For sometime, I have been holding on to Hewlett-Packard January 55 calls hoping that as the economy turns around and PC sales begin to pick up, HPQ would make its move towards that 55 strike (currently trading at $48.30). However, I decided to swipe out of my position in HPQ call contracts for Dell, despite the financial media just bashing on this company. Here is why:
After analyzing HPQ, IBM, DELL, and AAPL, I found some interesting results. Right off the bat, Apple does not amuse me. Allow me to take the contrarian approach on this one: AAPL is extremely overbought and to add, most analysts and individual investors are just TOO optimistic with Apple. The option contracts I was looking at were extremely over valued relative to its peers. Don’t get me wrong, Apple has great ‘innovative’ products, but they can only go for so long. What about Buffet’s ‘economic moat’ theory on this one? I still consider it, do others?
Ok, so now that Apple is gone, let us compare HPQ, IBM, and DELL. Looking at January calls that are roughly out of the money by 13%, 15%, and 12%, respectively, HPQ calls have the lowest premium demanded, followed by Dell, then IBM. With IBM also having the lowest probability of outperforming the S&P 500 index relative to HPQ and DELL not to mention the lowest 1 year volatility average (meaning the equity is less likely to move a lot thus leaving the option contracts less appealing), I will forget IBM.
Here we have it, HPQ or DELL? Personally, I have a Dell laptop and just love the computers, but that is beyond the point. DELL has a higher probability of outperforming the market by roughly 2%. The volatility is much higher than HPQ suggesting that Dell will more likely reach its strike faster than HPQ will. Year to Date, Dell has been outperforming HPQ by a near 2000 basis points. So with this all said, with the option contracts that are both out of the money by almost the same amount (considering intraday movements) with the same expiration, the premium for Dell is only $.07 more, or $7.00 per contract. I believe that is well worth it. By January, I look forward to discussing the movements both HPQ and Dell will have, going on the assumption that Dell will continue to outperform HPQ. Earlier this morning, Microsoft acknowledged strength in its Windows 7 product and PC demand is believed to have stabilized and expected to grow as businesses and people upgrade to newer computers. Of course there are other macro issues that could be figured into these assumptions but in the end, I believe Dell will flourish in terms of share price movement relative to Hewlett.
Thoughts and criticism are always appreciated.
Friday, October 23, 2009
Sunday, October 11, 2009
The Wave of Mergers NOW
It is this Monday, October 12th that marks the day, or week where I believe many companies can be acquired. We have seen M&A activity pick up with Disney’s bid for Marvel, a well run company that has strong fundamentals and a nice probability of outperforming the markets. We have also witnessed Kraft bidding for Cadbury, Dell making an offer to Perot, as well as Affiliated Comp. Services becoming a target for Xerox. Keep in mind that of these four acquirers, two are components of the Dow Jones Industrial Average. Thus a key question that comes to mind after considering the recent M&A activity is what Dow Components will be the next acquirers and who will be the targets?
Over the last 12 to 15 months we have seen endless companies hoard cash as a result of the economic crisis, lacking credit, and everything else that had caused such a spooky environment. But now that the markets have been fighting back with the help of some leading economic indicators, stabilizing home prices, available credit, and companies reporting better numbers than expected, with equities on the move, rising valuations are more likely than dubious. Therefore, many companies might almost feel obligated to make acquisitions now so they could avoid paying even more of a premium at some later point in time.
This week, October 12th – 16th, we will see many companies report: Charles Schwab, CSX, Intel, Citigroup, JP Morgan, Google, and GE just to name a few. With such a key earnings week approaching and the Dow recently hitting new highs for the year, not to mention the strong momentum and millions of investors that are so eager to jump back in, we easily have the fuel to push the Dow above that psychological 10,000 mark. If that occurs, the markets can continue to rise. Clearly there are some concerns such as a weak dollar and a federal tax credit to first time home owners that is near expiration to name a few, but on the contrary, everyone expects some ‘pullback’ but that might not even be warranted! If this week gives us a great optimistic read on the consumer and the general economy, why does the market have to pull back?
At the end of the day, I believe there is still a lot of room for consolidation throughout a broad array of sectors and synergies to be created if such acquisitions occur. How about Under Armour being taken over by Nike, Activision or Microsoft bidding at Take-Two Interactive, or a Merck or Pfizer picking up a Cell Therapeutics or some other biotech? Just some thoughts…
Over the last 12 to 15 months we have seen endless companies hoard cash as a result of the economic crisis, lacking credit, and everything else that had caused such a spooky environment. But now that the markets have been fighting back with the help of some leading economic indicators, stabilizing home prices, available credit, and companies reporting better numbers than expected, with equities on the move, rising valuations are more likely than dubious. Therefore, many companies might almost feel obligated to make acquisitions now so they could avoid paying even more of a premium at some later point in time.
This week, October 12th – 16th, we will see many companies report: Charles Schwab, CSX, Intel, Citigroup, JP Morgan, Google, and GE just to name a few. With such a key earnings week approaching and the Dow recently hitting new highs for the year, not to mention the strong momentum and millions of investors that are so eager to jump back in, we easily have the fuel to push the Dow above that psychological 10,000 mark. If that occurs, the markets can continue to rise. Clearly there are some concerns such as a weak dollar and a federal tax credit to first time home owners that is near expiration to name a few, but on the contrary, everyone expects some ‘pullback’ but that might not even be warranted! If this week gives us a great optimistic read on the consumer and the general economy, why does the market have to pull back?
At the end of the day, I believe there is still a lot of room for consolidation throughout a broad array of sectors and synergies to be created if such acquisitions occur. How about Under Armour being taken over by Nike, Activision or Microsoft bidding at Take-Two Interactive, or a Merck or Pfizer picking up a Cell Therapeutics or some other biotech? Just some thoughts…
Wednesday, March 11, 2009
3/6/09 - 6469.95: Bottom in Dow
That’s right, I’m going all-out optimistic and calling it. I haven’t been writing about the stock market, but I am an investor, so I think I’ll start right now. The market is inarguably oversold; I will attribute the last 10% or so downward to a combination of unnecessary government interference and the DOOM AND GLOOM media. If not for those two factors, we probably would have held at the 50% retracement support level.
I’m a technician, but I also take strongly into account the fundamental economic environment. From that perspective, the pieces of the puzzle here, especially looking through my perpetual lens of optimism, seem to be fitting together in the shape of a market bottom.
Tuesday’s rally was significant for a number of reasons. First, it was lead by news of profitability coming from the leper colony that is the financial sector, and from Citigroup of all companies. I don’t think I need to explain any further why this is so significant in the face of the unbridled pessimism surrounding the financials, and the entire economy for that matter.
Second, promising news came down that the up-tick rule will be restored. This is crucial in the current market environment. (If you aren’t familiar with the rule read here: Uptick Rule) If reinstated as promised, this will do wonders for the stock market (and limit profits for short sellers, but I’m making the bull case here).
On to the technicals, here is a 6 month daily chart of the Dow, with three of my choice indicators:
Now that’s a pretty picture. MACD and stochastics extremely bullish, and with the 20 day moving average in sight at approximately 7,200 there is some serious short term uptrend potential here.
Let’s now take a step back to look at the weekly 5 year chart of the Dow:
Of course, this isn’t as good looking a chart but I see that short term uptrend turning into some serious long term upward motion if that 20 day moving average is broken. On the 5 year weekly, the stochastics are starting to turn up, with a bulling crossover in our sights. Also, the MACD is turning back towards positive territory. Although maybe premature, these would be leading indicators of a bullish reversal.
What really catches my eye on this chart, however, is what appears to be a text book first half of a head and shoulders reversal. Putting this all together, if the 20 day moving average is breached to the upside, I would look for an upward trend to about 9,000 followed by a pull back, for the second shoulder, to about 8,000 before we start our long term climb back to our pre-2008 glory.
For those of you who shun technical analysis and think that these are just wild guesses, I won’t waste either one of our time explaining the reasoning and actual forces behind these chart patters or movements in oscillators, as there is a myriad amount of literature on the subject. Instead, I will make a fundamental case for the prediction:
The short term rally, as I’m calling from the 6 month chart (assuming the 20dma is broken), can be attributed to strength coming from the financials as well as the positive legislative changes expected. A short term rally would in turn relieve the media’s DOOM AND GLOOM attack on equities, which would in turn alleviate much of the downward pressure from panic selling and zero confidence. How does the second shoulder correction fit in to this fundamental analysis? I believe that this long term rally will briefly correct downward because there are still some credit/liquidity issues stemming from contagious fear that need to be flushed out by some economic optimism:
On Tuesday, the day of the rally, an article was posted on CNBC.com entitled “New Red Flag for Markets: Credit is Tightening Again." The takeaway was that Libor rates, the “Ted Spread” (the difference between 3 month Libor and 3 month T-bill rates), 2 year credit default swap rates, and the Commercial Mortgage-Backed Security index, are all currently indicating an increase in the reluctance to lend; credit is tightening up again. David Lutz of Stifel Nicolaus says, “"With those four things showing more and more strain, there's a disconnect with equities rallying the way they are. If they keep trading this way it's definitely an indication that there could be another leg down in stocks."
Couple that info with the other two key takeaways from the article:
“To be sure, the credit indicators are nowhere near the depths of September 2008 or so when lending all but dried up completely.”
“"After several months of swift declines and an environment where global central banks continue to cut short-term interest rates, any increase in Libor rates is a troubling reminder of the tension in credit markets," says Greg McBride, senior financial analyst for Bankrate.com. "The equity markets have effectively been behind the curve of what the credit markets have seen and experienced first-hand."”
And what I put all this information together as saying, in conjunction with the fundamental support I gave for a near term rally, is that we will have our short term rally, and a good sized one at that (I’m sticking with 9,000 if the 20dma is surpassed), based on a snowball effect of positive sentiment and flood of capital reentering the market, correct down to 8,000 because of credit worries, and then resume our long term upward ascent as everyone in the world realizes that the economy was never really that bad. This will be accompanied by a beautiful symphony of markups by all the companies that wrote off everything in sight and all types of good news. (This is supported by a statistic that I cannot find the source again, Kudlow presented it a few days ago, that compared to the financial crisis of the 90’s, companies are writing down twice the amount of assets compared to actual bad debt).
Pretty upbeat isn’t it? Are you feeling the sun emerging from behind the clouds yet? Well, I for one, sure hope this all comes true, and I really hate to say it but it is all largely reliant on the government not doing anything stupid. If all goes as planned and as they say, and Geithner really provides solid incentives for investors to by the “toxic” assets off the banks’ books, etc. and the Dow breaks that all-important 20 day moving average, I think that we stand a darn good chance at the nation-boosting rise back up to equity prosperity.
I’m a technician, but I also take strongly into account the fundamental economic environment. From that perspective, the pieces of the puzzle here, especially looking through my perpetual lens of optimism, seem to be fitting together in the shape of a market bottom.
Tuesday’s rally was significant for a number of reasons. First, it was lead by news of profitability coming from the leper colony that is the financial sector, and from Citigroup of all companies. I don’t think I need to explain any further why this is so significant in the face of the unbridled pessimism surrounding the financials, and the entire economy for that matter.
Second, promising news came down that the up-tick rule will be restored. This is crucial in the current market environment. (If you aren’t familiar with the rule read here: Uptick Rule) If reinstated as promised, this will do wonders for the stock market (and limit profits for short sellers, but I’m making the bull case here).
On to the technicals, here is a 6 month daily chart of the Dow, with three of my choice indicators:
Now that’s a pretty picture. MACD and stochastics extremely bullish, and with the 20 day moving average in sight at approximately 7,200 there is some serious short term uptrend potential here.
Let’s now take a step back to look at the weekly 5 year chart of the Dow:
Of course, this isn’t as good looking a chart but I see that short term uptrend turning into some serious long term upward motion if that 20 day moving average is broken. On the 5 year weekly, the stochastics are starting to turn up, with a bulling crossover in our sights. Also, the MACD is turning back towards positive territory. Although maybe premature, these would be leading indicators of a bullish reversal.
What really catches my eye on this chart, however, is what appears to be a text book first half of a head and shoulders reversal. Putting this all together, if the 20 day moving average is breached to the upside, I would look for an upward trend to about 9,000 followed by a pull back, for the second shoulder, to about 8,000 before we start our long term climb back to our pre-2008 glory.
For those of you who shun technical analysis and think that these are just wild guesses, I won’t waste either one of our time explaining the reasoning and actual forces behind these chart patters or movements in oscillators, as there is a myriad amount of literature on the subject. Instead, I will make a fundamental case for the prediction:
The short term rally, as I’m calling from the 6 month chart (assuming the 20dma is broken), can be attributed to strength coming from the financials as well as the positive legislative changes expected. A short term rally would in turn relieve the media’s DOOM AND GLOOM attack on equities, which would in turn alleviate much of the downward pressure from panic selling and zero confidence. How does the second shoulder correction fit in to this fundamental analysis? I believe that this long term rally will briefly correct downward because there are still some credit/liquidity issues stemming from contagious fear that need to be flushed out by some economic optimism:
On Tuesday, the day of the rally, an article was posted on CNBC.com entitled “New Red Flag for Markets: Credit is Tightening Again." The takeaway was that Libor rates, the “Ted Spread” (the difference between 3 month Libor and 3 month T-bill rates), 2 year credit default swap rates, and the Commercial Mortgage-Backed Security index, are all currently indicating an increase in the reluctance to lend; credit is tightening up again. David Lutz of Stifel Nicolaus says, “"With those four things showing more and more strain, there's a disconnect with equities rallying the way they are. If they keep trading this way it's definitely an indication that there could be another leg down in stocks."
Couple that info with the other two key takeaways from the article:
“To be sure, the credit indicators are nowhere near the depths of September 2008 or so when lending all but dried up completely.”
“"After several months of swift declines and an environment where global central banks continue to cut short-term interest rates, any increase in Libor rates is a troubling reminder of the tension in credit markets," says Greg McBride, senior financial analyst for Bankrate.com. "The equity markets have effectively been behind the curve of what the credit markets have seen and experienced first-hand."”
And what I put all this information together as saying, in conjunction with the fundamental support I gave for a near term rally, is that we will have our short term rally, and a good sized one at that (I’m sticking with 9,000 if the 20dma is surpassed), based on a snowball effect of positive sentiment and flood of capital reentering the market, correct down to 8,000 because of credit worries, and then resume our long term upward ascent as everyone in the world realizes that the economy was never really that bad. This will be accompanied by a beautiful symphony of markups by all the companies that wrote off everything in sight and all types of good news. (This is supported by a statistic that I cannot find the source again, Kudlow presented it a few days ago, that compared to the financial crisis of the 90’s, companies are writing down twice the amount of assets compared to actual bad debt).
Pretty upbeat isn’t it? Are you feeling the sun emerging from behind the clouds yet? Well, I for one, sure hope this all comes true, and I really hate to say it but it is all largely reliant on the government not doing anything stupid. If all goes as planned and as they say, and Geithner really provides solid incentives for investors to by the “toxic” assets off the banks’ books, etc. and the Dow breaks that all-important 20 day moving average, I think that we stand a darn good chance at the nation-boosting rise back up to equity prosperity.
Low Oil or High Oil? What Can This Mean?
I figured it would only be a matter of time for oil to trend upwards from its strong correction that took place from mid July 2008 to mid January 2009. Keep in mind many OPEC nations were not exactly content with having millions of fuel abusers get such a break at the pumps over the last few months. Also, is it possible that such goals to create jobs via alternative energy sources in America were put on hold, or better yet, lost emphasis because oil was so low?
With oil low, dozens of nations whose export markets rely solely on oil become distressed. To fix this issue, OPEC decides to cut production. Back in December of 2008, OPEC cut production slightly over 2 million barrels per day. Another production cut of near 1 million barrels per day in the near future is the speculation and those repercussions of such supply cuts can take time opposed to trading speculation that can dictate the price of oil per barrel by the immediate second. However, once the production cuts start to assimilate, oil can trend higher. Now there is a bigger picture to this issue.
With oil potentially undervalued, two things can happen of many: 1) a correction can potentially benefit dozens of countries thus shifting their Gini Coefficient closer to 0 (assuming that an oil producing nation as a whole benefits from oil revenues and not just the cream of the crop/dictating political organizations) and 2) it encourages the United States to focus more on producing alternative energy in America thus creating jobs in such relevant sectors.
In one of my research reports I wrote at DePaul University a few months ago, I outlined several bullish strategies on how to capitalize on the assumption that the securities markets were fairly ignoring the correction in oil prices simply because the financial sector pushed the oil sector out of the lime light. If the correction in oil prices helped such companies like JetBlue and FedEx, such upside would be realized in the underlying stock and the put options to protect against any downside would expire worthless. Albeit the underlying stock of JetBlue and FedEx ‘inefficiently’ trending downward with the rest of the market, a January 2010 put option on JetBlue and FedEx with strike prices of $5.00 @ 1.75 and $60.00 @ 10.90, would have experienced a 54% and 132% return, respectively. With such substantial upside present in the positions as of March 10, 2009 (the increased value in the put options would exceed the loss from the underlying equities), it would make most sense to sell the put options prior to their expiration date.
With that said, similar strategies can now be applied to such solar stocks. If oil prices are trending upwards, perhaps it would make sense to start buying numerous solar stocks, or the call options depending on how bullish you are. If the Obama Administration wants to emphasize alternative energy, why would this not make sense? I understand that the ‘infrastructure spending’ part of the Stimulus Package did not help companies like Caterpillar outperform because such an allocation to a hefty project does not happen over one night. This is why it makes sense to buy put options on such related stocks to perhaps compensate for the downside because the markets are so volatile and again, repercussions can take time (known as a Protective Put strategy if one is going long Stock A and buying the put options to Stock A). Bottom line is that I am still optimistic and based on several sectors out there, including solar, I believe the moment to start getting the toes wet might just be now.
With oil low, dozens of nations whose export markets rely solely on oil become distressed. To fix this issue, OPEC decides to cut production. Back in December of 2008, OPEC cut production slightly over 2 million barrels per day. Another production cut of near 1 million barrels per day in the near future is the speculation and those repercussions of such supply cuts can take time opposed to trading speculation that can dictate the price of oil per barrel by the immediate second. However, once the production cuts start to assimilate, oil can trend higher. Now there is a bigger picture to this issue.
With oil potentially undervalued, two things can happen of many: 1) a correction can potentially benefit dozens of countries thus shifting their Gini Coefficient closer to 0 (assuming that an oil producing nation as a whole benefits from oil revenues and not just the cream of the crop/dictating political organizations) and 2) it encourages the United States to focus more on producing alternative energy in America thus creating jobs in such relevant sectors.
In one of my research reports I wrote at DePaul University a few months ago, I outlined several bullish strategies on how to capitalize on the assumption that the securities markets were fairly ignoring the correction in oil prices simply because the financial sector pushed the oil sector out of the lime light. If the correction in oil prices helped such companies like JetBlue and FedEx, such upside would be realized in the underlying stock and the put options to protect against any downside would expire worthless. Albeit the underlying stock of JetBlue and FedEx ‘inefficiently’ trending downward with the rest of the market, a January 2010 put option on JetBlue and FedEx with strike prices of $5.00 @ 1.75 and $60.00 @ 10.90, would have experienced a 54% and 132% return, respectively. With such substantial upside present in the positions as of March 10, 2009 (the increased value in the put options would exceed the loss from the underlying equities), it would make most sense to sell the put options prior to their expiration date.
With that said, similar strategies can now be applied to such solar stocks. If oil prices are trending upwards, perhaps it would make sense to start buying numerous solar stocks, or the call options depending on how bullish you are. If the Obama Administration wants to emphasize alternative energy, why would this not make sense? I understand that the ‘infrastructure spending’ part of the Stimulus Package did not help companies like Caterpillar outperform because such an allocation to a hefty project does not happen over one night. This is why it makes sense to buy put options on such related stocks to perhaps compensate for the downside because the markets are so volatile and again, repercussions can take time (known as a Protective Put strategy if one is going long Stock A and buying the put options to Stock A). Bottom line is that I am still optimistic and based on several sectors out there, including solar, I believe the moment to start getting the toes wet might just be now.
Sunday, February 22, 2009
The Truth of the Labor Market
As I mentioned in my previous post, a more thorough explanation of the American Labor market is needed. Well, here you have it:
The labor market is like any other market; prices, in this case wages, are set by the forces of supply and demand. For any particular job function, there are a certain number of people in the world who are qualified to perform it (supply). For most job functions, there are a certain number of businesses/employers in the world who require a person to fill the position (demand).
(Now, I started off by talking about the American labor market, so why now am I talking about the global labor market? Because we live in a globalized economy in which, with exception of those nations that enforce protectionist policy, businesses are free to move across borders in pursuit of the most favorable operating conditions.)
So when ABC Inc. needs a new XYZ7000 machine operator they list the job opening. The XYZ7000 just happens to be the newest most technologically advanced piece of machinery there is so there are only 5 people in the area, seeking employment, that have the training and qualifications to run the XYZ7000. Well, if ABC Inc. is the only company in town, they only have to offer a wage superior to that of 1 of the 5 people's next best offer, in this case let's say manual labor at $7/hour. ABC Inc. offers $10/hour and John, one of the five, is hired. Well, if Bill is willing to take the position for $8/hour, he will get the position instead and the equilibrium wage for an XYZ7000 machine operator is $8/hour; where supply equals demand. Now, if 9 more firms all purchase the XYZ7000 and need operators for it the case is completely different. Now the 10 firms will be willing to pay per hour up to the cost of their best alternative, let's say having 30 workers do what the machine does by hand. We have said, for our example, that manual labor is worth $7/hour; 30 workers = $210/hour. Now John gets a raise to $200/hour just to retain him from getting hired by one of the other firms for that rate. Bill, being the the shrewdest negotiator, gets hired by one of the other five firms for $209/hour. As we see from the above example, supply and demand dictate wages. (I apologize to anyone already well versed in the concept.)
What's my point? The ones complaining not having/getting a job are those who have skill sets for which there is a far greater supply than there is for demand. What's the answer? Guess what, 9 times out of 10, if you don't have/can't get a job then you are not willing to work for the wage you deserve. Don't get outraged, just understand- when supply outnumbers demand, it's the demand that decides what you're worth. That's so unfair! You cold hearted son of a gun! This is the usual response. Unfortunately for everyone with this mindset, this is not a subjective matter. If you demand $34/hour for your manual labor on an assembly line and workers in Mexico can and will perform the same task at the same quality for $5/hour don't be surprised when your employer hops the border for more favorable labor costs.
This is what minimum wages do; make businesses leave in favor of better conditions, or when in response the government implements protectionist policies to try to stop that process the companies just get squeezed to death.
I hope this helps a bit to clarify why people "can't get work"; because they are asking too much for their skills relative to the supply of that particular type of labor. This doesn't even get into tax policies and disincentives to work which will be heavily covered soon. If you would like any points clarified or expounded upon please respond and let me know, I don't want to sound like a textbook, especially for those already familiar with this concept. Also, please feel free to criticize.
The labor market is like any other market; prices, in this case wages, are set by the forces of supply and demand. For any particular job function, there are a certain number of people in the world who are qualified to perform it (supply). For most job functions, there are a certain number of businesses/employers in the world who require a person to fill the position (demand).
(Now, I started off by talking about the American labor market, so why now am I talking about the global labor market? Because we live in a globalized economy in which, with exception of those nations that enforce protectionist policy, businesses are free to move across borders in pursuit of the most favorable operating conditions.)
So when ABC Inc. needs a new XYZ7000 machine operator they list the job opening. The XYZ7000 just happens to be the newest most technologically advanced piece of machinery there is so there are only 5 people in the area, seeking employment, that have the training and qualifications to run the XYZ7000. Well, if ABC Inc. is the only company in town, they only have to offer a wage superior to that of 1 of the 5 people's next best offer, in this case let's say manual labor at $7/hour. ABC Inc. offers $10/hour and John, one of the five, is hired. Well, if Bill is willing to take the position for $8/hour, he will get the position instead and the equilibrium wage for an XYZ7000 machine operator is $8/hour; where supply equals demand. Now, if 9 more firms all purchase the XYZ7000 and need operators for it the case is completely different. Now the 10 firms will be willing to pay per hour up to the cost of their best alternative, let's say having 30 workers do what the machine does by hand. We have said, for our example, that manual labor is worth $7/hour; 30 workers = $210/hour. Now John gets a raise to $200/hour just to retain him from getting hired by one of the other firms for that rate. Bill, being the the shrewdest negotiator, gets hired by one of the other five firms for $209/hour. As we see from the above example, supply and demand dictate wages. (I apologize to anyone already well versed in the concept.)
What's my point? The ones complaining not having/getting a job are those who have skill sets for which there is a far greater supply than there is for demand. What's the answer? Guess what, 9 times out of 10, if you don't have/can't get a job then you are not willing to work for the wage you deserve. Don't get outraged, just understand- when supply outnumbers demand, it's the demand that decides what you're worth. That's so unfair! You cold hearted son of a gun! This is the usual response. Unfortunately for everyone with this mindset, this is not a subjective matter. If you demand $34/hour for your manual labor on an assembly line and workers in Mexico can and will perform the same task at the same quality for $5/hour don't be surprised when your employer hops the border for more favorable labor costs.
This is what minimum wages do; make businesses leave in favor of better conditions, or when in response the government implements protectionist policies to try to stop that process the companies just get squeezed to death.
I hope this helps a bit to clarify why people "can't get work"; because they are asking too much for their skills relative to the supply of that particular type of labor. This doesn't even get into tax policies and disincentives to work which will be heavily covered soon. If you would like any points clarified or expounded upon please respond and let me know, I don't want to sound like a textbook, especially for those already familiar with this concept. Also, please feel free to criticize.
Saturday, February 21, 2009
Please, just let markets work!
Forget the intro; I’ll just cut right to the chase. Businesses that cannot survive without government aid should not survive. It’s really that easy. People that cannot afford to live in a house should not live in that house. Again, it’s really that simple. Forget the $800 billion pork-barreled-up-the-whazoo ‘stimulus’ bill. Taking the tax dollars of those businesses that make prudent decisions and operate with sustainability in mind, and using them to give as a hand out to the irresponsible businesses who either knowingly or ignorantly took blatant risks in the name of short term results is the epitome of inequity. Taking the tax dollars of those homeowners who break their backs and sacrifice everything discretionary in order to pay their mortgage on time every month to spend them on keeping the irresponsible people who bought houses they knew they couldn’t afford, or who would rather spend their income on a new BMW lease, in their houses is unfathomably sickening. Businesses: if you take risks, assume the responsibility for the result. American citizens: if you bought more than you can afford; assume the responsibility for your decisions. The government is not some generous bad parent who rewards blatantly irresponsible behavior by eating the loss so you don’t have to. Unfortunately, that’s exactly what this ‘stimulus plan’ garbage is. It’s also what all these ‘our top priority is keeping people in their houses’ programs are. This is atrocious. Seriously, what kind of message does this send to the youth of our nation? “Do whatever the hell you want son, live far above your means, max out your credit, bet on the long shots, because in the end you will reap the rewards and someone else will cover all the losses.”
Before you start posting enraged comments, obviously there are those businesses that made prudent decisions and are still facing bankruptcy. There are obviously homeowners that didn’t buy above their means, but rather lost their jobs or something similar and are now facing foreclosure. Well, unfortunately there will always be these outlier cases, no matter what the economic environment. What about everyone losing their jobs? We are in a contraction period in the business cycle. No one thinks anything out of tune with the labor market when it’s easier to find a job than your car keys. During times of major economic growth when firms all balloon up their employee base getting a job is quite easy; competition for those positions is not too bad. But when growth turns into contraction, and these same firms proportionately reduce their labor costs everyone is so shocked at the heartlessness of ‘Corporate America’. Only the best candidates get the jobs, all those non-top performers who got hired during the growth phase are no longer sustainable. This is what happens in a downturn. It is exactly the opposite of what happens in an upturn; but no one is paying attention when times are good. I’m going to need to supplement this with a subsequent post outlining the serious problems with the American labor market.
So what about those businesses that didn’t take any risks but are still getting beat down and out? When John Doe opened up his (whatever) business, how would he have known that the economy was about to tank and demand for his (whatever) would seriously decrease or disappear? It is this type of mentality that’s the problem. There is risk involved with starting a business. There is risk involved with operating a business. There is a business cycle; it is well documented. Just because someone is ignorant of history and economics does not mean that they should be excused from the consequences of their actions. Telling the judge, “But how was I supposed to know that in China pedestrians always have the right of way?” will not get you out of Chinese prison for vehicular manslaughter. In economics, just the same as in the judicial system, ignorance of the law is no excuse.
Opening or running a business does not guarantee success. Seeking or getting a job does not guarantee you indefinite employment. Investing your retirement money in a mutual or index fund does not guarantee you positive returns. This is how the world works. If you do not have the foresight to see the downturn coming, and/or have not adequately prepared for the lean years, your business will and should fail. If you are living near, at, or above your means and have not adequately prepared for the lean years, you will and should lose your house and assets. If you are not the most qualified for your job position, and/or are being paid more than the equilibrium wage for that position, you will and should lose your job. I’m not some heartless bourgeois; this is simply the real world, this is reality.
It is only after this reality is realized and accepted that we will stop trying to ‘fix’ the inevitable, with more misappropriated tax dollars which in turn only delay and exaggerate it, and embrace this correction as a much needed consolidation period from which increased efficiency, growth, and prosperity will emerge.
Before you start posting enraged comments, obviously there are those businesses that made prudent decisions and are still facing bankruptcy. There are obviously homeowners that didn’t buy above their means, but rather lost their jobs or something similar and are now facing foreclosure. Well, unfortunately there will always be these outlier cases, no matter what the economic environment. What about everyone losing their jobs? We are in a contraction period in the business cycle. No one thinks anything out of tune with the labor market when it’s easier to find a job than your car keys. During times of major economic growth when firms all balloon up their employee base getting a job is quite easy; competition for those positions is not too bad. But when growth turns into contraction, and these same firms proportionately reduce their labor costs everyone is so shocked at the heartlessness of ‘Corporate America’. Only the best candidates get the jobs, all those non-top performers who got hired during the growth phase are no longer sustainable. This is what happens in a downturn. It is exactly the opposite of what happens in an upturn; but no one is paying attention when times are good. I’m going to need to supplement this with a subsequent post outlining the serious problems with the American labor market.
So what about those businesses that didn’t take any risks but are still getting beat down and out? When John Doe opened up his (whatever) business, how would he have known that the economy was about to tank and demand for his (whatever) would seriously decrease or disappear? It is this type of mentality that’s the problem. There is risk involved with starting a business. There is risk involved with operating a business. There is a business cycle; it is well documented. Just because someone is ignorant of history and economics does not mean that they should be excused from the consequences of their actions. Telling the judge, “But how was I supposed to know that in China pedestrians always have the right of way?” will not get you out of Chinese prison for vehicular manslaughter. In economics, just the same as in the judicial system, ignorance of the law is no excuse.
Opening or running a business does not guarantee success. Seeking or getting a job does not guarantee you indefinite employment. Investing your retirement money in a mutual or index fund does not guarantee you positive returns. This is how the world works. If you do not have the foresight to see the downturn coming, and/or have not adequately prepared for the lean years, your business will and should fail. If you are living near, at, or above your means and have not adequately prepared for the lean years, you will and should lose your house and assets. If you are not the most qualified for your job position, and/or are being paid more than the equilibrium wage for that position, you will and should lose your job. I’m not some heartless bourgeois; this is simply the real world, this is reality.
It is only after this reality is realized and accepted that we will stop trying to ‘fix’ the inevitable, with more misappropriated tax dollars which in turn only delay and exaggerate it, and embrace this correction as a much needed consolidation period from which increased efficiency, growth, and prosperity will emerge.
Sunday, February 15, 2009
Blog Update
Readers,
I extend my sincerest apologies for the lapse in postings since just prior to the election. Much has happened and their is much going on that needs desperately to be understood through the clarifying lenses of logic and economics. Propaganda, misinformation and unfathomable falsities are being ratified by the media as fact and truth. Within the week posts shall resume, and in constant frequency.
I highly encourage checking back regularly and posting questions or comments in response to postings. I have invited a few guest writers to author pieces to augment those which I shall present, and through doing so I hope to stimulate a continual dialogue between authors and readers. Anyone wishing to be a guest author can either respond to a post with their own enlightened insights or, if they so wish, email me a draft of what they would like published.
Also, I have a large backlog of topics I wish to cover; but if anyone has suggestions please do not at all hesitate to email them to me, either abstract of specific all are welcome.
I hope all are off to an industrious new year and I look forward to reestablishing your readership.
Please check back regularly; new posts on the way.
Best regards,
Steven Louis
I extend my sincerest apologies for the lapse in postings since just prior to the election. Much has happened and their is much going on that needs desperately to be understood through the clarifying lenses of logic and economics. Propaganda, misinformation and unfathomable falsities are being ratified by the media as fact and truth. Within the week posts shall resume, and in constant frequency.
I highly encourage checking back regularly and posting questions or comments in response to postings. I have invited a few guest writers to author pieces to augment those which I shall present, and through doing so I hope to stimulate a continual dialogue between authors and readers. Anyone wishing to be a guest author can either respond to a post with their own enlightened insights or, if they so wish, email me a draft of what they would like published.
Also, I have a large backlog of topics I wish to cover; but if anyone has suggestions please do not at all hesitate to email them to me, either abstract of specific all are welcome.
I hope all are off to an industrious new year and I look forward to reestablishing your readership.
Please check back regularly; new posts on the way.
Best regards,
Steven Louis
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