Bulls make Money, Bears make Money, but Pigs get Slaughtered
Welcome to the Smart Money, Dumb Money show. Our bonus chart this week is going to be what we mostly focus on in today’s video. Now, before we get started, I want to bring your minds back to an old adage that some of you might’ve heard in the past. It says that bulls make money and bears make money, but pigs always get slaughtered. And that really comes into play on today’s message because my blogs this week covered a couple of things. One of them was on the budget plus a rant on how Canadian vaccines are not being distributed properly, but beyond the rant the budget that we are here, I know the budget doesn’t come out until the 19th, but what we have heard from him pretty reliable sources is the capital gains inclusiveness taxes, which if you don’t know what that means is that right now, if you make a hundred bucks, it’s $50 of that is included in your income taxes.
So those inclusiveness taxes are going up and that’s going to count for the property. It’s going to count for everything. So if they’re going up from what I understand to 60% from the current 50% and then incrementally each year, now some sources say 2%, some sources say 4% of the more reliable sources that I have been suggesting 4%, but that may not be true. That means that in 10 years, they’re going to be 100% inclusive.
This brings up why I mentioned bulls make money and bears make money, pigs get slaughtered because the old way of looking at things has been that you buy a bunch of stocks, a basket of stocks. and if they’re good quality companies, you sit on them for the long-term and then you put off the taxes. Don’t pay them now, as the saying goes, and then later in life, you pay the taxes. So, you have deferred the taxes to a time when you’re in a lower tax bracket. Here’s the problem with that.
- Number one taxes have never gotten lower. I never did understand that.
- Number two – now we’re seeing absolute evidence that taxes are definitely going up on capital gains.
It’s going to affect us from the capital gain inclusiveness side. And it’s also going to affect us from a marginal tax rate, which I’ve always talked about. Let’s use an example. Now I’m not a tax expert, but this is just my logic at work. And I’ve been a portfolio manager for 31 years. I’m just looking at it from the perspective of why I believe in this. Now you go consult with your tax advisor to clarify it for your situation. Cause I’m not in that business, but here’s the way I do things. At least for my own accounts.
If I put a hundred thousand dollars into a basket of stocks and sit on them and they make 10% a year to use simple interest, they double in 10 years. Okay? So that’s not 10% a year. That’s about 7% a year, but let’s say that our hundred thousand turns into $200,000 in 10 years, then we cash out. Well, guess what? We have a $100,000 gain in that year.
Here’s the problem.
Even if taxes stayed at 50% inclusive, now you’ve got a $50,000 gain that you must claim, which pushes your marginal rate up. The reality is the taxes on capital gains are going up. By 10 years from now, it will be, according to what I’m hearing, 100% inclusive. In other words, you’ve got a full hundred-thousand-dollar gain that you’re going to have to claim.
And then there is your marginal tax rate. Do you know what a marginal tax rate is? It’s the final rate of income that you’re paying tax on. Do you think that’s not going to shove you into a huge marginal tax rate bump? It’s going to double-sided hit you.
The other reason why I’ve never believed in buy and hold a basket of stocks is because the reality is things change faster than ever these days. A great company I’ve often used is the example of General Electric. GE was one of those companies that you bought and held. Well, have you looked at GE in the past 10 years? It’s been a disaster to have bought and held. It’s been a great trader though. We’ve traded it three times now and we’ve made money each time but buy and hold investors have not.
Sector rotation. I’ve talked in these videos a lot about sector rotation and that is happening like crazy right now, because I do believe we’re in the final innings of a bull market. That doesn’t mean that one month from now, the bear market starts going away. I’m saying is that bull markets don’t last for 30 years. They last for anywhere between 10 and 18 years typically. The bull market started, let’s imagine at the end of the ’09 crash so we’re into more than a decade, right? That is one of the reasons beyond the tax reasons that I recommend trading.
Let’s cover the next thing I want to talk about, which is sector rotation. And I mentioned on my last blog, that there’s been a bit of a pause on consumer staples and utilities and things like that, that I had been talking about in the last update. Some of these sectors are not going down, but they were underperforming a bit. I’m seeing a decline in energy, but that’s changed in the past number of days, probably by the time you’re seeing this video energies may be showing a little bit less downside on a relative basis to the S&P than I showed on the blog, but this stuff is normal where you’re going to get the materials in the energy space, generally underperform a bit during the summer from a seasonal perspective.
Plus the fact that they’re a bit overbought. For that reason, just recently we took some profits, but only about a third of our position in materials and energy. We are still two thirds exposed and we were overexposed to begin with. We had an overweight position in our equity platform and our aggressive platforms it’s helped us do very well in the past six months that trade as the technology stocks pulled back. But it’s time to take some profits out because likelihood is, they’ll kind of be flat over the summer. And in the meantime, you’ll see some of these staples; utilities, communication stocks move up or at least sideways.
Now, one of the things I want to show you is a growth stock versus dividend stock chart. And that’s our bonus chart. We’ll get to that in a second, but I want to point out that there is a parabolic look that you’re going to see on the growth chart and the growth stock chart, and what that means is that this sector, the growth stocks are becoming overbought again it is sort of like September of 2020 deja vu. They’re overbought. They’re probably ready for a pullback and I want to illustrate that that tends to cause overall market mayhem, but it does tend to suggest that going defensive in, defensive sectors is a good move if that happens.
So, let’s look at the chart. The red line is the growth sector. The growth is the iShares Growth Stock ETF. The black line is the dividend stocks. It’s the I think it’s the Spider Dividend ETF. Okay. The dividend aristocrats actually now they’re US indices, but you’d find the same in Canada.
What I’m showing you here is that at times they decline together, but it’s a relative performance thing. When the growth stocks take a monster hit, the dividend stocks take less of a hit. They still got hit here. And you can see that the correlation line here went below zero here, or the correlation line stayed about the same, but you can visibly see that when the growth stocks pulled back aggressively here, the dividend stocks for most of that period, went sideways, they took a hit at the very end of that sell-off. But again, net-net, the percentage decline, if you were to measure this, because this is a logarithmic chart and see it was smaller.
Finally, in February of this year, the growth stocks took quite a spanking. I mean, a pretty humongous spanking actually. And meanwhile, the dividend stocks went up during the same period. So, you can see at extreme moments when the markets are selling off the growth stocks, dividend stocks, which tend to include the staples, these utilities, these other low beta types of sectors, communications, telecom, that kind of thing. They tend to do better when the market sells going off that and cash. I just want to point out quickly, this is the growth stock line. You can see it’s rather parabolic, whereas the dividend stocks is not parabolic. This kind of move on any market indicates a parabolic move and it usually suggests some sort of retracement. I want to just finish up and reiterate that in this market, as the age-old saying goes, bulls make money, bears make money, but pigs get slaughtered.
So you must be prepared for so many reasons. And now we have a very defined tax reason as well beyond just the fact that you want to preserve your money, but we are beginning to become more and more defensive. You’ve read my blogs. You know, I’ve been moving into staples, utilities, that kind of thing. We’re now around 10% cash in our models. The point I’m trying to make is that if you’re not doing this stuff, if you’re don’t have a system for knowing what to rotate into, then you need somebody like ValueTrend. Cause we do it for you. And we do it at the right time. And we’re trying to do it with preservation of capital in mind. Most of our clients are business owners that can’t afford to lose their money or retired people. And we’re more about limiting your risk than trying to maximize every nickel out of the market.
We can’t, we try to make a stable return. And I think that’s one of the other benefits of sector rotation and trading because buy and hold, if this market does turn into a bear market, say one year from now, or one month from now, then buy and hold can be a pretty distressing thing for people who need to live on their money.
So come and talk to us because we’re exceptionally good in rotational volatile and perhaps risky markets. I want to thank you for watching this video and keep watching for our new blogs. You can subscribe to the blogs. You can subscribe to the video and if you have any questions by all means, shoot me a comment on the blog. I always read the comments. Thanks for watching.
