Posts Tagged ‘Utilities’

Get Ready To Invest.

Thursday, September 22nd, 2011

A while back we urged people to raise cash.  Republican intransigence against directly hiring people, either to rebuild infrastructure, or to rehire teachers, police and firefighters laid off at the municipal level, is having the inevitable effect of pushing the economy back into official recession levels.

While a double dip might make Republicans relent, or at least push traditional Republicans into a coalition with Democrats in the House and thus overcome Tea Partiers, the odds of this happening are still low, in our opinion.  The worse the double dip, the higher the probability of this badly needed coalition forming, however.

So when is the time right to wade out of cash?   Right now if you can take risk and sleep at night.  Put 10% to work now, and repeat the process on volatile down days.   Put the funds into companies that are growing and if they pay a dividend so much the better.  The ride is likely to be bumpy, of course, and there can be no guessing what will eventually turn out to be the lowest lows.    A lot of folks are advising utilities because they pay hefty dividends and are considered defensive.  We disagree unless you’re willing to quickly trade out of them once interest rates turn.  Traditionally one buys utilities when interest rates are high, and the stock prices low.  That’s when you buy utilities.  And of course your so-called advisor is telling you to dump utilities when that happens.  Ignore the advice.  Just like you should ignore it now, when you’re being told to buy defensive utilities.

What’s the ultimate sign of a bottom?  Look for the number of new highs.  If you get a string of bad market days and one day there’s only one stock making a new high (while the new low list is long) you’re at bottom.  If you see that happen, back up the truck.

From the Great Recession to the Great Reconstruction

Thursday, April 30th, 2009

Despite, or maybe because of, the Great Recession there’s tremendous opportunity for the United States in general, and for President Obama in particular.

Without going into detail (books will be written about all this) one underlying cause of this recession was the lack of strong credit securities for investors globally.  That lack still exists.

And herein lies the opportunity.  The United States has a great need for infrastructure improvements in many areas.  It has been estimated that just maintaining our existing infrastructure will cost well over $2 trillion the next five years.  But the need goes far beyond that figure.  Our energy system needs modernizing, and the demand for clean, sustainable base energy is only going to increase the next 10 years.  Dramatically increase.

The automotive and mass transit industries need to be re-built.  Universal health care will take huge investment to implement.  Public investment in education will improve our ability to instruct our youth in the skills needed for this century.

One can only guess at how much investment all this will take, but the total is likely to be many times the $14 trillion in GDP the United States produced in 2008.

Much if not most of this investment will take the form of bonds, the lifeblood of credit markets worldwide.  And unlike the derivative securities recently exploded, these will be real bonds.  Secure bonds mainly issued by government.  These types of AAA securities are just what credit markets need.  There will be willing buyers worldwide.

But there are two hurdles to overcome.  For 30 years the United States operated under the basic assumption that free markets, if left alone and essentially unregulated, would best create jobs, income and wealth for everyone.  It turns out that, although free markets are powerfully creative, they tend to ignore longterm goals in favor of short term profits.

Long term goals, it turns out, is primarily a function of government.  The first hurdle is to convince the nation that it’s wise to support government efforts in this regard.  And this means overcoming 30 years of ideology based upon the idea that government is the last place you go to for answers.  As President Reagan so powerfully argued, “Government is not the solution.  It’s the problem.”

Convincing at the time 30 years ago, the nation took his words too literally and wandered down the now crumbling road believing free markets would take care of everything.

That’s hurdle one.  Hurdle two is planning and explaining what the goals are and exactly how we intend to get there.   The better this is done the greater is the opportunity.  Well designed plans and clearly stated goals will attract investment dollars in search of the kind of projects that provide secure credit market returns. 

President Obama has begun this effort, but it needs to be fleshed out and better explained.  He’s called his initial efforts a “down payment” for improving the nation’s energy, social and education infrastructures.

Any good plan has specific actions, each building on the other and leading to success.  There is a well understood design showing how assets will be applied to making improvements.  There is detail everyone can clearly see and agree with.

One important aspect may be to design specific Treasury bonds to specific projects, rather than just a general raising of investment capital.   This kind of clarity of purpose enhances a bond’s attractiveness to credit markets.  During WWII, for example, the United States issued “war bonds.”  Also, the Treasury investment can create the need for private bonds as industry competes for contracts.

This clarity also demands clarity of payment.  It requires the government to have strong fiscal plans that back up the bonds.  Income from private involvement will help, but in the end, the government has to honestly budget what it will take in tax revenue to pay off investors.  Fortunately many of the required investments will generate easily identifiable tax revenues.  That’s why credit markets so love utility projects, for example.

The President has shown a tendency to suggest goals and seek bipartisan support from Congress.  It’s not likely this approach will work well.  More than suggestions are needed.  Specific plans that identify all the effort’s components, including investment sources and tax income, need to be included in the administration’s proposals to Congress.

If the detail is good, the focus strong and the opportunity well defined Congress will want to be associated with any proposed plan.  Cooperation will be forthcoming because that’s how Congress gets re-elected.

And the rewards will be huge.  The first reward will be a rise in public confidence, a serious victim of the Great Recession.  America has always relied on a native sense of optimism.  Just developing the goals and explaining the plans to reach those goals, will provide a tremendous boost.

The sooner we start, the better our rewards.  Real finance.  Real goals.  Real returns for investors.  From the Great Recession to the Great Reconstruction.

Why Progressive Tax Rates.

Wednesday, April 15th, 2009

There’s often a lack of understanding about increasing tax rates the further up the wealth ladder you go.  Most often the argument in favor of this progressive tax rate system is that those with the most income and wealth should pay the most taxes.  To the majority who are not in the top quintiles, this is considered fair.

The more accurate reason for progressive tax rates is that the “marginal utility” of another dollar is less for someone who is wealthy, than it is for someone who isn’t.  If you have income of $10 million per year, then another $50,000 doesn’t make that much difference, compared to a person who earns $80,000 per year.  For the lower income person, the extra cash has high marginal utility.  For the $10 million per year person, it doesn’t.

Progressive tax rates are based upon this concept.  If you’re going to raise tax revenue, you tax at a higher rate that money with low utility, not that with high utility.

There are government expenditures with high utility where this money can be used.  Base electric generation, for example, is a regulated utility.  With the nation facing the necessity of transitioning to sustainable, clean energy sources, putting investment into this effort transfers money with low marginal utility into money with high utility.  A wealthy person might take the extra $50,000 to buy another Benz, whereas the government can take the money and invest it in a “smart electric grid” which benefits the nation as a whole.

The same could be argued for universal health care.  With more than 40 million Americans without health insurance, it is a given this creates costs due to poor health care.  Putting tax revenue into a healthier population represents spending with high utility.

The truth is that America has a relatively flat tax rate system.  The difference in tax rates between the vast majority of Americans and those at the upper end is, at most 3%, ranging from about 27% to 30%.  And there are some real “whoppers” in this system, not the least of which is hedge fund managers who can make hundreds of millions of dollars in one year, but are taxed at 15%.

President Obama wants to return the upper income bracket top rate to 39%, which was where it was under President Clinton, and below what it was under President Reagan.  He’s also made some major budget policy changes by putting “on budget” real expenditures that under President Bush were, in effect, hidden as “off budget” items.  Obama believes that you shouldn’t hide the real amount being spent.  It’s a major cultural shift compared to past Presidencies, Democrat and Republican alike.

You tax at increasing rates income which has decreasing marginal utility.  You tax at decreasing rates income which has increasing marginal utility.  That’s a progressive tax system.

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