Jason Kelly

The Permanently Sidelined

noreply@blogger.com (Jason Kelly) — Fri, 19 Mar 2010 09:26:00 +0000

Stock market discussions are known for their high intensity. Bulls and bears, whether professional or part-time, tend to believe in their position for thoroughly-researched reasons and have that research at their fingertips for hard arguing.

I've noticed in this latest market cycle, however, that a lot of my readers and subscribers aren't as vocal as they've been in the past. When I discuss this with them, a lot of what I hear is just this: "I don't care anymore." One preempted the predictable bull retort that a mass of discouraged investors is just what a bull market needs to fuel itself higher when those people finally decide to get back into stocks. "I'm not discouraged," he said, "I'm not angry, I'm not waiting for certain all-clear signals, I'm just out. I'm never going back. I've moved on. I closed down my brokerage accounts and have my capital sitting ready for other investments."

If that's a growing trend, it's consistent with what happened in Japan in the 1990s after its big crash. The market jerked up a few times, then took back the gains after each time, and with each up/down cycle, more and more investors just walked away. These days, not a soul outside the financial districts of Japan's big cities knows or cares what's happening in the stock market because they don't own a single share and don't intend to buy one. "Life's too short for that nonsense," one told me.

The sentiment appears to be infectious. The idea of stocks is good when markets are young and investors are actually buying real ownership in real business enterprises, and they can choose which ones with fundamental research that they can see making a difference in the outcomes. Once the fundamental factors matter less, then less, then apparently not at all, then more people come to the conclusion that stocks aren't driven by anything that they can analyze on their own but rather by puppet-string pullers high up in the towers of government and banking, and they call it quits.

I'm not sure we're there yet in America, but the green shoots of a different approach to wealth management and preservation are visible. Japan was once covered in those same green shoots. Now, its stock market is all but invisible through the thick forest that the shoots became.

Boston Scientific

noreply@blogger.com (Jason Kelly) — Tue, 16 Mar 2010 09:47:00 +0000

Boston Scientific announced yesterday that it's halting sales of its implantable cardioverter defibrillators (ICDs). The suspension was due to filing errors and not safety issues, but the company says it still has no idea how long the suspension will last. For a firm fighting to recover back to former glory, this is another setback.

Yet, the stock's price chart suggests that bottom feeding might not be a bad idea one of these weeks. The news is bad, true, but the news around cheap stocks usually is bad. I watched the stock fall from $45 in 2004, patiently waited for some kind of base to show up, then built a position in 2007 and 2008 at a cost basis of $12.98. Boy, did that look cheap.

It closed yesterday at $6.80.

The stock chart will show you a price line descending at a 45-degree angle for the past five years or so. Notice, however, that even during the financial crisis, the shares bottomed in the $6-7 price band in the November 2008 to March 2009 time frame. Guess from where they bottomed before launching their 42-month 600% shot higher in November 2000? The $6-7 price band. Look where they are again now: the $6-7 price band.

Everybody hates the company, and the stock. The last time I saw people hating it this much was...autumn of 2000. I know there are challenges, yesterday's headline couldn't make that clearer, but the company's new CEO, Ray Elliott, did a good job at Zimmer.

Very good, actually. During his time at Zimmer's helm, the company's sales and market capitalization quadrupled. Sales increased from about $1 billion in 1997 to about $4 billion in 2007. He helped take Zimmer public in 2001, with an initial market capitalization of some $5 billion. When he left the firm in 2007, its market capitalization was more than $20 billion. In 2005 he was named "Best CEO in America" for Health Care (Medical Supplies and Devices), by Institutional Investor magazine. He's no slouch, and he's the guy in charge of getting Boston back on track.

He bought 100,000 shares of BSX last August for $11 each. Few people felt the pain of yesterday's news worse than he did. Has he succeeded yet? Not by a long shot. Better news is probably a couple or more quarters away. Still, those bad quarters are looking pretty well accounted for in the stock price these days, and the current price range has proven to be a profitable entry point in the past.

Disclosure: own BSX at $12.98

1149.99

noreply@blogger.com (Jason Kelly) — Mon, 15 Mar 2010 09:24:00 +0000

If you were a prankster of a market index and wanted to mess with every investor for fun, you would have behaved last week exactly as the S&P 500 behaved.

The bulls were getting their party poppers ready a week ago to celebrate crossing over the 1150 line, as they anticipated doing last week. Bears thought the index would hit 1150 and turn down, bulls thought it would hit 1150 and break through. If your job was to frustrate both sides, what would you have done? Probably edge right up to the line, then poke over and under it a little so both sides held their breath, then end right on the line so nobody could sleep all weekend.

That's just what the S&P 500 did, and ended the week at -- no kidding -- 1149.99. If this were a Hollywood movie, we'd be rolling our eyes at the false drama. Look at the march up to the line in these daily closes from last week:

1139 Monday
1140 Tuesday
1146 Wednesday
1150 Thursday
1150 Friday

If we have to split hairs (and what choice do we have, given the tiny movements involved), I'd chalk last week up to the bulls. First, the market did go higher, so that's an obvious one. Second, it did set a new intraday high on Friday at 1153, and new highs are catnip to bullish chartists. Third, a steady drip higher is actually more impressive than a charge higher because it prevents the market from getting overbought and ripe for a retracement.

All of that on the table and understood, everybody has to admit that the same range that's held the market since last October is still holding it, and that it sits smashed up flat against that ceiling. Just the thickness of the paint remains above, that 0.01 keeping the market closed below the top of the range at 1150.

Here's a true story. An investor friend asked me on Friday evening Japan time, before US markets opened on Friday morning, what would be the funniest thing that the market could do on Friday. "Move a tad over 1150 so all the bulls buy in for the run higher and the bears all stop out, then fall a tad under 1150 so the bears buy hedges for the plunge lower and the bulls stop out, then settle right at 1150 so both sides get screwed for the weekend."

You can imagine the smile and shake of the head I enjoyed when viewing Friday's price chart. Amazing.

The 1150 Ceiling

noreply@blogger.com (Jason Kelly) — Fri, 12 Mar 2010 09:57:00 +0000

Have you noticed the S&P 500's range? Many have not. A lot of analysts I read, and media I watch, keep referring to the stock market rally as being one year old. Is it really, though?

Consider that the first 49% of the bounce happened by last July. The S&P 500 rebounded from its 667 low in March 2009 to its 997 high in July 2009. From there, it gained only 15% to yesterday's close at 1150, which happens to be the high of the rally, and it was touched back in January, too.

Most of the last five months have been spent flipping over and under the narrow band between 1095 and 1100. From last July's high to the pivot band, the market gained only 10%. That's not bad, but it's hardly the runaway, one-year-old rally everybody's talking about. When we include the whole range since October, the market has just been fluctuating between +5% and +15% from its high last July. Big deal.

I wrote to subscribers two weeks ago:

Lest you think the rangebound market is new, note that we're sitting right where we sat at the end of November. The S&P 500 has gone nowhere since Thanksgiving. It closed Nov. 24 at 1106. Using the late-October/early-November closing supports at around 1040 and the mid-January peak at 1150, we could call the medium-term range 1150-1040.

Then, Gluskin Sheff's David Rosenberg agreed with that range thesis in his morning note sent to clients on March 3:

The S&P 500 has basically been hovering around the 1100 threshold since October 15, getting as low as 1042 and as high as 1150 in what can only be described as a tight 10% band. (As an aside, the 13-week rate of change for the S&P 500 has swung to negative territory.) It has split the time above and below the line almost perfectly evenly as well (52% above, 48% below). We can understand the emotions involved in such a prolonged sideways band -- a down move to 1080 triggers calls for a correction, while moves up back to 1120 prompt calls for a new high coming around the corner.

With that background, notice the market's sense of humor so far this week. It's toying with everybody. The bulls are dying to see it break decisively through the 1150 ceiling, the bears are dying to see it turn decisively down from the 1150 ceiling. Instead, it has marched gently, ever so gently, to precisely the 1150 ceiling as we head into Friday. Look at the daily highs so far this week:

1141 Monday
1145 Tuesday
1148 Wednesday
1150 Thursday

What's next? Come on, you stock market genius, are we breaking out or turning down? No matter which side you take, you'll find plenty of friends. That's why we're in a range...for now.

Enjoy the show today.

Bouchier Solves The Health Care Crisis

noreply@blogger.com (Jason Kelly) — Wed, 10 Mar 2010 09:15:00 +0000

I subscribe to David Bouchier's witty podcast, and find it to be one of the week's most pleasant listens as I cycle over nearby mountains to keep myself in shape and out of the doctor's office. It's a gentle break from the cacophany of political and financial programs. While most of those are dry with nary a fresh point of view on anything, Bouchier finds new perspectives on that most mundane of subjects: daily life.

Last weekend, however, he solved the health care crisis. Whoa! From the euphonious voice of a man more apt to discuss ducks and ponds than doctors and patients, came the long sought answer:

It's no secret that we have a problem with health care, in part because it costs twice as much as anywhere else in the world and in part because of the huge population of 70 million baby boomers who are just entering that stage of life where their bodies are like cars with 130,000 miles on them. They keep going, but they spend a lot of expensive time in the shop. The resulting repair bill could bankrupt the nation. . . .

Browsing in the pharmacy, looking at all the pills you can buy and all the tests you can do on yourself, I was struck by a brilliant idea. If we seniors are such a big part of the problem, we could become a big part of the solution. We have time on our hands, most of us have a few brain cells functioning, and we grew up at a time when people were encouraged to rely on themselves. So, why not allow every retired person to become his or her own physician?

Hear the amusing details in last weekend's broadcast, run time 3:44, available for free at the WSHU Public Radio site. To subscribe to Bouchier's podcast, visit his archive at the National Public Radio site.

Hedging Against Cheaper Oil

noreply@blogger.com (Jason Kelly) — Thu, 04 Mar 2010 11:06:00 +0000

Maria asked, "Do you think the price of oil is about to spike higher because Israel and the U.S. will soon attack Iran to stop it from making a nuclear bomb? If so, do you recommend that I buy oil company stocks, or an oil ETF?"

No to the first question and, thus, no to the second.

In fact, just yesterday, Kelly Letter subscribers and I doubled down on a remaining half-position in an oil price hedge. I sent a confirmation note to subscribers last night. The following text is from that note.

I'm confident that we'll be able to close [our hedge] at a profit. It traded at a price above our cost basis just last week, and substantially higher within the last month.

The reason oil prices have risen recently, and [our hedge] has therefore fallen, is that Europe's handling of the Greek sovereign debt crisis so far has calmed currency markets, which strengthened the euro against the dollar, making the dollar relatively weak. Because oil is priced in dollars, a weaker dollar means higher oil prices.

There's also a lingering concern that the US and Israel may mount an attack on Iran to prevent that country from building a nuclear weapon. Any military action in oil country would spike the price of oil. Geopolitical events are hard to forecast, however. You may recall that Iran's nuclear ambition has been a concern of oil traders for more than a year now. A strike was supposedly imminent last August, but never happened. Now, it's supposedly imminent again, but who knows?

What we do know is that oil is trading at the high end of its recent range, against a backdrop of a still-sluggish global economy. The US Energy Information Administration (EIA) reported in its weekly snapshot that US crude and gasoline stocks are rising. Demand is low.

Eyes on oil.

Trouble In Japan -- Again

noreply@blogger.com (Jason Kelly) — Thu, 25 Feb 2010 11:03:00 +0000

I'm hearing lots of rumors about Japan's economy teetering on the brink of implosion -- again. This comes up on a fairly regular schedule. The cycle began 20 years ago when the bubble popped, Japan nationalized most bank debt so that the bad assets never went away but instead became public liabilities, and its economic growth has been crippled ever since. Notice anything familiar, America?

The problem with calling for the end of Japan is the same one we face when calling for the end of the world: there's an abundance of evidence suggesting it's imminent, but somehow it never happens. I'm not saying that sovereign debt risk is not real -- it is, and is one of the highest priority risks we're watching this year -- but I can't help but notice that the latest round of reasons to expect Japan's economic collapse are the same ones I've heard each year for 20 years. The difference is that the numbers in the debt column are bigger than ever, but that, too, is trotted out every year.

One day, the music will stop in Tokyo. On that day, a thousand voices will rise to tell us that they told us it was coming. What they won't mention is when they started telling us it was coming. I'm not excusing myself from that criticism. I've warned on Japan and am still shaking my head with each new government report. Notice, however, that I'm just shaking my head. Part of that shake comes from not understanding how the business day continues as usual in Japan, why none of the people I meet and talk with everyday are the slightest bit concerned, or what it is that keeps the mail coming and the trains rolling.

Part of that might stem from most of the population having long since pulled itself out of anything that government mismanagement could affect. Not a Japanese soul outside of big banks owns a single share of stock. They learned that stocks can go down and stay down not just for a long time, but forever, as far as they're concerned. If you know where the Nikkei closed last night, you know more than almost anybody in Japan. Ordinary citizens couldn't care less what's going on in the stock world. Their assets are cash, land, cars, and such.

Sure, something might happen to kill the yen or spark hyperinflation, but that one has also been hanging in the air for so long that it's like warning Californians that "the big one," that mythic earthquake they hear about now and then, is going to crack their state into the sea. Maybe, could happen, lots of evidence exists saying it will happen any day now, but what are you going to do about it? Nothing, so move on. If Tokyo is going to screw up the economy so badly that money has no meaning, well, people will just have to cope with it.

The long decline in Japan is easy to see. It's not even the king of electronics, anymore, and Toyota seems to be working on stepping down from the top of the automotive world with all of its might. Yet, there, too, what you read in the headlines is more than anybody in Japan is thinking about. Ordinary Japanese citizens, which are a lot easier to describe as a group because nothing is as beautiful to Japan as a giant cluster of identical-looking people acting the same way and saying the same things, don't think nearly as much about their nation's place in the world as do citizens from other countries.

The conclusion along the narrow, winding streets left over from the days of the samurai, seems to be that there's no use spending time second-guessing government and certainly no use hoping for better government. Why Americans think all the worrying they do makes any difference is a mystery to Japanese people, who wrote government off long ago and feel it's just a matter of time until Americans finally figure out to do so, too. The longer I live in Japan and watch American politics from afar, the more I agree with my Japanese neighbors on this point. When Barack Obama triumphed in 2008, I asked an elderly man as he trimmed his bonsai whether he'd seen who won. "Does it matter?" he asked. No, it appears not. Nothing has changed.

So, look if you must at the latest round of dismal economic data out of Japan: the growing budget deficit, the rising mountain of government bonds outstanding, GDP growth that flatlined in the early 1990s remaining rangebound even now, the jaw-dropping ratio of government debt-to-GDP, the fact that interest rates are at zero and have nowhere lower to go, and the widely held conclusion that Japan is caught in a debt trap.

All true, and all valid concerns. But good luck knowing when any of it will matter.

Clip From Rants, Raves & Rock 'n Roll

noreply@blogger.com (Jason Kelly) — Wed, 24 Feb 2010 07:32:00 +0000

If you'd like to hear my discussion from last night's Rants, Raves & Rock 'n Roll radio show, details in the post directly below, let me know and I'll send you the clip. The length is 28:38 and the file is 14MB, so I had to remove the play link from this post to avoid exceeding my site's bandwidth allowance. I'm looking into other options for future clips. For now, though, let me know if you'd like to hear the show.

On Rants, Raves & Rock 'n Roll

noreply@blogger.com (Jason Kelly) — Tue, 23 Feb 2010 10:15:00 +0000

I'll be joining Nancy and Lisa, plus special guest co-hosts Eddie Maldonado and Johnny Mastro, on Rants, Raves & Rock 'n Roll radio tonight at 7:20 p.m. ET.

I'll discuss how the government/banking collusion has made it more profitable for banks to stall foreclosure for as long as possible and then force a short sale on a homeowner, than it is to modify that homeowner's mortgage so he or she can stay in the home. What? You didn't really think government was looking out for you instead of banks, did you?

Our conversation will help explain why so many people are finding it impossible to get a return phone call from their mortgage lender -- much less a modification -- and why this is keeping home prices depressed and thwarting economic recovery.

Commercial Property Crunch

noreply@blogger.com (Jason Kelly) — Tue, 23 Feb 2010 09:36:00 +0000

While the residential real estate bubble collapse has used up all the oxygen in the economic room, economists and real estate analysts have been telling us for more than a year that the impending commercial real estate foreclosure wave will add to the damage. They're still telling us that, and their voices are getting louder.

Elizabeth Warren, chair of the Congressional Oversight Panel in charge of watching the Troubled Asset Relief Program, said last week after her panel issued its February report, "There's been an enormous bubble in commercial real estate, and it has to come down. There will be significant bankruptcies among developers and significant failures among community banks."

More than the big banks, community banks sold more commercial loans than residential. Also, they did not securitize and sell them off. They held on to them. Some 40% of the US banking system, about 3,000 community banks, hold a high proportion of commercial real estate loans as a percentage of their capital. Those are the same banks that the government hopes to see start lending to consumers and small businesses again one of these months.

Unfortunately, money they lose when the commercial real estate foreclosure wave begins is money they won't be able to lend, even if they survive the shakeout. Warren said that such a large-scale failure of banks and seizing up even further of capital for lending would dampen the economic recovery.

There's roughly $3.7 trillion in outstanding commercial real estate-backed loans. More than $1.4 trillion in commercial real estate debt is slated to roll over in the next three years, just when willing lenders and adequate liquidity don't exist. Warren expects half of it to be underwater by the beginning of 2011. By comparison, "only" one-fifth of residential mortgages are currently underwater. What makes commercial more dangerous now is that most commercial lease agreements come with three- or five-year terms. That means those negotiated at the very height of the real estate bubble are about to roll over.

The reason that's a problem isn't hard to follow. The evaporation of consumer spending crimps a store owner's revenue until the store goes bankrupt. They can't pay their lease. That happens to the store beside them, and the one beside them, and so on. Enough of them breaking their lease agreements, and a dearth of new tenants, leaves the property owner unable to pay its mortgage. Because such mortgages are local in nature, the impact will be local, too. This is not the blowing up of a derivative now residing in Norway. It's the local bank not getting paid as the local property owner doesn't get paid as the local shop owners don't get customers.

The Feb. 10 report from Warren's panel states: "A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American. Empty office complexes, hotels and retail stores could lead directly to lost jobs."

Just what we need.

I can tell you from my own research of local banks along Colorado's front range that commercial lending is all but frozen right now. The FDIC mandated in 2008 that almost all community banks lower their loan exposure to commercial real estate to a level below 100% of their Tier 1 capital balance. If that Tier 1 was $1 billion, for instance, which is about right for a $13 billion community bank, then the commercial real estate book would not be allowed to exceed $1 billion.

Trouble is, most community banks went into 2008 with a commercial real estate book worth more than twice their Tier 1 capital balance. Some that focused on the sector are up around four or five times their Tier 1. When the rule came down from the FDIC, community banks all but unplugged their phones. Even screamingly low-risk deals with loan-to-value (LTV) propositions at or below 50% are turned down constantly.

What's about to come due? Deals from the peak with 90% LTVs and interest-only terms. Where will that crowd go for refinancing? Nowhere. The only organization that stands to benefit is the US Postal Service, by delivering all the keys to the banks.

It's unclear how much of this is already priced into the market, or perhaps ignored by the market. JPMorgan CEO Jamie Dimon, for instance, said last month, "Commercial real estate is a train wreck, but it's already happened." He thinks investors specializing in distressed debt are all over the situation, and that their buying will keep refinancing moving along. He pointed out that a change in ownership won't necessarily mean a loss of jobs. A new buyer of a mall, for example, will still need people to run it if it's going to succeed.

Elizabeth Warren disagrees. From her panel's report:

There is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public. The Panel is concerned that until Treasury and bank supervisors take coordinated action to address forthrightly and transparently the state of the commercial real estate markets -- and the potential impact that a breakdown in those markets could have on local communities, small businesses, and individuals -- the financial crisis will not end.

Warren said, "When commercial properties fail, the result is a downward spiral of economic contraction; job losses; deteriorating store fronts, office buildings and apartments; and the failure of the banks serving those communities. These are the same small banks that provide loans to the small businesses that create jobs and boost productivity. If hundreds more community banks go under the effect could be to dump sand in the gears of our economic recovery."

According to Real Capital Analytics, there are more than 10,000 troubled commercial properties worth more than $205 billion in the US. The damage to banks could end up being more than that, with estimates hovering around $300 billion.

It's hard to know the impact that the commercial property crunch will have on the economy and the stock market by extension, but it's yet another risk to weigh. Here's Elizabeth Warren:

The Top 40 Dividend Stocks For 2010

noreply@blogger.com (Jason Kelly) — Fri, 19 Feb 2010 04:59:00 +0000

Dave Van Knapp of SensibleStocks.com publishes an annual overview of the dividend-paying stock scene. This year's edition came out last month. Dave was kind enough to send me a copy of The Top 40 Dividend Stocks For 2010, and I've read through all 145 pages of it.

To the point: this is the best dividend-stock book I know. If you're interested in building a portfolio of dividend-paying stocks, start with this book. Below, I'll share some excerpts from the book to show what you can expect to learn, and put to use right away.

Here's the table of contents:

Introduction
A Look Back at 2009 and Forward to 2010
What Are Dividends?
Why Invest in Dividend Stocks?
What Are the Characteristics of the Best Dividend Stocks?
Creating and Managing Your Dividend Stock Portfolio
The Top 40 Dividend Stocks for 2010
Easy-Rate Scoresheets for the Top 40
Disclaimer and Important Information

From the introduction:

There are two phases to the [sensible dividend investing] process. The first is to identify the "best" dividend-paying companies. Ones that:
Are financially solid
Have a good initial yield at the time of purchase
Consistently raise their dividends
Are available at decent valuations
Are relatively low in risk as to both their dividends and stock prices (recognizing that stock market risk can never be fully eliminated)
The second phase is portfolio management. The approach presented in this book emphasizes making timely decisions to buy, sell, hold, or replace stocks; maximizing dividend yields and dividend increases; sidestepping dividend cuts; and avoiding outright loss of capital wherever possible.

From Chapter 2:

Overall dividends paid by S&P 500 companies declined by 21% in 2009. Early in the year, monthly records were repeatedly set for annual percentage declines in total dividends paid and the sheer number of decreases announced. As you might expect, financial companies were hit particularly hard. They plunged from accounting for 30% of all dividends at their peak to only 9% by the end of 2009. . . .

[However,] 35 of [last year's] Top 40 stocks (88%) increased their dividends in 2009. The median increase was 5.5% and the average increase was 4%, compared to the 21% loss in dividends paid by the S&P 500's stocks.

For 2010, Dave agrees with Standard & Poor's, which expects an overall 5.6% increase in dividends in 2010.

In Chapter 4, he presents the case for dividend stocks:

Simply stated, the case for dividend stocks goes like this:
Dividends are always positive.
The best dividend-paying companies raise their dividends regularly, usually at a pace that exceeds inflation.
Dividends are not just for current income. Dividends can be re-invested to build wealth.
Re-invested dividends compound, accelerating the wealth-building process.
Dividend stocks offer (with some risk) the potential for price appreciation in addition to the dividends they pay.
That's it. Five bullet points. Many investors consider dividend investing to be boring. Personally, I find the prospect of building a "cash machine" of ever-increasing dividend-paying stocks to be rather exciting. . . .

Studies show that dividends have accounted for half or more of the total return of the stock market over very long terms. This may be surprising considering how little publicity dividends get. There is no widely followed dividend index that gets the kind of publicity given every day to the Dow, the S&P 500, and the NASDAQ -- all of which reflect price changes only, and therefore give only half the picture of "how stocks are doing."

Also in that chapter, Dave provides a simple explanation of how, unlike bonds, dividend payouts can rise over time so that your yield increases, one of the best benefits of a reliable dividend-paying stock:

If you own shares in a dividend-paying company that increases its dividends -- meaning that the per-share payout goes up, as shown in the illustration -- something very attractive takes place: Your yield on cost as a shareholder goes up.

Many dividend-paying companies have a long history of increasing their dividend regularly. Often this is done in line with their earnings growth each year. So a company with annual earnings growth of, say, 10% may increase its dividends 10% that year too. For comparison, in your job, how often do you get a 10% raise?

When a company increases its dividend, your yield on cost (that is, the yield on your original investment) goes up. This happens even though the current yield quoted in the newspaper stays the same.

How can this be? It's simple math.

Say you purchase stock in Dividend Inc. when its price is $100 per share and its current yield is 3%. So you buy $1000 worth (10 shares) and the stock pays you $30 that year.

No matter how the stock's price changes over the coming years, your personal yield (= yield on cost = yield on your original investment) will always be based on that $1000 that you invested in the stock.

Let's say that Dividend Inc.'s longstanding practice is to increase its dividend in line with earnings. If it increases its earnings 10% per year, that means in Year 2 the company pays out 10% more to you, or $33, so the yield on your original $1000 investment increases to 3.3%.

Note that it no longer matters what Dividend Inc.'s current yield is. If the stock's price rises exactly in line with the company's increased earnings (which would happen in a rational market), Dividend Inc.'s price next year is also 10% higher ($110 per share), so the newspaper will still list the current yield as 3% ($33/$110). But that only applies to new buyers, not you.

To improve how effectively his Easy-Rate scoring system identifies top dividend-paying stocks on the market, Dave tweaks it each year to place more emphasis on higher-yielding stocks without adding much additional risk. This year was no exception.

The system uses data from DRiPInvesting.org, Morningstar.com, StandardandPoors.com, and others to find the companies with the best business models; healthy finances; strong earnings, low debt, and other solid fundamentals; a decent analyst backdrop; yield higher than 3.0% with a three-year total percentage dividend increase of at least 16%; a history of raising the dividend; and a reasonable stock valuation. The sweet spot contains companies with a high enough yield to be worthwhile, and a growth rate of that yield that is sustainable.

That rather lengthy, thorough process winnowed out the following sector breakdown in this year's top 40 stocks, as compared with the two prior years:

The book presents this year's top 40 in four tables, each with a different sort parameter: alphabetically, by company quality score, by total score (company quality + valuation), and by current yield percentage. The top five dividend yields are:

9.8%
8.4%
8.2%
7.6%
7.3%

Each of the 40 stocks is presented on a completed Easy-Rate score sheet, showing exactly why it made the cut. The completed score sheets are also useful as examples of the kind of research you need to do on companies outside the compact list of 40, if you'd like to apply Dave's methods to your own dividend-paying candidates.

Finally, Dave discusses what to do with stocks purchased from 2009's list that did not make this year's list. In most cases, but not all, he suggests keeping them.

It's another winning edition of this annual survey. Dave sells it in PDF form for $39 here.

Kindle, Onion, Stiglitz

noreply@blogger.com (Jason Kelly) — Thu, 18 Feb 2010 01:23:00 +0000

Many people have written to ask when Amazon will have the Kindle version of the 2010 edition of my stock book available. I just received word that it will be up in four weeks. So, if you've been waiting to get the book on your Kindle, mark your calendar for the middle of March. It will be linked from the paper book's page at Amazon.

My friend Michael asked, "Why can truth be told only by comedians?" and sent along a link to U.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion at The Onion. From the article:

"Though raising interest rates is unlikely at the moment, the Fed will of course act appropriately if we...if we..." said [Federal Reserve Chairman Ben] Bernanke, who then paused for a moment [during his report to the Senate Finance Committee on Tuesday], looked down at his prepared statement, and shook his head in utter disbelief. "You know what? It doesn't matter. None of this -- this so-called 'money' -- really matters at all."

"It's just an illusion," a wide-eyed Bernanke added as he removed bills from his wallet and slowly spread them out before him. "Just look at it: Meaningless pieces of paper with numbers printed on them. Worthless."

According to witnesses, Finance Committee members sat in thunderstruck silence for several moments until Sen. Orrin Hatch (R-UT) finally shouted out, "Oh my God, he's right. It's all a mirage. All of it -- the money, our whole economy -- it's all a lie!"

Screams then filled the Senate Chamber as lawmakers and members of the press ran for the exits, leaving in their wake aisles littered with the remains of torn currency.

The scene may yet unfold if recent comments by Nobel Prize-winning economist Joseph Stiglitz hold true. He told Henry Blodget at Yahoo Finance yesterday, "In many ways, things are worse now than they were before."

He says that, without financial reform -- of which we've had none whatsoever -- we're headed for another financial disaster. In the clip below, he says we need to change the incentive structure that still rewards high risk and short-term decision making. One and a half years after the collapse of Lehman Brothers, banks are even bigger and there's less competition. The word on Wall Street remains: bet the system and fail, taxpayers will pay for the mess.

He said that this is not the first time banks have been bailed out: "I was chief economist at the World Bank and I saw it happening over and over again. There were these bailouts with names of countries, but the bailouts were not the bailouts of the countries, they were the bailouts of the banks who had made bad lending decisions and excessive risk-taking: Mexico, Brazil, Argentina, Russia, Thailand, Indonesia, Korea -- I could go on. The point is, this has become a pattern since we allowed deregulation, since we allowed the banks to do whatever they want, and unless we stop it -- if history is our guide -- we can expect another one, almost for sure."

Here's the clip:

Noble Corp v. Transocean

noreply@blogger.com (Jason Kelly) — Wed, 17 Feb 2010 10:16:00 +0000

I wrote yesterday about the inevitable long-term rise in the price of oil, current recessionary pressures notwithstanding. I mentioned that at the end of the current leg down, I would be looking into buying leading oil-industry investments, such as Transocean (RIG).

Several people wrote to say that Transocean is one good idea, but that Noble Corp. (NE) is better. By almost any long-term valuation analysis, each driller is cheap these days. Which is cheaper?

12-Month Trailing Price-to-Earnings (P/E)
NE: 7
RIG: 8

5-Year P/E-to-growth (PEG)
NE: 0.6
RIG: 0.5

Price-to-Sales (P/S)
NE: 3.0
RIG: 2.2

According to Morningstar's analysis, NE closed yesterday at a price 10% below its fair value of $46, while RIG closed yesterday at a price 29% below its fair value of $116.

While both are cheap, Transocean is a tad cheaper. Also, its specialty of deepwater drilling will be in high demand as conventional sources of oil dry up.

Disclosure: I do not yet own shares of either NE or RIG.

Don't Lose Sight Of Oil's Long-Term Price Trend

noreply@blogger.com (Jason Kelly) — Tue, 16 Feb 2010 08:37:00 +0000

We've been betting on lower oil prices for a while now, with neither gain nor loss to show for it. Our thesis was that the recession would last longer than consensus had it, therefore oil demand would remain low longer than most people thought. However, neither stocks nor oil have suffered much of a setback since the bounce began in March 2009.

Our long-term thesis on oil has always been that much higher prices are in store for one simple reason: more people are demanding more oil just as the world is running out of it. A report published last week by a task force of six companies in the United Kingdom, titled The Oil Crunch -- A Wake-Up Call for the UK Economy, lent its support to that thesis by warning that an oil shortage will destabilize economic, political, and social activity within five years. From the report:

There are now serious concerns that the free flow of relatively low cost oil, which has underpinned OECD countries economic growth since 1945, may not be sustainable for very much longer. Low-cost (under $25/b) oil supplies effectively ended in early 2005 and are unlikely to return. The actual global supply of oil is now expected to be limited to 91-92Mb/d (million barrels per day) of capacity that will be in place by end 2010/early 2011. Global capacity will then remain in the 91-92Mb/d range until 2015 from which time depletion will more than offset capacity growth from then onwards.

Between July 2008 and January 2009 virtually all the world's economies went from vigorous growth to economic recession. This has radically changed the short-term outlook for energy demand in general and oil demand in particular. The recession has changed the market dynamics and potentially moved the "oil crunch" point (when demand exceeds production capacity) out by around two years. This in turn provides one of the few positive aspects to the recession -- it gives companies and individuals more time to prepare and adapt to the coming oil supply crunch. The great risk is that as prices may remain fairly low for the next year or so, and complacency may set in thereby postponing decisions on making adaptive investments being postponed until oil prices start spiking again.

The next major supply constraint, along with spiking oil prices, will not occur until recession-hit demand grows to the point that it removes the current excess oil stocks and the large spare capacity held by OPEC. However, once these are removed, possibly as early as 2012/2013 and no later than 2014/2015, oil prices are likely to spike, imperiling economic growth and causing economic dislocation.

The complete report, a 60-page PDF, is here.

As we're still firmly in the recession's low-demand spell, and the dollar is in an uptrend, we'll keep our bet on lower prices in place for now. Toward the conclusion of this next leg down, however, we'll hunt for good oil-industry investments, such as Transocean, and look to go leverage long the commodity itself.

TARP Has Not Worked

noreply@blogger.com (Jason Kelly) — Fri, 12 Feb 2010 09:16:00 +0000

From the executive summary of the January 2010 quarterly report to Congress from the Special Inspector General, Troubled Asset Relief Program (SIGTARP), come these tidbits:

While TARP did stabilize aspects of the financial system, many of its stated goals "have simply not been met. Despite the fact that the explicit goal of the Capital Purchase Program ('CPP') was to increase financing to US businesses and consumers, lending continues to decrease, month after month, and the TARP program designed specifically to address small-business lending -- announced in March 2009 -- has still not been implemented by Treasury. Notwithstanding the fact that preserving homeownership and promoting jobs were explicit purposes of the Emergency Economic Stabilization Act of 2008 ('EESA'), the statute that created TARP, nearly 16 months later, home foreclosures remain at record levels, the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages, and unemployment is the highest it has been in a generation."

From page 6, the following excerpt:

-----

The substantial costs of TARP -- in money, moral hazard effects on the market, and Government credibility -- will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years' time. It is hard to see how any of the fundamental problems in the system have been addressed to date.

To the extent that huge, interconnected, "too big to fail" institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.
To the extent that institutions were previously incentivized to take reckless risks through a "heads, I win; tails, the Government will bail me out" mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.
To the extent that large institutions' risky behavior resulted from the desire to justify ever-greater bonuses -- and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions -- the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.
To the extent that the crisis was fueled by a "bubble" in the housing market, the Federal Government's concerted efforts to support home prices -- as discussed more fully in Section 3 of this report -- risk re-inflating that bubble in light of the Government's effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.

-----

Great! Not only is the car faster, it's also mechanically less reliable due to the government's increasingly dangerous financial situation. America's leaders put the nation's shaky finances on the line to bail out a bunch of bad banks that did not become good as a result, and are creating a scenario to have to do it again.

See why sovereign debt risk is such a high-profile issue these days? The bail-out brigade marches fewer people carrying smaller buckets, but a bigger reservoir of water is already climbing the dam again.

The Impending US Bankruptcy Is Not Only Obama's Fault

noreply@blogger.com (Jason Kelly) — Tue, 09 Feb 2010 10:00:00 +0000

Now that the latest US budget has been thoroughly digested by the media, I'm encouraged to see a greater percentage than usual catching on to the nation's stroll down the path to bankruptcy. Maybe we can chalk that up to more people paying attention to finances after watching the ripoff of taxpayers orchestrated by banksters and their wholly-owned politicians.

What's discouraging, however, is that too many people think this is a new path for the US. It isn't. The nation has been walking down this path for decades. Too many people like showing pictures of President Obama on one-trillion-dollar bills and laying blame for the predicament at his feet. It doesn't belong only there.

What people need to know is that it doesn't matter who's president. To grasp that, one need only notice that US policies under both Bush and Obama have been roughly the same. Had McCain won in 2008, I'd be writing this exact same article, except I'd be using the name "McCain" instead of the name "Obama." Democrats would be screaming that, see, they told us McCain was just Bush 2.0. Instead, Republicans are saying that we need to stop the big government being created by Obama and the Democrats. "Stop the tax-and-spend mindset," they say, ignoring that much of our current predicament happened on their watch over the White House.

It doesn't matter who's president because government is owned by special interests, most of which are funded by corporations. That's why we get this breakdown:

Bush: Iraq War for no reason
Obama: Afghanistan war for no reason
Winner: Defense contractors

Bush: No national health care
Obama: No national health care
Winner: Health insurance companies, et al.

Bush: No smart energy policies
Obama: No smart energy policies
Winner: Oil companies

Bush: Mind-blowing deficits
Obama: Mind-blowing deficits
Destination: Bankruptcy

Bush: Bad speeches
Obama: Good speeches
Result: Same in each case

When a political system is run in a way that leaves politicians thinking more about funding than leading, those with the funds will lead. This will never change until we have either a second constitutional convention or an amendment that alters the landscape of campaign finance. The recent Supreme Court decision in Citizens United v. Federal Election Commission, which granted corporations the same rights to free speech that were previously reserved only for persons, shows that corporate control is growing rather than shrinking.

It has been growing for a long time. It was the Clinton administration, after all, that allowed Robert Rubin and Larry Summers to get the 1933 Glass-Steagall Act repealed in 1999, which cleared the way for the housing bubble's now-infamous toxic derivative assets. When those blew up, both the Bush and Obama administrations snapped to attention to spend hundreds of billions of taxpayer dollars to bail out bad banks and car companies. The Obama administration even hired Clinton's bad boy Larry Summers as head of the White House economic team, bathing in bright light how the more things change the more they stay the same. The guy who, under Clinton, lit the fuse for the economy to eventually blow up is now helping to put it back together again under Obama. Why vote?

The New York Times wrote in an editorial last Saturday:

When President Bush took office in 2001, the federal budget had been in the black for three years, and continued surpluses were projected for a decade to come.

By the time Mr. Bush left office in early 2009, the government had run big deficits for seven straight years, and the economy was on the brink of another Great Depression. On Jan. 7, 2009 -- two weeks before Mr. Obama was inaugurated -- the Congressional Budget Office issued new budget estimates showing a fiscal year 2009 deficit of well over $1 trillion.

About half of today's huge deficits can be chalked up to Bush-era profligacy: mainly cutting taxes deeply while borrowing to wage two wars and to enact the Medicare prescription drug benefit -- all of which Republicans supported, virtually in lockstep.

The other half of recent deficits is due to the recession and the financial crisis.

Those last two, the recession and the financial crisis, were brought on by the slashing of regulations during the Clinton administration, so we can't get too overjoyed about the budget having been in the black for three years prior to Bush. Every bought-off politician is complicit in the impending bankruptcy.

On that, the Times continued:

Under current policies, federal debt in the United States -- the sum total of annual deficits -- would grow from 53 percent of the size of the economy in 2009 to more than 300 percent by 2050, driven mainly by rapidly rising health care costs and, in part, by the aging of the population. Combined, those two factors exert enormous pressure on the government's biggest spending programs, Medicare and Medicaid, and, to a lesser extent, Social Security. . . .

Unless health care costs are controlled, there is no way to solve the country's long-term deficit and debt
problems. . . .

There is no way to get deficits under control until our political leaders are willing to acknowledge difficult truths and make even more difficult political choices. We have heard and seen too little of that from the Democrats lately, and none at all from the Republicans. That is truly a recipe for disaster.

Yes, it is, and we will run head-on into that disaster because our political leaders aren't leaders at all. They're the handmaidens of special interest groups that don't want health care costs to be controlled, or pointless wars to end, or dependency on oil to end, and so on.

To be clear, I am not an Obama supporter. However, nor was I a McCain supporter. Under either man -- indeed, under any person in the current political apparatus -- the results would be roughly the same because those directing the funding will control the outcome. What they want is not usually what citizens want. Therefore, US government under any figurehead will generate results that most citizens don't want. In this case, financial disaster.

A new party won't help, either, I'm afraid. Take the growing Tea Party movement. The name is right in the sense that the original Boston Tea Party used active resistance against existing government to make a point. They threw the tea into Boston Harbor. We need similar active resistance against government to change anything. Instead, the current Tea Party offers as its new version of leadership...Sarah Palin. Huh?

About the nascent Tea Party, Canada's National Post wrote earlier today:

The Tea Partiers face the same challenge faced by all populist protest movements: Crafting policies is far harder than simply venting against the status quo. Once they have driven the subject of their discontent from office, or forced him to retreat (say, from health-care reform), they typically descend into petty in-fighting or are co-opted by an established political party.

As their Tennessee convention showed, once one gets passed the Tea Partiers' common interest in spoiling "Obamacare" and stopping the expansion of the US federal government, the movement is not exactly brimming with sophisticated policy ideas. Its rank-and-file is a colorful but quarrelsome hodgepodge of fundamentalist Christians, antitax activists, anti-immigration cranks, protectionists, mixed in with more mainstream conservative Republicans.

The Obama blame game will continue because he's the current figurehead, but keep your eye on the bigger problem at work. Smart people know that it doesn't matter who wins elections anymore, and that what's needed is a revamping of Washington politics.

That will not happen within the current system because the people in charge don't want the system to change. Therefore, we need a constitutional convention. We won't get one, so prepare for disaster.

Double-Dip Recipe

noreply@blogger.com (Jason Kelly) — Mon, 08 Feb 2010 10:35:00 +0000

As I see it, the recipe for a double-dip recession is a simple one.

The supposed recovery, which we've doubted every step of the way, has happened on government stimulus and bail-outs distributed by bought-off politicians to their private sector cronies. Those politicians refuse to raise taxes for fear of losing their jobs. That leaves the game vulnerable to a bond market upheaval that sends interest rates higher and stops the hands of government money-throwers.

Said money-throwers would have no choice but to cut spending and raise taxes, precisely at the worst possible time to do so. The move could bring the second half of the recession. That's why any ripple in bond markets, but especially in sovereign bond markets, gets stock investors bent out of shape.

What's more, the same forces that contributed to the collapse of 2008 are working hard to cause and benefit from the next collapse. How? By buying credit-default swaps (CDS), which are insurance against a bond going bust, when they don't even own the bond in the first place. That's called "naked" buying. Naked buyers of CDS want to own only the insurance policy against a bond going bust, and collect when it does. Well, what happens when people want to buy the same thing? Its price rises.

Last week, the price of CDS on bonds out of Greece et al. rose like mad. The price of the cost to insure against default is used as a measure of the safety of the underlying bond and, by extension, the bond issuer. If the cost of insuring against Greece defaulting goes through the roof, we assume that Greece is in trouble. Few inspect the cause for the insurance price spike. That's how enough institutions buying the CDS can drive up the prices, cause fear around the bond issuer, lead to downgrades of its debt, and start the cascade that fulfills the prophecy of having bought the insurance against default.

It happened in 2008, and it's happening again. Watch carefully.

Bankers Winning Again

noreply@blogger.com (Jason Kelly) — Sat, 06 Feb 2010 21:09:00 +0000

Two weeks ago, I reported on President Obama's announcing his sudden desire to reform banks after Republican Scott Brown won the Massachusetts Senate seat formerly occupied by Ted Kennedy. I wrote that "after a year of following the traditional Washington way of bending over backwards to hand taxpayer money to financial firms, he was ready to put an end to risky bank activities like proprietary trading."

I went on:

While the market reacted in a way that predicted crashing bank profits ahead, history suggests that banks will win this scuffle. With the help of Robert Rubin and Larry Summers, they succeeded in getting the 1933 Glass-Steagall Act repealed in 1999, a measure that cleared the way for the housing bubble's now-infamous toxic derivative assets. If banks could whittle away a protection that had held for almost seven decades, why not block a too-little-too-late regulatory gesture that involves terms most citizens don't even understand?

Keep an eye on this issue, but do not be surprised when big bank money decides the outcome. . . . Nobody is more vulnerable to big money buy-offs than members of Congress, so all factors suggest banks will not be reined in.

It's already going that way. On Tuesday, Senate Banking Committee Chairman Christopher Dodd criticized the Obama administration for complicating the effort to overhaul financial-market rules, and said the late addition of a new idea for limiting risky behavior had threatened the process.

He said the announcement of the so-called Volcker Rule "seemed to many to be transparently political," as in Obama was trying to appeal to voters upset with Wall Street right after his party lost the Massachusetts Senate seat.

Senator Richard Shelby said Obama had "air-dropped" his new idea into the deliberations on fixing the financial system. Other Senators made similarly resistive comments.

Former Federal Reserve Chairman Paul Volcker, after whom Obama's new proposal is named, told the committee in testimony last week, "I tell you sure as I am sitting here, that if banking institutions are protected by the taxpayer and they are given free rein to speculate, I may not live long enough to see the crisis, but my soul is going to come back and haunt you."

Caution Paying Off

noreply@blogger.com (Jason Kelly) — Fri, 05 Feb 2010 01:44:00 +0000

We've been cautious for a while now, selling into strength and adjusting hedge sizes. It's been far from perfect, believe me, because some of what we sold we should have held longer into the rally, and we bought our hedges too early. We netted out positive, but would have done better if not for those crimps on profit.

Our caution may finally be paying off, though. Brand new subscriber Kent in Connecticut sent the following note earlier today:

I am a new member, joining your web site last weekend, and I am halfway through reading your little book that I ordered from Amazon.

Just wanted to thank you for your recommendation to buy a hedge with BGZ and to change the entry price from $17 to $18. Today, [with the market losing 3.1%] that hedge is covering my butt, and reducing some of the stress a day like this could cause.

That one call paid for my yearly subscription to your web site ten times. I hope to enjoy similar success as I adopt a few other of your ideas in the weeks and months to come.

And I hope to provide Kent with similarly useful calls down the line. By the way, the part of last Sunday's note that led Ken to buy BGZ at $18 was this:

With the market's continued drop last week, our limit order to double down on our BGZ hedge at $17 in Tier 3 did not fill. It closed the week at $18.88, a full 10% away from our target price. It would take a move on the S&P 500 back to 1110 or so to see that fill, and I doubt it'll go that much higher on a relief bounce. It might go to 1095, though, so let's adjust our order from $17 to $18:

Double down on Direxion Russell 1000 -3x (BGZ) at $18

A modest relief bounce would see that fill, and put us in position to make a few more moves before a drive lower takes hold in a new downward-sloping channel.

The S&P 500 peaked at 1105 on Tuesday, and BGZ bottomed that same day at $17.22. It was good to adjust the order upward. BGZ closed today at $19.23.

Please join us!

On Success Express

noreply@blogger.com (Jason Kelly) — Thu, 04 Feb 2010 00:12:00 +0000

I spoke with hosts Nancy and Lisa on "Success Express" from 7:20 to 7:40 p.m. ET. We discussed why most people feel intimidated by the stock market, how to make 3% quarterly growth consistently regardless of the market environment, and why the US market is still in great danger because the government followed Japan's flawed playbook for dealing with bad banks -- even though every US Treasury secretary flew to Tokyo for the past 20 years to tell the Japanese government that it shouldn't have made private banking debt disasters public.

When the US encountered its own private banking debt disasters, what did it do? Made them public. Way to go! Now, maybe America can enjoy a two-decade up-again-down-again recession just like Japan has experienced following its stock market bubble burst. The Japanese bubble burst in 1989, and the recession it caused still hasn't ended.

Nancy and Lisa were gracious hosts, and I hope to join them again in the future.

Why We're Going Bankrupt

noreply@blogger.com (Jason Kelly) — Wed, 03 Feb 2010 10:25:00 +0000

It doesn't get much simpler than this:

Fiscal 2011 Budget: $3,800,000,000,000
Fiscal 2011 Deficit: $1,300,000,000,000
Savings achieved by "tough choices": $20,000,000,000
Share of budget those savings represent: 0.5%

From a January 30 post titled Tough Choices by White House Communications Director Daniel Pfeiffer:

In the 2011 Budget we will release on Monday we terminated or reduced programs that weren't working well or duplicated efforts, some in areas that are important to the President and to the Administration.

Last year, President Obama sought to end or reduce 121 programs for a one-year savings of approximately $17 billion of which $11.5 billion was from discretionary savings. Congress approved cuts that produced a net discretionary savings of $6.8 billion, nearly 60 percent of the discretionary cuts proposed. . . . This year, we are proposing more than 120 terminations, reductions, and savings for approximately $20 billion in savings this year.

For perspective, cutting a $3.8 trillion budget by 0.5% is the equivalent of a household that spends $2,500 per month making "tough choices" that add up to $13 saved.

Being Careful

noreply@blogger.com (Jason Kelly) — Wed, 03 Feb 2010 09:44:00 +0000

We've been selling into strength, and also increased a hedge at the beginning of this week. I think the market is hitting a rough patch here, and that it would be wise to guard profits you've made on the way up.

If You Hate Corporations, Then Don't Buy Bonds

noreply@blogger.com (Jason Kelly) — Mon, 01 Feb 2010 09:52:00 +0000

Many of my readers have written me over the past two years to express their anger toward the causes of the recession. They hate the government that succumbed to banking calls to relax regulations, and the government that pushed "affordable housing" which turned into "housing for even those who can't afford it." They hate the banks who jumped on the chance to lend to great throngs of unqualified borrowers, securitize the loans, and crater the economy when the unqualified borrowers failed to make mortgage payments.

More than anything, though, you know what they hate? The constant collusion between government, banks, and big business that forever jacks up the ramps of commerce so that America's wealth flows steadily into their coffers. The recent Supreme Court decision allowing corporations wildly free rights to fund the political candidates of their choice is just the latest evidence that it's big against small in America.

If you don't watch your own financial back, you'll end up working a job you hate to take home a little bit of money after you're automatically taxed, buying too many depreciating trifles you don't need with credit cards you don't understand and whose balances you never pay down, living in a home too big for you to afford, driving a car that costs five times more than it should, and wondering why you can't get ahead. They don't want you to get ahead. They want you trapped in that very cycle because it keeps you docile and taxed...for life. Financial freedom is good for your interest, but not for the interest of government, banks, and big business. Financial servitude serves them better, so everything is tilted to get most citizens on the hamster wheel.

To fight back, many have decided to remove themselves from the stock market as if doing so will "show them," meaning the powers that be. A second reason they want out is that two bubble bursts in one decade were enough to send them in search of investment returns beyond Wall Street. Some have concluded that moving their money from stocks to bonds is a great way to shrink the influence of big business while still getting decent investment performance.

Here's the problem with that: bonds fund the big businesses people are trying to shun by turning their noses up at stocks. Tom Petruno touched on this in his Saturday column at the Los Angeles Times:

The Great Recession has killed untold numbers of small firms, many of which were unable to line up financing to keep their operations afloat.

But money is no problem at all for corporate America. And the biggest businesses don't need banks, at least not for loans. As the credit crisis has eased, they've been able to turn to the welcoming arms of the bond market.

Who helped make the corporate rich even richer? You did -- if you're one of many Americans who pumped your savings into bond mutual funds. An unprecedented $375 billion poured into bond funds in 2009, providing a significant chunk of the capital that then flowed into newly issued bonds from companies such as General Electric Co., Pfizer Inc. and Dow Chemical Co.

If you really want to shun every part of the government, bank, and big business cabal, you'll need to get your money out of bonds, too. Swearing off both stocks and bonds for your portfolio will leave a very unorthodox list of investments, but one that might not do as badly as some think.

One dawning notion among those snubbed at banks when seeking financing is that direct investment in small businesses is a way to move forward. It provides capital-starved small businesses with funding, provides investors with assets that can't be wiped out by the stroke of a bureaucrat's pen, skirts big businesses and banks entirely.

The simplest way to move capital from a former stock/bond portfolio to the small business sector is by using your own capital to start your own business, be it a shop, a hair salon, a professional firm, or something else. The balance of a typical 401(k) or IRA, for instance, is often large enough to start a small business, even after paying the early withdrawal penalties. Some people at a later stage of their career would probably have enough to start a small business and still keep most of the account in place. They'd end up with a new asset, cash flow from a business, on top of what's left in the old smoke-and-mirrors account.

I realize that starting a business is no small decision. Most are hard enough to operate that a person can't stay at their job that funded the retirement account and start a new business at the same time. Maybe, though, they have a spouse or child or a friend whom they could bankroll for a portion of the business profits. Barring that, they could go to Kickstarter or other sites like it that match people who have money with people who have ideas.

If you really hate the collusion at the top, you'll need to disown bonds as well as stocks. That will leave you seeking returns on investment elsewhere, but you may be surprised at how much more fulfilling -- and profitable -- some of those alternative places can be.

He Cometh

noreply@blogger.com (Jason Kelly) — Thu, 28 Jan 2010 02:33:00 +0000

The Corporate Takeover of America

noreply@blogger.com (Jason Kelly) — Mon, 25 Jan 2010 11:30:00 +0000

I finished a book last month, to be published by Wiley in June, that examines how financial manipulators at the top of every industry buy influence in government to create a legal and cultural backdrop that directs the assets of financially inept people in the general population into government, bank, and big business coffers.

That situation has gripped our nation for more than a century, even though during that time it was illegal for corporations to contribute directly to federal candidates. From my manuscript: "Since the Tillman Act became law in 1907, corporations have been prohibited from contributing directly to federal candidates. They still buy candidates, of course, but for more than 100 years they've had to do so through political action committees and individual members of their companies."

That was how, for example, President Obama accepted $889,000 from oil companies during his campaign, then crowed in ads, "I don't take money from oil companies or Washington lobbyists, and I won't let them block change anymore." Technically, he was right, because he didn't accept money directly from them, but rather from their various front groups. His biggest contributor was the financial services industry, which made those in the know roll their eyes at the "change we can believe in" line of bull as Washington's freshest face kept in charge the same crowd of cronies that blew up the economy to begin with: Bernanke, Geithner, Summers.

As bad as the steady corporate takeover of government has been, it got a whole lot worse last Thursday when the Supreme Court overruled two First Amendment precedents and prohibited government from banning political spending by corporations in elections. Under the auspices of corporations having the same right of free speech as individuals, the court dispelled even the veneer of propriety that existed a week ago.

While corporations are still banned from direct contributions to candidates, they can make any ads, videos, or other support material for the candidate of their choice as a form of free speech. Because such exposure tools are what every candidate spends his or her campaign budget on anyway, the result will be the same as if direct financial contributions were allowed.

Justice John Paul Stevens wrote in his dissent that the "court's ruling threatens to undermine the integrity of elected institutions around the nation" and "will, I fear, do damage to this institution." Even special-interest-backed-Obama called it "a major victory for big oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans." Too bad they've been able to continue doing so as usual under his administration.

The New York Times wrote in an editorial on Thursday:

The majority is deeply wrong on the law. Most wrongheaded of all is its insistence that corporations are just like people and entitled to the same First Amendment rights. It is an odd claim since companies are creations of the state that exist to make money. They are given special privileges, including different tax rates, to do just that. It was a fundamental misreading of the Constitution to say that these artificial legal constructs have the same right to spend money on politics as ordinary Americans have to speak out in support of a candidate.

The majority also makes the nonsensical claim that, unlike campaign contributions, which are still prohibited, independent expenditures by corporations "do not give rise to corruption or the appearance of corruption." If Wall Street bankers told members of Congress that they would spend millions of dollars to defeat anyone who opposed their bailout, and then did so, it would certainly look corrupt.

My book predicted that the situation would only worsen with time, but I had no idea how little time it would take. We can forget any gentle solution to America's national financial woes. What tiny shred of possibility there was of reducing special-interest claims on taxpayer money disappeared on Thursday. The nation will be bled dry by corporations focused on their own financial health, and oblivious to the nation's.