When you buy stock in a company, theoretically at least, you become a partial owner of that company. The reason to own a company is that hopefully the company will make money now and in the future. If a company does make money it can either be re-utilized or used to increase the companies value. Either way a profitable company increases value to the investor while an unprofitable company decreases value.
Now, the other aspect is whether the company will continue to make profit and maybe even increase its profitability via growth. However, suppose you had a company that produced a steady income stream, now and into the future, with no particular growth aspect but by the same token a steady business where profitability could increase via productivity improvements and possibly acquisitions, would it be a worthwhile investment? For an investor the answer is definitely yes but for a speculator, that company is of little to no interest. It isn't likely to see significant price movement so the ability to make a short term profit is limited.
Now I maintain that the investors are being driven out of the stock market by the speculators. The market, instead of a place where companies can raise money by selling stocks and bonds is becoming more and more a casino. This casino aspect is making regular people/investors take ridiculously low bond returns when perfectly good stocks pay higher returns via dividends. One reason for this is that many funds buy the S&P basket of stocks and try to maintain it in balance. So, when the speculative stocks go down, money is pulled out of the funds and they have to sell off all positions.
So investors see excessive volatility in stocks that should have little. They don't want this so they get out. Of course less investors increases volatility as speculators dominate the trading. I think we see where this is going.
Thursday, August 26, 2010
Monday, August 16, 2010
What to do
If we have seen a pendulum shift from the ever expanding consumer spending and associated credit of the last few decades to a more stable, consumer saving and living within his/her means does that mean the economy is in a constant recession? The formal definition of a recession is one where there is negative GDP for two quarters in a row. In a society where consumers are saving more, the companies that produce products will produce less. However not less quarter to quarter. Suppose we have an economy where the general consumption level stay about the same year after year.
Companies will have to adapt, and in fact many of them already have. They will grow profits (which really is the point after all) by becoming more efficient and finding new markets. Competition will increase and weak players will be driven out. We will also see an excess of labor that will have the effect of driving certain labor rates lower, especially those where required skills are minimal or easily obtained. Those who have skills in more specialized areas will of course be in better shape. If labor rates decline or stabilize, this will make certain domestic products more competitive with foreign ones.
Of course areas where we could see growth is in the domestic and renewable energy markets. Also, if American products get more competitive we may see growth in exports to the growing demand from developing countries.
On the down side is the fact that without growth and very significant growth, the drain of the deficit will be greater and reduce future spending. Of course the answer is to reduce spending and increase revenues in the smartest possible way. Simply, subsidies to those who don't really need them should be eliminated and fees should be charged for services provided. Programs such as Social Security and Medicare need to be made self sustaining over the long haul.
Companies will have to adapt, and in fact many of them already have. They will grow profits (which really is the point after all) by becoming more efficient and finding new markets. Competition will increase and weak players will be driven out. We will also see an excess of labor that will have the effect of driving certain labor rates lower, especially those where required skills are minimal or easily obtained. Those who have skills in more specialized areas will of course be in better shape. If labor rates decline or stabilize, this will make certain domestic products more competitive with foreign ones.
Of course areas where we could see growth is in the domestic and renewable energy markets. Also, if American products get more competitive we may see growth in exports to the growing demand from developing countries.
On the down side is the fact that without growth and very significant growth, the drain of the deficit will be greater and reduce future spending. Of course the answer is to reduce spending and increase revenues in the smartest possible way. Simply, subsidies to those who don't really need them should be eliminated and fees should be charged for services provided. Programs such as Social Security and Medicare need to be made self sustaining over the long haul.
Sunday, August 15, 2010
Things do change
There is a saying that generals always prepare for the war they just fought instead of the one that is going to happen. Of course, this is true in many areas, not the least of which is economic forecasting.
It is tempting and certainly sometimes useful to look at what has happened in the past and assume it will happen again. In situations where there have been no fundamental changes, this is definitely a valid approach. Many economists, or pseudo-economists, are of the opinion that nothing really changes and therefore the past is a sure precursor of the future.
But things do change and what needs to be determined is if we have seen a fundamental shift in behavior in the US consumer.
I think we have to some extent and perhaps it is more accurate to say we are seeing abnormal behavior the arose in the generation that grew up after the prewar economic problems, revert to a more normal approach. As a member of that generation, we grew up in an extremely optimistic period and pretty much ignored the warnings of the earlier generation. Certainly bigger was better, the stock market would always go up, real estate would always appreciate, each generation would do better than the previous one, America was a land of opportunity.
However, the last ten years or so have put each of those assumptions into doubt and we see the baby boomers reassessing things. Many find themselves in situations they never expected. Recently a good friend of mine complained that she never expected to have so much financial doubt at this point in her life. She is not alone. For many Americans, the one asset they really expected to sustain them was their home. However, over expansion and easy credit led to a glut that led to prices collapsing and home devaluations. It will take years for this excess inventory to be absorbed. This in turn led to a financial crisis, a severe recession and a realization that economic prospects for the next generation may not be so rosy.
The change in behavior may only be temporary or maybe, and this is more likely, be part of a cycle where the current generation will see wealth preservation as something you have to work at. Only time will tell.
It is tempting and certainly sometimes useful to look at what has happened in the past and assume it will happen again. In situations where there have been no fundamental changes, this is definitely a valid approach. Many economists, or pseudo-economists, are of the opinion that nothing really changes and therefore the past is a sure precursor of the future.
But things do change and what needs to be determined is if we have seen a fundamental shift in behavior in the US consumer.
I think we have to some extent and perhaps it is more accurate to say we are seeing abnormal behavior the arose in the generation that grew up after the prewar economic problems, revert to a more normal approach. As a member of that generation, we grew up in an extremely optimistic period and pretty much ignored the warnings of the earlier generation. Certainly bigger was better, the stock market would always go up, real estate would always appreciate, each generation would do better than the previous one, America was a land of opportunity.
However, the last ten years or so have put each of those assumptions into doubt and we see the baby boomers reassessing things. Many find themselves in situations they never expected. Recently a good friend of mine complained that she never expected to have so much financial doubt at this point in her life. She is not alone. For many Americans, the one asset they really expected to sustain them was their home. However, over expansion and easy credit led to a glut that led to prices collapsing and home devaluations. It will take years for this excess inventory to be absorbed. This in turn led to a financial crisis, a severe recession and a realization that economic prospects for the next generation may not be so rosy.
The change in behavior may only be temporary or maybe, and this is more likely, be part of a cycle where the current generation will see wealth preservation as something you have to work at. Only time will tell.
Thursday, August 12, 2010
The sky is falling!!
Panic in the street (Wall Street) led to a sell of that dropped the markets over 2% yesterday. This was based on a Fed announcement that the economic recovery was going slower than hoped for and that they would keep interest rates low for an extended period of time.
Really? This is the reason for the sell off?
There is nothing in the Fed announcement that is surprising. What we do have is an opportunity of for market manipulation, and market manipulation is what we got. Once the selling momentum gets going, other big traders feel they have to sell to avoid being caught. The equities they sold (pretty much everything) were not any worse than they were last week and will be next week.
Now, when the manipulators smell the blood in the water they start to short everything. They know that the little bit of uncertainty caused by the Fed announcement is going to put a damper on buying and they can start the downward spiral. As it picks up, others actually dump positions with the intention of reestablishing them at a lower price point. If you look at the statistics, you find that short sales were up 200 million shares since Monday. Now there is, in today's market always a significant amount of short selling as hedge funds basically take and drop short term positions. However, when the blood is in the water we see a tremendous increase an when it is successful, as it often is, the stock market goes down.
Now, at some point these short positions have to be covered and that will theoretically lead to a market rebound. However, I think the American public is simply tired of it and as the manipulation continues they are taking money out and putting it in bonds.
In my opinion, allowing short selling serves no legitimate purpose. It is not investing, it is gambling, but gambling that impacts investors. It allows some people to make money simply by manipulating stocks that otherwise might would probably behave quite differently.
Really? This is the reason for the sell off?
There is nothing in the Fed announcement that is surprising. What we do have is an opportunity of for market manipulation, and market manipulation is what we got. Once the selling momentum gets going, other big traders feel they have to sell to avoid being caught. The equities they sold (pretty much everything) were not any worse than they were last week and will be next week.
Now, when the manipulators smell the blood in the water they start to short everything. They know that the little bit of uncertainty caused by the Fed announcement is going to put a damper on buying and they can start the downward spiral. As it picks up, others actually dump positions with the intention of reestablishing them at a lower price point. If you look at the statistics, you find that short sales were up 200 million shares since Monday. Now there is, in today's market always a significant amount of short selling as hedge funds basically take and drop short term positions. However, when the blood is in the water we see a tremendous increase an when it is successful, as it often is, the stock market goes down.
Now, at some point these short positions have to be covered and that will theoretically lead to a market rebound. However, I think the American public is simply tired of it and as the manipulation continues they are taking money out and putting it in bonds.
In my opinion, allowing short selling serves no legitimate purpose. It is not investing, it is gambling, but gambling that impacts investors. It allows some people to make money simply by manipulating stocks that otherwise might would probably behave quite differently.
Wednesday, August 11, 2010
The mess we're in
In a country that has as many advantages as this one does, it is hard to believe things have gotten so bad. Of course bad is a relative term, since most people in this country still have a standard of living envied almost everywhere else.
So what exactly is causing the problem? Well partly because of our past success and the development of better communications and transportation technologies, it is cheaper to offload work to other countries. So, if you were in manufacturing or a service that is now done elsewhere, what is your new role? We haven't figured that one out yet and it may take quite a while before we do.
Pretty clearly this type of transition will work itself out. However, it will be painful. If you think about it, when the American industrialization took off, we lived off the cheap labor of European and Asian immigrants who couldn't find suitable work in their native lands.
In previous blogs I have talked about the wealth equation and while we create a considerable amount of new wealth every year, it is no longer enough to offset the wealth we send overseas. This net deficit is going to result in a better standard of living elsewhere and a declining standard of living here. Now, it is certainly not impossible to return to a stable or improving standard of living, but it takes some smart policies to do so.
The first thing is to reduce the wealth being exported in exchange for energy. We need to use domestic and/or renewable energy resources more and more. Its not gong to be like turning a switch but every bit of energy changed from foreign to domestic reduces wealth being exported.
Second we need to level the playing field for jobs. If you sell products in this country, you should pay a fair share of taxes. There has to be a better relationship between the profit made and the taxes paid. If you manufacture in this country you employ workers who pay taxes. You as a company shouldn't pay taxes until you sell your product and then only if you sell the product in this country should it be taxed.
Third, we need to eliminate health insurance and pension as a business cost and accept it as a societal cost. There is no logic in making it more expensive for a company to do business here because of medical and pension responsibilities.
Three simple things that would go a long way to cleaning up the current mess.
So what exactly is causing the problem? Well partly because of our past success and the development of better communications and transportation technologies, it is cheaper to offload work to other countries. So, if you were in manufacturing or a service that is now done elsewhere, what is your new role? We haven't figured that one out yet and it may take quite a while before we do.
Pretty clearly this type of transition will work itself out. However, it will be painful. If you think about it, when the American industrialization took off, we lived off the cheap labor of European and Asian immigrants who couldn't find suitable work in their native lands.
In previous blogs I have talked about the wealth equation and while we create a considerable amount of new wealth every year, it is no longer enough to offset the wealth we send overseas. This net deficit is going to result in a better standard of living elsewhere and a declining standard of living here. Now, it is certainly not impossible to return to a stable or improving standard of living, but it takes some smart policies to do so.
The first thing is to reduce the wealth being exported in exchange for energy. We need to use domestic and/or renewable energy resources more and more. Its not gong to be like turning a switch but every bit of energy changed from foreign to domestic reduces wealth being exported.
Second we need to level the playing field for jobs. If you sell products in this country, you should pay a fair share of taxes. There has to be a better relationship between the profit made and the taxes paid. If you manufacture in this country you employ workers who pay taxes. You as a company shouldn't pay taxes until you sell your product and then only if you sell the product in this country should it be taxed.
Third, we need to eliminate health insurance and pension as a business cost and accept it as a societal cost. There is no logic in making it more expensive for a company to do business here because of medical and pension responsibilities.
Three simple things that would go a long way to cleaning up the current mess.
Saturday, August 7, 2010
Jobs again
I just get a kick out of the reactions that you read when an economic report comes out. Now I understand that the people writing have two issues they have to deal with, writing for an uncertain audience which means having to over explain things, and dealing with their own point of view, bias.
When the jobs report came out, it was generally treated as horrible since overall the economy lost 131,000 jobs. A lot of these jobs were the elimination of temporary census jobs and as much as these jobs were somewhat discounted when they were created, they should be just as discounted when they go away. Consider them a constitutional blip that comes every four years.
Now, if you take that out of the report, what you have left is the loss of local government jobs and the creation of private industry jobs. Now, I would like to see a lot more private industry jobs created but that isn't going to happen until the economy gets a lot more robust and/or the government figures out how to incentivize business in this country a lot better than they seem capable of.
But going back to the primary trend, every public job eliminated reduces to some extent a burden on the taxpayer and every private job created increases the tax base. Yes, public workers pay taxes too, I should know, but that is simply returning a bit of what they got from the taxpayer in the first place.
This was an excellent trend for the economy, although once again, not enough private jobs. Public jobs are certainly important and necessary, we need teachers, police, and firemen (of either gender) and there are many other functions that have to be performed. Still, there is always going to be some level of inefficiency in government (of course in private industry as well) but a private job is a net revenue creator while a public job is generally a net revenue loser.
It doesn't have to be this way, if we consider the value added of a public job and make sure the value provided is greater than the cost. If you consider police activity, certainly the prevention of crime is paramount. This is a high value endeavor, if the crimes are real. Certainly a crime that destroys property or inflicts bodily harm needs to be prevented if at all possible. However, what about victimless crimes?
When you consider vice and drug offenses, and to some extent traffic violations such as speeding, who is the victim and why are the police intervening? Now, traffic violations may actually generate revenue but the last statistics I saw indicated a tremendous number of people in jail for drug offenses. Why? Really, if we legalized most drugs and put them under FDA oversight, instead of being a crime it would become an industry.
Yes we would have addicts but would that be worse than the addicts we already have plus the tremendous cost of enforcement? I'm not encouraging anyone to use drugs, but in all honesty, why do I care?
You either believe in individual responsibility or you don't. The same with vice. Why do I care what consenting adults do as long as it doesn't involve minors or uninvited violence? I may not approve, but I don't approve of lots of legal things already, such as smoking. It just isn't my business and it certainly should cost society as much as it does to try to prevent it.
Lots of people would and have argued that it would cost more to ignore it. Really? If it was legal, and taxed, it would generate more than enough revenue to support rehab and education efforts. The economics are clear.
Look, less government is a good thing since it equates to less taxes. More business is a good thing since it equate to more taxes. When are we going to wize up?
When the jobs report came out, it was generally treated as horrible since overall the economy lost 131,000 jobs. A lot of these jobs were the elimination of temporary census jobs and as much as these jobs were somewhat discounted when they were created, they should be just as discounted when they go away. Consider them a constitutional blip that comes every four years.
Now, if you take that out of the report, what you have left is the loss of local government jobs and the creation of private industry jobs. Now, I would like to see a lot more private industry jobs created but that isn't going to happen until the economy gets a lot more robust and/or the government figures out how to incentivize business in this country a lot better than they seem capable of.
But going back to the primary trend, every public job eliminated reduces to some extent a burden on the taxpayer and every private job created increases the tax base. Yes, public workers pay taxes too, I should know, but that is simply returning a bit of what they got from the taxpayer in the first place.
This was an excellent trend for the economy, although once again, not enough private jobs. Public jobs are certainly important and necessary, we need teachers, police, and firemen (of either gender) and there are many other functions that have to be performed. Still, there is always going to be some level of inefficiency in government (of course in private industry as well) but a private job is a net revenue creator while a public job is generally a net revenue loser.
It doesn't have to be this way, if we consider the value added of a public job and make sure the value provided is greater than the cost. If you consider police activity, certainly the prevention of crime is paramount. This is a high value endeavor, if the crimes are real. Certainly a crime that destroys property or inflicts bodily harm needs to be prevented if at all possible. However, what about victimless crimes?
When you consider vice and drug offenses, and to some extent traffic violations such as speeding, who is the victim and why are the police intervening? Now, traffic violations may actually generate revenue but the last statistics I saw indicated a tremendous number of people in jail for drug offenses. Why? Really, if we legalized most drugs and put them under FDA oversight, instead of being a crime it would become an industry.
Yes we would have addicts but would that be worse than the addicts we already have plus the tremendous cost of enforcement? I'm not encouraging anyone to use drugs, but in all honesty, why do I care?
You either believe in individual responsibility or you don't. The same with vice. Why do I care what consenting adults do as long as it doesn't involve minors or uninvited violence? I may not approve, but I don't approve of lots of legal things already, such as smoking. It just isn't my business and it certainly should cost society as much as it does to try to prevent it.
Lots of people would and have argued that it would cost more to ignore it. Really? If it was legal, and taxed, it would generate more than enough revenue to support rehab and education efforts. The economics are clear.
Look, less government is a good thing since it equates to less taxes. More business is a good thing since it equate to more taxes. When are we going to wize up?
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