center of the target? Thanks, Mike!"

B.R.

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"Great point in your blog today. As a person who lives in an extremely high cost of living area, where $2,000/mo might rent you a one bedroom condo, I daresay that "one size fits all" seems unfair in these income limits.

"Then again, my lower middle class parents always made just a few bucks more than income limits for financial aid when I went to college (and not enough to give me a dime), so why am I even surprised that now I get a shaft on the other end.

"Since I'm a reasonably intelligent individual and Washington, D.C., is full of idiots, I declare, Taxation without Representation!"

R.S.

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"I totally agree with your rant. In addition to the geographical cost of living disparities in people earning >$150,000, there are also family size disparities, e.g. a couple with one child versus a couple with more than two children going to college, etc. Or couples helping out their elderly parents as well. In addition, what this economy needs most is for people to spend. The people with a little more disposable income are the ones most likely to be able to help spend us our way out of this deflationary spiral. SO lets not tax away any disposable income they might generate. From the get-go I felt that Obama's tax policies are designed to punish a productive element of society."

P.

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"Couldn't agree with you more. Did you ever sit down and figure out what your true marginal tax rate is when you include: Federal income tax; State tax; credit phase outs; social security and Medicare taxes; sales taxes plus the cornucopia of miscellaneous user fees that hit you from every direction? When you add up ALL the money you pay to various government entities it is north of 50% of your income. So, effectively I work for the Government for more than six months of the year. If that is not socialism I don't know what is. This by the way is before the increased taxes we are all going to have to pay because of the massive underfunding of Social Security and Medicare amounting to trillions of dollars. Think also of the massive amounts currently being borrowed by the government in the name of "stimulus." The Fed is printing money on a monstrous scale. I have travelled all over the world on business and lived overseas also in countries with hyper-inflation (Brazil and Argentina). People think it cannot happen here but it can and will if the government continues on this path."

M.

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"The tax disincentive is even worse for single heads of household, I'm a single (widowed) mother and moved from a wage job where I was barely making it into a entrepreneur situation.
"I have greatly improved my income, but lost tax credit after tax credit.
"I'm buying a home this year, and at a mere 75K, I begin to lose the $7,500 tax credit, despite still having a family to raise and support, while childless married couples qualify for a much larger income threshold."

J.E.

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"My wife and I are retired. No child at home. Already own a home. So, we do not get any tax credit?!

"But, we are hurting also, with retirement income, other than Social Security down 35%, and re-setting at that lower figure for a full year.

"We would gladly spend any stimulus coming to us!"

E.

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"The reason behind keeping tax credits in the code, as well as much of the other confusing mess of rules and grey areas, is simple; most people don't apply for them. Credits are like rebates in that you have to do something to get that money back. Credits allow the government to get the revenue first and they hope you don't ask for it back."

T.

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"It appears many are threatening not to take risk if they don't get the same breaks people with less income get, that appears to me symptomatic of the widespread rationalizations going on in the interest of self-interest. Using your method, I'll follow by saying that I have nothing against risk-taking entrepreneurs, or others with high incomes who want to go higher.

"Just once in a while let the government help those not in the mainstream economy who are still wanting to be proud to be an American. Once in a while let the government invest in areas of social interest not driven by money.

"Thank you for your newsletter, from which I take good advice"

E.H.

Again, thanks for your comments and please add yours if you haven't already at http://www.iconoclast-investor.com.

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In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, I have links below to each issue.

Cabot Wealth Advisory 2/2/09 - Tax Credits Sound Good, But ...

On Monday, Michael Cintolo wrote about how people are affected by the income thresholds applied to various tax credits. Mike makes the case that the tax code discourages people from taking chances, such as starting a businesses. Mike also discussed the stock of a discount retailer that has been acting superbly in recent weeks. Featured stock: Dollar Tree (DLTR).

http://www.cabot.net/Issues/CWA/Archives/2009/02/Tax-Credits-Sound-Good-But.aspx

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Cabot Wealth Advisory 2/5/09 - Is Timothy Geithner Crooked or Just Stoopid?

On Thursday, Timothy Lutts wrote about Timothy Geithner, who was recently confirmed as U.S. Secretary of the Treasury despite failing to pay some taxes (he has now paid them). Tim also wrote about why it's important to watch and act upon the market's action, not economic indicators, when investing. Tim also discussed two stocks that have been acting well lately. Featured stocks: Myriad Genetics (MYGN) and Netflix (NFLX).

http://www.cabot.net/Issues/CWA/Archives/2009/02/Timothy-Geithner.aspx

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Until next time,

Elyse Andrews
Editor of Cabot Wealth Advisory

Editor's Note: For the best advice on investing in fast-growing stocks with excellent profit potential, I highly recommend Cabot Market Letter, our flagship publication.  Serving both professional and individual investors since 1970 with a mix of stock selection, education, market timing and portfolio management advice, Cabot Market Letter tells you all you need to know to buy and when ... and why.  Past big winners include Amazon.com, Intuitive Surgical, Apple, First Solar and Crocs, to name a few.  To get started with a no-risk trial subscription, simply click below. 

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