Investors Need To Thwart Global Threat To Markets

• January 17, 2005
• Mark Boucher

Every once in a while throughout history an attack on freedom takes place
that is so harmful that freedom-loving peoples everywhere need to unite against
it. Such an attack on financial freedom is taking place now by the OECD and the
EU’s Tax Savings Directive. Investors who derive their profits from free
markets, free movement of capital, capital gains, and economic growth, need to
be united in their opposition to these global threats on financial freedom and
on the pillars of global growth and capitalism itself. 

Tax-havens have been much
maligned and little understood. Let me now defend them. Tax havens are efficient
low-cost domiciles protected by the rule of law. They make international capital
markets more efficient, and allow cross-border pooling of capital that would
otherwise be impossible. Tax-havens increase global economic growth. They are
critical in directing the flow of capital to places where it will do the most
economic good and strongly increase global capital efficiency and freedom of
movement. Low-tax jurisdictions example of freedom and success tends to exert
influence on keeping taxes lower globally. Competitive forces have thus
encouraged countries to make their tax systems more attractive to investors and
their expenditure more efficient.  Competition doesn’t just work for companies,
it plays a critical role in just and efficient government too. Most tax haven
assets return to OECD country investments. Thus while tax havens are beneficial
to freedom and capitalism and to citizens of the world, competition is not
desired by governments themselves and the OECD and high-tax EU governments would
like to institute a tax monopoly over mankind, where they could find it much
easier to raise taxes and to spend recklessly.

Tax competition, which the
OECD calls”harmful” is the process by which countries lower taxes in order to
compete for global capital. It forces governments to give more thought to the
effects of their tax and other policies, and competition forces a degree of
market-guided restraint on tax rates and on policies utilized by countries
desiring economic growth. Tax competition is as essential to reigning in
excessive government power and spending as competition among companies is
essential to efficient utilization of resources and pricing by those companies.
What the OECD wants is a global financial police state of tax monopoly and no
competitive pressures. Tax competition has been critical to the expansion of
freedom and capitalism throughout the world since WWII in particular. Chinese
communism was reversed peacefully (at least externally) largely because of the
example of Hong Kong and the power of free markets and low taxes that finally
led China to try letting farmers in the poorest region keep their excess
production. That poorest region is now the richest and much higher degrees of
both capitalism and freedom have resulted from this experiment. Chinese
Communism died from the example of freedom in tax-havens like Hong Kong and the
unparalleled success mimicking such policies brought China in producing growth.

Like the Nazi Anschluss the
EU and OECD have tried to use intimidation and strong-arm tactics to force
acquiescence by tax-havens of the world to its terms to end tax competition. The
US has used similar tactics to get information from tax havens with an
anti-terrorist excuse. The sovereignty of every nation on earth is at stake
here. The Caribbean states have tried to resist but in the end almost all
low-tax jurisdictions conceded to remove the “harmful” aspects from their tax
systems – but only on the explicit condition that they would do so only when all
other countries had done the same. Neo-colonialism over these nations
sovereignty has made a huge step of progress. Thankfully so far Liechtenstein
(under Swiss protection) and four other jurisdictions have completely refused to
comply with the OECD’s demands, while the EU Tax Savings Directive has more
(loop) holes in it than Swiss cheese due heavily to Switzerland’s negotiations.

What the OECD and EU
governments want is to be able to raise taxes without having the negative
consequences of doing so. They want to soak the rich and middle class for more
money and turn “citizens” into “subjects” by not allowing them to escape,
putting up a new Financial Berlin Wall around all EU citizens first and around
all mankind eventually. Of course taxing  savings without any check or balance
will substantially damage investment, incomes and growth, as well as global
stock markets. And as it is now, raising taxes further would simply send more
citizens and more capital to freer shores offshore.  The OECD wants to imprison
those citizens and their capital for any sort of taxes its governments want to
institute — and the Savings Tax Directive and “Harmful Tax Competition”
proposals of the OECD are simply their attempts at thwarting the escape routes
to freedom. 

So far tax-havens globally
have played a critical role in helping increase competition among governments
toward lower taxes, more efficient spending, and accountability for policy. Tax
havens improve global efficiency and benefit mankind. Increasingly though, tax
havens and Eastern Europe’s low-tax new jurisdictions are having to pick up a
new role — defenders of freedom for mankind on earth and for global capital
markets. The US once stood for freedom but seems asleep in this regard as its
own hunger for tax revenue and anti-terrorist furor grows and leads it astray.
Let us hope for the sake of mankind that tax havens and Eastern Europe can hold
the torch of financial freedom high enough and long enough to hold off the
forces of oppression building feverishly.

Low-tax jurisdictions need to
unite and to fight pressures from bigger governments with an appeal toward what
is right and not an acquiescence with loopholes. And freedom loving peoples and
investors in the US and EU and the world need to understand what is at stake and
apply pressure to their governments to cease and dissest from harassing free
governments abroad. It is critical for mankind that the European governments do
not win this fight, and that global financial freedom and mobility, financial
privacy, the sovereignty of small nations, global economic growth, free trade
and freedom of investment continue to improve in the world. In addition, and
most importantly, particularly at a time when the US and developed Europe is
facing a demographic crisis in transfer payment and retirement policies that
could result in massive tax increases and spending and government expansion, it
is especially important that competitive forces and the example of freedom and
low-taxes continue to exert pressure on governments to spend efficiently and tax
responsively. Otherwise we could face an Orwellian nightmare global police-state
of taxation and “citizenship” that Hitler and Stalin could not even have dreamed
of. It is time for investors to take a stand for freedom.

The markets continue to
re-evaluate the threat of higher interest rates in light of the Fed’s release of
former minutes of meetings, where it was revealed that many fed members are
concerned about bubbles and markets pricing of risk being out of whack.
Breakdowns in banking, REITS, technology, materials, industrials, and host of
other sectors have developed, and the market is in a correction. Energy, health
care, European financials, and staples seem to be outperforming — with energy
perhaps the only positive performance sector. Crude has tested a trendline and
critical 40 support level and bounced off in a double-bottom. Energy stocks seem
likely to reassert their upside leadership or at least outperform. We believe
Energy, Healthcare, and Staples are set to outperform the market as a whole and
are more comfortable with long/short spreads in this regard than much allocation
to outright positions.

 

The dollar also still looks to
be correcting with a rally — and as long as this is the case Emerging Markets
and resources will have problems. Most investors should now be heavily in cash
and playing defense. As we said last week, “investors are encouraged to take
some profits and tighten trailing stops and remain nimble in this volatile and
treacherous environment.”

Our model portfolio followed in TradingMarkets.com with specific
entry/exit/ops levels from 1999 through May of 2003 was up 41% in 1999, 82% in
2000, 16.5% in 2001, 7.58% in 2002, and we stopped specific recommendations up
around 5% in May 2003 (strict following of our US only methodologies should have
had portfolios up 17% for the year 2003) — all on worst drawdown of under 7%.
This did not include our foreign stock recommendations that had spectacular
performance in 2003. 

This week in our Top RS/EPS New Highs list published on TradingMarkets.com,
we had readings of 15, 17, 40, 28, and 17 with 11 breakouts of 4+ week ranges,
no valid trades  and close calls in CLCT and SNSA. Breadth has now dropped below
the 20 consistent number desired for a favorable investing environment for Top
RS/EPS new highs. This week, our bottom RS/EPS New Lows recorded readings of 6,
6, 4, 9, and 11 with 7 breakdowns of a 4+ week ranges, no valid trades and one
close call in BLI.  Valid signals remain in place in MLI and BHP. 

For those not familiar with our long/short strategies, we suggest you review my
book

The Hedge Fund Edge, my course “The
Science of Trading,”

my video seminar, where I discuss many
new techniques, and my latest educational product, the

interactive training module. Basically,
we have rigorous criteria for potential long stocks that we call “up-fuel,” as
well as rigorous criteria for potential short stocks that we call “down-fuel.”
Each day we review the list of new highs on our “Top RS and EPS New High List”
published on TradingMarkets.com for breakouts of four-week or longer
flags, or of valid cup-and-handles of more than four weeks. Buy trades are taken
only on valid breakouts of stocks that also meet our up-fuel criteria. Shorts
are similarly taken only in stocks meeting our down-fuel criteria that have
valid breakdowns of four-plus-week flags or cup and handles on the downside. In
the U.S. market, continue to only buy or short stocks in leading or lagging
industries according to our group and sub-group new high and low lists. We
continue to buy new long signals and sell short new short signals until our
portfolio is 100% long and 100% short (less aggressive investors stop at 50%
long and 50% short). In early March of 2000, we took half-profits on nearly all
positions and lightened up considerably as a sea of change in the
new-economy/old-economy theme appeared to be upon us. We’ve been effectively
defensive ever since, and did not get to a fully allocated long exposure even
during the 2003 rally.

The current correction may stall when the dollar stabilizes. The rally coming
off of that low will be critical to watch for investors to determine if another
leg up can transpire in the global bull move in place since late 2002.

Mark Boucher