It’s How You Think That Counts in the Market

A Social Security (Partial) Solution

It’s How You Think That Counts

Compelling Action From This Potential Leader

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On Tuesday, the U.S. Treasury offered billions of dollars of four-week bills at an interest rate of 0% … and that issue was oversubscribed by a factor of four!  Three-month bills are currently yielding about 0.01%, the lowest level since 1929, when they were initially offered.  And long-term rates are hovering around 3%, some of the lowest levels in decades.

These super-low rates me got brainstorming, and since everyone else is offering out-of-the-box ideas with regards to the economy, I thought I’d chime in with one that, in my view, makes a lot of sense.  I won’t spend too much space on it, since, let’s face it, the idea won’t become law.  Or maybe it will?

Here’s the thought: I believe the U.S. government should borrow an extra $1 trillion, or even more, in floating long-term Treasuries, and use it to pre-pay some of Social Security’s future shortfall.  I know you’re probably thinking, “Great, Mike, just what we need–more debt!”  But I honestly think it would work.

Here’s why: Uncle Sam can effectively borrow at 3% rates for the next 30 years, which is not only historically low, but in all likelihood, is going to be less than the average rate of inflation during that time.  Maybe if such a huge borrowing was announced rates would tick up, but mybe not.  After all, we’re set to borrow huge sums of money in the quarters ahead, yet interest rates are sitting at multi-decade lows.

So here’s the plan–first, contact everyone over, say, 50 years old during the next few months, and offer to “buy them out” of their Social Security benefits.  Of course, the amount paid would be less than what’s owed to them because of the time value of money; cash in hand today is worth more than money given out over the next 10, 20 or 30 years.  It’s the same reason lottery winners usually choose to get paid upfront (instead of getting a 20-year annuity), even though, if they took the monthly payments, they might make more money over time.

Once you have a tally of who’s committed to such a program (participation would be optional), the Feds could go out and borrow however many hundreds of billions (trillions?) of dollars needed.  And do it for a ridiculously low rate of 3% … or maybe 3.5% if rates rise a bit.  

Won’t that flood of bonds eventually have a negative impact on rates?  I’m not so sure.  Remember, investors aren’t stupid, and they know not only how many bonds the U.S. actually has outstanding, but also the governments’ future liabilities (Medicare, Medicaid, Social Security, etc.).  Thus, it’s true that enacting this plan would increase the amount of bonds in the marketplace.  But in terms of the total debt–both bonds, plus future liabilities–that figure would decrease, or at least, stay the same.

Now that it’s exactly the same situation, but during World War II the U.S. floated a tremendous amount of debt–the total public debt outstanding was valued at more than the country’s entire GDP!  Yet because the market had confidence the money was being put to good use, it financed the war at interest rates in the 2% to 3% range.  We could do it again.

Taking a step back, what’s the advantage of doing this?  For the same reason any big, old company might pay part of its union’s pension upfront–to get it off the books.  In effect, Uncle Sam would be refinancing some of its debt; it would eliminate future pension responsibilities (and thus, avoid some of the unpleasantness of lowering benefits or raising taxes in the years ahead) with super low interest rate-debt.  I think it’s an idea worth exploring.

I realize many people may disagree (including Tim, who’s written repeatedly about the unwinding of the debt build-up in recent decades).  Either way, I’d love to hear your thoughts either by email or on our blog, http://www.iconoclast-investor.com.

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Back to the stock market, I wanted to relay an email I got from a valued subscriber just this week:

“A number of weeks back I purchased Thoratec (THOR) after reading about it in Cabot Market Letter. I missed the trigger to sell my shares when it dropped below 20% of its purchase price, and it continued down to nearly 30% below.  When it popped just before Thanksgiving the stock was at 14% below purchase price and I took the opportunity to sell my shares.  Over Thanksgiving break it was added to the S&P 500 Midcap index, and on Friday it gapped up big.  Since its new heart pump’s results have come in, the stock price has jumped further …

“I sure feel silly to have sold the stock just as it started its climb.  So I guess I’m wondering what I should have done differently, and how should I approach it now that I’ve been burned by it already?”

S.L.

Really, this email is all about how people think about their stocks, portfolios, profits and losses.  And it’s not just this subscriber–I’ve fielded hundreds of similar questions during the past few years.

First off, I think it’s great to look at your past trades and try to learn from them.  So don’t let anything I write below change that.

However, if you sell a stock and it goes up, that doesn’t necessarily mean you made an error.  Sure, there’s always room for improvement, but nobody is going to buy at the bottom and sell at the top (except the liars).  Nobody.

In this case, the investor cut his loss (after first being bailed out by the stock), and the stock went higher.  But was cutting the loss really the wrong thing to do?  Maybe the wrong piece of the puzzle was the buy point–it may have been ill timed, because the market was in a downtrend, or because the stock was extended.  

And, for the record, I’m pretty sure he bought the stock on my recommendation, so I’m not putting him down–I’m just pointing out that cutting your loss is never really “wrong,” in my opinion.  What if THOR had continued lower another 10%, 20% or 30%?  That would have meant big trouble, as it has for so many investors in so many stocks this year.

Moreover, the stock didn’t “burn” this subscriber; yes, he might have missed out on some upside from where he sold.  But lost opportunity is not lost money!  The market is going to present hundreds of chances to make a profit in the years ahead, so it’s not like missing out on this upmove in THOR should make anyone feel silly.  Far from it.

In this case, I don’t think there’s much he could have done differently–except cut the loss short the first time it broke his loss limit.  Yes, that would have meant an even bigger loss than he ended up with, but remember, your goal isn’t to make the most money on every trade.  Your goal is to make the most money you can over time.  There’s a big difference.  

If you follow a proven system (like cutting your losses), it doesn’t mean you’ll always be on the right side of things.  But it does mean you’ll come out richer in the end.

I also want to point out that it’s usually the investors who don’t have a proven system that get so nervous and anxious about the market, the future, what their stocks might do, etc.  You have to believe in the discipline you’re using.  If you do, you won’t be second-guessing yourself after every missed opportunity–you’ll be confident enough to realize it was just a bad break, and that another great opportunity will more than make up for it.

Take this as a little pep talk.  Making money in the market is difficult, especially this year.  So don’t feel silly or beat yourself up a poor trade or two–oftentimes, as in this case, it was just a bad market, or bad luck.  Simple as that.

For the record, I do like Thoratec (THOR), and it’s one of the top names on my Watch List again.  I dropped it from sight a few weeks ago because of weakness, but the last couple of weeks have been exceptionally impressive.  The stock has rallied to new peaks!

Looking at the bigger picture, THOR’s pattern during the past few months has been a bit sloppy, but it found support at 19 three separate times during October and November.  Not coincidentally, 19 was the stock’s breakout level back in early August, when the firm had a coming out party of sorts, reporting sales and earnings up 44% and 122%, crushing expectations.

The third quarter report was another great one (sales and earnings up 44% and 325%, respectively), and last week brought the news that the firm’s HeartMate II heart pump is far superior for so-called destination therapy (permanent use, because the hearts aren’t suitable for transplants) than its older heart pump.  To this point, most of Thoratec’s business has come from patients awaiting transplants; this news could propel FDA approval of its pump for destination therapy, opening up a huge market.

After ripping higher more than 50% in just a couple of weeks, I’m not buying Thoratec here.  But if the market can confirm its nascent uptrend, and if THOR can tighten up for a few days, it could be well worth buying.

All the best,

Mike Cintolo

Editor’s Note: Michael Cintolo is the editor of the flagship Cabot Market Letter, which, thanks to both its market timing and stock selection systems, has outperformed both the bull market of 2007 and the bear market of 2008.  (Believe it or not, Cabot Market Letter is up handily since the start of 2007, while the indexes are down more than 35%.)  In fact, Mike was one of the only advisors that got his subscribers into cash in early September, avoiding the market’s crash since that time!  Today, he’s still protecting subscribers’ capital, but his market timing indicators are now closing in on a BUY signal.  Believe it!  That’s why Mike is honing his Watch List with big-potential stocks that are likely to deliver great profits.  If you’d like to protect your capital during bear markets, and still outperform the market during bull markets, you owe it to yourself to try Cabot Market Letter.

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