MONEY 157 - BARRIERS

THIS IS MY 157^TH BLOG ON UNDERSTANDING MONEY TOOLS

January, 2019

www.understandingmoneytools.blogspot.com

The beginning of this blog has no relevancy to “tools” for making money, however the latter part gives ideas.

I’ve had a lot of failures in life and business, and some successes.  My successes included 1) systems in place, 2) responsibilities and 3) logical growth incorporating constant creativity.  In business, it is a daily task of staying on top of a realistic income statement and balance sheet.  Has America been following these principals?  Take a look at the US Debt Clock that you can find going to Google, and voice or type in US Debt Clock.  It incorporates income, expenses and the ingredients of a balance sheet up to the second.   No matter if you are in politics/government, corporate or private sectors, or as an individual as soon as you stagnate, stop creating, not moving forward seeing the future, you are dying.

The hottest topic in the political scene right now is the “Wall” to be built, or extended, between Mexico and the USA.  I’ve had discussions with friends lately and most think that we need a very organized system to permit and scrutinize immigrants coming into this county.  This includes entrances/exits only at recognized ports of entry, and a way of monitoring these individuals for control e.g. health, previous crimes committed, etc.  If individuals are to stay they should prove acceptable good health and purpose so they can support themselves.  Most do not speak English and will immediately be a drain on our social services.  Other countries like Greece, Italy, Germany, Sweden and France have already found this out.

In the middle of last night I thought of this, and with the mind working,  associated a ton of words with this.  Sometimes your mind works best when at ease. In my working years, I kept a voice recorder next to my bed so I could remember thoughts the next morning.  Let’s explore these words/non-words and thoughts that came to mind.  Is a wall, or extension to the existing wall: legal, purposeful, fundable, deter-able, maintainable, organized, do-able, systematic, automated/electronic, man-able, functional, responsible, people track-able, accountable, sustainable, etc?  If Mr. Trump wants a wall he better think this through.

In light of this 2000 mile Wall to supposedly control issues, I decided to write a simple blog on facts.  I know nothing about walls, so this is a repeat from research, and thought you would find it of interest.  I have always been one to concur that if there is a “will”, there is a “way”, so I am not sure from a determined immigrant’s standpoint a wall is the answer.  Again, it is the enforcement of “specific entry locations” that is important.

There are, or have been, about 75 such walls built over time around the world. Here are some:

-       The longest and one of oldest country walls built to keep people out is the Great Wall of China started in 200 BC.  It is 13,000 miles in length.  Over 1 million workers were used in its creation.

-       One of the most memorable in today’s time was the Berlin Wall. The wall was enforced by military with guns and land mines between 1961 and 1989.  The total wall extended for 91-96 miles, although only about 27 miles were in urban Berlin and 37 miles in residential areas.  The wall (the “wall” in many parts were two concrete walls up to 160 feet apart known as the “death strip”) was enforced by military with heavy weaponry including 302 watchtowers.  To deter escaping over or under the wall land mines were placed on the eastern side.  The width of the wall in many places was 22 feet, but only 12 feet high.  The main point of entry and transactions were at “Check Point Charlie”.  Approximately 5,000 people escaped East Berlin during these 28 years, and that includes via truck or car through Check Point Charlie.  That equates to about 2 people per year per mile of the Wall.  I guess, “viva” a good wall!

-       A 2500 mile wall was built between India and Bangladesh to block migrants from entering India.

-       Israel/West Bank wall is 400 miles in length, and built in 2002.  It is 20 feet high and patrolled by armed military.

-       Moroccan Western Sahara Wall.  It is a 1700 mile “sand wall” to keep people out, running through the southwestern part of Morocco.  It was started in 1975.  It was fortified with land mines.

-       Spain used a 20 foot high barbed wire wall to separate Melilla and Ceuta, two Spanish cities in northern Africa, from Morocco.

-       Between Saudi Arabia and Iraq.  A 550 mile long wall.  It was built starting in 2000.

-       One that has been in the news the past few years is the wall between Hungary and Serbia on the Balkan Route.  It is 110 miles long and strictly enforced.  Hungary is not accepting immigrants.

-       One island near the coast of France is Mont-Saint-Michel. (I have visited it, so know the facts.)  It needed no wall to keep the island and church safe, nature has done two things: there is “quick sand” all around the island and the tide flow is around 40 feet each day.

So, walls around the world are not anything new.  Is the price of a wall to placate to President Trump meaningful, no, but politics enters in. Our total defense budget in 2018 was about $700 billion so this is “chicken feed”! We gave countries like Egypt, who frankly hate us, $1.5 billion last year.   Did President Obama speak out strongly about illegal entry and similar controls in 2010?  Yes. 

Now, to the money aspect of this blog.  We have legitimate entry and exit points on our borders with Canada and Mexico, use only them!  I have friends in El Paso, Texas.  Mexicans come through the border daily, and most return at night.  They act as “service” people in El Paso and surrounding area. This is an integral part of both societies that has lasted a couple centuries.  We save money on labor, they make money to support families.  A symbiotic relationship!

Let’s look at 3 border towns with the US and Mexico: Nogales and Yuma in Arizona and Tijuana in California.  Millions of Americans cross these borders every year.  If you want to use your money wisely you may want to look at these towns for prescription drugs (at recognized, established drug stores as nice as you will find in the US), vision care including eye glass frames and dental work.

Here are some first hand illustrations:

-       I use an acidic form of cream for prevention of skin cancer called Efudix.  Efudix is made by Roche Labs in Switzerland, and last time I bought it in the USA it cost about $135/ounce. In Nogales, it costs about $11.  Same cream, same box.  In the year 2000 I was in Madrid, Spain. I went into a pharmacy to buy cough medicine. I asked the pharmacist if he had any Efudix from Roche Labs.  The answer was, yes.  The cost was roughly $2.38 per tube, no prescription required as in most cases, and I bought the two tubes he had in stock.  Drug companies say they need to charge the outrageous prices here in the USA to recover research and development costs.  Perhaps partly true, but that cost should be shared around the world.  The correct answer here is the drug companies know the insurance companies and consumers will pay it.  The system is rigged and needs reform.

-       Across the border from Yuma, AZ, is a town called Los Algodones. About 6,000 Americans and Canadians cross each day primarily to buy eyeglasses and for dental work.  Several of my friends use these services, and save a ton of money.  Here is an actual experience of a close friend.  My friend’s daughter in her 50s needed significant dental work completed including a bone grafting in her jaw.  The  dental work for oral surgery and implants in Scottsdale was $120,000.  I recommended a dentist in Los Algodones who friends use. With her extreme oral situation it took 1 1/2 years, but cost $19,000 and the result is fantastic!

-       The same holds true for Tijuana, although currently with crime perhaps more dangerous.  Californians still use the services.  Another good friend is Steve Abrahamson.  About 5 years ago Steve was diagnosed with severe ‘Valley Fever” from the Arizona soils.  Steve was/is in great shape.  (You can assume he lived!)  The Mayo Hospital in Scottsdale and Rochester gave up on him, and told him he would die.  He did not give up and went to a Dr. Calzada in Tijuana.  Dr. Calzada and many of these other doctors have gone to medical schools in the US.  (From what I am told Dr. Calzada’s sons are also educated in Switzerland with the most current and advanced medical techniques.)  In Mexico, and not constrained by the Federal Drug Administration (FDA) Steve went under experimental procedures.  Steve looks great today and works out daily at one of our local health clubs.  He continues to be monitored by Dr. Calzada.  When Steve is in Tijuana he stays at a fine 5 star hotel near the Calzada Clinic.  Steve insists I carry Dr. Calzada’s direct phone number in my phone in case something would happen to me!  (Ironically, I bumped into Steve yesterday at Starbucks.  He read this blog, and yes gave permission to tell his story!)

What are the drawbacks on Mexican medical treatment?  There is not the same kind of legal recourse against malpractice treatment as in the US.  American insurance companies do not recognize medicine in Mexico, therefore you will not have coverage.  Cash only!

If you need expensive medical or dental care, search out the costs and look at reliable sources outside the USA.

I hope you find this blog of interest.

      

MONEY 156 - THINGS

THIS IS MY 156^TH BLOG ON UNDERSTANDING MONEY TOOLS

January, 2019

www.understandingmoneytools.blogspot.com

First, I must apologize for an error in my last blog.   I write these blogs fairly quickly.  The error, which has been corrected, stated Pi incorrectly. For 60 years I have known Pi as 3.14159, however in my typing I put it down as 1.14159.  To adjust the last blog it should be the “3.14159 times 4, the radius used in the example, resulting in an area of 12.56636 miles, rounded to 12.6 miles.

This blog is about “Things”.   “Things” may not be cohesive or focused, however covering a variety of issues, topics and thoughts it may have constructive benefit for you.

Now, to a comment on stocks and the markets.  It boggles my mind.  You can take all the analyzing of principles one has learned over the years and throw them out the window.  The stock markets defy rational/logical thinking and analysis.  Very frustrating for me, and others.  With the problems and issues at hand politically and financially we should continue in a downtrend pattern, but have not done so over the past few weeks.  I could  present more analytical tools, but it is immaterial at this juncture.  At some point basics of economics will need to “kick in”; I don’t know when considering the manipulations happening.  Presently, for instance, Apple stock is down.  People do not need a new iPhone at $1,000 every year nor a new computer.  Samsung, selling computers and appliances, is also down.

Continuing with stocks, every fund in the world holds the “FANG” stocks; those being Facebook, Amazon, Netflix and Google.  Access to private and personal information may continue although some countries are fighting this intrusion.  I remember so well companies that were once very successful now in a failure mode or gone.  I knew the guys in Denver who started National Demographics and Lifestyles. They were the first in the 1980s to have people fill out cards on their “lifestyle” habits and you mailed them in, postage paid. That information was all computerized and sold to companies according to area or zip code. (National zip codes came into being in 1963.) The owners sold out and made a few million, not nearly what Facebook and Google are valued at!  Sears had a wonderful catalog, you could buy a ton of items.  Sears is bankrupt.  Jeff Bezos entered the 21^st century duplicating the concept representing the world of product.  Will Amazon remain years from now?  Even Jeff Bezos has learned from history and doubts that.  As Netflix surges I think of Blockbuster stores for video and movies.  They are long gone after a huge rise in stock price.  Will Netflix remain?

I thought it might be interesting to look at our past presidents over the past 40 years and see how general stock investing might have been favorable viewing each president’s stance on economic issues. Let’s start with peanut farmer, Jimmy Carter in 1976.  He was facing OPEC (oil) and inflation problems.  He was a Keynesian thinker as free markets carried inflation extremely high.  He believed in regulations of industries like oil/gas and adjusted interest rates with the Federal Reserve.  He implemented pricing standards for various types of oil and gas drilling which helped the independent US producers.  Interest rates were adjusted upward to the 16-18% range with then Chairman of the Federal Reserve, Paul Volcker, who remained in office until 1987.  Investments in regulated industries like utility companies were good along with oil and gas.  By 1979 you wanted to be out of real estate.

Next in line was Ronald Reagan in 1980.  He was voted into office with the backing of big business, and coming from California the defense industry.  Reagan was a “free market” economist.  He slowly did away with oil/gas regulations instituted by Carter destroying the independent oil and gas producers.  By the mid-1980s he had depleted the power issued to the Sherman Anti-Trust Act of 1890 and the Glass-Steagall Act of 1933.  I strongly believe these were two of the most important Acts ever voted in by Congress and the Senate, but because of big business and money, politicians caved in. (I have covered both of these Acts thoroughly in past blogs so to understand more please go back to my blogs, or use Google for information.)  Investments during Reagan years would have been to sell out of oil and gas by 1983, and by 1986 investing in or buying banks.  Note: In 1986, I was hired as a consultant for 6 months to advise a large investment banking firm.  We knew the 1986 Tax Reform Act was opening the door for changes.  One, was the significant drop in passive income taxes, thus more money investing in private companies.  Two, interstate banking was going to pass favoring the biggest banks, unfortunately hurting the local and state owned smaller banks.  Point three was that big companies through mergers and acquisitions were only going to get larger and more controlling. Wall Street loved this.

In 1988, George H.W. Bush entered office. Can’t say much for investing here.  War means money for defense and stocks in that industry.  We had a Gulf War in Iraq after Saddam Hussein invaded Kuwait.

In 1992, Bill Clinton moves into the White House.  He and Hillary attempted a national health care program.  I would have bought (which I did) medical, drug and health stocks.  As that turned into a failure mode, I would have shorted most of these same stocks, but I wasn’t smart enough to do that!  The end of the 1990s was “go, go” times for the Dot.com stocks.  This was one of the three highest priced stock markets in history including 1929 and today’s markets.  It would have been “get in”, “get out”.

In 2000, George W. Bush was elected president.  A person didn’t need to be smart to know because of the Bush family and their connections to the Saudi Arabia Royal family on investments that oil was going to take off.  (A past partner of mine in the oil and gas business contacted me wanting me to get back into the industry with him.  I was involved with two real estate developments, plus got burned once, not again.)  During Bush’s term oil went up to about $145/barrel, much of that pricing due to Wall Street future’s trading.  The stock markets cratered in the 2008 era when banks were failing.  Few people predicted the extent of this.  Of course, it would have been wise to get out early, let’s say 2005-6, and then have the fortitude to buy back in when the DOW reached approximately 6,800…especially buying the big bank stocks.

In 2008, Barack Obama was elected president.  Uneventful years in the markets so could not see strong direction.

In 2016, Donald Trump was elected.  Trump is a New Yorker coming from one of the wealthiest US families.  Wall Street “loves” Trump.  You knew the stock market would get a tremendous rally.  Whether you are a Democrat or Republican you should thank what Trump did for the stock market.  The “Trump Bump”, as it was called, accounted for a rise of about 7,000 points to the DOW, without a real change in earnings to date, only the price per earnings went through the roof!

This “Trump Bump” was one of the greatest examples of “perceived value” versus “real value”.  Time will tell, but I think the lowering of tax rates for corporations to 21% from 35% will not be enough incentive for companies to bring back their cash into this country and pay that tax.  The wealthiest also received a tax break down to 35% from 39%. Sounds nice, but the wealthiest have such good tax lawyers and accountants they rarely will pay that amount.

For capitalism to succeed we need to be able to constantly acquire things (goods or services) with money; infinite economic growth.  Money has been growing (M-1) through printing more money, and lending (debt) to  government, corporations and private sectors.  After one or so good growth years we will most likely lower our growth (GDP) expectancy to the 2 plus % range.  Over the past 35 years with annual inflation about 2% it reflects “no growth” for the past 3.5 decades.  To grow you need a very strong middle class of people with real money, not borrowed money. We have a shrinking middle class. The wealthy are greedy and don’t get long-term economics for success.  Actually, they get it, but don’t care!  It came out this week that the 26 wealthiest people in the world held as many assets as the lower 3.2 billion people in the world.  Is this success?  In my mind it is atrocious, and the world is doomed if we do not change economics and our ways.  The birth rate for the smartest people, in the most successful countries, continues to fall; not good.

I hear people talking about China going into recession, give me a break!  Let’s take a peek here.  China’s 2018 GDP dropped to 6.6%, yes, the lowest in 28 years. They have a fast growing middle class to buy their own goods, so does India.  Our trade imbalance with China hit another high going up 11.3% in 2018 when President Trump is trying to correct the situation.  He won’t.  China “owns” the USA.  They own over $1 trillion in our government bonds, and many companies here in the US.  In the US they own such companies as Smithfield Foods, the largest pork producer.  They own car companies like Volvo in Gothenburg, Sweden.  They have acquired a vast majority of the world’s lithium for batteries including the areas of Bolivia and Peru.  Right now, Kenya can’t pay them back on debt so they may take over country owned assets. They are building/built $6-8 billion in real estate in downtown Los Angeles.  And, they are a big buyer of gold on the market.  On and on.  China is wealthy and still growing at an incredible rate!  The last time we had a GDP close to their low right now of 6.6% was in 1984!

The auto industry leaving the US?  I predict because Asia needs to import oil for gasoline, China and Korea will be the first to really take over the electric car industry.

Politics and the closed Federal Offices?  I empathize with the employees. They are the ones made to suffer through the shutdown, and don’t receive paychecks every two weeks. It doesn’t hurt our politicians one bit.  The Federal workers do have a union to protect them to some degree, however only 100,000 of the 800,000 workers are members.  Some theorists speculate this gives reason for the government to get rid of employees, thin down the payroll, and hire new workers at lower pay levels.  Who knows?

Staying on the subject of politics, I am a firm believer that politicians should be serving the people of this country.  Politicians should serve a one time, 6 year term, then out, and not become lobbyists.  We need to put a constraint over lobbyists and their money buying politicians.  Politicians should receive only a minimum salary, and no special retirement/health benefits once out of office, similar to the rest of us Americans.  Just like the illegal drug trade we need to remove money from this equation.  Money breeds greed, greed breeds power, power breeds corruption and dishonesty.

I hope you got something out of this blog.

MONEY 155 - BUSINESS

THIS IS MY 155^TH BLOG ON UNDERSTANDING MONEY TOOLS

January, 2019

www.understandingmoneytools.blogspot.com

In this blog we are going to have some fun.  This idea came to me in the night while struggling for sleep.  I am going to present real business situations and problems, and you see if you can resolve the issues.

The first one came to me this past week.  While at Starbucks with a friend we ventured into his part-time business.  He retired from a successful financial background with international companies...no dummy!  He either bought into or is a consultant for a closed middle school in our town, which has been converted into a private “tech” school.  We both agree that for the future generation having a bachelor’s or master’s degree is not much help, unless you are in the medical or technology fields.  If you develop a “fine skill” that is needed you will make a decent, or perhaps a very good living.

The parallels to my background in real estate development are very similar.  The main stumbling blocks are conquering the need for “destination” type of businesses, realistic market expectancies and “economy of scale” for build-out or improvements.  This is a “Catch 22”.  How do you attract good, experienced teachers to a smaller town, when the student (younger generation) is 15-25 miles away? People drive toward more density and opportunity not away from.  Economy of scale comes into the equation as it costs money to convert a school into dynamic classrooms, modernizing and re-doing a lot of the infrastructure to meet the needs of a “tech” classroom (examples being electrical, plumbing, layout, etc.).  Most of the time it is more cost efficient to do all the work at one time.   This school concept is a great use for a closed middle school, but will it succeed?  What would you do?

If you are going to attempt something like this, know how far you need to reach out with population density and market share, before you enter into a business.  An example here is movie theaters.  The major players in the Phoenix, where I live, use a population of 100,000 before entering the market.  Fun test here:  Do you remember from junior high school how to draw the circumference around the ideal location to see if you have market share?  Your answer could be to take the center point and from there go out a reasonable distance on a map (called the radius, or 1/2 circle, a semi-circle).  With your string or “protractor” make a circle.  That is your area of interest for market share.

For those of you who are really smart, and want to go further with this dimension you could figure the whole “area” of the circle using, once again, your junior high school math of: Area equals Pi times Radius Squared.  Pi is 3.14159 to infinity.

Using the above formula let’s together use it in a very practical sense so that you realize the application where it could be used.  I want to start a destination retail store in a urban city center.  I figure people will drive up to 2 miles to patronize my store; the radius.  I also know that to get a bank loan they will most likely want to know if I have done a market study, to see if there is a demand for my goods/services, and how many people live in that area.  I will contract this market study to a consulting company.  Both the bank and consulting firm will want to know what “area” I am covering to hopefully succeed. 

Let’s apply our handy formula.  A=3.14159 X 2 squared, or to the second power. (To square a number just multiply it by the same number, in this case 2 times 2, equaling 4.)  Therefore, to get to the “area” in miles around my intended store location we simply multiply 3.14159 times 4 that will give us 12.56636 miles exactly. Round it down to 12.6 miles.  I know you knew this!

Let’s move on to another business problem.  This one involves me so I know it all too well.  I own a large real estate interchange development project in a city just outside Milwaukee, Wisconsin.  I have many years and a ton of money into land development.  The project was intended for certain uses which  are no longer economically viable because of changes in consumer’s buying habits.  This is seen all over the country with on-line purchasing becoming stronger and shopping malls going to pasture.  I didn’t do anything wrong, however it takes years to develop land, along with government, county and city approvals, and then building.  This project is now “mothballed”.  How do you exit from this type of situation, and yet with money?

The above is an example of a market change.  Let’s look at government regulation changes affecting “your” business.  Again, I will use my own experiences, however they are similar to thousands of other companies caught in change.  In the late 1970s the Feds and government raised interest rates sky high to the 18-20% range killing real estate.  Then, President Carter came in with the premise of protecting independent oil companies, and skirt OPEC as much as possible.  He instituted guaranteed pricing on natural gas and oil to assist the American oil companies. Subsequent to this era, President Reagan did the opposite, abolishing all price regulations and the independent oil and gas companies failed.  What would you have done with a company during these times?

In 2008-2010, as most of you can remember, the government stepped in and aided our failing banking industry permitting banks to foreclose on homes and real estate developments.  You might have had bank loans and contracts in place, but they no longer remained enforceable.  Banks won, private companies and homeowners lost.  Did the majority of homeowners do anything wrong to warrant this?  No.  What would you have done?

I have another friend who retired from Nestle Foods.  He joined a company with a consulting contract to take the company’s product,  freeze-dried yogurt cubes, into the China market.  Great product, reputation and idea.  Chinese people are very concerned about the health of their children these days, after being constrained with the “one child policy” for years.  The Chinese frankly do not trust their own dairy products with chemicals, contaminants and bacteria as much as they do products from the USA.  Everything was going fine until recently when China eliminated many US companies from selling in China.  We will see how this plays out with President Trump and the trade and tariff disputes.  My friend had nothing to do with the demise of this international market situation, but the effect has been financially terrible for the company as they no longer can sell there.  What would you have done?

In my eyes, I watch the evening news relating to and empathizing with the US Government workers not getting paid.  The same banks we assisted and kept alive in 2008 are not helping these 800,000 workers, and from what I understand will foreclose on their home mortgages unless paid each month.  If not that, any bill, such as a credit card statement not paid on time will lower the credit scores of these people, and it will take a long time for them to re-build credit.  What would you do?

I hope you related to some of these illustrations I went through.  It points out that variables pop up, many you can’t control.  Changes in government regulations can be unexpected and disastrous to your financial planning.  Also, think through each endeavor before you start to eliminate the variables that could “bite you” down the road.  Could you solve the problems and issues above?

MONEY 154 - MONEY

THIS IS MY 154^TH BLOG ON UNDERSTANDING MONEY TOOLS

January, 2019

www.understandingmoneytools.blogspot.com

Time on my hands, time to write another blog.

What a trip in the stock markets over the past 3 weeks.  We went from a ton of selling to normalize stock values, to the government stepping in with the “Plunge Protection Team”.  As I write there is an up-tick market.  Why is this happening, when we should be continuing on a down-trend market to equate to what is happening worldwide and to earnings?  The P/E for the DOW average is still around 20:1, or 25% overpriced to historical averages.  The end of December the “Plunge Protection Team”, consisting of the large banks and the Federal Reserve, set benchmarks one day for a DOW of 23,000, then the next days at 22,750.  Loved to watch the gyrations in trading patterns.

Let’s re-visit three things I always profess with some common sense: Most things are “Cause and Effect”,  “Debt Kills” (whether it is private debt or government debt), and “Never Assume” anything.  The term “investing” today is too much a misnomer.  It is “gambling” for the basic public, and calculated risk taking for Wall Street.  If you aren’t on the inside, you are “gambling” with your money and retirement funds.

I base my “assumptions” on facts; I can still be wrong.  The market the past few days has slowly gone up, when the facts on corporate earnings for this year and trend lines indicate downward pressures.  (In tech you have Apple missing it’s earnings and Samsung reported 4^th quarter earnings down 29%…macro economic uncertainties for future profits.)

From what I hear and know, US corporations are buying in their stock.  This does a few things: 1) it shrinks the “float” of their daily traded stock, 2) it increases the price of their stock and the markets go up, 3) this increases their liabilities on a balance sheet as debt if they borrow the money, or decreases their assets on a balance sheet if they use cash on hand or liquidate other assets to buy stock.

If you are sitting with a ton of cash like Google or Microsoft that is one thing, however if a company borrows money that is another issue, and can be quite dangerous down the road.  If a company is buying it’s stock at a high Price to Earning’s Ratio it may see problems if the economic environment deteriorates over the next two years, which I expect.

If you are one of the major US banks and a participant in the Plunge Protection Team the effects could also be deleterious in the long term.  Why is it dangerous for banks to step into the markets and buy stocks, as an executive order from the government?  If you answered the following, you are probably in the ball park: 1) In 2008-2010 the government mandated a “mark to market” valuation of real estate held on the books of banks.  That means that if the bank held a loan basing the value at a certain price, they needed to adjust value periodically.  In 2008, the banks went under as the value of real estate went down.  The same could be said for other assets like stocks. And, 2) These banks have less liquidity to lend money to businesses and Americans, as they need to concern themselves with “capital requirements” regulated and mandated by the Feds.

Buyers of stocks must consider the new Democratic Congress.   Higher tax increases will be proposed.  It will be interesting to see if they can get the proposals through the Republican held senate.  I think little will be accomplished the next two years.

Bottom line to this blog is that I believe we are in an unrealistic stock market climate.  Few economists think this year and next will be great for earnings, and a cycle down-turn is in store.  Too much has been aligned with President Trump and his abilities to accomplish what he intended from the on-set, versus reality.  Such things as the “trade wars” and tariffs are big talking issues, but will not produce much positive effect, even when there is an outcome produced.

NOTE:  If there is a term used in these blogs that you do not understand, please refer to previous blogs as I cannot re-define with each blog I write.

Thank you.

MONEY 153 - STOCK MARKETS

THIS IS MY 153^rd BLOG ON UNDERSTANDING MONEY TOOLS

January, 2018

www.understandingmoneytools.blogspot.com

Time again to write a blog.  This one is on the stock markets.  I find the markets to be ever fascinating.  I can draw parallels between stock markets and sheep farms.  You have the farmer, he is the Federal Reserve, Wall Street and the president (control); you have the sheep dogs herding the sheep, they are the financial advisors being told what to do and what to invest in; and then you have the sheep, the public investing in the markets and following others like sheep are supposed to do!

Partially what gets me to write are all the falsehoods coming out about the economy and markets.  We are in a normal downward correction...normalization in the business cycle.  And, this is happening worldwide.  Cycles are perfectly normal and to be expected, however it seems Mr. Trump cannot accept this part of the cycle.  Today, as I write, it is January 2^nd.  I just finished a blog on the “Plunge Protection Team” intervening last week, and buying up stocks to protect the downside.  It happened again today.  This morning Asian markets were down and our future’s markets were also down, big time (better than 400 points).  The Plunge Protection Team goes into effect with Executive Order, meaning the president or someone he appoints draws parameters on controls.  Sure enough, resistance at 23,000 on the DOW and buying occurred. It was a “seesaw” type of trading day based around this 23,000 number.  This permits the big 6 banks or the Federal Reserve to buy up stocks stabilizing markets, but they will eventually run out of cash doing this.  What will the banks do with all the stock they are buying at high prices when the stocks fall more and correct in the future?  At some point they need to watch their “capital reserves” to meet Federal requirements.

Mr. Trump made the statement that December’s correction in the markets was a “glitch”.  He feels that the markets will trend higher once he negotiates trade deals with China.  Wow, in 2018 we reached a parallel, or close to it, of having the highest stock market valuations related to earnings in history, surpassed or equaled only by 1929 and 1999, and both those years led to disaster.  How can it go higher when we already are in very dangerous territory?  Only if corporate earnings sky-rocketed, when in actuality they will be declining over the next couple of years, and this is worldwide.  The cycles!

Talking with a friend today, he asked a very good question.  That question was, “it was announced today that in December we lost $2.9 trillion in the stock markets, where did that money go?”  Good question, and the answer is, “it never really was there, it was an artificial value”!  It was a loss, (yes), of “artificial value”.  Let me use a simple illustration.  Let’s say there is a very small restaurant for sale that has pre-tax earnings of $50,000 for the year.  As a private corporation or individual I might offer to buy at 3 times earnings, or $150,000.  Now, why do most people want to go public in stock markets?  Greater valuations to earnings.  Historically, over the last 100 years, or so, publicly traded companies trade their stock at about 15 times earnings, or what we refer to as a 15:1 P/E. 

In this example of the restaurant if it were a publicly traded company we might expect 15 times $50,000 as the purchase price or $750,000. Another WOW!  You wouldn’t pay that, would you?  It would take you 15 years to get your money back (the P/E).  So let’s assume we are in today’s overpriced market.   Many of the stocks on the NASDAQ are tech stocks, but the NASDAQ has been at about a 50:1 P/E.  (In 1999 when it was this high it dropped 50% in value.)  With the example of the restaurant we would price it at $50,000 times 50 or $2,500,000.  Perhaps the restaurant stated that they wanted to expand.  It could never justify $2,500,000.  This is what has happened to our markets, all way overpriced to historical standards. (Look at companies like Tesla, Amazon, Netflix, and Facebook.)  Reflecting back on my friend and his question, you can see how the disappearance of $2.9 trillion from the markets in December happened, but it was phony money…it never should have been there, and we need to reach normality.  I never want to refer to my fellow Americans as being “stupid” as that reflects IQ, however very naïve may nicely apply!  Perhaps sheep might be a nice fuzzy comparison, as in my first paragraph!  This is exactly what is happening.  Wall Street and the government is leading us astray, pushing the emotion button, “greed”.  Following the herd.  We are being tremendously manipulated in what is supposed to be a “free market” society.

If you read my previous blogs I gave many reasons why the markets should, and will, trend down.  GDP will be cut in half this year from 2018, at a high of 4% growth.  Another factor entering in this year and effecting corporate earnings is the rise in the Federal minimum wage of $.50/hour.  Not much, but will erode into corporate earnings for those businesses now paying minimum wages. Minimum wage will vary from state to state, however it will bring the national wage to $10.10/hour.  You might think Jeff Bezos is kind-hearted going to $15/hour, however he is doing away with bonuses and stock options thus making more money for Amazon and himself.  Look behind the scenes of what is on the news each night.  He also is pushing faster into totally robotic warehousing, thus eliminating the human being and saving on such necessities as workman’s comp insurance, liability insurance, FICA and employee wages and benefits.

As long as we just mentioned Amazon, let’s proceed in the “real world” and discuss it briefly.  Amazon, for the most part, is a distribution, “plain Jane” company.  As of today, it is trading at $1,521.44/share. It has a P/E of 334.26/1 and a market capitalization of $748 billion. Would I buy this stock, hell no!  Here is the “real world” on stockbrokers and investment advisors:  This advisor needs to feed his family, and it comes from commissions and fees.  This person tells you to buy Amazon, but underneath is thinking, “buy the stock at this ridiculous price and we most likely will find another buyer dumber than you to get you out in the future!”

With the economy here and worldwide trending down, at least this gives Mr. Trump the ability to blame it on the Democrats, and perhaps a chance to win the 2020 elections, if he so elects to proceed forward for another 4 years.

Again, you must come to your own conclusions.  I just try to point out some facts for a clearer thought process.