Sep 24, 2012

Why Businesses Won't Hire

 This is a re-post from yesterday, but includes the charts referenced.  Sorry and have a great day. 

 In between all of the President’s cannon fodder that keeps arriving each month when the employment report arrives, job growth has been weak.  When I speak to employers I hear two major complaints.  The first is that they can’t find qualified workers to fill their open spots.  This is an indictment on both our immigration and education systems.  If we aren’t educating our children properly to fill these spots, then we should allow qualified, educated immigrants to enter this country on work visas.  In California, we once had a community college system that was the envy of the nation.  A system of low priced educational institutions that offered students an opportunity to study in a specific area and then leave, with an AA, to obtain a job in the field as a qualified entry level employee.  Unfortunately the politicians have spent the past 30 years re-crafting the curriculum at these community colleges to mirror the general education requirements at the state universities.  This curriculum is now heavy on liberal arts, light on practical studies.  The end result?  Job openings that can’t be filled because an AA degree now leaves you under-qualified for most of today’s job openings.

The second complaint I hear from employers is the uncertainty being created in both Washington and, for California based businesses, Sacramento.  Politicians plan around the election and budget cycle.  Elections every two or four years, budgets every year.  The political budgeting process doesn’t require any forethought, and in the case of DC hasn’t even resulted in a budget for the past three years. The lack of business acumen amongst politicians, and especially the group occupying the White House today, creates a level of uncertainty for businesses that dissuades them from planning capital expenditures and future hiring.  Most businesses I know create hiring and capital plans at least three years in advance.  Of course they will alter them as circumstances arise, but in general that three year plan is standard.  By not passing budgets and leaving tax uncertainty to the last minute, governments leave businesses unable to plan, in which case capital budgeting and hiring just don’t occur.  The current group in DC doesn’t understand this.  They will run this tax uncertainty right into next year, make some changes in February that are retroactive to the beginning of the year, claim they “fixed” the problem, and then sit around in amazement when companies don’t respond by immediately hiring and spending. 
With Mr. Obama clearly ahead in the swing states, get ready for more of the same for the next half decade and beyond.  While I find many issues with Mr. Romney, I can’t fault his business sense and wish that Mr. Obama would bring in a cabinet in which at least 50% has held a private sector job.  Unfortunately, given Mr. Obama’s arrogance and self-righteousness, my guess is that he will view a victory in November as a mandate for more of the same as opposed to what it really is-Mr. Romney’s inability to formulate a coherent campaign message.
Apple (AAPL) launched their highly anticipated iPhone 5 to a rousing reception.  The phone is already sold out after selling 5 million units in three days.  Now there are concerns about shortages, which should soon pass.  Additionally, the company announced 22 million downloads of the new IOS 6.  I downloaded it on one of my iPads and, while basically there were no noticeable changes, there were a few items I have been disappointed with.  First, the attack by AAPL on Google (GOOG) is annoying.  AAPL substituted the GOOG Maps app for their own, which at this point is an inferior product.  Additionally, my YouTube (owned by GOOG) app disappeared, and I have been unable to find it in the App Store.  It’s OK to have a feud with a competitor, but don’t do it at the expense of your customers.  Maps and YouTube are two of the most popular apps on the iPhone and iPad, and changing/eliminating those without suitable replacements doesn’t benefit users. 
The economy in China continues to soften as foreign investment and domestic demand continue to wane.  Some growth forecasts are in the 6% range for the country, just over ½ of the average over the past decade.  I’ve discussed in the past that these numbers are likely overstated.  Given the long decline in the Shanghai, I am starting to sniff around some of the Chinese names for values. 
Argentina announced that GDP declined 0.8% from the first quarter to the second quarter, which was flat with Q211. 
I know this is old news now, but we haven’t discussed QE3 (since I was on my political/media rant last week). The Fed announced plans to extend their securities buying by an additional $40 billion per month, with no cap on what they’ll spend and no end date.  In other words, we just joined the Europeans in perpetual QE.  If you have been a reader for a long time you’ll know that we have been predicting that the Fed’s first interventions were just softening us up for their eventual plan for permanent QE.  Remember, for a man with a hammer, every problem looks like a nail. 
The two charts below, courtesy of my friend Bob Rezaee, show the how the tax burden is distributed in the US.  The first chart shows the share of tax liabilities by income quintile, comparing the top 20% of earners to the bottom 40%.  I realize it doesn’t show the mix of earnings (the bottom chart addresses that), but the top 20% is paying nearly 90% of all taxes while the bottom 40% not only doesn’t pay any taxes, they in fact are receiving money.  Part of this is certainly due to the recession and the fact that we have added more individuals to the disability and welfare rolls over the past three years than we have added new jobs.

This second chart shows the share of income earned by the bottom 20% of earners in 1979 and 2007, at the cusp of the recession.  It shows that the bottom 20% earned 1.4% less of national income in 2007 versus 1979.  While certainly not a positive trend, it is a far cry from the way this trend is portrayed in the mainstream media.  Note also that this group’s share of income tax liabilities has declined from 0% to receiving a benefit of 3%.

The college football season is in full swing.  There have been some great upsets and games so far.  I’m not sure I’ve ever seen a team fall from the rankings as fast as Arkansas.  I’m even throwing some kudos to Notre Dame, which for the first time in 15 years actually has a credible schedule. 
Have a great day
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Sep 16, 2012

The Problem with Mainstream Media

I know this is supposed to be a blog about investing, but our mainstream media has allowed another travesty to go under reported because of their political bias, and I feel I need to comment.  The tragedy this week in Libya and the violence in other countries was obviously preplanned, condoned attacks arising from the United States' failure to lead.  How did this come about?  First, we have abdicated our role as the global leader pushing for democracy and capitalism against a rising tide of socialism and terrorism.  We have sat by while Iran has become the dominate power in the Middle East, soon to be armed with nuclear weapons.  We have abandoned our long time ally Israel, leaving them to twist in the wind while they face threats from all sides.

And now the press is jumping all over a little known video that has been circulating on You Tube for months, citing it for creating "flash riots".  The reality is that those riots were planned well in advance to occur on September 11th.  Flash rioters don't show up armed to the teeth, months after the supposed catalyst, and destroy an embassy and kill its inhabitants.  These riots were well planned, coordinated events that are attacks on our sovereign land. 

How could an attack like this occur on the anniversary of 9/11, and our President and his cabinet not be more attuned to what was happening? That's easy given the President has missed 67% of his security briefings this year, presumably while he was out campaigning to retain his post.  So while he was out campaigning, our embassies have sat without vital information about danger lurking all around them because the President was too busy to attend the briefings. 

With all this occurring, you would think the mainstream media would be all over this Administration, looking for answers.  Instead they are jumping on the challenger, wondering why he felt compelled to speak before he had all the facts.  Are you kidding me?  At least he was man enough to get out there and defend America, in spite of the fact he has never been given access to the security briefings, a customary accommodation given to the challenging party's nominee during a presidential election.   But rest assured, our fearless leader has "warned" our enemies that they "will be brought to justice." These warnings, and lack of any action, are the reason we have become an easy target around the world.  All bark and no bite. 

The role of the press in this country used to be to challenge, investigate, and help ensure that our leaders performed their duties, and they used to do it in an unbiased manner.  Today's mainstream media is so biased that their information and investigative role is worthless and untrustworthy. 

I say shame on this media.  Do your jobs, don't give us your opinions.  Leave the opinions to bloggers like me. 

Oh, in business news the Fed announced plans to buy mortgages and other securities in limitless quantities forever, but we'll discuss that in another note.

Have a great week


Sep 6, 2012

Goodbye Summer, Hello Election Season

Sept 5, 2012

As the quiet of August and a summer of barbeques, vacations, and swimming fade, the election BS is in full swing as both the Donkeys and Elephants battle it out over who can sling it the highest. The Donkeys are offering free everything to everyone, while the Elephants are offering who knows what.  While the battle ground should be about policy and the economy, the focus has been on the really important items such as which candidate was born in Kenya, which candidate drives around with domestic animals on his car, and which candidate feels your pain more.  At the end of the day, in my view, it will come down to which candidate makes the American voters feel like he'll deliver more to their particular cause, and both will fail to address the key issues facing America today.  Mr. Obama would like us to look more like a bankrupt European country, and while it may not take another four years of his policies to get us there, he may get his wish-and I don't mean that in a good way.

Speaking of Europe, ECB President Mario Draghi missed the Fed confab in Jackson Hole last week saying he had "too much work."  This morning Mr. Draghi announced that the ECB wouldn't be changing their main interest rate, hodling it at 0.75%, and that they will engage in permanent and limitiless bond buying to achieve that goal.  The ECB has become the first central bank to officially adopt what has already become the unofficial policy of most central banks:  permanent and limitless quantitative easing.  Our Fed unofficially adopted this policy, and now that the ECB is on board it would seem that Vanguard's estimate of massive currency deflation beginning in 2016 is baked into the pie.

The equity markets will love this new ECB commitment, even though it has been anticipated for some time.  After we get the initial equity bounce on the news of this announcement, which could last as long as a couple of months, long term investors are going to need to consider where to put their capital for long term protection.  Unfortunately, when currencies grind down to nothing, financial assets don't offer the level of protection required to keep up with inflation.  Real estate, timber, agricultural land, and other hard assets that have the ability to generate inflation adjusted positive cash flows offer the greatest protection.  Additionally, gold and other stores of value also offer some protection. 

Our own Fed Chairman spoke last Friday from Jackson Hole, and offered more of the same.  Mr. Bernanke said  "The Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."  Helicopter Ben-he still hasn't seen an economic problem that easy money couldn't solve. 

In spite of a middling economy and uncertainty in Europe, the S&P 500 has risen 12% so far YTD.  For investors who are confused as to how the market could be so strong in spite of a weak economy, consider that most bear markets and recessions have been started by Fed tightening action.  In this environment, a slow but not yet declining economy, the threat of Fed tightening is virtually zero.  Additionally, this Fed has repeatedly stated that they would be inclined to continually stimulate versus any other action.  With an economy that has minimal need for more easy money, the Fed's largess flows directly into the capital markets, creating a "wealth effect" that hopefully stimulates the economy.  In other words, while President Obama dismisses the concept of trickle down economics, Mr. Bernanke and the Fed rely upon it completely. 

It's finally here!!  College Football season has arrived!  I feel like Navin Johnson celebrating the arrival of the new phone books.  As always there have been a number of changes in coaches, players, league alignments, etc, from last season, but at the end of the day the product is the same.  Great Saturday entertainment.  While I think the Trojans have a tough road to get to the title game given their need to beat Oregon twice in a month and their lack of depth because of NCAA sanctions, I'm still picking them to make it to Miami!

Have a great day