Don't be fooled by Buffett

Warren Buffett is my hero as an investor and I very much admire him. But there are certain aspects where I totally disagree with Buffett. For one, his view on gold. And for two, his views on politics and tax. To me his views are vary naïve and to some extent even stupid in my taste. Recently Buffett has openly criticized Trumped on the tax issue in order to support HC. He has misled people into believing that he is not one who will take advantage of using tax deduction to his or his company's benefit. I must say Buffett is very hypocritical here in trying to promote his political agenda by misleading the public. Do you really believe Buffet dose not try to avoid tax? I just saw a write up by Alex Green, a former Goldman Sachs hedge fund manager. He has explained very well why Buffet has been doing nothing different from Trump in tax avoidance. I extracted his writing below for your information.

Where Donald Trump and Warren Buffett Agree

Alexander Green, Chief Investment Strategist, The Oxford Club
My recent column on Trump and his tax deductions generated a firestorm of feedback from readers.

It's not hard to understand why. Trump gets people's dander up. And so do taxes.

After the second presidential debate, Warren Buffett, an outspoken advocate for Hillary Clinton, stepped into the spotlight and disclosed information from his own tax returns to refute Trump's claim that he too used the complicated tax code to take "huge deductions."

The two billionaires differ sharply on taxes. But only in how they talk about them - not so much in what they actually do about them.

Buffett has often called for big tax increases on America's highest earners, even though - according to the IRS - the top 2.7% of U.S. households pay more income taxes than the other 97.3% of us combined.

But soaking entrepreneurs, business owners and investors does not incentivize business expansion, innovation or job creation.

Trump, on the other hand, wants to reduce personal income taxes for almost everyone. He also wants to cut the corporate tax rate from 35% to 15% and eliminate the estate tax entirely.

Polls show that Trump's chances of getting elected are growing increasingly dim.

But his tax proposals - while far short of the drastic reform and simplification the tax code needs - are a good starting point for discussion.

I have much more respect for Buffett as an investor and a philanthropist. But, at least in this instance, Trump is actually being more forthright.

How can I say that when Trump hasn't even released his tax returns? Because Trump doesn't deny he has used the code to minimize his taxes.

That's legal. And virtually all taxpayers do it, including Warren Buffett.

Buffett claims that his secretary pays taxes at a higher rate than he does. Yet he generally neglects to note that his annual salary is just $100,000 - and he takes deductions for his generous charitable contributions.

Moreover, let's not forget that Buffett is one of the world's wealthiest individuals precisely because his $64.8 billion fortune is almost entirely untaxed.

Like Trump, Buffett has used aggressive money-saving tax strategies, not so much on his personal returns, but most definitely with Berkshire Hathaway, the primary source of his wealth.

In 2014 and 2015, Berkshire did three "cash-rich split-off transactions" that allowed the company to avoid more than $2.5 billion in capital gains taxes.

This was not unusual. Buffett has long made an art of tax avoidance. For instance, Berkshire had money behind the recent Burger King-Tim Hortons inversion, helping a U.S. company avoid taxes by departing to Canada.

Buffett has famously said that the capital gains tax is not a tax on capital gains but a tax on transactions. So he makes very few of them.

He claims his favorite holding period is "forever." Indeed, he has held companies

"Let's not forget that Buffett is one of the world's wealthiest individuals precisely because his $64.8 billion fortune is almost entirely untaxed."

like American Express, Coca-Cola, Procter & Gamble, Wells Fargo, Graham Holdings and others not just for years but for decades.

In addition, Berkshire Hathaway has never paid a dividend in the nearly 50 years since Buffett began running it. So, over the last half-century, he has never paid a dime in dividend taxes on his multibillion-dollar Berkshire holdings.

Buffett won't be selling his own shares of Berkshire and paying capital gains taxes on them down the road either. He has pledged most of his fortune to the Bill & Melinda Gates Foundation.

That's a worthy thing to do. However, his contribution came with a single string attached. The donation is contingent on charitable contributions remaining tax-deductible.

By doing this, he will also dodge estate taxes on those shares, depriving the government of tens of billions of dollars of tax revenue.

In sum, both men take advantage of personal and corporate tax breaks. Trump admits it. Buffett doesn't talk about it.

Trump wants to make sure no one pays estate taxes. Buffett is only making sure that he himself avoids estate taxes.

I'm no great fan of Donald Trump. But when it comes to taxes, you'd be well advised to ignore what Buffett says.

And just minimize your taxes - the same way both men do.

Good investing,

Alex

How to be prepared for a potential recession (1)

I have been laughed at by someone that I kept talking about the potential of recession. For them, unless you immediately feel it, especially via the stock market, where is the recession and why keep talking about it? Well, for me this is a trend that potentially can be very devastating if not well prepared. While I’m not stupid enough to try to claim that I know exactly when the next recession will occur, I don’t feel shameful to be a crying wolf on it. After all, it will almost always be too late if you simply wait for it to be felt in the stock market. Just think about what happened before the dot.com crash and before 2008. Universally nearly everyone was euphoric about the ever increasing stock market and did not think a market crash would ever be possible, then it hit and hard without pre-warning. I think more and more evidence has emerged that the US may go into a recession in the not too long future but I don’t know exactly when. You see, the US GDP has been declining for 5 quarters executively and more than likely it will become 6 after the current earnings season is over. The financial world around the globe is in a total mess and very chaotic. We would probably have already seen the recession several times over if without the Fed and Central Banks around the world manipulating the interest rates and printing trillions of dollars from the thin air. All of this must have a consequence. It is not if but just when. Actually if we factor in the real inflation rate, we are already in a recession. Now another worrisome development is sending a signal silently. Libor or London Interbank Offered Rate is the most widely used benchmark for short-term interest rates between banks and is considered an accurate indicator for the health of the banking industry. During normal times, the 3-months US$ Libor is generally stable around 0.3% but during a financial crisis, it could shoot up to above 1%. E.g. Libor skyrocketed to 1.4% during the financial crisis in 2008/09 and since then, it has declined and stabled around 0.3%. But lately it is moving up to 0.8% without many people noticing it. It does not mean a deep trouble in the credit markets yet but it certainly suggests a worsening state of the global banking system. Wait to see what will happen when Libor touches 1%.


While I’m not expecting everyone would agree with me and share my worries, I’m glad that some friends with rational thinking are seeing the same thing as I do and are asking me what one may do to be better prepared in case the worst comes. I will share some thoughts next time.

Another great concern for the long term Treasury

I talked about the possibility that we are seeing the final top of long term Treasury bonds (or bottom of the long term interest rates). To monetize this idea, I have initiated the trades via TBT and have already got some short term good profits. The most recent one was last week that I took the profit by closingTBT in anticipating a rebound of TLT. Looks like this is indeed what is happening now. While I think this is the beginning of a very long term downtrend for long term bonds, certainly it will be naïve to think this will be a straight line down. I think there are many opportunities to do swing trades with TBT/TLT. Now we have another time bomb that may trigger a landslide for Treasury.

 
Not sure if anyone has noticed that the US Congress has just done something historical with a slap on the face of Obama before his leaving: they overrode a veto by Obama and passed a law allowing families of nearly 3,000 people killed in the attacks of 9/11 to sue Saudi Arabia for damages. You may ask what’s the big deal. Well, the SA kingdom is not a small dog for the US. On the contrary, it is one of the biggest holders of the US Treasury and other assets, estimated at $700 Billion. SA has already threatened that if this law is indeed implemented, they will dump the US Treasury in retaliation. If that happens, just wait to see the avalanche crash of the long term bonds and skyrocketing interest rates. Of course no one knows for sure if this is just a rhetoric threat or something they are really seriously about. But considering the initial trend already started, I’m not sure you want to fight against it. Buying some TBT at dip is not a bad idea for a potential bombshell in the bond market. After all, there is very little chance, if any, that you can make any serious money from the long-term government bonds. The risk is simply too high!

Stable buying power for hundreds of years

I’m a long-term gold holder and my faith in it will not change for very long time, if not in the rest of my life. With what’s going on around the world, gold will only become more valuable in the future. I cannot foresee anything at the moment that will change my view. I outlined before a few fundamentals that support a higher gold. Now a new research is just released, in which the author checked the data for hundreds of years from 1600 till now with the following methodology:

" When examining the value of gold we have to measure it in terms of goods and services. In this day and age one might forget the end goal of any participant in the economy is goods and services. All else traded in our vast financial system is merely a means to an end. All sorts of money, but also stocks, bonds, credit default swaps, options, futures, etc., have no use-value for humans as we can't eat, drink or wear them. Only goods and services we can truly use (for more information regarding use-value please read my post The Concept Of Money.) Therefor, to measure the stability of gold's value we have to compute the amount of goods and services gold can buy. For the sake of simplicity, we'll use publicly available Consumer Price Index (CPI) and Wholesale Price Index (WPI) data to measure the value of goods and services."



Here is the overall conclusion from the exercise:

“We can conclude, while there is no exact constant in economics, the stability of gold’s purchasing power is unprecedented. Not only on a gold standard the metal shows it’s constant nature, but also off the gold standard gold’s purchasing power is remarkably constant, albeit more volatile in the short term.”

 
Again, regardless how high gold will eventually go, it won’t be a straight line up. While gold is very constant in value, the traders on it are very emotional and can easily become very hyper and euphoric within a short time period to make it ahead of itself and then very depressed and pessimistic due to some short-term factors. As I have warned for quite some time in the past few months, gold has indeed entered a more serious correction at the moment. Baring from any black swan showing up suddenly, the correction may likely go for a while before we see a bottom. Who knows, maybe the upcoming presidential election could trigger its next bull leg up. As a longer term investor, I’m happy to see it go down more to allow me to buy more. As a trader, I’m happy to see the volatility that allows me to do swing trades and plant seeds for long term.

Medical hackers?

 It is not a safe world anymore. Along with the big trend of more and more activities conducted online, criminals can make all kinds of malicious attacks. It is not news anymore if your financial accounts or email have been hacked. But I bet you would probably have never thought about a cyber attack to medical devices!  Johnson & Johnson has just told patients that they have identified a security vulnerability in one of its insulin pumps that a hacker could use to overdose diabetic patients with insulin. If you are not sure what it means, then in layman’s language it is that  too much insulin (overdose) could cause low blood sugar (hypoglycemia), which in extreme cases could kill patients. In August, there was a report saying that heart devices from St. Jude Medical Inc had potentially life-threatening cyber vulnerabilities and St. Jude’s prices tumbled due to the news. 

 

You may not think this is anything to do with you but potentially it could in the future. Think about a scenario. If someone has a relative (important to him/her) who relies on a diabetic pump or a heart device or other device that is critical, instead of kidnapping, a hacker could use an cyber attack to control the device and then ask for money or kill. Sounds like a fiction but I won’t be surprised to see this happen in the near future.

 

From the investment perspective, buying some cyber security stocks will be a great idea and moving forward, this sector will only become more and more demanded and red hot. If you don’t know which companies to buy, then simply buy the ETF for security stocks via HACK. See some details here.  

Too good to stay

Technical analysis serves me very well again. I made a “perfect short” as I phrased it for shorting the long term bonds. Here is what I said: Looks like it was a good call as we are exactly seeing this in TLT, after hitting $133 it has moved up to $138, a point exactly lining against its resistance. Technically this is a perfect spot to short with a high probability of winning.

 
The timing was perfect as TLT almost immediately went down and hard for 2 days! And my trading via TBT calls has doubled within days. With such a fast move and profit, it would be crazy to stay for more, although TLT may certainly go down more from here. But, this is a big but, if TLT tries to make a dead cat bounce after a hard drop, the gain from call options will evaporate easily. I don’t want to see it happen. If you are the ones making a similar trade with me and having seen a good profit, don’t be greedy and better to take the gain now. The coming Friday’s job report can easily move the bond market and no one knows for sure which direction it will go. If TLT indeed bounces back to its resistance, it will be another perfect short to make, at least for me!










By the way, I do still keep my naked TBT puts for now, expecting for further downside risk for TLT. It is much less sensitive to the short term moves of TLT and I don't need to be exactly right to make money.

A perfect short

Two months ago in July, the long term interest rates hit its lowest point not seen in almost 40 years. In other words, the gigantic bull run for long term bonds lasted for nearly 4 decades has reached a peak none one could have imagined years ago. But likely this amazing bull run has run its course and we may have very well seen the extreme bottom of the long term interest rates, i.e. below 1.5% for 10 years bonds or around 2% for 30 years. Since July, the long term interests have moved up. While I cannot say for sure, I do believe new era has been born that moving forward, a gigantic bear run for long term bonds has begun and accordingly the long term interest rates will rise significantly from here. Of course, it won’t be a straight line up but as long as the July low is not breached, the uptrend will be intact.

 
I talked about this a couple of weeks ago. But at that time the long bonds (TLT) was kind of in a sharp move downward within a short period of time. As such I said we could see logic dead cat bounce to release the oversold condition. Here is what I said: As a trader, I will consider to buy TBT, a leveraged inverse ETF against long term bonds (e.g. TLT). TLT may be a bit oversold and is due to rebound in the short term but any bounce is likely an opportunity for buying TBT to bet for the next leg down for TLT.  Looks like it was a good call as we are exactly seeing this in TLT, after hitting $133 it has moved up to $138, a point exactly lining against its resistance. Technically this is a perfect spot to short with a high probability of winning. Buying TBF (an inversed ETF against TLT) or more aggressively TBT (leveraged inverse ETF against TLT) can do the trick. If I’m right, there is little chance TLT has energy to go above $140, a  level from which it broke down.