Wednesday, December 08, 2010

Payroll Tax Cut 2011

A short one on what is the real reason for the payroll tax cut. Its temporary, its a surrogate form of a check and its designed to quicken the pace of consumer deleveraging. If you subscribe to the notion that the sooner the consumer can deleverage, the sooner they'll feel more comfortable spending, this is an unpaid for, yet not totally ludicrous program. Because its tied to payroll it only helps those that can positively be confirmed as having a job and therefore avoids the handout stigma.

Unfortunately the unemployment insurance is getting extended another 12 months - that's getting close to 3 years! Why not make it 4 and every unemployed person could use the money to put themselves through college!

Better than extending money to unemployed yet again, lets put that money toward an empoloyer payroll tax holiday of 1 year?

Thursday, August 26, 2010

Why T. Boone is on the Right Track

Its been two or more years since T. Boone Pickens has been coming on the television and travelling around the country espousing his plan for converting a greater portion of our energy consumption to using natural gas. The main focus of his plan being the establishment and subsidization of commercial trucks running on natural gas as a start.

Many people are suspicious because T. Boone stands to benefit from an adoption of his plan because he has many natural gas investments, but those same people don't realize he also is invested in wind farms and even underground water rights in Texas. He is no evil genius, just a great American entrepreneur.

What should ring true most clearly these days is his assertion that his plan would create a pathway for creating American jobs on the back of infrastructure investments and retooling of many commerical vehicles. Perhaps more important over the long term is the possibility of reducing the foreign dependence on imported oil.

Each month we import about $20billion dollars worth of oil. In todays world of massive government spending this may not sound like much, but to put it in perspective - this amount of money would cover the monthly tab for our foreign war efforts.

If we were to retain these dollars in the U.S. through utilization of our own domestic natural gas, we'd have a monthly stimulus for growth of $20billion with an investment multiplier effect of probably 4-5 times in the short run. Simply stating a strategic shift to natural gas would create a stimulus of outsized porportions domestically and unlike our past spending - this would lead to virtuous growth leading to more jobs and tax revenue instead of more unemployment benefits.

While Boone admits that we'll likely be running battery powered cars in 40-50 years, what we need is a stop gap. Boone has this. What makes it more compelling is that this stop gap won't drain our wealth, but bolster it, allowing us to increase the likelihood that we'll make it to the battery powered era without a bankrupt government.

For those worried about the environmental effects of natural gas drilling methods - make the tradeoff for this plan coincide with the strongest governmental and independent oversight legislation. The investment will still be there and maybe, just maybe we'll have an example of how Government can aid private investment and lead us to a source of prosperity rather than dependence.

Pickens Plan

Saturday, August 21, 2010

Adrian Rogers - Smart Man.

"You cannot legislate the poor into prosperity by legislating the wealthy
out of prosperity. What one person receives without working for, another
person must work for without receiving. The government cannot give to
anybody anything that the government does not first take from somebody
else. When half of the people get the idea that they do not have to work
because the other half is going to take care of them, and when the other
half gets the idea that it does no good to work because somebody else is
going to get what they work for, that my dear friend, is the beginning of
the end of any nation. You cannot multiply wealth by dividing it."*

* Adrian Rogers, 1931*

Wednesday, August 11, 2010

Attention Income Investors

For those of you who have a bad case of vertigo with the market volatility, whether your 21 of 55 years old I've got a few holdings that have low beta's (how much they move in tandem with the market - 0 = unaffected by market moves 1=matches the market, 2=twice as volatile etc), earn 2-6 times the the 10yr treasuries. Perhaps just as important is that while bond investors have been on the right side of the market compared to equities this year, if/when the economy finally recovers, bond prices will decline as yields rise and you'll give all that back and more. If you look at bond prices, they're at all time highs, meaning yields are at all time lows (except perhaps for the junk category). Buying a bond right now has an extremely high probability of a negative return over the next 5 years. I'm going to give you some other assets with lower volatility and higher yields with the opportunity to raise their yields through better income in a recovery.

First thing - MLPs (Master Limited Partnerships) - usually pipelines that have long term contracts on transporting natural gas and oil therefore their income streams are steady. Because they're a tax beneficial part of the tax code means they pay out substantially all of their profit. The net result is you get a stable earnings yield and 90% of it is paid out quarterly via dividends. I would own more than just one to stay diversified, and it pays to investigate where their pipelines are centered to make sure you don't get over concentrated in a certain area of the market which might be subject to gluts or shut-ins. Most MLP's sport 6-10% dividend yields - nothing to sneeze at in the low interest rate world we live in

Try a few of these:
ETP - Energy Transfer Partners. Has a 0.53 Beta, and a 7.61% yield at current price.

TCLP - TC Pipelines. Has a beta of 0.47, and 7.12% yield at current price.

WPZ - Williams Pipeline Partners. Beta of 1.25, but only because its been on an upward tear due to debt restructing. Its off its recent 52 week high and yields 6%.

EPD - Enterprise Product Partners. Beta of 0.54 and yields 6.3% at current price.

The second place we go is into the preferred security world. Typically representative of common stock, but slightly higher in the debt tier ladder than common stock, these move less than the common, but often support higher dividend yields than common. We're looking for lower volatility and higher yield with some appreciation potential - these securities fit the bill. Because it can be difficult to buy and sell individual securities as their volumes are light, its best to get an index.

Try this:

PFF - Ishares Preferred Stock Index. Also recently off its 52 week high, it has a bit higher beta than MLPs at 1.02, but again this is because of the rapid appreciation. This pays a variable dividend which is normally around 7-9% depending on the underlying securities distributions. The good news is it pays monthly so the income stream is steady. While this follows the financial stocks moves to an extent, it gives you the exposure and income mix that makes for a successful long term holding. Also, because its an index fund, its got a pretty low expense ratio.

Next thing you should look into is convertible bond funds and indexes. Convertibles pay a coupon like a normal bond, but they're typically apportioned a share conversion option if the common stock of the bonded company appreciates to a certain point. Because of this, the yields are slightly lower than regular bonds for the same company, but the yield remains attractive because most of the companies issuing the convertibles are smaller companies hoping to grow their share price enough to release them from the bond obligation. Because they're smaller, they're a bit more speculative than blue chips and therefore have a higher yield. A great way to play this is through a mutual fund (you want them to do the research on the bond ratings). Vanguard is pretty much unbeatable from an expense ratio standpoint and VCVSX is my recommendation.

Next is starting to look into multi-state closed end muni bond funds. Its important to look at the closed end universe because key to return here is buying when the discount to NAV is higher than normal. Purchasing at these points can give you a capital appreciation upon which to boost the coupon payments you will receive. They typically pay 5% (Tax free) which depending on your tax bracket could be a 6.5 taxable equivalent. If you buy at the right moment, you can get a 5-10% capital appreciation and you can sit on the holding for a year, collect the payments, then decide on whether to sell the holding as a long term gain and use the coupon payments to offset your taxes. Nuveen has many Muni-bond funds and will show you the discount to NAV on a daily basis so you know when to buy. Key is to buy when its 4-5% than the normal discount, betting it will soon return to normal. Please note these can be often thinly traded and so can go up or down a good bit any given day, but you need to ignore the swings knowing that it hasn't anything to do with the underlying muni-bond securities which are typically non-volatile assets. Heck - if the fund dives - that's your signal to get in or buy more based on my thesis above. Try of NQM (beta 0.14), NPV (beta 0.11), NMY (beta 0.23).

Lastly, look into some closed end world bond funds and potentially some REITs. First Aberdeen has many - I like FAM for a world bond fund. Employ the discount to NAV strategy and you'll prosper similarly to the Muni strategy. Plus this one pays 8-9% with a beta of 0.76. The next time Greece looks like a nightmare or Hugo Chavez nationalizes another business - look for this fund for entry points.

That's enough for now - add some of these things to your portfolio and take some solace in watching your portfolio gyrations mellow, the cash pile up, and your alpha increase.

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Monday, May 17, 2010

Let the Soundbite Friendly Legislation Continue Hurting Small Business

You wake up one morning and turn on the news to hear "Congress is passing new regulations to help protect the consumer and small businesses from predatory charges and rates from big banks and transactionists like Capital One and Mastercard and Visa and J.P. Morgan".

"What a good idea - Congress is working to safeguard small businesses..." you think as you put on your clothes and head downstairs to grab your keys and head to your local coffee shop to get your favorite "what's new" coffee bean and one of those scones that can only be accomplished through the small bakery care of your locally owned corner coffee shop. Way better than those things at Star$ for sure.

You walk in with intention of getting your usual for about $4 paying with your newfound budget tool known as the debit card - an electronic and convenient way to manage your money and avoid ATM fees. Sorry you are to learn that your local coffee shop has set a minimum debit card transaction amount of $5 on all orders.

Upon hearing this news, you ask "what?" of the counter salesperson who then tells you that Congress passed legislation to allow them to force you to buy so much before they're willing to process your Visa or Mastercard. Not dismayed, you say - "That's fine, I'll pay cash" and look in your bill fold - oops you stopped carrying the greenback because it seemed it didn't matter and you were cutting down on those ATM fees. Well, now - you're either paying the ATM fees or your buying more stuff - or you're leaving buying nothing due to the frustration of the whole thing. What kind of a consumer / small business protection were you expecting from Congress, really?

The real effects of the soundbite friendly legislation will predictably do just the opposite of that which they intended leading you to lower your approval rating of your local congressman and senator, but here's some other things they'll do:

1.) Put small businesses at a disadvantage as the starbucks with a cash flow and profit advantage over the corner shop, will happily accept the $4 the corner shop won't. they'll eat the difference, but gain volume to make up for you're assistance by the government in price setting interchange fees. The corner shop that thought they were getting a break from the "no minimum transaction amount" contract terms will find they've only signed their own business death warrant.

2.) You'll fight with your small local retailers more as you learn they've all now determined their own minimum purchase amount and you'll constantly be finding out how you don't quite meet their minimum. Customers behind you will here this too and think "man, this shop is pretty presumptious to make me spend a minimum to use my convenient card to purchase this." They'll shop at the small merchant less and this will kill small businesses.

3.) You can easily see how this will put a minimum purchase on the gas pumps too, right?

4.) How about the fact that its only going to affect Debit cards and not Credit cards. Though I consider this good in that it's limited - it will raise the consumers credit card debt and raise the risk of going backward on the use of debit card as a better budgetary tool more tied to their checking account balance than a lofty credit limit. Hello 2007 - lets repeat!

5.) So you've said - that's ok - I'll just carry more cash. Except that now you're heading to the ATM, either searching for your local bank or inevitably stopping at one of Bank of America's ATM and paying a fee (that helps consumers, right?). Sooner or later you get tired of paying fees, so you just open a BofA checking account - and you've just helped put a nail in the coffin of another regional bank!

I could go on and on, but by now you get the point of the lunacy of trying to price fix markets and meddle with what is the largest and most beneficial transaction processing network in the world responsible for increasing the velocity of trade by amounts the world would be lucky to ever repeat. Don't blame Visa - they make your checkout speedy, blame Congress for saving their job while trying to brainwash you into thinking they're trying to help.


Saturday, March 27, 2010

A Real Student Loan Reform Solution

As Congress passed student loan reform yesterday we again saw the Democrats favorite solution to a growing problem of education costs - a government takeover of the market for educational cost lending. Based on their solution to healthcare it seemed only natural and we're seeing the same leanings on the home foreclosure front with a new program taking government debt funded dollars and assisting banks and then trying to have them pass the new loans off to FHA, surprise, surprise - a government program. I won't mention that most of these loans are Fannie or Freddie or Ginnie loans already.

Unfortunately, turning every problem into a future government obligation, which will invariably become underfunded like medicare or social security, is not a long term solution. This student loan program will end up costing the very graduates it is purporting to help through higher taxes and lower benefits and inflation adgusted earnings in the future.

A real solution to this problem and others is not to use the United States lower current (which will go up if we continue to borrow at these rates) cost of borrowing funds to show savings, but to get the incentives right between all the parties relating to education to make a private solution possible and successful. I doubt the Democrats even know who the parties are, but I'll tell you here - the student, the education institution, future employer, the taxpayer.

Right now, we're giving every incentive to the education institution to continue to raise the cost of education, we're giving the taxpayer a big future obligation and risk. If instead of government issuing the loans at below market interest rates, we gave employers tax credits for paying student loan payments of graduated students we'd help students cover the cost of their education without putting a burden on the taxpayer or saddle them with the risk of the student defaulting on the loans.

Some say that its two sides of the same coin - issue debt or collect less taxes from employers. But here is the main difference - one is promising ourselves more costs through debt obligations while the other forces us to make do with less in the way of government spending limiting our future debt. In addition, the incentive for graduates would be swung toward getting a job as soon as possible, the employer gets a better deal on hiring talent and a lower tax bill therefore spurring hiring (a needed thing these days). The risk to taxpayers is removed, the educational institution gets paid, private lenders re-enter the market with lower borrowing costs because they have a higher chance of being repayed once the student becomes employed and through the incentive more students are attracted toward marketable degrees for which they can get hired by an employer after graduation and have their loan payments covered. Higher employment levels and more higher education level/white collar jobs means higher wages which means higher tax revenues expanding the tax base, raising more revenue for the government to pay back the trillions it already owes the rest of the world.

While there are obviously details and levels that I haven't set here such as what amount of debt repayments, what type of tax credits, etc - the point is that instead of taking the easy way and saying "uncle sam" will pay for it and throwing tax dollars at it - you can devise programs which create incentives for private industry to work out a solution at little no cost to the government.

We need more of this type of thinking in Congress and from the White House. Maybe if someone from industry actually held a high ranking post in the White House, we'd see more things like this instead of making more and bigger debt bombs for future generations. The bill is coming due soon and the piper will need to be paid.

Saturday, January 09, 2010

2010 - Its the question of how the word "Unemployed" is employed

Here are my Saturday morning musings. Despite what may go on over the next 9 months national security wise or other, unemployment (its the economy stupid) will be the pillar issue for voters in November. Not sure if you saw the jobs report out yesterday...

Looks like its going to be a nine month number spinning game. See article below - Obama / Dems will spin this as the unemployment rate has "topped out at 10%" - meaning things have stopped getting worse, but this article shows the fallacy of those statements and confusion over the definition of unemployment leaving Washington to attempt to spin the confusion for their own salvation.

Interesting scenario. Even if the number doesn't get worse in coming months - it almost certainly won't get better (unless you count Census takers as real jobs - which I'm sure some will try). Corporations have record profits due to productivity gains and lower payroll costs and aren't likely to invest in more workers with so many potential taxes (health care, FICA cap elimination, marginal rates up, etc) possible and the economy showing no bright signs of recovery. With profits looking good based on current levels of economic activity, the have no need to take a chance on hiring and ruining their rosy profits.

The Obama administration takes every chance it can to bash corporations via the Wall St. conduit (yeah, most companies are listed/traded public companies) , but it foolishly doesn't realize that by doing so it is perpetuating the situation of lackluster employment and contributing to their record profits through keeping the labor market tight allowing them to keep wages down as well and reducing worker mobility. They have little urgency or conviction to hire given this situation especially when they're now in a great position financially for the most part.

Small businesses fear the same with more concern on health care benefit costs which can crush a small business when looking to expand their payroll by even one person is a 5-10% cost increase to the business for many mom and pop businesses. So we've got a chicken or the egg situation with hiring / economic recovery / taxes. Will the Republicans be able spin that as failure and push through supply side agenda and take over the house and ruin a filibuster proof majority? In short - could we be heading for another 1994?

I don't like deficits and ballooning debt, but if you're going to do it, you have to know that its only financed based on our expected recovery. The longer that doesn't happen, the less likely our creditors will be to lend, and the more expensive our current and future spending is to finance. I remember in March when Obama said the key to solving the deficit is growth - right there. Problem is, he never got the growth part right, unless he was talking about government entitlement and bureaucracy. It seems pretty evident to me that if you just gave the money we've spent directly back to the taxpayer, they'd have been a lot longer way toward de-levering their personal balance sheet and their de-levering/spending would be providing the green light in economic activity to businesses to hire again. We could still pay for the unemployment benefits, but we wouldn't be paying as much because people would be already on their way with new jobs.

Not surprisingly, I think the economy may get better despite the Government, albeit just more slowly. All it needs is a glimmer of hope that the Democratic agenda is over or neutralized. That would mean - if we get gridlock in the house and or senate in November without the health care bill and higher taxes - not just the stock market takes off again, but hiring and economic activity. If not, well you can guess. All this adds up to a huge cover up job by the Democrats and the White House on the meaning of unemployment while they hope for the economy to recover. Toward that end, look to become even more confused over what the actual unemployment rate is between here and November, but just remember - it won't be getting better until government centralized economic policy steps out of the limelight.

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