“What do you mean, shift to a lower gear…”

·         Government and Organizations

Truckers out west are familiar with the mountainous terrain encountered on Interstate 70 between Denver and Grand Junction, Colorado.  They’re cautiously aware as they pass the crest of each great hill they climb; the trip down must be made slowly and under control, not letting the trucks’ momentum increase the acceleration.  If the truck doesn’t shift to a lower gear to keep the vehicle’s speed slow, the trucker ends up with a runaway projectile, leaving a trail of devastation. 

Congress’ agenda seems intent on pushing into law (or equivalent) as many projects as can be voted on and signed by the President.  En masse “fait acompli” has never been successful in guiding positive changes in civilizations previous to now.  Has something happened that we Americans aren’t aware of?  Congressional leadership still seems to believe that their elected majority constitutes a mandate of sorts (don’t you get uncomfortable when our elected officials forget what one of the framers of the Constitution said “…There is no maxim, in my opinion, which is more liable to be misapplied, and which, therefore, more needs elucidation, than the current one, that the interest of the majority is the political standard of right and wrong.”  Bonus points if you know who it is.  Since when does skill in ‘creating’ an electable candidate equate to the talent of common sense versus political expediency?  A better guess is that there is a negative correlation.

Be careful of the prevalent assumption expressed by the Democratic leadership about “we have the momentum now”.  It may be better to remember that with many possessions the 1^st day you own it, but from then on it owns you.

Every trucker knows you never want to miss that downshift.  The question is, do the Democrats? 

·         Markets – It’s Memorial Day, let’s go on vacation

Graduation ceremonies are the event de jour.  Shouldn’t the markets feel special too?  After all, they’ve avoided apocalypse (or at least going to zero) and have rallied some 30 to 40% (domestically) during the last 2 months.  Let’s give them a round of applause, a pat on the back, some TARP funds (or PIPP or whatever) and send them off for the summer

Trouble is, they’ve gotten out of their last semester with a lot of new debt, cut allowances (diminished cash flow), summer jobs aren’t as abundant (no rising employment here), no new credit cards (talk to Congress and the President about that one), and the prices of gas, movies and snacks are higher.

For the next 6 to 8 weeks look for the markets to go lower.  Blame the usual suspects: financials, tech, industrials, and retail.

Maybe after the July 4^th holiday stocks indexes may resume their uptrend.  After all, the Chinese love to export fireworks, and after the 4^th, they’ll be on sale.  Lord knows we can all use a bargain. Just be careful of short fuses.

Till next time

The Slope of Hope (But I don’t want to be the 2nd derivative, I want to be 1st)

• Government and Organizations

With four months in the rear-view mirror (seven if you count the election) the audacity of hope has been redirected to the new Administration and Congressional agendas. Choosing to act with all possible speed because “the stars are aligned” (who knew our President was an astrologist? Is that a course at Harvard Law?), or just because like Commodore Vanderbilt said “I got the power, ain’t I?” our nationally elected officials seem committed to expanding the deficit to a size never before seen in this country, and doing it for several years to come. Yet governments’ estimation of revenues are as naively optimistic (let’s give them the benefit of public school grading on the curve) as their plans for health care utopia. You certainly don’t want to think they would miss estimates on purpose so they would have this as an excuse(I mean rationale) to raise taxes more to ‘fix’ their (oops, the) mistake of lower receipts.

Little substance has been directed toward the real drivers of the American economy. Small businesses have been an afterthought in the economic strategies thus far articulated. On the other hand, these same businesses are (and will) being told it is their “patriotic duty” to pick up the burden so that ‘all’ may share in the profits of capitalism.

The trouble is profits are shrinking and will continue to shrink further as overhead costs of labor, capital and materials rise. Our new political engineers aren’t aware that hope is not a strategy.

Be wary of the new national edifice being erected in Washington. The building blocks are being appropriated and there are wonderful plans for the grand opening. But the architects have never been certified, nor do they have successful experiences on their resumes. Construction itself is not taking place on a firm, proven foundation, and the structural framework is theory only, the mortar of success is nonexistent. And remember, they’re building a skyscraper, not a shed.

• Markets – Deflating the Instant Gratification of Inflation

The financial press keeps describing how multiple government actions by multiple countries are fanning the flames of inflation. The only air being moved are the hot winds coming from the pundits and promoters. The reality is inflation is alive but is currently a collection of glowing embers (we’re trying to keep the analogy consistent).

These embers of inflation are real and they are growing. It will take the better part of a year for the various components (monetary excess, diminished material supply and/or shortages, living wage pressure, investor sentiment rotation) to combine and exert a much greater than normal long-term upward force on prices. Once started, this will be a 4 to 5 year event. For now, the water in the big pot the frog is in is still cool. But the burner is on and it's being turned up. After the first of the year don’t be surprised if that pot of water is starting to resemble a hot tub.

Till next time

Put the Backseat Driver Behind the Wheel - A modest proposal (with apologies to Jonathan Swift)

• Government and Organizations

Much has been made of the concerted actions of the Administration and Congress to “save” the domestic auto manufacturers.

Current plans indicate the UAW (BTW, where are electricians, plumbers and other unions?) and Congress will have controlling interest in both Chrysler and General Motors. The UAW and the government (which legislates safety, economy and taxation) controlling the means of production.

Why use halfway measures? Since they want control, give it to them.

· Let the government and the UAW buy 100% of the companies.

· Let the government buy out the white collar employees with severance packages equal to the pensions that the unions are getting.

· Then the management and private capital can form new companies, pay competitive wages, build world-class autos in right-to work states, free of the of the legacy costs and restrictive work rules.

The government will have to be diligently monitored to make sure a level playing field for all car manufacturers is maintained, and favoritism is not used to “protect” one group at the expense of another. Also, no more injections of capital from the government. Make the “new” Chrysler and GM deal with the cost of capital AND the cost of labor. Make them pay the government money back and raise capital just like everyone else has to, that is, based on performance and profits.

• Markets – Vanna, can I have a letter please?

Economists of all stripes are trying to elbow their way to the front of the prognostication line by identifying the kind of recovery our economy will have with a letter: L’s and W’s and V’s oh my!

What’s a letter among investors? Perhaps if we consider the circumstances of the times and the contestants our vision will become somewhat sharpened.

The general market picture is one of relief: we’ve stopped going straight down. Volatility is reduced, and investors no longer feel like the animals in a whack-a mole arcade game.

Keep in mind the A.D.D. nature of the Baby Boomers and their propensity to magnify economic pressures. As they come out of shell shock and get past Memorial Day look for investors of all sizes trying to get “position” for the recovery. Prices may well move up during the summer as they all try to get in to make up what they have lost.

They may well succeed in pushing indexes past their fair value during the summer. When reality arrives in the fall (along with inflation, high unemployment, impending tax increases in 2010, and declining discretionary income) equity prices may well race the geese to the south. Remember there are an increasing number of Boomer’s trying to retire and downsize. Caution may well be the virtue of choice for the fall and winter of 2009.

Till next time

Rescued by the Junior Geniuses

Sunday, May 03, 2009

Rescued by the Junior Geniuses

· Government

Have you noticed that time has a way of exposing truth, copycats and frauds? It seems the current politicians in the majority are reinforcing their opinion the voters gave them a mandate for the enactment of Democratic polices. And now it seems those polices are assuming a 21^st century –type of manifest destiny. Yet when you examine the proposed actions, two facts stand out: not one of the people proposing these changes has ever had any success in prior attempts in what they are suggesting we do on a nationwide basis, and that each of their proposed actions have been attempted before, in much the same way, and have not only resulted in failure, but the correction of the “experiment” took a long time and cost much more than if the original position had been improved instead of dismembered.

Each of the proposals being worked on is recycled from prior attempts. The difference this time is the voting control – not the quality of the act or its potential for success. Perhaps the voting public needs better information regarding what is being proposed, and how it will affect individuals, families, businesses, and the country as a whole. Information that is more factual (less ‘branded’). Information that is provided from the documents themselves, not from “media” or “public relations” or “press secretaries”.

Another little point to keep in mind is that most of these politicians are promoting ideas from staff or selected “authorities in their field”, most of whom have been academians and have never actually built or run for- profit organizations. Given the opportunity to prove their theories on a national basis is exciting to them. They see tremendous upside for themselves if successful. On the other hand, if they are wrong, someone else will clean up the mess. I believe there may be major problems in the not-to –distant future simply because I see very few people asking “but what if you’re wrong?”

· Finance

If everyone received a penny for all the articles written about the major banks in the last 18 months there wouldn’t be a recession. Since that’s not possible, let me offer this. From the 3 year highs of the major banks and bank indices (at 30 –to 1 leverage) to the proposed 10-to -1 leverage that these institutions should operate, bank stock prices are about were they should be. Yes, some banks are better (or worse) than others, but as we all know, the market, such as it is, is forward looking. So give a 16% variation in price, based on the old 8% average return of the good old S&P 500, add in a little positive slope because we are not going to zero, and most of us should stop worrying about the banks and pay attention to the real problems.

Till next time