Political Economy Part Two..Why the Stock Market keeps going up.

As we mentioned in our posting "Political Economy" much of current stock market environment is being dictated by government actions in Washington DC.  Like it or not smart investors do not fight the Federal Reserve or Government actions at the federal level, they just get on the ride and try to make money using the tools offered.  Of course the issue is discovering that policy and which investments are the best to make money with that policy. 

The key here is understanding that the Obama administration has spent and continues to spend federal dollars at a pace unequal to any other President in the past. All those deficit dollars must come from somewhere and much of it is bond buying by the Federal Reserve.  The Federal Reserve is trying to keep interest rates low by keeping demand high for government debt and at the same time making stocks and financial instruments high and higher valued.  So as the new Federal Chair Yellen has noted low rates are here for awhile.  Further more as long as Obama is President and that is two years plus and is followed by a President with connections to Wall Street like Hillary Clinton one can expect the political economy to continue on for longer than two years.  Not reforming the federal tax code is actually a plus for them and their contributors

The reason is simple in that the low rate environment is highly beneficial to large corporations such as Apple, Pfizer, Verizon, Wells Fargo, GM, Oracle, IBM, and the list goes on seemingly forever.  These companies and many more are using low rates to buyback huge numbers of shares of stock each month.  These buy backs are in the billions of dollars and each of the companies listed are buying back 5% and more of their shares each and every year.  Stock buy backs mean less shares for investors driving up demand and prices.  That is exactly the idea by the Federal Reserve to push up asset prices.  If you are like many investors your holdings value have gone up considerably in the last three years.  Elites and most notably financial elites are prospering the most.  These financial elites are the very people contributing to Obama, Hillary Clinton, and Democrats keeping them in power.   They might regale against them, but those in the know it is all for show.  

Technology firms are prospering as well here due to demand for their products and those tech elites are also big liberal contributors.   No matter what side of the political spectrum one is on getting on the stock buyback wagon is a no brainer here. Truth is most of these elites do not want the rip rap people to be in their moneyed paradise and have decided the best way to keep them happy and down on the plantation, so to speak, is to offer lots of cheap government goodies. Goodies like phones, welfare checks, food stamps and such.  Assuming these goodies will keep them voting for Democrats and keep them from wanting more than just the minimum life.  That minimum life satisfaction must be maintained since a no growth economy means few jobs and even more so few higher wage jobs.  Just raise the minimum wage a bit keeping them happy with their low end job and as a bonus it also helps these big corporations from feeling any competition from small business start ups that might take away some of their declining business prospects since they can not compete wage wise.  Using government to kill competitors is like rent seeking it just makes the rich, well richer. 

Cash flow and profits at big corporations are also being encouraged by the current high federal tax rate and structure.  High tax rates mean instead of paying out dividends corporations can use their cash to buy back shares using low interest debt.  Simply put paying 3.5% for interest on debt to buy back stock is about what many corporations are paying out in dividend yield and interest costs are tax deductible so it is to the advantage to buy back stock by cutting corporate taxes too.  Not to mention that the buy backs inflate stock prices and make investors happy.  Elite investors who do not need the capital gains can just sit on the gains and smile.  If anyone wonders why many on both sides of the political game are against restructuring the federal tax code this should explain why. Note that the corporations looking to change domiciles currently to escape the highest corporate tax rates of 35% here in the US are those companies using profits to hire new workers and invest in their business expansion.  So the very companies wishing to hire people and expand are the very ones getting hurt by the current tax code and the Obama administration policies. 

All this financial engineering is only helping the wealthy elites as noted above.  The lower class is caught in a almost unescapable life of being poor due to the government incentive to do so.  The middle class is getting taken with screwflation.  That is wages that are not keeping up with inflation and there are few opportunities to advance.  Slowly but surely the middle class is getting hollowed out and that is frankly being done by government policies that hinder them and only them. 

If you are one of the blessed with assets that are appreciating in this environment or do have some money to invest we would suggest avoiding low rate government bonds of any kind.  As we have mentioned earlier using ETF's and mutual funds highly concentrated in big corporations taking advantage of the current political economy is the wisest approach.  MGV, which is the the value ETF for the biggest of the biggest corporations and VFIAX, which is the Vanguard 500 Index fund are good vehicles.   May we also suggest PKW, which is the ETF for corporations buying back a minimum of 5% of their outstanding stock shares too.  Go with the flow is the best investment in this environment.  Much of the other assets available are not going to do as well. 

               

Market Downturn Imminent?

As we posted about a week ago we do not see a downturn in the market any time soon.  Yes, a smallish correction, but nothing big.   There is just too much money floating around out there courtesy of the Obama spending and cheap money Federal Reserve.  Once a correction begins expect bargain hunters to step in and do some shopping.  The only thing that could cause a serious downturn is something foreign occurs that stirs fear in the markets.  This free money, cheap money cycle has made big companies flush with cash and they would step in a buy back their own stock if a downturn happened putting a floor under the market.  Dividends continue to move upward too keeping investors from selling since that would cause a capital gain tax and they would lose that steady dividend spigot. 

We continue to like mobile phone companies, T, VZ, and CHL.  We also like big insurance carriers like PRU and MET.  If APPL and O would back off about $5 each we would consider them good buys as well.   We continue to accumulate NNC, which we like for being significantly under par value and for the nice tax free distributions.  We do not like the big tech as we see them as overvalued.  However GOOG is a good long term buy as this company continues to get involved in almost every segment of the technology world and it"s PE is not too rich if you take a long term view.  Again one can avoid trying to pick winners and losers with MGV the mega cap ETF. 

The market is just a bit premium valued, but that is justified by lower than low interest rates and good corporate earnings. Every time the bond ghouls make a run to push up interest rates the weak main street economy pushes rates back down.   The 10 year US Treasury finds it difficult to advance much past 2.5%. That rate allows for a premium valuation of stocks.  So either that rate goes up or stock earnings go down before you get a real sell off.  Doug Kass, who has made a mint, predicting the markets has been predicting a downturn for over a year and sooner or later he will be right.  But we continue to fully invested and fully leveraged in our trading account.  

One final note remember the stock market is currently a good bit detached from the real economy.  As we mentioned in a earlier post during what we are calling a political economy big companies are doing well with cheap money while regular people are struggling with part time employment.  The only way to sustain this debt based model of expanding consumption is zero interest rates, so it continues for the time being and that being no less time of until Obama leaves office. 

               

Publishers are your REALLY serious about your circulation department?

Since retiring we have spent a good bit of time doing consultation activities for newspapers.  In every experience one segment of the business continues to be treated like the proverbial red headed step child.  That segment being circulation.  Yes, we can hear you saying that at your property that dept. is getting plenty of attention and we are addressing the needs there.  Well we are here to tell you we will bet you a nice lunch in your market that is not so and below we will some of what we will call "circulation sins' you are committing.  Your newspaper lives and dies by your circulation and if you are not doing what is needed your property will likely be one of those you read down the road that is closing.  

Sin number one:  Not placing value, real value, on each and every subscriber? ..... If you do value each one do your follow behind every single stop in a timely manner of a day or two after they stop?  Not a mailed card asking them to come back, not just someone in your office checking out why they did the stop, we are talking about a phone call from preferably your editor to the person asking why they stopped and what the newspaper was not providing that made the decision to stop.  The caller should have on hand some circulation subscription offer to get them back and they need to be sincere in their approach to the former subscriber.  After all the newspaper is dependent on each and every subscriber to survive.  A call from your editor or even better the publisher shows how serious your newspaper is about their dropping the newspaper and how important they are to your business. Tell your editor, if they balk at this idea,  to either accept they are part of an ongoing business or they need an attitude adjustment hour from the publisher. Treat circulation customers like you would a big advertiser who has told you they will not be using your product anymore. 

Sin number two:  Not offering a three year paid in advance deal for every subscription renewal. ... Here is the concept that all salespeople understand.  The "sale" is the hardest part of the process of getting a new customer and the most time consuming.  If you can cut down the number of "sales" you have to do by not having to do them every year or so then you save time, money, and frankly will need less employees to accomplish this task.  Make sure the paid in advance is on a credit card if at all possible, it is easier to process and you get your money up front.  Also keep that number on file so as to make the sale even easier next time this sub comes up so the customer will not have to go search down their credit card.  The deal here is if they buy three years paid in advance they get a nice discount. One nice part about this three year in advance deal is you get all that lovely cash sitting in your account up front that could help you with cash flow issues.  You give up some of the sale for the reduction in expense and the ability to have the early additional cash flow.  

Sin number three:  Not tasking everyone and we do mean everyone, in the newspaper to sell subscriptions......  When someone calls the newspaper they have in essence said they value your product since they are doing some type of interaction with your company.  Therefore if during that phone call someone does not ask them if they are a subscriber then you are being foolish with the opportunity they have offered you.  Preferably the first person who answered the phone should make the pitch, to avoid having the caller being asked multiple times.  The proposal should again be the deal of paying up front with a credit card and again offer three years before going with less time if needed to make the sale.  Let's be honest here you absolutely must make someone responsible to try and make this sale since responsibility is the key to getting things done and give them some incentive.  Depending on your circulation size it should be no less than $10 commission per sale for the three year sale on a credit card.  Going back to everyone selling subs in your newspaper, put everyone on the commission structure of $10 per sale and tell them yes it is ok to ask outside the office about new subscribers.  From time to time to keep the idea of selling newspapers top of mind do sales contests with added incentives of days off or free meals at a local steakhouse who advertises with you now. 

Sin number four:  Not grasping that circulation numbers are likely more important that you realize and this goes back to the three year subs.....  Yes the money flowing into your newspaper from subscriptions is important to your cash flow, but frankly that is secondary to where numbers really hurt you.  First and foremost those increased or decreased circulation numbers impact an area you likely have never thought about earlier and that is preprint revenue.  Every time you lose circulation numbers the number of preprints you can effectively deliver to your subscribers for your preprint customers goes down.  Here is a quick exercise.  If you are delivering 10 inserts per week and lose 500 customers and are charging $40 per thousand you not only lose the circulation revenue you have lost over $10000 annually in advertising revenue.  If this is a daily newspaper that can deliver upwards to 50 inserts or more per week then you could be talking $50000 plus in lost revenue.  There was a time when newspaper were not delivering so many preprints weekly and no one considered the impact on advertising revenue and you still might be caught in that mindset, if so you need to reset how you think about numbers. 

Sin number five: Not already having flattened your organization by getting rid of dept. heads and using the remaining cash flow to either enhance profit or more importantly hire some non dept. head employees to do things like sell subscriptions.....  One other idea here is go ahead and put your advertising manager in charge of your circulation dept and hold them responsible with incentives to get the numbers up.  They understand sales, they understand the concept of the sale, and they of course can connect  those circulation numbers to that preprint revenue too. Advertising managers also understand the other concept of how much circulation numbers effect ROP sales. Higher circulation means more eyeballs looking at ads and responding to those ads by going to the local retailers who notice the added customer count through their door and how valuable, or less so, an ad published in your newspaper can be to their business. Losing eyeballs is not a direct impact on ROP revenue like insert revenue, but over time it can be more deadly to your business. 

Sin number six: The use of telemarketing to gain numbers in circulation..... In my thirty years of working in newspapers I have NEVER seen where telemarketing, notably by outside vendors, has done anything more than produce churn.  Customers sold by telemarketing do not stick and frankly most times cost more than you actually get in the end.  Besides telemarketing generally gets paid up front and leave your operation to do the real collecting of the subscription sale.   Instead of telemarketing use kiosks sales locally.  Hire someone, full time preferably, or at least get someone who does this work on the outside to be out there every Saturday and Sunday pushing your subscriptions.  If you can not find someone, offer the opportunity to someone in your newspaper to make extra money on weekends.  If you do decide to hire a full time employee to do this have them out there every day selling your product.   In most every market there are literally hundreds of places to place kiosks, grocery stores, dept. stores, tire dealers, mobile phone stores, etc. there is NO store no matter how big or small off limits to work a kiosk.  Be at local festival and local get together's of any kind day after day.  Again having someone who is on your staff doing this is best in my opinion as they can be out there everyday and you can keep tabs on what is going on with the process and having someone responsible make sure the job gets done. When approaching a potential retail site for placing your kiosk get with the store manager and make some deal to buy some of their gift certificates to hand out as premiums for new subscribers.  You get the new customer the store gets some certificate sales and some almost guaranteed in store sales that day.  Have some premiums too for your off store kiosk sales such as at a local festival.  Maybe a t-shirt or some gift certificates from one your very best advertising customers is a plus for obvious reasons.

Sin number seven: Expecting your circulation revenue to cover more than just your circulation costs..... When we say "costs" we mean the actual act of delivering your product either by carrier or mail.  The circulation dept. is not a profit center anymore, it is a numbers game.  Remember numbers, as in preprint numbers as in eyeballs to see advertising sales.   That means for the most part NO circulation price increases period unless mail costs, circulation materials costs, or wage costs go up.  You might even consider absorbing those extra costs in lieu of keeping those subscription numbers up since they are more important to advertising revenue long term.  Let's consider there are numerous printed advertising vehicles in your market now and they are more than likely free to the reader so competing against those free competitors and trying to do more than covering cost is foolish since they are totally dependent on ad sales. 

Circulation numbers are crucial to the long term survival of your newspaper and partaking in any of the above sins is placing that long term survival in peril.  Refrain from these sins and do not allow them to be temptation again. 

           

A political economy and how if effects your investing.

Earlier this year we advised those with assets to invest to put their money into mega or large cap stocks.  As the year has progressed we have been proved correct.   Our
selections VFIAX and MGC has gone up all year and would have kept your money safe while rewarding you with some dividends and some nice capital gains.  We continue to believe the next six months will be more of the same.  Much of this belief is based on a summation of the current economy we posted on earlier this year that those companies, very large corporations and mega sized private businesses, are prospering under an Obama administration.  The very businesses Obama preaches against are the very ones he is using in his crony capitalism.  As they say watch what people do, not what they say, so smart people figure out the deal and adjust your investing accordingly. 

Let's call this new normal the "political economy".   The trend is a general malaise brought to you via a sub 2% growth.   One can only imagine what just a small uptick in the economy to a 3% growth would produce, but with the high regulatory environment and high taxation on small business this will not be occurring in the near future under Obama.  Remember the Reagan recovery was producing 5% growth rates and above quarter after quarter and with less regulations and less small business taxation jobs boomed.  Small business is where 70% plus of new jobs come from and right now they are not hiring.  Big companies shed jobs to increase profits and only add jobs when absolutely necessary, 

This is an asset rich/income poor economy based on cheap money and financial engineering via large government deficits and huge federal reserve debt purchases of government debt.   So people who have money and corporations who have assets benefit from pushing money into assets that produce capital gains and not income. More potential to gain wealth from lower taxed asset growth than higher taxed income producing assets.  Note how publicly traded companies have spent huge sums of profits and cash flow to buy back stock and not create jobs because there is no opportunities in a slow growth economy. Took us awhile to figure this deal out, but we did and since then we personally have prospered handsomely from the decision. 

Now those of us who have large holdings of stocks and financial assets and those who have real estate in places like New York and San Francisco are doing very well in the Obama economy.  Having access to credit is a plus as well since buying on cheap credit, below 4% sometimes, and investing in assets that gain due to federal largess and federal reserve engineered asset growth just adds to the money being made by the wealthy in this economy.  Truth is that regulation by Obama is actually helping big business and banks because they can spread the cost over a larger customer base and squeeze out small business competitors.   Point in action is note that Walmart is all for a minimum wage increase because they know it will hurt smaller operators nipping at their business model. 

Young folks and many who voted for Obama are actually the ones getting hurt in this "political economy".  There is much lower home ownership as many can not afford homes that have gained value or in jobs that are such low pay the monthly payments are above their reach. ,Those jobs offer young people little career experience or important early learned job skills, and there is little or frankly no upward mobility to be obtained.  The American Dream open to so many just three decades past has become out of reach for many young people in this new normal. 

Technology and so called green industries have prospered under crony capitalism where tons of taxpayer money has been funneled into a politically correct business model approved by the political masters.  Until Americans and most importantly young Americans decide that they want a better future this is our economy.  True wealth comes from earned success and not from financial engineering and as we noted in the first paragraph here wise investors will continue to place assets in mega capital business until the government leaders quit using financial engineering to stymie that approach.  

We own VIFAX.

                

 

Kenan Memorial Auditorium

News this week in the Duplin Times that the Kenan family would no longer be paying for the upkeep of Kenan Memorial Auditorium hit us rather hard.   You see Kenan Auditorium is like Hinkle Fieldhouse to us and we expect some other people of our basketball playing era, that being the late 1960's and early 1970's.   To those of you not familiar with Hinkle Fieldhouse, that is the gym where the "games" were filmed for the movie Hoosiers.   Some years ago when driving through Kenansville NC we took our wife by Kenan Auditorium and walked around the outside of the building and looked in the windows. The memories flowed as we told her about nights being part of our high school basketball team playing in the now old gym.  

Kenan Memorial Auditorium was a gift from the Kenan Family to their namesake home place Kenansville and Eastern North Carolina to have a large venue for events and sports.  Built in 1950 at the time it was the largest place from Raleigh to the coast.  There is a stage, a basketball floor, and what seemed like seats and more seats for basketball game viewing.  It had a second level for basketball seating which allowed for large numbers of spectators.   The second level for us always made the place larger than life.  For a young high school basketball team member playing in Kenan Auditorium was likely done during a conference tournament or a state level playoff where the gym was needed to accommodate larger number of people. 

Back in the 1960's and into the 1970's our league the East Central Conference consisting of our high school Richlands, some high schools in Lenior County, and some more in Duplin County where Kenan is located made the place a good central point for playing big games.  So on conference tourney nights our bus would leave our high school for the thirty minute ride to Kenansville to play our game.  Getting off the bus and entering Kenan from the back and finding our seats was sorta like the Hickory High squad entering Hinkle Fieldhouse as it seemed like we had arrived at the BIG HOUSE gym to play our game. Right before our game we would go into the locker room and suit up and prepare for the game.  Our coach at the time Jack Byrd would go over any strategy we had practiced and we would leave the locker room and head to the floor for our seats beside the actual game floor.  What a thrill and what a moment for those of us participating.  What we did not know at the time was that we were making memories for the future. 

For some half century the old auditorium hosted basketball games, events, and local festivities.  From what we understand the last few years the newer Duplin Events Center has taken much of the activity away from the now older and less well equipped Kenan Auditorium.  We also expect the cost of upkeep now over $1 million dollars a year that the Kenan Family has been paying for all these many years has reached the point they no longer want to pay the tab.  The Kenan family offered to pay for tearing down the old auditorium which means to us that the place might be truly nearing it's last days. To those of us who had many shared experiences in Kenan it could indeed be the end of an era.  If so I hope Duplin County opens up the place and has a goodbye event so those of us who loved the old gym can say goodbye in a proper way.