Brexit crushed

  • Happy tax day
  • An each-way bet
  • This bull market may not be over
  • Tiny stocks

We’ve said from the start that we don’t believe Brexit will actually happen.

We just don’t buy the idea that the ‘Deep State’ and global bureaucracy will allow a sovereign nation (the UK) to leave the clutches of the European Union.

Our suspicions have grown deeper since the announcement last night by UK Prime Minister, Theresa May that a general election will be held on 8 June.

Apparently, Mrs May is after a mandate to push forward with Brexit.

That’s odd. We could have sworn that, in a democracy, a vote greater than 50% in favour of something already represents a mandate. The Brexit result’s 52% in favour of leaving the EU should already be a mandate.

Mrs May claims that a win for her Conservative Party in the election will provide that mandate. Our bet is that it will muddy the waters further. After all, in the UK’s ‘first past the post’ electoral system, it’s rare for a government to get anywhere near a majority of the votes.

Margaret Thatcher’s crushing victory over the Labour Party in 1983 came with just 42.4% of the vote.

Tony Blair’s crushing victory over the Conservative Party in 1997 came with just 43.2% of the vote.

Our hunch is this is the ‘Deep State’s’ latest push to scupper Brexit. It’s no coincidence that the UK vote will happen one month after the French election.

That will give all sides in British politics the chance to modify their stance, and declare that Brexit is no longer a wise option…

Markets

Overnight, the Dow Jones Industrial Average fell 113.64 points, or 0.55%.

The S&P 500 fell 6.82 points, or 0.29%.

In Europe, the Euro Stoxx 50 index closed down 38.48 points, or 1.12%. Meanwhile, the FTSE 100 fell 2.46%, and Germany’s DAX index lost 0.9%.

In Asian markets, Japan’s Nikkei 225 is down 17.93 points, or 0.1%. China’s CSI 300 is down 0.66%.

In Australia, the S&P/ASX 200 is down 28.54 points, or 0.49%.

On the commodities markets, West Texas Intermediate crude oil is US$52.28 per barrel. Brent crude is US$54.74 per barrel.

Gold is trading for US$1,287.01 (AU$1,709.40) per troy ounce. Silver is US$18.24 (AU$24.23) per troy ounce.

The Aussie dollar is worth 75.29 US cents.

Happy tax day

If you’ve caught your editor’s witterings over the past few weeks, you’ll know we’ve just returned from a family trip to the US and Canada.

We won’t bore you with the details. Such as our visit to Montreal’s Museum of Fine Art, or our tour of the Canadian Parliament in Ottawa, or our attendance at a number of sporting events, such as… [Reader’s voice: We thought you weren’t going to bore us!]

As it happens, yesterday was ‘Tax Day’ in the US. It’s the date that income tax returns are due to be filed with the Internal Revenue Service (IRS).

It also happens that last week we came across the following ‘fun facts’ put together by Americans for Tax Reform:



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Source: Americans for Tax Reform
Click to enlarge


It’s 104 years since income taxes were first introduced in the US.

You can see how things have changed. In 1913, the top tax bracket was 7%. Today, at the federal level, it’s 39.6%.

In today’s dollars, an individual in 1913 would have had to earn the equivalent of US$11.8 million per year in order to fall into the top bracket.

Today, an individual only needs to earn US$466,950, to end up in the top tax bracket.

This is, we’re afraid, a consequence of progressive taxation. All taxes come into being as a way (supposedly) to tax the rich.

Unfortunately, the true outcome is that the reach of the taxes has to stretch wider, in order to draw in a much larger number of people — the middle classes.

The reason should be obvious. While the rich may very well be able to afford to pay the taxes, they have the means to minimise doing so. They can pay for the best lawyers and accountants to help them find the right structure to earn and hold wealth.

Those in the middle class are invariably prevented from utilising the same or similar tax structures by law, or because they don’t earn enough to make the structure worthwhile.

Or, they just can’t afford to get advice that would tell them how to do it.

If anyone thinks taxes are all about taxing the rich, the following note from Americans for Tax Reform:

When the income tax started in 1913, only 358,000 Americans had to file a 1040 [tax form]. Today 148,606,578 Americans file 1040s.

If progressive taxation really did result in the rich paying more taxes, the number of folks submitting tax returns should be proportionately the same today as it was in 1913.

Instead, only 0.4% of the population filed a tax return in 1913. Today, it’s 44%!

So much for progressivism.

An each-way bet

Our ‘favourite’ car stock, Tesla Inc [NASDAQ:TSLA] continues to ride high. It closed last night at US$300.25.

As you know, we don’t think much of the current Tesla business model, or its future ability to turn a profit.

However, we’re by no means down on the idea of electric cars.

And we’re by no means down on the industries and sectors connected to the electric car industry.

At some point in the not-too-distant future, we see a positive outlook for non-petrol fuelled vehicles. Not just electric cars, but hydrogen fuel-cell cars, and other technologies that are sure to emerge.

But even when it comes to Tesla, there are opportunities there too. Despite our attitude to the stock, we can’t deny the fact that the stock price has soared in recent years.

And regardless of whether Tesla actually turns a profit, that hasn’t stopped it from buying materials from its suppliers…a lot of materials.

That’s where we see the real opportunity in this sector. The foolish money is involved in trying to bet on the company that will be the market leader in electric cars.

Will that be Tesla? Or will it be one of its competitors? Such as General Motors Company [NYSE:GM] or Bayerische Moteren Werke [ETR:BMW].

Or maybe all three, and more, will do well — just as multiple cars in the petrol-powered car industry have done well.

But why guess? Instead, why not back the industry and the companies that one analyst believes could explode in value, regardless of which company dominates the sector.

It makes sense. You can find out more here.

This bull market may not be over

For some time now, we’ve heard that the era of low interest rates is over.

You’ve probably seen the chart, showing how the interest rate bear market (or bond rate bull market) began in the early 1980s, and has lasted ever since.

If you haven’t seen the chart, or you need a refresher, here it is:



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Source: Bloomberg
Click to enlarge


The premise is that after such a long period of decreasing interest rates, the end of low rates is surely nigh.

That may be so.

However, it’s also worth pointing out that at various times over the past 30 years, there were other opportunities for investors to come to the same conclusion.

We can imagine the investor in 1993, saying that interest rates couldn’t possibly go any lower. They no doubt felt vindicated as the US two-year bond yield climbed from a lowly 4%, to the stratospheric heights of 8%…only to drift to an even lower level barely 10 years later.

We’ve retold the story many times of our trip to the Agora Financial Investment Symposium in Vancouver in 2009. Every presenter said that rates were sure to shoot higher from that lowly level.

Except that the opposite happened. Rates went even lower.

Today, US two-year government bonds yield is 1.16%. By any measure, that’s low. But who’s to say that, after the rally in recent years, the rate won’t sink again?

The latest news report from Bloomberg may offer some support for this idea:

Traders are pulling back from bets the Federal Reserve will raise interest rates in June as inflation expectations crumble.

The odds of a hike have fallen back to about 44 percent from more than 60 percent earlier this month, based on a gauge compiled by Bloomberg. Yields on federal funds futures contracts for June and July are retreating as investors scale back forecasts for a move. Two-year Treasuries, among the most sensitive to Fed policy expectations, are poised for their first two-month rally in a year.

Higher rates? Maybe.

Lower rates? They appear to be a distinct possibility.

Perhaps the great bond bull market isn’t quite done with yet. We’ll continue to watch with a keen eye.

Tiny stocks

It’s a bad day for stocks. As I write, the S&P/ASX 200 index is down 0.53%. That’s on top of yesterday’s down day.

Meanwhile, not every stock is taking a beating. Check out this:



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Source: CMC Markets Stockbroking
Click to enlarge


I repeat, the big blue-chip index is down 0.53%.

Yet, one tiny ASX stock is up 68%.

Another is up 50%.

Eight more stocks are up between 25% and 40%. All in one day.

Are these the kind of rapid fire, speculative gains you’re looking for? If so, know this. Backing stocks that trade for 30 cents or less is high risk stuff.

It’s not for the squeamish. Or as iconic financial newsletter writer, Jim Grant says, they’re not for ‘widows and orphans’.

But, these gains are possible. To find out more about this hyper-speculative, and hyper-exciting part of the market, make sure you tune in to the special microcap investing summit, co-hosted by me and Sam Volkering.

But due to the high stakes nature of what we discuss, we have to restrict admittance to those who really understand the risks (and opportunities) in these stocks.

If you think you qualify, go here, and register now. The special event begins this Friday.

Cheers,
Kris