MONEY 181 - FINANCE/MORE

THIS IS MY 181^ST BLOG ON UNDERSTANDING MONEY TOOLS

December, 2019

www.understandingmoneytools.blogspot.com

Time to write another blog.  I usually write when someone initiates something material, or I feel it is important information that will be constructive to your life.

In this blog we will cover current finances, and more.  Recently, a friend of mine who went back to college late in life and this month is graduating with an MBA, talked to me about the direction he was intending to go and why; teaching with emphasis on AI.  Prior to his return to college he was “consulting”, the term used by many when unemployed.  He, and you, might find out that consulting is a tough “gig”, and very inconsistent.  If you are working for a large accounting or legal firm, that is a different world, but as an individual it is tough.  In that capacity he was very unfulfilled.

Through this conversation, we maneuvered into what makes success and personality traits.  In my professional life I have gone through several psychological tests for strengths and weaknesses related to the work environment. When helping build up an oil company we hired an “in house” psychologist to improve our employees and their state of well-being both at work and at home.  Here are some of the traits I have witnessed for a successful profession:

-       Right brained individuals are more creative, optimistic and think ahead and in larger scope.  Many times details and organization are left behind.  With a strong ego this type of person makes a good CEO or President of a company.  If you are into Zodiac signs Leos make good leaders.  Presidents Clinton, Obama and Trump are all Leos.

-       A left brained person is analytical, hesitant and sees every detail and is generally organized.  They make a great number two person in a company, and the CEO needs this person to point out the negatives and brings caution, and balances the two.

-       With both of these types of people they should work well with people and ideally “goal set” in the corporate world.  It would be nice to see a more social and interactive setting in today’s world!

In my friend’s case, I agreed, knowing him well, that teaching was a perfect setting for him. 

Let’s move on to stock and market analysis, with more definition from my last blog.  Once again, another friend reading my last blog could not understand financial ratios of importance.  Finance is numbers.  This made me want to venture into what we have below.  We have covered ratios.  They are important in comparisons when viewing stocks, mutual funds and index funds.  You want to compare before making financial decisions.  It also shows trends over time, when comparisons are made.  It makes you more knowledgeable when communicating with your financial advisor.

In the last couple of blogs I used the United States most conservative index the Dow Jones Industrial average of 30 stocks.  Over the past 123 years it has given us a “mean” or average overall for a price to earnings expressed as price/earnings, and that figure is 15.  (Sometimes shown as 15:1)  When you use a “/” it means a fraction of something, less than or greater than the whole.  Example is 1/2 of 2=1, or 1/3 of 12=4.  The top, or first number, is called the numerator and the bottom number is called the denominator.  The numerator or top number is always the multiplier number, the bottom number the denominator is always the number you divide by.  Let’s assume the numerator is 5 and the denominator is 3 and you want to find the “quotient” or result of 5/3 of 3.  It would be 5, yes?  Better say “yes”!

Now, relate this to your financial usage.  Right now, the Dow average is a ridiculously high 28,239 with a P/E of 29.9.  Recalling the “mean” average for the Dow at 15 using our above fractions, let’s see where the Dow should be without governmental interventions of money.  Should I buy into this Index?  We take the 15 as the numerator and put it on top, or the multiplier, and we take the 29.9 and place it on the bottom of the fraction as the denominator.  This gives us a “fraction” as to “earnings”.  Now take the fraction times the current price of the Dow of 28,239 and it will give you the number 14,166.  (We took 28,239 and multiplied that number by 15, then we divided that number by 29.9, to give us 14,166.)  That is where the Dow to historical “means” should be trading.  If the 28,239 were proper what should the parity ratio of historical earnings to current earnings be? Answer: 15/15.

Let’s use fractions another way; price to earnings ratios.  In this example, you place the price of a stock at the top (numerator) and earnings at the bottom (denominator).  Divide the bottom number into the top number and it gives you the price to earnings ratio.  Using this practically, let’s say you are viewing stocks in an Energy “index” (a grouping of oil/gas stocks that you buy together called an “Index Fund) and you see one stock with a P/E of 40:1 when the average is about 25:1 for oil and gas (as of December 23, 2019).  A red flag should go up and you question what makes this company so outstanding. You can find good stocks at a 10:1 price to earnings ratio paying dividends.

In today’s questionable “false economy” stick with low P/E stocks that have a good history of strong earnings.  No earnings and losses?  Not sure if I would buy! 

Now, you may ask, “why use all this math as many companies do not have any earnings, and show losses”?  Good question, and permit me to answer.  Many of these companies are tech companies found on the NASDAQ Exchange; about 3300 stocks.  First, we are at the top of our country’s “growth cycle” only held there this long because the government keeps pumping cheap and free money into circulation.  Immigrants and poor are getting food stamps and free care on Medicaid, however they are putting this money back into society, thus improving Gross Domestic Product.  The largest corporations are getting low interest loans and selling bonds; some of this money goes to improving their companies and manufacturing equipment.

Next, if a company was taking losses, never showing a profit and was a private company instead of a publicly traded company would you buy the company?  Hopefully, no.  Why then should you buy stock in a losing company on an Exchange?  There are only two reasons I can think of.  One of course, is that you think the stock will go up, company shows a profit, thus you profit.  Secondly, you hope that Wall Street has a sucker bigger than you to buy this stock and you receive a profit.  Of course, my poster children for this are Uber or Lyft.  Uber loses billions of dollars each quarter, never has shown a profit and may never show a profit.  A company like this goes public for two main reasons, 1) to make the original executives very rich and, 2) to be able to put up stock to borrow more money.  Last time I looked Uber’s capitalization was $45 billion.  (Capitalization is determined by taking the amount of outstanding stock being traded times the price of a share of stock.)  Crazy, but true!

I used the term “false economy” above.  Why?  Let’s take a look at only a couple of things.  First, the government with “off balance sheet” borrowing and lending has, and will, place another $2 trillion into the banks and stock markets to “stabilize and calm” markets.  This huge sum of infused money started on September 22, 2019 and will continue until the end of this year.  This has pushed our central bank, the Federal Reserve, into currently holding $4.2 trillion of our debt. (This was accomplished legally through a March, 1988 Act permitting such emergency action without Congress or Senate approvals.)  Big, smart money is sitting on the sidelines with cash and bonds in countries like Switzerland, Germany and the Netherlands; so much money that their bonds are in a negative yield position.

In my 20 years of work in the financial area I was a numbers guy.  It bugs me to see what we are permitting with company financial disclosures to the public and Wall Street.  The government’s “General Accounting Principles” (GAP) or “General Accounting Principles and Practices” (GAPP), have changed significantly to make companies look stronger than they are. What is the difference from old?  Have you heard of “EBITDA”?  This is reporting “earnings before interest, taxes, depreciation and amortization”.  This number then is the financial performance before these expensed items.  I recently read how extreme this can be in misleading the public. The example was a public company reporting earnings of about $600 million, but without EBITDA and following old practices they would have reported a loss of about $250 million.  Perhaps people would have sold the company’s stock or not invested.

Again, and as always, I hope this information helps you.

MONEY 180 - FINANCE

THIS IS MY 180^TH BLOG ON UNDERSTANDING MONEY TOOLS

December, 2019

www.understandingmoneytools.blogspot.com

What precipitated me to write this blog?  I was having coffee recently with a good friend from Nebraska and he asked my thoughts about what was happening in the financial markets.  Love it.  To my surprise he had no idea on basic financial understandings although he had money in mutual funds. He is smart, can adapt, but finances are out of his realm as a large farmer. Typical of today’s thinking, “as long as the market keeps going up, who cares?” 

We got into basic logics of finance and economics.  (Economics is merely finances of a governing body, let’s say a county, state or country.)  I lost him, and he told me so.  Therefore, the old expression from the movie Cool Hand Luke immediately came to mind, “What we’ve got here is a failure to communicate”!  I blame myself.  So, with that said let’s redefine some finance basics.

First, we have had great distractions since Mr. Trump took office so that our attention has been driven away from the extreme and dire financial situation our country and the world is really in.  Thinking back, our media attention went to the “wall” between Mexico and the US and our immigration problem on the southern border. Mexico was going to pay for the wall!  Who believed that one?  Then, came the threat of weaponry and missiles with North Korea.  Following that was China and our import/export imbalance and tariffs.  (And by the way, the imbalance is greater today than ever.)  Lastly and currently, we have the Presidential impeachment process going on.  I think very few people can bring you current on any of these issues.  They fade away, little being accomplished.

Now, what has been overlooked and most important in my eyes is the “real” state of economic stability.  We will look at the stock markets first.  Everything “should” evolve from finance, meaning profits and losses.  These ratios, norms, stats, baselines, etc. come over long periods of time.  You can deviate a short time from the normal accountability, but then correct to the norm.

What have we here?  Our most conservative index is the DOW Industrials of 30 precious stocks.  The Dow/Jones was started in May, 1896.  The S&P has 500 stocks and started in 1957, and so forth.  Therefore, we have a good history on standards and baselines to run off of.  In a free market we should return to the norms. Insurance companies, our government pensions, banks and other entities use these stats, or paradigms to figure out future expected returns.

Let’s return to my coffee buddy.  I explained that over the last 124 years the Dow Industrial average has had a P/E with a mean of 15 to 1.  I showed him that as of the last week in November it stood at 29 to 1.  This brought questions into conversation; these being how did it get so high and what should the norm be?  Answer to part one is 1) the intervention by the US Government, 2) everyone jumping into the market as they may feel left out and 3) companies borrowing at very low rates of interest and buying their own stock back, thus raising the price of their stock and the markets.  Simple!  These points above have falsely raised the stock markets compounding growth at 10-15% over the past 10 years when our GDP and corporate growth has been about 3%.  It can’t hold forever.

Returning to coffee buddy, he asked how to figure a realistic stock or market price.  Let’s assume an index, like the Dow average, is priced at 28,000 and has a historical P/E like the Dow of 15 to 1.  (That would be an expected return on investment of earnings of 6.5%, dividing 15 into 100.) It’s okay if you couldn’t understand that last figure!  28,000 is where the Dow is today.  Also, today it has a P/E of 29 to 1.  How are we going to calculate an approximation of where a realistic market price should be?  Take the 28,000 and multiply by 15/29, thus 28,000 times 15 = 420,000, then 420,000 divided by 29 = 14,482.  That is where the Dow should be rationally priced.

In the above example, I know that the Dow should be at 15:1.  Look it up!  Let’s say I go to the market at any given time during the day and it shows me the Dow “at” 15:1.  (15/15 = 1) Then, the Dow should be at 28,000, but that is not the case.  If you should be so lucky as to see a stock or market way under-priced, add money slowly as the stock or market could go lower.  Seek value, just like buying investment art or a fine collector car.  Who will buy you out of the stock or market?  If the Dow’s value slid to about 10:1 P/E, you’d also probably be making about 4 to 5% on dividends unless Board of Directors lowered their company’s dividends.  When it comes bonds, look at value and risk.  Also, “ladder” maturity dates of these bonds.

What kind of financial numbers are we talking about to raise the stock markets so high?  Since September 22^nd the government has placed about $1.3 trillion into our largest banks and stock markets to “stabilize and calm the markets”.  This has been done, “off balance sheet”, with the approval of the President and the Treasury Department.  If you go to Google and put in US Debt Clock, you will find the debt at $23.1trillion not reflecting the figures I mention.  Regarding large companies buying their stock, according to the latest figures corporate debt now stands at $10 trillion, higher than any time in history.

Now, for some thought without answers.  We all saw what happened with debt in the real estate industry and banking in 2008-2010.  What if the stock markets fall and companies cannot pay the interest on bonds?  What if the US Government cannot pay interest on bonds?  What happens if banks have to “mark to market” the value of their stock holdings and loans outstanding? This should be adjusted periodically.

The government says our economy is solid.  I see, only if we keep borrowing and lending to people and companies who/which should not be borrowing more money.  False impressions of a good economy.  The old expression of “give an economist an end result you want, and he will find the numbers to prove it true!”  Doesn’t take a genius to realize something is amiss!

I hope this gives you a good understanding of some financial basics.

MONEY 179 - BALLOONING DEBT

THIS IS MY 179^TH BLOG ON UNDERSTANDING MONEY TOOLS

November, 2019

www.understandingmoneytools.blogspot.com

This is a blog on our ballooning debt that has caught up with us, and the world…and what is worse, no way out.  The scary week of Halloween has  come and gone.  So, this is an appropriate time to write about our very scary economy.  As I repeat over and over, everything is “cause and effect”.  (If you want to read a lengthy recap of our country’s debt go to my website and view blogs 133 through 145.  It is about 51 pages, however a worthwhile recapping our accumulation of debt mainly because of wars from 1772 to current time.)  My other favorite quote is “that perceived value is greater than real value” and our government uses it daily.

Well, we are now showing a government deficit of over  $23 trillion.  As of the first week in November we slid into another benchmark of debt.  I am not blaming the president, but he did say he was going to balance our budget.  As I have always stated we reached a point of no return around the year 2000.  During Mr. Trump’s reign in office, which is now 2 years 10 months, we have increased our US debt by $3.4 trillion.  (Please Google the US Debt Clock if you want verification.)

One of my biggest concerns is the extent and broadness of debt.  How long before the world will not accept our currency as the dominant world trading currency?  In 2008-2010 the crisis was brought on by our lending policies, narrowly focused on the real estate industry and speculation.  Now, the debt crisis has greatly broadened into other fields.

Let’s first discuss “sub-prime loans”, and then talk about current financial topics that may not come across normal business news.

The new and fastest growing sector of lending is “sub-prime” loans.  What are sub-prime loans?  These are loans made to people who may have trouble paying back loans.  These are people with very low credit scores, poor track records of paying back loans and people who frankly “just can’t get a loan from a bank”.

There are tons of companies that will do sub-prime lending, some reputable, some not.  Let me name a few just in the mortgage industry today: Angel Oak Mortgage, JMAC Lending, Citadel Servicing, Athas Capital and many more.  If there is no collateralization substantiating a loan, interest rates can be extremely, if not ridiculously, high so that a borrower has little chance of paying off the loan; these can be over 100% interest!  Some states have usury laws regulating the amount of interest that may be charged on a loan, constraining excessively high rates of interest.  However, many states do not have such laws, and lenders can charge what they want.

Since the banking debacle in 2008, these sub-prime loans have grown to well over $1 trillion.

Let’s move on to another topic of financing concern; this being in the auto business, and manipulation of lending.  Auto loans are now about $1.5 trillion.  What is moving people into more debt here?  You want a new car, but they depreciate the moment you drive the car from the dealership.  Dealers offer cars with essentially no money down except perhaps a few closing costs.  If you have an accident within months of the new purchase you may be out thousands of dollars.  Get “gap insurance” to cover the difference between what the car has depreciated, once it leaves the lot, and the original loan amount.  A new car is no more than a used car with low miles once you leave the dealership; this could be 15% less within a few months.  Dealers are now offering to lend more money than what your car is worth if you purchase a new auto.  Example:  You purchase a new car for $30,000.  After one year that car’s value is $21,000 or a decrease of $9,000.  Your loan is at $27,000; you are “upside down”.  The dealer offers you a new car for about $30,000, (as he needs to sell cars), and your monthly car payment went from $249/month to $310.  You say you can afford $310/month so you go ahead.  What you don’t realize is the dealer is pushing that loss of $6,000 forward into your new debt.

Let’s discuss meaningful new financial information.  To save space and keep this concise I will use a question and answer format.  See if you know the answers, before reading my answers.

-       Question: We increased our US debt using “off balance sheet” financing $1 trillion starting September 22^nd of this year.  Why?

-       Answer: Because our largest 6 banks again could not meet capital requirements, and the wealthy were selling out of the stock markets.  We infused capital into both.

-       Question:  Regarding above, how is this financing accomplished?

-       Answer:  The president along with our Treasury Department issued bonds (debt).  This is in conjunction with our Central Bank, the Federal Reserve.  The Federal Reserve bought these bonds and currently holds about $4 trillion of our debt.

-       Question:  Will this be the end of needing more capital to once again save banks?

-       Answer:  No.  Just recently, on November 8^th, it was announced the government needed to put another $60 to100 billion into our banks and markets.  The statement used by the news is to “stabilize and calm the markets”.

-       Question:  Mr. Trump has stated that if he is not re-elected the stock markets will crash.  How can he make such a statement?

-       Answer:  The next president may not put the trillions of dollars needed to hold up false impressions of strength, (perceived value).  It may be better to let free markets intervene. 

-       Question:  Why is the government doing this when in the long run it is illogical?

-       Answer:  People think they have more money, have done well in the stock market and therefore will go out and spend money in the economy and borrow more money rather than retract and pay off debt.  This is how Gross Domestic Product (GDP) is created.

-       Question:  The stock market is doing so well, what backs my monthly statements?  Why?

-       Answer:  Quite simply.  Let’s take our safest stocks and that would be the 30 stocks in the Dow Jones Average.  Historically, and only a decade ago, the average price to the earnings in the Dow has/had been 15 to 1.  This is a multiple of 15.  As I write, the Dow today has a price to earnings ratio of 29.3 to 1.  Therefore, the fact is that currently the stocks in the Dow are priced twice as high as they should be for conservative stocks, and earnings have not kept up with the increase in the price of stocks.  Besides the government “feeding” the stock markets, companies have been using low interest rates to borrow billions of dollars and buying back their stock.  This increases stock prices.

-       Question: You own stocks and stock funds.  What is the real value to these assets?

-       Answer:  Nothing, gar nichts (if you speak German), nada!  Okay, this seems irrational, but it isn’t.  Without a buyer at a certain price stocks have no value.  If no buyers or sellers in the market place you own nothing.  If we have a deep recession you might get back 30% of your money, that is a 10 to 1 P/E for the Dow; worse with other markets like NSADAQ.  The Dow is at 29.3 to 1!!  Let’s explain further.  There are basically three types of investing in companies, those being bonds, preferred stock and common stock.  Most likely you own common stocks, which mean if times get tough you are the last in line for any money.  First in line are bond holders, but they are debt holders given an IOU for a certain hold period and interest rates, not a dividend.  Next in line of security, if there are any assets, are the preferred stockholders and most likely receive a dividend of some sort.  Lastly, and most common, is where you enter the picture and that is with common stocks.  So, you see, you are only holding paper and a statement that states a monthly worth.  The worth is nothing until someone is “willing and able” to buy you out and you convert your stock to cash, or a currency.  When times get tough there is usually a wealthy investor that enters the picture at some point as a buyer.

-       Question:  The Federal Reserve has lowered interest rates a couple of times this year.  Why is this both good and bad?  Why are they doing this?

-       Answer:  Inflation is not a threat as we keep buying inexpensive goods from abroad, like China.  We are buying more than ever, so trade tariffs have not held back the average Americans buying of goods.  It has hurt us in the farming and manufacturing sectors more than foreign countries selling to us.  The lowering of interest rates brings down the interest rate we pay for our government debt instruments, bills, notes and bonds.  Bond rates will affect real estate mortgage rates.  The negative to this is that it hurts older people who should be on fixed incomes with savings accounts, money markets and bonds.

-       Question:  Some countries have actually gone to negative interest rates.  What countries and why?

-       Answer:  Here are some of the countries where you pay to hold bonds or fees banks charge for holding cash: Japan, Sweden, Denmark, Switzerland, and the rate you pay is around 1%.  In general, world economies are not doing well so people with money go to a cash position or bonds.

-       Question:  We are dropping interest rates, might we also go negative? 

-       Answer:  There is a good chance of this as the wealthy keep going to cash and flee risky investments.  This also makes our middle class more willing to borrow and spend money.  Currently, Mr. Trump is advocating the Federal Reserve to drop interest rates to compete with other countries. The Federal Reserve is backed by private, wealthy investors.  I’m not sure how happy they would be with this.

-       Question:  Other countries like in Europe can’t borrow like we do.  What are some differences?

-       Answer:  They are more conservative.  Let’s take credit cards for an example.  Master Card, Visa and American Express are worldly accepted.  In Europe a person can get any of these cards issued by banks, however you cannot carry-over a balance month to month.  You need to pay the balance in full each month, or you lose your card.  It puts less stress on their banks, and people show restraint on spending.

-       Question:  So how bad is US consumer debt?

-       Answer:  Right now it stands at approximately $14 trillion, and a lot is not collateralized debt.

-       Question:  The government touted last month that unemployment is down and we have 158 million people in the workforce.

-       Answer:  Numbers lie, and are meaningless.  First, these are not necessarily people but W-2 employee filings and 1099’s for contract workers. Many people today work more than one job so they are counted each time they become an employee or contract worker.  Secondly, working doesn’t really mean a thing, it’s all about how much you earn so you have money to spend. Our average worker’s pay has not gone up, taking inflation into account, over the last 40 years!

-       Question:  Last quarters growth was at 1.9%, is that good.

-       Answer:  Not really.  A good growth is around 4% for this country and we have been declining for several months now.  Inflation is about 2%.  Both these figures are not really very reliable by our government.  Example would be on inflation.  If agricultural goods go up (which you know they do when going shopping for groceries), the government excludes them.  Another omitted stat is petroleum products and gasoline. 

-       Question:  What are the numbers for new immigrants coming into this country.  They need everything so they will spend; is this not financially good?

-       Answer:  The government recently reported that we had 550,000 immigrants enter the US in 2019.  How many entered illegally?  Many, many more.  Yes, these immigrants spend money, but for the most part they are getting the money from us at approximately $20-25,000 per person a year.  I would say this is false economy.

I hope you got something from this blog.  The facts I render are from reliable sources and I believe to be accurate.  Bottom line is the audacious manner in which the government is spending money will catch up to us.  I thought it would be long time past, however “the can keeps getting kicked down the road”!  Some day the beans will spill out of the can!

MONEY 178 - FED RESERVE

THIS IS MY 178^TH BLOG ON UNDERSTANDING MONEY TOOLS

October, 2019

www.understandingmoneytools.blogspot.com

In this blog we are going to take another look at the Federal Reserve and its relationship to banking and our economy.  In our last blog we discussed “Repos” or Repurchase Agreements.  The Federal Reserve reacted to the lack of mandated capital requirements by our largest banks.  Recently, a friend asked more questions based upon this, so I thought I would continue in more depth.

In the past, I have written several blogs on the Federal Reserve so please refer to them.  Our Central Bank, the Federal Reserve, was started in December, 1913.  It was created to work with our Treasury and banking industry to monetarily stabilize our economy with the use of money and interest rates.  It can add liquidity adding more dollars into the economy to “spur” the economy, or conversely pull dollars out of our system to stem inflation and slow the economic growth.  The Federal Reserve works in conjunction with our Treasury Department in printing more money.  There is a natural attrition to the currency you see in the market place just from money deteriorating, being lost, burnt, destroyed, etc. Therefore, printing new money is necessary.  How much is in circulation is what is important.

In my view, the Federal Reserve accomplishes several things.

-       It stabilizes the financial markets, and calms them.

-       It provides liquidity of money.

-       It provides short-term loans to banks when necessary.

-       It controls interest rates to banks.

-       It controls interest rates to the public, you and me.

The Federal Funds Rate is the rate banks charge other banks to meet Federal Requirements.  (As with Repos.)  This has a direct effect on what banks offer for interest on CD’s and money markets.  In the longer term it will affect Treasury Bills, Notes and mortgage rates. These rates are set and discussed at regular Federal Reserve Board meetings. 

The Federal Reserve buys and sells government securities expanding or restricting the supply of money.

Another interest rate the Federal Reserve controls is the Federal Reserve Discount Rate.  This is the rate of interest the Fed charges banks to borrow money from them, again with Repurchase Agreements.

To keep this in simple context, banks need to meet capital requirements on a daily basis.  To meet any “short-falls” banks first look to borrow and lend between banks.  If this cannot be accomplished, banks will lean toward the Federal Reserve to lend them money, on an over night or short-term basis.  To borrow from the Federal Reserve banks are normally in some sort of trouble, as what we saw a few weeks ago around September 20^th when the Feds stepped in to help most of the large banks infusing hundreds of billions of dollars.  The obvious sign to the Feds was that the overnight “Repo” Rate soared to heights of just over 10% from a normal 2.75%, mainly because of risk.

I hope this renders more insight to what the Federal Reserve does.

The government is currently pumping billions of dollars into banks and stock markets which will total about $1 trillion “to stabilize and calm” the markets.  (So stated in recent news by our government.)  In turn, this has pushed the ownership of government debt with the Federal Reserve back to around $4 trillion.

We live in a very dangerous economic worldwide time!

MONEY 177 - STOCKS/ECONOMY

THIS IS MY 177^TH BLOG ON UNDERSTANDING MONEY TOOLS

October, 2019

www.understandingmoneytools.blogspot.com

This is a blog on stocks and the economy.  I had an epiphany this week, not at all about religion, but the stock market.

As you know, I write about facts that should have certain expected results; cause and effect.  Not currently holding true, nor for quite some time.  The stock market may actually go up!  Why?  A few factors.  It does revolve around money and the Feds; not so much from buyers and sellers in the market place, and other things. 

As stated in previous blogs, big money, “the wealthy” have pulled back from the stock markets into safe havens.  This amount of money is flowing into secure investments in countries like Switzerland and Germany, and has resulted in those countries issuing “negative interest” investments like bonds.  The supply of money is so great that they do not have to pay interest. Also, their economies are weakening so corporations may borrow at low rates of interest.

In the last couple of weeks, our biggest banks, funding the economy and stock markets have not met their capital requirements.  Banks are in trouble as in 2007-2008, but not nearly as bad.  A lot of bad loans out “there”.  I am making an assumption that part of this loss of capital by the banks was from their buying huge amounts of stock in our markets to “stabilize and calm the markets”.  By executive order from Mr. Trump our government could issue a mandate to change the financial situation of banks and markets.  (This is in accordance with an Act of Law passed in March, 1988). 

The first step by our government was an infusion of capital on December 22, 2018.  The Feds started this to “stabilize and calm the financial markets”.  Around September, 20^th of this year it was announced by the government that they would pump money into these same banks as they were underwater on capital requirements.  One of the first indications was the “repo” rate for banks shooting up to 10%.  We have covered repos in past blogs, but a quick recap is that bank repos (repurchase agreements) are short-term (many times overnight) loans to banks by the Fed so they can shore-up capital.  The banks usually pay off the loans the next day.

The volatility in the repo rates could effect the bond markets as well as the investment bank costs and rates on margin accounts.

The instability of the stock markets and the banks led the Federal Reserve in conjunction with our Treasury Department to continue capital infusions to stabilize the monetary system including both banks and markets beginning about September 20^th of this year.  It started with 3 infusions totaling about $150 billion.  This infusion of money will continue to the tune of $75 billion per day ending October 10^th.  That is about $1 trillion, and I bet the government keeps this “off balance sheet” to make our financial/reported situation appear better than it is.

What is “off balance sheet”?  The government and corporate sectors do this quite often to hide actual costs.  An example of our government doing this is with all the wounded in war coming back to the US for sustained medical care.  Most war costs are accounted for in the defense budget, however not the medical costs in the billions. 

Banks have been noted doing “off balance sheet” lending as a favor to large customers.  They keep it off books in separate accounts where the auditors will not account for a questionable loan.

Going back to my epiphany, with this control over the monetary system people may expect a continued rise in markets.  This, of course, is conversely related to our real economic situation, and a free market of buying and selling of stocks.  Apparently, debt does not matter and is not being addressed at the moment. We have a great diversion from government finance with the attempt to impeach Mr. Trump.  If you add the above  referenced infusion of dollars to our deficit spending going into the new-year October 1^st, we are looking at about $2 trillion or more.

Another smaller realization that stocks might go higher is that “emotions” by people around the world may enter into the picture.  I am thinking of emotions like fear, greed, passion, calmness, anxiety etc.  Fear is our strongest emotion and stronger than greed.  In this case people may be “fearful” they have been left out of the great run-up of markets since The Great Recession.  With bond rates, bank CD’s and other secure investments yielding essentially nothing, people are “fearful” and perhaps still willing to jump into the stock market.

In an election year, no president seeking re-election can afford a down-turn stock market.  Big investors are sitting with cash or liquid assets waiting for the next recession and downturn.  The middle-class investor is the one who is continuing to buy into markets with funds like Vanguard and Fidelity.  When the wealthy do invest they have their own teams investing/managing their money, not using the household named funds.

It was reported this week that the GDP is holding at 2% growth, I doubt these numbers like most numbers coming out of our government.  In Michigan you have the largest industry, auto-workers, on strike.  This is taking billions out of taxes, and will soon have a significant impact on businesses unrelated like restaurants, retail stores, auto sales, etc.  It is sad that companies like General Motors will find the money to pay their Chairman and CEO, Mary Barra, $22 million in bonuses similar to the previous year, when the labor workers want more money.  It was also announced General Electric Corporation is freezing the pensions of 22,000 workers.  This greed and inequality will catch up to America.

When Mr. Trump came into office he promised a resurgence in the coal industry, this has lasted only a short time and you have some of the largest coal companies shutting down as in the Powder River Basin in Gillette, Wyoming.

It amazes me how quiet the World Bank and International Monetary Fund remain as the biggest indebted nation in the world, the USA, becomes more indebted.  One day it will just implode. 

Will we have a new Democrat as president and see Jubilee years in 2021-2022?  What will we do with our debt and need for more money? 

Everything is cause and effect, and we have certainly caused our messes.

I hope you got something from this blog.

MONEY 176 - BANK/FED

THIS IS MY 176^TH BLOG ON UNDERSTANDING MONEY TOOLS

September, 2019

www.understandingmoneytools.blogspot.com

I wouldn’t normally write two blogs so closely together, however certain banking issues came to bear on September 16-19 that I thought meaningful for all.

As I have mentioned in past blogs our ludicrous liberal lending and borrowing both in the private sector and government will cause the s__t to hit the fan once again. 

In a quick summary before more detail, our commercial banks fell below capital requirements to Federal Reserve standards this week.  Commercial banks seek short term, over-night borrowing (known as Repo’s) from the Fed and other banks until they meet capital requirements. They put up collateral with assets like treasury notes.  This overnight interest rate peaked at over 10% this week, normal standard about 2%.  The Federal Reserve intervened with commercial banks.  I am afraid this is the beginning of a tipping point in the financial communities similar to what we had in 2007-2010.

Now, for a bit more detail on the subject.  Commercial banks have been lending to the private sector, now owing $14.6 trillion, companies both private and publicly traded and to government agencies.  You probably know that the US government was $1.3 trillion in deficit spending with our year-end coming up September 30^th.  We need to issue billions more in bills, notes, bonds (anything) to keep us afloat.

In conjunction with this debt, Mr. Trump had authorized our 6 largest banks to step into our stock markets and buy billions in stock to shore up falling markets beginning about December 22^nd last year.

When the banks can’t meet Federal Reserve requirements they need to borrow money from the Federal Reserve and pay it back quickly.  If they are not able to, they could be closed down.  In the past, as in 2007-2010, the banks called commercial loans and lines of credit due and payable immediately.  This time around Mr. Trump can’t afford that in an election year, so games will be played.  That includes pumping another $138 billion into the economy.

Mid-September this year is a bit unusual, demand on borrowing exceptionally high.  You have the government debt involved but also corporate quarterly taxes owed September 30^th, and banks supporting the stock markets with buying. You have private sector monthly payments due on credit cards, auto loans, etc.

Federal Reserve Chairman, Mr. Powell, has lowered the interest rate another 1/4% in the US while the target borrowing interest rate for the Federal Reserve itself increased 1/4%.  Time out for a quiz:  Who makes up the Federal Reserve money?  The world’s wealthiest.  Do those people expect a low risk return on investment?  Of course, they do.  Why would interest rates go up for the Federal Reserve?  Our horrendous overall debt, and continuous growing of debt, therefore increasing risk.  Why is this all so important?  These interest rates and debt obligations have worldwide implications.  How many Districts in the Federal Reserve? 12.  How many Federal Reserve Banks? 12  How many branches?  24.

What is scary about this in my mind?  For the most part Americans don’t know about any of this, and they don’t care!

The markets have calmed now the end of this week, but this is an illustration of what mostly is in store for us down the road.

MONEY 175 - STOCKS/MONEY

THIS IS MY 175^TH BLOG ON UNDERSTANDING MONEY TOOLS

September, 2019

www.understandingmoneytools.blogspot.com

In this blog we are going to talk markets and money.

MARKETS:  In this context we will cover stock markets.  “Insanity” captures it all well in my mind.  Permit me to draw a parallel.  I envision the stock markets as a merry-go-round wildly spinning too fast with children aboard.  The children are the middle classes of people investing.  At some point the children do not realize it, but they are going to be tossed aside and hurt badly.

The markets are way too high, assisted by our president Mr. Trump who states if Federal Reserve Chairman, My Powell, would lower interest rates the markets would jump another 10,000 points.  I am an independent voter, however voted for Mr. Trump.  I probably know more about Mr. Trump than many as I lived part-time next to him and his first wife, Ivana, at 66 Vista Dr., Greenwich, CT. while working with NYC investment bankers my 20 years in financing deals and corporate finance. I did not own the home owned by a close friend, but always welcomed a stay on 8 acres situated on Long Island Sound. 

Mr. Trump inherited much of his money from his father and their trusts.  Mr. Trump has monetarily bankrupted more companies than any other person in America, including taking (from what the news reported a couple years ago) a $950 million dollar write-off for his bankrupt Atlantic City casinos.  He had little, if any, “skin” in the game as the casinos were financed by “junk bonds” bought by “little old ladies” who carried quarters around while gambling.  Even my Ernst and Young accountant doesn’t know how he pulled that one off…fantastic lawyers and accountants who you and I can’t afford. Mr. Trump lends his name to projects for payment or carried interest in the projects.  He is our President, please don’t listen to him on finance. He is a politician who wants re-election.

Let’s list the markets and indexes.  The first and least risky is the DOW Jones Industrial average.  It is comprised of our top 30 matured companies, and mostly companies with the least downside risk, but least upside as well.  This index includes Merck (drugs), Walmart (retail). Exxon.Mobil (oil/gas/diversified),  American Express, Microsoft, Goldman Sachs (financial services), 3 M, Home Depot and more.  The Dow Jones was started by two individuals Mr. Dow and Mr. Jones in 1896. It has a historical average for price to earnings ratios of 14 or 15 to 1.  As of September 13^th this year it now carries a 29 to 1 price to earnings ratio.  What does this tell you?  Earnings have not changed much, as expected, however the price is twice as high as it realistically should be.  What concerns me with all market highs is the promotion these days.  Every evening when watching TV, the advertisements are either drug companies or financial institutions luring in more users or investors…scary!

The next most stable market or index is the Standard & Poor’s, or S&P consisting of 500 stocks, all solid companies. 

After this and gaining in risk would be the NASDAQ comprised of 3300 stocks, many of which are technology.  In 1999 when the markets corrected, I was heavy in technology.  The NASDAQ dropped from 5200 to 2800 and I lost a ton of money.  I did not time the market, I just stayed in.

Following the NASDAQ in the line of risk is the Russell 2000 holding 2000 “small cap”, (meaning capitalized) companies.

Next in line would be the “penny stocks” under a couple of dollars per share, and “pink sheet” stocks.

People today think only one thing, the markets trend upward.  They forget about 1929, 1987, 1999 and 2008.  You might lose 30-40% of your money in a conservative DOW Index, however you might lose 70-80% in some of the riskier markets. 

Smart money has left the stock markets for the most part seeking cash or bonds for liquidity or low risk.  Cash is your big asset to be able to buy in on the next downturn, which is forthcoming.

I have mentioned this before, but will again here.  Don’t be fooled by the market rebounds after downturn days.  Since March, 1988, the government can step in with our largest banks to buy stocks and reach market support.  Mr. Trump in conjunction with Treasury Secretary, Mr. Mnuchin, has authorized this.  Very dangerous in my eyes, as at sometime in the future these banking institutions will again have to “mark to market” their asset holdings and loans, and may very well be “underwater”, with tax payers bailing them out as in “The Great Recession” of 2008-2010.

The next recession will be more debilitating than “The Great Recession” because it involves much more debt from more sources.  Private debt in the USA now stands at $14.6 trillion.  Divide that figure by the 320 million, men, women and children in the country and it is about $45,000 per individual.  People don’t have that kind of money.  Beyond that said figure is the corporate debt where companies have borrowed to the “hilt” to buy their stock “back in” at high prices.  These are loans from Wall Street.  What if their revenues shrink, stock prices fall and can’t pay back Wall Street and investors?  Do the taxpayers need to pick up that tab, as we did with General Motors in the last recession?

I watched the Democratic Conventions.  Most platforms are to give the people a lot including free education, forgiving student debt, free medical, etc.  We, as a country, are too far gone.  These candidates need to moderate to win.  For one thing, if we proposed this type of borrowing to fulfill promises the World Bank and International Monetary Fund would step into the picture as the world currently trades in US dollars.

There are two very fundamental principles I believe in, and they are “everything is cause and effect” and “debt kills”.  You can see where we are today, and the violations to my principles.

MONEY:  My blog is based around “understanding money as a tool”.  Money is both an asset and a tool.  The reason for my writing is this past week I heard a woman say “I would love to win the lottery, I love money”.  I grew up with my mother telling me to “like” material things including money, but love people and God.  Money can come and go, as a reflection in my life.  I have been lucky to have made quite a bit of money (in most people’s standards) during my life, and also lost a lot of it.  My true friends stuck by me, my money did not.  Yes, during those times I was able to buy a new Corvette, Porsche and BMW with cash. I worried about them getting a scratch, and parking away from my shopping destinations.  What happened was perhaps a lesson.  My Corvette and BMW were stolen.  The BMW was stolen from a country club parking lot in Denver while I was inside dining.

I went from the expensive cars to two new Saabs in a row.  In the 1980s I lost about 7 radios to thieves who broke my windows, broke the dashboards to steal radios that they would “hock” for about $25.  Now, I drive an old car, license plates cost me a mere $30 a year, I don’t worry about a scratch in the paint and could leave the keys in the ignition and no one would steal the car.  Peace of mind!

Where am I going with this thought process?  Having any asset, including money, is a burden and it takes work to keep it and keep it nice.  Many people do not realize this.  You have a responsibility if you have money, or another asset to keep it in good health and working order.  People who win the lottery don’t realize the stress and bane it can cause.  Look at pro athletes who make millions and are broke by old age.  Many of the rich, or people who win these lotteries regret their money; they, or their children, turn to alcohol or drugs.  They lost focus on the values of life.  All their relatives and friends want money.  Who are their friends?  They become paranoid.

Okay, you get lucky, make some money, want “things”.  Quite common and normal.  You buy a Rolex or Omega mechanical watch.  Recommended service by a watch dealer is every 3 to 5 years and will set you back about $1,000.  Buy a Richard Mille watch for $1 million, and I bet service is a lot more!  Love this one.  You are quite well off and buy a Bugatti auto for $2.2 million.  A general service runs $22,000, and you are to change tires every 2,500 miles, (yes, 2,500 miles) for a cost between $30,000 and $42,000!

Money is the same.  Your financial advisor wants a piece of you, your lawyers and accountants setting things up want, and then people maintaining things want a piece of you, etc.  You buy an expensive home, and you forget that it costs thousands of dollars each year in maintenance…and the headaches.  People who take care of your possessions don’t show up, they steal from you, etc.  How many athletes and movie actors blame their agents for losses, many justifiable.

Bottom line here is be prepared for the work that money brings to the table.  Without working on preservation of any asset, it will go bye, bye!  This includes you!  God or something brought you into the world as a baby with a beautiful, healthy mind and body. Take care of it or it will fall apart!

Hope you enjoyed this blog.

MONEY 174 - STOCKS

THIS IS MY 174^TH BLOG ON UNDERSTANDING MONEY TOOLS

August, 2019

www.understandingmoneytools.blogspot.com

In this blog we are going to take another look at stocks.  I attempt to teach you to be more independent when it comes to financial and business decisions.  I am “not going to give you a fish, but will give you the rod, reel, line, hook and bate for you to catch fish.”  If you’ve referred to my past blogs on the economy and markets they should have left you with some thoughts:

-       President Trump will do all he can to prop up the stock market and avoid recession until he gets re-elected.

-       The stock markets are very manipulated with government and large banks intervening.

-       The stock market trends and erratic swings on a daily basis are not norms; there is not a 50, 100 or 200 day moving average to rely on.

-       The bond markets have been in an inversion curve for some time, and the government makes light of the historical reading on this.  Short term note yields are higher than the 10 and 30 year bond yields.  Increased demand for bonds. Interest rates (yield) come down and market value of existing bonds goes up.

-       The tremendous printing of money, debt (governmental and private) and the ignoring of warnings by the International Monetary Fund and World Bank about our fragile financial situation are not to take lightly as the world “works” around our currency.

-       Except for a couple times in history the unprecedented highs of the markets.

Let’s start by looking at the unrealistic highs of the stock markets, as I keep pointing out.  Are we in a new paradigm to evaluate stock prices? Some people say the new price to earnings ratios can be 20 to 25 to 1, versus the hundred year average of 14 or 15 to 1.  Is this excuse because financial people want to sell you more?  I want to ask you a question and we will  relate that to the stocks and funds you are buying.  Let’s assume I have a small retail business for sale that has some growth potential.  My bottom line pre-tax earnings are $100,000.  How much will an investor most likely offer for my business if I wanted to sell?  If you say about $250,000 to $300,000 plus inventory at cost it is realistic.  Let’s assume this small company is a public company in today’s market.  Taking the DOW P/E today at 27.5 to 1.  That would mean that you or someone else thinks your company is worth $2,750,000.  It’s not real nor are the stock markets today. 

We have helped you analyze stocks in past blogs.  We used price to earnings, projected price to earnings, book value and other terms.  I like to look at more tools.  How about the price to book value as a ratio?  Book value and break-up value are quite similar.  Take assets and remove intangibles and “blue sky” from the equation, then less a company’s  liabilities.

How about taking the capitalization in regard to price and earnings.  Capitalization is the value of a company’s value taking the price of the stock times the number of shares outstanding or “in the float”.  Some of these values are out of sight, and will come down.  The favorite 5, or “FAANG”, are already coming down or stable.  The real money has been made. Those stocks, if you don’t know, are Facebook, Amazon, Apple, Netflix and Google.

For stocks look at “insider” trading.  Insiders are the directors, officers, Board members, and top management.  Are they selling or buying?  From what Trim Tabs Investment Research states about $600 million of stock value is sold “each day” by insiders; tells me “watch out”!  Many companies  have completed initial public offerings the past few years.  Typically insiders and stock “option” people cannot sell for a period of 2 years unless they are defined as an institutional investor. (Ruling 144 of the Securities and Exchange Commission.)  Institutional investor designation is a bit of a misnomer.  An individual who makes himself wealthy like Bill Gates, Jeff Bezos or Jeff Zuckerberg can be declared institutional investors and sell large blocks of their stock through Wall Street banking firms within the two year time period.  This has to be applied for and approved by the SEC.

For stock stability, look at the “liquid asset test” or “quick ratio”.  This is the ratio between assets and total liabilities.  The ratio should be 2 assets for 1 liability, or 2:1.

Don’t just look at current earnings, look at track record of earnings growth.  What is the pattern? Volatile?  Is the Board of Directors continually increasing the dividend yield, or just hoarding money?

Strong or weak days on Wall Street?  Make sure you look at volume traded. One stronger day with weak volume says nothing.

There is a “Tracking P/E” and a “Forward P/E”.  Tracking P/E is the price to earnings in the past 4 quarters.  Forward P/E is the projected price to earnings ratio the next 4 quarters, (PP/E).

Where to invest?  Basically for funds there are 4 locations, the DOW Jones Industrials, the S&P 500, the NASDAQ and the Russell 2000.  The NASDAQ and Russell 2000 are more small-capitalized companies and technology oriented.  I would tend to invest, if at all, in quality, staple companies with low P/E’s around 10:1 paying good dividends.  Why take the risk in these economic times?

If I were buying bonds, I would “ladder” my bonds, meaning purchasing with various maturity dates.  I do think interest rates and yields will come down from here.  Many solid countries around the world like Germany, Switzerland and the Scandinavian countries have lower interest rates than we do.  All economies are slowing.

Gold?  Always a reason to keep a small amount in a good portfolio.  Buy a gold stock instead of bullion on the dips.  Analyze a gold company the same way you would analyze an oil/gas company: what are the reserves, what are the potential future reserves, good management in place, and history.  About 20 years ago when gold was going up I “played” a company called Randgold.  They met my criteria years ago.  I believe they merged and now under Barrick Gold.  Symbol on the NASDAQ exchange is GOLD.

If you’ve made money on growth stocks, this may be the time to re-evaluate your portfolio.  Long-term capital gains on stocks held longer than 12 months are 0%, 15% or 20% based upon your income tax bracket.  In the longer term I don’t see how the US can operate without increasing taxes, especially if a Democrat becomes president.  This may be good and needed for the younger generation of people.

Farcical.  Such a delightful word, that only brings up Uber in my mindset. A company with no assets to speak of, most likely will never see a profit and ran a $5 billion loss second quarter 2019.  I am not sure how many quarters they could sustain as such.

Again, I hope you got something out of this blog.