The Frustration of Taxes

Sun, 08 Feb 2009 17:42:00 US/Mountain

Over the past couple weeks in my school we've had the nice opportunity to have a small class on personal accounting, budgets, banking, taxes, etc. Everyone made a rough budget estimate for necessities they would have to provide for themselves once they were out on their own in the real world. Basics like rent, food, utilities, clothes, and so forth were all covered.

Then our guest teacher (who is a local accountant) got into taxes. And goodness gracious, that really made an impact on all the students. Now, I am lucky enough to go to a very small private school where the students are well informed on current events and have a very realistic and balanced approach to life. I think for all of us in the class, though, taxes for that one instant didn't make any sense at all. The IRS never made sense to me, but this really hit it home. Now, for the people reading this, I'm sure it isn't anything new. I've had more experience and exposure to taxes than most of my friends, but still this class managed to smack us all in the face with reality a little bit. The amount set aside for taxes in our de facto budget outdid any of the other categories.

I've said it before and I'll say it again, basic common sense is something that is lacking right now, especially when it comes to government, but even with individuals and businesses as well. This will be the first year that I have to file taxes, and even though what I pay (roughly 12%) is a relatively small amount, it doesn't keep me from already getting frustrated in this system we're forced to tolerate and comply with. Most of my taxes go to Social Security, a flawed government program that will most likely be bankrupt within 15-20 years. (That and probably many other areas of our government.) Just the rules that people come up with for this sort of stuff is pretty funny. Everyone in the class started cracking up when our teacher started to explain 401(k)'s, because none of us could see how such absurd rules and regulations could be justified. And our teacher was explaining it in all seriousness; the whole philosophy of taxes and the rules that come with them are what really got to the students. Taxes make saving and investing so much more difficult than they should be; any exchange of money is basically penalized. Basic common sense says this is not a system the Founding Fathers would have appreciated.

I think young people, both teens and young adults, are picking up on the ideas that it would be nice to just live their own lives without so much intrusion from the government. I've been constantly discussing politics and policies from the perspective of Austrian economics for more than a year, and the ideas simply make sense to them. Education is the number one way to spread the ideas of liberty, personal responsibility, and a non-intrusive government. I think all of us in the class started to realize that the IRS gives the notion that the government owns your labor and your property. This is not a good way to motivate young people to go out and get a job. Heck, it's already hard enough to get a consistent job with the strict labor laws in the U.S. Now that we get a chance to go out and get a real job, we have a relatively massive tax burden to deal with.

When you analyze the IRS and Federal Reserve, both of which were created in 1913, you start to realize that this country is a lot less free than politicians would have you believe. The way I see it, the U.S. is becoming hostage to a huge national debt, over regulation, and central power. I honestly don't think the young people of this country will want to sit back as they start to feel the accelerated impacts from these socialist, centrist policies. There is no way that our current policies are paving the way for a more prosperous future. Debt, inflation, regulation have all been tried countless times throughout history in many different shapes and forms, and they never work. Logic says they can't and won't work, and as much as politicians in Washington might hope they can, the market cannot be suppressed forever. Luckily, more and more people are picking up on this across the country and starting to ask questions. The movement for liberty, responsibility, and a simple return to the Constitution can only go up from here.

Stocks and Monetary Policy

Sat, 07 Feb 2009 13:41:00 US/Mountain

I've been investing in individual stocks since 2005. The idea of owning a business fascinated me when I was then just 12 years old. Over the next several years probably 95% of all the money I earned doing odd-jobs around my community went into individual stocks that I researched and analyzed on my own time. Unfortunately for me, I started investing in a very inflationary, bubble environment. At the time it didn't get much attention and I thought I would easily ride out any downturn. I subscribed to the belief that bubbles and recessions are the "side effects", or something of that sort, to a capitalist free market. I even consistently wrote that there's always something to complain about and used that as an excuse to avoid thinking about the possibility of a serious downturn. Certainly, I'm not saying optimism is a bad or dumb thing. I consider myself a skeptical optimist. Today I believe a lot of "optimism" is really just ignorance or avoiding looking at all of the facts because they are a nuisance to one's beliefs.

My stock portfolio has never really made money. I can remember only a couple times in the past four years that I was worth more money than what I put in. However, this isn't something that frustrates me, because now is the time when I can afford to make mistakes and (hopefully) learn from them. I made mistakes and really I think I got careless, and I take responsibility for a losing effort so far with my investments. I've always believed and written about long-term investing with individual stocks, and there is good evidence from past investing legends such as Warren Buffett and Peter Lynch to show that this is a very worthwhile method. I still strongly believe that the philosophy of finding businesses you know, love, and understand is the way to go if you want to invest in businesses through stocks.

In early 2007 I watched an online video of the 2008 Republican presidential debates. Ron Paul was among the candidates, and at first I wrote him off as a loon who was simply being overly pessimistic about foreign policy and the U.S. economy and didn't really know what he was talking about. After months of job growth in the economy and jumps in U.S. production and exports, it sounded crazy when he talked about a major recession being not too far off. However, he just wouldn't go away! He stuck in the presidential race, and in October of 2007 I decided to take a closer look at what he was saying. I watched his speeches, read his articles, and researched his voting record. He was not simply a pessimistic looking to get attention. He analyzed everything, and that's something that drew me in to research him further. And most impressive of all, his objections to both foreign and domestic policy weren't based on only his personal opinions, but rather on the Rule of Law and what the Constitution says on every issue. It wasn't long before I was a full fledged Ron Paul supporter, but I still couldn't help but wonder if his predictions and constant warnings of a deep recession were a bit far fetched and overdone.

"We are at the verge of bankruptcy, we are moving into a New Era, believe it or not, with the dollar and our economy and the world economy. This is a New Era." -- Ron Paul; January 24, 2008

The economy seemed strong. Unemployment was dropping, exports were rising thanks to a lower dollar, and companies were reporting strong earnings. But over time I started to realize that his reasoning actually made a lot of sense to me and, evidently, a lot of other people around the U.S. and the world.

The Federal Reserve was something that got me scratching my head once I looked into it more myself. How could we call the U.S. a "free market" economy when we have a couple dozen people at the Federal Reserve controlling money and credit with no oversight from Congress? Under the Constitution, money is Congress's reponsibility and only gold and silver can be legal tender. Yet somehow in 1913, Congress passed its monetary duties onto a central bank. Today, the Federal Reserve prints and hands out trillions of dollars, even though none of its members are elected nor is the Fed regulated and overseen by Congress. A central bank has no place in a free market and there is no way to call a market free when a massive central bank has a monopoly over money and credit enforced by the government through Legal Tender laws.

On top of the central bank, we have a fiat monetary system. The only thing that makes our dollars not worthless paper is because the government says it is legal tender. The credibility of the government is really the only thing that backs the dollars we use every day. I find it very questionable and discouraging that people, especially economists, don't know the full story of the Federal Reserve and monetary history in general. No country has had a fiat monetary policy that lasted. Every time throughout history, paper money has failed miserably and crashed and burned. Even the Founding Fathers got to experience it firsthand with the failure of the Continental Dollar, which was a paper money started by the Colonies in an effort to pay off debts from the Revolutionary War. The painful and quick collapse of the system prompted the Continental Congress to put in the Constitution that only gold and silver could be legal tender. They knew that paper money failed and they surely did not want to experience that pain again.

One of the things that many people have lacked when it comes to economics is basic common sense. How can a fiat monetary system survive? Federal Reserve Notes are nothing but worthless paper, and sooner or later we, and all other countries with fiat monetary systems, will have to come to the realization that a paper currency is not a sound foundation for a sustainable economy to be built upon. We're lead to believe that too much growth is bad for the economy and that recessions are just a natural trend of the free market to correct too much production and growth. This is such an absolutely bizarre, absurd belief in economics. It isn't high growth that hurts the economy and creates bubbles; rather it's cheap credit and inflating the money supply that are to blame. When people can borrow money for next to nothing like they have been able to, especially over the past twenty years or so, they will take risks that they ordinarily wouldn't have. The Fed controls money and credit, and through the process of lowering interest rates to unsustainable, artificial levels, cheap money abounds through the economy as the printing presses work at full speed churning out new money to hand out. This inflates the money supply dramatically, encourages businesses to take risks that inevitably lead to malinvestment and failure, and creates the inflationary, bubble environment. This is what we saw in the 1990's with the tech boom, and we're seeing the major side effects of such policies today. One must act why the people, the free market, can't handle adjusting interest rates on their own and why the Federal Reserve makes such crucial decisions regarding monetary policy without Congress raising a finger.

As I've studied the Federal Reserve in great detail, I've started to come to the conclusion that long-term investing isn't nearly as simple as it used to be or could be. When you have artificially created bubbles come about through irrational monetary policy controlled by a few central bankers, you have to sit back and wonder. Had you invested in the S&P 500 10 years ago you would not be making money today, especially when you factor in inflation. 10 years is a long investment horizon, but when you have an unstable and unbacked currency and really an unsound economic system, long-term investing isn't nearly as simple as it should be. I think the long-term investment philosophy is fantastic, but I don't believe people realize just how damaging the Federal Reserve and government are to what's left of the market. Every time the economy goes through the booms and busts created by the Federal Reserve, the same solutions are suggested: print more money (lower interest rates), borrow more money, and spend more money. Over the past year, these interventionist, central planning policies have expanded at a scary rate. We are told by both sides of Congress that if the government doesn't intervene we'll have another Great Depression. We are told that capitalism failed. Considering that we've essentially had worthless paper money shoved down our throats, considering that we have a ridiculous tax system that completely contradicts what a free society is all about, and considering that we've tried government intervention for nearly a century in economic affairs to no avail, I find it sickening when capitalism is blamed for this mess and government is said to be the only solution.

I haven't given up on stocks. I don't invest nearly as much in stocks now as I do in hard silver, but I think it will be an interesting thing to watch how individual businesses cope with such a massive intervention by the government into the market. I have no doubt that there are quality businesses out there that will ride this out and make investors money even through these tough times. There were quite a few stocks that tripled and quadrupled during the Great Depression (such as Coca-Cola) and I believe there will be some of those opportunities over the next few years. But, I am taking a much more cautious approach and highly encourage others to do the same. However much the government and Federal Reserve try to prop up this faulty system, a day of reckoning must come. The more money that's pumped in to this mess by the government in an effort to stall a seroius recession, the more deadly the recession will be later on. Delaying the inevitable does not help a thing, and when looking for investments in any area I think people will have to be much more careful and consider many more factors than they used to. I may be wrong; I hope I'm wrong. Ron Paul said the same thing in 2003 when he warned about the mess we are in today.

Above all, it is time for people to analyze everything. Business, economics, public policy. The more involved and informed people are about these things, the more we can learn from our mistakes and really get a better idea of why and how things are happening in the economic and political world. I'm hoping to create a new web site built on a community of people determined to stay involved and interactive in an effort to become better informed about all these things. Above all, I want to create an environment that encourages people to have smart skepticism, analysis, and discussion on current events and policies on all levels. Please comment here or e-mail me at pencils2@gmail.com if you would like to help get this started or if you have ideas, criticisms, or suggestions for this effort.

How Is Barack Obama Different?

Wed, 04 Feb 2009 08:00:00 US/Mountain

What I find interesting about Barack Obama’s economic policies is that they are hardly different from what George Bush, Congress, and the Federal Reserve have done over the past year. And that’s just when talking about the economy. More spending, more debt, and power and trust placed in government are the Obama Administration’s proposed cures from our current economic downturn. Capitalism is blamed for today’s problems; when in reality we have never had a true capitalist, free market, sound money economy. Little by little, the government is working to take individual responsibility out of the equation.

What’s slightly funny about this is how we forget what we’ve done over the past year to “help” the economy. We tried the $150 billion stimulus plan, $300 billion homeowner bailout, the corporate bailouts of AIG, Fannie Mae, Freddie Mac, and several other businesses, and we can’t forget the whopper that is the $700 billion bailout from this past fall. We’ve run up the national debt and deficit by trillions of dollars already. For the past century, we’ve tried socialism and government intervention in many forms to no avail. Yet nothing new is being proposed by the new Administration. A day of reckoning is very close, and we will learn the very harsh but true lesson of history that no sustainable economy or country can last without individual liberty.

I find it very frightening that someone as young and inexperienced as Obama is willing to spend what will probably turn into trillions, without the blink of an eye. Obama’s economic experience is miniscule at best (“Community Organizer”? Are you kidding me?), and his solutions will only strongly advance wealth redistribution, money printing from the Federal Reserve, and a massive expansion of debt and deficits. He says that trillion dollar deficits are something that we should expect over the next several years.

This is not “hope”. This is not “change”. This is simply socialism, fascism, controlled by lobbyists and special interests. The rapid escalation of central power is not even discussed by our highest leaders. I guess we can take comfort in the fact that at least this Administration is much more open about these increasing powers than past President’s have been. We’re expected to believe from someone with no background or experience in economics to believe that more spending, more debt, and more printing of money will solve our economics troubles. The ideas of lowering spending, lowering taxes, and lessening regulations as a whole aren’t getting too much attention or support from Obama.

The only sustainable solution to these problems is to take the federal government drastically out of the picture. No more special and harsh treatment for certain industries. How about looking to the Constitution of the United States and the advice of the Founding Fathers to have a small, limited government that does not intervene in the affairs of the people? How about getting rid of the notion that the federal government “manages” the economy?

Sound money is especially important for long-term stability. No nation has ever survived a paper, or fiat, monetary system; no less controlled by a central bank. The Federal Reserve is a secretive, elitist group of no more than a couple dozen people who control money and credit, both of which are vital in an economy. The Federal Reserve has a monopoly over money and credit, which hasn’t seemed to help our currency much considering the dollar has lost 95% of its value since the Fed was created in 1913. A fiat monetary system encourages unnecessary risk, discourages saving, and leads to malinvestment from individual people, businesses, and governments. Why can’t the free market decide which currency has merit? Why can’t the market decide interest rates using supply and demand? We are forced to use and accept paper money printed by a massive central bank and forced upon us through the legal tender laws passed in the United States Coinage Act of 1965. It is worthless paper that we are forced to use! At the very least, legal tender laws should be repealed, letting other currencies develop if they are seen as valuable and worthwhile by the market.

During his campaign, Obama promised a different approach to the war in Iraq; he promised peace and bringing our troops home. Unfortunately, after just a couple weeks of taking office, we can see that this is not the case. He’s hoping to move the 20,000+ Marines in Iraq to Afghanistan, he has already bombed Pakistan, and we have begun a new program to rearm the Afghans in an effort to fight the Taliban. Essentially there is not a speck of difference in Obama’s foreign policy from that of George W. Bush. We continue to go down the disastrous path of foreign bribery and trickery, the ideas of military aggression and preemptive war remain on the table, and who can forget Vice President Joe Biden promising that more troops will die as we load Afghanistan with more soldiers? I hate to say it and I pray that things do change for the better, but there is no end in sight to our policies of government intervention both foreign and domestic, the Constitution is still largely ignored, and individual liberty certainly is not a priority of Obama as evident from his first days in office.

This is why I see absolutely no reason to get excited about Barack Obama. He stands for nothing different from what we’ve been getting. He tells us that government is the only solution to our economic problems; he will spend trillions to “save or create” several million jobs. The free market has been trampled on a huge amount over the past century, but nothing like we have seen in the past year. We as a people must return to a Constitutional government determined to protect freedom, liberty, property, and individual responsibility. Liberty is the only sword that can slay the evils of central planning, interventionism, socialism, fascism, and corporatism.

Wall Street bailout aid questioned at Fed event

Mon, 25 Aug 2008 07:34:00 US/Mountain

Wall Street bailout aid questioned at Fed event

Saturday August 23, 3:38 pm ET
By Jeannine Aversa, AP Economics Writer

Fed conference speakers say US central bank too responsive to Wall Street on bailout issues

JACKSON, Wyo. (AP) -- Do Washington policymakers listen too much to Wall Street? A possible bailout of Fannie Mae and Freddie Mac, on the heels of similar action involving investment firm Bear Stearns, seems to send a loud signal to financial companies that the government will clean up their messes.

That's the feeling of some analysts and academics here Saturday, the final day of a high-profile economics conference. The Federal Reserve's handling of the worst financial crisis to hit the country in decades spurred much debate.

"The Fed listens to Wall Street," said Willem Buiter, professor of European political economy at the London School of Economics and Political Science. "Throughout the 12 months of the crisis, it is difficult to avoid the impression that the Fed is too close to the financial markets and leading financial institutions, and too responsive to their special pleadings, to make the right decisions for the economy as a whole," he wrote in a paper presented to the conference.

Critics like Buiter worry that the Fed's unprecedented actions -- including financial backing for JPMorgan Chase & Co.'s takeover of Bear Stearns Cos. -- are putting taxpayers on the hook for billions of dollars of potential losses. They also say it encourages "moral hazard," that is, allowing financial companies to gamble more recklessly in the future.

Fed Chairman Ben Bernanke, who spoke to the conference on Friday, defended the Fed's actions, saying they were "necessary and justified" to avert a meltdown of the entire financial system, which would have devastated the U.S. economy.

The important thing many people don't seem to understand is that the Fed is not a part of the government. The Federal Reserve is made up of the world's largest banks, so is it any surprise that they come running to Wall Street and the financial industry? When you see what the Fed is made up of, it really isn't. It's pretty easy to throw other people's money away with bailouts and it sure isn't difficult to turn on the printing presses and churn out billions of dollars of new bills at the expense of the value of the currency. As long as this connection is ignored by the public the bailouts and printing of the money will continue. The Fed does not control interest rates for the individuals in the country but rather for the banking institutions in the country. Whether it's Alan Greenspan or Ben Bernanke, the end aim of interest rate manipulation has been to protect and strengthen the banking institutions. With a fiat monetary policy, this is doable for a bit. Heck, many people enjoy the bubbles while they last and even accept that a bubble economy is created from the free market. As long as there is a central bank in control of money and credit the economy is not free. Even Alan Greenspan admitted this.

Until people understand the connection of the Fed to Wall Street it will be difficult to have a meaningful debate on this subject. But, it is good to see some economists in the above article are questioning the Fed's actions. What's funny to me is why people don't see Freddie and Fannie's unlimited line of credit to the Treasury as a bailout. If that's not a bailout, what is?

US food prices to post biggest rise since 1990

Thu, 21 Aug 2008 18:33:00 US/Mountain

US food prices to post biggest rise since '90: USDA

Wed Aug 20, 2008 5:26pm EDT

WASHINGTON, Aug 20 (Reuters) - U.S. consumers should brace for the biggest increase in food prices in nearly 20 years in 2008 and even more pain next year due to surging meat and produce prices, the Agriculture Department said on Wednesday.

Food prices are forecast to rise by 5 percent to 6 percent this year, making it the largest annual increase since 1990. Just last month, USDA forecast food prices would climb between 4.5 and 5.5 percent in 2008.

"It's a little bit of a surprise how strong some of the numbers were in July," USDA economist Ephraim Leibtag, who prepared the forecast, said in an interview.

"We've been waiting for some moderation, but especially with some of the meat prices and how much has come through relatively recently (at the retail level) leads me to believe the overall number may be a little bit higher for the year," he added.

..

Prices are expected to rise by 4 percent to 5 percent in 2009, lead by red meat and poultry. The forecast, if correct, would be the third straight year where food prices have surged at least 4 percent.

Short-term, the biggest factor contributing to higher food prices is most likely the federal corn E85 subsidy. This isn't a whopping realization as its been discussed often over the past year, but it's important to follow and understand what drives up prices both in the short-term and long-term. Globally corn is a vital food and the U.S. is the leading producer and exporter of the grain, so it doesn't take too much common sense to understand that when the U.S. starts throwing a large portion of that corn to ethanol it's going to drive up prices. E85 is a whole other topic that I've gotten into before so I won't go into it too much, but this is the basic overview. Essentially, the government feels it knows which energy sources are the best and most "environmentally friendly" when in fact E85 has been a failure both economically and environmentally.

The other main driver behind higher food prices, I absolutely believe, is monetary inflation. It's more of a long-term factor but a vital one nonetheless that very few people understand or even think about. It's pretty simple when you use a supply and demand perspective: if all of a sudden there are billions of new bills in the marketplace, of course the purchasing power of the dollar will increase. More dollars = less value (purchasing power, and higher prices are the consequence. My feeling is that the impacts of monetary inflation on food and energy prices (both of which are very much connected especially in the global economy) won't be ignorable if we continue down this path of reckless and unchecked money printing. Higher prices over the long run should be no surprise with a fiat monetary policy. Certainly there are other factors like a growing global economy, but an economy is not stable when it is built on the foundation of a fiat money system controlled by powerful central banks. Free market economics teaches this and just going back in history proves this point. The bottom line is that government intervention and centralized economies have been tried in all shapes and forms yet none of them have survived or been sustainable in the long run. Yikes...

Bailout concerns slam Freddie, Fannie shares

Mon, 18 Aug 2008 15:38:00 US/Mountain

Bailout concerns slam Freddie, Fannie shares

Monday August 18, 4:45 pm ET
By Lynn Adler

NEW YORK (Reuters) - Investors dumped shares of Fannie Mae and Freddie Mac on Monday after a newspaper report said government officials may have no choice but to effectively nationalize the U.S. housing finance titans.

A government move to recapitalize the two companies by injecting funds could wipe out existing holders of the largest U.S. home funding companies' common stock, the weekend Barron's story said. Preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt would also suffer losses.

Shares of Fannie Mae sank more than 22 percent to a 19-year low on Monday, closing at $6.15, while Freddie's shares plunged 25 percent to $4.39. Some of their bonds sharply underperformed Treasuries. A $4 billion sale of new Freddie Mac debt drew weak bids compared with similar issues last week.

A spokeswoman for the U.S. Treasury said the department has no plans to use its authority to backstop the two funding agencies. That authority was greatly increased by a rescue plan approved at the end of July.

"The Barron's article overstated Freddie Mac's financial situation," Sharon McHale, a Freddie Mac spokeswoman, told Reuters. "We continue to be adequately capitalized."

My feeling is that in the long run Freddie and Fannie will either have to be nationalized or fail in the old school style of capitalism. This current strategy of blindly supporting the companies with an unlimited line of credit is downright foolish and is not at all sustainable. Given the trend of current events, if I were a betting man I would say that there's a very likely chance that Freddie and Fannie will become nationalized businesses. Clearly the government won't let them fail, but today's bailout strategy is only encouraging poor decisions rather than punishing them. There's only so much the Fed and Treasury can do without getting more heat than they already are, so in all likelihood I would expect the government to make it official and nationalize the businesses. Don't stop at watered down socialism, go for the real deal!

I still can't stop laughing when I hear that the companies are "adequately capitalized". How's that working out for you, guys? I guess on one hand there is a bright side to this, we know the market can and will weed out the loser businesses even if they are monopolies like Freddie and Fannie (without the bailout from the Treasury both companies would almost certainly fall apart). The way I see it the market will eventually win out, whether the companies are nationalized or not. All attempts at socialism will inevitably fail anyway, the "invisible hand" is still at work over the long-term regardless of the system. The free market is almost always blamed for the problems created by government intervention and those problems are used as an excuse for more interventionism still. Having the government meddle in the affairs of the market may sound fantastic in the short-term, but the price must be paid sooner or later.

I've already repeated things I've said quite a bit over the past couple months, so I'll stop here for now. This is a very important topic at the moment and at the rate things are going we haven't seen the last in the short or long run.

Thoughts on ANWR

Sun, 17 Aug 2008 08:30:00 US/Mountain

The common argument against lifting federal restrictions of oil drilling in ANWR is that it would be years before oil was produced and it wouldn't provide any immediate relief. The way I see it, the exact same thing could be said with the ridiculous current and proposed subsidies for "green energy" or a windfall profits tax on "big oil". Of course the impact won't be immediate, it would be silly to expect a sudden increase in supply. But, the current price and price movements of oil is largely from speculation which is greatly fueled from the fact that we buy the majority of our oil from volatile, state-owned companies around the world. There is actually a good amount of oil in ANWR and the technology today is much better than it was ten years ago when people made the same argument that it wasn't worth drilling because the oil wouldn't be flowing for another ten years. It would take several years for oil to start pumping and I believe volatility would be greatly reduced because of it. Opening up ANWR would not solve all our problems, I'm not claiming that. Eventually, Americans will need to smarten up and lift the federal restrictions on nuclear, coal, and the land in the Midwest that's full of shale oil. Eventually people will realize that the Federal Reserve's idea that you can create wealth out of a printing press does contribute to higher energy prices through inflation.

Even so, opening up ANWR is a step in the right direction. When the state governor and the majority of Alaskans want it opened, it makes absolutely no sense for Congress to continue its restriction. At the very least, let the states decide which energy sources to produce and use. Continuing with an energy policy of "only what the federal government likes" is foolhardy, dangerous, and makes absolutely no sense. Like I said, ANWR is a step in the right direction. Not a long-term solution, but in the short and mid-term, it would lessen volatility, lower U.S. oil demand from unstable and anti-U.S. countries, and create a lot of new jobs. So while I really would love to see federal restrictions lifted on all sorts of energy sources, there has to be a starting point.

Thoughts on the future of Starbucks

Fri, 15 Aug 2008 16:02:00 US/Mountain

My feeling is that Starbucks did lose its way which is why Howard Schultz came back on board as CEO. Over the past several years the company has focused too much on new store expansion while pretty much ignoring the store atmosphere which is really what made the company so popular in the first place. I am still invested in Starbucks even though it has performed very poorly since I first bought it a year or two ago. With Schultz back in charge I feel much more comfortable with the company's ability to work through the store closings and once again bring the focus to the atmosphere and service. The transition period of these store closings and a revamping of current stores will not be easy or cheap, but I feel that in the long run it is absolutely the right move and I am confident that Schultz knows how to make it work. There's no one who understands the company more or what got the company to where it is today.

I'm not expecting much upside movement in the stock price over the next 1-2 years, so I'm certainly not jumping in at this price. I'm waiting to see how the closings go and get a better idea of what the long-term picture looks like. Financially it will most likely be a painful process in the short-term, but if management can stay focused I think Starbucks will come out of it a stronger business. Starbucks was a great business that screwed up and lost touch with its "thing". Over the next few years Starbucks will either prove that it is a great business and work through these troubles, or that the concept just isn't workable anymore.

The thing to realize is that Starbucks is still producing very strong cash flow. So while earnings growth will certainly be slowed and possibly negative in the near future, the key items to watch are cash flow production and the balance sheet. So far, the balance sheet has stayed steady and cash flow production is quite strong. As long as Starbucks can produce consistent and positive cash flow over the next couple years I'll be confident enough financially. However, if cash flow production slows considerably and/or turns negative, that would be a tempting sign to sell. But, it's impossible to predict, so for now I continue to hold my position with the hope that the Starbucks experience and atmosphere can work their way back into the stores.

On a slightly different note, I see Peet's Coffee & Tea as a very strong coffee/tea business. The company's growth has been picking up along with margins and is actually becoming a pretty strong company both financially and in terms of stores opened (I believe there are somewhere in the area of 180 stores opened). The company carries $18.1 million in cash with no debt, just recently opened a new roasting facility, has produced very strong cash flow so far this year, and like I said earnings and margins are both expanding nicely. I truly believe Peet's is a strong investment for the long run, management is experienced and so far has made some decisions that I believe will definitely benefit the company over the long-term. Let's just say that management is willing to sacrifice short-term results for the greater good (partly why the stock was so depressed for awhile). Peet's is a business that I'm very glad to own a part of and I see it as a nice way to get exposure to the specialty coffee/tea industry. It may be a good way to counter an investment in Starbucks, because Starbucks' store closings would probably help Peet's more than it hurt.

So, I'm not adding to my position in Starbucks but I'm confident that in the long run the company will come out stronger. For now we just have to take it quarter by quarter to see how this transition process is going and impacting the company financially. In the meantime, I see Peet's as a great growth opportunity and a better way to get exposure to the industry. Peet's is similar to Starbucks years ago because it is the atmosphere that attracts the customers, and management is very focused and committed to preserve and expand that atmosphere and experience. With Starbucks now doing what it's doing, I'm sure Peet's investors and management will be all the more careful going forward. Both companies are in interesting positions and I certainly am looking forward to how they both progress and compete.

FDIC Fund Strained by Bank Failures May Lift Premiums

Thu, 14 Aug 2008 07:54:00 US/Mountain

FDIC Fund Strained by Bank Failures May Lift Premiums

By Alison Vekshin

Aug. 11 (Bloomberg) -- The failure of IndyMac Bancorp Inc. and seven other banks this year may erase as much as 17 percent of a government insurance fund and raise premiums for all banks, from Franklin National of Minneapolis to Bank of America Corp.

The closing of IndyMac in July, the third-biggest U.S. bank failure, may cost the Federal Deposit Insurance Corp.'s fund $4 billion to $8 billion, in addition to an estimated $1.16 billion for seven closures through Aug. 1. Premiums for insuring deposits will likely rise, FDIC Chairman Sheila Bair said in a July 30 interview. A decision is due by the fourth quarter.

``It's going to be a bloody, expensive mess for the banking industry,'' said Bert Ely, president of Ely & Co. Inc., a bank consulting firm based in Alexandria, Virginia. ``Healthy banks are paying for the mistakes made by failed banks.''

The pace of bank closings is accelerating as financial firms have reported almost $495 billion in writedowns and credit losses since 2007. The FDIC's ``problem'' bank list grew by 18 percent in the first quarter from the fourth, to 90 banks with combined assets of $26.3 billion. A revised list is due this month. The insurance fund had $52.8 billion as of March 31.

This is not a cheap thing going on with these banks. Playing with a system and allowing the federal government to just step in may very well lessen the pain in the short-term, but few are looking at the long-term picture and whether or not the system itself is flawed. It has gotten to the point where a $300 billion homeowner bailout bill is passed almost without a second thought. Seriously, $300 billion? Fannie Mae and Freddie Mac received an unlimited line of credit to the Treasury. We are constantly assured by Paulson and Bernanke that the company's are in fine shape and its simply a precaution. In their most recent quarterly reports both companies lost a huge amount more than expected. In the end, who is going to pay the bill? While I would like to say that the hundreds of billions of dollars being used to bailout anyone who cries for help will not come out of thin air, it most likely will. Such is the fiat monetary system.

The unfortunate thing for the individual here is that the end result from this relentless printing will come in the form of more inflation and a further decline of the dollar. Heck, just today the Fed "auctioned" (*cough*printed*cough*) another $25 billion to banks in an effort to sort out the wide array of problems in the industry. I honestly don't know how people could believe that you can print trillions of dollars out of nowhere in the matter of a few years and not expect to face severe consequences as a result. It is nothing more than a counterfeiter sending counterfeit bills into the marketplace. The currency gets diluted, prices go up, and the hardships start.

Believe it or not, the Founding Fathers were some of the few who actually understood this. Paper money was briefly tried by the colonies in an effort to pay off the massive debt accumulated during the Revolutionary War with a great lack of success. Once the war was over and a monetary system had to be put in place, paper money was very unpopular and with the 1792 Coinage Act the mint was established and the backed-money system put into place. The penalty for counterfeit, embezzlement, and fraud from any employee or officer of the mint? Death. Times sure have changed.

I am not exactly saying that the best way to go is to return to the monetary policies of way back when. What I am saying is that Founders had firsthand experienced and seen what harm paper money brought to the economy and country. Fiat monetary systems have been played and experimented with dozens of times throughout all of history all around the world. The one thing all these experiments have in common is that the system collapsed and was no longer sustainable. Fiat money leads to a worthless currency, higher prices, and economic stability. And while I absolutely hope that I am wrong, I don't see why today it would be any different with the U.S. and the major economies around the world.

A fiat monetary system has other negative impacts. Easy money and easy credit from the Fed has taken a lot of the focus off of long-term results and sustainability and has rather put all the attention on short-term results, regardless of where that road leads. While the blame will most likely continue to be on capitalism and lack of regulation, hopefully somewhere along the line the blame will finally be brought to the Federal Reserve. I'm keeping my fingers crossed.

Analyzing stocks that are up after earnings

Sun, 10 Aug 2008 13:10:00 US/Mountain

Since we're in earnings season I thought I would expand a bit on the topic of watching for opportunities as companies report their quarterly results. I've talked quite often about looking for opportunities with stocks that have been hammered even after a good report. Today I thought it'd be a half-decent idea to discuss the situation of when a stock you're watching shoots up after releasing earnings. This situation is pretty common and can make life very frustrating for bargain hunters or people who just want to buy in at a good level.

For me, Dawson Geophysical is a great, recent example. The stock was trading at levels it hadn't seen (from a valuation standpoint) for years, the company was doing great, but of course I did not have the cash in my account to jump forward with opening a position. For someone like me who has an unpredictable flow of cash to use for investing, it makes the situation all the more frustrating. Dawson reported its earnings just a little more than a week ago. As you could probably guess from the context of this example, it was an exceptionally good report that beat estimates and gave Mr. Market a good amount of more confidence in the company. The next day the stock rocketed from the low $50s to more than $60 per share. After kicking myself for awhile, I decided to take another look at the valuation. To my surprise, the valuation remained quite attractive historically. Even though the stock had shot up, the valuation had not significantly changed. So despite the higher share price, Dawson remains high on my watch list.

A very recent example is Hansen (not again...). Yesterday the company released a solid earnings report and today the stock was up 7%. I've been buying shares in Hansen since 2006 so I can't exactly complain about the rise in share price, but this is another similar situation to Dawson. Hansen's P/E sits at approximately 13.5, still well below the competition and the industry average despite the company's stronger growth, bottom line margins, and balance sheet. A higher share price should not scare away interested investors. While the share price may seem important, the valuation is what's key.

This is certainly not earth shattering advice. And I can't say I've always followed this "advice" either, but I like to think that I'm learning from experience. In my experience, earnings season brings a lot of emotion to the table for investors. What I am saying is to not let those emotions get in the way of following a good business because the stock shot up 20% after a good earnings report. All too often I've completely dismissed a company after seeing its stock rise only to miss on what was still a great opportunity. Basically, the moral is this: don't let a higher share price take your attention off the valuation. The same could be said for stocks that have been hit. Just because the stock was hit does not mean it is automatically a smart investment. The one thing predictable about individual stocks is that they will be volatile. Keep your eye on the valuation, stay strong through the volatility, and in the long run the ride will be a lot of fun.