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Market Pauses As Investors Fret About Tax Plan

Published 11/12/2017, 02:10 AM
Updated 07/09/2023, 06:31 AM

Quality is remembered long after the price is forgotten. Gucci Family Slogan

If you work for any kind of public bureaucracy, especially at the entry level or staff position, chances are you are not highly compensated, to put mildly. Often times this involves school districts, and specifically, hard working teachers. I know this because many years ago, when my hair was not turning gray, I took home those paltry paychecks at the end of the month. As a result, in order to conserve money for investing, naturally, I sometimes chose to buy merchandise which, shall we say, was bargain priced. In doing so, I found out it would wind up costing me more in the end as I would have to repeat the purchase because the initial item would break. Not good when you want to invest, or just want to use the money for other purposes. Anyway, good ol tried and true experience taught me to pay up for high quality items and services, regardless of the circumstances.

This hard learned lesson is probably even more important when it comes to investing in stocks. Most investors are well aware that trading excessively ultimately makes your costs too high, which is a big part of the reason why index funds have become so popular. It is also why finding good companies and owning them over a long period of time has historically been a great strategy for wealth creation. In practice, it is also difficult because inevitably, the companies you own will have a stumble, a hiccup, an issue, something will happen which causes operational performance to suffer, as well as you know what. Where quality comes into play is how the management team subsequently responds to the problems. Over the last few weeks, as earnings season rolled on, it became evident that many of the companies we are involved in have learned quite well from their obstacles, and responded by strengthening their businesses. As an investor, you always have to monitor the performance of your companies with a watchful eye, but it certainly is encouraging and makes me optimistic about the future, even as I try and put my teaching memories behind me and forget about my changing hair color.

In the markets this week, most of the attention revolved around merger and acquisition rumors. Last week, we learned CVS Health Corp (NYSE:CVS) may be trying to buy Aetna (NYSE:AET). Now, Disney may be buying assets from Rupert Murdoch in an effort to better compete in the digital arena. It was also rumored that ATT is having problems with the acquisition of Time Warner because of Justice Department anti trust concerns and the request to divest CNN or other assets. More on that later. Naturally, Rupert Murdoch called the head of ATT, Randall Stevenson, to discuss the topic of CNN. You can only imagine why. Yesterday, the news broke that Hasbro (NASDAQ:HAS) is trying to buy Mattel (NASDAQ:MAT), so you can see the rumor mill is alive and well, to say the least. Elsewhere, Bitcoin is still all the rage as it smashes price points on a daily basis. One contributing factor is the news that the CME Group (NASDAQ:CME), the dominant player in futures and options, will offer Bitcoin futures to help owners hedge, and who knows, maybe even speculate in the currency? On the oil front, it appears Venezuela stiffed their creditors with a billion dollar payment due, and the entity which overlooks credit default swaps, the ISDA (composed of large banks and entities like PIMCO), is declaring those who own the swaps in the money. Looking ahead, it certainly could have an impact on both shipments from and to Venezuela, so supply may be tightening there.

Also, the little issue of the lobbed missile from Yemen and intercepted by the Saudis may escalate the conflict in the Middle East between the fellows in Riyadh and the Iranians. There is also talk the Donald may reimpose oil sanctions on the Iranians after the new year rolls in, which would certainly restrict supply. Keep your eyes on the region as it certainly is, ahem, highly charged. On the earnings front, retailers like Macy’s and Kohl’s reported numbers which were not bad. The problem there is now one of scale as comparison to Bezos and the big A. The same situation is applicable in the media space, only the competition is not just Amazon (NASDAQ:AMZN), it is Google (NASDAQ:GOOGL), Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and now, increasingly, Alibaba (NYSE:BABA). I don’t know if you saw this, but yesterday at single’s day in China, Alibaba reported gross merchandise sales of over 25.4 billion, which is double what we do in the United States on black Friday and cyber Monday. Massive numbers, just massive.

When you look at the Trump administration’s posture on forcing AT&T (NYSE:T) to divest CNN or Direct TV in order to complete the acquisition of Time-Warner, it clearly is being driven by ‘non-traditional’ decision making at the Department of Justice. Moreover, with the largest companies earning well over 20 billion dollars a year with very little capital expenditure, and when you compare it to the combined earnings power of the ATT combination, along with the differences in balance sheet strength (Apple, Google, Microsoft, Facebook Inc (NASDAQ:FB)all have net cash positions of over 20 billion), under no market based metric should the deal not go through. The size of the largest companies is just hard to comprehend, so even a big entity like Walt Disney Company (NYSE:DIS) has to think about what they have to do to give themselves a fighting chance. On the tax front, I found it interesting that part of the proposal is to limit the interest destructibility of corporations to at most, 30% of operating profits. This item alone makes a huge difference to highly leveraged entities, which may be one reason why the high yield bond index had a tough week. Of course, they are not typically quality companies, and we know how important that is.

Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one's overall financial situation. The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantees financial returns which exceed those of a market index.

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