Sunday, July 26, 2009

Stealth Rally

From the Desk of Joe Rollins

This week proved to be another excellent one for investors. We are now seeing a great deal of investors who are trying to get invested before the market gets too high. I must’ve heard a hundred times in the recent financial news that too many investors have missed this rally, so now people are trying to get on the train before it leaves the station. Many of our clients listened to our suggestions and allowed us to get them comfortably seated on that train as the year has progressed.

For this week alone, each of the major market indices is up about 4%. Given the overwhelmingly negative news provided by the media, who would’ve thought that the major market indices would be up so positively in this week alone? For the year thus far, the Dow Jones Industrial Average is up 5.65%, the NASDAQ Composite is up 24.66%, and the S&P 500 is up 10.02%. If the financial year came to a close right now this would represent excellent returns for 2009, but we still have a little less than half a year to go.

Most of the gains we are enjoying at the current time are not due to the financial results of the companies being all that extraordinary. While it’s true that every major company has beaten their anticipated financial results, it’s also true that for the first time in a long time, companies actually have visibility into the future. However, do not lose sight of the fact that earnings are still dismal as compared to normal earnings in prior years.

I have often written that the stock market did not need for the economy to get better before starting to improve. The stock market is only interested in seeing the economy quit going down before it begins improving. At the current time, the economy seems to have stabilized, and virtually all economists are forecasting better days to come. By the year 2010, the United States’ annualized GDP growth rate should return to normal levels.

There’s a great deal of chagrin by the financial press that many of the largest U.S. companies are making their anticipated earnings for this quarter, but are failing when it comes to their gross revenues. The analysts seem to be uncomfortable with a company making its profitability numbers by cutting costs without having the anticipated revenues due to the recession. This attitude is simply not supported by the facts.

Corporations anticipated a downturn and dramatically reduced their costs. This has allowed them to make their projected profits at the disappointment (and in some cases, unemployment) of many of their employees. U.S. corporations are now “lean and mean” and are ready for improved gross revenues. If the corporations in this quarter are doing so well on lower than anticipated gross revenues, can you even imagine what types of profits they will realize with these reduced costs and normalized gross revenues? I think we should expect significantly higher profits in 2010.

I know that my readers get tired of me telling them it’s a good time to invest. I have been saying that fairly consistently since the beginning of 2009. Given the excellent returns that we have enjoyed so far for 2009, and with a reasonable expectation of better returns in the future, you can see why I continue to encourage you to invest in your future. While I cannot promise that your investments will do nothing but go straight upward from here, I do believe that over the next decade, you will have above average rates of return, especially in light of last year’s negative results.

At the risk of sounding like a broken record, if you have not made your IRA investment for 2009 or contributed to your child’s 529 plan, now is an excellent time to do so.

Saturday, July 25, 2009

Breaking News: Weekend Update

From the Desk of Joe Rollins

When I was a relatively young man, I took a job working in the accounting department of an international construction company that built elevated water tanks. I’ve written about my experiences at this job in the past, but current events have made me reflect on some of the lessons I learned from the elders at that company.

Mr. Elliott Brown, Sr., was barely 5’8” tall, but he had the reputation of being the toughest man in the tank building crew. He boasted – and I never heard anyone challenge him – that he could easily beat-up any other man on the crew, regardless of size. He was a true self-made man who began working in the yard of the old R.D. Cole Manufacturing Company in Newnan.

After Mr. Brown became disenfranchised with the R.D. Cole way of doing things, he opened his own manufacturing company in his backyard in direct competition with R.D. Cole. Even though he had virtually no education, he was street smart. Building elevated water tanks requires significant engineering support, of which he had little. He simply knew how to work hard and who the right people were who he could hire to help him. Slowly but surely he gained respect; and some time later, he purchased his former employer, the R.D. Cole Manufacturing Company. He lived in a 1,000-square foot house right next to the manufacturing plant until his death.

Mr. Brown was an interesting man, and late in life he wrote two books regarding tank building. He told me that he self-published the books because he didn’t think he’d live long enough to see them published by a company, and he was probably right. I’ve read both books and find them extraordinarily entertaining and insightful. They reflect a true American entrepreneurial spirit and the hardships of steel construction on the road.

Late in his life, Mr. Brown had a tendency to drink too much and oftentimes he would show up at the office in the middle of the day wearing his bathrobe with the smell of Listerine on his breath in an effort to cover up the smell of alcohol. All of us were amused when he would enter the office at lunchtime wearing his bathrobe, reeking of Listerine.

Mr. Brown would sometimes come into my office to discuss whatever was on his mind. These conversations would often go on for over an hour, but I would continue doing my work and let him ramble on. He seemed to be perfectly satisfied discussing issues whether anyone was listening or not. I was sad when he passed away years later, as I learned a great deal about business from Mr. Brown.

Being involved in the financial aspects of Mr. Brown’s business, I would seek his input when we needed to purchase new equipment. Two of his comments live with me to this day. I would approach him with a recommendation on buying a new piece of equipment, usually having worked out in my mind exactly how I was going to sell him on it. I’d say, “With this piece of equipment, we will be able to do our jobs better.” Almost always, his response was, “Sometimes you can go broke doing things better.”

The other thing that amused me about Mr. Brown and his frugalness was his inability to throw anything away. He was known to have kept every piece of equipment he ever purchased, well beyond its usefulness to the company. If I approached him about a capital acquisition and explained that someone in the company really wanted this piece of equipment, he would say, “Don’t let your wants get to hurtin’ you too bad.” At the time, his comments were very frustrating. But when I look at them through today’s eyes, I see the significance and importance of simply slowing down, taking a deep breath and thinking through your actions.

The current economic environment often reminds me of Mr. Brown. Wanting a “better” health care program will probably make us all go broke. Maybe it’s time for us to not let our wants get to hurtin’ us too bad. And so, I’ve been reflecting on some of the posts I’ve written over the last year to see what updated information I can provide to you.

On September 24, 2008, I posted that the TARP plan proposed by Congress was not a bail-out (This is NOT a Bailout!!). At that time, I said that contrary to what you read in the media, the TARP was not designed to be a bail-out. Rather, it was a loan to let the banks get back on even-footing. I indicated back then that it was highly likely that the Treasury would get back the money from the TARP, and they would also probably make a profit. An update of the current information supports my forecast from last September.

You may recall that the original TARP proposal was in excess of $700 billion. The intent was to buy toxic assets from the banks that later became an investment tool to buy the preferred stocks of those banks. Some people may not recall that the second half of the TARP ($350 billion) was never even utilized. The original numbers on the TARP were that only $204 billion was ever utilized to support the banks. There was another $100 billion that was put into AIG and to General Motors and Chrysler. These amounts were never authorized by Congress and never had anything to do with the original TARP act. They were simply used on an emergency basis to essentially nationalize those three companies. However, as it relates to the TARP itself, the numbers are overwhelmingly positive.

To this point, of the original $204 billion loans to banks, $70 billion has already been repaid to the Treasury. As of today, there is only $134 billion still outstanding from the related banks. Of this amount, $80 billion of it is to two financial institutions alone – Citigroup in New York and Bank of America in Charlotte, North Carolina. It appears now that the Treasury will recover every dime of this money. As such, to classify it as a “bail-out” was absurd, even though the majority of the public still believes to this day that the government bailed out Wall Street. Now you know the real story.

I even argued in that post that the Treasury would likely make money from this transaction. As of the end of May, which is the most recent record available on the government’s website, almost $6 billion has been repaid to the Treasury in the form of dividends by these banks. In addition to the above, many of the banks have bought out their warrants that were issued in connection with these equity offerings. In fact, Goldman Sachs agreed to purchase on Wednesday of this week their warrants for an amount in excess of $1 billion. The Treasury has absolutely no cost on investment in these warrants, and this amount is all profit.

Also on Wednesday, BB&T announced that they will repurchase their warrants this quarter for $67 million. I think we will see many more banks repurchasing their warrants and paying off their loans to the Treasury, which should offer a significant windfall to the taxpayers. Given that the bonds were issued to purchase these equity investments at a cost of approximately 1% per annum, the Treasury has so far enjoyed an enormous profit on these transactions. If you would like to look at the official government website of these amounts, please follow this link to review the spreadsheets that are updated regularly -

I’ve written many times about the 3-month Libor rate (View all of my posts mentioning the Libor rate). You may recall that I discussed the chaotic nature of the 3-month Libor interbank rate and the obstacles that rate causes other banks. Essentially, this is the rate at which banks loan money to one another. Since there was such a high level of pessimism among the banks that any other bank could repay their loans, the Libor rate skyrocketed to well over 5% at the height of the crisis in the 4th quarter of 2008. Here we are today, not even one year later, and the 3-month Libor rate has dropped to 0.5% per item. In fact, the 3-month Libor rate and the general credit spreads in the debts markets are lower today than when Lehman Brothers declared bankruptcy. You may recall that Lehman Brothers bankruptcy was the catalyst that kicked off the worldwide credit scare.

Credit spreads are defined as where interest rates are in respect to risk to the underlying securities. As the credit spreads widen, it signals a healthy debt market. Today those credit spreads are as wide as they have ever been, signifying normalization of credit conditions. In fact, I went back and checked to see where the NASDAQ Composite was when the credit spreads were as good as they are today. At that time, the S&P 500 Index was trading at 1,250. If it were to maintain that level today, that would be an upward move in stocks of approximately 30% from where it is trading as I write this post.

Because of all the publicity the health care reform has received, I have been reading more on the subject. It is really a scary time where the White House and Congress are trying to ram through legislation that will ultimately transform America as we know it today. There is absolutely no question that health care reform is needed, but a nationalization of the health care industry is not in any American’s best interest. I thought maybe I was swimming upstream on this matter until – to my amazement – I read The New York Times on Wednesday and noticed that they are also skeptical of the White House’s proposal - Challenge to Health Bill: Selling Reform - By David Leonhardt.

What I found especially interesting in that article is that 90% of voters already have insurance. Therefore, it’s natural for those who already have insurance that they are happy with to be skeptical and wonder why they’d want to approve such an overwhelming change in the system that could dramatically increase taxes and make fewer prospects for employment in the United States.

I think there is a general consensus that is now developing among most voters. Basically, people think the White House and Congress should slow down, take a deep breath and think this through clearly before passing the bill. I don’t think it could be more clearly conveyed than in the final paragraph of The New York Times article:

“In recent weeks, polls have shown that a solid majority of Americans support the stated goals of health reform. Most want the uninsured to be covered and want the option of a government-run insurance plan. Yet the polls also show that people are worried about the package emerging from Congress.

Maybe they have a point.”

When The New York Times questions whether this bill is appropriate or not, the liberal community needs to take notice. The New York Times has never been known for its conservative thinking – when they question liberal goals on health care reform, it will hopefully make everyone sit back and give it some additional thought.

The more that comes out about this plan, the more devastating it would appear to be to small businesses. I keep coming across things that absolutely “blow me away” when I think about how it would affect my clients. One of the provisions in the bill is that you can maintain your current medical plan, but it would come under the scrutiny of the new government-supported decision makers on medicine. Therefore, it’s clear to experts that all the plans would eventually offer the same benefits but the private companies wouldn’t be able to compete in price with the public option, which will be supported by your taxes. For that reason alone, private employers would opt for the smaller premiums, and in short order, there would only be one medical plan in America.

As detailed in the proposed bill, there are too many penalties for employers to continue to offer medical insurance to their employees. This is the reason the government plan will be the only survivor. For example, an employer would be required to pay an 8% premium on all employees they do not provide medical insurance coverage. Interestingly, this would include employees that elected not to participate. Therefore, if the employee elected not to participate, he would get his insurance provided for free at the full expense of the employer. What is even more interesting is that the employer would still have to pay an 8% premium even if an employee is covered under someone else’s plan (like their spouse’s).

Clearly, employees will quickly figure out the cheapest form of insurance and employers will choose the government plan since it would be cheaper. Additionally, there would be a burdensome reimbursement rate for employers. Under the House’s plan, businesses would be required to pay 72.5% of an employee’s coverage. My suspicion is that most employers do that anyway, but the biggest change is that employers would be required to pay 65% for family coverage. It is uncommon for businesses to pay for family coverage, much less at a 65% level. This one change alone will dramatically increase the cost to employers, forcing employees off private insurance programs and into the public plan in order to obtain family coverage.

Even though most people are not covered by self-funded plans like those offered by big businesses, there is still a high percentage of employees in the United States who are covered by self-funded plans. Essentially, this bill will mandate that those plans will cease to exist, and therefore, the benefits of self-funding the plan with no administrative costs will go away. As incredible as it may seem, the bill also opens the door for attorneys to sue any self-funded plans that do not currently exist. As a clear payback to the trial attorneys, this bill opens up the door for further costs of the system in frivolous litigation. Costs going down? The public is not this dumb!

In an opinion piece in The Wall Street Journal on July 20, 2009, they adequately sum up their take on the health care bill - Repealing Erisa. No matter how you feel about The Wall Street Journal, it is still one of the most respected financial publications in the world. The last paragraph of this piece summarizes their feelings on the bill:

“So when Mr. Obama says that “If you like your health-care plan, you’ll be able to keep your health-care plan, period. No one will take it away, no matter what,” he’s wrong. Period. What he’s not telling the American people is that the government will so dramatically change the rules of the insurance market that employers will find it impossible to maintain their current coverage, and many will drop it altogether. The more we inspect the House bill, the more it looks to be one of the worst pieces of legislation ever introduced in Congress.”

I don’t know about you, but if The New York Times and The Wall Street Journal are both saying we need to take a closer look at this matter, I think we’d be na├»ve to ignore their warnings. Let’s slow down and review this matter.

In my post of July 16, 2009 (Follow Up on the Cap and Tax Bill), I told you about my letters to the Georgia Congressmen regarding the Cap-and-Trade bill. If you recall, I asked each of them if they had actually read the 1,300 pages of this bill before they voted on it. As of today’s date, I’ve received only one response – from Representative Westmoreland who admitted that he hadn’t read the bill himself, but that he had voted against it. The other Georgia Congressmen have elected to ignore my letter, which presumably means they didn’t read the bill, either.

I think we should take a clue from this lack of response. Any representative who doesn’t read a bill prior to voting on it doesn’t deserve another vote of confidence from their constituents.

Interestingly, the health care reform bill also runs over 1,000 pages. Almost every day, I read where 20 to 30 pages of this bill are undergoing amendments. I read yesterday that in the House Finance Committee, there are more than 160 amendments to the existing bill that have yet to be addressed. Given what I have discovered on how many of our representatives actually read the cap-and-trade bill, I wonder how many people have read the 1,000 pages of the health care reform bill.

I think it would be useful for all concerned taxpayers to contact their representatives and ask them if they have read the Cap-and-Trade bill in its entirety that was passed by the House and the 1,000-page Health Reform Act being considered by the House. Remember that President Obama’s original deadline for approval on this bill is in only one week. I dare say that if it’s approved in that period of time, none of our respected members of Congress will have read the proposed act.

The Cap-and-Trade bill has lost a lot of its momentum in recent weeks and has yet to even be considered by the Senate. It’s likely at this point that if the bill is considered by the Senate, it will be dramatically altered, if not completely destroyed. What is even more interesting in the bill is that President Obama’s EPA administrator now admits that the law would have virtually no impact on the climate. It would seem to me that the bill was sold on the premise that it would have a major effect on the environment in its operation. What we now know is that it’s really only for the purpose of raising money and the bill itself has no environmental effect. Everyone agrees that we need to move towards a cleaner environment, but the last way we need to move there is by overtaxing businesses that employ Americans on a daily basis.

I once wrote in these posts that I get aggravated by those who point out only problems without offering any solutions. I guess I come from the “Keep it simple, Stupid!” point of view. There are lots of ways to attack the issues regarding the problems we are facing today. Admittedly, most of them are far too complex for the average American to understand, but here’s my shot at a few of them:

Rather than create a tremendous bureaucracy to tax carbon emissions, why not just add a simple tax to the gasoline tax? If there was a $0.20 tax attached to the sale of fuel that was separately allocated to environmental causes only, it would be much more focused and useful. Everyone would see the tax and know how the money was spent. Yes, it’s true that this is a regressive tax in that it taxes the rich and poor in the same manner, but it taxes based on your usage of gas, which is the correct way to tax.

The money received from this tax could be used to convert vehicles to run on natural gas. Natural gas is emissions-free, and there’s enough natural gas in the United States to provide for every car running in America today. It would be such a simple and easy transition automobiles that run today on gasoline to natural gas over time. The government would sponsor and provide natural gas fueling areas convenient to the cities and give tax incentives for taxpayers to convert their automobiles. Perhaps this idea is too simple that it defies logic.

It is now clear that the $743 billion stimulus bill was an absolute failure to this point. It was promised that this money would be spent on shovel-ready projects and would be immediately put into the economy. To date, the economy has lost two million jobs since its passage and only 10% of the money has even been spent. The administration now projects that the impact of the stimulus bill will not be felt until the end of 2010. That may be exactly the opposite of what we were told during the debate – that the money would be immediately placed into the economy to provide jobs.

There are ways that this could be fixed almost overnight. By reallocating some of the remaining stimulus money to fund federal highway construction, you could put that money into the economy almost overnight. The current gas tax fund is out of money, and therefore, private projects are not being funded. By using $30 billion to $50 billion of the remaining stimulus money, we could fund those jobs that have been delayed due to a lack of federal money. These projects are truly “shovel ready” and would not take two years to begin.

Additionally, there could be a FICA tax holiday for both businesses and employees for 90 days. By eliminating the FICA tax on both employers and employees, one-quarter of a trillion dollars could be put into the economy is only 90 days. This would be a 7.5% raise for each employee and employer for a short period of time. By virtue of such a simple provision, you could put more money into the economy in a shorter period of time than the stimulus bill has spent so far. During Christmas, it would help retail sales and increase employment immediately – not in the future. It would also be a nice holiday present for all working Americans.

The provisions related to the remaining stimulus money could be pared back to accommodate this request without spending more money. You wouldn’t need the constant Congress bickering about its own little private projects that do not create jobs, and you would put an instant and immediate charge into the economy that would benefit all Americans. I guess this is just too simple, and therefore, it will not work. Since it does not add to government earmarks, it’s unlikely that our corrupt Congress will ever even consider such a simple plan.

Health care reform will take longer to achieve. I am often asked by clients why the doctor groups endorsed the bill if it’s so bad. Quite simply, they were bought off in the proposal. Doctor reimbursements under Medicare go up 5% under the new bill. Essentially, they traded out their support for higher reimbursements. Similarly, the pharmaceutical companies and the hospitals have traded out not for higher reimbursements, but so they would not have catastrophic reductions. Essentially, both agreed to lower reimbursements in order to block out the potential for something quite worse.

The more I get to thinking about the numbers, the more I question why we’re going through so much trouble. If there are 47 million Americans not covered under a medical plan today, that doesn’t mean that they don’t receive medical care – they’re just not covered under a plan. As you well know, any sick person that enters an emergency room in the United States is required by law to be seen, whether or not they have insurance. Of the 47 million uninsured, 10 million are illegal immigrants.

The true number of uninsured American citizens borders on 35 million. A great number of these individuals can be covered under other plans, but they have elected not to be covered. Essentially, of the U.S. population of over 300 million, only 10% of the population is uninsured. We as a country certainly need to do something to cover these people, but in a manner that doesn’t break the bank for taxpayers.

I always find it interesting that the poor go to the emergency room for care regardless of how minor the injury. Emergency care is the most expensive medical care in America due to the highly sophisticated nature of that care. All the government has to do is develop clinics for routine care instead of making emergency rooms be the sole providers for the uninsured. The main concern is catastrophic conditions that would essentially bankrupt the individual. It would not cost that much money for the government to basically develop a catastrophic universal policy that would be a safeguard for all Americans for large medical expenditures.

Everyone is now talking about how this medical care reform bill will affect Medicare. Quite frankly, there is a simple and swift solution to the exploding Medicare costs that should be addressed immediately. When it comes to Medicare, one of the principal fixes would be for higher income individuals to pay more for the cost of Medicare. There’s a deal currently in the works, and I have clients who are seeing their premiums increase. However, it’s not effective and not universally applied to those who could afford to pay for Medicare if they so elected. Additionally, many people on Medicare have private policies that overlap, and therefore, create duplication. A simple fix would require potential recipients to choose one or the other, but not both.

The simplest fix for Medicare and Social Security is to increase the age limits for coverage. While younger people cannot collect full Social Security until age 67, the age for collecting full Medicare benefits is 65. If the government began increasing that age today, it could be moved to age 70 without affecting anyone over the age of 40. This would dramatically reduce the actual cost of servicing the younger generations with a Medicare plan that has no funding and only gets its funding from employees who are currently working. Since young people are a long time away from collecting Social Security, I highly doubt they’d object to such a change.

With the length of this post, I’m sure I’ve lost most of my readers already. I could give you many more “KISS” solutions to governmental issues. One thing I always scratch my head about is the issue concerning balancing the federal budget. When the State of Georgia cannot balance the budget, the Governor requires each department to cut their budgets enough of a percentage to balance the current budget. It’s not pick and choose an expenditure; it’s cutting all expenses by whatever percentage necessary.

With the current deficits projected under the Obama Administration at approximately $2 trillion per year, then every federal department would have to cut their budget by 50%. The government receives $2 trillion a year in revenues, but spends $4 trillion. I cannot tell you one more bullish move that the federal government could make today to improve the U.S. economy and the financial status of the United States in world economics than cutting the size of government by 50% overnight.

As always, the above are my opinions, thoughts and observations. Of course, I could always be wrong.

Saturday, July 18, 2009

A Summer Holiday? Hardly! It Was a Great Week for Investors

From the Desk of Joe Rollins

While driving down Peachtree Street earlier this week, I could not help but note that there was virtually no traffic on the road. In spite of this, I traveled through six traffic lights without once hitting a green light. Throughout the entire world, cities and towns have computerized traffic light systems that help the flow of traffic; the City of Atlanta has yet to acquire that sophisticated technology. In fact, if you ever want to test the efficiency of Atlanta’s traffic light system, just drive down Peachtree Street at midnight. Even when no one is on the road, you’ll be stopped by red lights more often than not. But I digress…

When I entered the Colony Square parking garage that day, there were almost no cars parked on the top level. I suppose all of the above is reflective of the slow, hazy days of summer. Because of vacation schedules, there aren’t many people actually working, and due to the heat, I suspect people’s thoughts are absorbed by taking a holiday.

If you haven’t noticed, we’ve recently had a major stock market rally. Perhaps the lack of news is positive for once. As I write this post, the Dow Jones Industrial Average is up a cool 7%. I’m not talking about the Dow’s performance for the year; I’m talking about for the week. Since the Dow bottomed on March 9, 2009, the index has gained an astounding 33%.

The Standard & Poor’s Index of 500 Stocks is also up a sterling 5.8% for the week. Since the S&P’s bottom on March 9, 2009, that index is up an incredible 37%. There’s no question that the true stellar index so far in this rally has been the NASDAQ Composite. This week, the NASDAQ has gained 7.3%, and since its bottom on March 9, 2009, it is up an amazing 49%.

While most Americans have been planning their summer vacations, there’s been a stealthy rally going on; most people haven’t even noticed it. The markets are not gaining because the economy has recovered. Rather, the markets are gaining because they anticipate the economy’s recovery. As I’ve often said, the stock market doesn’t need to see the economy improve – it only needs to see it quit going down. Today we have the evidence to prove that the economy has finally stopped going down.

During Thursday’s trading day, Nouriel Roubini, a long-time gloom and doom forecaster, proclaimed that the U.S. economy would be out of recession before the end of 2009. The market moved up a small amount with that surprising reversal proclamation. Later in the day, there must’ve been too much positive news for Dr. Roubini, and he reversed his position, indicating that he’d been misquoted. He then said that the U.S. economy was in a 24-month recession that he anticipated would not end until the end of 2010. Notwithstanding his complete 180-degree change in economic forecasting during the course of the day, we should examine his other economic forecasts.

If you read my post from May 16th titled “The Most Important Stock Market Week of the Year!” wherein I discussed the famous doomcasters, Dr. Roubini and Paul Krugman, you’ll see that both of them were forecasting a complete seizure by the U.S. government of all banking institutions. Both indicated that there would be no way for the banking industry to survive without the full and complete seizure of the banks by the U.S. government. In the last three days, CitiBank has reported a profit of $4.3 billion for the quarter, Bank of America earned a tidy $3.2 billion, and J.P. Morgan Chase earned $2.7 billion. I suppose the economic reality of positive financial results completely contradicts these doomcasters’ forecasts.

Just as I predicted in my “2nd Quarter Financial Review” post on July 2nd, banks are reporting blow-away profits. It’s often said that an investor would be ill-advised to ever discount the U.S. economy. It seems that these noted economists have discounted it, and therefore, their forecasts should also be discounted.

I also continue to hear from the financial news and others I’ve spoken with that the banks’ losses have yet to be realized. It seems that the public doesn’t understand how accounting really works. If you don’t believe that the accountants haven’t already fully and adequately reserved for these potential loan losses, then you don’t really understand the conservative nature of accountants. Due to the sheer cost of malpractice insurance, you may rest assured that not only are the losses fully recorded on the books of these banks, they are also grossly over-recorded. You may think I make all this stuff up, so here’s the information directly from The Wall Street Journal:

In Friday’s edition, The Wall Street Journal had a detailed analysis of J.P. Morgan’s earnings for this quarter, including information regarding loan losses. For example, they reported that non-performing assets at June 30th were $17.5 billion as compared to $6.2 billion one year ago. “Non-performing assets” is a bank term that doesn’t necessarily mean that the assets are bad, but that the holder of those assets is not currently paying interest. In fact, a vast majority of these loans will be later recovered. You may rest assured that none of these loans are uncollateralized, and even if the collateral has been reduced by 50%, the bank is more than likely going to collect at least half of the non-performing amounts. One might assume that this would be a worrisome sign for the banks, but as mentioned before, the accountants have already provided for this potential liability.

The article also pointed out that later in the quarter, J.P. Morgan set aside an additional $1.8 billion reserve for future credit loss reserves. With this addition, it brings the total reserves for future bad debts to $30 billion. Assuming that non-performing assets were 50% bad, which I consider to be ridiculous, it would mean a potential loss of $10 billion on these non-performing assets. The bank has already provided a reserve three times as high as the potential losses on non-performing assets.

I will also forecast that in the coming year, we’ll see these banks start to reverse these over-exaggerated loan loss reserves and return them to income. My analysis of these particular numbers is that J.P. Morgan Chase has excess reserves close to $15 billion against loan losses. As these amounts return to income during 2009, the financial press will express amazement at the profits suddenly earned by the banks. In fact, it will only be an accounting sleight of hand where it will appear that profits were generated at that point when they were, in fact, generated now.

You have to love the way the government pulls accounting sleights of hand. Even though California is technically bankrupt, they are still continuing to try to balance their budget for the fiscal year that started July 1, 2009. One incredibly creative means they’ve used to balance the budget is by changing the date of their payroll. By changing the June 30, 2010 payroll to July 1, 2010, that payroll is not included in the 2010 budget. It’s amazing how California just saved half of a billion dollars by moving its payroll out one day.

Profits reported this quarter through the first two weeks of the reporting season have been nothing short of “breathtaking.” Goldman Sachs, a company that was previously forced to take TARP money, reported record profits during the quarter. “Record profits” is a term that is used too often, but to put Goldman Sachs’ situation in context, they reported earnings higher during this quarter – in the middle of a recession – than they have ever reported in their entire history since going public.

In addition to Goldman Sachs, Intel reported blow-away profits along with IBM, and of course, the aforementioned banks. Profits have so far been nothing short of staggering given the so-called backdrop of an economic recession.

I told a client yesterday that I felt the need to write a blog on why the public is missing the correlation between unemployment and corporate profits. One of the beauties of technology today is that a manager who knows how to use it can adequately forecast upcoming trends. You’ll recall the gigantic layoffs that were announced over the last few years. During 2008, businesses were making significant personnel layoffs in order to cut costs. From an accounting perspective, they recorded the full cost of the layoffs immediately, even though some of the employees do not leave for weeks, months or sometimes years. Therefore, the layoff costs have occasionally been reported in prior years. Businesses are as lean and mean as they have ever been.

Without the additional payroll costs and because of other cost-cutting moves by corporations, they are able to report record profits. The good and the bad of this is, of course, that the corporations have record profits, but many Americans are without jobs. It is somewhat ironic that we celebrate the success of the corporations to the detriment of the people not employed. However, that’s the basis of capitalism, a concept we used to cherish in this country.

It’s often said that unemployment is a lagging indicator and is the last to turn up. The reason for that should be quite obvious: Corporate employers will continue to operate as lean as possible until the very last second. They’ll refuse to hire more personnel until they’re positive an economic recovery is at hand. Employers will first work their employees more hours and even overtime to get productivity up. They’ll use technology and better computer applications to avoid hiring personnel. It will be a significant amount of time before we start seeing employment start increasing.

It now appears that the employment base has stabilized, so it should be running on a replacement basis for six to eight months. I would not expect any significant improvement in the unemployment rate until at least this time in 2010.

I have been reading the daily articles written on the ridiculous national health plan as proposed by the Democrats in the House of Representatives. In fact, I dedicated an entire post on the subject (“Healthcare Relief without Universal Health”). However, yesterday’s events illustrate how completely out of touch Congress is when it comes to the business world. Yesterday, the House of Representatives pointed out their potential bill for revolutionizing the health insurance industry in America. I will not bore you will all the details, especially since many of them will be changed before the bill gets its final vote.

The bill does contain information on how the cost of the plan is to be financed. One of the proposed changes will be a major hit to the U.S. economy during a time when it certainly does not need additional taxes. What is even more interesting is that we have long been told by the administration and Congress that the proposed changes would bring down health costs, and that the plan would be neutral. Yesterday the Congressional Budge Office reported that the cost savings were just an illusion. Under the proposed plan, health costs would actually increase.

Mr. Elmendorf, director of the independent and non-political Congressional Budget Office, told the finance committee, “In the legislation that has been reported we don’t see the sort of fundamental changes that would be necessary to reduce the trajectory of federal spending by a significant amount. And on the contrary, the legislation significantly expands the federal responsibility for healthcare costs.” Therefore, we know that nothing in the proposed plan will reduce costs.

Speaker of the House Nancy Pelosi said yesterday afternoon that she would squeeze more costs out of the system. By “squeezing more costs out of the health system,” she means fewer services provided by medical institutions. Essentially, the government will pick and choose what medical procedures you need to have and what they’re willing to pay for them. It’s very clear that there will become a rationing of medical services, but the ultimate question is who will be deciding which services are rationed. Will that be you, or will that be the government?

In addition to the rationing of services, they are proposing an 8% payroll tax on all employees where group medical insurance is not provided. Therefore, if an employer elects not to provide medical insurance for their employees, they have the option of simply paying 8% directly to the government plan, which will then provide medical insurance to the employee. I anticipate that once this plan is implemented, virtually all employers will go to the government plan almost immediately. Here’s an example for you to ponder:

If you’re paying $5,000 to $6,000 per year, per employee for medical insurance, and the average employee in America makes $40,000, an 8% premium for this government-provided insurance would be $3,200. I anticipate the vast majority of all employers will gladly choose to get rid of the headache of providing healthcare for their employees and instead take a guaranteed 8% premium in the form of payroll taxes. I anticipate that within five years, there will be only one insurance company in the United States, and it will be the one run by our own government.

In addition, there’s a 2.5% tax on all individuals who do not buy medical insurance and who are not employed by someone, meaning that the self-employed would pay a 2.5% tax to get medical insurance. I can assure you that every self-employed individual in America would gladly pay 2.5% of their income to get medical insurance and avoid the hassle of finding an individual policy.

The logical question to all of this is how everyone’s cost of insurance can go down from where it is today with this sort of plan. Employers will be paying less, the self-employed will be paying less and yet we would supposedly be covered by a fully adequate, government-sponsored medical plan. It doesn’t take a rocket scientist to see that any proposed plan will be heavily subsidized from your tax dollars. Since only 50% of the U.S. population pays tax anyway, the full burden of the taxes to pay for this medical insurance will be assessed to only half of those who are receiving benefits. Duh?!?! Am I missing something here?

Also, the above provisions will dramatically change the perception of how employers will employ people. Take an industry where virtually no one is currently providing medical insurance – the restaurant industry. In that industry, the vast majority of employees are young and healthy individuals who have no desire to purchase their own medical insurance. Now the employer is faced with the legal obligation to provide medical insurance, whether or not the employee wants it.

Under the universal healthcare plan, you would be obligated to pay Social Security tax for that employee at 7.65% the very first day an employee is on your payroll. In addition, the employer would have to pay 3.2% Federal and State unemployment and the 8% government-mandated percentage on health insurance. Therefore, the first day on the job for a new employee, the employer is obligated to pay 18.87% in some form of matching taxation on this employee.

There are very obvious conclusions that will be reached by employers. The first and most important is that they’re going to hire everyone more slowly, which is the last thing this economy needs now. Remember that for every dollar you pay an employee, you’re paying almost 20% additional for these social services. This one act alone will make the recovery of employees working in America very slow. No employer is going to incur this cost without a lot of thought and evidence that the economy has recovered.

I’m sure none of you are concerned with how the government is going to efficiently run their proposed healthcare system. The Wall Street Journal reported on Friday morning that only one month after the United States became the principal shareholder in General Motors and Chrysler Group, LLC, our Congress is now interjecting in the business. Even though both of these companies eliminated 3,200 dealerships to cut costs so that they would to improve profits to pay back the government, Congress has already voted to have all 3,200 dealerships reinstated. I cannot even imagine what Congress will do once they get control of the healthcare system in the United States!

You may also recall that it was said there would be no tax increases on anyone making less than $250,000 under the new proposals. If anyone really believes that this is not a tax increase, then they really don’t understand business dynamics. Since the employer is going to be required to pay this extra 8% cost that they have never been required to pay before, where do you really think this money is going to come from? It will come dollar-for-dollar out of the payrolls of future employees. A clearer example of an indirect tax could not be better illustrated.

Whatever your thoughts are about former Georgia governor and U.S. senator Zell Miller, you must admit that he is somewhat amusing. He gave a speech recently to the American Legislative Exchange Council, wherein he remarked, “Today, we’re spending like we’re Paris Hilton, regulating like we’re Ralph Nader, nationalizing like we’re Hugo Chavez, printing money like we’re the Weimar Republic, and taxing like we’re well, the Democratic Congress.” Although Zell continues to be a member of the Democratic Party, he is clearly not in step with the current Democrats in Washington.

I’ll always be grateful to Zell Miller for one thing – against overwhelming odds, as Governor he was able to get the Georgia Lottery through a conservative and backwards Georgia legislature. Regardless of your feelings on the lottery, it has made affordable education for every student in the State of Georgia that desires an education and is willing to work for it. Due to the Georgia Lottery program, universities in Georgia now have more applications than they can even process. It was a bold move on his part, and in retrospect, it’s done a great deal of good for many Georgia kids seeking a higher education.

I hope you had the opportunity to watch some of the Congressional hearings this past week with former Treasury Secretary Paulson. This country needs to get a grip on how poorly educated and uninformed our Congress really is. I would think that in civics classes around the world, they are pointing out the complete illiteracy of our Congress regarding financial matters. If we learn nothing else from this economic crisis, we need to elect representatives that have more than a few IQ points to rub together.

Zell Miller’s statement above sums up how things are going in Washington today. As I’ve mentioned on numerous occasions, our government’s incredible mismanagement gives me great optimism that new legislators with better financial constraint and an understanding of economic reality will shortly be elected.

As always, the foregoing are just my opinions, and of course, I could always be wrong.

Thursday, July 16, 2009

Follow Up on the Cap and Tax Bill

From the Desk of Joe Rollins

In my “Issues on My Mind” post from July 1st, I expressed my concern regarding the new Cap-and-Tax bill (formally titled the “American Clean Energy and Security Act”) recently passed by the House of Representatives. The more I thought about the complexity of the bill, the more I wondered whether members of Congress had actually read the 1,300 page proposed bill.

What I read in the newspapers about this bill is so intricate and confusing, I cannot even imagine that a typical Congressman would understand the provisions well enough to even cast a vote. For that reason, I wanted to know whether our Georgia representatives read and understood the bill prior to voting on it. And so, I wrote each of them the following letter:

As you can see, I requested a response by July 15th, indicating that I would assume they had not read the entire bill before casting their vote if I did not hear back from them. Interestingly, out of the 13 Congressman to whom I wrote, I received one response – from Representative Lynn Westmoreland’s office. The staff member who called me stated that they received the proposed bill two days prior to when it went to vote, and he further acknowledged that Representative Westmoreland had not read the bill personally, but that his staff members had read it on his behalf. Representative Westmoreland voted “No” on the bill. Here’s a link to his press release on the subject if you’re interested in reading it - Press Release.

You can think whatever you want about the unresponsiveness of the other members of Congress. However, I think it’s somewhat scary that four Georgia Congressmen voted “Aye” to a bill that will have such a major effect on all Americans when they likely never bothered to read it.

Thursday, July 2, 2009

2nd Quarter Financial Review

From the Desk of Joe Rollins

The month of June came to a close on Tuesday, although it was only marginally positive, it was the fourth straight month that the major financial markets had positive returns (as measured by the S&P 500). I am following-up on my May 30th post (Light at the End of the Tunnel – And It’s Not a Train) to show how much the markets have moved in a positive fashion since early spring. Year-to-date results are as follows:

The markets are truly starting to heal. The reason the markets are better today than they were during spring is because the economy is noticeably better. While it’s true that most economists are forecasting a negative GDP growth in the 2nd quarter of 2009, it’s only a relatively minor amount, estimated at 1.3%. In fact, virtually all economists are forecasting that the 3rd quarter of 2009 will be breakeven from a GDP standpoint, and the 4th quarter of 2009 will be solidly positive. I understand that these numbers are not sterling, but the fact that we came from virtually the edge of the abyss in the 4th quarter of 2008 to positive GDP less than a year later in 2009, should be very encouraging to everyone. The stock markets are reflecting that positive trend.

I’d be willing to bet that you haven’t heard that the 2nd quarter of 2009 was one of the best for positive financial results in the history of investing. For the 2nd quarter of 2009, the Standard & Poor’s Index of 500 Stocks was up 15.9%. The Dow Industrial Average was up 11.9% and the NASDAQ Composite was up a whopping 20.3%. In fact, the S&P 500 has not had such an excellent quarter since 1998. Given how bad the markets were from September, 2008 through February, 2009, to see these types of positive returns in the 2nd quarter of 2009 was very heartwarming.

Most of my clients completely ignored my recommendations to invest their IRA’s during February and March of this year. I understand that the markets were terrible at that time, and it takes a lot of nerve to invest when the markets are bad. However, as the 2nd quarter of 2009 has illustrated, the best time to make money in the financial markets is when no one else wants to invest. If you wait until the markets have already turned themselves around and have headed towards a positive trend, you are often too late. We’ve had a great 90 days, but I don’t believe that the upward trend is now over.

Historically, the financial markets suffer from the summer doldrums in July, August and September. In fact, many traders take off the entire months of July and August and only return to work full-time after Labor Day. For that reason, it would not surprise me to see the markets trend sidewise during the next few months.

There is a great deal of encouraging news, but one of the most encouraging signs is that as a general rule, fund managers are way underinvested. For example, I continue to read that there are literally trillions of dollars of uninvested cash in money market accounts paying practically nothing. It’s only a matter of time before this money migrates away from the low yielding money market accounts and is either invested in stocks or high-yielding bonds. No respectable fund manager would dare risk losing a client invested in cash when relatively conservative alternative investments yield many times cash’s low annual rate of return.

As pointed out in many of my prior posts, virtually none of the stimulus bill money has been spent to this point. There’s no question that money will begin to flow from the bureaucracy of the Federal government to projects in the 3rd quarter of 2009. In fact, I read that almost $100 billion in new construction around the U.S. will be funded with your tax dollars in the 3rd quarter. Notwithstanding the questionable nature of these expenditures, they will unquestionably create employment, which was the goal. We should never lose sight of the fact that many of the problems in the economy were created by the fact that not enough Americans were working. If these stimulus dollars create employment, then the plan will have been positive for us all.

Yes, it’s true that I worry that spending stimulus dollars into 2010 might overheat the economy and create inflation somewhere down the line in 2011 and 2012. However, any form of inflation today would be a positive, not a negative. It is truly hard for the average person to see how much the economy has improved given the information we receive from the nightly news. However, an economy that goes from a deficit greater than 6% in the 4th quarter of 2008 to a positive GDP one year later in 2009 cannot be underestimated. The United States will be the first of the developed countries to recover from the recession, and the others will soon follow.

Asia is already reporting better numbers and the growth of consumer spending in China, India and the developing countries will dramatically increase GDP and wealth around the world. The economy is improving and stock prices will soon reflect that improvement.

This so-called world recession that we have suffered through has been unusual in many respects. It seems like the U.S. was the first to feel the full impact of the downturn, but the rest of the world quickly caught on. Never in the history of modern finance have we seen such a coordinated effort on the parts of all major governments to stimulate their own economies. Clearly, China led the way, but other countries quickly followed. Even the stately and slow-moving Socialists in Europe eventually got on the bandwagon and funded stimulus plans in their countries. As hard as it is to believe, the Shanghai market was up a stunning 63% so far in 2009. I guess we all have to admit that’s a good rate of return for a country in a supposedly slow economy.

Virtually all the major banks have now repaid their TARP money and fortunately for them, and for you, Barney Frank now has no say-so in how their banks are run. There’s still a lot of work to be done in the banking industry, but we certainly don’t need to worry about financial viability. The major banks are adequately funded and will report “blow-away” profits in the quarter just ended. As I’ve mentioned on numerous occasions, when the government loans money to banks at practically nothing, it doesn’t require the banks do much to make big profits when they’re charging their customers interest. Many of the banks will report close to unbelievable profits in the 2nd quarter of 2009.
It was also quite an extraordinary quarter for some of the emerging markets and some of the economies of the developing countries. For example, India’s market is up 50% year-to-date. Argentina is up 47%, and of all places, Turkey is up 38%. Mexico continues to rally and is up 34% for the quarter, but Treasury bonds have lost 4.21% for the year. It’s clear that during the quarter, investors embraced the growing economies and traded away from the safety of Treasury bonds.

Almost every day, I hear one fund manager after another promoting the safety of Treasury bonds. It’s hard to envision that fund managers would be willing to accept the low rate of return on Treasury bonds in the face of increasing inflation, which we all know is coming. This quarter, the financial markets turned from a major loss in January and February to a marginal profit in the second quarter, making up all the major losses from the first quarter. In many respects, it is a very satisfying quarter.

I do not believe anyone is operating under any illusions that we can have positive results in the 3rd and 4th quarters like we did during the 2nd without increasing profits. I continue to hear a cascade of negative comments regarding upcoming profits. I suppose I am just not in the negative camp. I know for a fact that the banks will record extraordinary profits during the 2nd quarter of 2009. I think that should be very encouraged. Even the maligned car manufacturers will have better performance in the second half of 2009. The evidence is out there for anyone to read.

The U.S. car market is now on course to sell about 9 million cars in 2009 (17 million in 2007). During the 2nd quarter of 2009, the manufacturing rate for the automobile industry in this country was only 4 million units. Therefore, the production to meet the demand must increase by 100%. There’s no question that the automobiles will not have robust profits, but there losses will be significantly less for the remainder of 2009. That increase in profitability will bring stock valuations back into normal ranges.

I’ve read so much about how the recession will affect travel and hospitality. Did you know that the hotel stocks as a sector were up 73.8% in the 2nd quarter? Even the downtrodden retail sector stocks outperformed, returning 43.2% for the 2nd quarter. There are extraordinary opportunities available in stocks at the current time. However, the vast majority of investors continue to ignore the potential gains.

I feel comfortable saying that 2009 will show positive returns. I attribute that to the lack of competition that cash and CD’s have compared to stocks. If money markets and CD rates ever become competitive again, I would not have the same confidence level in stocks.

There was an article in Wednesday’s edition of The Wall Street Journal that was very interesting. It was referring to jumbo CD’s, which usually means CD’s of at least $100,000 or more. It was amazing to see how poor the rates are on these exclusive jumbo CD’s. The six-month rate was at 0.9% annualized. The two-year CD yield was 1.52% and the five-year jumbo rate was 2.31%. It’s perfectly possible that during the five-year term of that CD, inflation in the United States will reach 4%. Any investor willing to take the risk of inflation will have a significant reduction in purchasing power at the end of that five-year CD term than they did at the beginning. For that reason alone, much of this rollover CD money will eventually find its way back into the equity and stock markets.

If you haven’t been investing for fear of a new major market downturn, you should review the information contained in this posting to evaluate whether your money market account offers you the same potential for gains that the equity markets provide. I expect the years ahead to be excellent for the financial markets. I urge you to participate.

Wednesday, July 1, 2009

Issues on My Mind

From the Desk of Joe Rollins

After reading the New York Times this past weekend, I started wondering when the concept of writing a movie review became so complicated that it’s impossible to tell if the movie is recommended or not. In recent months, the current administration seems to be rewriting every law since the beginning of time. Maybe they should make a new law regarding how movie reviews should be written. In it, they would dictate that every movie review begins with a “like” or “dislike” sentence.

I read two movie reviews this weekend in the New York Times, and by the time I finished, I had no idea whether the reviewer was recommending the movie or not. They seem to get so preoccupied with their flowery prose that they forget the purpose of providing the review to their readers. In any case, since new laws are being made on practically a daily basis, a law of this type would certainly be helpful to moviegoers.

Likewise, there are hundreds of cell phone provider ads on television every day. AT&T and Verizon ads both indicate that they provide cell phone coverage everywhere in the world. However, with my AT&T iPhone, there are three places that I can never seem to get any cell coverage: Turner Field, the Georgia Dome and my own home. Other than my office, I am in these places more than any other, and therefore, I go without cell phone coverage fairly frequently. I just wonder, after seeing all those commercials how a company as large as AT&T couldn’t cover the 70,000 people that regularly attend events at the Georgia Dome.

On Friday, June 26th, the House of Representatives narrowly passed the Waxman-Markey bill, which would be more appropriately titled the “Cap and Tax” bill. The Act now goes to the Senate, and if it passes, every American would face a new large tax. Of course, the end result would be devastating to the U.S. economy, especially since the bill is not even based on sound science. What American would not want a cleaner environment? But at what cost?

Investor’s Business Daily brought up something interesting in last Thursday’s editorials regarding the environmental effect of this bill, “According to an analysis by Chip Knappenberger, administrator of the World Climate Report, the reduction of U.S. CO2 emissions to 83% below 2005 levels by 2050 — the goal of the Waxman-Markey bill — would reduce global temperature in 2050 by a mere 0.05 degree Celsius.” Maybe it’s just me, but doesn’t it seem like cutting our annual GDP in the U.S. by 50% is hardly worth the cost for a reduction of the global temperature by just 0.05 degrees Celsius.

If this bill weren’t so incredibly destructive, it would almost be amusing. Do you realize that the House has now passed a tax on bovine flatulence?!? I can’t make up stuff as incredible as this! This is just my guess, but haven’t cows had gas since the beginning of time?

Did you happen to catch the Congress drilling Federal Reserve Chairman Ben Bernanke regarding the Bank of America/Merrill Lynch merger? It’s downright embarrassing for Americans to have Congressman who are so uneducated and with such little ability to comprehend the complexity of governmental finance.

The Waxman-Markey bill should scare all of us given the intellect of the House of Representatives. The bill itself is approximately 1,000 pages. In addition, at the last moment there were 300 additional pages of amendments added to the bill on the last day of debate. It’s unrealistic that anyone in Congress actually took the time to read and understand a bill that could potentially have devastating effects on the U.S. economy. Given the intellect that the House of Representatives has shown during the hearings on the subject, I’m not sure that even if they had read the 1,300 pages, they would have any idea of what it actually said.

Everyone is in agreement, including the Obama Administration, that all forms of energy will skyrocket in cost. Rates for electric, according to the administration, could go up as much as 90% adjusted for inflation. Inflation adjusted gasoline prices could rise 74% and residential natural gas prices by 55%. The only way you will not have to pay this increase in tax will be if you use no energy. My suspicion is that there are not very many people in the U.S. who would fall into that classification. So much for not having a regressive tax rate system in the U.S!

Notwithstanding the absolute insanity of passing any type of tax increase in the midst of a recession, this one should be particularly frightening to you. The American Farm Bureau warns that the “Cap and Tax” bill will cost the average farmer $175 on each dairy cow and $80 for each beef cattle. Of course, this tax is meant to compensate for the emissions of barnyard animals, including methane from cows.

The Washington Post reports that the legislation also would pay domestic and international companies not to cut down trees in the U.S. While it’s strange enough that our government pays farmers not to grow food, now they’re going to pay companies to not cut down trees. Of course, since wood is such an integral part of our economy, the effect would be devastating to jobs.

The Heritage Foundation projects that in 2035, the new “Cap and Tax” bill would reduce aggregate gross domestic product by a cool $7.4 trillion. They estimate that in an average year, 844,000 jobs will be destroyed if this bill were fully implemented as now proposed. See the chart below.

Even weirder about this bill is that it would increase the taxes on all Americans, including the 95% that President Obama assured us would have no tax. Our only hope is that the Senate slows down and takes the time to actually read and understand this bill before passing it on to the President for his signature. It’s clear that the U.S. Congress is totally out of control, and for whatever reason, is determined to pass all of these large tax bills as quickly as humanly possible and before all the facts are known by the public.

Congress has gone crazy with their spending over the last few months. In fact, they are debating and passing bills with such speed that I have a hard time believing they even have a clue as to what they’re even debating.

I continue to hear enormous amounts of bad information reported by the media regarding the deficits and the exact amount of the deficits. Therefore, I decided to compile the information and let you decide what it’s all about. The Congressional Budget Office prints a total budget analysis going all the way back to its beginning. I have gone back to the Nixon Administration, and the accumulated deficits under each President in office from that administration forward are as follows:

Even more interesting than this list of accumulated deficits under Presidents is what is being projected for the Obama Administration. Based on the current estimated budget deficit of $1.9 trillion in 2009, in only one year, President Obama will almost exceed the accumulated deficits in the eight years of the GW Bush Administration. Don’t blame it on the recession – GW Bush had his own recession after September 11, 2001.

The projected deficits do not relate to the stimulus bill. Even though we were assured that all the stimulus money would be spent immediately, very little of it has actually been spent. As of late May, only $36 billion of the original stimulus money of $787 billion has actually been expended. In fact, it is estimated that only 24% of the entire stimulus act money will be spent in the 2009 fiscal year. A full one-quarter of the bill will not be expended until 2011 through 2015.

See the embedded chart produced by the Congressional Budget Office as to the publicly held debt as a percentage of gross domestic product. As you can see, by the year 2021, the total amount of debt as a percentage of the gross domestic product will be greater than it was during World War II.

Of course, all of these increases in the national debt do not even take into consideration the new proposed healthcare bill that is projected to cost a minimum of $1 trillion over the next 10 years. Obviously, the taxes or deficits to fund this bill would clearly increase the amount of the deficits indicated in the chart above. I couldn’t even believe my ears when I recently heard several talking heads explaining how a government-sponsored program would be advantageous for the U.S. economy.

It’s hard to imagine that they even expressed the opinion that the Medicare program was a prime example of how well (?) a government run health program could be managed. At last count, the Medicare program in the United States will completely run out of money within the next decade, and it is now projected to have an accumulated actuarial deficit of $35 trillion. Again, that’s trillions, not billions or millions.

Obviously, anyone using Medicare as a good example of anything is incredibly uninformed. In 1965, when the Medicare Health bill was passed, it was estimated by Federal actuaries that the cost of the program would be a mere $9 billion by the year 1990 – 25 years from the date of enactment. The real cost, however, was a cool $66 billion. Another bad estimate?

When Medicare Part D, the portion of the program related to prescription drug benefits, was passed in 2003, the estimated cost was $534 billion over 10 years. Less than two years later, the government was forced to admit the actual entitlement cost $1.2 trillion over the first decade. With our experience of these two programs, can you even imagine what a program projected by Congress at $1 trillion over the next 10 years is going to actually end up costing.

I have now read on a number of occasions the same statistics that were provided in my post of Saturday, June 20th (Healthcare Relief Without Universal Health) as to the number of uninsured Americans today. As I pointed out, the numbers being used to represent this great need for medical insurance are just inaccurate. Presumably, these inaccurate numbers represent a failure to do the research, but that seems hardly likely since the same numbers have now appeared on the front page of the New York Times, The Wall Street Journal, and the Washington Post.

The bigger issue regarding medical insurance is just because someone doesn’t have medical insurance doesn’t mean that they don’t have medical care. I think I have beat that point into submission in prior postings. Not that I feel my postings will actually change the trend by the Congress to spend more and more money on programs with less and less credibility, but I thought I would at least do my part.

The most discouraging part of the healthcare proposal is that it proposes a government sponsored health program to compete with the private sector. I like the comment of Representative Paul Ryan (R-Wisconsin): “Having the government compete against the private sector is kind of like my seven-year old daughter’s lemonade stand competing against McDonald’s.” I think everyone gets the point that a government agency competing against the private sector is absurd. With the clear intent of governmental subsidies of medical care with your tax dollars, it will only be a matter of time before medical insurance from the private sector disappears. At that point, we as taxpayers will be assuming a liability many times the $35 trillion facing Medicare today.

You might think that I’m very discouraged after reading all of the above. Actually, I’m probably more encouraged today than I have been at any time during 2009. Congress has passed such ridiculous bills that are so far “over the top” that even the public is catching on. Lesser bills probably would not have received the same amount of negative publicity. The polls clearly reflect that most people in the U.S. do not support a government sponsored health plan.

No one understands the “Cap and Tax” bill, but that’s only a matter of time. Once the public understands the boondoggle of these two bills, I think there will be an immediate backlash against the irresponsible members of Congress that support them. While we surely cannot continue to run the deficits that are now proposed for the next decade by the current administration, I have confidence that the public will resist them.

As we move further into 2009, we must get away from the Rahm Emanuel (President Obama's Chief of Staff) mentality of “You never want a serious crisis to go to waste. And what I mean by that is it's an opportunity to do things that you could not do before.” We must now slow down and actually think about the laws we are passing. Eventually, sanity will return to the taxpayers, and they will vote against these extraordinarily new high taxes and a government that more closely resembles Europe than the United States.

As always, above are my opinions and observations. I could be wrong.