The Direct Credits Society?

Come with me, and Mr. Peabody, in the “Wabac Machine” (Wabac) to a place from a time long ago and galaxy far, far away. It was during the Great Depression in this country (1929 – 1939) when Lawsonomy was proposed by Alfred Lawson. I recalled Lawsonomy while listening to Bernie Sanders over the weekend, who sounds amazingly like Alfred Lawson. Lawson (1869 – 1954) was a man who believed in giving everything in the world to everybody. According to Wikipedia:

Alfred Lawson propounded his own philosophy, Lawsonomy, and the Lawsonian Religion. He also developed, during the Great Depression, the populist economic theory of “Direct Credits," according to which banks are the cause of all economic woes, the oppressors of both capital and labor. Lawson believed that the government should replace banks as the provider of loans to business and workers. His rallies and lectures attracted thousands of listeners in the early 1930s.

Boy if that doesn’t sound like Bernie Sanders I don’t know what does! Lawson’s speeches drew thousands in the streets of Detroit back then, and to quote the Detroit Free Press:

This was the first great co-operative demonstration of the people in their demand for an economic system that will give “Justice to everybody and will harm nobody” through the establishment of Lawson’s great plan which offers “a purchasing power equal to one’s productive power.” The thousands of people in the lines of the demonstration were members of the Direct Credits Society, who are devoting their lives teaching the principals of Direct Credits for everybody, an honest economic system so perfectly balanced that it gives everything to everybody and steals nothing from anybody.

Speaking to “Direct Credits,” (a concept that if Bernie knew about he would likely propose), to quote Alfred Lawson:

  1. Gold must be abolished as money and everybody prohibited from using it to pay for anything.
  2. Paper currency must be made the standard of exchange and issued in sufficient quantities for all purposes.
  3. Interest and all other form of payments for the use of money must be abolished and prohibited.
  4. Control and supervision of money must be by the government, who will operate all banks and other financial institutions. Private banking must be prohibited.
  5. All financial loans must be made by the government. Private loans in business transactions must be prohibited.
  6. All credits must be issued by the government direct to everybody.
  7. Everybody must be entitled to basic equal credits given by the government.
  8. Everybody must perform actual service in return for credits.
  9. Limited credits must be issued to everybody without security.
  10. Credits must be issued for the upkeep and education of children up to 21 years of age, to be voluntarily repaid by them, if possible, at some future and convenient time.
  11. Credits must be issued to everybody past the age of 65 years of age for living expenses.
  12. Charity must be abolished and justice take its place. Credits must be issued to the sick and lame. Doctors, nurses and practitioners will be paid by the government both with money and honors. They must treat all patients with equal consideration.
  13. All controversies must be settled by courts appointed by the government, who will furnish lawyers for both sides.
  14. Everybody must furnish sworn statement periodically showing the amount and character of wealth possessed and the manner in which it was obtained.

Again, if that doesn’t sound like Bernie Sanders I don’t know what does! So let’s resurrect “Lawsonomy,” and the Direct Credits Society, yet as Maggie Thatcher said, “The trouble with Socialism is that eventually you run out of other people's money."

And last week, the stock market did not actually run out of money late week, but it did run out of “internal energy.” Indeed, in Thursday’s report we noted that the stock market’s “internal energy” had been pretty much used up with the S&P 500’s 120-point romp from its successful test of the January 20, 2016 intraday “print low” of ~1812 last week into Wednesday’s ~1930 high. That nearly 7% rally, in a mere four sessions, caused our “internal energy” indicator to suggests the equity markets were going to have to rebuild said energy if we are going to take another stab at the upside. Moreover, our model that targeted the week of February 14th for a trading low is now indicating the equity markets should have a sideways move, with small pullbacks, into the first week of March. If indeed the “lows” have been made with the double-bottom around the 1812 level (see chart on the next page), over the next week investors will have an opportunity to buy select stocks that have been put on “sale.”

Last week we referenced PEG ratios (price to estimated growth), noting that the Technology sector was trading at a PEG ratio of 1.4 while the Utility sector trades at 3.2. Our quip read, “If you think that utilities are going to grow faster than technology, I have a few yards of swampland south of here I would like to sell you!” In past missives I have referenced comments from tech savvy portfolio managers that think many of the legacy technology companies are so far behind in the cyber security space they need to catch up. Enter Palo Alto (PANW/$127.16/Strong Buy), whose share price was recently just about cut in half, and has a favorable rating from our fundamental analyst (Michael Turits). According to Michael:

We recently reiterated our Strong Buy rating on Next Gen Firewall (NGFW) leader Palo Alto Networks following a solid beat and raise F1Q16 (October). Despite mixed results from security vendors in 3Q15 and some vendor commentary that security spending growth could be moderating, continued mid-50% revenue growth from Palo Alto suggests demand for NGFW combined with “platform” sales of adjacent products like APT (Wildfire) has not eased.

The call for this week: Last week I received questions like this, “You have mentioned before that to break the back of a ‘selling stampede’ you need to seemore than three consecutive sessions on the upside. With the DJIA down 40 points today, does that mean the selling stampede is not ‘officially’ over?” My response read, “While markets can certainly do anything, I think the ‘selling stampede’ is over, even though it would have been better to see a fourth positive session. Indeed, such stampedes typically only have one- to three-session counter trend moves, still yesterday looked like a consolidation day to me, after a 120-point pop in the S&P, and not a resumption of the stampede.” And this morning that looks like the correct “call” with the preopening S&P 500 futures better by 22 points at 5:30 a.m.

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