Is Timothy Geithner Crooked or Just Stoopid?
Do You Want to Make Money or Fix the Economy?
Investing in the Future: Two Great Stocks
We start today with a follow-up to last week's column, in which I wrote, "Timothy Geithner won approval as Secretary of the Treasury, despite the fact that he'd failed to pay enough tax in 2001, 2002, 2003 and 2004. Do we need any more evidence that our tax code is too complicated? Simplify, simplify, simplify, and let thousands of CPAs and tax lawyers and lobbyists find productive work."
In response, D.T. from Alaska wrote, "You are assuming or maybe concluding that Timothy Geithner did not knowingly cheat on his taxes. With the plethora of examples in the media (and several you gave) of politicians knowingly partaking in illegal acts why would you conclude otherwise with Timothy Geithner?"
And M.M. from Washington, D.C., wrote, "I absolutely agree that the tax code should be simplified. Your comment about Geithner's tax issues was however beside the point. Geithner worked for the IMF. U.S. citizens working for the IMF, the World Bank, the UN and many other organizations have identical obligations in respect of Uncle Sam, notably in relation to the self-employment tax. And because those obligations are identical, all organizations go out of their way to make sure that employees comply with them. Failure to comply with those obligations is a cause for immediate termination--and quite a few U.S. citizens who were employees of those organizations have found that out the hard way.
"U.S. citizens who have to pay the self-employment tax get an allowance (usually paid up-front) for that tax from their employer. Each organization makes each employee claiming that allowance sign a one-page notice with lots of big letters in bold characters to the effect that they know/get/understand/fully understand/are 100% clear about their obligation to pay self employment tax to Uncle Sam.
"If Geithner was too dumb to understand that form--which he would have had to sign once a year while at the IMF--it is frightening that he is in charge of the Treasury. If he understood the form, but ignored it anyway, it is possibly even more frightening because the problem then would not be intelligence."
M.M. appears to know whereof he writes and I will not quarrel with that. In retrospect, I should have said more clearly that I refrained from judging Geithner either guilty or innocent of stupidity or willful tax evasion. The politicians in Washington wanted him. They got him. He paid his taxes plus interest (no fines). And that case is closed.
My point was that if the tax system were dramatically simpler, it would make not only the filing of taxes more efficient but also the catching of cheats. Furthermore, it would give tens of thousands of people the opportunity to go out and find employment in industries that actually produce something of value.
Since then, we've had Tom Daschle, who failed to pay roughly $128,000 in back taxes, and when caught, explained, "All of my life I assiduously tried to pay my taxes in full and on time. ... I deeply apologize." It didn't help; after days of scrutiny, he withdrew from consideration for the head of the Department of Health and Human Services. Less prominent was Nancy Killefer, who withdrew her name to be the first "chief performance officer" for the federal government, also citing tax errors.
Now, the cynic might say that if the IRS just took a close look at the last 10 years' tax returns of everybody in the Federal government it would scare up enough revenue to close the budget deficit by a few percentage points. Me, I'll just repeat and elaborate on my main point. The tax laws are too complicated. Every new program, gained by earnest lobbying, that aims to fine-tune the system to benefit or penalize specific groups, only serves to make the whole process more complicated, and thus less efficient, for both the taxpayers and the overseers. And that helps nobody but the people employed in the tax industry.
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Moving on, a friend of mine who's an investment advisor recently wrote, "I'm wondering if you might address the very gloomy speech Nouriel Roubini made recently which has been all over YouTube. Also, I'm worried about students getting out of school with loans that need to be repaid and poor prospects for employment. Credit card debt is one thing, and may have a stigma attached, but student loans are socially encouraged. Are you aware of any program addressing this issue, other than personal bankruptcy? It's going to be devastating."
In response, I took a look at a couple of Roubini's videos. Nicknamed Dr. Doom because he's been predicting bad things for a while, he's now famous because he's finally right. Looking forward, he's predicting the following.
* The recession will last through 2009, and growth will return in 2010.
* We'll have trillion dollar deficits in 2010 and 2011.
* China's growth will slow to 5% or 6%.
* We'll avoid a great depression.
* And global equities will fall another 15% to 20%.
I can't argue with any of this; in fact, it doesn't seem all that gloomy!
But here's a funny thing. All indications are that Roubini--being an economist but not an investor--has held onto his investments in equity funds through the entire bear market, believing what the academics have long advised, that long-term buy and hold investing in diversified mutual funds (particularly index funds) is the best strategy for the average individual. If this is true, his investments lost 30% to 40% in 2008, just like most people's!
As to the point about students repaying college loans, filing for personal bankruptcy does not wipe out education debts; if it did, many students would immediately take that route upon graduation! I know of no program--or even proposed program--that will help indebted students, though it's quite possible that one will come along. I think the #1 bailout resource will be parents.
Looking forward, however, I'm confident that we'll see student debt loads shrink dramatically in the years ahead, as students work to minimize the amount of debt they assume while pursuing educations that lead to real employment. The result, in my opinion, will be dramatic shrinkage of the traditional education establishment and dramatic growth of the for-profit education sector.
I have lots of other expectations, too, which might or might not come true.
I think Americans have passed a tipping point, and that saving will trump consuming for decades to come.
I expect alternative energy to slowly supplant fossil fuels in the decades ahead and to spawn dozens of great investments.
I expect medical care to focus more on low-cost health maintenance (tackling obesity is #1), and thus enable growing numbers of people to avoid the need for expensive medical care.
I expect the U.S. to return to the growth track not by manufacturing (sorry, Detroit) but by doing what we do best, adapting to the changed conditions of the world and leading the way in creating software, entertainment, medicine, health care, science and education.
But when it comes to making money in the market, what I think doesn't really matter.
And what you think doesn't matter either.
What does matter is what the market's doing. So, you can choose to focus on the economy, crunch the numbers, try to predict what sectors will shrink and grow and argue about whether the economic stimulus package is too big or too small. If you're good, you might get as famous (temporarily) as Nouriel Roubini. You might also lose 30% of your money.
Or you can focus on the market. Recognize that the market, in its infinite wisdom, is always looking six to nine months into the future (so today's news is next to useless). Study the charts, and listen, with as little bias as you humanly can, to the true message they carry. Then act accordingly.
For example, back in December, we twice recommended Myriad Genetics (MYGN) here, noting that it had earned repeated appearances in Cabot Top Ten Report, our publication that brings subscribers the market's 10 top-performing stocks every week. In the December 1 recommendation here, the stock was trading at 58, having just completed a normal pullback, and I wrote, "The long-term trend of the chart is clearly up, and I think buyers who get on board here and wait patiently will likely be rewarded."
Then on December 22, when the stock had climbed back up to 65, and was building a little base, we recommended Myriad Genetics again. This time, it was Michael Cintolo, editor of Cabot Top Ten Report, who wrote, "The past few weeks have successfully taken the stock out of the public's eye, and while it may need a bit more time to set up, I think it's primed for a breakout early next year. If the market's nascent uptrend can persist, I think MYGN can be a big winner."
Well, the market's nascent uptrend hasn't continued with quite the strength we would have liked. Nevertheless, MYGN has done extraordinarily well. The company announced excellent earnings results on Tuesday morning and the stock, which had closed at 71 on Monday, gapped up at the market open and finished the day at 84. Readers who bought on those earlier recommendations are now sitting on profits of 45% and 29%.
Admittedly, there was fundamental analysis involved, too. We told you how Myriad's growing success in the genetic diagnostics business enabled it to predict which patients were most susceptible to which diseases. (The company calls it Cancer Predisposition testing.) We explained how this success had lead to fast-growing sales and earnings and the prospect that much more growth lay ahead. And we noted that institutional investors were climbing on board fast.
But there are lots of companies with similar great stories whose stocks are going nowhere fast. Myriad also had a supportive chart pattern, and in this case that has made all the difference.
So what else looks good?
Netflix (NFLX). The story is already well known to most Americans. The company is the world's largest online movie rental service, with more than eight million subscribers. It has over 100,000 DVD titles, and a growing database of consumer preferences, so it knows what customers will like. It has a growing library of titles that can be watched instantly thanks to online streaming. This saves the company the expense of buying the DVD, the expense of handling it in the warehouse, and the expense of mailing it . . . both ways.
Furthermore, the company has partnered with numerous technology companies so that its streaming will be easily received on an increasing number of devices. (The company announced today that a million Xbox users have watched Netflix streaming video on their devices.) I've been a Netflix customer since April 2003, and I watched my first streaming video (on my computer) this week.
But here's why the stock looks good today.
Remember how in the Great Depression people watched movies because they were an inexpensive form of escapism, often sitting in the theater through multiple films? (I don't remember, but I read about it.) Well, a trip to the theater is no bargain today, but Netflix is! More and more people are staying home to watch movies and the proof is in Netflix's numbers. In the past three quarters, revenue growth rates have actually accelerated from 7% to 11% to 16% to 18%. Earnings growth rates have accelerated from 36% to 38% to 58%.
And the chart is strong; it climbed from 18 in October to 30 in mid-January, paused to build a base there for a couple weeks, and then soared to 37 on the heels of a super earnings report.
I don't recommend buying NFLX here; I think it's a little overextended, short-term. But I recommend that you keep an eye on it, and try to pick up a little if it pulls back to 34 in calm fashion and builds a healthy base.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
Editor's Note: Netflix is a perfect example of the stocks you'll find in Cabot Top Ten Report. Every Monday our in-house staff, aided by software program OptiMo, combs through stock charts to find the ten strong charts that are most likely to keep on running higher in the weeks and months ahead. The result is an active investor's guide to the best moneymaking possibilities TODAY. In past years, Cabot Top Ten Report has been an early recommender of Apple, Baidu, DryShips, eResearch, First Solar, Gamestop, Hansen Natural, Intuitive Surgical, Royal Gold, Titanium Metals and hundreds of other big winners. In 2009, it's already identified the stocks that are attempting to lead the market higher today. If you want to own the best-performing stocks of 2009, I urge you to give it a try. To get started with a no-risk trial subscription, simply click here.