THIS IS MY 170TH BLOG ON UNDERSTANDING MONEY
TOOLS
July, 2019
In this blog we are going to discuss essential knowledge for
stocks, and hit upon our current economy.
In regard to the fundamentals of stocks much of which I have covered in
previous blogs it may be redundant.
I feel that if you have incorporated a business, bought stocks/thinking
of buying stocks or just interested in the make-up of stocks that account for
much of our economy you should have a basic understanding.
A friend recently asked me how I would evaluate the value of
stock they purchased in relationship to the value of the company itself. Good question, and I have answers. The most accurate and simplistic answer
I gave him is “zero”. The same
goes for the stocks you own!
First, have you ever taken possession of a stock certificate showing ownership
in that company? If you have a
private company you have a stock certificate and may have placed it in safe
keeping in your safety deposit box at your bank. If you lose the certificate
it’s gone. (You should have at least annual meetings and the secretary of your
corporation would have ownership records.) If it is a public company the company has your ownership of
record. You have the right to show
ownership in your name rather than “street name” with your brokerage account
and take possession of the certificate.
If you look at a certificate in the upper right hand corner
it will most likely show the value to each share of stock the company states it
is worth. It states, “Common
Stock, Par Value of $.01 Each.”
That is your value, “zippo”.
You only realize true value when you sell the stock at a given price to
a willing buyer, and that is under a “bid/ask” basis. This means that Wall Street, or investment banker hopefully
has buyers and sellers for your stocks.
If you want to sell, you “ask” a price, someone offers you a “bid” and
you come together in agreement. In
reality with a brokerage firm it happens instantly, or you can place a “sell
order” for your stock only at a given price or better. If there are no bids, you do not have a
sale. Simple!
Now, what other ways do we give value to a company? Let’s try “break-up” value. It’s happening to a degree to Sears
stores, right? The CEO has been
trying to place a value on the various “hard assets”, such as real estate,
inventory, and accounts receivable (which I doubt they have) to buy them out.
Not successful so far that I know.
How about “bankruptcies”? Any assets over liabilities? Doubtful, but sometimes under a Chapter 11 restructure of
company. It’s used all the time.
You may have “hard assets” like real estate, furniture, etc. Does this company have “Proprietary
Products” like software and patent rights to assets such as medical devices and
drugs? These add value.
In the real world law firms get involved and creditors stand
in line. If the creditors are of
the same kind they are in line to get paid according to when they filed as a
creditor. This usually is with the country clerk and recorder. In the case of a larger company the
bondholders get paid before stockholders. With present stockholders they get
paid according to class of stock such a “A” Class, “B” Class, etc. When I have been involved with public
stock bankruptcies I received a letter from a law firm representing
stockholders in a “class action suit” for “X” millions of dollars. Perhaps a year or two later I received
another letter that stated the law firm won and my proceeds check was
enclosed. In my cases it has been
ridiculous and not worth the time.
The law firm takes almost all the money and you receive less than one
cent on the dollar.
Let’s move on with fundamentals. You want to form a corporation
to protect yourself from creditors and liabilities. You then decide on how many
shares you want to “Authorize”; a lot!
Then, you “Issue” stock from the Authorized shares to key company people
and for stock options, etc. holding back perhaps millions of shares. If you
think you want to one day go “public” with your company, you want to authorize
more shares than a small private company.
Your lawyer or accountant will discuss this with you. You want the company to either be
“tightly controlled” with fewer shares issued for trade, or highly traded with
more shares in the “float”. The
term float is the daily amount of stock that is tradable in the market place.
Another way of discussing valuations of a company is to
determine the number of shares in the float and issued, times the price of a
single share of stock.
Example: Let’s say company
“xyz” is priced at $100/share. It has 1 million shares issued and has a value
in the market place. What is the
“Capitalization” of the company or value?
$100 million.
The stock market in general this week again boggles the
mind, higher yet, not because of earnings or real gained assets of companies,
just more money chasing stocks. In
the last few months we went from a price to earnings of the DOW Industrials
from 26:1 to 28.9:1. 120 year
average for this P/E has been 15:1, therefore the market is overpriced by
100%. Be very careful. To me this smells of Herbert Hoover
being elected a Republican president in 1928 during the “Roaring 20’s” followed
by the crash of 1929 and a decade of The Great Depression. If you are old enough to remember the
stock markets of 1999 when the economy was doing well, stocks re-adjusted and
the values were cut in half!
Let’s talk economy.
Economics is the “financials” of a country or government looking at the
big picture and longer term. The
US economy since The Great Recession has been built on a “Ponzi” model, one
photo of this statement is the above regarding our stock markets. The Ponzi Scheme comes to bear as we
have printed money, lent it to banks, they lent it to mainly big companies (now
individuals) so they can buy “things” or stocks that are taxed so we create
revenue and economy known as Gross Domestic Product (GDP). Then, we print more money as the
economy needs dollars to cover US debt and lend more money out, etc. A big circle of false economy,
expressed in simple terms.
Another problem is that large businesses didn’t share income
or higher wages with middle class workers, so in the last few years the middle
class has had to borrow money for student loans, car loans and using high
interest credit cards because they couldn’t earn enough money working to
support themselves.
Once again, we went from tighter credit in 2012 to loose
credit now. We do not have income verifications
in many cases, and have lowered necessary credit scores for purchases and
borrowing ability. Tell the banks
your income is $200,000, even though it isn’t, and you will receive a credit
card with a huge credit line! That
is what’s happening, and it will backfire on the US once again, and be larger
than what we witnessed in 2007-2009.
Is our economy in great shape? In my eyes it is in terrible shape and I will continue
with my premises. We ended 2018
with a Gross Domestic Product of $20.5 trillion. Our current US Government debt as of July 1st is
$22.5 trillion. Simple math shows
that we have a debt to GDP ratio of 110%, higher than any G20 country in the
world. (There is a US Debt Clock,
to the second, in Manhattan, NY on West 44th Street, or you can save
the airfare and go to Google and get “US Debt Clock” receiving the same figures
for revenue and expenditures. Fascinating! There are Debt Clocks for many
countries in the world where you can get these financial figures.) You have to
watch media and government statements very carefully. We are the largest economy in the world, but one of the
“sickest” in the world, with no way out.
On September 30th we end the government fiscal year
completely broke once again, and needing Congressional approval to print more
money to pay bills. Current yields
are going up for both short-term bills and notes and long-term bonds. Will the investors behind the Federal
Reserve Bank want to “swallow” up more of our debt/bonds? The market value of bonds just took a
hit. (Interest rates and the market price of debt instruments always work
inversely to one another!)
Fed Chairman, Powell, is caught. Inflation should be at 2%, but now appears increasing so he
wouldn’t want to lower interest rates.
The stock markets are adjusting for a lower rate. The government needs to raise more
money from instruments especially 10 and 30 year bonds, however we, the USA, is
weakening and other countries might want a higher rate interest. Will the biggest buyers like China keep
buying? They have a healthy
economy with a great debt to GDP ratio of about 50% or less. China currently holds $1.3 trillion of
our US Bonds, and separate Hong Kong owns $300 billion of US Bonds. President Trump and the US don’t have
China over a barrel, they have us over a barrel as we need them and other
countries to buy more of our debt!
Can we keep printing money to keep our doors open and
economy going? Doubtful. Remember what this did to Germany in
the mid-1930s.
A couple other points.
We have alienated many countries like Germany, France and Canada telling
them whom they can trade with.
This is going to start closing down the US Dollar markets in the long
term. BRICS plus Iran unified some
time ago (Brazil, Russia, India, China and South Africa) plus Iran. Many countries want to start diverting
from the universal US Dollar to other currencies, including BRICS for oil
trading and more. Watch our dollar slide in the next 5 to 10 years unless something
drastic is done.
The US has also sanctioned trading to over a dozen countries
including Russia, North Korea, Libya, Syria, Venezuela, Iran and more. It’s hurting our friendly nations as
well cutting down their trading abilities, hurting economies.
I hope you got something from this blog. I wish Americans were more interested in
finances and economics as that is your future in the hands of mostly very inept
people.
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