Destroying Value When It's Needed Most

One investment maxim I've learned is to start building your nest egg while you're young. The sooner young people become investors and build capital, the more financially secure they'll be decades from now.

The big problem is that the unemployment rate of those aged 16-24 is at a staggering 52.2 percent, eroding their lifetime earning potential, and thus, their ability to secure their long-term financial futures.

What disgusts me is that the U.S. government has shown absolutely no desire or urgency in fixing this issue. Obama recently described his stimulus plan as a "tourniquet" that stopped economic bleeding, and that it'll take years to get out of this mess. Sadly, he completely ignores the fact that an immediate transfusion of financial incentives to businesses for entry-level job creation would put more young people to work. Not years from now. This year.

I find it ironic that the majority of this younger demographic probably supported Obama's presidency. Little do they realize that Obama's focus on health care reform instead of helping create jobs for their age group -- and creating them now -- is the worst thing he could do to secure their financial futures.

The Triple Bottom Threat

As a contrarian, this story about a double-dip recession adds to my confirmation that this current rally has legs. As a market observer, two things make me think the story may have some merit.

First is the historical context: If this recession is as bad as people say it has been (and by all accounts, it is), historically similar recessions have seen the triple-bottom. That is, one severe drop (i.e. October 2008), an even-worse drop (March 2009) and a third drop that is bad, but doesn't retest the previous drop's low point. I don't think that third drop has happened yet.

Of course, history doesn't have to repeat itself, but then there's the second thing, which is the enormous debt load the U.S. government carries. This debt will need to be repaid, and unless the economy roars to life and increases tax receipts, the only alternative will be to raise income tax rates. Such a move would inevitably kill off any recovery, since money that would fuel an economic rebound would be rerouted to extinguish debt.

Putting those two things together, I think it's safe to say that a triple-bottom remains certainly in the realm of possibility in the next year.

American Idiot

OK, I'm neither a political insider nor an economic guru, yet even I have the basic common sense to know that the stimulus bill was a dumb idea when the main driver is public spending rather than private enterprise (the latter via tax cuts and incentives).

Now, it appears that finally our vice president has figured out that perhaps it was too.

The salient question here is this: When will the president figure this out? And since when is "sorry" good enough when billions of taxpayer dollars are at stake?

Obama = Bush x 2

More government math fun (well, less fun when you realize you currently owe the government $37,000-plus dollars right now):

Mark Knoller of CBS News recently reported that Obama's current budget projections show that he’ll run up nearly as much government debt in four years as President Bush did in eight.

So does this make Obama's spending policies two times better -- or worse -- for the U.S. economy and its taxpayers?

Obama's Failure to Defend our Economic Reputation

Obama and his Democrat allies are so hung up trying to repair our nation's reputation overseas ... but they are completely failing at repairing our nation's economic reputation.

Case in point: The U.S. could lose its triple-A bond rating. Note that despite the economy being so bad under Bush, the U.S. never had to worry about its bond rating until the Democrats and budget-busting moderate Republicans (yes, including Bush) began burning through money via TARP and Obama's stimulus bill.

A ratings downgrade would be crippling to the U.S. economy. Foreign investment would flee to "safer" pastures, limiting our nation's ability to raise money. It could also shift control of the world's economic engine to better-capitalized nations, i.e. China.

If Obama fails to preserve our nation's triple-A bond rating, it will be the greatest economic policy failure by a president in nearly a century. Since Moody's started its rankings in 1917, the U.S. has never lost its top-tier creditor status.

The Financial Comedic Genius of Obama

From this Bloomberg story:

President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

Unsustainable deficit spending? Don't you wish Obama was smart enough
to figure that out before he "blew the doors off" deficit spending limits with his massive stimulus plan?

Or is this idea of a funny joke? Too bad the joke's on our future tax burdens.

Why Government Shouldn't Nationalize Health Care...

...or car companies or banks, etc.

Government can't even achieve neutral cash flow on Social Security (nationalized retirement) and Medicare (nationalized low-income/senior health care). Read the link below for the gory details:

Social Security and Medicare finances worsen

Thank god the government doesn't manage my investment portfolio (at least, not yet).

IVWT Challenge/Lesson #1: Your Philosophy

IVWT was originally intended to be a forum for truly independent traders. Of course, we've been sidetracked by covering how political policies and processes are destroying the stock market's ability to recover on its own in a timely manner. But let's get back to our "core principles," shall we?

Every smart trading philosophy and model is made up of three ingredients:
1. Timing: When to buy and sell
2. Valuation: What to buy and sell
3. Risk Management: How much to buy and sell

Technical traders focus on timing, value-oriented traders focus on valuation. Every trader should focus on risk management -- but you'd be surprised by how many don't.

So the first IVWT challenge is this: Analyze your trading philosophy. How much is dependent on timing? How much on valuation? Risk management? Don't get analytical, just break it down by percent. We'll cover each of these "ingredients" in the weeks and months ahead.

And the first IVWT lesson is this: If your current trading philosophy or model lacks any of those three ingredients, you will ultimately fail as a trader.

Future installments in this series:
-- Debunking the Trader vs. Investor Myth
-- The "KISS" Test
-- The Power (and Pitfalls) of Timing

No Job Growth Until 2010: The Change We Need

Obama's administration continues to prove that they lack the initiative, ability and/or desire to policies that will provide short-term relief to the economy, at a time when it is needed the most. The first sentence of this New York Times article says it all:

"President Obama's chief economics forecaster said on Sunday that the country was not likely to see positive employment growth until 2010, even if the economy began to grow later this year."

Later in the article, Obama's team makes the laughable assertion that the slowing rate of job loss is a good sign for the economy. Call me wacky, but I would define a good sign as actual "job creation." And as the days pass, it's becoming more clear that Obama's economic policies are failing the American people when it comes to creating jobs in 2009.

The Hidden Disaster of Obama's Chrysler Plan

Obama promises to recoup all the taxpayer-funded loans being funneled into Chrysler/Fiat before Fiat can regain majority control of the company. Wonderful idea, right?

Wrong. Obama's plan is built upon one major assumption: That Chrysler/Fiat will re-emerge as a company with value. A company that can make money by selling cars once again.

Suppose any of the following happen in the years ahead:

a) Fiat no longer wants to own Chrysler and tries to pull out of the deal

b) The new company makes cars no one wants to buy

c) The restructuring turns out badly and results in the company losing even more money than before

d) Any combination of the above three

If the new Chrysler/Fiat company loses all its value after we as taxpayers loan them billions of dollars, there won't BE any money left to repay. And that's the kind of change we can't invest in.

How Obama Killed Investment in the Auto Industry

Obama's nationalization of GM and Chrysler effectively destroys all future incentive to invest in American car companies.

Would you invest in any company -- auto or otherwise -- in which the government can confiscate, revalue and redistribute your investment return? Even if you were dumb enough to invest in such a company, do you think it's fair or right for the government to interfere in the first place?

Obama thinks he's saving these car companies, but the raw truth is that his actions will severely prevent free capital from reflowing back into them. The result? Obama will have to use even more taxpayer money (or print it) to subsidize reinvestment back into these companies. (Of course, he's assuming that the companies will once again make vehicles that people want to buy. If they don't, then our tax money will be in an even more dire predicament).

When people who don't have a clue about value investing all of a sudden know what investments are best for America, prepare yourself for disaster.

Stimulus Bill + 2009 = FAIL

The White House has officially confirmed what most of us already suspected: Obama's $787 billion stimulus bill will fail to provide any short-term recovery relief in 2009.

Directly from the horse's mouth: Lawrence Summers, director of the White House National Economic Council...

"I expect the economy will continue to decline," with "sharp declines in employment for quite some time this year," said Summers as seen this Bloomberg article.

The counter-argument from Obamaists is that short-term relief is irrelevant unless a sound long-term foundation is built. My counter-counter is simple: Why didn't Obama create a bill to do both? Why not reserve a portion of the stimulus to provide for a short-term "holiday" (meaning you don't pay tax) on social security, capital gains and/or income taxes for six months? That freed-up money could be immediately injected into the economy. Instant short-term relief. Instant confidence booster for the stock market.

Or are the Democrats who controlled the stimulus bill-writing process not that bright?

AIG and the Displacement of Anger

Here's what everyone seems to be missing about the outrage over AIG's bonuses:

1. This wouldn't be an issue in the first place if the TARP bill had a simple clause: "This money cannot be used for executive bonus pay." So the blame and outrage should be directed on the legislators who failed to include such a clause. In fact, the truth is even uglier: The stimulus bill that Congress passed (without reading) and Obama signed had a provision that legally protected these bonuses. For the government to get pissed over something they said was OK and signed into law is the height of incompetence.

2. Do you realize that if the $165 million in bonuses had been equally distributed to all of AIG's employees, there wouldn't be this outrage? Ironically, people would be happier if the money went to everyone -- even if they did nothing to earn that bonus.

Of course, none of this would even matter if Bush and Congress didn't meddle and pour billions of dollars into a short-sighted and poorly structured bailout.

In Defense of Mark to Market

As a value-oriented investor, I love mark to market accounting. It prevents companies from manipulating or inflating asset values to distort their balance sheets. It provides a better "apples to apples" comparison between companies. Most importantly, it better reflects a company's real value at this very moment.

I know many conservatives despise mark to market, such as Rush Limbaugh. He claims mark to market distorts a company's true long-term value because it is subject to asset pricing fluctuations that may vary wildly from quarter to quarter -- especially during economic contractions.

Rush may have a point, but his implied solution -- stopping mark to market accounting -- would prevent investors from knowing how much their stocks are really worth, and open the door to asset valuation manipulation. That would be terrible for value investors.

How Warren Buffett is Breaking His Own Investment Rules

Warren Buffett invested nearly $35,000 in donations in the Democrats and Barack Obama in 2008. While that is surely chump change for him, it is interesting to look at this "investment" in Obama in terms of Buffett's own company-evaluation rules:

1. Invest only in great management teams with proven records

2. Invest only in entities with low or manageable debt

3. Invest only in entities that have a business model you like

Considering that Obama:

1. Has very little political experience and an economic management team that hasn't even been assembled yet

2. Has already passed a stimulus bill that tripled the nation's debt load in 2009

3. Has positions that Buffett himself went on the record to disagree with (carbon emissions cap and trade, Card Check and executive jet usage)

Do you think that Obama -- if he were a company -- would be considered a good investment?

Proof That the Economy Isn't Obama's Top Priority ...

... because if it were, this situation would have been fixed weeks ago. To summarize the story (click the link for the full story):

"US Treasury Secretary Timothy Geithner is practically alone on the job, working night and day to cope with the worst economic downturn in decades. Of the 15 key Treasury Department positions that require Senate confirmation, only one has been filled."

I know Obama asked for patience to recover from Hurricane Economy -- but this is inexcusable! Proof once again that your tax dollars are "hard" at work ...

Hurricane Katrina vs. Hurricane Economy

I find it amusing that British Prime Minister Gordon Brown would describe our current financial mess as an "economic hurricane."

Remember all the criticism that President Bush received over his response to Hurricane Katrina?

Do you think President Obama deserves similar criticism over his response to this "economic hurricane"?

Why President Obama Should Love the Stock Market

Obama said he is not measuring policies against "the day-to-day gyrations of the stock market" -- but here's why he should:

In addition to the fact that the stock market is the world's top wealth and pension/retirement income creator -- it also is a key revenue stream (via capital gains taxes) for the U.S. government. As Obama's policies destroy wealth in the stock market, they are also destroying the money that'll be needed to fund his spending programs. Does he realize that the amount of capital gains losses that have been and will be recorded will result in a staggering drop in the U.S. government's coffers?

In other words, the more Obama continues to ignore the stock market and do nothing to halt its slide, the more he's killing the goose that'll pay for his golden eggs.

1 Obama Stimulus > 1 Osama 9/11

UPDATED to reflect the DJIA as of March 6:

It's official: Once the first draft of it was approved by the House, Obama's stimulus plan (combined with his subsequent economic rhetoric) has caused MORE DAMAGE to the stock market and to the American economy -- as represented by the stocks that make up the Dow Jones Industrial Average -- than Osama Bin Laden's attack of Sept. 11, 2001.

Check the numbers and do the math yourself if you don't believe me:

DJIA close Sept. 10, 2001: 9,605.51

DJIA lowest point after Osama Bin Laden's Sept. 11 attack: 7,926.93 on Sept. 21, 2001

Total decline from Sept. 10 / the impact of Bin Laden's attacks: -1,678.07 (-17.5% rounded)

DJIA close Jan. 28, 2009*: 8,375.05

DJIA lowest point since then: 6,542.99 March 6

Total decline from Jan. 28 / the impact of Obama's plan: -1,832.26 (-21.9% rounded)

*This is the date of the first House vote to approve the stimulus plan, which officially spelled out what was likely to be in the final bill

You can debate whether the DJIA accurately reflects the state of the American economy. I would respond that the stocks that make up the DJIA also make up the portfolios of many retirement and pension plans across the nation, and represent the "biggest guns" in our economy. Plus, when evening news shows talk about the economy each night, two numbers are always mentioned -- and the first one is always the Dow.

You can also debate the whether the comparison between Osama and Obama is fair or not, or whether the DJIA's drop was caused by factors other than Obama's stimulus. In my view, I think a $787 billion stimulus bill qualifies as a significant factor when it comes to reviving and boosting confidence in our economy (and if that wasn't the point of the bill, why pass it in the first place?) -- especially in the time frame I cited above. 

Nevertheless, those debates do not change the bottom-line results to investors in the stock market:

Whether you strike fear in the American people by crashing planes or talking down the economy, or whether you create uncertainty through a senseless act of terror or legislation -- the actual economic damage as illustrated by the benchmark of our economy's health (the DJIA) is tangible, measurable and inescapable. 

In addition, it is becoming painfully obvious that Obama's stimulus bill and subsequent rhetoric have done NOTHING to stimulate confidence in the U.S. economy; if the DJIA is any indication, Obama has made matters worse.

Obama's Presidential Address: What He Got Wrong

President Obama gave a great speech last night, it underscored many of the ideals that America's greatness has been built upon. However, here's what he got wrong from a purely financial (not political) standpoint:

Market-based cap on carbon pollution: If foreign countries don't adopt the same caps, they'll have a competitive advantage since they won't be burdened with the costs associated with meeting those caps. In addition, if the caps are so onerous that they force companies to reduce production output (or even worse, move production to foreign subsidiaries) to bypass these regulations, the result will be a loss of U.S. jobs.

End tax breaks to U.S. companies that ship jobs overseas: In theory, this is a wonderful idea; a good political sound bite. In reality, if U.S. companies are forced to make products in the U.S. but their foreign competitors are able to make them cheaper overseas, it's foreign companies who will benefit the most. Again, the net result will make U.S. companies less competitive and profitable, especially in industries that rely heavily on foreign production.

So while Obama talks a good game about saving the U.S. economy, here are two policies in his speech that will hurt it in the long run. However, I'll reserve final judgment on his administration's commitment to fiscal responsibility when specific plans are revealed in the months ahead.