Walking In An Economic Wonderland

A Golden Prediction

In reviewing my 2011 predictions made last December (Economic Bowl Pick post December 27, 2011), I discovered the Model T had forecasted an S&P 500 Index high of 1400 for the year.  The index peaked at 1370.58 in late April. Therefore the forecast was off by less than 30 points and just 2.1%.  I hope somebody was paying attention and sold at the right time.  Next year’s predictions come in two weeks.

A Surprising Observation 

A little over a week ago I made my annual Christmas shopping trip to the mall.  I had heard all the negatives about the holiday shopping season.  Yes Black Friday sales were strong, but consumers had spent all their money and recent shopping activity had been slow.  Yes consumers say that will spend more this year, but they really won’t. Internet sales are much stronger this year, so traditional retail sales will suffer.

Therefore I was expecting the number of shoppers at the mall to resemble those of the last three recession-weakened years.  I venture to the mall about the same day and time each December so I do have a good baseline for comparison.

But this trip to the mall was not as I expected.  My first surprise happened in the parking lot.  I always park at the end of the mall (by Sears) to avoid the mall traffic maniacs and so I can park close to a door.  Due to the weak economy I could park about 10 cars from the door the last three years.  In a strong year I would park about 25 cars back.  This year I parked about 35 cars back.  Could there be that many more shoppers here? 

There were more positive signs before I even got inside the door.  I passed several people leaving the mall loaded down with shopping bags. There was a help wanted sign on the Sears door.  Once inside the mall there were customers six deep in two lines at the first check out station. I actually had to walk around people to get through.  And this was at Sears!  I didn’t think anyone was supposed to be shopping at Sears anymore!

In the mall the crowd was huge. I can’t remember ever seeing this many people on my shopping trip. And they were buying stuff.  They were buying clothes, they were buying shoes, and they were buying knick-knacks. They also must have been buying expensive perfume because in one area of the mall the air was so thick with the scent; it was literally difficult to breathe.   The food court was extremely busy also.

I managed to complete my purchases fairly easily although I had to wait at the calendar kiosk because they ran out of shopping bags.  You know business is good when you run out of bags.  While I waited for them to get more bags, I had the opportunity to see which calendars people were buying.  One popular calendar is called “Nuns Having Fun”.  This is not what you expect.  It is totally “G” rated.  The cover shows nuns having fun on an amusement park ride.  Another popular one is a daily calendar called “Oh No Obama”.  It boasts that it lists 366 (leap year) stupid things Obama and his administration has said or done.  No, I did not buy this one.  Why would I want to start every day next year by getting upset?  To me, it ceased being humorous a long time ago. 

I stopped at another store at a “mega” strip mall to buy my final gift.  The store was very crowded and there was another help wanted sign on the door.  There is a whole lot of consuming going on!

The True Meaning of this Economic Wonderland 

I know this is just one person on one shopping trip, but can things really be that bad?  This looks like a recovery, this smells like a recovery and I really can’t believe we are in or headed for a recession when there is this much positive economic activity. There are still some negative economic indicators out there, but for now I’ll believe what I can see and what I see may be a Christmas economic miracle.

How bad can the economy really be when people are forking over cash for greasy mall food, expensive cologne, and buying overpriced calendars featuring everything from scantily clad lingerie models to fully clothed nuns?  And unemployment may still be high, but apparently companies are having trouble finding enough retail workers this year.

So my holiday message to the people who shopped like crazy in the stores and on the Internet this year: I thank you, the economy thanks you and Ricky Bobby would say that the baby Jesus laying in the manger thanks you.  

My holiday message to the economic naysayers is this:  Quit whining about how bad you think the economy is.  It doesn’t help consumer confidence and there is a good chance you are wrong. So just shut the (insert your favorite expletive here) up Scroogeheads and go buy some Christmas gifts. Shame on you for upsetting the baby Jesus on his birthday.

Merry Christmas and Happy New Year to all my readers.

 One Final Gift

If you haven’t had time to give anything to those less fortunate, you can buy Christmas dinner for the homeless at the Refuge of Hope in Canton, Ohio for only $2 per meal.  Click here to donate.

Housing Market Constipation

Two simple stories illustrate the sad and strange state of the housing market:

Story One:
I was considering moving due to my job change and improved finances.  However in the last year, the most valuable and the least valuable properties on my street both sold for 16% under what I considered the market value.  And it wasn’t just my assessment.  The widow who lived next door to one of the sellers was not very pleased with his selling price.  When the last conversation between two long-time, good, neighbors includes the phrase “You stupid son of a *****”, you know things are not good in the housing market.

So my house is now worth 16% less that I was expecting.  When I subtract the home improvements (windows, deck, structure) that I have made in the last 16 months, I would be selling my house (after 17 years) at an effective $10,000 loss.  You may argue that I should not subtract the improvement expenses, but that is a tough psychological sell.  Therefore I am not selling my house and I am going to stay put and enjoy my new deck and windows

Story Two:

My friend’s wife got a new job about ten miles from where he works.  By moving closer to their workplaces they could cut their total daily commute from 165 miles to 35.  So they fixed up their house and put it on the market.  Under normal conditions it would have sold in three months or less and life would be good.  But the house still sits there months later, drawing little buyer interest with the winter commute approaching.    

Multiply these two stories out by the hundreds of thousands and you begin to understand why the housing market, and the economy, is so weak.  The alarming thing is the two housing markets described above are probably “better than average” locations.  They did not experience overbuilding or rapid property appreciation, yet property values have sunk nonetheless.

Recent information from the Census Bureau indicates that only 11.6% of people in the U.S. moved into a new home in 2010.  This is down from 12.5% in 2009 and is the lowest rate since tracking began in 1948.  Many people can’t move because they can’t sell their houses (either the poor market or one of 10.7 million with negative equity).  Also, more young adults are living at home because they can’t find jobs. And in this recession many older workers lost their jobs and are less likely to move across the country to find work.  The result is that when people aren’t mobile, they don’t spend money on new houses, new furnishings or any other expense associated with establishing a new residence.  This is a major drag on economic growth.

Housing Constipation

The housing market is “constipated”.  It is straining to move.  It is pushing, it is wheezing, it is cramping, but it still won’t go.  The other industries are standing outside the bathroom door, impatiently waiting for the housing market to let loose.  They know that housing has to start producing first before they too can find relief.  But housing is bound up due to poor diet (toxic assets) and poor life style choices (sub-prime mortgages).  So it just sits there producing very little and sometimes emitting some very disturbing gas.

The government has tried to stick its hand in there and provide help with the mortgage modification program, but that failed.  The banks are modifying the mortgages of people that they determine should be helped.  They have a vested interest in not foreclosing on more homes because they already own too many foreclosures.  So the government should just stay out of there and let nature (banks making sound economic choices) take its course.  There is no magic enema for this situation and the laxative of low interest mortgage rates has been futile to this point.

Scraping Along the Bottom

I believe that the housing market hit bottom around February or March of this year.  But I was way too optimistic on the rate of recovery.  Most industries that hit bottom after the great recession skidded and scraped “along the bottom” for an extended period of time before starting to recover.  Housing is doing the same.  It was the last industry to hit bottom because it had the furthest to fall. This skid has been long and continues to be painful.  The industries that fell the furthest took approximately 12 months to begin a recovery.  If housing follows this pattern, look for things to start to improve around March 2012.  The recovery will start slow, but has the potential to grow faster as market slack begins to be reduced.

Here is a review of the current statistics in the housing market.  The number on “where we need to be” and “when we will get there” are my forecasts.  Note that the “where we need to be” numbers are much lower than the housing peak.  This is because the housing marketing in the aughts (00’s) was on steroids.  Those numbers are artificially pumped up and won’t be seen again for many years.

Housing Starts

Oct 2011 = 628,000 (Annual Rate)

Oct 2010 = 529,000

Where we need to be = 1,600,000

When we will get there: 2015

New Home Sales

Oct 2011 = 307,000 (Annual Rate)

Oct 2010 = 282,000                 

Where we need to be = 1,000,000

When we will get there: 2016

Existing Home Sales

Oct 2011 =4,970,000 (Annual Rate)

Oct 2010 = 4,380,000

Where we need to be = 6,900,000

When we will get there: 2014

Who Shredded My Cheese?

It is the “Game” and we are all players.

Once there was a company in Northeast Ohio that made vacuum cleaners.  Time after time the salary negotiations for the workers went something like this:

The Union:  “Give us more money and benefits or else!"

The Company:  “Or else, what?”

The Union: “Or else we will go on strike and you will have no vacuum cleaners to sell!

The Company: “Okay, here you go.”

The union’s goal was to maximize the salary and benefits for its members.  The company played along and paid higher wages and benefits because it could raise prices and still make profits. 

But one day the salary negotiations went like this:

The Union:  “Give us more money and benefits or else!”

The Company:  “Or else, what?”

The Union: “Or else we will go on strike and you will have no vacuum cleaners to sell!”

The Company:  Sorry, you are not getting an increase.  In fact, this time you aren’t getting anything.  The Mexico plant can now make and assemble quality vacuum cleaners so we are expanding capacity there and closing this plant.

The Union:  “What?  Wait, why would you do that?  Okay, okay, let’s negotiate.” 

The Company:  “There is really nothing to negotiate.  You drove your compensation up so much over the years that it is three times higher than the Mexicans.  We can’t raise prices anymore because of increased competition.”

The Union: “But this is not fair.  You cannot do this!”

The Company:  “Oh yes we can.  Here we go. Adios.”

The company closed the plant and over a thousand workers lost their jobs.  Most of the people worked in assembly.  Many of them had worked for the company for over 20 years.

Unfortunately the skill these people had developed over the years was “vacuum cleaner assembly”.  In the new world economy, this is not a very valuable skill because Mexicans can assemble vacuum cleaners, Guatemalans can do it, and of course the Chinese. 

In this new world economy, you are not competing for work with the people in your city.  You are competing with everyone in the world.  It therefore is very important to have or be developing skills that are of increasing value in the world economy.

The people who assembled the vacuum cleaners were at one time winning the Game.  They had a marketable skill, but then the Game changed.  Somebody didn’t just move their cheese, they ground it up and scattered it around the world.

The “world economy” has had a significant impact on personal incomes in this country.  If you have a competitive skill, your value rises.  If you don’t, your value, and income, falls.  Even if you are not competing directly with foreign workers, you may be competing for domestic jobs with workers who have been displaced by foreign labor.    This means there is a surplus of workers for the “lower skill” positions and this drives salaries down.  As some workers rise up from the center and even more workers get pushed down from the center, the “middle class” shrinks.  Nobody caused this to happen, it’s the Game that changed and these are the results. 

Two weeks ago I said I supported the Occupy Wall Street protests because of legitimate outrage over unethical behavior of banks and financial firms.  However since then, OWS has taken a distinct “left-turn” and the focus has been on “income inequity”.  If this is now the rallying cry, it is no surprise the movement is producing more violence, more crime and basically more anarchy.

In a free-market economy there will always be income inequity.  The people who are risk takers, entrepreneurs and have exceptional skills will always be able to make more money than your average manual worker. The problem is that winning the Game has become tougher because the competition got larger, worldwide larger. Camping in the street and complaining about the Game may make you feel good, but it does nothing to change the rules of the Game, or to help you win it.  To win today, you have to work harder and the protesters don’t seem to want to do that.

And you may complain that the Game isn’t fair.  But guess what, few things in life are fair.  Today a baby will be born in Bangladesh and may not survive the week.  Another baby will be born in the Hamptons and will be wealthy his entire life.  The Game is not fair and sorry comrade, you cannot make it fair.  Karl Marx thought you could, but the reality is, that you can’t.

It doesn’t make sense to tax the successful people excessively and give the money to the least successful.  That would be punishing, not rewarding success.  In addition, the manager of this redistribution of wealth is Big Government, which means most of the new tax money will disappear down a rat hole.

However, our society must determine how much support the people at the top of the Game need to contribute to provide basic life services to the people that have been squeezed by the Game.  And due to changes in the Game caused by the world economy, they probably need to contribute more than they do now.  And you cannot ignore this issue.  Remember, the revolutions of the “Arab Spring” were all economic in nature and were a result of the people at the top hoarding too much of the wealth.  We must figure out a way to make the "new" Game work for everyone, but the solutions will not be easy.

Interesting Side Note:  The closed vacuum cleaner factory mentioned above was remodeled and is now used for light production and assembly work for several different companies.  A new company just rented space in the building to assemble, get this --- vacuum cleaners.  The product was previously assembled in China, but was redesigned to make assembly much easier.  This change made domestic assembly cost competitive so the vacuum cleaner will now be assembled here.  The jobs pay much less that the old jobs, but I would make the argument that the new jobs are paying the competitive wage for that skill, just as the old jobs paid the competitive wage at the time.    

Occupy This Thought

When there are people protesting in the street, something is wrong.

Last year people took to streets to protest the expansion of Big Government. Big Government growth had been a problem for years, but the increased spending and governmental intrusion of the new healthcare plan was enough to push people over the edge.

This protest became know as the Tea Party Movement (it’s a movement, not a political party!). The movement was very effective, working through the political system in stopping (maybe just slowing) the growth of Big Government and changing the attitude and actions of many politicians. It also raised awareness of the issue in the general population.

Now Occupy Wall Street has caused many people to protest what I will refer to as Big Money. While it is easy to criticize and any find reasons to discredit many facets of this movement, I repeat:

When there are people protesting in the street, something is wrong.

At first I thought of these people as misguided hippies who were acting very stupidly. Now no one dislikes hippies more than me (except Eric Cartman), but the protesters do have some legitimate concerns even if they have problems communicating them.

It took awhile to figure out, but the issues driving the protests are: The lack of accountability of banks/financial firms for causing the housing market/financial system collapse, the cozy relationship between Big Money and Big Government, and the growing inequality between the “rich and poor”. The first two issues are very valid. The third raises some complicated factors which I plan to address in a future post.

The main issue is that Big Money made billions promoting the use and abuse of sub-prime mortgages. It also used derivatives, insurance abuses and anything it could to exploit the situation. Corporate profits are good, corporate greed is bad. Remember greed is a sin, one of the seven “big ones” by the way. Sometimes profit and greed are divided by a thin, gray, line, but in this case Big Money went way over the line.

Sin always has a cost. In this case because of Big Money greed, millions of people lost their jobs, millions more are underemployed, many college graduates are working at Mc Donald’s and many people have lost their houses. And millions of unemployed people are still suffering from the sins of Big Money.

Taking in one step further, from lower wages and benefits, lower home values, lower stock values, higher taxes, etc., it is difficult to find someone who has not been negatively impacted by the Great Recession.

And what is the punishment for Big Money for being so irresponsible, for being so greedy? Not much. No one has gone to jail for their role in this fiasco. Remember that Bernie Madoff and the other Ponzi pals did not do anything to cause the financial crisis; their crimes were merely exposed by it. They were the super-greedy, so their penalties were either jail, or in one case suicide. Sometimes the wages of sin are indeed deadly.

Sure, some corporate CEO’s lost their jobs. They had to take their million dollar separation settlements and go sit idly by the pool. Ouch! That’ll teach ‘em.

So the banks took all these great financial risks. The banks raked in enormous profits. The executives all collected huge bonuses. And then it all fell apart and we all had to pay for it all through blood, sweat, tears and bailouts. But the bankers got to keep their big bonuses. It makes you so mad, so mad, that you just want to run out in the street and well, scream. Which I guess is the whole point.

This brings us to the friendly relationship between Big Money and Big Government. Big Government was way too willing to bailout Big Money and become its savior by paying for Big Money’s sins. Big Government was supposed to be watching Big Money, but it clearly saw what was happening and looked the other way.

Yes, this time Big Money was making so much big money that it had enough loot to buy off both the Democrats as well as the Republicans. We expect Big Money to buy off the Republicans and for the Democrats to serve as the watch dog. This time the watch dog had a big bone stuck in its mouth and did not bark.

I don’t know what the penalty should be for the people who caused the financial crisis at this point. The Democrats are now trying to punish Big Money for its actions, but that is resulting in the industry (even the banks that were “sinless”) having problems functioning effectively. And we need the financial system to heal and to be able to function well to get us out of this mess.

And then we read that not enough has been done to safeguard the system (still too big to fail!). More important than anything, laws should be written to ensure that this never, ever, comes close to happening again. Please use some common sense and just fix it! These guys were stealing cookies from the cookie jar, got caught, but received no penalty from grandma for doing so. What are the chances they will go for the cookies again since there were no consequences last time? We must make sure that grandma puts the cookies on the top self where Big Money can’t get them (joke to hockey fans, eh).

There are serious problems in how the Occupy Wall Street protesters are behaving. However peaceful, lawful, protests are protected by the First Amendment. You may disagree with their methods, their politics, etc, but on substance, in the words of that great philosopher M.C. Hammer: “Too legit, too legit to quit”

The Scariest Monster This Halloween

Mad political and dismal scientists worked behind closed doors in a fervent rush to create it. We were told we had to commit to the creation before we could see it. Now the work is finished and it is apparent that instead of formulating something good, they have created a very scary monster. This monster, Frankenturd, threatens to cause all sorts of terror and pandemonium.

Of course I am talking about the Patient Protection and Affordable Care Act (PPACA) – the Healthcare Bill. I am not going to refer to it by its more popular name because I want to keep the politics out of it. Nancy Pelosi said that we would have to pass this bill to find out what was really in it. This is similar to buying a mystery gift bag, but in this case when we opened the bag what we found is a turd.

It is an ugly, terrifying, monster, of a bill. The more we see of it , the uglier it becomes. The closer it gets to us, the more it smells.

Because many people have much political capital invested in the PPACA, they still try to convince us (and themselves) that it really isn’t that bad. But that doesn’t change the fact that it is still a turd. Yes it’s a turd, but it’s their turd.

Almost every week some new analysis of a provision of the PPACA finds something that is either unworkable, very expensive, or will wreak havoc on the current system. It is rumored that the authors of the bill wrote the provisions to be excessive because they expected them to be reduced in the final negotiations. Because the bill was rushed through, there were no changes. It just shot through untouched. In addition, there are some errors in the bill that have created bad loopholes. If people would have actually had time to read the bill (all 2,409 pages worth), these would have been corrected.

I don’t think anyone read (or understood) the entire bill before it was passed. And now we have some politicians that are screaming in horror because they voted to create a turd. A turd so hideous, so destructive, and so odorous.

This Frankenturd is so bad that two weeks ago they had to remove one of the smelliest parts. The CLASS program was supposed to have healthy young workers plow hundreds of dollars per month into a fund that would eventually pay nursing home bills for sick, old, people. This had absolutely no chance of working, unless of course you assigned Bernie Madoff to run the program.

The reason it made it into the PPACA to begin with is that it provided an accounting gimmick that made the bill appear more financially positive. They would collect all these great contributions ($70 billion worth) from the healthy, young people in the first five years, but not pay anything out in benefits. In Washington accounting speak that equals a $70 billion savings! Ba Ching! There are several more of these types of financial gimmicks in the bill.

Now that CLASS (what a classy name for a piece of turd) has been taken out, I do think that the true cost of PPACA should be recalculated. This should not be too difficult or costly. Step one: Take the existing number. Step two: subtract the $70 billion.

Secretary of Health and Human Services Kathleen Sebelius had to explain why CLASS was being stopped. I feel sorry for her every time she has to defend the PPACA. Her job has been reduced to a turd salesperson. She basically is married to the PPACA. Yes, she has become the bride of Frankenturd. I hope she showers after every press conference.

Of course all the Republican presidential candidates have promised to kill Frankenturd. But this is not good enough. Everyone knows this turd must be flushed. Even its creators understand it can’t live in its present form, but they don’t have the heart to kill it, after all it is their turd baby.

I do think the candidates need to tell us what plan they would come up with to improve the healthcare situation. The problems still remain: High costs, lack of coverage, pre-existing conditions, Medicare/Medicaid reform. These problems need solutions now.

Who would have imagined that we would need protection from something called the Patient Protection and Affordable Care Act? And who would have ever thought that tax payers can’t really afford it either? Sounds like a “1984” double play to me.

So far we have only gotten a whiff of what the PPACA will truly do. Unfortunately Frankenturd is the scariest thing you will encounter this Halloween. And no, that isn’t a Tootsie Roll in your beggar’s sack.

Look Out Elizabeth, Here Comes the Small One!

Recently ECRI (Economic Cycle Research Institute) announced that the U.S. economy was soon going into recession. This is a huge prediction. ECRI has the best business cycle model in the world. They are very accurate in predicting economic downturns. This negative forecast is supported by several other analysts citing various economic indicators that are signaling an imminent recession.

So this means the economy is definitely headed for recession, right? Not so fast “bear-boy”. There are other indicators that should be much more negative now if we are headed for a dip. And most importantly, the greatest investor in the world, Warren Buffet, says we are definitely not going into recession.

ECRI says definitely yes and Buffet says adamantly no. This is an economic smack down of epic proportion. The best model versus the best mind --- It’s on!

This is the mother of all mixed signals. To gain perspective it is important to remember how we got to this point. There was significant damage to the financial structure and credit markets. The housing industry suffered severe calamity. Layoffs spiked and the economic collapse created a structural unemployment problem. Because of all these problems and the severity of the recession, the recovery was expected to be long and slow.

We are getting exactly the recovery that was expected and the recovery that we deserve. This isn’t good enough for many commentators and news outlets that report a steady stream of negative economic news. The problem is that recessions have a psychological aspect. If you constantly tell people that the economy could go into recession, they stop spending money and it results in a recession. Consumer confidence numbers right now are terrible. So if we do go into recession, the negative atmosphere is probably was a contributing factor.

As I have previously stated, our slow recovery was further hurt by bad weather (snow, rain, hurricanes and tsunamis), bad gas (high prices), world uncertainty (the Arab Spring) and my big, fat, Greek default (possible). And we are being guided through the most tenuous economic situation in over 70 years by a president with no business experience, no business acumen and no business skills. Worse yet, he is either very stubborn or a slow learner (you make that call).

The recent stock market correction appears to be a payback for the extraordinary actions taken to stabilize the economy in 2008-2009. Most models (including the Model T) indicated the stock market should have gone lower than it did. While the magnitude of this correction was unexpected, the stock market dip is not a big concern. The Model T indicates that the stock market will be back to its July 2011 peak in Q3 of 2012 – a long, slow, climb.

So which of the economic titans is going to be correct? I have stated in previous posts how this unique economic situation, with the extreme actions of the Fed, has caused usually reliable indicators to be wrong. Could this be happening to the stellar model of ECRI? We will soon find out. The Model T, which is supposed to be a predictive model, is currently moving in tandem with the stock market. It is possible that the ECRI model is reflecting what is currently happening (a slowing economy) instead of a future slower economy. And Buffet? You don’t make billions by being very wrong in key situations.

My Call

My panel of economic experts is forecasting GDP growth of 1.9% in Q1, 2012 and 2.8% in Q2. However, the panel has been too optimistic by 1.5 to 2 points for the past several quarters. Therefore, expect a GDP of near 0% (could even be negative) in Q1, 2012 and near 1% in Q2. Not technically a recession, but oh so close. This would mean that Buffet would be correct, but there would be no reason to celebrate.

I am working on a new model based on non-commercial transportation (call in Model-T Jr.). This model says we are on the edge of a recession, but the next data inputs will determine if it indicates recession or just near 0% growth. The Model T is now predicting moderate, instead of robust, growth in 2012.

The good news is that the economy is moving so slow, we don’t have very far to fall. That’s right; the recovery has been so anemic we can’t even have a decent recession! If we do have a recession, it will be like when Dick Cheney has a mild heart attack. Yes it’s bad, but we will hardly notice it and may not even feel a thing.

Fred Sanford -- The Big One!

Sex, Drugs and Investments

I previously wrote that when investing you should act like a “Vulcan”, using pure logic and no emotion. Based on that premise you would expect that men (kings of logic) would be much better investors than women (queens of emotion). And if you believe that to be true, you are wrong, very wrong.

A recent study showed that women hedge fund managers averaged more than 3% higher yearly returns than their male counterparts. The men tended to hold on to losing stocks too long while the women took their losses and moved the money into better places. The study concluded that testosterone may cause men to take more investment risks and to stick with loser stocks rather than to admit their mistakes. (At this point my female readers are wondering why I had to state the obvious and my male readers are totally in denial) It seems the presence of testosterone can cause poor investment decisions.

Now what does this “testosterone factor” mean for us average people when choosing an investment advisor or broker. Should you drop your male broker and look for a female one? Because the study is based on averages, this would be a much too simplistic approach. However it does mean that if you are looking for a new financial advisor you should not hesitate at all in choosing a woman. And if you have two people of different genders that you regard as equal in ability, the study would say that you should pick the woman.

But men should still be careful when selecting a female broker. You do not want to be sexually attracted to her at all. The goal is to maximize the return on your assets and to do that you can not be influenced by her assets. Be aware it doesn’t matter if she achieves a 10% return on your investment, if you end up losing 50% of your net worth in divorce court. And just as you don’t want your mutual fund to be “front-loaded”, you don’t want your financial advisor to be so either. Some guys (okay most guys) brains turn to jello when in the presence of a buxom lady. No, you want your investments to be “A” rated and your broker to be “A” cupped. You see testosterone is still a problem in this situation also.

The study does have implications for choosing male brokers and financial advisors. If you trust the study, too much testosterone is not good for making wise investment decisions. Since older men have less testosterone than younger men, this plus the experience factor should favor older advisors in general. If your broker is a young guy named “Mike Machismo”, then maybe you should worry. Several of the men recently caught running Ponzi Schemes had very macho personas. And there is no riskier financial venture than a Ponzi scheme.

But now there is another problem to worry about. Perhaps you have seen the commercials warning about a condition known as “Low-T” which is short for low testosterone. Yes, now there is a prescription medicine that will quickly boost a man’s testosterone. Do you understand what this means? One trip to the pharmacy could turn your mild-mannered broker Mr. Feebles into “The Tradinator”. I vill pump up ya portfolio and crush da mawket”. One day your money is in a nice, stable, large-cap mutual fund and the next day it could be invested in a yak farm in Pakistan.

We can’t have this, so I am advocating (sounds so Obamaese) regular testosterone testing for all brokers and financial advisors. If we test athletes for steroids, we should test these people for “T” levels. And when we have this data, the investment firms can publish it along with average return rates for each broker. For example: Greg Morris has averaged a 9.3% rate of return while maintaining a “T-level” of 2.8.

I wouldn’t worry too much about the T-level of your female broker unless of course she is a former member of the East German swim team. But maybe you should check for an Adam’s apple just in case.

The Tale of the Beer Parties

- It’s story time children, with a parable so simple even a child (but not some congress people) can comprehend.

Dan is owner of Wonderful Widget Company. His brother-in law Ron is a major source of financing for the business. Dan has made a request for “emergency” funds to pay several bills that are past due. Ron is making an unannounced visit to Wonderful Widget to determine the nature of the request.

Dan: Hey, what are you doing down here?

Ron: You sent me an e-mail about needing more money and I thought I would stop by and see how things are going.

Dan: Aw man, you didn’t have to do that. You should have just transferred the cash like you always do.

Ron: But I sent you “emergency” funding last month and now you are requesting even more money. Is business that bad?

Dan: Sales have been alright, but it’s those darn extra expenses that are really eating up all the profits.

Ron: What expenses are you talking about?

Dan: You know. The stuff that you don’t plan for, but you still have to pay for it. That stuff.

Ron: This “stuff” doesn’t have anything to do with throwing beer parties, does it?

Dan: Beer parties? Are you serious? Beer? Frankly I’m very offended that you would even consider that. What makes you think that there have been any beer parties?

Ron: Well, the dumpster in the parking lot is overflowing with beer cans. And look over there in your meeting room. There are pretzel bits all over the tables and beer stains on the floor.

Dan: Okay look, the beer is needed because it makes everyone happy, the people really love me for buying the beer, and most importantly, the chicks dig it.

Ron: But you don’t have enough money for these parties. You can’t continue to do this wasteful spending.

Dan: Hey, I didn’t “waste” it. I bought good beer with it. Now just write me another check and I will pay my bills.

Ron: If I write you a check, how do I know you will not spend it on beer?

Dan: Come on man. I will use that money to pay my bills unless something more pressing comes up.

Ron: Such as?

Dan: You know. If there is a very hot day and people need some refreshment. Or if the employees eat too many salty pretzels and need relief. Or if some very thirsty ladies show up here unexpectedly. Then I might need to immediately respond to these critical situations.

----- Just then one the secretaries walked by and called to Dan, “Hey Beer Man. I think I’m going to very thirsty this afternoon. Do you think you can satisfy me?"

Ron: That’s it. I am not giving you any more money. You can’t buy any more beer.

Dan: But you can’t cut off my beer money. The people are very accustomed to having beer. I mean they feel entitled to it.

Ron: That shouldn’t matter. Your main focus should be producing wonderful widgets, not making everyone happy. You have to cut off the beer.

Dan: I think you must hate Bavarians to just cut off their beer. Bavarians are huge beer drinkers and it is very mean spirited to deprive them of beer. You are a Bavarian bigot!

Ron: Wait, this has nothing to do with the Bavarians. I don’t hate Bavarians. How am I a bigot? You are the one talking about the Bavarians as a separate group and associating certain behaviors with them. Doesn’t that make you the bigot?

Dan: That’s not how it works. How can I be the bigot when I’m the one that is pointing out your obvious hurtful behavior towards the Bavarians?

Ron: I’m sorry, but the Bavarians are going to have to get their beer somewhere else. I’m not giving you the money.

Dan: But you have to. If you don’t, I will default on my bank loans and I won’t have money to pay my suppliers and other creditors and they will cut me off. This will have horrible consequences for the business and will personally cost you money and respect.

So Ron was still very hesitant to provide Dan with any more money because he was concerned that Dan would spend the money on beer instead of paying down his debts. And Dan was in danger of defaulting on his debts unless Ron provided him with more money.

What will happen next?

Life In The Slow Lane

(Eagle economics – cue Joe Walsh on guitar)

He was a bright-headed man
He was always in fashion, his team ivy-league degreed
He had a plan and he put it in action
There was no doubt that it would succeed

He had a stellar reputation as a cool guy
They said he was brilliant, they said he was wise
He had a stimulus deal, backed by the Fed
He said “Faster, faster. The charts are turning red.”

Life in the slow lane
Surely make you lose your race
Life in the slow lane

(Are you with me so far?)

Eager for job growth and hot for some votes
He said things were better, but never took notes
He had all the right slogans, He made terrible bets
He took dangerous chances, he ran outrageous debts

There were lines at the job fairs, confidence screeched
He pretended not to worry, he just made another speech

Quarter by quarter, until it was bleak
GDP going nowhere, unemployment too steep

And it was
Life in the slow lane
Surely make you lose your race
Life in the slow lane, nothing works, all the time
Life in the slow lane

Dropping and stalling, blinded by pride
He didn’t see the bad signs, took a turn, then a slide.
They said, “Listen man. What is it do you bring?
You’ve spent all our freaking money
Haven’t changed a ***damn thing”

He said “Call the Chinese, I think we’re going to crash
Chinese say they’ll help us, but you gotta pay in cash.
He went running round in circles, got confused and looked tired
His numbers tanked, but he was trying to stay hired

And it was life in the slow lane

Life in the slow lane
Life in the slow lane
Life in the slow lane

Avoiding Moral Hazards in the Stock Market

A few weeks ago (before the debt ceiling debate and stock market dip) I wrote a post that explained that you should invest your money with the purpose to “make more money” and not to promote personal convictions or causes. In other words, do not consider outside “positive” factors when deciding where to invest your money.

However, I do believe that “negative” factors, based on moral or ethical standards, should be considered when making investment decisions. This may sound contradictory, but it is my personal standard. You are not going to agree with everything in this post. We are entering an area that mixes economics and morals and that is a smoky, gray, world. Keep in mind I am not telling you what to do or what to believe. This is how I approach this issue and my purpose here is to make you think about how you invest and hopefully improve the process and results.

Many moral/ethical factors can impact investment decisions. Most can be divided into three categories:

Vices: Alcohol, tobacco, gambling, etc.

Environmental Conduct: Pollution, off-shore drilling, oil spills, destroying the Rain Forest and now, fracking, etc.

Corporate Conduct: Child labor, corporate scandals, corporate policies, CEO conduct, etc.

There are other factors in addition to these, but you get the idea.

So how do I navigate these issues when investing? Because the situations are different, I will look at mutual funds and stocks separately.

Mutual Funds

Because most mutual funds invest in hundreds of companies and because many consumer and entertainment companies have diversified into many products and services, it is difficult to find a mutual fund that does not have something in it that is objectionable to someone. My solution to this is what I call “Don’t Look, Don’t Know”.

That’s right; treat it like a blind trust. Do take the time to research the fund. Know what the strategy is. Know what the performance has been. Look at the summary categories provided in the prospectus (Manufacturing – 23%, Consumer goods -16% etc.), but don’t look at the individual investments. It is too time consuming and you will drive yourself crazy. Is a fund that has 0.2% of its money in a company that derives 4% of its profit from something objectionable, toxic? I don’t know and I don’t want to know. If this is unacceptable to you, then there are those “clean”, socially responsible (I call them “gadget”) mutual funds. But as I stated a few weeks ago, the primary objective of these funds is to be “clean” of something first and make money second. And that makes me nervous as an investor.

It is important to track the performance of your mutual funds and how they are managed. One time I held a substantial investment in a “value” fund that was supposed to provide moderate returns with limited risk. In the late ‘90’s this fund started to rack up yearly returns of over 20%. This delighted me. Great returns with no risk! (This reminds me of the Seinfeld episode where the frozen yogurt is delicious, and Jerry, it’s non- fat). When the internet bubble burst in the early aughts (00’s), my value fund lost much of its value. It lost more than most other funds that were supposed to be riskier. It turns out that the fund manager had totally abandoned the stated strategy of the fund and had put lots of junk (bonds) in the fund’s trunk.

You should also review your mutual fund when you get those notices telling you that the fund manager has changed. If the fund was doing well (compared to similar funds) and the manger left the firm, that is a red flag. This probably means that the manager wasn’t paid enough and that the firm did not value his or her ability. Now the new manager will probably be paid less and be told, “Just manage the fund like Bill did and things will be fine. (How difficult can that be?). If this is the case, it may be time to move your money to another fund. Conversely if the fund is underperforming, the fund manager was not doing a great job and you may as well see if the new person can turn it around. But please keep watching it. Too many people put their money in mutual funds and then never look at it until a big correction occurs.

Individual Stocks

These are much easier to make decisions about. When I was considering dividend stocks to add to the “George Fund”, several consumer product companies that have strong profits and high dividends looked attractive. However, these companies make significant profits selling cigarettes to third-world countries. Because I enjoy sleeping at night, I decided not to buy stock in these companies. But remember, these decisions are based on personal convictions. So I am not saying you should not invest here or are wrong if you already do, however it is not a good investment for me.

So invest wisely and carefully, my friends.

George Fund Update

I finally made changes to the George Fund a few weeks ago. Even though I only ended up changing 20% of the fund, it was actually very difficult to pull the trigger on the sale of the old stocks and the buying of the new ones. When it was finished, I realized why. By taking these actions I had taken total ownership of the fund and this caused some anxiety. I thought about renaming it the “Don Fund”, but that didn’t seem right since 80% of the fund remained the same. From now on I will refer to it as the “GeoDon” Fund. Sounds very 21st century, now doesn’t it?

Seinfeld Frozen Yogurt Clip

Mrs. America Has Some Serious Junk in the Trunk

The completion of the ‘Why You Invest Series" will be delayed again due to all the commotion in the stock market. (You probably are not investing much right now anyway).

Did I really end the last blog with “No need to panic just yet.”?

Well I could argue that there is still no need to panic, but I won’t (until later in this post). Panic and volatility are the driving factors right now.

Back in April I did say we would be fortunate to make it through the year without a correction. But in the past, corrections usually happened over weeks. With computer programmed trading, corrections happen in hours. Computers do happen to trade like Vulcans, unfortunately it’s like Vulcans on meth.

This panic of course resulted from the U.S. credit rating being downgraded by Standard & Poors. (We have no standards and now we’re poor). The administration claimed the downgrade was a mistake because S&P used bad math (not bad meth). That’s sounds like an excuse a fifth-grader uses when he brings home a “D” in History (The teacher used bad math when adding up my grade!).

Of course this administration knows all about bad math. It put together the Obamacare budget so it appears to save us money when it really costs us money. Talk about the lemon calling the banana yellow! (Can’t use the pot-kettle thing without being accused of racism).

But there is really no need to panic. The stock market was getting way ahead of the economy. It was like a deep sea diver going too fast away from his oxygen source. He looked very skilled until he ran out of air and then had to retreat quickly coughing and wheezing until he could breath normally again.

A few months ago I compared the economy to a woman. We’ll what would happen if a man said to his lady: “Your ass is fatter than it used to be. It is not as tight and attractive as your friend Cindy’s.”

There would be some serious panic. There would be some massive volatility. There would be screaming. There would be crying. Objects would be thrown. Things would get broken. If she is an NRA member, shots may be fired. There would be an extreme, emotional, outburst.

However, the intensity and fierceness of the reaction would have absolutely no bearing on the fact that:

1. Her ass is bigger than it used to be.

2. Cindy’s ass is in better shape.

She may call her European cousin for support but her cousin is dealing with her own big, fat, Greek ass and will be of no solace. Yes, her ass has been downgraded. It is no longer considered AAA prime. But once she calms down and looks in the mirror, she will realize that she needs to go on a diet and exercise the glutes.

So Mrs. America has some serious junk in the trunk. America’s ass has been downgraded. It is now fat and flabby and not as prime as say, Canada’s ass. Nice cheeks on me, eh?

We have appointed a 12-member committee to save America’s ass. In my opinion, the committee is too large. In my business career, I have never been on a committee that had more than six members that accomplished anything significant. I think if they put Senators Rob Portman and Max Baucus in a room with Beavis and Butthead they would accomplish more than they will with a big committee. Of course you would have to give Beavis and Butthead some nachos and music videos to keep them occupied while a solution is formulated or you could get the following:

“Hey Beavis, stick some more taxes in the bill. We’re almost out of nachos and we need to buy another bag.”

“I am the great Taxholio. I need nachos for my piehole.”

Let's hope the big, fat, committee does better than this!  But it could be just as entertaining to watch.

We will need to make some serious lifestyle changes to get our ass firm, hard, and back into shape. We need the world to once again leer at our booty and proclaim “baby got (green) back”. This needs to be resolved by the end of the year because we don’t want our buns hanging out of our running shoes when things start moving faster in 2012.

Lead, Follow Or Do What!!!!!

We will take a break from the “investing” series for some random Economic/Political thoughts....

Lee Iacocca used to say “Lead, Follow, or Get Out of the Way”. Who would have thought that during this important debt ceiling crisis the President of the United States would choose number three? Okay maybe Jimmy Carter, but who else? A new phrase should be: “Lead, Follow, or Make Another Eloquent Speech”.

Say What?

The speech was delivered brilliantly as always, but there were a few missteps. After the President explained that the government was spending too much money during good economic times, he then said the recession came and we had less money coming in so we had to spend more. Of the millions of Americans who lost their jobs during the recession, I don’t think anybody increased their personal spending. So the government spends too much when times are good and it spends too much when times are bad. And now politicians are surprised and alarmed that people believe government spending is out of control. Spend less. Spend less. Spend less.

He also said that our budget surplus was depleted because of tax cuts. The budget surplus was depleted because of out-of-control spending. But you can’t cut taxes and increase spending at the same time. Is anybody in either party a math major?

No Sugar in the Tea

The Tea Party movement started as a reaction to big government getting bigger. Bigger government means bigger spending, which means bigger taxes. You don’t need to be a math major to figure that one out. Under this principle people from any political party (including independents) could be a supporter. And any politician embracing that principle would be viewed positively. The Tea Party went off course when it added other issues to the agenda and became too partisan. Still, are Tea Party members “crazy” (maybe terrorists?) or just the people who are the most informed?

One Out of Three is Bad

We are fighting three wars and only having significant success in one. In Afghanistan you either declare victory because you achieved your main objectives or you declare a tie. I know in this case a tie is like kissing a camel, but either way it’s time to go home. We have seriously done all we can in Iraq, now it up to the Iraqis. And we are fighting a war in Libya. Were you fooled when we announced that we were turning the war over to NATO? Hey, guess what? We are still paying 75% of the costs. And it is a “war”. If you are dropping bombs from the sky to kill people, that’s a war. Recently Libya was described as a huge stalemate. You know what they say: If you have a stalemate, it’s time to get a new spouse. It’s time for us to get a new strategy. Oh but we never had a strategy, that’s right.

You can’t count the savings from ending these wars in any budget plans because that would assume that you will not be involved in any other wars for the next ten years. By the way, North Korea and Iran both like that budget gimmick.

Please Don’t Scare Granny

It was disgusting, unethical, and cruel to frighten older people during the debt ceiling debate. If you have to resort to this tactic, how strong is your argument? If you are the primary caregiver to an elderly person, you know how damaging this can be. Senior citizens are easily frightened and can worry constantly about things that impact their simpler life. I will have no respect for any politician or group that uses this tactic.

The Free Market Wins Again

Home foreclosures are down 29% from last year. While some experts are claiming this is due to paperwork delays, a new trend is emerging. Banks are realizing it is best to help troubled homeowners work through their problems rather than to foreclose. There are already too many distressed homes on the market and the banks will not benefit from adding more. Underwater homeowners are realizing that they still need a place to live and that defaulting will have future credit and legal implications, so they are more willing to work with the banks.

This is a significant trend. All the dire housing projections were based on larger foreclosure percentages and more foreclosed homes flooding the market. If this continues, the housing market, including housing prices, could recover stronger and faster than expected. This is another example of the free market being able to accomplish what the costly government mortgage relief program failed miserably to do. The free market is superior to government programs almost every time.

Move That Freight!

The freight market is back baby! The American Trucking Association Freight Index is up in June. The Diesel Fuel Freight Index is up in June. FTR (Freight Transportation Research) is expecting continued moderate truck freight growth the rest of the year. Rail Freight and port freight are improving. That’s why my panel of economic experts is forecasting Q3 and Q4 GDP of 3.0%. However, the preliminary July indicators are coming in weak due to the uncertainty caused by the debt ceiling debacle. Thank you Washington D.C.! The Model T is still predicting good things in 2012. No need for all this panic just yet!

Invest Like a Vulcan

In recent posts I analyzed the “George Fund” and reported on things that George did right. But I also mentioned that the George Fund included a few “dogs” that needed to be sold. Can we learn anything by looking at the losers? Yes, we can.

Four of the stocks (most of the dogs) were in local (in or near Akron, Ohio) companies. I believe George bought these stocks for one of three reasons:

1. George was a businessman in the community and wanted to support other community businesses.

2. Many of his friends and acquaintances worked at these companies, so it gave George something to talk about. As mentioned previously, George was a huge “people person” and loved talking to people.

3. Many of George’s customers worked at these companies and it would be good for George’s business if people knew he was investing in their companies.

Of course it is impossible for me to know why George bought these stocks, but it was probably a combination of all three reasons. But that reveals a flaw in George’s decisions. The only one of the reasons that is legitimate is number three and only because you may be getting an indirect return on your investment.

It leads to the question: Why do you invest? The correct answer is: To end up with more money that what you started with.

You should invest your money to make more money, period. This is a totally acceptable concept and in its pure form does not involve greed. Wise investing has been endorsed at the highest level. In the “Parable of the Talents”, Jesus Christ uses the example of financial investment to make a point about spiritual matters. But the context is that financial investing to acquire more money is indeed good. Experienced investors know that greed is indeed bad (been there, done that, lost some coin.) Jesus didn’t care much for greed either.

So investing is good, but the purpose of investing is to make money. It is not to support your community, it is not to support your friends, and it is not for derived benefits. And most importantly, it is not to be done to make you feel good. We are emotional and rational beings. We make our investment mistakes when we become less rational and more emotional.

If you want to support “green” energy initiatives, buy the products, donate to the causes, but don’t invest in the companies unless you do the research and determine it is a good investment. It feels good to invest in a “religious” mutual fund where all the companies claim to adhere to certain principles, but the companies are chosen based on principles first and then results. You are investing for results. Give money to your church, give money to the poor, but invest your money based on your risk/return tolerance. If you love the food at a large restaurant chain, eat there as often as you wish. However, this is not a valid reason to invest in the stock (I have made this mistake). The only time I want to feel good about my investments is when I review my statements at the end of the month.

For a personal application, I will use the Smucker’s Corporation as an example. Here are the factors that influence my personal opinion of the company:

1. I love Smucker’s products. They make some of the best tasting products around.

2. Smucker’s is a local company with a great reputation and it supports the community.

3. I have friends that work at Smucker’s.

4. I have relatives that get paid to serve on Smucker’s food tasting panels.

5. Smucker’s is a strong supporter of my college alma mater.

Therefore, I would feel great if I purchased Smucker’s stock. It would be fun to own stock in this company. It would be enjoyable to tell people I am a Smucker’s stockholder. It would even make my peanut butter sandwich and cup of coffee taste better.

But none of these factors are valid reasons to buy the stock. It may be a great investment, but that is determined by research based on data, not emotions.

Conversely, I was seriously considering investing in a “green” energy company based on its growth potential and dividend even though I am not hot on the idea of wind and solar power. However, I have backed off the stock based on experts reporting that some subsidies will get cut in the next budget.

We are humans, not Vulcans, but I think Vulcans probably make better investors. This is not to say that moral and ethical factors are irrelevant when making investment decisions. These often come into play when deciding where “not” to invest. These will be discussed next time.

The “Grocery Cart” Recovery

The night was black, the roads were icy
Snow was fallin', drifts were high
And I was weary from my drivin'
And I stopped to rest for a while
I sat down at a truck stop
I was thinking about my past
I've had a long streak of that bad luck
But I'm praying it's gone at last

When you push a shopping cart in the grocery store it rolls very easily on the smooth, level, floor. However when you push the same cart on the store parking lot, it moves much more slowly and any bump, crack, imperfection or even a pebble can impede its progress.

Well, our economy is the shopping cart and after moving fairly well on the smooth surface, it has been struggling to overcome the obstacles in the parking lot in the first half of the year.

What were the obstacles?

1. Bad Weather – Snow storms, ice storms, tornados, floods. And weather statistics are usually useless when determining economic impact. It doesn’t matter if total snowfall for the season is “average”. It depends where it falls, when it falls, how much falls at one time and how icy it makes the roads and runways.

2. Bad Karma – The Middle East has been in political and social turmoil for several months. Do you think that people might get concerned as they watch the possible start of World War 3 on their big screens? And it’s alarming for the U.S. to enter its third war when we are having problems ending the first two.

3. Bad Gas – The Middle East turmoil only generated a “fear impact” until things in Libya heated up. The disruption in crude supply caused gas prices to spike. This sucks huge amounts of money out of our economy and severely limits consumer discretionary spending.

4. Bad Supply Chain – Who knew the impact of the Japanese tsunami would eventually be felt
here? This slowed the growth of several industries, especially the auto industry. The decrease in supply of autos resulted in higher prices for most brands. This of course led to lower industry sales.

After making it through the tough first half of 2011, let’s take a look at some key economic indicators:

Housing

I believe the housing market hit bottom in February and has been dragging across the bottom ever since. We have seen this in various industries during the downturn. The reason housing is the last to bottom out is that it had the furthest to drop and the government’s misguided attempt to prop of the sector. If the government had stayed out of the way, housing hits the bottom much earlier and would be recovering right now. Regardless, the housing market should start its recovery soon. It will not be strong enough to significantly help the economy this year; however it will cease to be a drag and that is a very good thing.

Inventory / Freight

Companies currently have a good read on inventory levels and cut stocks as soon as consumer spending slowed. As a result, all trucking freight indexes have gone negative the last couple months. Rail freight has slowed, but not as much. The good news here is inventories are very lean and any increase in consumer sales will immediately result in more production and more freight (which probably happened in June). In addition, activity at the commercial ports shows that import and export activity was not significantly impacted by the slowdown.

Manufacturing

The ISM (Purchasing Manager’s) Index says manufacturing activity increased unexpectedly in June. Orders were up, employment was up and production was up. Imports and Exports also increased (conformation of the port data above).

Unemployment

Unemployment remains high, but don’t believe the rule that GDP has to be greater than 3% for the unemployment rate to decrease. This is one of the old rules that don’t apply to conditions right now. Remember, many traditional indicators (and rules) are not relevant right now due to the unusual circumstances. Many companies cut employment too deep during the recession and are starting to “right size”. A profession recruiter told me that his business in March was stronger than it had ever been. Of course the “bad” factors have tempered this some. Job growth should resume increasing very soon.

Auto Sales

Auto sales should jump in the second half of the year. Supply will increase, prices (through incentives) decrease and there is significant pent-up demand in the market. Showroom traffic has already started to increase.

Restaurant Index

The Restaurant Index was down in May as a result of the high gas prices, but the index had shown solid gains prior to that. Almost all the restaurants near my house that closed during the recession have reopened (under new names) and Friday night waiting lines are back to normal levels. The Hotel Occupancy Index was up 2.8% in May, another sign that consumer discretionary spending is starting to roll.

What Happens Now?

It looks like the shopping cart has just reentered the store. But it is still a shopping cart. Not a Lamborghini. Not a Ford. Not even one of those motorized scooters (that blatantly and publically rip off Medicare) that you see advertised on television. This recovery is everything we expected it to be (or not to be) at this point: slow and bumpy.

My panel of experts is forecasting GDP growth of 3.3% in Q3 and 3.2% in Q4. The Model T is more positive so I would add 0.5% on to both estimates. The Model T is still indicating a much stronger 2012.

Good Times?

The weather is improving, the Middle East appears controllable and Japan should be back ramping up production soon. This just leaves gas prices as an obstacle and that brings us to the Libyan situation.

The Chicago thug tactics, lean on the guy until he leaves, are not working. Khadafy is tougher than we thought. But I have an idea. Instead of using bombs, I would use a bombshell. All we need to do is find him asylum in some country, then pay his blonde, voluptuous, nurse (now in Norway) to go there. Next she tells Moammar where she is and that she misses him badly. Game over, gas prices fall.

Once in a while from out of nowhere
When you don't expect it and you're unprepared
Somebody will come and lift you higher
And your burdens will be shared
Yes I do believe, if I hadn't met you
I might still be sinking fast
I've had a long streak of bad luck
But I pray it's gone at last

Gone at last, gone at last
Gone at last, gone at last
I had a long streak of bad luck
But I pray it's gone at last

Gone at Last - Paul Simon

George Is Still The Boss!

(Part 2 of the series, please read By George I Think He Got It Right, the previous post, before reading this one)

What to do with the George Fund? My first inclination is to make no changes, to treat it as a treasured heirloom. It was my grandfather’s, and then my mother’s and now mine. What right do I have to change it? Then the light went on, actually the whole room lit up. Last time I wrote that I never could figure out why my mother never sold the stocks in 30 years of ownership, now I know why. If I was having these feelings now because this was my grandfather’s, her feelings were even more intense. I think she viewed the portfolio as sacred. This reverence was no doubt expressed to me by voice tone and facial expression when she talked about the stocks. (I’m amazed by how you suddenly understand your parents’ difficult decisions when you unexpectedly have to make those same decisions in your life. Also, we communicate values to our children not by what we say, but what we do, including “how” we say it).

The decision about what to do still remained tough. It was almost if the stocks were “alive”. They grew some days, shrank some others and sent gifts (dividend checks) almost every month. Was I going to just sell assets, or was I going to perform surgery?

I needed guidance. Who to go to? I decided to ask the person who knew the fund better than anyone. I decided to ask George. The moment I asked two questions: “What would George think?” And “What would George do now?” I started to make progress. Yes, I tied to “channel” George. This is ironic because I am an investor because of George. As I wrote about a year ago, I have owned stocks literally my entire life because George gave me three stocks when I was born. Also, I had a great uncle who was a day-trader in the 1920’s. How did you day trade then? You caught the trolley every day to the brokerage house downtown. You negotiated a bulk trading rate (wonder how close it was in real terms to $7 trades today) and you watched the “stock ticker” and traded away. He made a good living doing this until the 1929 stock market crash.

What Would George Think?

George would be proud that the fund has done so well over the past 40 years. But I think George would then say, ”Yes, this is good, but somebody needs to do something about these “dog” stocks. Why are they still here? Boy, you’ve got some work to do!”

What would George Do Now?

To answer this one, I had to study the George Fund in careful detail. It is similar to an archeologist studying a find that had been well preserved for a long time period.

You always hear that you should invest what you know. What George knew was food products and retailing. The portfolio does not include any company in these sectors. I think George had seen many companies in these sectors come and go and thought they were not solid investments.

The companies in the George Fund are all (except one) industrial manufactures. There are several “heavy” manufacturing firms. It is also diversified among industrial sectors. There are oil companies, pharmaceutical companies and chemical companies as well. I determined that all of the companies paid dividends when George originally bought the stocks. The only service firm was a railroad company (you have to transport all that heavy stuff).

The Goal

Before making any changes it is important to establish the purpose for me of this investment. The George Fund will be for me the classic “basket of dividend stocks” that you often read about. The dividends will help pay living expenses in retirement (along with my IRA and 401-K) and the stock portfolio value can then be passed on to my decedents.

What Gets Dumped?

The first part of this is easy. Any company that no longer pays dividends will no longer be in the fund. Of course if the company had to eliminate its dividend, it has had some financial problems and is a weak performer anyway.

The second part of the divesture strategy is brutally tough. Because the top stocks have performed so well, the fund is out of balance. The top stock (a pharmaceutical firm), now makes up over 25% of the portfolio. To maintain diversification and balance, holdings in the top performers must be reduced. This is very difficult to actually do. In addition, some holdings in stocks where the dividends were low will be reduced also.

What to Add?

Obviously no consumer goods or retail stocks will be added. I will add at least one utility and maybe two (Exelon and First Energy look good). Utilities weren’t publically traded when George was buying stock, so that’s why there are none currently in the fund. Utilities make stuff (energy) and pay nice dividends. I probably need a high-tech company to bring the portfolio into the 21st century. It’s difficult to find dividend stocks in this sector. I’m thinking maybe Intel. I also need some healthcare product companies to modernize the group. I’m looking at Baxter and Johnson and Johnson. I may even add a service provider. Both AT&T and Verizon are possibilities. They pay good dividends and should be around for a long time. The other candidates are a natural gas company and a mineral mining (stuff to make stuff with) firm.

The New George Fund

The New George Fund should have around 20 stocks (like the original) that pay decent dividends. I will have changed about 25% of the fund, which means the “base” 75% remains solid. The portfolio will be more diversified, balanced and stronger with less risk than when I began the process. I think George would approve of the changes and that’s far good enough for me. Now it’s time to get some lemonade and enjoy the summer!

By George, I Think He Got It Right

The subject of today’s post is the By George Mutual Fund (BGMF). You have never heard of it because it is one of the most exclusive funds in the world, yet it is a part of my portfolio. How was I able to get into this elite investment? Well it just turns out that I am the only investor and thus own all the money remaining in the fund.

The BGMF was created by my grandfather George around 40 years ago. It consists of shares in 20 common stocks. When he died 30 years ago, the fund was inherited by his children. While I assume that the other shares of the fund have long been sold off, the portion inherited by my mother remains largely intact. My mother owned the BGMF for 30 years, the only decisions she made was to redeem shares for cash when offered due to buybacks or transfers. Other than that, the BGMF was not “managed” or intentionally varied in 40 some years. I always wondered why my mother didn’t sell it all due to the work involved handing dividend checks and all the paperwork and tax issues that come with direct stock ownership.

The Man Behind the BGMF

George the Businessman

George obtained his wealth through hard work. He started off as a teacher (I teach part-time and several cousins are teacher/educators, funny how that works), but soon found his passion and opened a small grocery store. George was an excellent store owner. His outstanding people skills combined with natural business acumen resulted in continuous success.

His store grew in size throughout the years and George had some money in the bank. At this point most people would have opened more grocery stores in order to gain more wealth, but not George. I think that George loved what he was doing, which was personally connecting with his customers, personally connecting with his employees and cutting meat. More stores would mean that he would be managing store, and not doing what he truly loved. This brings us to:

Life Lesson #1: Find out what you love doing and then do it well as you possibly can.

George the Person

I have to say something about George the person. George was very generous. My mother told me stories about how he let his customers run up credit during The Great Depression when they didn’t have jobs and he had no assurance he would ever be paid. He also would give away soup bones to others who were hungry.

Life Lesson #2: Having the money isn’t as important as helping others with your money. (If you don’t agree with this one, I suggest you give a try and see what happens)

George’s people skills were extraordinary. I watched him interact with customers in the store, but was too young at the time to realize just what was really happening. But I now see the impact based on what people said about my mother’s people skills and my interactions with my uncles (one still living). The most important person in the world to my uncle(s) is the person he is talking to at the time. You just feel after having a conversation (about anything) with these guys. That’s a special gift and they got it from George.

Life Lesson #3: Treat everyone (no matter income, race, religion, appearance, etc.) with the utmost respect. Everyone you interact with should be important to you.

George the Investor

So instead of investing in more stores, George invested in the stock market. That way George got to continue doing what he loved and to increase his wealth by doing what he liked (investing in the stock market). And he was good at it.

The incredible thing about the BGMF is how solid it is after 40 years. This is the mother of all “buy and hold” strategies. As far as I can tell, the portfolio when George stopped managing it had stock in 20 companies. It has 20 companies today. Only one company went out of business and one company spun off a new company, so there are still stocks of 20 companies in the fund today.

Many of the companies in the fund are strong blue-chip stocks. There are a few “weak sisters”, but that is to be expected. George believed in diversification. Of course if he had bought only the five best stocks, the fund would be worth much more today. But if he had bought the five worst, it would not be worth very much at all. George knew he would make mistakes so he spread the risk.

Life Lesson #4: You are not going to be right all the time, so make sure you prepare for those times when you will be wrong. In investing, that means diversify, diversify, and diversify some more.

The bottom line is that George was one great stock picker. To put together a portfolio that has withstood the changes and crises over the past 40 years and is so solid today is remarkable. When I told my broker (who now services the account) the history of the BGMF, he was speechless. I have even more respect for George because in doing the research for this post I discovered that the worst performing stock in the fund is not a stock that he bought, but the spinoff mentioned earlier.

What Now?

So upon the death of my mother a year ago, I became sole owner and now manager of the BGMF. What to do, what to do? Me. The person who bought into Braniff Airlines (bankrupt), Storage Technologies (bankrupt), Home Centers (bankrupt) and Gliatech (bankrupt). It would seem that the BGMF could be in grave danger.

To Be Continued ………..

She’s Nobody’s Fool

Almost every important economic indicator was either negative or less positive in April. In addition, Q1 GDP came in at a disappointing 1.8%. This resulted in numerous articles declaring the recovery over with disastrous consequences ahead. So what is going on? How much trouble are we in?

Due to the damaged financial system, the housing market collapse, the restructuring of the employment markets and all the problems created during the Great Recession, this recovery is expected to be slower, weaker, and uneven. When the economy stabilized, it started going through “normal” cycles, but at a lower growth rate. The economy now is still cycling, but is moving upward at a slow pace. A strong recovery is able to cast off obstacles the same way Arnold Schwarzenegger is able to cast off women …, sorry I mean cast off attackers in the movies. A weak economy gets diverted by any bumps in the road.

And 2011 has been full of obstacles. The first was (and still is) unusually bad weather. There was very cold weather in the South, ice storms and flooding in the Midwest and huge snowstorms in the East. This weather caused major business disruptions in a wide swath of the nation. This nasty weather has continued into the spring. Tornados and rainstorms are battering the country and hurricane season is just starting. A robust economy absorbs this hit. A strong recovery puts on a jacket and barrels through. But a weak recovery catches a cold.

The next obstacle is the unrest in the Middle East. One of the consequences of our mass mediated news coverage is that we tend to forget the recent past very quickly. Beginning in February, everyone was very worried as protests and revolts started in several nations. We were already fighting two wars, briefly involved in a third and hoping World War Three wasn’t beginning. (On a side note, it is interesting that the “fake” end of the world received extensive media coverage while a potential “real” end of the world, the initial uprising in Saudi Arabia, received relatively minor coverage). Once again, a strong recovery gets past this, but a weak economy gets the shakes.

Of course the Middle East situation caused crude oil prices to spike. Most of this was speculation. You know this because most crude production was briefly affected in Libya (the rebels plan to restart production in their fields soon). Once Moammar and the rebels figured out how to milk the cow and keep fighting each other at the same time, things stabilized. The speculators are keeping the price high because there is still considerable unrest in the region. You can’t really blame them for trying. If the Saudis get overthrown, crude would shoot to over $200/barrel and retail prices would go to $10 a gallon, or the end of the world as we know it.

Higher gas prices are a tough obstacle for any economy and a big problem for this one. High gas prices act just like a tax on disposable income and really hurt lower-income people.

So what is this economy like? It’s sensitive, it’s cautious, it’s mysterious. It can be strong, it can be weak, and without warning it can be anything in between. That’s correct, this economy is a woman! This observation should be viewed as purely descriptive and is not derogatory or sexist in any way.

(Cue Billy Joel)

She can kill with a smile
She can wound with her eyes
She can ruin your faith with her casual lies
And she only reveals what she wants you to see
She hides like a child,
But she's always a woman to me

She can lead you to love
She can take you or leave you
She can ask for the truth
But she'll never believe you
And she'll take what you give her, as long as it's free
Yeah, she steals like a thief
But she's always a woman to me

You see this economy has been hurt very deeply by all the turmoil of the last few years. She has been lied to. She has been deceived. Her trust has been broken. She has been betrayed. She feels like we have been insensitive to her needs, she feels violated.

She is not really moved by some short-term, artificial, stimulus. She wants a real, long-term commitment. This relationship can be restored, but it will take time. She wants to take it slow and cautiously. She wants it to be deep, meaningful and long-lasting.

And she'll promise you more
Than the Garden of Eden
Then she'll carelessly cut you
And laugh while you're bleedin'
But she'll bring out the best
And the worst you can be
Blame it all on yourself
Cause she's always a woman to me

She is frequently kind
And she's suddenly cruel
She can do as she pleases
She's nobody's fool
And she can't be convicted
She's earned her degree
And the most she will do
Is throw shadows at you
But she's always a woman to me

We want to tell her that we really didn’t mean anything by it. That we wish that it never happened. That we need to get beyond this and just get back to the way things were before. And we promise that it will never, ever, happen again. We’re sorry baby, we are so very, very, sorry.

So what do we need to get this recovery (or to heal this relationship) to get going again? First, we need for the Middle East to stabilize. We are leaning on Khadafy like Chicago thugs (wonder where that idea came from?) and I actually think that it’s going to work. Second, we need the weather to get back to normal. Third, as the Middle East calms down, so will the speculators demand for crude oil futures. And finally, some Barry White music couldn’t hurt.

She's Always A Woman - Billy Joel

Please check out my new humor blog  Next post: June 2