AAA

Rich On Money

A Blog Just About Money and Investing

Rich '-' A Blog About Money and Investing

Welcome to my website

My Promise to YOU

If you don’t mind me being politically incorrect, I am going to give you the straight truth about what I have learned about MONEY over the course of my lifetime. You will also understand what is happening in the world of money today. This is my gift to those who choose to read about what I am thinking. I work with a group of people, all of whom report to me.

On the other hand, I report to no one. I have earned that right. I have paid for my mistakes with losses, and sometimes heeding the advice of empty suits. I don’t take too many losses anymore, and you won’t either, if you heed the wisdom that I will impart to you, and it won’t cost you a penny. Just come with an open mind, and leave the rest to me.

November 23rd, 2011

Home Sales are Up but House Prices are Down

: America needs a housing recovery to sustain an economic recovery

This past October which is the latest period available,
house sales were up 1.4% from the previous month. This is a seasonably adjusted rate of just about 4.97 million units. During 2010, the level was 4.91 million units, and 2010 was the lowest number in the last 13 years. In the meantime, mortgage rates are less than 4%. It’s been more than 60 years since we have seen a mortgage rate that low.

Now here’s the problem, the median price of a house is about $162,500. This is down more than 4.7% from 2010. The implications are simply that the sheer number of homes being sold is UP, but each of them are being sold for
less because individual housing prices are down.

The logic behind what is happening is simple. During last month October, it looks like a disproportionate number of sales contracts fell through. The deal simply could not get closed. The answer comes in two parts. Appraisals are coming in under the agreed value between the buyer and the seller and therefore – no deal. The second reason is that many buyers upon putting in their paperwork are not getting the deal approved. Lending standards
are getting stronger.

CONCLUSION

Without question, this is what you need to know. This country cannot have a major economic recovery without housing turning itself around. Too much of the economy is dependent upon housing. From employment to buying furniture, paint, and new sheets, without a housing recovery, the economy at best will move along at a weak 2% or lower growth rate, and that doesn’t spell well for America.

1 Comment »

October 1st, 2011

Retirement isn’t what it used to be

: Will your retirement seats be taken by someone else?

: Or will this be you, hanging out at the beach?

It’s strange how things happen. Remember the old line about if you want to make God laugh, “Make Plans”. It may be funny, but fun isn’t the state for tens of millions of Americas who have planned their retirements for the last 20 years and now realize that much of the value they have built up in their portfolios have now been destroyed by the chaos created by the federal government.

We have now experienced the lost decade. The Dow Jones was 11700 in 2000, and today closed at 11153, which means no progress in ten years. Who’s kidding who as they say? Real estate prices peaked back in 2005, and certain real estate sectors are in a depression in this country. We are at 9% plus unemployment, a number not seen in decades, and America is continuing to lose millions of manufacturing jobs to China. Are we going to go back to making license plates for cars?

Now when you put it all together and think about how people planned for retirement in this country, you can imagine the quandary they are in. My thoughts and recommendations are always simple. We are simply not through ringing out the excesses that we built into the system over a 50 year period. Let’s just cover the last 20 years. We have basically done away with the work ethic in this country and built a society leaning towards England’s social system.

England once the most powerful country in the world is no longer on the short list of powers. They lost their work ethic, and they lost their place on the list. Our defense spending is indefensible. Communism is gone, and so should overspending on defense. When Bill Clinton left office it was $300 plus billion per year. Now that we are fighting Moslems in caves, it’s close to $700 billion with the generals clamoring for more. The battle cry of any musician is “I need more gear” (amplifiers, keyboards, speakers). For a general, it’s I need more planes, bombs, ammunition. Give it a rest; we spend almost as much on defense as the rest of the world combined. What else do you need to know?

The revenues of the country are about $2 trillion a year with government spending at over $3 trillion a year (actually about 3.3), giving us a greater than a one trillion dollar annual deficit, and the government refuses to cut spending, saying it’s all right to borrow long to pay current expenses. My answer is SURE.

What about Retirement?

Here’s what you can expect. The government will have to create a big round of inflation. We did this during the Vietnam War in order to help control the debt. Both Johnson and Nixon experienced the inflation. Houses doubled in price during this period, but the value of the dollar declined big time so it was a wash. For bonds it was not a wash though, because bondholders were paid back with cheaper money. This must happen here too, and it will happen relatively shortly.

The government always pulls the same trick. Cheapen the currency, and pay back the debt holders with that cheap money. For you, this means you must own assets that are pegged to inflation. Gold and other commodities will do that. Really smartly run companies with brilliant management teams with the flexibility to morph and change their business models will make you a killing on the upside. Always have some cash around. There will be intermediate buying opportunities in special situations that will make you a fortune as well. Think like Warren Buffett. If you trade, you will get killed. Just stand at the plate and wait for your pitch, and then swing for the fences. You can stand at the plate all day just waiting for the right pitch. Good luck.

No Comments »

September 29th, 2011

Health Care Insurance Premiums are Sharply Higher

: Health Care costs are out of control

Many thought that the cost of health care would go down with the passage of the President’s Health Care Reform Act. The opposite seems to be happening. The Kaiser Family foundation has released a study. Family coverage now costs an annual premium of $15,073 for a family of four through an employer. This is 9% higher than last year, and there has been no inflation recorded. Over a ten year period since 2001, the cost of a policy has doubled in real terms, but there has only been a 34% increase in wages.

I can’t explain what is happening and no studies have come out with any definitive conclusions. We do not know if this is a result of the advent of Obama Care or are some insurance companies tacking on extra charges before new rules and regulations go into effect in 2012. One rule requires insurance companies to justify any increase over 10%. It’s in effect next year.

The United States economy amounts to about $15 trillion dollars. Of that amount about 17.4% represents health care. This is a staggering $2.6 trillion, unheard of as a percentage in any other country. No other country goes beyond 12% of their economy. As an example of the coming rate increases, Aetna is asking for increases ranging from 9% to 53%, while United Health Group / Oxford is talking in the range of 13% to 34% increases.

Very simply, this cannot continue. Costs are out of control, and the government cannot tax enough to continue to afford these kinds of expenditures. With America moving towards an older workforce, and people living longer, it seems the problems are going to get exacerbated. We are not at a crisis stage yet, but it will probably occur after the next election and before 2016. We are fast reaching an inflection point.

No Comments »

September 22nd, 2011

How one Trader could cost UBS $2 billion plus in losses Answer Banks can’t manage brokerage risk

: Kweku Adoboli took UBS for $2 billion in trading losses

Banks are Dumbest Guys in Town

The banking industry today is not the banking industry you grew up with. In the old world they took deposits and lent out money, pocketing the difference which criminals call the veg. Today they believe they are investment banks and brokerage firms because Glass Steagall which separated banks and investment banks in the 1930’s was repealed by the Republicans in the late 1990’s at the behest of the banking industry.

In my opinion and experience, banks should not be allowed to be investment banks or proprietary traders. Bank management teams are among the least capable of any management group I have ever encountered. Banks simply do not know how to manage brokerage risk, never have, and never will. I have seen this all my life and there are no exceptions.

I watched Prudential Insurance take over Bache and & Co. – the result Prudential Securities blows up, and gets sold. UBS takes over Paine Webber – the result proprietary trading blows up UBS with $2 billion loss. General Electric perhaps the best managed company in the world takes over Kidder Peabody. I warned the management team at GE be careful. Their retort was we are the masters of risk containment. Oh really, a year later GE takes a multibillion dollar loss and then blows out Kidder Peabody.

Over and over again I have watched banks take over brokerage firms and investment banks, and always with the same result. Pain on top of pain as the banks recorded losses for transactions they did not understand, and now here we are again a $2 billion hit for another bank. They will probably write it off as extraordinary to avoid a massive hit to the income statement. Why you ask, because that’s what banks do.

Only once in several decades did I think I was wrong with my general thesis that banks can’t manage Wall Street type risk and that was during Sandy Weill’s reign at Citigroup. He bought brokerage firm after brokerage firm, probably 15,000 brokers when he was done. He bought Salomon Brothers the bond house in addition to other trading firms. I was wrong for a couple of years and then it all unraveled. It could not be managed, and Citigroup fell apart. The stock virtually collapsed down to $2 a share and required a major bailout by American tax payers through the TARP Program.

Now we come full circle again, as we watch UBS reveals that management was asleep at the switch while a trader lost billions. No risk containment whatsoever as General Electric would say. These guys have hundreds of internal auditors and nobody was watching as to who was driving the bus. It will happen again and again. We are not through with banks losing billions because they do not understand Wall Street risk. As investors you had better be careful where you keep your money.

1 Comment »

September 20th, 2011

I Don’t Believe I am Looking at a FAILED PRESIDENCY but I am

: Robert Lovett – one of the smartest men ever to serve a President

Being candid, I tend to vote in the Barry Goldwater tradition of conservative Republicanism, and I mean real conservative, not the phonies you see today. Nevertheless, whoever the President of the United States is, I root for his success. This is because we can’t afford 4 wasted years. Now it looks like we are going to have two failed Presidents in a row, and this is tough for America to swallow. We don’t have the time. China is down our back economically, and we are in transitional period because we simply don’t have the excess wealth to waste on programs like we have for decades.

Bush hurt us terribly because he cut taxes mostly for the rich, but did not cut appropriate spending to compensate for it. He ran wars without paying for them, and we all had a party. For 8 years, I do not remember a single veto, certainly not for the first six years, and the Republican Congress accompanying him was scandal ridden and full of thieves who were avaricious beyond belief with their bridges to nowhere costing hundreds of millions of dollars.

Obama then runs for the Presidency, and it is without question the finest campaign I have ever witnessed and I could lecture at Harvard about Presidential campaigns. Remember, Obama knocked out Hillary Clinton who was the sure favorite to win. There is not a professional in the Democratic Party that thought Obama would prevail over Clinton, but he did. He then rolls up a flawless campaign and trounces McCain the old man who should never have ran.

Expectations for the Obama Presidency were SKY HIGH

Now for the disconnect. When one objectively looks at the performance of Obama in the campaign and then as President, they are diametrically opposed – a disconnect exists. He and Jimmy Carter are what I term failed Presidents. Here’s why:

Health Care – Yes, America should have health care for every living American. It should be an inalienable right just like freedom. Here’s the rub. The problem was that 45 million Americans lacked health care. That represents about 15% of the American population of 315 million, but 85% of the population DID have health care. So the President completely screwed up the system for 265 million Americans to instead help 15% of the population. He should have simply concentrated on a program for the 15%. This was a terribly misguided decision that cost him two years of his Presidency when he should have concentrated on JOBS, JOBS, JOBS.
Insanity – They say insanity is doing the same thing over and over again expecting a different result. The President has proposed programs that simply do not work, and he keeps coming back with the same initiatives that we have heard for generations. At some point, you have to give it a break. They thought that the recession we are in was the same as previous recessions, and that all it required was spending trillions and we would be on our way again. He simply doesn’t get it.Millions of jobs have been lost to China. They are gone forever, that’s it, those jobs are not coming back. We need to retrain millions of people for jobs that are coming back, and there are such jobs. Look at any catalogue for any community college in America, and you will see those jobs that need people. We need to take a couple of million people without college education that are receiving unemployment benefits right now and create a program similar to the GI Bill of Rights for them. I say that for $8000 we can send them to community colleges which are now 40% occupied and get them an Associate’s Degree so they can be gainfully employed. Every one million people in community college will cost us $8 billion. This means we could do 10 million unemployed for $80 billion versus Obama’s $447 billion stimulus program which is simply to aide his re-election chances.
The President’s people are in over their heads – Sometimes you need advisors around you that have been there, done that. Even the old guys can get it wrong, but they have seen it before. Lyndon Johnson had such a group that included Clark Clifford, John McCloy, Robert Lovett, Averill Harriman, George F. Kennan, and Chuck Bohlen. Every one of them a giant. The people around Obama haven’t been there, and haven’t done much. The President himself has very little resume. What I am surprised at is that after 3 years, you would think he would know what he is doing, but he still seems to be out of his element.

In conclusion, I am hoping that this President is successful, but hope has never been a great recipe for success. For us in the investment world, we are permanently endangering our future success, and losing much valuable time that could have been used to truly restore the economy. This country is desperate for inspired leadership, and I don’t see much from the Republicans at the moment. Where is the talent in America.

No Comments »

September 16th, 2011

Will Residential Real Estate Prices Rise Again and When

More than a million families have received foreclosure notices

The American dream has been since World War II for a family to own its own home. Housing ownership was also thought of as a forced savings plan. This is because for 70 years, every year without interruption, the housing market experienced a gain in prices. During 70 years, not a single year of residential housing prices decreasing. Yes there were sections of the country that declined, but never the entire county itself. There were a whole set of reasons for this. They included:

Our population was growing
Our wealth was growing – GNP was increasing regularly with very few recessions interrupting the growth
The tax code was biased towards housing ownership due to the deductibility of both mortgage interest and real estate taxes
People just saw a never ending stream of price appreciation and thought it would never end.

Now for the vast majority of those 70 years there were no fun and games. By this I mean, you bought the house, and when you sold it, you took out the profit. In the meantime, while you owned the house the price appreciation sat there. It was never available to you unless you sold the house.

The fun and games started in the early 1990’s when home equity loans came into existence. People started to borrow money based on the built in appreciation during the holding period. For the first time, owners could take out cash without selling the property. Starting in 2000, the borrowing went big time. People borrowed so much based on their home value that the American consumer began for several years to spend 109% of his income year after year.

This means you spent all of your income with no savings and then spent another 9% on top of that income, based on your home equity loans and credit card build-up. It was a party and everything wanted to come. Housing prices exploded and people started to buy additional houses on speculation, and their credit rating, and then the banks relaxed their credit standards on new mortgage approvals. Millions of people bought properties that they really could not afford. The banks believed as they always believed that the appreciation in housing values would bail them out, even if the house owner could not pay the mortgage payment.

The House Came Tumbling Down
As you know the banks and investment firms beginning in the 21^st century began to bundle mortgages in $100 million dollar increments and then sold off the mortgages as triple A rated paper (it never was triple A) to institutions and individuals who got suckered. The paper collapsed as it eventually had to, and this resulted in the banking crisis of 2008 and 2009 which required the American Tax Payer to bail out the banks with an $800 billion cash infusion, or in the absence of a bailout we would risk the whole economy swiftly going over the edge instantly into a 1930’s style Great Depression.

As an aside, I believe Nancy Pelosi, the House Speaker literally saved America by acting swiftly, even though I deeply resent having to bail out stupid bankers acting more stupidly based on greed, and the concept that everybody is doing it. I am also surprised that the rating agencies have not been dismantled as a result of their stupidity.

Where We Are At TODAY?
At the moment, the federal government is stuck with 250,000 homes in its possession. That works out to roughly one third of the 800,000 houses that have been repossessed during this period. There are also hundreds of thousands of additional homes that will be foreclosed on. For housing prices to move up from here, these homes have to come off the market. They have to be owner occupied.

You cannot have a bifurcated market which means two –tier pricing. Nobody is going to buy a $300,000 house next door to a foreclosed house that may go for $225,000. These foreclosed homes are an overhang on the real estate market and they will continue to be. I think it takes years to work out, for these houses to come off the market.

Currently, three agencies, Fannie Mae, Freddie Mac, and the Federal Housing Administration have been putting their brains together (an oxymoron) to see if they can come up with a way to get rid of this inventory of foreclosed homes. So far, they have failed nothing new there.

The CONCLUSIONS are Simple

There will be no nation wide growth in housing prices so long as there are one million homes that have been foreclosed upon, and more on the way.
The economy in my opinion cannot have sustained growth in the 3% area unless these houses are again occupied by new owners. The housing market is such a major factor in our economy that the nation’s growth depends upon it. When you buy a house, you furnish it, you fill the closets, and you fill the garage, maybe an additional car. Hey, it’s like a boat which is a hole in the ocean that you just keep pouring money into.
We can in the absence of moving this housing inventory have an economy that muddles along at 0 to 1% growth rates, and continued high unemployment, but 3% growth which is what we need just to absorb new college graduates, it’s simply not in the cards.
As for my investment thoughts, I believe that it has never been a stock market; it is instead a market of stocks. You pick the right ones and you will be on easy street. I still like certain banks and I am expecting 100% gains over a couple of years, and don’t forget there’s dividend capability with the banks as well.

Richard Stoyeck

4 Comments »

September 15th, 2011

Presidents New Stimulus Package Better Look Close

: President Obama is late to the plate with stimulus

I took a look at the President’s proposal to stimulate the economy which amounts to $347 billion and my first look surprised me. This is not going to work. A couple of hundred billion is dedicated to temporary tax cuts like cutting payroll taxes for both people and employers. The hope is that employers will add new jobs to their corporations if the government cuts the payroll tax. Well I figured it out and if a corporation pays an employee $30,000 per year, net of all taxes it will add $300 to the employer’s bottom line. What company is going to add to their labor force by saving $300 per individual. Workers do just about as well under the proposal.

I have talked to a number of economists and they all seem to come in at about the same numbers that I worked out regarding adding new jobs to the labor force. The answer is that this proposal could add a million jobs to the labor force over the next year. When you consider the amount of money being spent on jobs alone, it comes to a cost of about $200,000 per job. Does this really seem like the best use of money.

My last point is simple. The President is once again proposing to increase taxes to pay for this stimulus package. Now let’s be realistic. He knows the Republicans control the House of Representatives. He therefore knows his proposal will not pass the House. So what is he doing? Is he window dressing? Is he simply grandstanding for re-election? It would seem so.

One final point for us to think about. The taxes he wants to implement would be permanent increases, and yet the stimulus package is temporary. Once again the President is simply prepping for re-election. If he were serious about stimulus, he should have started two years ago instead of concentrating on health care reform, which involved a maximum of 15% of the America’s population of 315,000,000. Misplaced priorities and letting time lapse is not a prescription for leading what is still the world’s most powerful economy.

Richard Stoyeck

No Comments »

September 9th, 2011

Does Keynesian Economics Still Work or did it ever Work

: Does Keynesian Economics Still Work or did it ever Work?

The United States entered the Great Depression in 1929 subsequent to the stock market crash. The crash did not create the Depression, but was certainly a major symbol of it. At the end of the day, if you put liberal and conservative economists in a room and put a gun to their heads and said, what caused the Great Depression, the answer they would give is an ABSENCE OF DEMAND.

Consumer Demand collapsed very quickly after the stock market crash in 1929, and then production immediately collapsed with it, since people were not buying much of everything. So Demand went down and Production followed, and then people were laid off, because Production was down. This caused a further decrease in Demand, and a further Decrease in Production. What you are seeing is a SPIRAL on the downside that keeps getting bigger and bigger until finally somewhere Demand Equals Production.

Franklin Roosevelt and his advisors tried everything, and the President did have the finest collection of minds around him since the founding fathers occupied office. Nothing seemed to work because no one had yet formulated a theory to understand what was going on?

Enter John Maynard Keynes

It wasn’t until 1936 which was several years into the Depression that British economist John Maynard Keynes published a book entitled “The General Theory of Employment Interest and Money.” This book and Keynes’ theory became the working explanation to resolve the Great Depression. In essence Keynes said that when consumer demand collapses, the government must substitute ITSELF in place of the consumer as the SPENDER OF LAST RESORT. The government must continue to spend until the economy grows and the consumer begins to spend again. Sometimes this can take a year or two. Where the politicians get it all wrong is that their attitude is to spend, spend, and spend some more. They run deficits in good times and bad times.

Keynes wanted governments to run SURPLUSES in good times, and not continual deficits. This is the classic difference between true Keynesian theory and the nonsense that politicians expose. You run deficits in bad times and surpluses in good times. Last night the President proposed a 450 billion stimulus program. This would be in line with Keynesian theory.

The problem is he will probably waste much of the money by spending it on the wrong things. As an example he wants to put money towards saving the jobs of tens of thousands of teachers. That’s not Keynesian economics. Keynes would say hire 50,000 new teachers and get people off the streets. Obama wants to help states with their deficits. That’s not Keynesian, the economist would tell you to start new production programs and put people to work. Build dams, bridges, paint schools, build new schools, just get money into people’s pockets and they will spend it, and spending expands the economy.

Richard Stoyeck

1 Comment »

September 2nd, 2011

Apple without Steve Jobs Unthinkable

: Steve Jobs, the most successful entrepreneur of his generation

God bless the security analysts. They always seem to get it wrong in the end. Recently Steve Jobs resigned as the Chairman of Apple for medical reasons. Jobs has had perhaps the most extraordinary business career of his generation. It will take time and distance to properly assess his contributions, but if we harken back to previous generations, the comparisons are there. I am going to talk about a few comparisons, but first think about this.

Jobs basically created the personal computer, then participated in dominating the marketing of it, and created the most elegant operating system to this day. On top of it all he managed to co-own Pixar the animation people who obsoleted everything Disney did to such an extent that Disney had to buy the entire company to make up for lost ground. He then comes back with the iPod, iPad 10 inch tablet, iPhone, and revolutionizes communications and media in this country. In the process he amasses an $8 billion personal net worth, and manages to live a highly private personal life.

Perhaps unknown to most admirers, Jobs was forced out of Apple, the company he founded. Back in 1985 the Board backed John Scully as the boss after Jobs had brought Scully into Apple. Scully essentially stabbed Jobs in the back, which is not unusual in terms of corporate politics. What’s interesting is that most corporate types would not have survived the departure. For Jobs however, it was really the beginning of the next phase of his career. Most of his achievements came after he left Apple for the first time. Now for the comparisons with others like Jobs.

Howard Hughes – Both men did it their way, with complete disregard for what the rest of us were thinking at the time. Both were impervious to public opinion or even public tastes. Jobs did however have an uncanny feel for public tastes and the future. Both became fabulously wealthy as a result of their pursuits.

Walt Disney – Both Jobs and Disney were visionaries, years ahead of their times. Both used technology to bring their vision into reality, and both were multidisciplinary in attacking many different fields and succeeding in diverse venues.

I personally believe that the departure of Steve Jobs from Apple has signaled the peak of this company’s growth cycle. I believe that he is an irreplaceable manager and force behind this company. The other day a friend of mine who owns Apple’s stock came into my office. The stock was trading at $383 per

share. He gave me all the usual reasons why the stock is worth a couple of hundred dollars more per share than what it is selling for. We have a bet going. I think he’s crazy and he thinks he’s right. We will see who wins in the end over the next year or two. I simply do not believe that Jobs’ departure can lead to an upward transformation of this company. It’s probably time to sell, and the $75 billion that Apple has in cash means nothing without this man to run the company.

Richard Stoyeck

No Comments »

August 31st, 2011

Bank of America Is there a Conspiracy Afloat

: Short sellers can kill a stock’s QUICKLY – Bank of America is a great example

I have been involved with Bank of America on and off, for the better part of 30 years as an investment. Since 2008 and the financial crisis I have watched the largest bank in our country self-destruct. The cause was greed and stupidity but probably not in that order. You have heard the expression, when in Rome, do what the Romans do, and it is probably appropriate here also. Bankers went crazy when it came to risk. They were doing no documentation loans or loans without looking at the documentation which is just as bad. As a result, everybody was able to get a mortgage, and then even a home equity loan after that. Hundreds of thousands of homeowners did not deserve the loans they received, but once receiving them, said to themselves, “I must be okay; the bank approved it after all”.

So Bank of America went out and bought Countrywide, and paid billions upon billions of dollars for a mortgage company that was worthless. To top it off, they bought Merrill Lynch for $29 per share. Had they waited 24 to 48 hours, they could have owned it for $2 per share, the way JP Morgan Chase took Bear Stearns for $2 initially.

Here we are a couple of years later, and there has been a massive amount of shorting in Bank of America’s common stock (symbol BAC). There is no longer an uptick rule in effect. The SEC enforced uptick rule ensured that short players had to wait until there was an uptick in the price of a stock before you could come in and short again. No more, now you can short, and short, and short – no waiting.

This means you can legally organize a short sale battle against a stock. What you cannot do is issue verbal negative statements about a company unless they are true statements. In my opinion, Bank of America got down to the $6 and change level recently, where I bought it because of a barrage of negative short sale players. Warren Buffett’s investment of 5 billion dollars in the stock should serve as a buffer against further shorting. The upside should be interesting from here.

Richard Stoyeck

2 Comments »