Since you can't trust anything you hear from any politician I decided to do the work myself. Here are the results. You can be the judge of what is "fair" and what is not.
Gross Income Tax Due
$16,250 -$4,710...that's right. A negative which means a refund from the
earned income tax credit. This assumes Social Security tax too.
$52,000 $4,399 Again, assumes the FICA (i.e. Social Security tax).
$99,000 $15,710 2 times the income, 3.5 times the taxes.
$300,000 $85,970 This is assuming a small business owner. Doesn't include the
amount of money she pays for her employee's FICA.
$1 Million $316,584 Again, small business owner, not including employee's FICA.
$1 Million $132,123 Only capital gain income. This is why Warren Buffett says he
pays less % than his secretary.
Is it fair if you make 3 times more than your neighbor, you pay 5.5 times more in taxes? Or if you make 10 times more, you pay 20 times more taxes? You can decide. But those are the real numbers.
I think what people are missing is the definition of "rich". If you just came out of school and you are a new family doctor making $150,000 and your spouse opened a small business making $100,000 you are "rich" according to one candidate. Even though you may have a small business loan for $100,000 and medical school loans for $100,000 and little to no net worth. These are the people trying to get rich. Should you penalize them? Warren Buffett takes little if any salary because he doesn't need it. So, what should the definition of "rich" be? Politicians have always used income. Do you think that is right?
I don't mind paying my "fair" share of taxes. I just want it to be fair.
So, if this redistribution of wealth works so well...hell, let's do it everywhere! Warren Buffett said himself the average American has a higher standard of living now than ever before and is living better than John D. Rockefeller. So let's have all those $52,000 income people give up $5,000 of that to give to people in third world countries since they're doing so much better. After all, according to http://www.globalrichlist.com/, they are in the top 1% income earners on the planet.
Thursday, October 16, 2008
Wednesday, October 1, 2008
I Couldn't Have Said It Better Myself
How to Start the Healing Now
Fix accounting rules and private money will come.
By BRIAN WESBURY
The most amazing paradox of 2008 is the continued growth of the U.S. economy and the sorry state of the U.S. financial markets. Despite major financial-market problems, real GDP has increased by 2.1% in the year ended in the second-quarter -- 3.1% if we exclude housing. Not everything is great, but we all must agree that the economy has remained remarkably resilient.
This paradox works both ways. Financial problems have not yet dragged down the economy, but it is also true that the economy is not the cause of financial-market problems. Most of the loans that have been going bad in recent months would have gone bad even if the economy had been growing twice as fast. So what is to blame for the "worst financial crisis since the Great Depression"?
The answer seems simple. Mark-to-market accounting rules have turned a large problem into a humongous one. A vast majority of mortgages, corporate bonds, and structured debts are still performing. But because the market is frozen, the prices of these assets have fallen below their true value. Firms that are otherwise solvent must price assets to fire-sale values. Not only does this make them ripe for forced liquidation, but it chases away capital and leads to a further decline in asset values.
For example, the prices of assets on the books of Washington Mutual, when it was bought by J.P. Morgan at a fire-sale price, were cited as a reason to mark-down the assets on the books of Wachovia. This, some say, forced the FDIC to arrange its sale to Citibank.
The same is true of what happened to Fannie Mae and Freddie Mac, which had positive cash flow when they were nationalized by the Treasury. Here's something you won't believe: Fannie Mae and Freddie Mac have not drawn a dime from the Treasury's $200 billion facility that was created to bail them out. It was the use of mark-to-market accounting that allowed Treasury to declare them bankrupt. On a cash flow basis, they were solvent.
Mark-to-market accounting causes so much mayhem because it forces financial firms to treat all potential losses as if they were cash losses. Even if the firm does not sell at the excessively low price, and even if the net present value of current cash flows of these assets is above the market price, the firm must run the loss through its capital account. If the loss is large enough, then the firm can find itself in violation of capital requirements. This, in turn, makes it vulnerable to closure, nationalization or forced sale.
Because the government has been so aggressive with the use of these capital regulations, private capital has been scared away. Just about the only transactions taking place in the subprime marketplace have been sales to private equity firms that do not have to mark assets to market prices. Their investors agree to commit capital for the long haul, and because they are able to bend the current holders of these assets over the knee of the accounting rules they get prices that virtually guarantee a huge profit.
Despite all this evidence, the government has yet to provide relief from mark-to-market accounting. However, the Financial Accounting Standards Board will meet today to discuss potential changes. One thing it ought to consider is that the Treasury plan tips its hat to the problem by acknowledging that its goal is to put a floor under distressed security prices. Warren Buffet understood this and invested in Goldman Sachs before the law had passed, but with full expectation that it would. Other investors will follow. There is no shortage of liquidity in the world.
Nor would relaxing mark-to-market rules temporarily in the U.S. -- let's say for three years, for troubled assets issued between 2003 and 2007 -- undermine our standing internationally, as some allege. If a $700 billion bailout fund and the takeover of Fannie Mae, Freddie Mac and AIG have not already undermined foreign confidence, then nothing will. On the same day the bailout bill failed in the U.S. House of Representatives, the dollar soared.
Another argument is that changing the accounting rules is like sweeping the problem under the rug, which could lead to a Japanese-style decade of lost growth. However, back in the 1990s, Japan took six years to get real overnight lending rates below zero. It also increased tax rates. This was what caused Japan's lost decade -- a policy-induced deflationary recession, not just an unwillingness to book losses.
But it took the Federal Reserve only six months to cut real rates below zero, starting last September, and U.S. tax rates are unlikely to be hiked anytime soon. Even Barack Obama says he would not raise taxes in tough economic times. As a result, the U.S. is not anywhere near the kind of environment that would allow that to happen. Nor will relaxing mark-to-market rules allow losses to be hidden or ignored. Basing prices for illiquid assets on cash flows would still reflect impairment, but not allow them to dip down to fire-sale levels.
Once private investors know they cannot be taken out by accounting rules and illiquid markets, their cash will flow freely. And if the real issue is to find a proposal that will help fix the problems in our financial markets urgently, then the current Treasury plan fails the test. Because of government bureaucracy and legal issues, the first purchases by the Treasury plan will not be made for at least two weeks and possibly four weeks. Mark-to-market accounting changes could start the healing overnight and prevent the U.S. from moving further away from free-market capitalism.
Mr. Wesbury is chief economist at First Trust Portfolios L.P.
Fix accounting rules and private money will come.
By BRIAN WESBURY
The most amazing paradox of 2008 is the continued growth of the U.S. economy and the sorry state of the U.S. financial markets. Despite major financial-market problems, real GDP has increased by 2.1% in the year ended in the second-quarter -- 3.1% if we exclude housing. Not everything is great, but we all must agree that the economy has remained remarkably resilient.
This paradox works both ways. Financial problems have not yet dragged down the economy, but it is also true that the economy is not the cause of financial-market problems. Most of the loans that have been going bad in recent months would have gone bad even if the economy had been growing twice as fast. So what is to blame for the "worst financial crisis since the Great Depression"?
The answer seems simple. Mark-to-market accounting rules have turned a large problem into a humongous one. A vast majority of mortgages, corporate bonds, and structured debts are still performing. But because the market is frozen, the prices of these assets have fallen below their true value. Firms that are otherwise solvent must price assets to fire-sale values. Not only does this make them ripe for forced liquidation, but it chases away capital and leads to a further decline in asset values.
For example, the prices of assets on the books of Washington Mutual, when it was bought by J.P. Morgan at a fire-sale price, were cited as a reason to mark-down the assets on the books of Wachovia. This, some say, forced the FDIC to arrange its sale to Citibank.
The same is true of what happened to Fannie Mae and Freddie Mac, which had positive cash flow when they were nationalized by the Treasury. Here's something you won't believe: Fannie Mae and Freddie Mac have not drawn a dime from the Treasury's $200 billion facility that was created to bail them out. It was the use of mark-to-market accounting that allowed Treasury to declare them bankrupt. On a cash flow basis, they were solvent.
Mark-to-market accounting causes so much mayhem because it forces financial firms to treat all potential losses as if they were cash losses. Even if the firm does not sell at the excessively low price, and even if the net present value of current cash flows of these assets is above the market price, the firm must run the loss through its capital account. If the loss is large enough, then the firm can find itself in violation of capital requirements. This, in turn, makes it vulnerable to closure, nationalization or forced sale.
Because the government has been so aggressive with the use of these capital regulations, private capital has been scared away. Just about the only transactions taking place in the subprime marketplace have been sales to private equity firms that do not have to mark assets to market prices. Their investors agree to commit capital for the long haul, and because they are able to bend the current holders of these assets over the knee of the accounting rules they get prices that virtually guarantee a huge profit.
Despite all this evidence, the government has yet to provide relief from mark-to-market accounting. However, the Financial Accounting Standards Board will meet today to discuss potential changes. One thing it ought to consider is that the Treasury plan tips its hat to the problem by acknowledging that its goal is to put a floor under distressed security prices. Warren Buffet understood this and invested in Goldman Sachs before the law had passed, but with full expectation that it would. Other investors will follow. There is no shortage of liquidity in the world.
Nor would relaxing mark-to-market rules temporarily in the U.S. -- let's say for three years, for troubled assets issued between 2003 and 2007 -- undermine our standing internationally, as some allege. If a $700 billion bailout fund and the takeover of Fannie Mae, Freddie Mac and AIG have not already undermined foreign confidence, then nothing will. On the same day the bailout bill failed in the U.S. House of Representatives, the dollar soared.
Another argument is that changing the accounting rules is like sweeping the problem under the rug, which could lead to a Japanese-style decade of lost growth. However, back in the 1990s, Japan took six years to get real overnight lending rates below zero. It also increased tax rates. This was what caused Japan's lost decade -- a policy-induced deflationary recession, not just an unwillingness to book losses.
But it took the Federal Reserve only six months to cut real rates below zero, starting last September, and U.S. tax rates are unlikely to be hiked anytime soon. Even Barack Obama says he would not raise taxes in tough economic times. As a result, the U.S. is not anywhere near the kind of environment that would allow that to happen. Nor will relaxing mark-to-market rules allow losses to be hidden or ignored. Basing prices for illiquid assets on cash flows would still reflect impairment, but not allow them to dip down to fire-sale levels.
Once private investors know they cannot be taken out by accounting rules and illiquid markets, their cash will flow freely. And if the real issue is to find a proposal that will help fix the problems in our financial markets urgently, then the current Treasury plan fails the test. Because of government bureaucracy and legal issues, the first purchases by the Treasury plan will not be made for at least two weeks and possibly four weeks. Mark-to-market accounting changes could start the healing overnight and prevent the U.S. from moving further away from free-market capitalism.
Mr. Wesbury is chief economist at First Trust Portfolios L.P.
Tuesday, September 30, 2008
I Would Never Say "I Told You So"
Look back at the April 23rd post. Then read the following from Yahoo:
The CRB Index, which measures a basket of 19 commodities, is down 26% due to concerns of a global slowdown and an unwinding of speculative positions during the recent turmoil. The hardest hit commodities include natural gas (-46.9%), soybean oil (-34.4%) and corn (-31.2%). The best performing commodities are lean hogs (+12.2%), sugar (-3.6%) and gold (-5.5%). Crude oil is down 29%.
The CRB Index, which measures a basket of 19 commodities, is down 26% due to concerns of a global slowdown and an unwinding of speculative positions during the recent turmoil. The hardest hit commodities include natural gas (-46.9%), soybean oil (-34.4%) and corn (-31.2%). The best performing commodities are lean hogs (+12.2%), sugar (-3.6%) and gold (-5.5%). Crude oil is down 29%.
Thursday, September 25, 2008
Bailout?!? What's Really Going On?
I've always been a supporter of free market capitalism, but lately I've had my values tested. Listening to many people much smarter than I am saying we need some sort of "bailout" or our economy will be in jeopardy. But I finally found someone with my same values to help me out and keep things in perspective. He's Brian Wesbury, chief economist for First Trust. You can read his stuff at http://www.ftportfolios.com/Retail/Research/EconomicResearch.aspx . Since he is an economist, I'll try to put things in simple terms.
First, when you get a mortgage, a bank originates that loan. Nowadays, they usually don't hold the loan, they package those up and sell them to investors. In those packages, there are all sorts of mortgages bundled together, it's very hard to determine what the value is of those loans. There are people with excellent incomes and credit history and there are sub prime or liar loans in there. The thing I would like everyone to remember is 96%-97% of mortgages are being paid ON TIME! To me, value is what a buyer is willing and able to pay for something. Since this is a "crisis of confidence", nobody wants these loans and their prices are falling...really fast.
Second, OVER regulation by the government forces companies to use "mark to market" accounting. This means, if "the market" is currently valuing those assets at $0.22 on the $1 and you are an institution currently holding similar types of loans, you need to mark yours down to $0.22. Even though you may want to hold them forever! Again, because of over regulation, federal banking requirements force you to raise more money to shore up your balance sheet. It becomes a vicious cycle and snowballs...thus a "crisis of confidence". Mr. Wesbury uses the example if houses in your neighborhood were all worth $200,000 and you had a loan for $100,000. If one of your neighbors went bankrupt and sold their house for $75,000, your house would now be "valued" under mark to market at $75,000. The bank would come to you and say you need to raise an additional $25,000 and give it to us to even it out. Let's say you do that and then another neighbor went under and sold for $50,000. Now you need to mark yours down yet again and add another $25,000. But you may say, you never even want to sell your home. You'll stay in it forever. You couldn't do this for too long could you. Well neither can the banks.
Mr. Wesbury's idea is to temporarily stop the "mark to market" rules. Let things cool down and the panic to stop. 96%-97% are still paying their mortgages on time so maybe these investors WANT to hold their loans forever and not sell them. They certainly don't want to sell them at $0.22 on the $1.
This won't cost taxpayers one dime. This, along with strong language could prevent further panic.
First, when you get a mortgage, a bank originates that loan. Nowadays, they usually don't hold the loan, they package those up and sell them to investors. In those packages, there are all sorts of mortgages bundled together, it's very hard to determine what the value is of those loans. There are people with excellent incomes and credit history and there are sub prime or liar loans in there. The thing I would like everyone to remember is 96%-97% of mortgages are being paid ON TIME! To me, value is what a buyer is willing and able to pay for something. Since this is a "crisis of confidence", nobody wants these loans and their prices are falling...really fast.
Second, OVER regulation by the government forces companies to use "mark to market" accounting. This means, if "the market" is currently valuing those assets at $0.22 on the $1 and you are an institution currently holding similar types of loans, you need to mark yours down to $0.22. Even though you may want to hold them forever! Again, because of over regulation, federal banking requirements force you to raise more money to shore up your balance sheet. It becomes a vicious cycle and snowballs...thus a "crisis of confidence". Mr. Wesbury uses the example if houses in your neighborhood were all worth $200,000 and you had a loan for $100,000. If one of your neighbors went bankrupt and sold their house for $75,000, your house would now be "valued" under mark to market at $75,000. The bank would come to you and say you need to raise an additional $25,000 and give it to us to even it out. Let's say you do that and then another neighbor went under and sold for $50,000. Now you need to mark yours down yet again and add another $25,000. But you may say, you never even want to sell your home. You'll stay in it forever. You couldn't do this for too long could you. Well neither can the banks.
Mr. Wesbury's idea is to temporarily stop the "mark to market" rules. Let things cool down and the panic to stop. 96%-97% are still paying their mortgages on time so maybe these investors WANT to hold their loans forever and not sell them. They certainly don't want to sell them at $0.22 on the $1.
This won't cost taxpayers one dime. This, along with strong language could prevent further panic.
Wednesday, September 24, 2008
Secrets of Investing
Benjamin Graham, author of The Intelligent Investor and Warren Buffett's teacher, said you need three things in order to become a successful investor:
1. Every time you buy a stock you need to think about it like you're buying the whole business and you're a business owner. Buying one share of Microsoft should be viewed the same as buying the corner pizza shop, let's call it Pizza Express. When you become a business OWNER, all you should care about is how much cash is in the cash register at the end of the day after all the bills have been paid. This is what the great investor Bruce Berkowitz says. That is all you can pocket as an owner.
2. Take advantage of Mr. Market whenever you can. Mr. Market was a man created by Benjamin Graham. He is completely crazy. It used to be every day, but now in the day of the internet it's every second, he is offering to buy you out of your Pizza Express business. He doesn't know what you paid for it. In fact, you paid $100,000 cash and have no debt on the business. He offers you $90,000 right now. Do you accept? Do you panic? You still have the same amount of cash in the cash register today. People are still buying pizzas. So you tell him to stick it where the sun don't shine. But he keeps coming back. $80,000...$75,000...$99,000...$105,000... So you have two choices. One, take advantage of him, buy more Pizza Express stores when the offering is low or two IGNORE HIM. There is no reason to watch the stock market daily, weekly, monthly, quarterly or even yearly. Warren Buffett said they could close the market for years and he wouldn't care.
3. Buy with a margin of safety. If your Pizza Express, which you paid $100,000 for, generates $10,000/year to you (and you don't work in it), that means after 10 years you'll have your investment back and start making money on your investment. This, of course, assumes no increase in your annual income nor any appreciation potential in the business. So buying with a margin of safety would say, I only want to pay $50,000 for this Pizza Express. That way, if people start buying less pizzas, or if costs of ingredients skyrocket or if "fill in your own" happens, then it won't take me so long to get my money back. Buying what you believe is a $100,000 business for $50,000 lowers your chances for a loss.
I think the main point of all of this is in trying to help investors control their behaviors, because controlling your behaviors is of utmost importance. As a business owner (stockholder), focus on the cash in the cash register. Stop listening to Mr. Market (watching stock prices) and buy or use managers who buy with a margin of safety. Then go golfing, fishing or hiking and enjoy your life. You'll only be following the advice of the greatest investor ever.
1. Every time you buy a stock you need to think about it like you're buying the whole business and you're a business owner. Buying one share of Microsoft should be viewed the same as buying the corner pizza shop, let's call it Pizza Express. When you become a business OWNER, all you should care about is how much cash is in the cash register at the end of the day after all the bills have been paid. This is what the great investor Bruce Berkowitz says. That is all you can pocket as an owner.
2. Take advantage of Mr. Market whenever you can. Mr. Market was a man created by Benjamin Graham. He is completely crazy. It used to be every day, but now in the day of the internet it's every second, he is offering to buy you out of your Pizza Express business. He doesn't know what you paid for it. In fact, you paid $100,000 cash and have no debt on the business. He offers you $90,000 right now. Do you accept? Do you panic? You still have the same amount of cash in the cash register today. People are still buying pizzas. So you tell him to stick it where the sun don't shine. But he keeps coming back. $80,000...$75,000...$99,000...$105,000... So you have two choices. One, take advantage of him, buy more Pizza Express stores when the offering is low or two IGNORE HIM. There is no reason to watch the stock market daily, weekly, monthly, quarterly or even yearly. Warren Buffett said they could close the market for years and he wouldn't care.
3. Buy with a margin of safety. If your Pizza Express, which you paid $100,000 for, generates $10,000/year to you (and you don't work in it), that means after 10 years you'll have your investment back and start making money on your investment. This, of course, assumes no increase in your annual income nor any appreciation potential in the business. So buying with a margin of safety would say, I only want to pay $50,000 for this Pizza Express. That way, if people start buying less pizzas, or if costs of ingredients skyrocket or if "fill in your own" happens, then it won't take me so long to get my money back. Buying what you believe is a $100,000 business for $50,000 lowers your chances for a loss.
I think the main point of all of this is in trying to help investors control their behaviors, because controlling your behaviors is of utmost importance. As a business owner (stockholder), focus on the cash in the cash register. Stop listening to Mr. Market (watching stock prices) and buy or use managers who buy with a margin of safety. Then go golfing, fishing or hiking and enjoy your life. You'll only be following the advice of the greatest investor ever.
Signs of the Bottom Continued
1. Investors yanked more than $33 Billion out of stock mutual funds so far this year. This number surpasses the $27 Billion that investors took out in 2002...the year of the last bottom. The last year before 2002 with net redemptions was 1988 right after the crash of 1987. People love to buy high and sell low. They can't control their behaviors. That is why most people won't ever be rich.
2. Warren Buffett (the world's greatest investor if you didn't know) made a sizable investment($5 Billion) in Goldman Sachs. Warren loves to buy low. If these things aren't a buy signal from Heaven...I don't know what is.
3. There is a HUGE discrepancy in operating earnings for the S & P 500 (THE stock market). Top down is showing $58.87 for 2009. Top down takes a macro view of everything and the places a "guess" on what the economy is going to do as a whole. They have talked recession for over a year and we haven't been in one, but we may get there eventually. Bottom up earnings for 2009 are $104.63. This comes from individual analysts researching individual companies from the bottom up. Averaging analyst results for each company individually is showing a pretty darn cheap market right now. Could the media be producing so much misery?
2. Warren Buffett (the world's greatest investor if you didn't know) made a sizable investment($5 Billion) in Goldman Sachs. Warren loves to buy low. If these things aren't a buy signal from Heaven...I don't know what is.
3. There is a HUGE discrepancy in operating earnings for the S & P 500 (THE stock market). Top down is showing $58.87 for 2009. Top down takes a macro view of everything and the places a "guess" on what the economy is going to do as a whole. They have talked recession for over a year and we haven't been in one, but we may get there eventually. Bottom up earnings for 2009 are $104.63. This comes from individual analysts researching individual companies from the bottom up. Averaging analyst results for each company individually is showing a pretty darn cheap market right now. Could the media be producing so much misery?
Tuesday, July 29, 2008
Signs of the Bottom?
Is the market showing signs that it is bottoming? Let's take a closer look at the following interesting statistics:
The staggering balances in money market funds- The amount in money market funds (cash) has increased by almost 71% over the last two years. *Source: Investment Company Institute
Pimco Total Return (a bond fund) was the hottest selling mutual fund- The fund had net inflows of $14 billion just in the first six months of 2008.
9 out of the last 11 quarters had outflows of stock mutual funds- This means more people sold stock mutual funds than purchased stock mutual funds. Investors typically buy high and sell low. People typically give up on their stock investments when the “news” looks bad and that has historically been at the bottom.
The American Association of Individual Investors survey of bullish to bearish difference was more than 29 for the first time in years- In fact, only 13 times out of 1,040 times were investors this pessimistic. Average returns for the five years after each of these last 13 times were 81.3% for large cap stocks and 123.3% for small cap stocks. *Source: Al Frank and Morningstar
Investors Intelligence Sentiment Indicator hit a 14 year low- Subsequent average 12 month returns for similar readings were 15.82%. *Source: Dr. Jeremy Siegel “Stocks for the Long Run”
Be assured that all of this proves nothing-except that the mob is shunning equities as it rarely does and flocking to cash and bonds. The more (and the longer) it does so, the more bullish you should become.
The staggering balances in money market funds- The amount in money market funds (cash) has increased by almost 71% over the last two years. *Source: Investment Company Institute
Pimco Total Return (a bond fund) was the hottest selling mutual fund- The fund had net inflows of $14 billion just in the first six months of 2008.
9 out of the last 11 quarters had outflows of stock mutual funds- This means more people sold stock mutual funds than purchased stock mutual funds. Investors typically buy high and sell low. People typically give up on their stock investments when the “news” looks bad and that has historically been at the bottom.
The American Association of Individual Investors survey of bullish to bearish difference was more than 29 for the first time in years- In fact, only 13 times out of 1,040 times were investors this pessimistic. Average returns for the five years after each of these last 13 times were 81.3% for large cap stocks and 123.3% for small cap stocks. *Source: Al Frank and Morningstar
Investors Intelligence Sentiment Indicator hit a 14 year low- Subsequent average 12 month returns for similar readings were 15.82%. *Source: Dr. Jeremy Siegel “Stocks for the Long Run”
Be assured that all of this proves nothing-except that the mob is shunning equities as it rarely does and flocking to cash and bonds. The more (and the longer) it does so, the more bullish you should become.
Friday, June 6, 2008
Oil Prices=Dot Com Bubble=Real Estate Bubble
Wow! Oil prices are through the roof today and they may end up going much higher in the short term. It appears there is a speculative "bubble" in the commodities market. I am betting within the next five years oil prices and all commodites will crumble and shoot through the floor. People speculated in tech stocks in the late 90's, real estate after that and now are doing the same with commodities. When will they learn? POP!
Wednesday, April 23, 2008
Greedy Oil Companies
I think the candidates for President need a lesson in economics. The candidates, along with the media, are using scare tactics to try to gain votes. All the talk is about the "greedy oil companies" and high gas prices.
I wonder if these same people paid attention to all the other commodites that went up in price over the past several years. According to Thomson Financial, the average annual return the past three years for Wheat was 46.69%, Corn 39.26%, Copper 36.76%, Gold 29.74%, Oil 29.09% and Cotton 27.87%. Not to mention what you get charged for a bottle of water these days.
These are scare tactics used to get you to believe the Oil and Gas companies are screwing consumers and if you "vote for me" you'll see relief at the pump. These prices will come down eventually...no matter who is in office. That's how commodities work!
I wonder if these same people paid attention to all the other commodites that went up in price over the past several years. According to Thomson Financial, the average annual return the past three years for Wheat was 46.69%, Corn 39.26%, Copper 36.76%, Gold 29.74%, Oil 29.09% and Cotton 27.87%. Not to mention what you get charged for a bottle of water these days.
These are scare tactics used to get you to believe the Oil and Gas companies are screwing consumers and if you "vote for me" you'll see relief at the pump. These prices will come down eventually...no matter who is in office. That's how commodities work!
Thursday, April 17, 2008
Yeah...Capitalism!
Recently, I heard an advertisement on TV from one of the Presidential front-runners. In the ad, the candidate berated insurance companies, oil companies and drug companies.
I, for one, am extremely happy we live in a free society. A society where companies can profit freely from their efforts.
The drug companies used their profit to research and develop new drugs. One of those new drugs has a 100% cure rate for the type of leukemia my sister had 18 years ago when she had a full bone marrow transplant and was given a 30% chance of survival.
The other drug, which is used typically for asthma, was given to my wife during both pregnancies and helped stop her pre-term labor. Both of my children are alive and healthy today because of those "greedy" companies. Thank God!
I, for one, am extremely happy we live in a free society. A society where companies can profit freely from their efforts.
The drug companies used their profit to research and develop new drugs. One of those new drugs has a 100% cure rate for the type of leukemia my sister had 18 years ago when she had a full bone marrow transplant and was given a 30% chance of survival.
The other drug, which is used typically for asthma, was given to my wife during both pregnancies and helped stop her pre-term labor. Both of my children are alive and healthy today because of those "greedy" companies. Thank God!
Wednesday, April 2, 2008
Is the Stock Market Cheap?
The last time I checked, there were only a few basic places to invest money. The first place is cash. This includes checking and savings accounts, certificates of deposit and money market funds. In a nutshell, you give the institution your money, they give you 2% and loan it out at 7% making a 5% "spread" on your money. This is the fee they charge you. If you need any money in the next 1-2 years this is the best place to put those dollars because you know it won't drop in value and it's safe.
The second place is in bonds. Bonds are lending instruments where an institution, goverment or corporation borrows your money and pays you interest on that money. At the end of a certain term they give you your money back...hopefully. Depending on the institution you're loaning it to is how the rate is determined. The U.S. Government has never defaulted on their bonds, so obviously you won't receive that much interest from them. If Bear Stearns wants to borrow your money right now, you may want to ask them for a little bit more interest. Bonds are for time frames of 3-7 years. If you're saving for a downpayment for a house in 5 years then this may be the best place for those dollars. But, you should be cautious because you CAN lose principal in time frames of less than three years. You should expect 3-6% over time from bonds.
The final place I can see where to invest your money is in equities or ownership of assets. This can be real estate or stocks. Investing in stocks is buying partial ownership in a business. The reason you start a business is to make money. When you start or buy into a business, all you should care about is the cash in the cash register at the end of the day after you pay all of your bills. This is the money you get to take home. These dollars should have a time horizon of at least 7+ years. You would never start a business and put time, effort and money into it and give up on it or expect to make a huge profit on less time than that, or at least you shouldn't expect it.
Well right now you have the above options. Cash is paying you 2%. Bonds, and specifically the 10 year Treasury, are paying you 3.4% and the earnings of the 500 largest U.S. corporations (the S&P 500) are paying you 7.14%. But, since we're going through a downturn in the economy and possibly a recession, we want to factor in a margin of safety and say that earnings may go down 30% in which case we will only earn 5% at the end of the day in our cash register.
So you have 2% versus 3.4% versus 5%. Where should you put your money? It's that simple.
The second place is in bonds. Bonds are lending instruments where an institution, goverment or corporation borrows your money and pays you interest on that money. At the end of a certain term they give you your money back...hopefully. Depending on the institution you're loaning it to is how the rate is determined. The U.S. Government has never defaulted on their bonds, so obviously you won't receive that much interest from them. If Bear Stearns wants to borrow your money right now, you may want to ask them for a little bit more interest. Bonds are for time frames of 3-7 years. If you're saving for a downpayment for a house in 5 years then this may be the best place for those dollars. But, you should be cautious because you CAN lose principal in time frames of less than three years. You should expect 3-6% over time from bonds.
The final place I can see where to invest your money is in equities or ownership of assets. This can be real estate or stocks. Investing in stocks is buying partial ownership in a business. The reason you start a business is to make money. When you start or buy into a business, all you should care about is the cash in the cash register at the end of the day after you pay all of your bills. This is the money you get to take home. These dollars should have a time horizon of at least 7+ years. You would never start a business and put time, effort and money into it and give up on it or expect to make a huge profit on less time than that, or at least you shouldn't expect it.
Well right now you have the above options. Cash is paying you 2%. Bonds, and specifically the 10 year Treasury, are paying you 3.4% and the earnings of the 500 largest U.S. corporations (the S&P 500) are paying you 7.14%. But, since we're going through a downturn in the economy and possibly a recession, we want to factor in a margin of safety and say that earnings may go down 30% in which case we will only earn 5% at the end of the day in our cash register.
So you have 2% versus 3.4% versus 5%. Where should you put your money? It's that simple.
Wednesday, March 26, 2008
The End of the World Delayed Once Again
I'd like to share a story of one investor. A story of a man who invested $20,000 in October of 1974. He did this as he looked at the cover of the October 1974 Time Magazine issue which had a picture of President Gerald Ford trying to fight back inflation, recession and high oil prices. The same things we're fighting right now. Also, the stock market just finished two years of being down about 45%.
And during his lifetime he watched as NYC teetered on the verge of bankruptcy. He watched Three Mile Island nuclear reactor in Pennsylvania as it relayed a cloud of radioactive gas in the air and one hundred thousand local residents fled their homes. He watched Iran seize US hostages and an oil crisis in Iran where the price of oil skyrocketed. He watched Soviets invade Afghanistan, President Ronald Reagan get shot. He saw a Cold War during which movie after movie "entertained" him with the notion the world could end any second in a global thermonuclear war. He watched the US invade Granada, bomb Libya. He witnessed the stock market crash in 1987. He watched the news on the Iran Contra scandal. He saw the World Trade Center get bombed, The US Embassy Bombed, the Oklahoma Federal Office building bombed, USS Cole attacked and thousands of lives lost during 9/11. He feared Anthrax, Bird Flu, SARS, Aids, recessions, Enron, United Airlines going bankrupt, shuttle exploding. He saw an Iraq war times two and a President impeached. He watched devastating hurricanes wipe out an area as large as Great Britain. And during this time he watched the markets go down every so often as follows: -27%, -24%, -33.5%, -21%, -19% and -49%. One on average every 5 years.
And on March 25th, 2008, he woke up. And do you know what happened? The sun came up. He drank his Starbucks or Folgers coffee by Proctor and Gamble, he shaved with his Gillette Razor, brushed his teeth and rinsed with Listerine put on his Speed Stick from Colgate, flipped on his Sony TV and watched his Time Warner cable, ESPN to be exact by Disney and ate his breakfast a Pop Tart from Kellogg. He fed his cat some Friskies from Nestle and he got on his Harley Davidson and went to work using Exxon Mobil gasoline, where for lunch he couldn't decide between 7-up from Cadbury Schweppes or a Pepsi from Pepsi co. After work he went to the golf course and used his Titelist golf ball from Fortune Brands. After golf he had a Budweiser from Anheuser Busch and a Captain and Coke from Diageo and Coke. But before he went to bed, he didn’t want to forget all the bad stuff that had been going on in the world so he popped his Xanax from Pfizer. And there, laying on the table in front of him, was his recent statement from his investments. He had never looked at it. He opened his statement and found the following:
Initial Investment $20,000 October, 1974 Current Balance $1,033,380
This is what happened when he invested in the S&P 500 and reinvested all of the dividends and capital gains. This time it's not different. An investor's behavior is what matters most. Keep the faith.
And during his lifetime he watched as NYC teetered on the verge of bankruptcy. He watched Three Mile Island nuclear reactor in Pennsylvania as it relayed a cloud of radioactive gas in the air and one hundred thousand local residents fled their homes. He watched Iran seize US hostages and an oil crisis in Iran where the price of oil skyrocketed. He watched Soviets invade Afghanistan, President Ronald Reagan get shot. He saw a Cold War during which movie after movie "entertained" him with the notion the world could end any second in a global thermonuclear war. He watched the US invade Granada, bomb Libya. He witnessed the stock market crash in 1987. He watched the news on the Iran Contra scandal. He saw the World Trade Center get bombed, The US Embassy Bombed, the Oklahoma Federal Office building bombed, USS Cole attacked and thousands of lives lost during 9/11. He feared Anthrax, Bird Flu, SARS, Aids, recessions, Enron, United Airlines going bankrupt, shuttle exploding. He saw an Iraq war times two and a President impeached. He watched devastating hurricanes wipe out an area as large as Great Britain. And during this time he watched the markets go down every so often as follows: -27%, -24%, -33.5%, -21%, -19% and -49%. One on average every 5 years.
And on March 25th, 2008, he woke up. And do you know what happened? The sun came up. He drank his Starbucks or Folgers coffee by Proctor and Gamble, he shaved with his Gillette Razor, brushed his teeth and rinsed with Listerine put on his Speed Stick from Colgate, flipped on his Sony TV and watched his Time Warner cable, ESPN to be exact by Disney and ate his breakfast a Pop Tart from Kellogg. He fed his cat some Friskies from Nestle and he got on his Harley Davidson and went to work using Exxon Mobil gasoline, where for lunch he couldn't decide between 7-up from Cadbury Schweppes or a Pepsi from Pepsi co. After work he went to the golf course and used his Titelist golf ball from Fortune Brands. After golf he had a Budweiser from Anheuser Busch and a Captain and Coke from Diageo and Coke. But before he went to bed, he didn’t want to forget all the bad stuff that had been going on in the world so he popped his Xanax from Pfizer. And there, laying on the table in front of him, was his recent statement from his investments. He had never looked at it. He opened his statement and found the following:
Initial Investment $20,000 October, 1974 Current Balance $1,033,380
This is what happened when he invested in the S&P 500 and reinvested all of the dividends and capital gains. This time it's not different. An investor's behavior is what matters most. Keep the faith.
Subscribe to:
Posts (Atom)