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Manage your Tax Liabilities
March 4, 2011: Taxation>>How Much is Enough?
Like most things in life there are limits to what people will endure. The same applies to the level of taxation. There are certain limits no government should go beyond.
No one should have to pay to government more than 20% of their income in total taxes. Total taxes in the U.S. would be those taxes paid to the local, state, and Federal governments. Unfortunately, even those in the middle income brackets pay well in excess of 20% of their income in total taxation.
When you get above the 20% mark, you are becoming a Serf and the government is becoming your Master.
Be Free & Prosperous, Sanford Kahn
March 3, 2011: What do you want>>which path to take?
Which path to take as a nation. Either we will take the path of having a smaller government with enumerated powers–OR–a large expansive government that will try to control everything within its grasp and be good at nothing.
In the end, though, we will have no choice. Why? The credit markets will, within two years at most, no longer lend us an abundant amount of cheap credit to finance our reckless spending. If we continue down the current path, the U.S. will (not might) lose its coveted AAA credit rating with very real negative consequences.
March 2, 2011: A simple rule-of-thumb on when oil prices will napalm the economy.
There is a simple rule-of-thumb that can give you advanced warning when rising oil prices will torpedo the economy. If you can add 1 + 1 and get 2, you can easily use this simple formula. In addition you will sound like a flaming genius to your associates and will go to the head of the class.
Enough BS>>what is the formula? When you add the price of a gallon of gas to the interest rate on a fixed 30 year mortgage and the total is 10 or more, the economy will be facing some strong headwinds. It will definitely slow down and might re-enter another recession. As of today, the total is fast approaching nine. If gas goes to $4.50 per gallon and 30 year mortgage rates go to 5.5%, we will be at 10. This could happen by mid summer. Stay tuned!
March 1, 2011: Is the U.S. Dollar Worthless?
The answer is because it has no tangible backing. For over 4000 years of human history the most common backing of currencies was either gold or silver. The reason why nations for over 40 centuries backed their currencies with gold or silver was that it tied or anchored their currency to the earth. They could only expand their monetary unit in tandem with the production of gold or silver. It took monetary control away from the political class to manipulate the supply of money and its eventual debasement.
Today, the U.S. dollar is a true fiat currency (meaning it has been decreed a currency the central government). It has no backing other than the full faith and credit of U.S. politicians. Scary! President Nixon ended the last gold backing of the dollar on August 15, 1971.
Now, politicians can expand the total debt of the U.S. to pay for any program or programs they wish without having to worry about draining the gold supply from Fort Knox. If worse comes to worse (it will), they can always print the dollars to pay for their programs.
How long can this game continue. Simple—it can continue until confidence in the government’s ability to manage its financial affairs is lost. Then, the game is over.
I can’t predict when, but eventually the U.S. will have to return to some type of commodity backing of its currency. The result of this will be deflationary.
Be Solvent & Prosperous—Sanford Kahn
February 28, 2011: The Weekly Stock Market Update for week ending Feb. 25th.
In spite of last week’s decline in the popular averages, the basic trend in the S&P 500 index is still UP. The 20 day moving average is still above the S&P 500 index’s 50 day moving average, and the 50 day moving average is well above the 200 day moving average. I can’t argue with the trends.
Sentiment indicators, though, measuring investor bullishness have reach extremes. They have exceeded the levels in 2008 right before the stock market crashed. They can still go to further highs, but then the downside will only get worse. What could cause the market to pivot downward? Try an oil supply crunch and the U.S. economy growing much slower than expected. For your info, 4th quarter, 2010 GDP was revised downward from 3.2% to 2.8%. An oil supply shock can decimate economic growth to 1% to 2% range at best. This will be a big hit to earnings.
“A secure future lies in economic growth.” Sanford Kahn
February 25, 2011: What is the ONE eternal truth of the Universe.
This one eternal truth applies not only to planet Earth, but to all civilizations no matter what planet they are on. Therefore, I encourage all you space aliens to read below.
The eternal truth of the universe is that all actions provoke reactions. In human terms these reactions or consequences may be positive or negative. Someone or something has to pay a price or cost. There are no free lunches.
For example, in interpersonal relationships, honest communication is both important and essential. You can control the “what and when” of your communication, but you can not control the resulting impact (positive or negative) it has on the other person. This, honest or otherwise, is the cost or price of your communication.
Another example—in economics you can not simultaneously control the cost and quantity of any product or service. If you try to control the cost (price controls), the quantity (and quality) decreases. This is the result of trying to control the price of any product or service.
There are always consequences or costs to any action taken by an individual and their consequences have to be weighed against the cost of the proposed action. This applies to everything!
February 24, 2011: Was Ebenezer Scrooge a really bad person–a different viewpoint?
You don’t have to email and inform me that the Christmas season is over. I know that. I would like to look at the personality of Mr. Scrooge on two levels. First, on a personal level and then on a societal level. On a personal level, Mr. Scrooge was a cold hearted, tight fisted, and greedy man who had no friends—and nobody wanted to be his friend.
On a societal level, though, Mr. Scrooge was indispensable for the improvement of society and providing the capital for the advancement of the Industrial Revolution. It was the Industrial Revolution that started the long process of moving the masses of humanity out of poverty and lengthening their lifespans. The average lifespan in 16th century London was no longer than it was in ancient Rome. The Industrial Revolution changed all of that.
In order for the entrepreneurs of his day to launch new businesses someone had to provide the capital (money). Scrooge and his brethren fulfilled this indispensable task. The poor and downtrodden, as unfortunate as they are, do not provide the savings and capital for the advancement of society. They consume–not produce. The true wealth of a society comes from its ability of produce —not consume!
On a societal level we should celebrate Mr. Scrooge. He and ilk did more to advance society than all the charitable giving combined. Maybe we can set aside one day of the year as All Scrooge Day. May I suggest July 1st as All Scrooge Day.
February 23, 2011: Who are the New Business Lords?
The New Business Lords will be those individuals who can quickly discern, adapt to, and exploit the unpredictable movements in the turbulent flow of life. The new lords will be those business people that have as their target the goal of growing the free cash flow of their business. This cash flow represents the means— the wherewithal— for those shrewd business people to take advantage of opportunities and events that present themselves. By so growing the free cash flow of a business not only do you increase its value, but also you provide it with the means to maintain its market share and possibly increase it. On the other hand, the new serfs are those businesses that are mired in debt and illiquidity. If they stay this way, they will travel down the road to extinction.
February 22, 2011: All you need to know about the economy in two simple equations.
Having trouble understanding our economy and what will energize it and what will chain it? Keeping it simple, the two basic formulas below will give you a good understanding of what will propel an economy (job opportunities) and what will shackle it (rising unemployment). The two formulas are:
1. Taxes UP=Economic Activity DOWN
2. Taxes DOWN= Economic Activity UP.
Raising taxes is an economic depressant>>>not a stimulant. Increasing taxes will decrease economic and business activity, as well as, employment opportunities. There are no free lunches!
February 21, 2011: Stock Market Update for week ending February 18, 2011.
The trend is your friend and the trend in the S&P 500 stock index is still UP. The 20 day moving average is still above the 50 moving average of the S&P 500 index. Matter of fact is almost running parallel with it. Continuing, the 50 day moving average is well above the 200 day moving average. These numbers are saying that, in spite of disturbing international news, the stock market is climbing a wall of worry.
The only caution right now is that the “fear index” of the S&P 500 average,the VIX, is at or near all time lows. This registers a lack of fear or downright complacency in the market. Market don’t like complacency or being taken for granted. This bears watching.
February 18, 2011: The Impoverishment of America–The New Poverty Cycle
Part of today’s post will be a spillover from yesterday’s post. I mentioned a news item in The Wall Street Journal yesterday stating that the “median income for men was actually higher, in real terms, in 1973 than in 2009.” This is true. Continuing, household income has scantily eclipsed inflation since 1975. The gains in household income from the mid 1970′s was primarily due to large numbers of women entering the work force. This trend is now over.
The average gain in salary and wages this year will fall between 2.5% and 2.75%. Don’t expect much more with 9% plus unemployment. In the last six months the consumer price index (CPI) increased at an annual rate of 3.2%, and in the past quarter it increased at an annual rate of 3.9%. With energy and commodity prices galloping higher, I suspect that the CPI with be increasing further.
The Conclusion: Real income growth this year will be negative and the American middle class will take a hit to their standard of living. But, what do you expect when you have a fiat currency. This Monday will be my weekly stock market update.
February 17, 2011: How to Destroy the Middle Class.
The rule is the same no matter whether it is the middle class in the U.S. or any advanced country or emerging economy. How to do it—easy, just debauch (corrupt) the currency which will lead to a rising inflation. Thanks to the U.S. Federal Reserve this process is now in full measure in regards to the dollar. The U.S. dollar is being debased to make our exports cheaper in the international market place. This will work for a time, but the price will be a rising inflation due to increases in import prices. We are now observing this in the wholesale market. It will soon spread to the retail market–meaning the things you and I buy. By the end of 2011, consumer inflation could be running at a 3.5% to 4% rate. This will be larger that the average increases in wages and salaries. This means that real wages and salaries will be negative after inflation—a declining standard of living for the middle class.
NOTE: This process has been going on for some time. As reported in the Wall Street Journal today, “median income for men was actually higher, in real terms, in 1973 than in 2009.” The attack continues!
February 16, 2011: What the Hell what is another 4 to 5 percentage points?
What are these 4 to 5 percentage points that I am talking about? They are the increase in U.S. Federal government spending as a percentage of GDP that has occurred over the past two years. A few years ago, U.S. Federal spending averaged about 18% to 19% of GDP. In the past few years it has increased to about 23% to 24% of GDP. This may not sound like a lot, but in a $15 trillion economy we are talking about major big Bucks.
A question for you—where do you think the revenue for this extra spending comes from? Answer–it is sucked out of the private sector. How can you have a sustained and growing economy when the Federal government is depleting the resources (the wherewithal) of the private sector? You can’t! Who spends money more efficiently—government or the private sector (you & I)? To the contrary of what many believe (especially in Washington), you must shrink the size of government and return resources to the private sector to enable long-term economic growth (jobs) to resume. This is a first step requirement.
Friends, it is your future and business opportunities at stake. There are no free lunches!
February 15, 2011: Einstein & the Fixing of American Education
The late physicist Dr. Albert Einstein had a brilliant saying on how to solve problems that seem intractable. In essence what he said is that no problem can be solved within the paradigm it was created inside of. This is especially true with the poor quality of American education.
You will not solve the problems of K through 12th grade American education by throwing more money at it. We have been doing this for the last 3 decades and it doesn’t work. Education doesn’t need more $$; it needs more competition. The educational $$ should flow directly to the childrens’ parents or guardians. They should be able to chose where to send their kids—either to private or public schools. In other words–give the parents or guardians educational vouchers and let them send their kids to the best schools that meet their needs.
Educational competition will produce miraculous changes at lower cost per pupil. Competition works; the bureaucracy will never reform themselves.
The same-old, same-old doesn’t work anymore.
February 14, 2011: Stock market update for week ending February 11, 2011.
The trend is the S&P 500 index is still UP. The 20 day moving average is still above the 50 day moving average which is significantly above its 200 day moving average. As long as this holds, the trend will stay up for now.
Early WARNING: The volatility index for the S&P 500 index (symbol VIX), also know as the “fear factor” is getting near record low readings. This is indicating complacency and a lack of fear in the market. The last time the reading got this low was towards the end of April, 2010. We then had a sharp downward leg that lasted till early September. Markets do not like complacency and a lack of fear. They are the great humbler–they demand respect. The VIX reading can stay low for some time yet, but the market is being set-up for a nice correction. I suspect this will happen sometime in the second quarter of 2011. Time will tell—but be warned.
February 7, 2011: Stock market update for week ending February 4, 2011.
The stock market as measured by the S&P 500 index remains in a strong upward bias. The 20 day moving average remains above the 50 day moving average. The S&P 50 day moving average is also above its 200 day moving average. The market is tell us it still wants to go UP. As long as the FED supplies the easy and abundant money and credit, the market will continue upwards. Inflation pressures are slowly building. Please see the February 3rd posting.
NOTE: For the rest of this week I will be away on business and unable to post. The Daily Post will resume on Monday, February 14th. Please give the Daily Post’s URL to your friends and associates. Thank you, Sanford
February 4, 2011: Money=Opportunity: Class Warfare Stupidity
In our complex and swirling market economy this simple equation is of paramount importance. It is: MONEY=OPPORTUNITY. Now, if you tax opportunity away from those who have made it within the rule-of-law, do you not also tax it away from those who wish to make it? You can’t hurt the one (the so-called rich) without hurting the other. Economic opportunities should be open to everyone.
The simple point is: the policies of class warfare don’t work. Everyone becomes poorer!
February 3, 2011: Can U.S. economic growth be sustained?
In the 12 months ending December, 2010 wages and salaries were up 1.7%. In the same period of time the consumer price index was up 1.5%. The net result was a meager .2% real increase in wages and salaries. This is nothing to write home about. Now, let us go forward.
As reported in today’s Wall Street Journal, steel prices have increase six times since November, 2010 for a total increase of 20% to 30%. Flat-rolled steel is used in everything from cars to toasters as the Journal reported. This is in addition to double-digit price increases in many of the basic commodities (oil, wheat, sugar,corn,coal,coffee, etc.) an advanced economy uses. These price increases will be reflected in the consumer prices index with a lag of approximately two quarters. It is very possible that by the end of the second half of 2011, the consumer price index will be galloping forward by 4% to 5% annual rate. With a 9% plus unemployment rate, it is very doubtful that wages and salaries will be increasing more than 2% annually. By the end of 2011 the real growth in incomes most likely will be negative.
You can not have a vibrant growing economy when the growth in real wages and salaries is negative. You are asking for the impossible. Consumer expenditures make-up 70% of GDP. The growth in exports and business investment can not make-up for the deficiency in real growth in wages and salaries.
Please Note: If this scenario holds true the stock market will start to anticipate it by mid year.
February 2, 2011: How to get the giant U.S. economy galloping. Yes how–please read below.
First, you must define who are the real “movers and shakers” of economic growth? The genesis of economic growth are those individuals who put their money (capital) at risk to start legitimate business enterprises and hire people.
Therefore, to get our business economy moving in the direction of sustained growth, implement these three simple tax policies:
- Effective January 1, 2011 the Capital Gains tax rate is ZERO.
- Effective January 1, 2011 the corporate income tax rate is ZERO. Corporations don’t pay taxes, people do (corp. pass on all taxes in higher prices for goods and services and reduced employment).
- Effective January 1, 2011 the top marginal personal income tax rate is 25%. Eliminate all tax phase-ins, phase-outs, and the alternate minimum tax.
This is the first but very important step. The next step involves the other important economic ingredient–the Federal Govt. spending habit. If the Federal government doesn’t get a rope around its out-of-control spending habit, it will suck vital resources out of the private sector lessening the positive impact of the three tax policies above. Federal spending should not increase any faster than the rate of increase in population and consumer prices. This would currently be about 3% per year. This number includes all Federal spending along with entitlement programs.
If these three actions are implemented, our economy will begin a prolong period of sustained economic growth. The stock market will boom and New Wealth will be created. It will take guts and determination for a national leader to fight for this.
February 1, 2011: What Wall Street and the capital markets are really after.
The answer to the above question is probably a little rough and crude but after thinking about it, it has a large element of truth in it. Wall Street and the capital markets are set up to take dollars from stupid people and give it to smart people. Don’t get me wrong–you are not stupid but Wall Street thinks you are.
There are a few conclusions flowing from the above. First, Wall Street is not on your side. They have absolutely no concern about your best interests. I think recent events have shown this to be true. Second, do your own research. Wall Street’s research is designed to sell investment products for their large clients and palm them off on you. Third, (and probably not the last one) is that you should be highly suspicious of any so-called investment professional trying to sell you a product in which they get a commission. This is a direct conflict of interest. Are they selling you an investment product that will generate the largest commission to them or is it in your best interest? Given the nature of human beings, the answer is most likely the first suspicion.
Let the buyer beware!
January 31, 2011: Stock market update>>week ending January 28th.
Friday’s selloff in the S&P 500 stock index did not change the up trend in the market. The S&P 500 stock index’s 20 day moving average is above its 50 day moving average. The 50 day moving average is well above its 200 day moving average. The 20 moving average is almost running parallel with the 50 moving average. This means, so far, that the stock market is not giving any indication that it is changing direction. The trend is your friend and the direction is still UP.
The one thing that could adversely impact the stock market is that the price of Brent crude rose today $1.59 to settle at $101.01 a barrel. Brent crude is used to price oil in Asia and Europe. If it stays above $100.00 per barrel for some time, it could adversely impact economic growth in Europe and the fast growing economies in Asia. Markets do not exist in a vacuum and this will eventually have negative consequences for the U.S. economy and stock markets. Keep your eyes side open.
January 28, 2011: Where do the future jobs and opportunities lie?
The U.S. Census Bureau reported about a year ago that since the mid 1980′s almost 100% of the net new jobs were created by small business that were in operation five years or less. Do you realize what this is saying? Not only were the vast majority of new jobs created by small businesses, but by new small businesses. The large employers (1,000 employees and up) have been reducing net employment due to competitive pressures.
If you wish to reduce the high unemployment in the U.S., then you have to give those resourceful men and women (entrepreneurs) the environment to create new enterprises. Do we do this in the U.S.? Hell no! We burden businesses (especially small businesses) with excessive rules, taxes and don’t forget pointless lawsuits. If you wish to have a thriving economy and increasing employment then you must have a political environment that encourages work, saving, investment and a sound currency.
Lastly—the true wealth of a nation comes from its ability to produce; not its ability to consume.
January 27, 2011: We are standing at the Precipice–PART II.
It is nice to get into economic/political debates as to what spending programs our political leaders can and should take. This assumes that the country has the financial wherewithal to engage in this political discussion. There comes a time though where you run out of political and economic rope. The United States is now at that juncture.
This fact is a given>>>about 50% of U.S. debt is held by overseas investors. Moody’s Investors Services, the bond rating firm, has been warning the United States for the last two years that they must get there fiscal house in order or else the United States will lose its coveted AAA bond rating. Last week they gave the U.S. two years to make a serious cut in its fiscal deficit or else the U.S. will lose its AAA bond rating. If overseas investors even sense that Moody’s will be cutting our AAA rating, they will dump U.S. Treasury securities. This along with a lower bond rating from Moody’s will dramatically push up interest rates and borrowing costs for everyone.
The impact on the real estate market will be particularly devastating. Real estate prices will not just fall; they will plummet. The net result will be the United States will enter a second and much more serious recession. Friends, the game is over–we can not continue down the same path. In other words>>>all games come to an end including this one.
January 26, 2011: We are standing at a precipice–part I.
The President’s State of the Union last night was the same-old, same-old feel good nonsense. In it he proposed new spending of billions of dollars on high speed rail, education, and clean energy. These are not investments; these are subsidies mostly to his high paid union backers. In one proposal he stated that in 25 years he wants 80% of Americans to have access to high speed rail services. We already have that and it is call jet aircraft. Government spending and “investments” are determined by political purposes and not where it makes economic sense.
I strongly feel that he does not realize the precarious position that the United States is in. Approximately 50% of U.S. government debt is held by overseas investors. If I was a foreign investor, after listening to the President last night, I would have serious doubts if he and his administration are serious about getting their fiscal house in order. They most likely will reach the conclusion that in the margin it would be best to reduce their buying of U.S. debt. The U.S. government wants to promote economic growth by debasing its currency. This is a sure formula for higher inflation and interest rates. The impact on the economy will be strongly negative.
Stay tuned>>tomorrow part II and the final act.
January 25, 2011: Weekly Stock Market Update for week ending January 21st.
For review, may I suggest that you re-read the January 18th posting. This will be an introduction to the moving averages and how they will be an indicator of the stock market direction.
For the week ending January 21st the 50 day moving average was well above the 200 day moving average almost by extremes. This indicates that the primary trend is still up. Looking closer, the 20 day moving average was above the 50 day moving average by a healthy margin. This indicates that both the short-term and intermediate term trends are still up until the indicators pronounce something different.
Are there any worrying signs? Yes! The VIX or the volatility index of the S&P 500 index is getting into its historic low range. This means the stock market is getting rather complacent. Markets do not like complacency and being taken for granted. Any important negative news can upset the market and produce a sharp movement downward. But, for now the trend is up and don’t argue with it.
Longer term, though, I am starting to be cautious as to whether or not the market is forming a major double top. The first top occurred in 2007 when the S&P 500 index hit a record of a little over 1500. A major double top would be a highly negative signal. What could cause this? Please read tomorrow’s posting.
January 22, 2011: I will be away on business on Monday, January 24th and there will be no Daily Post that day. The Daily Post will resume on Tuesday, January 25th with the Weekly Stock Market Update. I plan to make this a regular feature on the first posting of the new week.
Until then—“Bad economic policy–even for the best of reasons–is still bad policy.”
January 21, 2011: Who are the New Business Lords? We are all in business because we all participate in the business of life. Therefore, do you wish to be a business lord or a business serf?
The new business lords will be those business people who can quickly discern, adapt to, and exploit the unpredictable movements in the turbulent flow of life. The new lords will be those business people that have as their target the goal of growing the free cash flow of their business. This cash flow represents the means— the wherewithal— for those shrewd business people to take advantage of opportunities and events that present themselves. By so growing the free cash flow of a business not only do you increase its value, but also you provide it with the means to maintain its market share and possibly increase it. On the other hand, the new serfs are those businesses that are mired in debt and illiquidity. If they stay this way, they will travel down the road to extinction.
January 20, 2011: A call option writing example using Chevron stock. First, I would like to thank Mr. Ken Pittman of radio station WBSM in Providence, RI for allowing me to be interviewed on his station. As promised the listeners, I have prepared a covered call option writing strategy using Chevron stock. Before reading this strategy, may I suggest reviewing the January 19th posting. You should only contemplate using this strategy if it meets your suitability requirements. The example below neglects commission costs
Chevron closed today at $92.71 per share. Let’s say you buy 100 shares of Chevron for $9,271. Each call option represents 100 shares. You feel that in the next 6 months Chevron will have a difficult time getting above $95 per share. If you feel this way, why not sell someone the right to buy your 100 shares of Chevron for $95 per share between now and the third Friday in June. For this right (call option) and based on today’s closing prices, someone will pay you $305.00. This is your money to keep no matter what happens. If Chevron stock goes above $95 per share, it can and most likely will be called away. If it stays below $95 per share, the the call option will expire worthless and you can then sell another one out in time. The price of the option will be determined by the markets. It varies from day to day.
This is a simple strategy on how to enhance your rate of return. It does not guarantee a positive return. If Chevron stock should fall in price, your total return can easily go negative. Please be aware of this. There are no sure-things in investing.
FULL DISCLOSURE: I currently own 300 shares of Chevron stock and employ this strategy in my self-directed IRA account.
Much Success, Sanford Kahn, Business Author/Speaker
January 19, 2011: Is GOLD a great inflation hedge?
With many investors or should I say speculators piling into gold because of a rising inflation threat due to a depreciating dollar, the above question is very relevant. The answer is that historically gold has not been a good hedge against rising inflation. Since 1980, consumer prices have increased approximately190%. In the same period gold future prices have increased about 185%. In most of that time period gold prices were flat to downward. It is only been in the past two years that there was an parabolic movement up in price. The above does not include the holding or storage costs associated with buying gold.
Is there a better way to protect yourself against inflation? Why not buy stocks in high quality large integrated oil companies that pay a dividend of 3% or greater (for example Exxon Mobile, Chevron, Conoco Phillips). If commodity costs (especially oil) continue to rise, so will their stock price. The beauty, especially with these three stocks, is that you can sell out-of-the-money call options on them to enhance your rate of return and cash flow. I am currently doing this with Chevron and it has been rewarding.
Let the masses (the herd) pile into gold. There are other alternatives for the quick and nimble.
January 18, 2011: The Weekly Stock Market Update–Is the Trend UP or DOWN!
Instead of guessing what the direction of the stock market is why not let the market tell you. The market in this case will be measured by using the S&P 500 index. I consider this index much more accurate of the market direction than the Dow Jones 30 Industrial Average.
What I look at are the 20, 50 & 200 day moving averages on the S&P 500 index. When the 50 day moving average is above the 200 day moving average, the direction of the stock market has a bias to the upside. What confirms this is when the 20 day moving average is above the 50 day moving average. This is currently the case and, therefore, the direction of the stock market is UP.
How will you know when problems are brewing? When the 20 day moving average crosses the 50 day moving average to the downside, this can be an early warning sign that trouble is brewing. Now, when the 50 day moving average crosses the 200 day moving average (this is called a Death Cross) to the downside, watch out. There could easily be a substantial correction coming to the stock market. At this point you might think of taking some of your chips off the table or at least selling covered call options to give you some downside protection. This is what I do.
As of right now, though, the direction of the S&P 500 index is up. All movement in life is turbulent and things and perceptions change. I hope to make this analysis a weekly posting on Mondays except if it is a holiday or I am away from my office.
Please keep following these Posts and inform others. Thanks, Sanford
January 17, 2011: It is a holiday today and I will be going to the beach for some body surfing and thinking great thoughts. The Post will resume tomorrow with the “Stock Market Update”.
In the interim please remember the cardinal rule of investing>>>never play another man’s game. Play your own and play it well.
January 14, 2011: Beware of good tiny beautiful fairies granting wishes. I think you will enjoy this short and amusing story.
A married couple in their early 60s was celebrating their 40th wedding anniversary in a quiet, romantic little restaurant. Suddenly, a tiny yet beautiful fairy appeared on their table. She said, ‘For being such an exemplary married couple and for being loving to each other for all this time, I will grant you each a wish.’
The wife answered, ‘Oh, I want to travel around the world with my darling husband The fairy waved her magic wand and – poof! – two tickets for the Queen Mary II appeared in her hands. The husband thought for a moment: ”Well, this is all very romantic, but an opportunity like this will never come again. I’m sorry my love, but my wish is to have a wife 30 years younger than me. The wife, and the fairy, were deeply disappointed, but a wish is a wish. So the fairy waved her magic wand and poof!…the husband became 92 years old. The moral of this story: Men who are ungrateful bastards should remember fairies are female.
Another moral of the story is that all actions have consequences>>>including wishes you would like to have granted from fairies.
January 12, 2011: What is the outlook for income growth? Good question! This is important because 70% of GDP growth is the result of consumer expenditures. If consumer income doesn’t grow, then this will impact economic growth and, hence, employment.
In the 12 months ending Sept., 2010, wages and salaries in the U.S. grew 1.5%. Over this same time period consumer prices were up 1.1%. In real terms wages and salaries in the U.S. are hardly growing. With 9% plus unemployment I expect that this trend will continue. Inflation on the consumer level will probably start to accelerate due to rising fuel and food prices. There is a good possibility that latter this year the real growth in wages and salaries can actually turn negative. If this should happen, real GDP growth in the U.S. can stumble by the 4th quarter, 2011. One early indicator of this would be the stock market. It would start to turn down by summer if this was a possibility. On the S&P 500 index look at the 50 day and 200 day moving averages. If the 50 day moving average crosses the 200 day moving average on the downside, this would be a clear warning of pending problems. So far, all is well.
January 11, 2011: Wherein Lies the Light–OR–Achieving institutional escape velocity!
There are two broad categories of thinking. To keep these two understandable, I will label them #1: the inside-the-box thinker and #2: the outside-the-box thinker. I realize that these two phrases have been used extensively, but I want to keep this essay short and simple to read and understand. The inside-the-box thinker is very much an institutional type of thinker, i.e., don’t expect too much creativity from his or her mind. The second type of thinker has definitely achieved institutional escape velocity and has the creativity and guts to forge ahead.
In the economic environment that we will be in for at least the next decade, it will be the second type of thinker that will set the agenda. We are not going back to the same-old, same-old economy that we had pre 2007. It is a brand new economic environment!
Lastly, to answer the question of wherein lies the light, just imagine yourself inside a box. There is very little to no light inside the box. The real light of opportunity and freedom is outside the box. I encourage you to try to break away from the conventional and institutional line of thinking. This is where the solutions to our most pressing societal issues lay.
I would appreciate it if you could share this blog URL with others.
Sanford Kahn, Business Author/Speaker
January 10, 2011: The Conservation of Personal Power—
In physics there exists a law titled the “conservation of matter”. It basically states that matter can not be easily created or destroyed. However, the states of matter can be changed. For example, by applying enough heat to a solid you can transform it into a liquid, as with ice. A liquid heated to the boiling point can be changed into a gas. In all cases they are still the original matter, but in a different state.
In a similar vein, using the law of the conservation of matter, there exists in all societies a conservation of personal power. It states that Personal Power can neither be created nor destroyed, but it can be transferred.
Societies have two and only two broad options:
Through their respective governments, they can institute policies that will empower the individual or policies that will empower government. If you wish to empower the government for greater economic stability, then you must transfer some of your personal power to it.
There are consequences to both broad options. One set of policies will lead to a growing set of opportunities for advancement while the other will lead to dependence and stagnation. It’s you choice.
Sanford Kahn, Business Author/Speaker
January 7, 2011: Who is the ultimate Master in any economy? I will first tell you who it isn’t. Without insulting you, the answer is it isn’t you. You are the master of your own domain but as an individual you have very little to no influence on economic trends.
The ultimate master in ANY business economy are the markets namely the financial markets. When they decide that a trend has come to its end–it changes—slowly at first but change never the less. Through the political process you can fight the change, but it will only delay the inevitable. So, therefore, what is the great economic/social trend change that will occur over the next several decades?
The answer>>>the great social experiment in expanding social liberal democracies (that started in the 1930′s) is over. Why? The financial markets will no longer finance liberal governments to expand their social experiments (entitlement programs) a low interest rates. Once the financial markets lose confidence in governments ability to manage their financial affairs, they will jack-up interest rates. The cost then is prohibited and the game is OVER. This is slowly happening in the United States and other social liberal democracies.
A new trend is developing. It will be changes in the income tax code that will start to reflect this changing trend. Please be aware of this.
January 6, 2011: The true wealth of a nation comes from its ability to produce; not its ability to consume. There are only 5 (I repeat–only five) wealth producers in any society at any time period in history. These five are: FISHING, MINING, AGRICULTURE, MANUFACTURING & CONSTRUCTION. What is the common thread that binds these five wealth producers together? They are all production activities.
Do you notice what is missing? The service sector is not one of the wealth producers. The service sector is to be of service to one or more of the five wealth producers. Societies that do not give incentives (through tax policies) for production will eventually see both their production and consumption decline.
PS: Your homework assignment is to remember these 5 Wealth Producers. Now, go and produce!
January 5, 2011: Why is the Stock Market going UP? This is a good question–so I will propose a simple analogy to help you better understand why the stock market is going up. Think of the stock market as a bunch of young beer drinking horny college frat guys. What is the one thing they crave the most? Why, it would be a flock of young horny college sorority gals. This would make them happy at least for the time being (until their next craving for beer).
This analogy applies equally as well to the equity markets. What is the one thing that the equity markets crave the most? It is plenty of loose money. Guess who is supplying the loose money in spades. You guessed it–the U.S. Federal Reserve Bank. As long as the FED keeps supplying it, the trend in the market is up. Watch out when it takes the money punch bowl away!
January 4, 2011: The Foundations of Tyranny
The basis of tyranny is best stated by the late Nobel Prize winner in economics, Dr. Milton Friedman.
He stated that when the combination of economic and political power is concentrated in the same hands, this is a sure recipe for tyranny. The locus of political and economic power is now concentrated in Washington, D.C.
Government is not your friend. It is your competitor for personal power. Be careful how much power you allot to the political class.
Grow & Prosper,
Sanford Kahn, Business Author & Speaker
January 3, 2011: The economic objective of political policy is…..
to give individuals the incentives and opportunities to grow and prosper within the Rule of Law and the bounds of morality. Anything other than this will slowly eat away at the fabric of freedom and opportunity in all societies.
With the highly charged political environment in the U.S., I decided that the first post of the New Year should get to the basics of what political systems are all about. Economics is the study of human behavior in its historical setting. It is psychology not science .
December 31, 2010: Another year another dollar—how has your year been? Do you know what 2011 holds for us? This I do know that all movement in the course of economic life is turbulent and therefore hard to predict. The major trend operating in the U.S. and western economies is still in play. This trend is a deleveraging economy and will continue for another 5 to 10 years. The result of this will be slower economic growth than normal.
How to survive and prosper in this environment? Remember these words>>>>LIQUIDITY IS KING: NOT ELVIS!
Have a prosperous New Year.
PS There is a favor you can do for me. Can you refer this site to your friends, associates or followers. I believe it serves a useful social function. Sanford Kahn
December 30, 2010: The paramount rule of personal investing is….. NEVER play another man’s game even if it is a reasonable game with good returns. You have to concentrate and focus on what game you are good at playing and then become a master of that investment game. Many individuals ran into the real estate game in the early part of the last decade without any knowledge of real estate evaluations and markets. Guess what—many lost big time. Learn your markets and play your game. The above is written for personal investing rules, but it also applies to the business realm.
December 29, 2010: The 90% Rule: Before proceeding, it would be best to re-read the December 28th posting.
The gross debt of the U.S. Federal government is now at approximately 95%. The 90% rule is derived from examining the debt ratios data of the major leading economies going back several centuries. What is says is that when the ratio of the gross debt of a major nation exceeds 90% of its GDP, economic growth slows down by 1% compounded per year. This one-percent doesn’t sound like much, but it is significant. For example, instead of an economy growing at 3% per year, it now grows at 2% per year. An economy growing at 2% annually does nothing to reduce a stubbornly high unemployment rate—nor does it lead to much of a sales growth for companies. Individuals and businesses will be fighting over the pieces of an economic pie that is very slowly expanding.
Now the $64,000 question of how to reduce the size of the government. From past experience with other governments in a similar situation as ours, at least 85% of the cuts has to come from spending side to be successful. The spending cuts have to concentrated in two areas to be successful. These are significant cuts to entitlement programs and cuts in government salaries and benefits. I admit that this will be difficult to implement, but not impossible. Just look what the governor of New Jersey is doing. This will have to be replicated on the national level.
December 28, 2010: REALITY= PERCEPTION. We interpret what is transpiring about us through the filters of our perceptions and myths. Our reality is what we perceive and this perception varies from individual to individual. Perception is also important when it comes to the larger picture, i.e., the state and precariousness of our economy.
The financial markets currently have the perception that the United States government will get its financial house in order. This is why the U.S. can borrow tens of billions of dollars at very low interest rates. If this perception by the financial community changes, then the cost of borrowing money by the U.S. government will increase dramatically due to the increase in risk. We are not that far away from a change of perception by the international financial community. Let’s do a little math. The current GDP of the U.S. is about $14.6 trillion. The gross debt of the U.S. government is just shy of $14 trillion. This leaves a debt to GDP ratio of about 95%. We are not that far away from 100% and beyond. To put it in another way, if nothing is done to reverse this trend we can easily become Greece in another two years maximum. A question! What then will happen to our economy and business and employment opportunities? More on this debt to GDP ration tomorrow.
December 27, 2010: The 3 Frontal Attack on the American Middle Class. The American middle class is going to be invaded or assaulted on three fronts that will trash their standard of living. The first is rapidly rising oil and fuel prices. If the U.S. government wants to debase their dollar to be trade competitive, then the bill we pay is for oil (which is priced in $) to rise in price. The second assault also follows from above. Many farm commodity prices are now rising faster than oil in value. This is especially true for corn future prices. Corn is especially important because it is a feedstock for many of the popular meats we eat. The last assault on the middle class will come in the form of rising electric prices. The EPA is engineering strict emission rules that will result in the closing of many of our current coal generating electric power plants. This may not sound important but almost half the electricity generated in the U.S. is from coal. These coal plants will have to be replaced by more expensive gas generating plants. Guess who will pay the price for this? YOU!
There are no free lunches in economics. You will be paying the bill for these attacks by diminishing standards of living and employment opportunities. HOPE– policies can be reversed depending who is elected to govern.
December 24, 2010:
From Joe E. Lewis–“There’s only one thing money won’t buy, and that is poverty.”
Have a merry and hearty Christmas holiday and a prosperous New Year. I will be back on Monday, Dec. 27th.
December 23, 2010: Is your DOLLAR Worthless?
Why is your dollar worthless? The answer is because it has no tangible backing. For over 4000 years of human history the most common backing of currencies was either gold or silver. The reason why nations for over 40 centuries backed their currencies with gold or silver was that it tied or anchored their currency to the earth. They could only expand their monetary unit in tandem with the production of gold or silver. It took monetary control away from the political class to manipulate the supply of money and its eventual debasement.
Today, the U.S. dollar is a true fiat currency (meaning it has been decreed a currency the central government). It has no backing other than the full faith and credit of U.S. politicians. Scary! President Nixon ended the last gold backing of the dollar on August 15, l971.
Now, politicians can expand the total debt of the U.S. to pay for any program or programs they wish without having to worry about draining the gold supply from Fort Knox. If worse comes to worse (it will), they can always print the dollars to pay for their programs.
How long can this game continue. Simple—it can continue until confidence in the government’s ability to manage its financial affairs is lost. Then, the game is over.
I can’t predict when, but eventually the U.S. will have to return to some type of commodity backing of its currency. The result of this will be deflationary
Be Solvent & Prosperous,
Sanford Kahn, Business Author/Speaker
December 22, 2010: What is the missing link between business risk and maximizing your rate-of-return?
The nexus between business risk and maximizing your rate-of-return is suitability. Suitability is the most important investment criterion whether on a personal or business level. Not only does it concern the investment that is made, but also how it is financed. Is it financed by taking on a substantial amount of debt or by equity capital (common stock or internally generated funds for example)?
Which one is for you? Debt is more risky, but allows for faster growth. Equity financing is not as risky and hence allows for more stable growth. Without asking yourself the question as to whether this particular investment is suitable to my operation, you may make reckless business decisions that do not mesh with sound financial management and your basic business philosophy.
December 21, 2010: How Markets Work— In market driven economies, all markets (especially true for the financial markets) are in constant movement between being extremely overvalued and grossly undervalued. They pass through the area of normal rational valuation on their pendulum swing to the extremes. Timing and liquidity are the two most important ingredients in determining business success. Another way of stating it is that—liquidity is King, not Elvis!
December 20, 2010: A rule of thumb on interest rates and home prices—states that a one percentage increase in mortgage rates effectively raises home prices for buyers by about 10%. Therefore, if mortgage rates go up one percentage point, then to keep payments the same home prices would have to decline by roughly 10%. The interest rate on the 30 year fixed mortgage is based on the interest rate on the 10 year Treasury bond. The rate on the 10 year Treasury bond is currently at 3.35%. It has gone up by almost one percentage point from October, 2010. It wasn’t too long ago that the 10 year Treasury bond had a interest rate of 5.5%. If the 10 year Treasury should go up to a 5% yield, then the 30 fixed mortgage would be approximately 6.5 to 7.0%. This would further devastate the real estate market. Let the buyer beware.
December 17, 2010: What is the objective of political and economic systems?
In democratic societies all economic policies and priorities are realized through the political process. This then begs the question of what should be the North Star of economic policy? The economic objective of political policy is to give individuals the incentives and opportunities to grow and prosper within the Rule of Law and the bounds of morality. Anything other than this will slowly eat away at the fabric of freedom and opportunity in all societies.
December 16, 2010: What is the Basic Law governing human behavior?
I would like to ask you a simple question. Why must understanding peoples’ behavior be complicated? As one of my more outstanding engineering professors always emphasized, we should try to keep things simple. This gives you a better feel and grasp of the problem or situation.
Therefore, what is the basic law that drives human behavior? It is– people act and do what they perceive to be in their best interests. The key word is perception. All movement in the course of life is turbulent and therefore unpredictable. Peoples’ perceptions are also in constant movement and change over time (especially as you age). As a result, their behavior changes as their perceptions change.
Life should not be complicated>>>keep it simple my friends!
Be Solvent & Prosper,
Sanford Kahn, Business Speaker/Author
December 15, 2010: Where stands residential real estate in the U.S.? At the end of the third quarter, 2010, approximately 22.5% of U.S. homeowners with a mortgage were underwater–meaning they owed more on their mortgages that their homes were worth. If home prices fall another 5% this would leave another 2.4 million homeowners underwater. Gary Shilling writing in the Dec. 20, 2010 issue of Forbes magazine predicts “housing prices to decline another 20%.” Even if he is mistaken and housing prices decline only by half of his prediction (that is 10%), this will further increase the number of underwater mortgages by over 3 million. Banks will take hits to their capital because their securities backed by mortgages will decline in value.
What does all this mean? The economy will have no significant sustained upturn until housing finds a bottom. The bottom is not in sight yet.
December 14, 2010: How to prosper in the coming age of Poverty & Privilege—OR– do you wish to be a business Lord or Serf??
The new lords will be those business people who can quickly discern, adapt to, and exploit the unpredictable movements in the turbulent flow of life. The new lords will be those business people that have as their target the goal of growing the free cash flow of their business. This cash flow represents the means— the wherewithal— for those shrewd business people to take advantage of opportunities and events that present themselves. By so growing the free cash flow of a business not only do you increase its value, but also you provide it with the means to maintain its market share and possibly increase it. On the other hand, the new serfs are those businesses that are mired in debt and illiquidity. If they stay this way, they will travel down the road to extinction.
December 13, 2010: Opportunity lost and Opportunity regained. At the conclusion on the December 10th posting, I stated the opportunity equation of: Money=Opportunity. In other words, money is wherewithal that enhances your opportunities in life. Now, let us carry this a little bit further to society in general.
What I am specifically talking about are the cheap policies of class warfare. These policies are mostly implemented through tax legislation. Now, if you tax opportunity (money) away from those who have made it within the rule-of-law, do you not also tax it away from those who wish make it? You can’t hurt the one (the so-called rich) without hurting the other. The simple point is: the policies of class warfare don’t work! Society in general becomes poorer because new investment is discouraged.
December 10, 2010: What is the real purpose of MONEY? What a question! It probably has as many answers as there are people. But, in the business of life–money greases the wheels of opportunity. It can not of itself guarantee success, but it can certainly open doors to it. If you can remember the following equation below, you will have no problem in remembering what money is and can do. The equation is:
More on this in Monday’s post. Have a good weekend.
December 6, 2010: A short little homework assignment for you to pass your time away. In the next few days I will be away on business. In the meantime I want you to memorize the 5 societal wealth builders in ANY society at ANY time period. These five are: Fishing, Agriculture, Mining, Manufacturing and Construction. If we should meet, I want you to rattle-off these five societal wealth builders. If you correctly do, you go to the head of the class. Much Success, Sanford
December 3, 2010: Who owns the future–the Big or the Small or Nobody?
We have had the mistaken belief in this country that the business future belongs to the big and the mighty. This is nonsense. The future belongs to the swift. The swift are those men and women whose businesses have liquidity (low debt levels) and are generating sufficient levels of free cash flow to take advantage of opportunities that will be presenting themselves. Free cash flow is the wherewithal, the stuff, that successful business people can use to innovate new products and services, which along with effective marketing and customer relat
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