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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.

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.

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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.

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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.

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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.

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August 29th, 2011

Gold May Be Peaking NOW !!!!!

: Stack of Gold Coins

Anybody who knows my work knows that I am actively engaged in the world’s markets including equity, commodities, and currency. I have been following gold for several decades. In fact in 1980 my principal client was the largest gold player in the world. He probably controlled a billion dollars’ worth of gold back then and that’s a 1980’s billion, equivalent to at least $3 to $5 billion now.

Based on my experience I believe gold may have temporarily peaked in the last week at $1897, an all-time high, of course that’s not inflation adjusted, and that’s my problem. The brain surgeons on television keep saying that adjusted for the January 1980 peak of $850, gold would have to peak at $2,330 this time around. What the television commentators fail to take into consideration is you can’t go by a one day blow-off price and that’s what happened in January 1980. No decent economist would ever use a one day price to make future decisions with. It’s inappropriate.

You really have to take a quarterly average or a yearly average, for the period immediately preceding the January 1980 $850 high. If you were to chart an average for the entire year preceding the one day high, it comes to $612. To make $612 in inflation adjusted terms, the number you come up is $1,680. We blew through that number a couple of days ago, when gold peaked at $1,747. We blew out all our gold positions shortly after that price was reached.

In my opinion what happens now is simple. I believe that gold will trade down from these levels and consolidate at a lower level. The market will wash out the amateur money that is gone massively into gold. The crowd is always WRONG, and the crowd is betting that gold will go immediately to $2500. The crowd will be wrong this time as well. When cab drivers are buying gold, the game is over. However after gold settles down for the next several months or quarters, it will be time to get back in for what will probably be a 1000 point move from the consolidation level.

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January 18th, 2011

New Tax Law What’s in it for YOU

President Obama, Nancy Pelosi, and John Boehner

In the closing days of December, President Obama capitulated (maybe) and entered into an agreement with the Republicans to pass a new tax law after 2 years of bickering. It amounts to an $858 billion cut based on the expiration of the old Bush tax rates which are now being extended through 2012. This is what you need to know.

1) The top income rate remains at 35%. It would have gone to 39.6%.

2) Long term capital gains, and dividends are treated the same – a 15% tax.

3) Most workers will get a full 2 percentage point reduction in their Social Security payroll tax which means you will pay 4.2% on the first $106,800 of your paycheck. It was set to go to 6.2% prior to the deal.

4) In 2010 the estate tax was suspended which is why guys like George Steinbrenner passed on all their wealth tax-free to their heirs. The new law has a $5 million exemption. And then there is a 35% estate tax.

5) SPECIAL NOTE: You might not be aware of this but there is now a lifetime gift tax exemption of $5 million. If you are married, as a couple it is $10 million. You can now give your children up to $10 million in gifts without paying a tax on it. There is also a new $5 million exemption from the generation skipping tax.

These are just some of the provisions. There are others that affect municipal bond holdings, and IRA charitable gifts. Other adjustments have been made to the traditional IRA’s. Keep in mind that the budget deficit is approaching $1.7 trillion. That is more money than the budgets of 200 countries in the world put together. This means that coming down the road we will find higher taxes, higher interest rates, increased inflation, and a weaker dollar versus other currencies. Just some food for thought.

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January 15th, 2011

Is Uncle Sam Still Worthy of a Triple A Credit Rating?

: Ben Bernanke & Treasury Secretary Timothy Geithner – It’s not up to them, it’s up to us.

Many people believe that any potential downgrading of the United States credit rating would be years away. I am not so sure. At the moment US Government paper is accorded the highest credit rating possible. We are Triple A and it has been like that since the inception of credit ratings many decades ago. The problem is that Moody’s said that the probability is increasing that it will revise the US credit rating over the next two years or so if no action is taken by America to deal with our creditworthiness.

Such a revision would cause us to go from stable to negative in the view of the credit agency. Moody’s has been rating government debt since 1917 when our initial rating was Aaa, and it’s been that way ever since. Our government and our people must deal with this problem. It is understandable that we must run deficits right now to ward off the continued effects of a severe recession. There are questions as to our desires to deal with our problems. We have simply not taken the steps to deal with our sovereign credit rating. Moody’s also spoke about Britain, German, and France in the report they issued as being countries under pressure. The difference seems to be that these other countries are taking steps to deal with their spending. We in America have to get on board and tell the politicians to rein it in.

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October 30th, 2010

Stock Market is Celebrating Republican Victory early

: Focus should be Jobs, Jobs and more Jobs

The stock market has been in a real bull rally the last few weeks. In my opinion it is anticipating a Republican controlled House of Representatives, and a near change in control in the Senate. This is as it should be all things considered. The people will not be voting the Republicans in so much as they will be voting the Democrats out. President Obama took his eye off the ball when he put the energy of his Administration behind a healthcare reform package since day one for almost two years.

The energy should have gone into JOBS, JOBS, and more JOBS. It is amazing to me how people do not learn from the past, and therefore according to Harvard 19^th century philosopher George Santayana are doomed to repeat it. The model in this case was 1932 when FDR swept into office on the heels of the Great Depression. Two years later in 1934, FDR consolidated his gains by increasing the Democratic base in the Congress. This year, Obama is about to see his base get blown out of office.

The President must be given credit for staving off another Depression which is where we were going when he took office. Between Bush and Obama, we were saved from it, but then very little was done to correct the situation. We have major real problems that need addressing, and small potato issues like gays in the military and abortion rights are not the real issues. What follows are the real issues very simply:

The dollar is at $1.40 to the Euro. The American dollar is not going to serve as the Reserve currency of the world much longer if this continues.
Our education system from kindergarten through high school is ranked as somewhere between number 12^th and 16^th in the world. This is a clear failure of will on our part. Unions that are unwilling to allow change, teachers not held to accountability, political correctness, and a sheer lack of technology applied to a failed 19^th century education model has led to this.
In 1990, the US spent $300 billion per year on defense. Since 2001, we have spent $600 plus billion per year on defense. The Soviet Union is gone, no more 30 minutes, thousands of warheads on either side launch capability, and our defense budget has doubled. Five star General and President of the United States Eisenhower said that we must spend every dollar we must on defense, but not one dollar more than is necessary. We should heed his advice.
The defense budget of $600 billion does not include the cost of either Iraq or Afghanistan which is a supplemental appropriation, another $100 to $150 billion per year.
China and India are on a trajectory to dominate the world economically and take the mantle of power from the United States. Do we want this to happen, or are we just going to let it happen?
We must emphasize jobs, jobs, and more jobs. Everybody in this country should have a college education or the equivalent of some kind of training after high school. It should be a right as a citizen to have such training. Recognize this: Since 1990, there has been no net new job creation among the Fortune 500 companies. All new jobs have come from the entrepreneurial startups in this country, not Detroit, not New York, not the rustbelt of the Midwest, or the old garment manufacturing companies of New England. It’s happening in Silicon Valley and the Sunbelt, and Texas and New Mexico, and Nevada.

Here’s the problem in a nutshell. The Democrats believe in free this and free that, all kinds of inefficient programs that simply have no end to them. On the other hand the Republicans don’t give a dam about the poor and the middle class for that matter. Some of these Republicans look like they need a blood transfusion while most Democratic politicians have never held a real job or done anything in the private sector. We have to wake up soon, the future is upon us and it’s not particularly pretty.

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September 15th, 2010

Your Hospital Bills and You

: You want to wind up like this?

You got to get this right folks. I have clients who go to the hospital and never look at their medical bills to determine if perhaps there are inaccuracies. We are dealing with clerks here. They are not perfect, nor are they even super clerks, so be careful. The old people especially believe that everything is taken care of by Medicare, and so they don’t even bother to look. The first thing you need to understand is what is this going to cost?

When you are in the hospital, the staff thinks they have you by the short hairs and so they take advantage. We know of one patient that was billed over $500 for a couple of doses of a prescription drug she takes that costs about $150 per month for 30 doses. We told the patient to complain to the hospital which she did.

The pinheads in bookkeeping told her she could request an audit if the bill was over $1,000, which in this case it was not. Now if you request an audit, the hospital will try to jack up the bill even higher. Why you ask? It’s to discourage audits of course, but in this case they lowered the bill by $300, because when you have them, you have them.

I have a friend who is an expert on medical insurance. I can’t imagine why he would devote his life to it. He has a law degree from UC Berkeley and his whole world is the world of medical insurance. One day he explained it to me. He said Rich, listen up, medicine is not priced for you, a guy that can walk in and pay cash for something. Medicine is priced for the medical insurance industry, so what this means is they rip off anybody who doesn’t have the power of a medical plan negotiating for him. He was totally accurate.

A big problem right now is hospitals putting you under observation status. This means you are not formally admitted to the hospital, but you are in the hospital. It is supposed to go on for a maximum of 1 to 2 days. We have seen it last for 2 weeks here in Connecticut. So what’s the problem? The problem is that Medicare slaps you with a co-pay of 20%. There is also no coverage at all if you are placed into a post-hospital rehab center, or under nursing care, unless you were first formally admitted to the hospital.

You are talking about potentially seeing a bill for tens of thousands of dollars that you were unaware of coming down the pike. This is why the hospitals show you the bill when it’s all over. If you are there for 2 or 3 weeks, send one of your relatives down to the billing office, with a signed note after a couple of days, and ask to see the bill. Get copies of the bill every couple of days. If it’s out of control, change things right there. Don’t wait until you have to sign foreclosure documents on your home to figure out what is going on.

Do you think that hospitals can’t accidentally move a decimal point over in the wrong direction on a bill? It happens routinely, and it never ends up benefiting you. It always favors the hospital. What about scheduled and then cancelled procedures that wind up on the bill – happens every day. Also keep in mind that the codes they used on those bills are there to annoy you. They are meant to be incomprehensible. That is why you must contact billing, and go through the bill line by line if necessary.

How to Negotiate

You want to be as sweet as apple pie first of all. These people on the other end of the phone are the most abused people in the world. Well actually the second most abused people. The most abused are NYC parking enforcement agents. You talk about being abused. They get beat up on a regular basis. The absentee rate is huge because of the beatings.

Now when you talk to the clerk on the phone, you be as sweet as Pepsi. If you have a bill, trust me, for cash they will knock it down immediately. They want the cash. Discounts on the phone of 20 to 40% are routine if you can pay right there, especially in the first month of the bill.

Don’t be intimidated by the hospital. The other day I took one of the boys I mentor here in Connecticut to the Metropolitan Museum of Art in NYC. I have a membership so I can get him in for nothing but I wanted to teach this 4.0 perfect average high school senior how the world operates. The sign says $10 for students, $20 for adults. I gave Joe $2 and said Joe, you go right up there and tell them you are giving them $2 and show they your high school ID.

They took the $2, and gave him an admittance button. I said Joe, look at how professionally done that $10 sign is? Big letters, it is a major statement. The price is written in stone. My point was and is, nothing is written in stone. You can negotiate anything, especially HOSPITAL BILLS.

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September 13th, 2010

General Motors versus Ford Which way to go?

: Whitacre-one of four GM Chairman in 20 months

I have held Ford for clients for a while now, and it has done very well. The stock trades near $12, and we are in at about $2 per share. It’s up 600 percent for us, and that’s not too shabby. So now I have to make a decision as to whether or not to get out. It peaked at $13, and change. As you know General Motors is ramping up to do an IPO. GM declared bankruptcy after the US government under Obama, put about $50 billion of American taxpayer funds into GM

There is a big GM presence in Canada and our neighbors up north did not want to lose the GM employee workforce in that country with their own recession going on. This means the Canadians put about $10 billion of their own money into GM to keep it going. In return the Canadians got a 12% ownership in GM while the American taxpayers got 62% of the stock.

It is believed that when GM goes public, both the US and the Canadians will sell portions of their respective positions. GM’s capitalization would have to be about $70 billion for the American Taxpayer to get all his money back. When I checked the peak capitalization I found for GM over the last 10 years was about $53 billion. This means GM would have to sell for more than at any time in the last 10 years for Americans to be made whole.

But Wait – there’s more!!!

I mentioned I am thinking of selling Ford up 600% in my case. Well Ford has a $43 billion capitalization and just made $4.7 billion for the for first half of 2010. By contrast GM made $2.2 billion. How can GM be worth more than Ford

on that basis? Some will argue that GM has $8.2 billion in debt on the books while Ford has $27 billion. Ford never went bankrupt, remember? Ford kept its debt, and added more. GM got to wipe the slate clean. I still don’t get it, and getting it is what I do for a living.

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