The Tasgall Group

So there is talk of removing some or all tax on gas now that prices are getting high again.? Sounds reasonable enough: lower taxes and gas is magically cheaper.? Assuming for the moment that the US doesn’t rely on this revenue, why should be pay all of this extra money on top of the true value of gasoline?? Simple math states that $3 – $1 = $2.

But for the life of me, I can’t get that answer from my trusty Econo-Calc 3000.? Every time I punch in $3 – $1, I get…$3.? WTF!?? Well, when technology fails, go back to good ol’ pen and paper.? Where’s a good envelope when you need one?? Ah, here’s one.

Scene: Somewhere on the back of an envelope. (more…)

It’s probably too soon to post this, but if I wait to finish my other REIT post then the moment will pass. REIT’s peaked this week and I sold 50% of my REIT holdings on 8/9 (my Tasgall post on the 10th covered this decision). Since then REIT’s have been really hammered and are starting to go what will be a correction at best and a “recession” in the REITs at worst. Their 4+ year run up that at least doubled the REIT market’s value (while halving it’s yield) is likely at an end. I believe that it lasted almost a year longer than it should have. Last Sept I halved my REIT position after things looked just as bad as they do today, only to see things get startlingly better by Dec, so I beefed my position back up again. Now, things are just turning south and I believe that they will continue to do so.

My recent 50% sale was based on the belief that I am right about REITs, and the 50% that I’m still holding is based on the fact that I’m still unaware of all the factors that influence REITs. Plus, it’s nice to have some REITs mixed into my asset allocation and I’ll be purchasing more REITs via dollar-cost-averaging over the next several months to slowly buy back up on the way down. I still like REITs for the long term, but right now they have hit a very rough patch.

I think we’ve mentioned it before in spoken conversations, but here is a definative source. TaxProf Blog: Gas Taxes Exceed Oil Companies’ Profits.

The government collects more in tax revenues applied to gas and oil than oil companies make in profits.

The next time Congress is pandering and trying to buy your vote, ask them to remove some of their legislated taxes instead.

It makes me wonder again why the CPI exclude taxes…

As individual investors, we have a unique advantage that most institutional investors don’t have… the ability to staand aside when the market is not favorable. That means either not trading, or getting out of your buy-and-hold investments and moving to cash or cash equivalent investments. (more…)

It was obvious when Enron went bankrupt in December 2001 that it’s stock was to be avoided.? It wasn’t just because of the details of the scandal, but because Enron didn’t really have much in the way of assets.? Enron sold it’s ideas, it’s concepts, it’s people.

When WorldCom went bankrupt 6 months later due to their spectacular scandals, the stock price plummetted to pennies per share.? After the company entered into Chapter 11, I was fascinated that the stock was still active and actively traded as a penny stock for weeks.? When a few weeks went by with no indication that the stock was going to be delisted, I was influenced by various naive things that I read online that the stock still had value thanks to WorldCom’s extensive assets and MCI division. (more…)

After this morning’s news about a foiled terrorist plot, one would certainly expect some spasmodic behavior in the markets.? When I looked just now, I was surprised at what I found…

• Crude oil down 2.8%
• Unleaded gas down 5.2%
• Gold down 2%
• Gold stocks down 2.2%

Not so surprising, the airline stocks are down, but not by much (down less than 2% each).

I’m not a big believer in one-day price moves based on news, but the weakness in these commodities makes me wonder what is behind the moves.? My guess is that some speculative money wanted to take profits in these areas and re-deploy their capital based on today’s news? Maybe just people scaling back speculative positions to see what happens over the next few days?

An important point, philosophy, or whatever is the fact that “the market” is not efficient.

This flies in the face of much academic theory stating that the markets are efficient, and that one assumption is the basis for much of the modern portfolio theory (MPT) and capital asset pricing model (CAPM). That one assumption is why these are both flawed theories (even nobel winners can be flawed).

The market (and in this way I refer to markets in general, not just the equity markets) is not efficient, it is instead an efficiency process. This is important, as it explains why any of us can take above average profits out of the market over the long term. (The average profits would be dictated by the growth of the economy.)

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Money Markets are looking really good right now for safe money while we wait for several markets to get over their jitteriness. SECU raised their MM rates to 4.5% (4.6% APR). ING is cruising at 4.35%, but I suspect they will raise within the next 30 days. For parking your money in “cash” in your trading accounts, consider Vanguard’s MM account (VMMXX), which is currently posting a hefty 5.08% yield.

I just drastically scaled back my REIT positions after today’s crushing news from Toll brothers, Bill Gross’ sickening chart (see link within earlier post from Jason) and the additional failure of yesterday’s REIT market peak to hold out. I moved half of my REIT position into equal portions of Money Market (VMMXX) and Total Bond Market (VBMFX).

I’m percolating a blog post regarding REITs but it will take some time to make that post worthwhile.

Jeremy Grantham’s 3Q Letter is another good read (free registration required). Here is a quote:

The May through June shock to the low risk premium caused a rapid response, not surprisingly, from the newly gigantic hedge funds. They moved quickly to reduce their leverage and the carry trade in sensitive areas. …I would hope that most of the fastest guns have shot by now, but since we have never lived in a $1.2 trillion hedge fund world before, we have to guess. A great majority of all hedge fund money has never known a world that was not dominated by Greenspan moral hazard ? heads you win and tails I?ll help you out ? and this fact has two consequences: first, they should be very slow to entirely give up speculative confidence; and second, there is an awful lot of speculative confidence to finally give up!

In addition to the recent market action, Grantham discusses the trends in risk premium, the correlation between EAFE and domestic equities, personal savings rates, reversion to the mean, An Inconenient Truth, efficient market hypothesis tyrany, and a whole lotta other stuff.

The 3 page section after the quarterly letter is titled, “Everything I Know About the Market in 15 Minutes” and does a good job of describing Grantham’s style and beliefs.

For those who don’t know, Jeremy Grantham is the front man for GMO, one of the big money managers with over US$122 billion under management. He’s not afraid to make unpopular arguments and certainly isn’t afraid to call out things like “career risk” that do affect returns.

To see the other side of the argument, check out Bill Gross’s latest Investment Outlook. He calls the end of the bond bear market and gives some good background on why he thinks so.

Recession/no recession is really a faux decision to be entertaining at bond market turning points. Any number of cyclical histories point toward bond market prices bottoming ? and the Fed peaking ? as the economy downshifts into second or first gear as opposed to breaking to a full stop. (more…)