MONEY 72 - BASELINES

THIS IS MY 72^ND BLOG ON UNDERSTANDING MONEY TOOLS

A week ago a wonderful young man and his wife were introduced to me for business reasons. In our discussions outside our main business purpose, it became obvious that our opinions on the economy and business were quite different. It intrigued me enough to write this blog on the subject. I will call it “baselines”.

The gentleman I refer to above has just received his master’s degree and is starting his employment as a stockbroker with one of the national firms. No dummy.

Many of the variances of opinion come from baselines developed because of age differences, and perceptions on business derived from environments and school teachings; there is no right or wrong on the matter. At the heart of the talks were valuations of companies. Now, in my generation (old), to have value that related to a company’s dollar value it needed to produce tangible goods or services that many people needed. So, right there we had a differing of opinions. I look at companies like Proctor and Gamble, Nestles, toss in the computer companies of IBM, Dell, Apple. To me these companies create something of value, hire many thousands of people at higher than average wages and contribute to the societies of the world.  This is my baseline.

My new acquaintance brought up the various companies that he could relate to in today’s world of finance, some of these being Facebook, Twitter and Google. This is his baseline. (By the way, I love Google and think it has great value and a real future.) The question was posed by me, “where is the true value and how are returns on investment created?” Both the gentleman and his wife simultaneously stated, “through advertising and media”.  Yes, social media. When Facebook came out I didn’t give the company a chance in hell of survival and here as of July 24, 2015 it stands with a capitalization of $246 billion dollars. If you are a bit remiss on how many zeros that is it is 9, and equates to a quarter of a trillion dollars. Facebook only employs 6300 people which is very few for a company of that magnitude.

Now, I don’t want to hit too hard on magic, smoke and mirrors, but the values placed on some of today’s stocks, pushed by stockbrokers and Wall Street seem a bit high (I will lay off the term ‘ludicrous’.) Someone has trained the “millennials” well or should I say “brainwashed” them.  These tech companies of today have relatively few assets, employ relatively few employees, and produce relatively nothing in my eyes. Do I use Facebook? Periodically, only if someone sends something out to me, and then a quick look. I, and many of my friends, are tiring of it. Also, someone already stole my contact list in Facebook which has not made me very happy.

Here is the question I posed in our discussion, and it has been a mystery for years with big companies; “how do you monitor the effectiveness of the billions of dollars spent on advertising?” The most important thing to companies is the conversion rate.  How many sales do you make for the dollars spent on advertising? So we just keep spending billions of dollars on advertising and these high tech companies make a few cents on each click. As you get billions of clicks that adds up to a lot of dollars. Sort of like the slot machines at the casinos!

So, these companies have astronomical capitalizations for little true value added. How did we get here the past few years?  This is important. The answer is too much available money for Wall Street and venture capitalists.  The Federal Reserve printed about $4.5 trillion. This went to big banks and Wall Street. Next enters “Uber Keynesian Economics”. That is correct, manipulate everything so there is no such thing as Milty Freidman’s Free Market Theory.  Everything is totally manipulated the way the government wants. Is the stock market 30-35% overpriced?  Yes, to historical values, but the world has never experienced what we are experiencing now. ( I have written about both Milton Friedman and John Maynard Keynes in previous blogs.)

Our stock markets have held quite well this past month even though the European markets over the Greece fiasco have gone down and China’s market has crumbled over the past 4 weeks with investors losing billions to trillions of dollars. Normally, this should have an effect on us, but we play the game with financial controls. There is no free market of buying and selling using rational decision-making. “If you hype it, they will come”.

Okay, let’s address a couple more things and then end this blog. First, there are only a few cities holding this country together with strong economic strength; these being New York City, Washington DC, Dallas, Houston, Minneapolis, San Francisco and Los Angeles.  California can thank it’s lucky stars for all the Asian people with money moving in, and technology in the northern part.  The next tier of successful cities include Seattle, Denver and Boston.

One industry sector to avoid buying for the next year should be transportations. With China trying to buoy it’s economy and markets, it still won’t be like the good old days for a long time and therefore shipping and transportations will slow. The big trading markets with China like Europe for goods and Brazil for minerals will slow. With the world slowing economically there is no way transportations in the USA can remain unaffected. GDP will be flat, with no growth to speak of.

So, we have looked at two different baselines of values in this blog; two or more generations apart.  All we can do is see if today’s paradigms for investment and value hold true.