The Freedom Factory

Politicians love to preach about the virtues of an industrial base. They do it for three reasons: Industrial firms are great sources of subsidies and political patronage, such patronage buys support from organized labor union voting blocks, and it actually does make sense for countries to produce real things of value. Since WWII America’s industry has steadily declined as a percentage of GDP, but the winds of change are blowing. Continue Reading

The Mustache Revolution is brewing. It is not a fashion statement; it does not even involve hair. It is the revolution that is happening in America, Right Under Our Noses. It fits right in between Marx’s model of government overthrow and Bernstein’s democratic socialism. This is elected officials distracting the electorate that begs them to act unconstitutionally. Here is how it was done.

A Little History
Karl Marx advocated a violent revolution to nationalize industry, redistribute wealth, and create a proletarian dictatorship. This would be very difficult for the American left, since they are anti-gun, anti-violence, and tend to dislike noncompliance. Edward Bernstein came around after Marx’s death and advocated democratic socialism. His goal was still to nationalize industry, but to accomplish it democratically. What is happening today is the Mustache Revolution; it meets the standards of both socialist ideologies. The US has elected our President and Congress democratically; most of the legislation has come about democratically; the problem is that the boundaries set by the constitution, make the process too slow. Therefore, in the name of Crises, Necessity, or Protection the limits on government are quickly removed.

Bailout Big Banks
Step one, use tax dollars to keep private businesses afloat. This gives government, not total control, but the ability to regulate finance in order to protect the interest of the people. Step two, make an enormous legislative blunder, and blame it on the banking industry. Let us not forget that the clause about the executive bonuses was removed, not forgotten, not left out, but removed. After there is a huge public outcry over executive bonuses, the next step is to levy a 90% tax. This tax of course is not limited to the bank that gave the bonuses, nor is it limited to the banking industry; the plan is to levy a tax on all executives who have a high salary and receive bonuses.

Stress Test
Of course, the wealth redistribution is not enough. The remaining step is to take major services, such as banking, health care, or auto manufacturers, and make them national industries. The first and most important of these is to take over the financial industry. The Financial industry is essential, because all businesses run off of the availability of credit (hence capitalism). Once all industries are getting their loans from the government, their nationalization will happen quickly and with little protest. So, after bailing out the banking industry, the next step is to create a stress test; this serves two purposes; 1) it asserts government power over the industry (no other industry needs to be deemed “strong enough to survive” in order to exist in the US economy), and 2) it makes people think that the government should step in when the test is not passed. Third, after the failure of the stress tests, the government will claim that the banks need to come under temporary government control. Since government has never improved a business after taking it over, temporary can be a very long time.

Not Under My Nose!
Things that stink are not meant to pass under your nose without notice! This revolution cannot continue to be ignored simply because we are in an economic downturn. Recession is not an excuse to jump from crises to crises without thinking out the political consequences of our actions. The hardest thing to regain, once it is lost, is freedom. And freedom is blindfolded on its knees in front of a gun named socialism.

With the increase in the number of foreclosures an increasing number of the borrowers are turning to loan modification programs. Working with your lender, loan modification can prevent foreclosure and also help you in save some cash. Continue Reading

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Who could have possibly seen the severe credit crunch and subsequent market crash this past year? And, if someone saw the impending crash, why did they not caution against it? Like it or not, there were several modern-day Cassandras that tried to warn us about the impending collapse; unfortunately, just like the citizens of ancient Troy, we failed to listen. Continue Reading

The people who know the company the best are the people who work there.  So their actions can give you information you may not otherwise be able to get.  I’m going to discuss what you should look for and where to find it.

1) Insider Trading

The easiest way to tell what bosses think is look at their buys of company stock.  You can find this information on Yahoo Finance by clicking on ‘Insider Transactions’ once you’re on a stock’s main page.  You can also see it on MSN Moneycentral by clicking ‘Insider Trading’.  Both of these pages will show you recent transactions of CEOs and other executives/insiders.

Big purchases are what you want to focus on.  And if they are big purchases at a smaller company, that is even better.  As a rule, you want to find purchases of more than $100,000 in a 3 month period.  For example, if you look at DELL, Mr Dell bought $100,000,000 worth of shares in Sept of this yr.  That’s an impressive buy.

2) CEO Compensation

If the CEO is paid like a king, he is likely to underperform.  That goes contrary to common thinking, but its been proven true.  You can find Executive compensation on Yahoo Finance by clicking on ‘Profile’ once you’re on a stocks main page.  The payroll will be on the bottom right side of the page.

Its hard to tell how much is too much though.  I have heard of a couple of rule-of-thumbs.  The first, is that the CEO shouldn’t make more than the rest of the top 10 on his staff combined.  The reasoning behind this thinking is that one guy cannot run a company on his own.  So if Mr CEO is making $10M and the rest of the top ten on his management team are making $100K each, then something is likely out of whack.  Also, many times in the past, if the CEO was paid a huge sum, it worked out very well in the beginning, but then very badly in the end (Lee Iacocca of Chrysler).  The hypothesis behind this thinking is that his ego will swell as his paycheck swells and he will think himself invincible, conceited and unable to make a bad decision.  You do not want your leader to possess those qualities.

The second rule-of-thumb is that the CEO should be making what other CEOs for similar sized companies make.  Last year, large cap CEOs averaged $12M.  Mid Cap CEOs averaged $6M.  And small Cap CEOs averaged $2M.

Another thing, I don’t think CEOs should make loads of cash during years of underperformance.  Their pay should be commensurate with their performance.  So if the stock or earnings are up 100% in a given fiscal year and the CEO is paid much more than other CEOs, that is probably alright.  But if he is paid $50M in a year in which the stock or earnings are down by 50%, that seems unacceptable.

Also, make sure you lump stock options into the compensation equation.  Many CEO’s stock options account for a larger portion of their compensation than does their normal paycheck.

3) Letters to Shareholders

You should always check out the annual report of a company before buying its stock.  And somewhere in the Annual Report should be the CEO’s letter to shareholders.  This part should include goals and strategies for reaching those goals.  It should be written in a manner that shareholders can understand.

If you want to read great examples of Shareholder Letters, you should check out Berkshire Hathaway’s letters here.  Warren Buffett has great business acumen, sense of humor, and a way of explaining complex things so anyone can understand them.

To fully appreciate what is occurring in the financial markets, I recommend reading two articles: Deleveraging: A Fate Worse than Debt from The Economist and The Question of Our Age by Tony Crescenzi.

The theme of both articles is the same- cheap credit for the past 20 years has fueled economic growth. Now that credit has dried up, can the system deleverage without causing economic contraction? The coordinated effort of the U.S and other governments is meant to prevent (or at least slow) this deleveraging process. So far the governments have added liquidity to credit markets and injected capital to expand lending and revive economic growth. Continue Reading

Everyone seems to be asking the same question- is this the bottom? Personally, I don’t think so, but we are close. The basis for my conclusion is three-fold.

First, the credit market is still largely frozen and there is a lack of confidence between banks. Although LIBOR dropped significantly last week, the TED spread is still quite high. Until interbank lending and confidence is restored, I will continue to remain bearish on the market. Once the credit market thaws, I believe the market will rally significantly because sophisticated investors are using the credit market as a signal to reenter the market. Currently, the institutional money is sitting on the sidelines and is unwilling to risk money to ‘catch a falling knife’.

The second reason is based on technicals. During the Dot-com bubble, the S&P topped at 1,550 and dropped to about 800 two years later. The S&P topped out again at 1565 on October 9, 2007, and yesterday (October 15, 2008), it closed at 908. If one directly compares this situation to 2002, the S&P could fall another 10%, or about 100 points. Secondly, economic downturns typically last about 18 months, which means the market should suffer for another 6 months (or so). Granted, I do not place much faith in technical analysis because it is not correct to compare today to historical events. For example, there has not been a terrorist attack like in 2001. But, it does help to use history as a gauge for approximate price ranges.

Finally, the fundamentals of the S&P 500 appear appropriately priced. The current P/E ratio is about 13.5. If corporate earnings start to decline, the price must also decline to maintain this ratio. The big question is by how much earnings will decline? If you have knowledge about this, I encourage you to blog about this article. It would be great to know what the historical P/E ratio has been at ‘bottoms’, or the average amount that earnings have decreased in recessions. Either piece of info would give great insight into possible market behavior.

To play this market, my recommendation is to make three equally spaced purchases. (See my previous article here.) One thing is certain- you will never be able to catch the exact bottom. Over the coming months dollar cost averaging is the best approach to take advantage of these bargain-basement prices. The market has already lost a lot of its value. How much lower can it really go?

There are several reasons to wade back into the market this week – the Dow is down 20% for the year, the S&P 500 fell 8% on Monday, and Warren Buffet is buying.  Although there is blood on Wall Street, there is not yet blood on every street- especially Main Street.  In short, I think the economy will get worse before it gets better, but it’s time to start buying. Continue Reading

An often overlooked element to lifetime financial planning is the value of human capital. It can be an ephemeral concept, but if analyzed properly has a discrete value that depends on some basic assumptions. In an interview with CNNMoney.com, retirement expert Moshe A. Milevsky (associate professor at York University’s business school in Toronto) illustrates the importance of considering your future earning power in the labor market in addition to traditional financial assets. We are often better off than we realize, but that’s only if we efficiently translate human capital potential to tangible future value.

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