MONEY 94 - DEMOGRAPHICS/STOCKS

THIS IS MY 94^TH BLOG ON UNDERSTANDING MONEY TOOLS

In this blog let’s explore two things.  One, that the undeniable effect low, zero and negative interest rates will have a profound effect on retiring baby boomers, pensions and life insurance/annuities where these people expect to be solid and financially fit in retirement.

The second item to explore is again how corporations manipulate financing to make numbers appear to be better than they may actually be, thus pushing the stock market upward.

On the first point, more and more of the world economies have gone to zero or negative interest rates in the hopes of halting deflation and trying to encourage investment and appreciation of hard goods thus adding to some inflation.  If this remains the status quo for several years the side effect is going to be very detrimental to financial institutions, pensions and retirement programs.  We have discussed this before, however it seems that the media does not touch upon this to any degree with public news.  It does not take many years of no growth or zero interest/yield to drastically throw off the investment paradigms.  Whether it be a bank, insurance company or investment company they base their future returns on past history, or about a 6% or more return. We have not seen these times since the mid-1930’s on a worldwide basis.

Most Americans are counting on some form of social security as most of us have paid into the program for years.  The government periodically sends out a statement informing you of what the amount should be once you qualify for social security.  Prepare yourself; these numbers may not be real. You may have noticed that social security did not have an increase in benefits, even though inflation was felt especially through food/produce items and drug/medical care.  If we have a sustained period of very low interest rates and growth for a decade or so, watch out.

Let’s move to the second topic of discussion, stock valuations. I try to point out caveats in analyzing stocks and bonds.  Here is one you may have already picked up on, but I thought I would cover it.  If you read my blogs you have realized I am not big on the manipulated information handed out by Wall Street.  In BLOG 92 we talked about the magical accounting going on to favor earnings per share ratios.  Since the government started quantitative easing money, much of it went to help big business and banks. As the interest rates for this money was very low big companies went to banks to refinance loans.  They also used this opportunity to issue new corporate bonds and use the money to re-purchase (buy-back) stock from the public. Yes, this does raise the price of the stock, however it does something besides.  Let’s look at price to earnings ratios (P/E’s).  I think we can all agree business is quite flat or we would be raising interest rates.  This also means earnings are flat.  However, if a company re-purchases stock their earnings per share should be greater. (This figure can be obtained by dividing earnings by shares outstanding.)  The fewer shares outstanding the greater the earnings per share. If you essentially borrow free money from the government, great deal, your net earnings would not be significantly affected. This will give the illusion that earnings have risen, although they may have been flat.

Bottom line (excuse the pun), P/E and PP/E are affected. Price per share is a constant however the earnings per share have been tweaked in favor of the company.  It demonstrates why it is so difficult to compare baselines against historical baselines. No time in history has the government essentially given  big banks, big business and the wealthy the access to $4.5 trillion of essentially free money.

So much for this blog.  Hope you learned one or two things to get the brain stimulated.

MONEY 93 - BANKING LESSON

THIS IS MY 93^RD BLOG ON UNDERSTANDING MONEY TOOLS

I write these blogs for the general understanding of various finance topics, trying to make them practical and understandable for the common person.

My mission is to present financial information where hopefully the reader will be able to take away at least one piece of information that may be constructive and informative to them.

In this blog we will cover a hard learned and costly banking experience that could happen to anyone.

I will try to keep this concise.  A person had a close relative come to them to borrow $100,000 to start a new company.  The person didn’t have that amount of money available, but had various real estate, free and clear of any loans, including a home valued at approximately $300,000.  After reviewing various possibilities to assist, it was decided that the relative could borrow this amount of money using a low interest “home equity line of credit” on the primary home/residence.

A line of credit can be used up to the maximum amount approved and paid down at any time without penalties.  There is a set duration for the loan.  Interest is calculated only on the outstanding loan balance.  To make this loan there are two possibilities within reason.  The homeowner could borrow the money, sign the promissory note and lend the money to the relative thus hurting his credit score or another possibility. The latter is what was done.  The homeowner would deed part of the home to the relative for a period of time, the relative could then borrow against the asset where they held an ownership position and because of this they could deduct all the interest paid on their tax returns.  The homeowner would not be on the loan, not be negatively affected on a credit score, and only give permission for an “encumbrance” of up to $100,000 maximum, which in the worst-case scenario he could afford to lose.

Here is the learning experience.  The active loan was assumed by one of the large banks in Chicago through a bank buy-out.  The new bank called all their home equity and commercial loans due and payable at once.  The homeowner and relative didn’t have cash on hand or other liquid assets to payoff the topped off line of credit of $100,000.  The relative never told the homeowner what was happening until the bank foreclosed.  The homeowner was never notified by the bank of a foreclosure as they were not on the loan.  First necessary step was to call his lawyer, which was done.  The lawyer advised the “clock was clicking” fast on total foreclosure proceedings, no time for a short sale of the home, therefore it was listed at a greatly reduced price.  In a real estate listing agreement if a property is in foreclosure it must publicized as such. This is when the vultures come out of the woodwork.

A contract was accepted at an extremely low price within a week.  Through this process all parties concerned including the law firm representing the bank had to meet in court in front of a judge for approvals to proceed.

After the buyers of the home were approved the title company ran a title search.  It came out that the relative had another large loan that was in default and a judgment against him in another county.  A judgment is “all encompassing” as to a person’s assets, not just a particular pledged asset to a loan. That bank’s law firm took the action to court for permission to “piggy-back” the Chicago bank’s loan. A new judge granted approval.

Adding up the demise, the homeowner originally assumed that the worst case scenario would be a loss of $100,000; wrong.  Totaling up costs it was the original amount of $100,000 plus court costs and all legal fees for the Chicago bank’s law firm plus the second banks defaulted upon loan, court costs and second bank’s legal fees.  On top of that there are bank loan penalties and interest accrued to date of close. Then, the homeowner needed to pay his law firm for the representation and time in court.

What did we learn here?

-       Be careful when lending any amount of money.

-       What you think may be your top loss can be significantly different.

-       Judges can rule the way they want. There was no reason for the judge to permit the second loan amount and judgment to go against this home, although it was the most liquid asset and ready to close.

-       Don’t grant a loan where the encumbrance is more than 125% of loan amount. In this case, an asset with significantly more value was lost.

-       This is a good way to create ill feelings between relatives.

-       Lines of credit normally can be called due and payable at any time.

In the end, the total value of the home was gone.  And, the worst was that the homeowner was me!

MONEY 92 - STOCKS

THIS IS MY 92^ND BLOG ON UNDERSTANDING MONEY TOOLS

A friend of mine asked me if I thought it was a good time to get back into stocks.  I am not an adviser, I don’t render advice, but have been known to hold opinions.

I want to level the playing field a bit with Wall Street, trying to give accurate numbers to the common man. I believe Wall Street and the big banks can take care of their own.  My friend felt that because it now is reported that stocks have lowered from a very high of 23:1 price to earnings ratio (P/E) to a more historical 15:1 this might be a good time to jump in.  I am going to address this with the facts I know for you to make judgment.

Where do I come from to make assumptions on this topic?  I worked in conjunction with Wall Street firms and venture capital firms for almost 20 years holding 4 security licenses. In the mid-1980’s I worked for a well-respected Denver private equity company, L.R. Nicholson & Co. where we worked daily with many corporations in various industries, for start-ups, growth and re-structure; both small private and publicly traded companies.

Let us start out and re-cap what I have addressed in previous blogs.  General Accepted Accounting Principles (GAAP) and General Accounting Practices (GAP) have been used for years with the government setting standards for Wall Street/ Banks and major companies.  This is supposedly regulated by a federal agency, the Financial Accounting Standards Board (FASB).  Also, important here are two terms in order to value stocks you may purchase, price to earnings ratios (P/E) and projected price to earnings ratios (PP/E). To determine the ratio you simply divide the price of one share of stock by the earnings per one share of stock. 

Now, here is what has happened over the past few years. Wall Street wants the P/E as low as possible to make a company look favorable. Wall Street and big companies employ the best law firms and accounting firms to figure out new accounting practices that will hold up to the law and yet optimistically “distort” the numbers, or the actual picture as to what is happening.  Where we used the commonality of P/E and a figure, about 90% of companies now are commonly using projected earnings. The public doesn’t know any better, therefore does not ask. So, we get a 15:1 earnings versus 23:1.  The projected earnings, I believe, are using increased growth numbers that will not be attained, realistic tepid growth (1.5%) versus robust, unrealistic growth (3-4%).

What is actually happening economically here and abroad?  This will have a profound effect on future corporate earnings.  Growth in the US has been stagnant for the past 10 years even with the quantitative easing money that was printed for the purpose of economic improvement.  A decade of growth of only 2%, and yet billions poured into the stock markets.

Many countries have gone to negative interest, these will not be of benefit. Countries are figuring that it will force money into society and investments versus savings.  Japan is in deep debt and financial trouble.  They are now going negative rates as Switzerland has.  I predict this will happen: 1) hurt the middle class and elderly that rely on fixed income (savings, CD's and bonds) thus making the spread between wealthy and poor greater, and further diminishing the middle class 2) not help economies and backfire on countries, and 3) people will get scared from government intervention and hoard money, versus spend more (some countries are cutting out large denomination bills that would make hoarding of money easier).  The longer we fool around with manipulated finances and stay away from free market supply and demand the worse it will be, and the longer to recover.

Historically, we need to be at an ideal 3-3.5% GDP growth. Actually, for a few years 4-5% growth would really stimulate our economy.  The problem is that we can’t get there.  It would lead to some inflation, but we could address that once growth has returned and been established.

The only intelligent step forward is to get money into the hands of the middle class, encourage spending and then measure velocity (flow) of money through society, (M1 and V). I mentioned this in prior blogs, but it would have been better for the Federal Reserve in 2009  to have approved of the printing of money and have given each working American (about 120 million people) up to $40,000 over a few years ($4.5 trillion in quantitative easing) rather than bail out banks, big Wall Street firms and permit big companies and the wealthy to borrow at near zero interest rates.  This did not stimulate our economy and transferred a ton of assets from the middle class (e.g. in losing homes and businesses) over to the wealthy who picked up assets for nothing.

To date, the United States and US companies have faired pretty well in relation to foreign companies. Most have done well up until the past year moving factories abroad, taking advantage of free government money to set up foreign plants, employing cheap labor, not bringing earnings back to the US to be taxed at US tax rates, and holding their profits abroad in trusts.  This prosperity in growth has changed.  Free market supply and demand will prevail in the long term over any manipulated intervention.  Economic downturn has been reflected in the significant drop in every major commodity needed for the manufacturing of goods including, natural gas, oil, coal, copper, iron ore, precious metals like silver, gold, diamonds, etc.  The next thing I have been watching is merchandise shipped worldwide; quantity is way down.  Just this week China announced that exports were down 26%, ouch. Our US exports are off about 5%, but we only export about 13% of goods produced so we don’t rely heavily on exports. Watch the transportation index, it will tell you a lot.

I love Wall Street blaming the small correction in stock market this year first on China and then on oil pricing.  It has merely to do with world supply and demand, and right now world demand is diminishing. Period, that is it. Fewer middle class people can afford things; Europe is a mess with immigration and rising taxes, emerging countries leveraged to the hilt selling bonds supported by their commodities when the value of their commodities have dropped through the floor.  They can’t pay their debt.  Just the way it is, and people need to come to terms with that.  Don’t get too bullish on buying stocks!  Earnings should be declining at most companies. Companies are trying to hold earnings with revenues dropping mainly by more efficient operations including employee layoffs and hiring HB-1 workers.  Go worldwide for the best stock values and high dividends.

So much for this blog.

MONEY 91 - EXTRACTIONISM

THIS IS MY 91^ST BLOG ON UNDERSTANDING MONEY TOOLS

I mentioned in my last blog that I might approach one of my pet peeves, “extractionists”/ “extractionism” and the detrimental effect on our nation. 

The word “extrationist” is probably not a word you will find in any dictionary, but it was a commonly used word when a bright friend mine and I discussed our economic US system.  To us, the word meant a person, company or industry that added little or no value and yet reaped quite substantial economic rewards.

First, let me take you into my mental memorabilia on great, simplified, highly functional societies or ethnic groups, the Eskimo of year’s past. How did I get here with this?  In college in the 1960’s I took classes from one of the best professors there could be, and of all classes it was anthropology.  Every time I had an elective I would take this subject from a Dr. Olson.  He was the Indiana Jones of that time. During the summer months he would go off looking for unique finds, some of the most interesting in Central America and the northern part of South America. The stories he brought back were horse back for months, tents and shoot-um outs with people trying to rob their group.  However, his favorite people were the Eskimo of “old”, and related it to a next to perfect, functional society driven on individual responsibilities to the family and society or tribe.

With the Eskimo every individual had a role.  Everyone had to work, to engage themselves.  When they became too old to add value they took it upon themselves to wonder off into the cold and die, not be a burden on the family or community.  Where I am going with this?  Hopefully, you will see and it will make sense.

Back to America and extractionists.  Let me take my favorite four in the group, Wall Street investment bankers, commercial bankers, lawyers and politicians.  None produce one thing.  They all live very well-off taking a piece out of society without producing one item; hedge fund managers and investment bankers at the top of the list.  Now let’s add on insurance companies to the list. They have annuities and insurance products based upon actuarial studies and statistics, however don’t produce a tangible product. Bottom line, these industries take a lot of money from society, and really offer very little in value.  If our society and the world could conduct themselves within a reasonable civil order of honesty, integrity with ethical and moral behavior we could save a ton of money!

Let’s also look at more “extractionist” behavior.  I am all for taking care of people who aren’t able to take care of themselves because they are obviously sick/handicapped, mentally or physically.  However there are so many people who are capable of working, but chose not to and live off the system.  With training and encouragement many could be productive.

To a degree we have permitted this to happen; cause and effect.  Money can corrupt for the short term, leading to disastrous long-term effects.  That is what we have, and I am afraid we have crossed the border of no return.  Money has bought politicians for years, nothing new. Politicians make laws.  Who benefits from most of these laws, big business; they have the money and pay the lobbyists. In turn, lobbyists work the politicians. We don’t have enough good jobs for people who can’t find work. Yes, we have the low paying service jobs, but that doesn’t help our economy very much.  There are certain things that have happened over the past 30-40 years that are quite concerning for our nation and aid extractionists/extractionsim:

-       The dissolving of the 1894 Sherman Anti-trust Act. I’ve covered this many times before.  The Act kept US companies from acquiring  smaller companies and uniting into one, limiting healthy competition.  Today we have a few retail stores and six banks.  Now, big companies can squeeze the small business out and own many companies under one “holding company”, e.g. General Electric.

-       The dissolving of the 1933 Glass Stegall Act. I have also beat this to death in past blogs.  This was created for a purpose under FDR and after the financial ruin in the late 1920’s.  The dissolving of this Act helped lead us to the disaster of 2007-8; crazy lending, little competition.  Certain commercial banks and investment banks were too big to fail, and bailed out by the taxpayer.  Today, the situation is even worse leaving only a few major powers.

-       The creation and passing of NAFTA,  (North American Free Trade Agreement). It was created under President George Bush in 1991, and became law under President Clinton.  Companies started really exiting the US with this becoming law. It was free trade between countries and US companies can actually get financial assistance setting up new factories abroad.  Today, Mexican factory workers get about 30% in wages compared to what Americans receive so American companies are closing factories by the thousands.  From an alarming statistic I received this week, we have closed over 56,000 factories in the US since the year 2000.

-       Trans-Pacific Partnership which recently passed under President Obama. This is only going to bring in cheaper products created by cheaper labor from emerging countries, thus more American companies will set up production plants there. This is only an extension of NAFTA.

Relating this to extrationists, our US companies are getting subsidized to start up business abroad using our tax-payer dollars. What does this really do?  Our trade deficit will go up as we import yet more from cheaper labor.  These are US dollars leaving the US, most likely never to return. Our biggest export is cardboard containers back to Asia to be recycled. Sad.

Let’s consolidate at this point and briefly mention what else is extracting money, and other things preventing us ever to be a great nation.  These all impede the growth (GDP) of any nation.

-       High taxation.  Corporately we have one of the highest tax rates in the      world.  Company’s headquarters are leaving the US for more favored foreign soil.  The other option for companies is to keep retained earnings abroad, tax free, currently in the billions.

-       High government debt and personal debt.  We now have “on” balance sheet US debt approaching $19 trillion, debt with future entitlements over $100 trillion. Personal debt to GDP one of the highest in the world.

-       As mentioned above, trade imbalance.  Now, almost $400 billion per year deficit.

-       Long term manipulated monetary policies (Keynesian) versus free market.  Worldwide low interest to zero and even negative; profound effect on financial industries and the elderly.

-       Corrupt government benefiting the politicians themselves. Controlled by big business. Politicians are some of the biggest extractionists there are!  Look at their benefits and what they receive.

-       Wars/hegemony.  Now, we have been in Afghanistan about 15 years, no gains and nothing to eventually gain.  Long wars will not unite a country but destroy morale. (Napoleon Bonaparte mentioned that.)  We have expensive government bases and the CIA  all over the world trying to control political circumstances where we have no business right.  Frivolous government spending favoring extrationist defense contractors.  E.G. the old example of $500 toilet seats and our useless $800 million US Embassy in Iraq.

-       Too great a percentage of people on public payroll and support versus private sector. Today, we have approximately 144 million people getting some sort of government check or aid.

-       High unemployment. The government puts out figures, however they calculate employment differently from most countries making us look superior. Many millions of people can’t find work at livable wages, and many have given up looking.

Bottom line, doesn’t look promising!

MONEY 90 - THINGS

THIS IS MY 90^TH BLOG ON UNDERSTANDING MONEY TOOLS

In this blog we are going to recap several things going on in the international scope of money and investing that has come across to me. 

Again today, March 1^st, 2016, the DOW continues to rise. Almost every money manager and economist I follow refers to this as a traded market with little reason for the market going up. I agree. Wall Street knows how to make money off volatility taking the markets up then, bringing them down. The only market they have a tough time making money in is a stagnant market. Another trick Wall Street firms have always used is to unload their “in-house” stock onto the public. Firms don’t like to lose money!  If they have been a market maker for a company looking unfavorable, and most likely hold stock in that company, they may be selling it out into the public. Be careful. It has been quite common for a Wall Street firm to issue a “buy” recommendation on a stock knowing all too well it isn’t a good buy, just to unload their position.  (Investment banks and commercial banks are typical of over paid “extractionists” of society, producing nothing of value….I think I will write a blog on the leaches of our society!)

Let’s hit oil briefly.  It ain’t going anywhere soon.  Iran is now pumping more oil, and the OPEC members aren’t holding together. Supply and demand, common sense.  There is no country that I know of in the world that is in great financial shape. The US touts a grand economy, but it isn’t; it is an election year!  We just reported that in the last decade we have not had years above 3% GDP which is a benchmark for minimal growth and expansion.  Many of the oil producing countries are in tough shape with all the debt borrowed on oil reserves. They can’t maintain payment on debt and bonds.  Even the Saudis are now starting to get nervous over the situation.

ZIRP and NIRP, what are these?  ZIRP is the abbreviation of zero interest rate, and NIRP you may have guessed is negative interest rates.  Several countries have gone negative already to force savings to flow out into investments.  Among these countries are Japan, the European Union, Denmark, Sweden and Switzerland.  Do I think this will work, no.  Quantitative easing money never helped us grow as mentioned before with GDP, and negative interest rates are not the answer either. The people who are really getting hurt the most with negative interest rates are the elderly relying on fixed income from CD’s and saving’s accounts to live on.  Even in the US Janet Yellen (Federal Reserve) has discussed the topic with all presidents of our 12 Federal Reserve Banks.  My feelings are the longer time we spend away from some sort of common sense free market, supply and demand, the worse things are going to get.  The world can’t expect to grow at the same multiple we have grown since the end of WWII.  The biggest reason I can think of is the typical middle class person is not having the expected growth rate we used to base upon of 2.2 children per family. The poorest people on earth are the people having the children. Unfortunately, this continues to be a financial drain on the rest of us, not the buyers of goods and services.

One of the most dangerous elements of negative interest rates is the worldwide financial projections being thrown for a loop.  Corporate pensions, whole life insurance policies including annuities, ERISA retirement plans and much more are projected on historical returns between 6 and 8% annual returns.  We may not see those returns for years to come.  This is going to have a profound result on demographics, lifestyles and retirement.

Stock investments.  As interest rates stay low even the elderly are taking more of a risk entering the equity markets to make some return on investment.  The only suggestion I might render is to look internationally, try to find solid companies with P/E’s around 10:1 or below and are paying a historically high yield.  Even though these yields are not guaranteed in the future it might be the best bet for investment. The US equity markets are considered lower risk, however are priced on the high side.  Many municipal and various government bonds are going into default. Just remember if it is too good to be true, it most likely is.

Gold. Gold is trading about $1230 per ounce today.  Investors have been selling out of their put options the past few weeks and buying calls. China again is a buyer of gold to back their currency and strength. The recent high price hit about $1265 per ounce, and will trade inversely to the stock market pricing, thus when the markets rise like in the last week, the price of gold will weaken.  Not a bad idea to diversify a bit in the metal when the price falls.

Jobs.  The job market for college graduates and people over 45 is weak.  A friend of mine attended a once a year, week-long seminar on start up companies sponsored by Chase Bank and JP Morgan.  Of course, the bankers didn’t do this out of their kind hearts but in hopes that if any new company can make some money they will use Chase as their bank, and perhaps JP Morgan for an IPO (Initial Public Offering) when, and if, the time arises.  Banks still won’t lend money, however they come up with suggestions like “crowd funding” and the use of EB5 programs, perhaps “angel money” from a venture capital firm.  My friend who attended the seminars found the week fascinating; truly is a new world order and one must think outside the box.  For instance, as a simplified offshoot to Uber, there is a start-up for package delivery while you are on a bicycle. While in transit on your bike, might as well check in with the company on their app to see if a package could be delivered in route, and then you get paid for it.  As my friend put it, there is a whole new “underground world” of business start-ups and ideas coming to fruition.

The industries that maintain momentum continue to be high-tech and medical.  College degrees?  More and more colleges are teaching on-line to make money, not for the purpose of a good education. The practical applications are missing the target. I have a friend who has gone back to get another degree on-line and all his courses are with team participation. You know how that works out!  With every team there are slackers.  Another friend has gone back to school in his 60’s to get a student loan of $1800 per month to help with living expenses. Repayment of student loans is based upon your income so older people using this “technique” most likely never intend to pay the loan of completely, and the loans are at low interest rates!

Enough for one blog!