MONEY 116 - BUSINESS

THIS IS MY 116^TH BLOG ON UNDERSTANDING MONEY TOOLS

It has been quite some time since I wrote a blog, time to do so again.  Let’s call this business at hand.

So much has been happening in the world. I will address a few varied things in this blog.

Let’s start out with reality and financial values.  Most Americans don’t get attracted to and place as much value in country concerns and politics as other countries do such as Germany, Switzerland, Israel and others.  America and politicians talk as if we are a wealthy nation, however in reality if we look into it we are broke.  (As previously mentioned per capita we are the second most indebted country in the world, second only to Japan.)  Let the numbers speak.  Balance sheet debt, as most know, is roughly $20 trillion and we are now heading into asking for extensions to this debt. Recently an article boasted how much came into the Federal government from taxes, an all time high.  We were still off break-even by $500 billion.  With a direct relationship between debt and growth, we can’t grow more than about 2% and that is not going to cut it. First quarter GDP came in at an annualized rate of .7%.  How does President Trump plan to cut taxes without getting the USA into much further debt?  Can’t be done, and results will only be found way down the line.  I question if Congress will go along with much spending, especially on well-needed infrastructure repairs.  With off balance sheet debt and future obligations we owe about $100 plus trillion.  For simple math divide approximately 320 million Americans including children into these numbers.  The future obligations I mention above include such things as social security, government pensions, ongoing medical for military wounded, etc.  Corporate and individual tax cuts are only beneficial to the economy if the end results are that companies and individuals will take that money and spend it.  If they pay down debt, hoard the money or spend it outside the USA it has no beneficial value.

Regarding pensions I recently received an economic report showing viability of many pensions.  There are only two ways to maintain pension payouts, one is continued income from pension members and two is return on investment from pension managers. In both cases they are off about 50%.  Corporate pensions are in the same category, under-funded; Chicago and Puerto Rico are good examples of failures.

Goldman Sachs recently sent a member of the firm to Puerto Rico for restructure of debt, as Puerto Rico cannot declare normal bankruptcy. As Goldman Sachs was involved with Greece joining the European Union I am afraid the outcome might be similar; the wealthy Puerto Ricans get their money out, the poor can’t lose anything, the middle income people will have austere measures placed upon them and the country will have to sell off good assets to the wealthy around the world.

This blog is about understanding money.  Unlike years ago today’s business game has so many variables connected to it that it significantly limits your potential success.  I periodically walk with a friend and we discuss business.  I was amazed that many people don’t have a clue as to the real world of business.  That said, here are a few things to be apprised of:

-       You have a bank loan for your business or upcoming business. Most working lines of credit can be called due and payable for any reason.

-       Your company has some wealthy investors, and is successful.  Many times if it is successful your wealthy partners will try to cut you out and take over the company.  The old expression, “sue us” comes up, has with me, and you can’t afford the legal fees as the wealthy can.  If your company fails, your partners may sue you for mismanagement or fraud to recover losses, even though no such things occurred.  A personal experience.

-       Politics.   I was one of a few original employees who helped grow a company into one of the largest independent exploration and development oil/gas companies in the USA.  We went public in 1983 on the New York Stock Exchange.  Then, politics changed under President Reagan who favored using foreign oil and natural resources.  This killed the US independent producers and gave the big natural gas pipeline companies an opportunity to break contracts.  In the natural gas business we had “take or pay” contracts, which meant a price for the gas was established and companies committed to buying a certain amount.  For us this included contracts with the “big boys” like Northwest Pipeline, People’s Gas and Lone Star Gas down in Texas.   They refused to pay according to contract and told us if we sued for contract they could hold us off in court until we went bankrupt.  Once we started negotiating new contracts there was no bottom to pricing and our company, Energetics, Inc. went bankrupt.

-       You file international patent rights.  Big companies will skirt the rights or buy you out and then never pay you the contracted royalties. If you ever win in court, those large companies will have already made a ton of money from your product.  They wear you down.

-       You think you have a proprietary product. If it is successful a large company most likely will be right behind you with similar product and tons of advertising to drive you out of business.

I don’t mean to be negative, but knowledge of what happens, or could happen is very important.

Let’s look briefly at stock market highs.  Insanity in the markets continues with more foreign money pouring into American companies.  American companies appear to be the strongest in a weak world. These markets are like giants, the bigger they get without corrections, the harder they fall.  It is not “if” we are going to have a major correction in the markets, it is “when”.  We were due for a normal historical correction 3-4 years ago.   We are hitting new lows on the VIX (market volatility index), below 10, similar to 1999 and 2008 and see what happened then.  There is no sensible way to value most of the high profile companies.  Let’s take only one, Amazon.  Amazon is no more than a 21^st Century Sears and Roebuck catalogue, and a fast distributor of retail goods.  Amazon has a price to earnings ratio in excess of 150 to 1, and retains earnings.  A price to earnings ratio means the number of years it will take you to get your money back if you bought the company.  In this specific illustration it would take you 150 years to get your money back and that is if they distributed all their earnings.  The only way to make any money on the stock is to try to find a bigger sucker than you to sell your stock to.  Right?  Okay, enough of this and I could go on all day regarding idiocy.  The stock markets are higher and more ridiculous than in 1929 and during the dot com bubble of the late 1990’s.

Now let’s look at retail stores in general, a great deal of the backbone of this country.  In the last couple blogs I mentioned that some of the top money managers are starting to look seriously at shorting REITS and funds that hold a lot of commercial/retail real estate.  Reasons for this are that demographics and buying habits are changing.  The millennials are quickly changing the landscape for many things and companies are not paying attention..  If you don’t keep up you are going to go out of business.  Millennials have certain commonalities that will change the way we live.  Some of these are:

-       Simpler way of life.  On-line retail buying, mass transit versus large car ownership, and technology driven.

-       Less social connection.  Again, technology driven with smaller computers and hand held devices.

-       Rent apartments versus buying real estate.  Apartments meant for convenience and close to shopping and hip restaurants and bars.  Don’t tie me down attitude.

-       Dress codes.  Very informal, gone the days of white shirts and ties except for urban center office legal and accounting.

-       Structured 8 to 5 jobs not desirable. Millennials want control and don’t want the sacrifice their parents and grandparents needed to endure.  The HB-1 working visa foreign guys and gals in the tech area live together, cat nap instead of getting a good solid 8 hours of sleep and will go 24/7 for the tech companies.

Currently, there are about 12 or more of the big box retailers who are in deep financial trouble, one of the worst is Sears.  Many of these companies make the mistake of selling off their best assets to stay alive.  Granted they have few options to stay alive when the creditors come knocking.  Thousands of small retailers are also closing their doors.  On line buying is where it is at.  Many retailers are trying for supplemental enticements to lure people into stores including music entertainment, food samples, etc.  In my viewpoint many deserve their demise, poorly run on the inside and lack a unique identity.  There is simply too much supply of product, and too many ways the customer can get their hands on it.

So much for this blog.  I hope it helps someone with thoughts.  I love to analyze companies.  In the 1980’s I owned a very respected private equity firm in Denver, L. R. Nicholson & Company.  We reviewed many proposals from start up companies to mergers and acquisitions.  Once this stuff is in your blood it never leaves.