August 09, 2011

The Debt Cieling, The Tea Party and Fuzzy Math

Father and daughter change the oil
source: Gamma Man

The Debt Cieling, The Tea Party and Fuzzy Math

"Where the tea party is wrong" by Jeanne Sahadi; Cnn Money

"Reactions to the Debt Deal" by Justin Lahart, Wall Street Journal

I could end the deficit in five minutes. You just pass a law that says that anytime there is a deficit of more than three percent of GDP all sitting members of congress are ineligible for reelection. - Warren Buffett

"'46% in U.S. don't pay taxes' only half the story" by Joe Garofoli; San Francisco Chronicle

"Spending AND Taxes Got Us Into This Mess, And Only BOTH Can Get Us Out" by Chad Brand; Peridot Capitalist

To counter one of the most common rebuttals to this conclusion (that taxes are too high) consider that federal taxes today are at their lowest point since 1950 (again, as a percentage of GDP). In order to balance the budget, we need to close an annual deficit of $1.4 trillion, the product of $3.6 trillion in spending versus just $2.2 trillion in tax collections. If we do not raise taxes at all, government spending would have to be cut by that $1.4 trillion figure, which would be a cut of 40% (and is impossible).


"Has Starbucks had enough of laptop loungers?" by Chris Matyszczyk; CNET News


"The Six Levels of Trust" by Carol Kinsey Goman; Forbes

"Jay-Z and Kanye West's 'Watch the Throne': Track-by-Track Review" by Erika Ramirez; Billboard

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August 08, 2011

The Downgrade

The Hill
source: Crazy George

The Downgrade:

On Aug. 5, 2011, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA'. The outlook on the long-term rating is negative.

...the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges...

S&P downgrades the credit rating of the United States (link).

David Beers, Standard & Poor's Global Head of Sovereign Ratings, and John Chambers, Chairman of the Sovereign Ratings Committee, explain our rationale for lowering the rating. (video: 18:23 minutes)


"Buffett: US Rating Still AAA, No Matter What S&P Says" by Becky Quick; CNBC (link)

Warren Buffett says there's no question that the United States' debt is still AAA and that he's not changing his mind about Treasurys based on Standard & Poor's downgrade. "If anything, it may change my opinion on S&P," the legendary investor said.

"How will the fallout of the U.S. downgrade affect you?" by Greg Gardner; Detroit Free Press (link)

"Standard & Poor's Defends Lowering U.S. Credit Rating" by David Kerley and Dan Arnall; ABC News (link & video)


'Leucadia National Corporation Stock Downgraded (LUK)" by The Street Wire (link)

"Coach Reports Robust Results" by Zacks Equity Research (link)


"Fatherless to Fatherhood" documentary spot on (video)

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January 20, 2009

Congratulations President Barack Obama

Our New President: Barack Obama
Source: Flickr by Cloganese

I just wanted to take a moment away from writing about personal finances and investment to simply be an American today.

The inauguration of Barack Obama as our 44th president is a monumental event. I feel proud grateful to have witnessed an event that gives people the feeling of inclusion, possibilities and hopefulness. Those are the exact elements the country needs to move forward in this difficult time and in difficult times to come.

I want to congratulate President Obama on what he has achieved. I want to wish him luck on what lies before him. And I want to thank him for having the fortitude and the courage to take on the task of the Presidency of the United States of America.

Today I am very proud to be an American and I hope you who are reading this feel as I do.

Disclosure: none

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December 12, 2008

The Auto Bailout and Mental Accounting

Source: Flickr by Cobalt at
Source: Flickr by Cobalt

Last night the $14 billion bailout for the auto industry failed in the Senate primarily because the United Auto Workers union refused to accept a pay cut for its members. This likely spells big trouble for the Big 3 as collectively they are asking for funds in excess of $30 billion. General Motors (GM) alone, which employs a quarter of one million workers, needs $8 billion over the next two months to stay afloat according to its CEO Rick Wagoner.

Supporters of the bailout are now looking to the White House and the Treasury to step in. To date the Bush administration has resisted dipping into the remaining balance of the $700 billion TARP earmarked for the banking industry to help the Big 3. The Bush administration’s position in this regard is well understood. It wants to reserve the remaining TARP funds for the banking industry “just in case”. But there is also no denying reluctance to use the TARP funds to assist the auto industry is really grand scale mental accounting.

Mental accounting, as studied by Richard H. Thaler, is the way we attribute a monetary value or utility to an economic transaction, situation or expectation. It tends to separate those values in different accounts according to their origins and purposes. Mental accounting can also be seen as the failure to see the entire financial picture and how one decision affects another. To understand this concept on a personal level it is best to consider a couple of examples.

  • A divorced mother holds a grudge against her ex-husband and father to her children on whom she depends for child support. In an effort to exact revenge against the ex, the mother makes crank calls to the father’s place of employment causing him to loose his job. This in effect decreases the mother’s income in the form of child support. The mother failed to connect that her income was dependent upon his. In her mind they were separate.
  • A consultant on a temporary project wants a file cabinet to store just a few papers. The local office supply store has small, medium and large size cabinets which cost $200, $250 and $300 respectively. Being analytically minded the consultant buys the largest cabinet as he calculated it would allow him to get the most space per cubic inch for his money. However, he failed to consider he had only enough files to fill half of the smallest cabinet. In essence, he wasted $100 dollars. When something sells for below the mental price we have assigned it, the deal takes precedence over the actual utility of the item.

Whether the government uses the TARP money, some other funds or does nothing at all, we as Americans will collectively “pay” for the automakers woes. Perhaps it will be in funds going directly to the companies. Or perhaps it will be in increasing the welfare and unemployment rolls. It may come in increasing bankruptcies and foreclosures among former workers of the industry. At this point, we, Americans, the government, cannot avoid expending these dollars either directly or indirectly.

In the interest of full disclosure, I wrote an earlier post suggesting giving money to the automakers amounted to a very bad investment decision. I stick by that position. In 2007, GM lost $38 billion in 2007 and Ford (F) lost $2.7 billion. However, in no way was I suggesting nothing be done. As an investor, I am against the bailout. As an American, I can see the government giving the Big 3 the billions they are asking for – I will just close my eyes and hold my nose when and if they do.

Disclosure: I do not, nor do the clients of Brick Financial Management, LLC, own any securities mentioned in this article. But positions may change at any time.

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November 14, 2008

A GM Bailout Would Be Agony For Investors


Talk in the marketplace, Detroit and Washington has been percolating about giving General Motors (GM) and the auto industry in general a bailout ala the TARP for the banking industry. GM is on the verge of running out of money. Cash received from auto sales, down dramatically from last year, will not cover the cost of running its business. GM has a monthly cash burn rate of $2 billion or more per month and only $16 billion in cash left on its latest quarterly balance some of which needs to be held in reserve.

GM blames the current economic environment on their woes. Year-over-year sales at month end October saw a 45% decrease, worse than almost all of their competitors. Toyota (TM) for instance, which will soon overtake GM’s market share in the space, saw sales decline a significant but less severe 23% over the same period. But GM’s execs are not being genuine. GM has never been a great business.

Warren Buffett in a 1991 gave a speech to Notre Dame students and faculty. In it he compared two businesses - Company Agony and Company Ecstacy. Company Agony lost its investors more money than virtually any business in the world while the other, Company Ecstasy did nothing but make money.

The difference in the two businesses was Company Agony, which in Buffett’s story was American Telephone and Telegraph had all kinds of employee benefit programs, stock options, pensions, the works. The business operated under heavy regulation, was heavily unionized and extremely capital-intensive. In fact, shareholders had to continually reinvest in the company simply to keep it going.

Company Ecstasy on the other hand, Thompson Newspapers, didn’t have elaborate compensation programs and never needed to reinvest in the company. They simply wrote a story and produced it by putting ink to paper. Thompson was able to raise prices which raised earnings and there was nothing to do with the money except to return it to shareholders or purchase more profitable businesses.

In advising his audience about which kind of businesses to work for, an Ecstacy non-capital intensive business or an Agony capital-intensive business, Buffett said,

“One is a marvelous, absolutely sensational business, the other one is a terrible business. If you have a choice between going to work for a wonderful business (Ecstasy) that is not capital intensive, and one that is capital intensive (Agony), I suggest that you look at the one that is not capital intensive.”

The same can be said for investing in capital intensive businesses. Investment in a capital intensive, Agony business like GM where market share [chart below] is eroding which began well before an economic recession, labor costs are the highest in the industry at $73 per hour [$30 higher per hour than Toyota’s], the workforce is heavily unionized and it makes products consumers don’t want (i.e. gas-guzzling SUVs), doesn’t seem like a smart move to me.

Click for larger image 

The government is our investment manager now. It must make prudent investments and should make sure we see some return. GM has not returned any money to investors for years and years. In fact, an investment in a simple index fund like the Vanguard S&P 500 Index Fund (VFINX) would have been a much better investment over the long haul. [See chart below].

Click for larger image 

If an investment in GM never made money in the past, what would be different now? I venture to say, nothing.

Disclosure: none


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November 07, 2008

Obamanomics and The Stock Market: Part II

Source: Getty Images

We Can All Relax… Maybe Not

Today President-Elect Barack Obama held his first press conference since the election on November 4th. This followed a meeting with his economic advisors the purpose of which was to solidify a strategy to right the U.S. economic ship.

Ah! Now that Obama is on the job we can all relax. Well, not quite. In Obama’s opening statement he said, “We are facing the greatest economic challenge of our lifetime.” Although Obama’s statements were strong, his speech seemed mainly aimed to temper expectations of what he can do as the incoming President. In answering a reporter’s question, Obama said as President his chief goal will be to restore confidence in the market and get people working. Unfortunately, in the President-Elect’s first time out, he fell short of calming the markets. The Dow Jones fell 100 points during his 18-minute press conference. [video]


Are Democrats Good For The Market?

The market’s drop was understandable. The bi-partisan rhetoric dubs Obama “the-most-liberal-senator”. According to Karl Rove, he out-Democrats most Democrats. John McCain picked up this “too liberal” stance at the end of his campaign. The purpose of which was to equate Democrats as being bad for the economy and the stock market. Of course there are those who buy into this, but is it true?

In a recent New York Time article, the returns of the stock market are plotted over an 80-year period, according to the political party in office. The results? The market does better under Democratic Presidents. Under Democratic administrations the average return for the S&P 500 since 1929 was 8.9% and 0.4% under Republican administrations. [click image for larger view]

Source: New York Times

Party Power

Obama will be coming into office with a Democratic House and Senate as well. I have heard the talking heads on stock market television shows say this too is bad for returns. Again, the evidence does not support this view. According to the research conducted by Wharton professor, and stock market historian, Jeremy Siegel,

“…a Democratic president and a Democratic Congress? Well, Siegel's research shows that such a combination has generated annualized returns of nearly 14% since 1948. That's more than 4 percentage points better than under a GOP president and GOP Congress, and more than 3 percentage points better than under a GOP president/Democrat-controlled Congress.”

Here is the dirty little secret. The party that is in power probably has only a slight effect, if any at all, on the trajectory of stock market returns. Stock markets are like living organisms and are affected by many interlacing influences. So the best an investor can do is to invest consistently no matter who sits in the oval office.

Diclosure: none

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November 04, 2008

Obamanomics And The Stock Market


Meet Joe-The-Dentist

Joe-The-Dentist earns over $600,000 per year. Although he earns a high income from his dental practice he also earns a good bit of income from capital gains from his stock holdings of publicly traded companies. Most of Joe’s holdings are in consumer oriented businesses. His largest holding is Walmart stock.

Unfortunately, Joe has seen his passive income from stock holdings decrease during the Bush administration – a period of low tax rates. Gone were the days of the Clinton era bull market – a period of high taxes. So Joe hasn’t paid much in capital gains as of late, because Joe’s passive income hasn’t been much to brag about.

Joe has an epiphany. Obama’s tax plan is very Clintonesque and middle-class oriented while the McCain plan is an aggressive version of the Bush tax policy which heavily favors the wealthiest Americans.

Joe contemplates if the middle-class had more income to spend, they might spend it at Walmart. Which means Walmart’s revenues would go up, which would increase the value of the stock, which would in turn allow Joe to have more passive income. Joe also realizes the even though he might pay a higher tax rate under an Obama/Clinton tax policy, it would mean little as his take-home-income would be at its peak. Under the McCain/Bush plan, middle-class incomes would be relatively lower, not allowing them to spend as much thus stalling the economic recovery, depressing Joe’s stock holdings.

Joe-The-Dentist as well as the average American need only look back at the last 16 years. Paying lower taxes will not necessarily, as smart people like Warren Buffett have pointed out, hurt economic decision making. Thus an Obama/Clinton tax policy will help all Americans by helping the middle-class. The following chart shows how the stock market performed during the Clinton administration (from the time of the election in 1992) to how it performed during the Bush administration. Under Clinton, the stock market nearly quadrupled while under Bush the market stood still.  [Click chart for larger view.]

Source: Tax Policy Center 

Implications for the National Debt

Much of the argument from the John McCain camp against voting for Barack Obama is that Obama will raise taxes. The truth of the matter is Obama simply wishes to return to the modified Clinton administration tax policy. Under such a plan very few of us will see a rise in our overall tax rate and most will see an increase in their take-home-income.

According to the Tax Policy Center (TPC), the wealthiest among us, the top 1% of households with incomes of $600,000 per year or more, would see their after-tax income decrease under the Obama/Clinton plan by about $19,000 representing a mere 1.5% decrease in after-tax income. The next 4% of households would see their after-tax incomes remain about the same. Most Americans, about 95% of households, would see their after-tax income increase by about $2,200 per year.

McCain espouses a Bush-like “trickle down” tax plan which aims to cut taxes across the board. His plan leaves most American with an increase in after-tax income of about $1,400. But his plan most favorable to the wealthiest Americans. The top 1% under the McCain plan would see their after-tax incomes rise by $125,000, according to TPC. [Click chart for larger view.]

Source: Wilshire Associates 

Each of the candidates’ tax plans has implications for national debt. It can certainly be argued the McCain/Bush tax plan will cost the nation more in the long run. According to the Tax Policy Institute (TPC),  

“The main differences are two: first, McCain’s plans would reduce revenues by significantly more than Obama’s; and second, McCain’s would be substantially less progressive, especially among very high income taxpayers.”

The McCain/Bush policies would cost (reduce tax revenue) $4.2 trillion over 10 years while the Obama/Clinton plan would cost $2.9 trillion during that time. If interest costs are included, McCain’s plan would boost the national debt by $5.1 trillion and Obama’s would increase it by $3.6 trillion. 

However, as the above anecdote suggests income for everyone, even the government, will potentially be higher under an Obama/Clinton tax policy. Even though both candidates’ tax plans will be expensive, the Obama/Clinton plan has relatively more upside for the economy than the McCain/Bush plan. Basically, under the Obama/Clinton plan, all boats will rise.

Disclosure: none

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March 25, 2008

When Buffett Speaks, Obama Listens

Buffett & ObamaIn a recent interview with CNBC, "Money Honey" Maria Bartiromo asked Barack Obama, "How do you plan to change the tax code when it comes to capital gains? How high will that 15 percent rate go?" Obama answered with the following:

"Well, you know, I haven't given a firm number. Here's my belief, that we can't go back to some of the, you know, confiscatory rates that existed in the past that distorted sound economics. And I certainly would not go above what existed under Bill Clinton, which was the 28 percent. I would — and my guess would be it would be significantly lower than that. I think that we can have a capital gains rate that is higher than 15 percent. If it — and if it, you know — when I talk to people like Warren Buffet or others and I ask them, you know, what's — how much of a difference is it going to be if it's 20 or 25 percent, they say, look, if it's within that range then it's not going to distort, I think, economic decision making.

On the other hand, what it will also do is first of all help out the federal treasury, which is running a credit card up with the bank of China and other countries. What it will also do, I think, is allow us to make investments in basic scientific research, in infrastructure, in broadband lines, in green energy and will allow us to give us — give some relief to middle class and working class families who have been driving this economy as consumers but have been doing it through credit cards and home equity loans. They're not going to be able to do that. And if we want the economy to continue to go strong, then we've got to make sure that they're getting a little relief as well."

Obama went on to further state that he'd be open to some sort of exemption for people making under a certain amount of money. I'm sure the Republican party will shout, "Obama will raise your taxes!" But at least Obama is listening to the right advisor.


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November 26, 2006

Pay Your Taxes

Warren E. Buffett"Charlie [Munger] and I have absolutely no complaints about these taxes. We work in a market-based economy that rewards our efforts far more bountifully than it does the efforts of other whose output is of equal or greater benefit to society. Taxation should, and does, partially redress this inequity. But we remain extraordinarily well treated."

- Warren E. Buffett

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September 20, 2005

Bush Admits Failure

Devil's Advocate:

Perhaps the government response was exactly what it should have been. What I hear most in the media and among those talking about it is that the response was slow. But was it really? What would have been a timely response? Is there even an answer for that. I'm sure there would be many different answers. But let's say we (the media, public) could agree what a timely response would have been. Could the gov't have even done it in that time?

If we expect a sprinter to run 100 meters in 8 sec flat we are disappointed when he runs 9.5 sec flat. Never mind that he just broke the world record. (Disclosure: I don't actually know what the world record is for the 100 meters.) He failed in our eyes because he didn't meet (or beat) or expectation. The reality is that we will probably never see an 8 sec sprinter in our lifetime. Perhaps we were expecting our gov't to be an 8 sec sprinter and were disappointed when all it did was run 9.5.

I know that when big tragic events occur peoples' response is emotional more than rational. And we are all influenced by the mob mentality. (Ask any Indian or Pakistani person if they were harassed after the 9/11 attacks. A totally irrational yet emotional response to two groups of people that had nothing more in common with the terrorists other than their shade of skin.) "Group-think" in action. The American media is the biggest group-think leader in the world. When they began to say the response was slow, we (the public) bought in without really any question. But perhaps when looking at it "unemotionally", we are expecting too much.

Bush's response to the criticism then is to admit to a "slow" response when actually the gov'ts response was as fast as any gov't could "run" under these conditions. If he knows that they could not have done better, then his admission is totally propaganda driven. Admitting to something you know is false just to appease your constituents' irrational expectations of you is...well...political. But perhaps being political is exactly what he should be doing.

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July 12, 2005

We're Not Afraid

I just came across and interesting website called We’re Not Afraid. It was a site started as an answer of sorts to the terrorist bombings in London. The site consists of photos from people from around the world proclaiming that they are unafraid of the terrorists. And how they’re going to live their lives as they have all along.

To be honest, when I first came across the site, I was a little offended. I guess I took the “We’re Not Afraid” stance as somewhat of a dis to those that actually died in the bombings. But after a minute of perusing the site, I realized that that’s not really the intent here. It’s an attempt to “castrate” the terrorists’ power (which is fear mongering). The pictures on the site of are people (animals, scenic views, babies) who are going on with the daily lives with smiles on their faces. I thought that’s pretty wild to fight terrorism with a smile. Crazy concept right?

On a related note, it’s interesting to see how very little news the bombings have gotten. Perhaps it’s because it’s on foreign soil, but you’d still think it would have gotten more coverage. But overall, folks seem to be relatively unaffected. Perhaps it’s because we expect this now. The financial markets barely made any movement on that day. In fact, the iShares MSCI United Kingdom ETF (symbol: EWU) has actually gone up 3.6% in the time since the bombing. Perhaps it’s an indication that the terrorists are losing their impact. At the very least it’s interesting.

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About Brick Financial Management, LLC

Blogged by Brick Financial

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Brick Financial Management, LLC is a Registered Investment Advisor specializing in providing investment management services to individuals, families, organizations and institutions. We implement highly focused stock, bond, and balanced portfolios using an investment approach commonly referred to as value investing. Disclosure


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