Category: Markets, Business, and the Economy

It seems that the American People think things are not all skittles and beer.

The University of Michigan’s consumer sentiment report is down substantially from September’s 94.2 to a current 87.5. Even the most pessimistic analysts had expected 92. But wait, there’s more. The consumer expectations index dropped over 9%. Here’s The Associated Press, via the Seattle Post-Intelligencer, and here’s a very comprehensive article from Bloomberg. I particularly like Bloomberg’s explanation of why the numbers are so abysmal:

A 34 percent surge in gasoline prices this year is forcing consumers to spend more of their budgets to drive. U.S. payrolls have increased less than forecast in the last four months. Democratic presidential candidate Sen. John Kerry is running ads blaming President George W. Bush for the loss of U.S. jobs and declining real wages.

In short, things stink, and Joe Average isn’t expecting them to get better.

Meanwhile, Mr. Ashcroft has taken a break from fighting terror and crime to crack down on piracy and theft of intellectual property. Clue to the record and movie industries, try producing something people want to buy. Ashcroft’s strange priorities leave guys like Eliot Spitzer free to deal with issues like, oh, wildly inflated insurance commissions that drive up costs for everyone. It’s even costing Wall Street types money, as they furiously bail out of what they thought were good, solid insurance stocks because “nobody knows what’s next.”

“So far during the Bush administration, the Michigan index has fallen by 18.6. President Bill Clinton enjoyed an 18.8 gain over his term,” The Seattle Post-Intelligencer reports. Furthermore, the President’s approval rating is slipping. Expect a rise in the terrorist threat level any minute now, and a subsequent lack of substance from Corporate Media.

Part One: A man’s home used to be his castle; now it’s somebody else’s bond portfolio

I’ve been critical of Fannie Mae (and by extension, Freddie Mac) before. Here’s the quick and dirty version of what they are, as condensed by Bloomberg:

“Fannie Mae and… Freddie Mac were chartered by the government to spur homeownership by purchasing mortgages from banks with the proceeds from bond sales. They own or guarantee almost half the $7.3 trillion mortgage market. Until 2002, the two companies were exempt from filing financial statements with the SEC…. Fannie Mae is the second-largest debtor in the U.S. after the government, with $942 billion as of July 31.”

So, Joe and Jane Average get a house/mortgage combo pack, their mortgage holder sells the mortgage to a quasi-government entity, which gives their mortgage holder money to lend for somebody else’s mortgage, racking up another set of origination fees in the process. There are several potential pitfalls. First, since the original lender doesn’t plan on holding the mortgage, there is the risk that they won’t screen applicants as well as might be desirable. After all, if the homeowner defaults, it’s Fannie Mae’s problem. Second, we are in the beginnings of a rising interest rate environment. This means that mortgage companies get to sell all their below-market-rate junk, which again becomes Fannie Mae’s problem. Finally, if you have any reason to believe there is a real estate bubble, you must believe it will someday be — you guessed it — Fannie Mae’s problem.

Sounds like somebody else’s problem? When one company — worse yet, backed by government money — has their fingers in almost half of all American mortgages, their problems can quickly be an issue for everyone.

So, as if Fannie Mae doesn’t have enough problems, it has an accounting mess, including “clear instances in which management sought to misapply and ignore accounting principles….” Furthermore, they may not be the only folks in the mortgage industry with such problems. The results of an 8 month investigation by a government agency found little things like $200 Million in expenses nobody bothered to mention until months after the fact. The feds are unhappy. Congress wants hearings. Investors are unhappy. People who need mortgages will be unhappy as rates rise to reflect the fact that mortgage holders may actually have to hold the mortgage to maturity.

If you think the Savings and Loan scandal of the 80s was a big deal, better fasten your seat-belt.

Part Two: Oily to bed and oily to rise makes a man smell like $2 per gallon unleaded.

Crude oil hit record intraday prices today, and may well hit $50 a barrel Real Soon Now. As the Taipei Times reports, that’s a rise of 73% over the last year. Less than 24 hours ago, the Administration was still filling the Strategic Oil Reserves (buy high and sell goodness knows where) and saying this stockpile must not be used to manipulate oil prices. Flip-Flop! Today it turns out maybe some of it can be lent out. Oh, and if you are really interested in more than the soundbite, the folks at Reuters have done this nice item on Why Are Oil Prices So High.

Of course, the price of oil effects the price of gasoline, which is already high priced and supply constrained due to hurricanes. Unless you are a self-sufficient hermit — in which case, why are you reading this? — this effects you.

The parade of Republicans has begun on CNBC, and one of the bells they were ringing was “Social Security Reform” dogma. Before things get too deep in New York City, there are important things you need to know.

Social Security is not now, nor has it ever been, a savings plan. Remind yourself of this anytime anybody starts talking about the “return” on your payroll taxes. There is no return, because the dollars you pay in today go directly to your grandparents, who in turn paid years ago to support their elders. Yes, there is currently a surplus, but that will vanish in a few years (the exact number of years depends on which analyst is speaking and the nature of his/her agenda).

Social Security has worked for this long because more people are working than are retired, but that is changing. Before, say, 1964 this was always true. There were always more able-bodied working people than retired people. The baby boom and subsequent advances in contraception changed this. Now experts say there will come a time when Social Security taxes collected from Generation X and younger will simply not cover Social Security payments to the Baby Boomers and The Greatest Generation.

When somebody like Alan Greenspan talks about Social Security Reform he means raising the retirement age, raising the Social Security tax paid by younger workers, and/or lowering benefits to be paid to retirees. Greenspan has been singing this tune on and off for over 20 years now, and many people either agree with him, or think he’s painting the picture as too rosy.

When today’s Conservatives talk about Social Security Reform they are talking about something completely different. They are talking about allowing Personal Retirement Accounts which would allow workers to “control” and “own” their retirement funds. The idea is that workers would be able to take some of the money that would have gone into the Social Security Trust Fund, put it into a special brokerage account, and invest in stocks and bonds.

When Conservatives say “own” and “control” they mean “pay for” and “be responsible for.” Of course “owning” and “paying for” have always gone together, but it is important to remember this point. Simply put, this system will mean that any returns you generate on your PRA will be yours and yours alone, a sort of “eat what you kill” system.

There are at least two problems with this approach.

Most people are really lousy at investing. That’s one of the reasons Social Security was put together the way it was in the first place. People didn’t have much in the way of savings, let alone investments, and what investments there were blew up in the Great Depression. As for the modern day, look real closely at your IRA and 401k statements and be honest with yourself. If you are like the overwhelming majority of Americans, you haven’t done as well as you would like. Even if you invested in nice, well managed mutual funds. Even if you took the Motley Fool’s long term advice of using index funds. Frankly, I can’t understand how anybody can look at a 5 year chart of the S&P 500 or the NASDAQ and really think investing in stocks is going to save Social Security.

If the problem is that there will not be enough money for retirees, taking in less money does not solve the problem. There is no way around this. If people are investing their money instead of sending it to the Social Security Trust Fund, there will be no money whatsoever for existing retirees. You can’t have it both ways. That is why we are hearing very few specifics about this program. If we were to hear the specifics, everyone would recognize that things do not add up at all.

I have done everything I could. I wrote my Congressional Representatives.* I wrote essays. I posted to online forums. I told anybody who would listen to me. It is now officially too late to prevent new overtime rules from going into effect.

There is a lot of disagreement over the number of people who would gain or lose overtime eligibility. The Labor Department and the Bush Administration both insist that more people would gain than lose, and that as pure bonus there would be fewer lawsuits. Pretty much everybody else says the opposite. Some states already have laws which supersede the Department of Labor guidelines.

Most regular readers know my opinion: that such rules will mean fewer people get overtime because the administration is unashamedly pro-business (there is no reason to suppose this proposal is a departure); that under these rules there is disincentive to create new jobs because it is cheaper to work existing employees harder than to hire more people; and that most people are not in a financial position to protest beyond a letter to Congress or a passive-aggressive “sick day”.

One thing is for sure. In a few weeks everyone will get paychecks reflecting implementation of the new rules. Look at your pay-stubs carefully before voting on November 2, 2004. Better yet, send away for your absentee ballot today. Not only will your vote have a paper trail, but you won’t have to worry about getting out of the office early enough to make it to your polling place.

One reply:

Thank you for contacting me regarding the Bush Administration’s overtime proposal. I am pleased to inform you that on Tuesday, May 4, the Senate approved an amendment by Senator Harkin that would block the Department of Labor from implementing any rule that would disqualify workers from overtime pay who are currently eligible under current law. At the same time, the amendment allows the implementation of new rules that would increase the number of low-wage workers who would be eligible for overtime pay.

Another reply:

I am strongly opposed to the Department of Labor’s roposed rule changes. These rules will drastically reduce the number of workers who are eligible for overtime and compensatory time. I am outraged that the Administration is willing to cut overtime pay for nearly 8 million Americans, many of whom depend on it to make ends meet. This includes nurses, emergency medical technicians, police officers, firefighters, secretaries, sales representatives, surveyors, journalists, paralegals, retail managers, dental hygienists, and many others. I am leading the fight in the Senate against these mean-spirited changes.

John Edwards has been talking about how there are “Two Americas” for almost a year now. But talk is cheap. Let me show you a picture. When Lyndon B. Johnson was President, the top quintile mean household income was $81,883 and the bottom quintile was $7419; in 2002 the top quintile mean household income was $143,743 and the bottom quintile was $9990.

Of course, this chart is meant to show you that the richest Americans made 11 times what the poorest did in 1967, yet 14 times more today. Better yet, you are supposed to notice how the little brown bar for the lowest quintile appears almost unchanged next to the big beige bar soaring above it for the top quintile.

To me one of the most striking features of this data is that the households in the bottom 20% rose a mere $2600. True, that’s a rise of 35%, but we are still talking about less additional money over the course of 35 years than you might spend on a major appliance or a computer. Minimum wage in 1967, where our data begins, was $1.40 per hour. Our theoretical LBJ era full-time minimum wager earned $2912 annually, much higher than the poverty line of $2168 (family of two, any age). Now, minimum wage is $5.15 nationally, with some exceptions. A theoretical modern minimum wage full time employee would earn $10,712, which is 7% more than the average for the bottom quintile, and lower than the poverty line of $11,756. Because this chart expresses everything in “2002 dollars,” the effect of inflation is removed, and the effect of rises in minimum wage are lessened.

In the meantime, inflation keeps prices rising. So far this year, the core rate of inflation is 2.4%.

What does this tell us about the minimum wage? It tells us that raising the minimum wage is not going to cure poverty. Indeed, it seems clear that on average, the lowest earning 20% of households are not even making a full-time minimum wage salary. Whether this is because they are working part-time, or because they are “contractors” doing per-job work ($20 per lawn you mow, $30 per house you clean) does not matter: there are no benefits. Such jobs are of the Don’t Work, Don’t Eat variety.

The point remains that back in the late 60s, a family in the lowest income group could manage to get by. They certainly did not have a luxurious life, and they didn’t have cable TV or internet access — mainly because there was no such thing — but they managed. I can’t honestly say how a family making $9990 manages, particularly once childcare comes into the picture. Tax rhetoric isn’t going to fix that. We can’t honestly put all the blame on the President for this situation, but we can hold him accountable for making it worse while claiming to make it better.

You probably didn’t need a newspaper article to tell you that Americans, individually and collectively, owe more money than ever before. And it’s not because housing costs more, although that is a factor.

The biggest culprit is credit cards. With credit card debt at record highs, and credit card companies doing everything they can to keep it that way, it’s no wonder lenders want bankruptcy reform: if enough cardholders were to file for bankruptcy, it could cause serious banking carnage. And that’s only problem one with this situation.

Credit cards are not evil. Like any tool, they can help or hurt you depending how you use them. In this day and age, credit cards are almost a necessity for adults; just try renting a car, getting a hotel room, or buying airplane tickets without one. College Students are especially vulnerable to the siren call of plastic money, graduating with an estimated $2000-5000 in credit card debt on top of student loans. Nor are students the only people who spend credit they have instead of income they don’t have.

If people living on the edge — or anywhere near it — have already maxed out their credit cards, they have no cushion against the bad things that can happen. They haven’t got savings (if they had, they would have put it towards debts) for emergencies like job loss or illness, let alone for certainties like the day they will no longer be able to work. And what will happen then? Either we will pay charities to take care of it, or we’ll pay taxes so they can receive government assistance. Oh, or they can turn to a life of crime. In any event, it will be expensive for everyone. That’s problem two.

Some experts warn that, with the Fed raising short term interest rates, a rise in credit card rates is almost certainly coming. The same rise in short term interest rates is likely to raise mortgage rates, which means that a home equity line is not the credit problem solver those television commercials would have you believe. Even if you own a house, and have actual equity. The short version is that people are going to feel a credit crunch –more money has to go to Visa and MasterCard on things they bought months ago, leaving less money to spend now — and that means consumer confidence and spending will both be headed down. That will directly effect the economy as a whole. Problem three.

So what can you do about this? Here’s some starter advice on credit. Or here’s a more comprehensive version. Pay off the cards. Keep them paid off. It’s one thing to use a credit card to pay a major expense over the course of six months, preferably interest free. Or to put everything on the card and just write one big check instead of twenty little ones. It’s another thing to spend money you may never have. Oh yeah, and if you have the occasion to tell somebody this advice, do it.

It might be my imagination that every four years or so — liberally mixed with campaign rhetoric — we hear talk about the possibility of a Federal Sales Tax. This time the lead instigator is Speaker of the House Dennis Hastert. It is of course coincidental that his new book has been released during campaign season. Nice trick, getting people to buy a hard-bound campaign ad. But the interesting thing is that the President has been quoted as saying “You know, I’m not exactly sure how big the national sales tax is going to have to be, but it’s the kind of interesting idea that we ought to explore seriously.”

The loudest perennial voice in favor of such a tax is American for Fair Taxation, the “FairTax” people. A long explanation of the pros and cons of such a plan — really pretty well balanced — can be found over at About.com.

Once you look through the information, it becomes clear that we are talking about a tax of 23-30%, depending whether you calculate it before or after the price-tag goes on. No exemptions, no exceptions, send roughly a quarter to every dollar spent to the feds.

The advantages, in a nutshell, are that it is very simple and transparent. Better yet, it encourages savings, because after all you don’t pay tax on money you don’t spend. In even encourages productivity, because there won’t be tax consequences to working overtime — no, I never understood looking at the taxes before deciding whether or not to do my job.

Oh yeah, and the IRS could be dissolved, throwing the entire agency and a legion of accountants and tax attorneys out of jobs. Whether or not that is an advantage or a disadvantage depends on what you do for a living.

The disadvantages are, first and foremost, that it would add roughly a quarter to every single dollar you spend. At least most state sales taxes exempt things like food. This tax would be on everything, from Tiffany jewelry to store-brand macaroni and cheese, from healthcare to housing. Even with the expected deletion of Federal Income Tax — and that is no sure thing — it will feel like a one-time burst of inflation. Furthermore, it is regressive. “Increased incentive to save” only works if there is money left over after all the absolute necessities are paid. People who spend all their income will pay a greater percentage of their earnings in taxes than those who do not. Furthermore, people who are in a position to spend their money outside the United States will do so. Border towns and overseas mail order houses stand to benefit. United States tourism will likely be down, since Americans who can will vacation overseas, and foreign nationals will find other destinations.

All this being said, if there is only one thing you remember about the idea of a Federal Sales Tax it is this: it will require a Constitutional Amendment. The Sixteenth Amendment, the one that allows income tax in the first place, very specifically says “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

It’s not going to happen.

Today, Google announced some important figures regarding their upcoming IPO. They will be offering a total of 24.6 million shares, 14.1 million from the company and 10.5 million from current stockholders, for something between $108 and $135 per share in a Dutch Auction Process that is intended to maximize money the company gets should the stock price rise substantially during the IPO process. These shares represent 9% of the outstanding shares — meaning insiders and the company itself will still control over 90% of the shares. The company expects to pocket $1.66 Billion and have a $36 Billion market capitalization, making it an instant large cap stock, bigger than Dow component McDonalds. Nevertheless, this is not the biggest IPO ever. And at least now we have some income and revenue figures for the company: revenue of $1.4 Billion for the first half of the 2004 ($560 Million for first half of 2003); income of $143 Million for those 6 months ($58 million last year). That works out to 54 cents per share. If we say, for the sake of argument, that they might have earned a dollar per share over the last year (just short of 2 times 54), that still makes a rather rich triple digit multiple. Ticker symbol will be GOOG (4 letters because it’s listing on the NASDAQ).

You know what’s missing from this impressive mass of information? We still don’t know what Google needs with an IPO! Google is able to give us SEC documents with single sentences 594 words long, but all they are willing to say about where the money is going is it’s for “for general corporate purposes.”

If the proposed offering price is not sufficient to discourage you from calling your broker and learning more about how Dutch Auctions work, let me offer some more information. Despite Google’s publicly stated goal of making this an IPO that average people can participate in, the odds of you getting any of those shares at the initial distribution is low. Chances are you will not be able to buy any shares until they are available in the open market, and that means you won’t be paying $108 or $135 per share, but whatever the market says — it might be less, it will probably be more. The next important thing to remember is that the purpose of the Dutch Auction process is to insure that any insane bid-up process benefits the company, not some speculative institutional investor. In short, the company doesn’t want to make investors wealthy, they want to make the company wealthy. And finally, you need to be aware of something called a lock-up period. About 6 months after the IPO, not only will insiders be free to dump massive amounts of stock for incredible profit, it will become possible for short-selling to occur. Both these things have the potential to bring down the stock price.

Issues with the stock offering itself aside, you also need to know about some looming legal issues. There’s a big age discrimination suit filed against the company, with millions of dollars in real damages. And based on information revealed so far, this case isn’t going away cheaply.

But if you have $13,500 — what 100 shares of GOOG at the IPO price is likely to cost — burning a hole in your pocket, why not consider 150 shares of IBM, which will also pay you a $0.72 per share quarterly dividend. You could buy 145 shares of United Technologies, and get $1.40 per share each quarter. That money would also buy 465 shares of Microsoft, which announced a $3 per share special dividend last week. Or 425 shares of Apple, which doesn’t get you a dividend, but is in an up-trend (disclaimer, I own shares). Or if you’d prefer something more diversified, there’s iShares, sort of like mutual funds that trade like stocks (disclaimer, I own shares in one of them).

If you prefer to put your money in the karmic bank, there are lots of ways to spend $13,500 towards the good of others. Around your community there are probably charities that could use some money. Look around you.

Or, How Not To Pick Stocks

Imagine a world where police don’t have to kill bad guys. More importantly, imagine a world where police never kill an innocent person. No, instead of shooting a gun, police would shoot an immobilizing blast of electricity, allowing the police several minutes to secure a potentially dangerous individual and figure out what to do next almost at leisure. Taser International would like you to imagine this world. In fact, they’d like you to live in it. Oh, and they would like you to buy their stock.

Before you call your broker, there’s a lot of things you should know. First of all, the stock has been highly volatile, having traded in the last year as low as $2.02 and as high as $64.15. Just today, they lost $5 per share after a negative article in the New York Times regarding the safety of their products and today’s earnings announcements. Taser executives have spent much of the day telling any media outlet that would listen that their products are safe and their balance sheet is fine.

The safety of the product is the subject of intense debate. Taser says they have research showing the device is safe. Critics call this research flawed and anecdotal. In any event, The Sharper Image has decided not to sell the consumer grade Taser product on the basis of the NYT story.

As for the balance sheet, it may seem odd to say that the profits were too good. When a product can cost upwards of $800, there is a limited market for it. No company, no matter how well it is managed and how good its products are, can triple their revenues and multiply their actual profits by 13 every year. That’s just not possible. For the matter of simplicity, we are assuming the figures they released are actually true — after Enron and Worldcom, that needs to be said. As The Motley Fool points out, the stock is up 1600% in the last year — also a clearly unsustainable trend — and a competitor may come along sooner or later. Assuming everyone who needs one doesn’t already have one by then.

Finally, I’d like to address the fact that upper management spends a lot of time with the media, “aggressively defending” the company and it’s stock. I don’t like seeing this situation. After all, if the CEO is out there refuting news stories, appearing on television, blaming short-sellers, and threatening people who say bad things about the company, who exactly is getting the work done? My attitude is “don’t tell me, show me.” Get some bigger, unquestionably independent research that shows the product is safe and effective. Make the analysts and short-sellers rethink their positions by delivering good, solid, sustainable growth every quarter.

A world where police never accidentally kill anyone is too good to be true. Never buy a stock based solely on company hype.

Today, we learned that 112,000 jobs were created in June, a tenth straight month of job gains. Not only that, the work-week got shorter. There were no signs of “wage inflation,” meaning Greenspan can theoretically take it easy on the rate hikes everyone who pays attention has known were coming. The Unemployment rate was flat. Great news, huh?

No, not really.

First, the economists thought the number would be more like 250,000. Second, on average we needed 150,000-200,000 new jobs each month to stay “even.” Third, June is the month when the economy gets a huge influx of job seekers who just graduated High School or College. Those young people do not count as unemployed because they were never employed in the first place. Add to that the fact that things have gotten just good enough that some “discouraged workers” are starting to think about looking for work again. Depending on when these people were last employed, these people may or may not count in the unemployment rate.

As for the work week dropping to 33.6 hours on average, that means a lot of people are working part time — and therefore have no benefits. This notion is further supported by the fact that HMOs are concerned about growth going forward. This explains why one in five adults did not have health insurance last year. Or, if you prefer to think of it this way, 46.3 million people. Not to alarm any Baby Boomers, but a job that doesn’t provide health insurance probably doesn’t have a retirement plan either.

And finally, there is no “wage inflation” because jobs are being created fastest in low-wage categories. Furthermore, Greenspan would not be raising interest rates if there were not inflation — the normal kind of inflation that means milk, gas, and blue jeans cost more this year than they did last year. So wages are not going up, while the cost of everything else is. Oh, and there are some who make a credible argument that the Bush Administration is allowing inflation to occur so as to pump up future tax revenues and thereby reduce the deficit. I guess they think that’s easier than making Bill Clinton pay more taxes.

Happy Independence Day this Fourth of July. Remember, the FBI would like you to “stay vigilant.”