THIS IS MY 143RD BLOG ON UNDERSTANDING MONEY
TOOLS
August, 2018
understandingmoneytools.blogspot.com
This is our 11th blog on America. We will continue with financial
information as almost all Americans have some money in banks or in funds
through commercial banks or investment bankers. How does this relate to America? It most likely is our most important industry and relates to
politics as well. The power of
money effects everything; wars have been created because of banker’s controls
and imperialism….power, money, oil, hegemony. Another reason I write about this easily is it was my
working life for 20 years and I know it well. Another point is for YOU! Although this topic can be mundane and boring, I feel the
more knowledge you have and understanding the better questions you will ask
your advisors.
I will make one very profound statement. Don’t trust the institutions of
commercial banks or investment banks. (Add in our Federal Reserve Bank) If they
succeed at investments they retain the money, if they fail, Middle Americans
bail them out. They will lie cheat
and steal not to lose money. They
may hire some very nice people you deal with on a personal and professional
level, but I am referring to the industry as a whole. Your financial planner is nothing more than a pawn on the
chessboard of the “big boys” and Wall Street.
After you digested the fundamentals in my last blog and read
this blog you can now communicate better with your financial planner and not
look like a “f…k..g” idiot. Love
what I learned from the Wall Street guys.
I used the “F” word above as an adjective in that sentence. I learned a lot in high school English!
In this blog we are going to look more closely at markets,
give you a larger vocabulary, pick apart a stock or two, and continue with one
of my “life stories”, that I thought might be of interest. How about my promised input on bonds,
currencies and gold? As I don’t
want these blogs to get too long and have a lot to say, I will kick those three
investments down the road a bit.
I have said for years now, “the markets are sky high and out
of reason with a heavy correction to occur at some point”. Warren Buffett, a big investor, is more
pessimistic than me. I have missed
that “some point” by a few years now.
We have covered Keynesian economics in regard to finance many times.
(Broadly speaking, the government’s manipulation of economics.) For the past 10 years we have seen
Ponzi Scheme economics to give an impression we are having a great, prosperous
economy. How? To recap, during The
Great Recession we created new money, ($4 trillion), in conjunction with our
central bank, The Federal Reserve.
This money was given to our biggest banks, the biggest banks lent that
money to the wealthy and biggest corporations at next to zero percent. Then, those big businesses and
retailers sold goods to the consumer like cars, homes, furniture, etc. for no
money down and finance the asset; mind you almost all purchases were
depreciating assets. The consumer
now has become an indentured servant owing a lot of money at high interest
rates in many cases. Got it? (Government and personal debt is now
300% of GDP, higher than any other G-20 country.) An economy created from new printed money, not real growth.
Through history we have used a benchmark for public
companies at a 15:1 price to earnings ratio. Today it is way higher and should correct. How do we get a norm for a P/E? If you divide the first figure, 15,
into 100 you get roughly 6.5. Convert that to percentage and it is 6.5%. Now, we look at competing investments
and risk. In good real estate we
may get a 6-8% return, with hard assets standing behind it. Real estate like good stocks carries
some risk. Bonds may yield around
3% with little risk. A mixture of
bonds and stocks for funds and pensions we assumed a return of 6%. That is how we got 15 to 1 on P/E’s.
You are smart. You now probably
recognize that in the above situation the number 15 also represents the number
of years it will take you to earn back your invested money at that given price
per share of stock. In days past
companies we evaluated were solid with a “liquid asset test” of 2:1. It is also
known as the “quick ratio test”. It is the ratio of assets to liabilities on
balance sheet. Today, after Wall
Street let corporations borrow a ton of money issuing bonds, we don’t have that
solidity behind companies and the P/E is commonly over 30:1, or higher, and
perhaps no earnings at all.
COMMON TERMS AND THINGS YOU SHOULD KNOW:
-
Capitalization:
The amount of issued stock, or “float”, in the market place times the
price of a stock. Recently we saw
supposed outstanding economic news that Apple had a “cap” over $1
trillion. THIS MEANS ABSOLUTLEY
NOTHING! All it says is that Wall
Street sold a bunch of institutions around the world Apple stock at a higher
price, or the company perhaps issued more stock to give this capitalization.
-
The next falsehood in investment news is “gross
sales”. THIS ALSO IS NEXT TO
MEANINGLESS! Here is why. Bottom line is all important. Example: let’s say I have one retail store and sales are $1 million a
year. I decide to open another
store and therefore my gross sales pop to $2 million. Then, I open a third store and my sales jump to a total of
$3 million. What does this tell
you? Only that my gross sales went
up, however most likely my overall profit percentage may have gone down. You may say economy of scale because of
purchasing power has increased net earnings, however other costs may have eaten
your lunch such as opening the new stores.
-
Income statements: Simply put your income and your expenses show bottom line or
profit.
-
Balance sheets: Simply put your assets and liabilities
and stockholder equity.
-
Break-up value:
This is a term used to determine estimation of assets if a company needs
to be liquidated. It is the value
of component parts and assets if we sell off separately. With today’s tech companies there
“ain’t” much there. Example:
Sears/Kmart is closing stores faster than they can announce closures. They sold off their Craftsman
tool line (a very strong part of their business).
-
Blue Sky:
This is an estimated value for “goodwill”. It is immeasurable. A ton of that with today’s companies. Companies try to get away with it, but
tough to convince buyers.
-
Red Herring:
A preliminary prospectus.
If you hear of an Initial Public Offering coming out on a stock, your
broker may be able to get you one for information. (Typically, financial
information is still being worked out between the Securities Exchange Commission
and that company.)
-
Stock Prospectus:
The final prospectus giving all information on a company that has passed
the Securities Exchange Commission (SEC).
-
Mutual Funds:
This is a pool of money from investors to buy a grouping of stocks,
bonds or money markets. This may
have applications to “indexes”; stocks/bonds of a certain industry.
NOTE: If a company decides to build their own buildings they
are getting into a second industry outside what they know, and that is real
estate. This can sink a company and
should be noted in every analyzed investment. A good example is grocery store
chains. Grocery stores are a low profit margin business, 2-3 % bottom
line. If they own their real
estate look at the configuration of the structure. The building is a “white elephant”. What would a person or company do with
that building?
Okay, enough of definitions. Investment bankers make a good deal of money on taking
companies public and then being “market makers”. They are always searching for good companies to groom and
take public. Investment bankers work closely with venture capital firms, which
give money for growth. If Wall
Street loves you, you have it made.
In the past several years we saw many that shouldn’t have the value they
do, however Wall Street “makes them successful”. Let’s look at “FAANG”, the “golden boys”. What? Facebook, Amazon, Apple, Netflix and Google. Wall Street said “fantastic ideas” and
sells their stock to every institution around the world.
To keep this simple let’s look at Google. Google has a market capitalization of
$855 billion, a stock price of $1236/share and yet the net earnings are only
$3.2 billion. P/E is 33:1. Wow,
someone is promoting the hell out of this stock. I do think Google is a good stock and has incredible ideas
for the future, but I wouldn’t buy at this price. A stock that is techie to a degree is Elon Musk’s Tesla, and
really getting beat up lately. He
has major problems. Every auto
dealership in the country wants to sink him and the cars. He broke the mold for cars and how they
are sold.
Let’s look at Facebook. It has a market cap of $504 billion. The stock price is $173/share and a P/E
of 24:1. For the stock to crater all it takes is grandparents getting tired of
posting photos of their grandkids and pets. To me it is a fad.
These companies tracking all your movements and habits are quite
overpriced, and will find it harder to sell information to companies.
Let’s look at Amazon.
Again, mostly a distribution company off an electronic catalogue using
your computer. Market cap of $929
billion and a P/E of 173:1. This
means that if you buy the stock at today’s price it would take you 173 years to
get back your invested dollar. I hope you live that long!
As I have eluded to over and over, the stock market does not
relate to reality. Wall Street and banks along with our government decided that
we needed to create artificial wealth for people so they think they have money
and will spend more money.
Remember that you don’t have that money until you sell the stock or
fund! After the DOW
and S&P reached a certain level a few years back the markets rose outside
an ability to analyze a company using fundamentals to the term “the trend is my
friend”. This is fast computerized
trading off volume. Last one in is
going to get burned! Then the DOW
got another 5,000 point boost because we elected Donald Trump; “the Trump
Bump”. Democrats can say what they
want about “the Donald” but they better thank him for a 20% increase in their
portfolios.
What stocks would I invest in? Consumer staple companies that are solid and pay out high
dividends. I would go with an
index fund rather than an individual stock. What are consumer staples? I use toilet paper everyday. That item and essentials you can’t live without are consumer
staples.
I hope this has given you more ammunition when making
investment decisions. Let’s finish
up this blog with a life story, hopefully of interest.
MY LIFE STORY:
I have mentioned that most of my 20 years in the financial and corporate
field revolved around a somewhat privileged life. It looked that way to many of my friends, but there were
many ups and downs. I made quite a
bit of money at times, and mostly because of government intervention lost much
of my money. It is very difficult
to outthink what the government will do with laws, regulations and interest
rates.
I thought it might be of interest to you to give a brief on
“how the rich live”. I had a
friendship develop from my Vail, Colorado, days in 1969 with a man named Edwin
“Jack” Whitehead and his family.
Jack had the good fortune to take a company public in 1967 called
Technicon, the first computerized blood analysis machine. I also had the
pleasure of meeting the man who invented the machine, a humble engineer. It made
Whitehead the wealthiest man in America the day he went public. For 20 years I was able to be a guest
in his home anytime I wished in Greenwich, Connecticut, Vail or his beautiful
condominium in NYC. I lived in
Greenwich periodically and then 4 months straight when working on a project for
the family. The home was situated
on 8 acres adjoining Indian Harbor and Long Island Sound. Donald and Ivana Trump lived next
door. All these wealthy families
have many homes. I saw Donald and
Ivana at times but people do not socialize except for parties. You don’t go over to borrow a cup of
sugar!
Permit me to describe the home, then life there. The home was built by a commodore, and
a photo of it was used on the book cover of the “Great Estates of Greenwich”. Here is a history most don’t know. President Cleveland had jaw
cancer. The public didn’t know
about this. The cancer was
operated on on a yacht in Long Island Sound in 1893, and Cleveland recuperated
at this home. There is a plaque on
a tree in the front yard giving the history. As you can imagine the home is huge.
These homes are like compounds, and this being one of the
best. There is security, so unless
living there or invited you cannot enter the road, Vista Drive. Then, these estates have their own
security and steel gates for entry.
The first massive building is the stables, no longer used as stables but
serves various purposes. First
floor is a gym, showers, dressing room, squash court and half the building for
yard equipment. The upstairs has
been converted to apartments for the staff. The “top staff” have their own apartments within the
house. Just outside you have the
tennis court. We played tennis
every Saturday and Sunday morning.
I periodically played tennis at the Greenwich Tennis Club with the son
of the next door neighbor, Roy Simpson.
The club had various surface courts including grass. Of course only white clothing was
accepted, shirts with collars.
Whitehead was a very good athlete being a great snow skier, tennis
player and squash player. He
unfortunately died of a heart attack on his squash court in February, 1992; he
was 72. I miss the guy greatly!
My bedroom was upstairs, probably 1500 square feet including
sitting room, fireplace, dressing area, and bath. It had a huge balcony off French doors looking over Long
Island Sound. The lowest level of
the house, with walkouts, had another living room, bar and a fully functional
bowling alley if one was so inclined.
Outside was the swimming pool, greenhouse, and many gardens. The family always had blossoming
flowers except winter. When one
season was over, let’s say tulips, the gardeners would plant new fresh blooming
flowers.
Jets? Doesn’t
everyone own one or two? Chuckle,
chuckle! Whitehead’s jet was a
custom Canadair. The cockpit was a
Boeing 737 with engineer’s seat.
The main cabin was like a very expensive living room, there was a galley
for food preparation and a bathroom.
The jet was large and could easily accommodate international
travel. This jet was so nice
Canadair borrowed it for the Paris Air Show. When a person traveled across the country or longer
distances you would arrange for a “rent-a-stew” from the private airports. That is a stewardess who catered to the
prepared food, drinks and anything else, similar to normal first class service
on airlines.
What was a typical workday for me? I would get up in the morning and go for a run down Vista
Drive and then to the outside world.
I came back showered and went down to the smaller dining room used for
breakfast and lunches. A waiter
would come, bring me coffee and ask what I wanted for breakfast. Anything was at hand. We had a family office in Greenwich,
but my business normally was in NYC so I took the train. I enjoyed the train ride into the city
talking with locals. When working on my own business for Energetics, my oil
company in Denver, I always took the train. Friday nights you many times saw notable people leaving the
city for their country places. One
favorite couple of mine was Jessica Tandy and her husband Hume Cronyn,
wonderful British actors both stage and screen. (When I worked for Whitehead
especially on a 4 month project they wanted me to take a limo into and from the
city each day. I obliged but
preferred the train with locals!)
There were perks living at the house. You always had a house car at your
disposal. Your shoes were polished
daily. All you did was leave them
outside your bedroom door at night and an “elf” would polish them and leave
them shiny in the morning. Same with laundry and suits. You place these items
in a linen bag and hung it on your door knob at night. You would find your clothes washed and
pressed in your room the next day and your dry cleaning was hanging in the
closet within two days.
At breakfast the staff would ask each morning what you
preferred for dinner. You could
have anything you wanted. I many
times had the whole lobster as I knew I wouldn’t have many back in Denver!
Each day about 5-6 pm was scotch time in the library/bar
before a dinner at 7 pm.
That’s how it worked.
Weekends were the same as anyplace. A bit of boredom.
We would play tennis, go sailing or go over to the Greenwich Polo Club
and look at all the funny women’s hats!
Most wealthy get bored just like you and me. They also are fearful of losing money. This was where people like me came in;
a confidant of the Whitehead Family that takes a long time to develop. Across Indian Harbor lived other people
I knew and would socialize with.
One was Tom Watson, Jr., chairman of IBM. I didn’t know her but Diana Ross and her Norwegian shipping
magnate husband lived by Watson.
What did the boys in the family do? Each boy/man was given a company for
something to do. Most of the time
the family had a capable person run the company so the offspring could go ski
in Europe. I was involved with the
purchase of the company for Jack’s oldest son, John. Jack bought Technicon Data Systems (TDS) in Atlanta for him
to the tune of $450 million. Jack
was Vice-Chairman of the Board of Revlon and owned 10% of all stock in the
company. TDS was a subsidiary of
Revlon. As Malcom Forbes said
years ago, “it is far better to give your son a good company than a good
education”. I agree! Several of the work employees for the
family I needed to work with were quite unpleasant individuals. On the other hand, the household staffs
were always great and I had wonderful long lasting relationships. One for instance, was the head of all
homes and very close friends of mine for years, Mark and Madeleine Cervetti. Jack hired them away from Charles
Revson of Revlon. When you hold
these types of positions it is very lucrative. Mark and Madeleine had their own homes in Paris and
Corsica. They had a 10 month
contract with Whitehead.
Jack had a very questionable business reputation on Wall
Street, however he did some wonderful things as a philanthropist. He started the Whitehead Institute in
Cambridge, MA, mainly a research center to solve cancer issues. He also gave readily to the Betty Ford
Foundation for alcohol abuse. I
think we all could have checked ourselves in!
What were the obvious downsides to this life? People forget the expression “there’s
no free lunch”! In the mid-1980’s
I was married to a lovely woman 11 years younger than me. Debra was very
educated and multi-talented. This
lifestyle looked great to her on the surface. Mutually, we enjoyed scuba diving, golf, tennis and snow
skiing…and hard work as professionals.
What she didn’t realize were the negatives to this lifestyle. These included commuting to work if one
wanted a very good income, the back-stabbing from various business people, the
obligatory black tie functions a couple times a month, (and as my wife she was
also required to attend), and more negatives. Debra really didn’t like the
Eastern Coast life where I needed to work especially around 1990, and was
afraid that for me to make a good living we would need to move back there. She and I commuted every couple of
weeks for 3 day weekends. Many
times a missed flight connection made it a 2 day weekend! Not much time together. End result was a divorce in 1992;
amicable and we remained very good friends.
That’s it for this blog. Hope you enjoyed it. In the future we need to cover bonds,
gold and currencies, and also world financial markets and what is
happening. For the most part, not
a pretty picture.
