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I'm about to take you with me on a trip back in time to some of the most magical years of my life. Fear not, this story has a direct bearing on you and your money in the present.
The Dire Straits' self-titled debut album was a revelation for me in high school. There's not a "throwaway" song in the lot, and it became the first album that I literally wore out. I listened to that vinyl album so much that the grooves wore down and one line on "Sultans of Swing" would play over and over until I bumped the stylus forward.
The high-energy hit songs "Sultans of Swing" and "Down to the Waterline" are breathtaking. But there's a more reflective and mellow song on that album that has won my heart. Here's the story…
Two years after graduating from college, in front of a secluded park bench in central London, I knelt down on one knee (I'm a traditionalist at heart) and asked my girlfriend of six years to marry me.
The woman who is now my lovely and talented wife said "yes."
Weeks later, I realized – quite by coincidence – that a passage from the song "Wild West End" on that first Dire Straits album was a perfect narration of that engagement night.
Before that fateful moment at the park bench, we had enjoyed the play "Figaro" in the West End, London's predominant theater district. And in the West End, the main thoroughfare is Shaftesbury Avenue.
That's about all the background you need to see why these song lyrics still bring a thrill to my soul every time I hear them:
I saw you walking out – Shaftesbury Avenue
Excuse me for talking, I wanna marry you
This is the seventh heaven street to me
Don't you seem so proud
You're just another angel – in the crowd
And I'm walking in the wild West End
Walking with your wild best friend
When I heard that song play weeks after our engagement, my jaw dropped. I called my fiancee and excitedly told her about my musical epiphany.
And then I did the (almost) impossible – I wore out a CD version of the same album I had listened to so much in high school.
Why this musical walk down memory lane? Because much like my old Dire Straits album, I'm about to sound like a broken record – the market narrative is still driving almost every twitch in the stock market…
And that sets us up for repeated profits, too…
It's All About the Market Narrative
The strong push up in the markets has everything to do with the market narrative. That's the overarching theme that is the most prevalent driver of the long-term stock price trend.
I know – broken record. I hear you saying, "D.R. – you've talked to us about the market narrative so many times…"
I do it for one reason: money.
If we have a clear understanding of the market narrative, we can make money, and plenty of it.
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Since early November 2016, the Trump Growth Narrative has been the prevailing market driver. The three legs of this growth narrative are still – and have been since our original discussions – reduced taxes, regulatory reform, and infrastructure spending.
And right now, the most important driver out of this three-legged stool is the recently passed tax reform. I believe that the effects of tax reform have not yet been fully priced in by the markets. Here's why.
The most basic fundamental analysis of a stock's value would be that the current price should reflect the net present value of all future cash flows produced by the company.
Given that definition, when cash flow has a step change increase (in this case from reduced tax expense), the stock price must, over time, increase to take into account all of the future tax benefits.
And until companies start reporting actual earnings under the new tax regime, we won't know all the nuances of the tax benefits.
Because of this uncertainty, the market has not yet fully been able to price in or "discount" the effects of reduced tax expenses.
So what do we do about that?
Let's look at the three areas of the tax reform that I believe will have the biggest impact on stock prices:
- Companies with most or all of the tax revenue coming from the United States
- Companies that require large capital expenditures
- Companies with large cash hoards overseas
Let's look at these individually and then zoom in on some companies that I have my eye on in each category.
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.