Today's Elections .. Races to Watch

Races to Watch:Texas Senate, Georgia Taxes has the story on today's political races worth watching.

Associated Press

Former Texas Solicitor General Ted Cruz is surrounded by supporters and media at a voting precinct Tuesday.

"Today is election day in both Texas and Georgia with the fate of a transit tax and several competitive primaries being decided. Here’s a rundown of  the day’s top contests:

Texas: Cruz vs. Dewhurst for Senate

The voters in the Lone-Star state will determine who will be the Republican nominee for the open Senate seat to replace the retiring Sen. Kay Bailey Hutchison. It’s a runoff following a May vote that had nine Republican contenders.

Lt. Gov. David Dewhurst has the support of most of the GOP establishment, including several leading business groups, a number of Republican state senators, and current Texas Gov. Rick Perry. But Ted Cruz, a former state solicitor general, is the insurgent conservative candidate with the backing of tea-party groups and several top conservative politicians such as Sens. Rand Paul of Kentucky and Mike Lee of Utah and Sarah Palin, the former Alaska governor.

Just weeks ago, Mr. Dewhurst appeared to have a comfortable lead. But polls now suggest momentum has shifted to Mr. Cruz. A June WSJ profile of Mr. Cruz noted that his promise has captured the imagination of conservative leaders. National Review magazine has called him the “next great conservative hope.”

Georgia: Traffic and Taxes

Is more money the right way to improve the terrible traffic in Atlanta? That’s what voters in Georgia will decide on Tuesday. They’ll give their verdict on whether to add a one-percentage-point increase in local sales taxes to pay for billions of new highway projects and other transportation upgrades.

Republican Gov. Nathan Deal and business leaders support the tax increase, saying it will improve the state’s economy and relieve congestion. Over 10 years, the tax would pay for an estimated $7.2 billion in rail, road and bus projects in the Atlanta region. But some tea-party groups and conservatives argue that increasing taxes in a weak economy is not a wise move, and other critics, including the Sierra Club,  say the project doesn’t offer a strong long-term solution to transportation problems. The Journal recently took a close look at the issues."

Summing Up

In Texas, my hope is for a Cruz victory.

In Georgia, my hope is for a no new taxes victory.

It's time to send the pols some clear messages.

In any event, we'll know more about all this in a few hours.

Thanks. Bob.

More on Capitalism ... The People We Meet and the Books We Read ... MIlton Friedman's 100th Birthday

Long ago someone told me the way we change our view of the world is by (1) the people we meet and (2) the books we read.

Other than from my parents, I learned the most from someone I never met.

Since the latter 1970s, I've read much of what Milton Friedman wrote, and I've watched and listened to much of what he had to say. He caused me to change my basic view of how the world works, and his teachings still greatly influence my thoughts today.

Today would have been his 100th birthday, and many of his teachings are highlighted in The Man Who Saved Capitalism.

I've selected eleven brief excerpts from the editorial for your review and consideration:

(1) "It's a tragedy that Milton Friedman—born 100 years ago on July 31—did not live long enough to combat the big-government ideas that have formed the core of Obamanomics. It's perhaps more tragic that our current president, who attended the University of Chicago where Friedman taught for decades, never fell under the influence of the world's greatest champion of the free market. Imagine how much better things would have turned out, for Mr. Obama and the country. . . .

(2) "I remember asking Milton, a year or so before his death, . . . : What can we do to make America more prosperous? "Three things," he replied instantly. "Promote free trade, school choice for all children, and cut government spending."

How much should we cut? "As much as possible."

(3) In the 1960s, Friedman famously explained that "there's no such thing as a free lunch." If the government spends a dollar, that dollar has to come from producers and workers in the private economy. There is no magical "multiplier effect" by taking from productive Peter and giving to unproductive Paul. As obvious as that insight seems, it keeps being put to the test. Obamanomics may be the most expensive failed experiment in free-lunch economics in American history.

(4) As for congressional Republicans who are at risk of getting suckered into a tax-hike budget deal, they may want to remember another Milton Friedman adage: "Higher taxes never reduce the deficit. Governments spend whatever they take in and then whatever they can get away with."

(5) Friedman stood unfailingly and heroically with the little guy against the state. He used to marvel that the intellectual left, which claims to espouse "power to the people," so often cheers as states suppress individual rights.

While he questioned almost every statist orthodoxy, he fearlessly gored sacred cows of both political parties. He was the first scholar to sound the alarm on the rotten deal of Social Security for young workers—forced to pay into a system that will never give back as much as they could have accumulated on their own. He questioned the need for occupational licenses—which he lambasted as barriers to entry—for everything from driving a cab to passing the bar to be an attorney, or getting an M.D. to practice medicine.

(6) "The issue he devoted most of his later years to was school choice for all parents, and his Friedman Foundation for Educational Choice is dedicated to that cause. He used to lament that "we allow the market, consumer choice and competition to work in nearly every industry except for the one that may matter most: education."


(7) Equally illogical is the superstition that government can create prosperity by having Federal Reserve Chairman Ben Bernanke print more dollars. In the very short term, Friedman proved, excess money fools people with an illusion of prosperity. But the market quickly catches on, and there is no boost in output, just higher prices.

(8) Small in stature but a giant intellect, he was the economist who saved capitalism by dismembering the ideas of central planning when most of academia was mesmerized by the creed of government as savior.

Friedman was awarded the Nobel Prize in economics for 1976—at a time when almost all the previous prizes had gone to socialists. This marked the first sign of the intellectual comeback of free-market economics since the 1930s, when John Maynard Keynes hijacked the profession. Friedman's 1971 book "A Monetary History of the United States," written with Anna Schwartz (who died on June 21), was a masterpiece and changed the way we think about the role of money.

(9) More influential than Friedman's scholarly writings was his singular talent for communicating the virtues of the free market to a mass audience. His two best-selling books, "Capitalism and Freedom" (1962) and "Free to Choose" (1980), are still wildly popular. His videos on YouTube on issues like the morality of capitalism are brilliant and timeless.

(10) He loved turning the intellectual tables on liberals by making the case that regulation often does more harm than good. His favorite example was the Food and Drug Administration, whose regulations routinely delay the introduction of lifesaving drugs. "When the FDA boasts a new drug will save 10,000 lives a year," he would ask, "how many lives were lost because it didn't let the drug on the market last year?"

(11) No doubt because of his continued popularity, the left has tried to tie Friedman and his principles of free trade, low tax rates and deregulation to the global financial meltdown in 2008. Economist Joseph Stiglitz charged that Friedman's "Chicago School bears the blame for providing a seeming intellectual foundation" for the "idea that markets are self-adjusting and the best role for government is to do nothing." Occupy Wall Street protesters were often seen wearing T-shirts which read: "Milton Friedman: Proud Father of Global Misery."

The opposite is true: Friedman opposed the government spending spree in the 2000s. He hated the government-sponsored enterprises like housing lenders Fannie Mae and Freddie Mac.

In a recent tribute to Friedman in the Journal of Economic Literature, Harvard's Andrei Shleifer describes 1980-2005 as "The Age of Milton Friedman," an era that "witnessed remarkable progress of mankind. As the world embraced free-market policies, living standards rose sharply while life expectancy, educational attainment, and democracy improved and absolute poverty declined."

Well over 200 million were liberated from poverty thanks to the rediscovery of the free market. And now as the world teeters close to another recession, leaders need to urgently rediscover Friedman's ideas."

Summing Up

We could sure use another Milton Friedman in the world --- and quick.

Thanks. Bob.

Government Craziness in Illinois and France ... Political Fraud, Too?

Illinois and France have several things in common, it seems. And those things, other than out-of-control government spending and sick economies, include government leaders that don't have a clue about what's happening. Either that or they simply don't want We the People to know what they know but are unwilling or afraid to share with us.

My guess is that they really don't have a clue about the impact their actions are having and will continue to have on their economies and the future financial well being of their citizens.

First up is Illinois. The Governor has called for a special congressional session to deal with and hopefully resolve how to fund the $83 billion unfunded public sector retirement liability of the state. In an obvious sleight of hand maneuver, Congressional officials are complaining about the cost of such a session. I guess they don't want to waste the taxpayers' money. What a crock!

Maybe they're lying about why they don't want a special session this summer.

Let's do the math. If the special session were to cost $8.3 million (my guess is the cost would be much less than that), and if the unfunded problem they would purport to solve is $83 billion (which it is), that means the special session cost relative to the total problem to be solved is infinitesimal, miniscule or whatever other word describes nothingness. $8.3 million x 10 x 10 x 10 x10 = $83 billion.

So why are the legislators balking? Could it be that they have no interest in performing their elected duties? Could it be that they don't want to anger taxpayers -- er-- voters prior to this fall's elections?

That's my guess.

Now let's go to France.

France's President Takes on Peugeot tells the story of the crass and overtly political comments by the French President and his ally in attacking the auto company for trying to run its operations responsibly in light of current and foreseeable economic conditions.

As with Illinois, the French government knows no bounds as to how much OPM it can spend or commit to spend. The problem is it's running out of places to find the money to do so. Again, similar to Illinois and its $83 billion retirement funding obligation, there's no money left in the French till. And lenders certainly aren't lining up to lend them more.

So the President yells at Peugeot's leaders and calls them names. Nice way to handle things, I guess. At least it's the French way.

Here's the story:

"Earlier this month PSA Peugeot Citroën announced it would shutter an assembly line . . . north of Paris. Citing its high labor costs and sharp international competition, the company warned that some 8,000 jobs in France would have to go. Both President François Hollande and Minister of Industrial Renewal Arnaud Montebourg declared the decision to be "unacceptable."

"The State won't let it happen," Mr. Hollande told a French television interviewer after Peugeot's announcement.

The main tactic so far has been to publicly rebuke Peugeot's management as "cheaters," with Hollande officials now accusing the company of concealing or even lying about its labor costs....

Peugeot CEO Philippe Varin has now promised that "there will be no forced layoffs and that we will do what is necessary to reindustrialize the ... site." Workers who voluntarily retire will receive generous buyout packages. Naturally, that's still not good enough for the unions, which have organized strikes to show their contempt....

Mr. Montebourg either doesn't know or doesn't care that Peugeot also hired more than 2,000 people in France last year (10,000 globally) . . . . In the first half of 2011, the company booked a profit of €806 million; in the first half of this year, it lost €819 million. Different times, different strategies—there is nothing abnormal here.

Peugeot's French cuts are part of a broader contraction for the industry across Western Europe, where all the macroeconomic indicators are pointing against manufacturing.

French car-making is no exception. The sector is plagued with some of the highest labor costs in the world—about 50% of which wind up in government coffers, not workers' pockets.

Car sales have nose-dived since the Sarkozy government cut down on the cash-for-clunkers and other "stimulus" goodies it doled after the 2008 crisis. In the first half of this year, new Peugeot sales dropped 21.6% year-on-year.

To fix all this, Messrs. Montebourg and Hollande have come up with the Socialist trifecta of bullying, subsidies and protectionism. That may be the easiest political gamble. But France's failure to adapt its economy to the modern world is real, and the consequences are now painfully obvious. Fixing the problem will take more than "green" spending sprees and blaming Asia.

The government so far has refused to consider basic economic principles and the cost of statism on industry. Until it does, it can't begin to helpfully address France's crisis of competitiveness. The Hollande administration, try as it might, simply cannot replace all private employers in France with senior civil servants, all willing consumers with taxpayer subsidies, and all private investment with state-run banks. . . .

Rather than meddling more in private industry, President Hollande and his administration might do better to . . . consider their own job descriptions. Their role is to provide a fiscal and legal background for companies to thrive—and in these areas, France isn't lacking in work to be done, starting with the tax and labor codes.

French voters elected a new government in May, not new CEOs for their auto companies. If those are the jobs that Messrs. Hollande and Montebourg want, the people to talk to would be auto executives and shareholders—once they're done insulting them, that is."

My Take

Governments can't cope with having no money to spend, but any money they do spend has to first come from the private sector or borrowing.

Auto companies worldwide are struggling; in France, in the U.S. and elsewhere. Many other industries are suffering through this ongoing debt induced economic debacle as well.

Growing government by borrowing uncontrollably has happened. Meanwhile, paying for that growth in government hasn't happened. Debts and commitments for future spending are now enormous.

 So now the fat lady is singing, or at least preparing to sing, but there's no money to pay her.

Any further delay to face the facts by refusing to convene in order to address the fundamental issues of no money in Illinois and recognizing that there's not enough business in France to keep automotive facilities running full tilt won't solve anything. It will only result in "death by delay."

The governments of Illinois and France, like the emperor, have no clothes. At least none of their own.

There's a big fact based economics lesson being taught these days, but politicians don't want to attend the class.

They'll forced to show up someday soon, and it's not going to be a pretty sight when they do.

Thanks. Bob.

Stock Market Returns ... Surprised?

Stocks have performed really poorly these past ten years or so. Right?

Maybe not. Here's a table showing the rolling average over multiple ten year periods.

S&P Rolling Ten Year Returns: Better Than You Think has the details:

"While the period from March 2000 through now has been classified as the dark ages for investing, the rolling ten year returns for the S&P 500 hit their highest levels since January 2008 this month.

The chart below shows the historical rolling ten-year returns for the S&P 500 going back to 1938.

As shown in the chart, the returns have been rebounding from multi-decade lows in the last couple of years and are now up to 51.9%. In other words, $100 invested in the S&P 500 ten years ago this month is worth $151.9 today.

Before we start calling it a golden age for equities, though, we would note that a big reason for the current positive level is the fact that this Summer also represents the 10-year anniversary of the end of the dot-com bear market that went from Spring 2000 through Summer 2002.  Time sure flies when you're having fun.  Doesn't it?





 

My Take


Equity investing is a long term proposition. It's a good bet, too.

Even when it's "terrible," it's still pretty good.

Especially when compared to other forms of investing.

And you can always sell and stop playing whenever you decide to do so.

Unlike real estate and other illiquid investments.

That ability to take the money and run, even if it's not intended to be and never is actually used.


Thanks. Bob.

Amateurs and the Olympics ... Missy's Story

Here's a great story to help start the day.

Missy Takes the Gold, subtitled 'A high school swimmer with the right priorities.' makes me feel good. I hope it does the same for you:

"Among the most compelling champions of the London Olympics so far is 17-year-old Missy Franklin, who won a gold medal Monday in the 100-meter backstroke. She may win a few more before she returns to Colorado for her senior year in high school. But don't expect to see her on a Wheaties box anytime soon.

Ms. Franklin is something of a curiosity in her sport because she has resisted lucrative endorsement deals in order to maintain her amateur status. "I really, really want to swim in college," she told the Journal earlier this year.

An economist might question her judgment, but Americans will likely be encouraged that in our texting, tweeting era of instantaneity, there is still a teenager somewhere who believes in deferred gratification. And even if the Supreme Court still doesn't understand it, one virtue of a truly free market is the freedom not to participate in it.

Americans may also take note of her parents' decision not to uproot their daughter to place her in one of the nation's top swimming programs in California, Florida or Texas. Instead, Ms. Franklin still has the same coach who gave her lessons when she was seven years old. Parents wrestling with a youth sports culture that seems to treat every Little League contest as a World Series game might conclude that, sometimes, less is more.

All Americans, especially those struggling to find their places in a sputtering economy, might also find inspiration in the tale of Ms. Franklin's coach Todd Schmitz. Mr. Schmitz owned a lawn-mowing business and then tried a brief corporate career before taking a stab at coaching. On his first day as a full-time swimming coach, young Missy showed up at his pool.

A decade of no doubt very grueling work later, the Franklin-Schmitz collaboration is a reminder of the Olympics's amateur roots and why we still watch the games. "

Have a great day. Bob.

For Profit Colleges And Other Costly Taxpayer Ripoffs

Senate Committee Report on For-Profit Colleges Condemns Costs and Practices has this to say:

"Wrapping up a two-year investigation of for-profit colleges, Senator Tom Harkin will issue a final report on Monday — a voluminous, hard-hitting indictment of almost every aspect of the industry, filled with troubling statistics and anecdotes drawn from internal documents of the 30 companies investigated.

According to the report, which was posted online in advance, taxpayers spent $32 billion in the most recent year on companies that operate for-profit colleges, but the majority of students they enroll leave without a degree, half of those within four months.

“In this report, you will find overwhelming documentation of exorbitant tuition, aggressive recruiting practices, abysmal student outcomes, taxpayer dollars spent on marketing and pocketed as profit, and regulatory evasion and manipulation,” Mr. Harkin, an Iowa Democrat who is chairman of the Senate Health, Education, Labor and Pensions Committee, said in a statement on Sunday. “These practices are not the exception — they are the norm. They are systemic throughout the industry, with very few individual exceptions.”

In a statement on Sunday, the Association of Private Sector Colleges and Universities, the leading trade group of for-profit colleges, called the report “the result of a flawed process that has unfairly targeted private-sector schools and their students.”

For-profit higher education has long been a politically divisive issue, with Democrats generally arguing that greater regulation is needed to prevent huge publicly traded colleges from plundering the Treasury for student financial aid while leaving students with crippling debt and credentials that are worthless in the job market. Many Republicans see such colleges as a healthy free-market alternative to overcrowded community colleges, offering useful vocational training and education to working adults who will not attend more traditional institutions. . . .

Over the last 15 years, enrollment and profits have skyrocketed in the industry. Until the 1990s, the sector was made up of small independent schools offering training in fields like air-conditioning repair and cosmetology. But from 1998 to 2008, enrollment more than tripled, to about 2.4 million students. . . .

Enrolling students, and getting their federal financial aid, is the heart of the business, and in 2010, the report found, the colleges studied had a total of 32,496 recruiters, compared with 3,512 career-services staff members.

Among the 30 companies, an average of 22.4 percent of revenue went to marketing and recruiting, 19.4 percent to profits and 17.7 percent to instruction. . . .

The bulk of the for-profit colleges’ revenue, more than 80 percent in most cases, comes from taxpayers. The report found that many for-profit colleges are working desperately to find new strategies to comply with the federal regulation that at least 10 percent of revenue must come from sources other than the Department of Education. Because veterans’ benefits count toward that 10 percent even though they come from the federal government, aggressive recruiting of students from the military has become the norm.

The amount of available federal student aid is large and growing. The Apollo Group, which operates the University of Phoenix, the largest for-profit college, got $1.2 billion in Pell grants in 2010-11, up from $24 million a decade earlier. Apollo got $210 million more in benefits under the Post-9/11 G.I. Bill. And yet two-thirds of Apollo’s associate-degree students leave before earning their degree....

On average, the Harkin report found, associate-degree and certificate programs at for-profit colleges cost about four times as much as those at community colleges and public universities. . . .

Many of the for-profit colleges, the report found, set tuition at almost exactly what a student could expect in maximum federal aid, including Pell grants and Stafford loans. . . .

Furthermore, the report found, recruiters are often encouraged to avoid directly answering questions about costs and instead emphasize that with federal aid, student will pay little out of pocket. And costs are not easy for students to determine. A former Westwood College recruiter explained that prospective students were told that the cost was $4,800 per term, but not that there were five or six terms a year rather than the usual two or three.

At many schools, students learned only after the fact that their credits would not transfer to another college or university or qualify them for the professional licensing they sought.

Students at for-profit colleges make up 13 percent of the nation’s college enrollment, but account for about 47 percent of the defaults on loans. About 96 percent of students at for-profit schools take out loans, compared with about 13 percent at community colleges and 48 percent at four-year public universities.

Colleges with very high loan default rates in the two years after graduation (now changing to three years) lose their eligibility for federal student aid. As a result, the report found, many of the for-profit colleges try to move students having trouble with repayment into deferral or forbearance until they are past the years the government monitors."

My Take

For-profit colleges are an obvious taxpayer ripoff. That's not a surprise. Collusive capitalism in action.

However, not-for-profit public colleges and universities are generally a taxpayer ripoff as well. Pell Grants and government sponsored student loans in action.

So are technical schools and other "skill" oriented facilities. Same story.

The common ingredient is an abundance of unaccounted for and broadly available "free or cheap" government money. Sometimes it's in the form of student grants or loans, sometimes in the form of research grants and sometimes in other variations of the same theme.

A common ingredient of all this is lack of accountability and transparency. A lack of metrics as well.

In other words, it looks a lot like K-12 spending on public schools and other government spending programs, too.

Government takes from the people and then doesn't serve the people by acting as stewards or ficudiaries. It doesn't even try.

As a result, the new Senate report doesn't surprise me even a little bit. Nor should it surprise you. But it should have covered all the other areas mentioned hereinabove as well. Not just for-profit institutions.

The problem is government and not the genuine non-government sponsored private sector profit generators. Government shouldn't use taxpayer money to help its collusive or crony capitalist friends make a profit or otherwise make money or enrich themselves at taxpayer expense.

The solution is obvious. Let the market decide and keep government knows best rules and regulations off the campus. Subsidize individuals and not institutions.

Finally, what would surprise me would be to see some genuine "public servants" taking care of the money entrusted to them by We the People.

But a MOM mentality and approach has been MIA in our elitist government for a long time now.

Instead it's OPM all the way. How sick!

Thanks. Bob.

EARNED SUCCESS ... The Moral Meaning of Capitalism

Why Capitalism Has an Image Problem tells the story:

"Mitt Romney's résumé at Bain should be a slam dunk. He has been a successful capitalist, and capitalism is the best thing that has ever happened to the material condition of the human race. From the dawn of history until the 18th century, every society in the world was impoverished, with only the thinnest film of wealth on top. Then came capitalism and the Industrial Revolution. Everywhere that capitalism subsequently took hold, national wealth began to increase and poverty began to fall. Everywhere that capitalism didn't take hold, people remained impoverished. Everywhere that capitalism has been rejected since then, poverty has increased.

Capitalism has lifted the world out of poverty because it gives people a chance to get rich by creating value and reaping the rewards. Who better to be president of the greatest of all capitalist nations than a man who got rich by being a brilliant capitalist?


 Yet it hasn't worked out that way for Mr. Romney. "Capitalist" has become an accusation. The creative destruction that is at the heart of a growing economy is now seen as evil. Americans increasingly appear to accept the mind-set that kept the world in poverty for millennia: If you've gotten rich, it is because you made someone else poorer.

What happened to turn the mood of the country so far from our historic celebration of economic success? . . .  the problem of crony capitalism is trivial compared with the collusion engendered by government. In today's world, every business's operations and bottom line are affected by rules set by legislators and bureaucrats. The result has been corruption on a massive scale. Sometimes the corruption is retail, whereby a single corporation creates a competitive advantage through the cooperation of regulators or politicians (search on "earmarks"). Sometimes the corruption is wholesale, creating an industrywide potential for profit that would not exist in the absence of government subsidies or regulations (like ethanol used to fuel cars and low-interest mortgages for people who are unlikely to pay them back). Collusive capitalism has become visible to the public and increasingly defines capitalism in the public mind. . . .


The objective changes in capitalism as it is practiced plausibly account for much of the hostility toward capitalism. But they don't account for the unwillingness of capitalists who are getting rich the old-fashioned way—earning it—to defend themselves. . . .

Another factor is the segregation of capitalism from virtue. Historically, the merits of free enterprise and the obligations of success were intertwined in the national catechism. McGuffey's Readers, the books on which generations of American children were raised, have plenty of stories treating initiative, hard work and entrepreneurialism as virtues, but just as many stories praising the virtues of self-restraint, personal integrity and concern for those who depend on you. The freedom to act and a stern moral obligation to act in certain ways were seen as two sides of the same American coin. Little of that has survived.


To accept the concept of virtue requires that you believe some ways of behaving are right and others are wrong always and everywhere. That openly judgmental stand is no longer acceptable in America's schools nor in many American homes. Correspondingly, we have watched the deterioration of the sense of stewardship that once was so widespread among the most successful Americans . . . . Capitalists who behave honorably and with restraint no longer have either the platform or the vocabulary to preach their own standards and to condemn capitalists who behave dishonorably and recklessly.

And so capitalism's reputation has fallen on hard times and the principled case for capitalism must be made anew. That case has been made brilliantly and often in the past, with Milton Friedman's "Capitalism and Freedom" being my own favorite. But in today's political climate, updating the case for capitalism requires a restatement of old truths in ways that Americans from across the political spectrum can accept. Here is my best effort:

{NOTE: THIS NEXT PART IS WORTH READING CLOSELY--VERY CLOSELY--IT DEFINES AND DESCRIBES THE IMPORTANCE OF "EARNED SUCCESS" IN AMERICA.}

The U.S. was created to foster human flourishing. The means to that end was the exercise of liberty in the pursuit of happiness. Capitalism is the economic expression of liberty. The pursuit of happiness, with happiness defined in the classic sense of justified and lasting satisfaction with life as a whole, depends on economic liberty every bit as much as it depends on other kinds of freedom.

"Lasting and justified satisfaction with life as a whole" is produced by a relatively small set of important achievements that we can rightly attribute to our own actions. (A co-worker) ) has usefully labeled such achievements "earned success." Earned success can arise from a successful marriage, children raised well, a valued place as a member of a community, or devotion to a faith. Earned success also arises from achievement in the economic realm, which is where capitalism comes in.

Earning a living for yourself and your family through your own efforts is the most elemental form of earned success. Successfully starting a business, no matter how small, is an act of creating something out of nothing that carries satisfactions far beyond those of the money it brings in. Finding work that not only pays the bills but that you enjoy is a crucially important resource for earned success.

Making a living, starting a business and finding work that you enjoy all depend on freedom to act in the economic realm. What government can do to help is establish the rule of law so that informed and voluntary trades can take place. More formally, government can vigorously enforce laws against the use of force, fraud and criminal collusion, and use tort law to hold people liable for harm they cause others.


Everything else the government does inherently restricts economic freedom to act in pursuit of earned success. I am a libertarian (NOTE: SO AM I.} and think that almost none of those restrictions are justified. But accepting the case for capitalism doesn't require you to be a libertarian. You are free to argue that certain government interventions are justified. You just need to acknowledge this truth: Every intervention that erects barriers to starting a business, makes it expensive to hire or fire employees, restricts entry into vocations, prescribes work conditions and facilities, or confiscates profits interferes with economic liberty and usually makes it more difficult for both employers and employees to earn success. You also don't need to be a libertarian to demand that any new intervention meet this burden of proof: It will accomplish something that tort law and enforcement of basic laws against force, fraud and collusion do not accomplish. . . .



Finally, people with a wide range of political views can acknowledge that what has happened incrementally over the past half-century has led to a labyrinthine regulatory system, irrational liability law and a corrupt tax code. Sweeping simplifications and rationalizations of all these systems are possible in ways that even moderate Democrats could accept in a less polarized political environment.

To put it another way, it should be possible to revive a national consensus affirming that capitalism embraces the best and most essential things about American life; that freeing capitalism to do what it does best won't just create national wealth and reduce poverty, but expand the ability of Americans to achieve earned success—to pursue happiness.


Reviving that consensus also requires us to return to the vocabulary of virtue when we talk about capitalism. Personal integrity, a sense of seemliness and concern for those who depend on us are not "values" that are no better or worse than other values. Historically, they have been deeply embedded in the American version of capitalism. If it is necessary to remind the middle class and working class that the rich are not their enemies, it is equally necessary to remind the most successful among us that their obligations are not to be measured in terms of their tax bills. Their principled stewardship can nurture and restore our heritage of liberty. Their indifference to that heritage can destroy it. "

Summing Up

The many virtues of capitalism are generally misunderstood and even vilified.

 Still, our American values all stem from and are built on the idea of individual  "earned success."

Accordingly, capitalism, freedom, morality and other basic American values are inextricably linked.

In simple language, capitalism is the absolute best sytem in the world for enabling freedom loving people to pursue individual "happiness," however that word may be defined by each of us.

Freedom and a self governing  capitalistic system provide opportunities for each of us and represent the keys to a full and bountiful life.

Finally, capitalism is the most moral system in the world, although that simple fact is generally left unsaid.

That's really too bad. Let's speak up.

Thanks. Bob.

Individual Freedoms versus Majority Rule

Which is more important to a self governing society?

Majority rule or individual freedoms?

The blessings of liberty would argue for individual freedoms, and I would agree.

Long ago the tyranny of the majority was held out as an existential threat to a free society.

It's worth remembering that our individual freedoms are the underpinnings of both American government and our inalienable rights as human beings.

Notable & Quotable offers still timely food for thought from an incisive commentary written long ago by Auberon Herbert in "The Right and Wrong of Compulsion by the State" (1894):

"We are fast getting rid of emperors and kings and dominant churches, as far as the mere outward form is concerned, but the soul of these men and these institutions is still living and breathing within us. We still want to exercise power, we still want to drive men our own way, and to possess the mind and body of our brothers as well as of our own selves. The only difference is that we do it in the name of a majority instead of in the name of divine right. . . .

In this case the possession of power would necessarily confer upon those who gained it such enormous privileges—if we are to speak of the miserable task of compulsion as privileges—the privileges of establishing and enforcing their own views in all matters, of treading out and suppressing the views to which they are opposed, of arranging and distributing all property, of regulating all occupations, that all those who still retained sufficient courage and energy to have views of their own would be condemned to live organized for ceaseless and bitter strife with each other.

In presence of unlimited power lodged in the hands of those who govern, in the absence of any universal acknowledgment of individual rights, the stakes for which men played would be so terribly great that they would shrink from no means to keep power out of the hands of their opponents. Not only would the scrupulous man become unscrupulous, and the pitiful man cruel, but the parties into which society divided itself would begin to perceive that to destroy or be destroyed was the one choice lying in front of them."

Summing Up

The virtues of majority rule are overrated.

The tyranny of the majority is a real and always clear and present danger.

With respect to governments, 19th century commentator Lord Acton perhaps said it best, "Power corrupts and absolute power corrupts absolutely."

But Lord Acton said another thing about government that to me is even more profound, "The danger is not that a particular class is unfit to govern; every class is unfit to govern."

And so it is.

Thanks. Bob.

Teachers Unions, Impoverished Students, Choice and Vouchers

In the prior post, we commented on sexual predators in the New York classrooms and the complete defense of their awful actions by teachers unions.

Let's move to Louisiana and see how the teachers unions are reacting to a new law supporting allowing poor families to select better schools for their children.

It's another example of what unions really do.

'Whatever Means Necessary' says this about the Louisiana vouchers and the unions' reaction:

"In some parts of the antebellum South, it was illegal to teach blacks how to read. Are teachers unions in Louisiana trying to turn back the clock?

Last week, lawyers for the Louisiana Association of Educators, one of the state's two major teachers unions, threatened private and parochial schools with lawsuits if the schools accept students participating in a new school choice initiative that starts this year. Education reforms signed into law in April by Governor Bobby Jindal include a publicly funded voucher program that allows low-income families to send their children to private or parochial schools.

Teachers unions allege that sending public dollars to nonpublic schools violates the state's constitution, and they are challenging the law in court. A hearing is set for October, but the unions have already lost several court bids to delay the voucher program until the lawsuit plays out. Hence, the bullying.

On Thursday, lawyers representing the unions faxed letters to about 100 of the 119 schools that are participating in the voucher program. "Our clients have directed us to take whatever means necessary," the letter reads. Unless the school agrees to turn away voucher students, "we will have no alternative other than to institute litigation." The letter demanded an answer in writing by the next day.

Louisiana's voucher program is adjusted for family income and is intended above all to give a shot at a decent education to underprivileged minorities, who are more likely to be relegated to the worst public schools. Forty-four percent of Louisiana public schools received a D or F ranking under the state's grading system, and some 84% of the kids in the program come from one of those low-performing schools.

Demand for vouchers has been overwhelming: There were 10,300 applications for 5,600 slots. Despite claims to the contrary by school-choice opponents, low-income parents can and do act rationally when it comes to the education of their children.

State officials have rightly slammed the union's tactics. A spokesman for the Governor said in a statement that union leaders are "stooping to new lows and trying to strong-arm schools to keep our kids from getting a quality education." State Superintendent John White said it was "shameful" that the unions were "trying to prevent people from doing what's right for their children."

The unions claim that vouchers don't benefit students, but we know from school-choice programs in Washington, D.C., and elsewhere that voucher recipients attend safer schools and enjoy higher graduation rates than their peers in public schools.

The real reason that unions oppose vouchers has nothing to do with the impact on students and everything to do with the impact on teachers unions. The Louisiana Association of Educators doesn't want students taught by nonunion teachers—even if that means suing in court to make it illegal for a kid in a failing school to attend another school where he might learn something."

My Take

Seeking and telling the truth is a prerequisite to effective learning.

And if we can't change our mind, we can't change anything else.

Choice is essential to a free society.

Informed citizens are essential to a free society.

A decent education is essential to becoming an informed citizen.

We have free public schools, public school teachers and individual freedoms in a self governing society in order to enhance educational opportunities for our citizens. Our system of "free" public schools is intended to be especially helpful for those families who don't have the means to pay for a quality education on their own.

Why can't parents have choice about their children's educational opportunities?

Why are teachers unions so powerful?

That last question is an easy one to answer.

Teachers unions are joined at the hip with Democratic party politics and use membership dues, fund raising and soliciting votes to keep the status quo Democratic party and union alliance political merry-go-round in good working condition, even as it harms Americans and America.

Thanks. Bob.

Teachers Unions Versus Teachers, Parents, Students, Taxpayers and Communities

Unions represent their members, of course.

Therefore, teachers unions represent teachers. Not parents and students, of course.

But in effect unions don't represent all teachers, because most good teachers don't need union representation.

Thus, unions basically go all out to defend the worst of the worst, and the vast majority of teachers, parents, students, taxpayers and the community at large pay the price.

Teachers Unions Go to Bat for Sexual Predators hits the nail on the head:

"By resisting almost any change aimed at improving our public schools, teachers unions have become a ripe target for reformers across the ideological spectrum. Even Hollywood, famously sympathetic to organized labor, has turned on unions with the documentary "Waiting for 'Superman'" (2010) and a feature film, "Won't Back Down," to be released later this year. But perhaps most damaging to the unions' credibility is their position on sexual misconduct involving teachers and students in New York schools, which is even causing union members to begin to lose faith.

In the last five years in New York City, 97 tenured teachers or school employees have been charged by the Department of Education with sexual misconduct. Among the charges substantiated by the city's special commissioner of investigation—that is, found to have sufficient merit that an arbitrator's full examination was justified—in the 2011-12 school year:

• An assistant principal at a Brooklyn high school made explicit sexual remarks to three different girls, including asking one of them if she would perform oral sex on him.

• A teacher in Queens had a sexual relationship with a 13-year old girl and sent her inappropriate messages through email and Facebook.

If this kind of behavior were happening in any adult workplace in America, there would be zero tolerance. Yet our public school children are defenseless.

Here's why. Under current New York law, an accusation is first vetted by an independent investigator. (In New York City, that's the special commissioner of investigation; elsewhere in the state, it can be an independent law firm or the local school superintendent.) Then the case goes before an employment arbitrator. The local teachers union and school district together choose the arbitrators, who in turn are paid up to $1,400 per day. And therein lies the problem.

For many arbitrators, their livelihood depends on pleasing the unions (whether the United Federation of Teachers in New York City, or other local unions). And the unions—believing that they are helping the cause of teachers by being weak on sexual predators—prefer suspensions and fines, and not dismissal, for teachers charged with inappropriate sexual conduct. The effects of this policy are mounting.

One example: An arbitrator in 2007 found that teacher Alexis Grullon had victimized young girls with repeated hugging, "incidental though not accidental contact with one student's breast" and "sexually suggestive remarks." The teacher had denied all these charges. In the end the arbitrator found him "unrepentant," yet punished him with only a six-month suspension.

Another example from 2007: Teacher William Scharbach was found to have inappropriately touched and held young boys. "Respondent's actions at best give the appearance of impropriety and at worst suggest pedophilia," wrote the arbitrator—before giving the teacher only a reprimand. The teacher didn't deny the touching but denied that it was inappropriate.

Then there was teacher Steven Ostrin, who in 2010 was found to have asked a young girl to give him a striptease, harassed students by text, and engaged in sexual banter. The arbitrator in his case concluded that since the teacher hadn't actually solicited sex from students, the charges—all of which the teacher denied—warranted only a suspension.

Michael Loeb, a middle school teacher in the Bronx and UFT member, calls this a "horrible situation," telling me "if you keep these people in the classroom, you are demeaning our profession."

Parents I spoke with described their tremendous fear about what is happening in the classroom. Maria Elena Rivera says her 14-year-old daughter was stalked by one of her Brooklyn high school teachers (who resigned from his position before the Department of Education decided whether to send the case to arbitration). Today her daughter is in counseling, says Ms. Rivera, and doesn't trust anyone: "It so messed her up. I can't protect her."

Local media have begun to get the word out, yet the stories come and go with trifling consequences or accountability. New York City's schools chancellor and districts statewide must have the power to fire sexual predators—and the final say cannot be that of an arbitrator with incentives to lessen the punishment.

Fortunately, state Sen. Stephen Saland has proposed legislation in Albany to do just this, removing arbitrators' final say while still giving teachers due process and the opportunity to appeal terminations in court. But the buck would stop with those officials in charge of our schools and tasked with protecting our kids: the chancellor in New York City, and school districts elsewhere in the state.

Mr. Saland's initiative has little chance of success without union support—which is hardly assured. "I don't understand how they think this could be a gray area," says Natalie Harrington, who teaches English at New Day Academy in the Bronx. "I worry that if the union goes to bat [against] this, it makes it seem like they will do anything to keep anyone in the classroom."

Michael Loeb still supports his union but says it "treats teachers like interchangeable widgets"—defending all teachers no matter what they have done.

The union has reached a moment of truth. With responsible legislation on the table, the right course of action is obvious. At stake is the safety of kids, the reputation of the unions, and the standing of every good and responsible teacher throughout the state. "

My Take

The public education system is rigged against the very people it's intended to support --- students, parents, taxpayers and the community.

Unions aren't conerned with output or quality "products" at affordable prices. Productivity and doing the right thing, in other words.

Instead, union leaders spend their time and the memberships' dues defending the bad actors to the hilt, both in the private and public sectors.

Third party "impartial" arbitrators are often their accomplices.

And it's not just in teachers unions where this applies.

Specifically in the case of education, our system of public education is not at all about providing a quality education at an affordable cost to taxpayers for all students.

Meanwhile, the vast majority of teachers are solid people desiring to do the right thing.

It's the political and educational system, Stupid! And it's rotten to the core.

Thanks. Bob.

U.S. Stocks in the 2012 Equities Winner's Circle So Far ... American Exceptionalism at Work or a Temporary Phenomenon?

U.S. companies are clearly "overachieving" compared to the rest of the world's companies this year.

The U.S. economy is as well by being the best house in a bad neighborhood. We're operating pretty much at "stall speed," but at least we're not on the cusp of a recession.

And year-to-date the U.S. stock market has put in a very strong performance, too.

And much of this U.S. outperformance can be attributed to a stronger U.S. dollar after many years of weakening.

Lower oil prices, commodity costs and enhanced U.S. consumer purchasing power are just a few of the benefits we're deriving from having a stronger U.S. currency.

Add in record low interest rates, and things are in pretty good shape right now for us.

Of course, all the foregoing is merely "yesterday's news." What's Ahead?

Putting things in a global context, Exceptionally Fortunate makes a compelling case for continuing to own U.S. stocks over the long term:

"The concept of "American exceptionalism" has re-entered heavy rotation in the news cycle . . . .

Less discussed is the starkly exceptional performance of American equities, compared with most other world stock markets, and the question of whether it will continue. Following the late-week buying and short-covering spree that lifted the S&P 1.7% last week, to 1,386, only about 2.3% off its 2012 high, the benchmark is up 10.2% in 2012. This is among the best runs of any major market, with the EuroStoxx index off fractionally in euros and more than 5% in dollars, thanks to the U.S. currency's strength. Japan is flat, China is slightly underwater, Brazil's sitting on narrow losses.

Clearly, scared capital is migrating to where it expects to be treated less badly, and the U.S. markets are so far soothing it as best they can, as are other perceived stable venues such as Germany (without which the Europe index would be dramatically lower) . . . .

The rotation benefiting America is part of the global surge in stability-seeking and defense-playing. And why not, given the well-capitalized, liquid, easy-to-understand profile of U.S. multinational blue chips? Also, America is really the only country with domestically geared companies both somewhat buffered from global capital markets stress and big enough for a global investor to own.

This is so intuitive and logical that it has encouraged a "Where else are you going to go?" sort of backhanded rationalization that should prompt the forward thinker to ask whether U.S. outperformance has nearly run its course. After all, the euro-based investor now sitting on a 15.9% year-to-date gain in an S&P 500 index fund probably feels much smarter than the market likes its minions to feel for long.

If last week's little spurt in equities, following a succession of signals from central bankers that their money-printing fingers were getting itchy is the start of another "risk-on" phase, then beaten-down foreign markets will likely regain ground on stateside blue chips, as they did in Thursday's powerful bounce. It's by no means apparent yet that such a risk-preference shift is about to occur, but the odds are higher than they were a week or a month ago.

In the crisis-pocked terrain of the past few years, determining where capital is treated best also involves deciding which central banks are supportive of growth and of palliating debt-stricken financial markets. This generally has meant the U.S. . . .

Have central bankers, along with hedge-fund managers and market commentators, figured out that in the past two Augusts, markets foundered on global slowdown fears and the concern that sovereign-debt contagion would escape the authorities' reach and grasp? Does this mean that central banks will try to head off another late-summer struggle, rather than wait for one?

Impossible to say. But this notion is giving pause to investors positioned for a straight rerun of last year's punishing market action."

My Take

August is only one month, and nobody knows what the market will do in any month, let alone in any single year or even two. In the last two years, August has been a very rough ride for individual stock market investors.

This year may or may not repeat this sorry stock market performance. July's unemployment report will be forthcoming this Friday, and throughout the month other market moving data and commentary from Europe and the U.S. political campaigns will likely send the market in different directions on several days. Then it's on to September and the rest of the year before 2013 hits. It's always something.

Of course, the upcoming U.S. elections will keep us in suspense as will the "tax cliff" negotiations in Washington, both prior to and after November's elections.

Summing Up

All that said, the U.S. economy is doing a bit better than most others in the world, and the dollar's recent strength and low interest rates should bode reasonably well for future consumer spending.

Add in the likelihood that housing may have reached the bottom, and we are poised to continue slow but steady progress in the U.S. economy. Nothing great, for sure, but no disaster ahead either.

So while there can be no guarantees that we won't have another recession soon, it's not the most likely outcome.

Accordingly, my view is that even though nobody knows what's going to happen in the short term, the probability is that our economy will improve in the months and quarters ahead.

Those are good enough odds for long term investors to choose to "stay the course" and stick with stocks in August and beyond, assuming we mentally can handle the ups and downs of a volatile market.

And if we can't handle the volatility and still sleep well at night, we shouldn't invest in stocks in August or any other time.

I'm in for the long haul.

Thanks. Bob.

Blue Chip Dividend Payers Outperforming Broad Market in 2012

In my view, owning the individual shares of a well diversified group of blue chip stocks is always a good idea.

Over time, investing in the shares of companies that are solid performers in the marketplace will help us put together and maintain an appropriate stock portfolio which will eanble us to achieve our long term individual investment objectives. In that regard, I'm a big believer in focusing on the ownership of big well positioned and well managed blue chips that consistently earn good money and pay increasing dividends to their shareholders over time.

This year so far has been an especially good one for these types of companies. Of course, thus far it's been a good one as well for the stock market generally. The broad market has appreciated by ~10% year-to-date in 2012, cash dividends excluded.

Giant Stocks Are Walking Tall Again has the details of the relative performance of American blue chips:

"STOCKS around the world have been struggling lately, but one group of equities may ultimately benefit from all the fear and uncertainty: so-called megacaps.

Investments in huge companies like Wal-Mart Stores have helped some mutual fund managers bolster their returns over the last year. . . .

Ever since worries over the European debt crisis began to escalate more than a year and a half ago, the biggest American blue-chip stocks have been among the few bright spots for investors.

Since the start of last year, the Russell Top 50 index of the largest-capitalization domestic stocks has climbed more than 14 percent, while the MSCI EAFE index of foreign equities has sunk more than 15 percent and the Russell 2000 index of small-company shares has gained just 1 percent. Tack on dividends and megacap stocks have returned more than 18 percent during a period of heightened volatility and fear on Wall Street.

These giant stocks, with a market capitalization of around $50 billion or higher, managed to avoid losses in what’s been a tough month for many smaller stocks. The megacaps are up around 2 percent in July, while small-cap stocks are off nearly 1 percent.

Because of their size and industry dominance, megacaps have traditionally been seen as a relatively stable spot for equity investors. But their recent outperformance was a notable turnaround for a group that had generally been out of favor since the late 1990s, when shares of giant companies like Microsoft and Cisco Systems dominated the market before the growth stock bubble burst in 2000.

Some strategists say this could be an early sign of the market’s gradual shift back toward big stocks after years of favoring small-company and even international equities.

“Large caps may finally be having their day in the sun,” said Jack A. Ablin, chief investment officer at Harris Private Bank.

Mr. Ablin added that while equities are still slogging through a rough patch, a number of factors are weighing in the favor of large-cap stocks in general right now. “One is their stability,” he said, “but there’s also their dividends.” . . . 

The recent turmoil in Europe may be indirectly helping the megacaps in other ways. For starters, as global investors have been fleeing the euro, they’ve been driving money into dollar-denominated assets like Treasuries. That has bolstered the value of the dollar, which is up 13 percent since April 2011.

“Basically, people have been looking to escape Europe, and those who want to keep their money in equities are probably seeking the safer shores of megacaps in the United States,” said Sam Stovall, chief equity strategist at S.& P. Capital IQ.

The strengthening dollar has also focused American investors’ attention back on the domestic market. When the dollar was falling for much of the last decade, Americans could make money on their foreign investments simply through the currency fluctuation.

From January 2002 to April 2011, the dollar lost 39 percent of its value against a basket of foreign currencies. During that stretch, European stocks sank 6.5 percent when measured in the local currency. But because of the sinking dollar, Americans actually saw their European shares soar 61 percent.

Now that the dollar has reversed course and is gaining ground, American investors have less desire to invest abroad and more reason to keep their money in domestic shares.

But aren’t megacap stocks also exposed to foreign markets?

Yes. The average large company generates more than 46 percent of its revenue abroad, versus just 31 percent for small companies, according to S.& P.

Yet megacaps have generally done well anyway. “Bigger businesses, in particular since the financial crisis, have clearly proven to be more adaptable than a lot of people thought,” said Keith Trauner, co-portfolio manager of the GoodHaven Fund, which invests in a mix of big and small stocks. “They’ve been able to reduce costs and adjust their expense structure better than most people would have imagined.”

Mr. Trauner’s fund has beaten 75 percent of its peers in the last year, thanks in part to big stakes in megacaps like Microsoft and Wal-Mart. He added that some investors were probably still overlooking this group because many megacaps were “dead money” for more than a decade.

From 2000 through 2010, for instance, Microsoft lost 4.6 percent while Wal-Mart sank 1 percent, both annualized.

Wallace Weitz, president of the Weitz Funds, said, “I’ve been doing this for more than 40 years, yet it still surprises me that people look away from good companies because they ‘haven’t done anything’ for a long time.”

That’s exactly where value-minded investors ought to be looking for attractively priced shares, he said.

MEGACAP stocks, which in 2000 had a frothy price-to-earnings ratio of 33, are now trading at 13 times estimated earnings. By comparison, shares of medium-size companies have an average P/E ratio of 16, while the figure for small companies is nearly 20.      

“It’s a question of what risk you want to take,” said Pat W. Dorsey, president and director of research and strategy at Sanibel Captiva Investment Advisers. Investors fearful of stocks with any European exposure may be wary of megacaps. But in such times, skittish investors are also prone to punish stocks with high P/E ratios.

Mr. Dorsey says many megacap are cheaply priced — and they appeal to him. “I would prefer to take less valuation risk,” he said. "

My Take

Blue chip stocks are the best place to be for individual stock investors for many reasons, five of which are as follows.

1- Their cash dividends are adding another 2%-3% appreciation to any increase in share prices.

2- That cash dividend yield on blue chips, in and of itself, is greater than the interest rates paid on ten year U.S. treasury bonds currently. Approximately twice as much, in fact.

3- Stocks are reasonably valued and remain the best asset class to own for the next several years. In fact, the principal of bonds will become worth less if interest rates increase, which they will over the next several years.

4- Meanwhile, as the economy strengthens over time, share prices will show strong gains by decade's end. I'm betting on at least a 20,000 Dow by 2020, exclusive of dividends.

5- But even if I'm wrong about the 20,000 Dow, owning strongly positioned dividend paying and growing blue chip companies still offers the best value in the investing world today. And for the foreseeable future, too.

Thanks. Bob.

Stocks are Doing Well ... Investors Remain Wary

Share prices are up ~10% for this year so far, but most individual investors continue to shy away from them.

Unfortunately, that's pretty much par for the course. We tend to buy high and sell low, always a bad idea and one which is very harmful to our economic health.

Stocks Continue to Defy Investors' Sour Mood summarizes the situation nicely:

"Amid a fresh barrage of bad economic news, the mood among investors these days is glum. So it might come as a surprise that stocks are actually up so far this year.

Stocks had swooned during the spring amid yet another flare-up of worries about Europe, with the Dow Jones Industrial Average losing 820 points in May alone.

But since then, the Dow has rebounded almost 700 points. Crucial to the bounce has been expectations that the Federal Reserve will move quickly should the U.S. economy deteriorate further.

As a result, even after a couple of white-knuckle days last week, the Standard & Poor's 500-stock index is up 10% so far this year.

The Dow has struggled a bit more, gaining 7% so far in 2012, but the technology-heavy Nasdaq is up a hefty 14%.

While that's good news for many portfolios, investors shouldn't get complacent. There are considerable risks both in the U.S. and abroad that could quickly send the still-jittery markets into a tailspin.

Not That Bad

Investors, particularly individual investors, haven't been convinced by the 2012 rally. They've bailed out of U.S.-stock mutual funds in droves—withdrawing $71 billion so far this year, according to the Investment Company Institute, the mutual-fund industry's trade group.

Bullish investor sentiment, as measured by the widely followed American Association of Individual Investors survey, was at its lowest in two years in the week ended July 19, before rebounding somewhat last week. Bearishness, meanwhile, is near recent peaks.

"There's this unbelievable disconnect between what the stock market is actually doing and the psychology of investors," says Liz Ann Sonders, chief investment strategist at Charles Schwab.

Ms. Sonders says that providing some support for stocks is a sense that although the U.S. economy is struggling, it's not falling into another recession. She points to economic data showing that while companies aren't adding significant numbers of new workers, they are increasing the hours worked by existing employees and hiring temporary staff. . . .

"Things aren't fabulous, but they aren't recession-like," says Ms. Sonders. The Schwab strategist expects a "muddle-through environment" for the U.S. economy and says that while stocks will likely continue to see sharp price swings, "it should be a pretty decent year."

Fed Is Ready

Another reason for hope that the U.S. can avoid recession is a belief that the Federal Reserve will move quickly to shore up confidence should the economy deteriorate further. . . .

Another prop for stock prices has been that by historical comparisons, prices aren't expensive, analysts say. For example, the price/earnings ratio for the stocks in the S&P 500, based on the next 12 months of expected earnings, is below 13, according to Thomson Reuters. That compares to a long-term average of around 15.

Those valuations have helped cushion worries that a softening of global economic growth is threatening to halt a remarkable run of earnings growth. "I don't need great earnings for stocks to be OK at these valuations," says Robert Doll, senior adviser at money-management firm BlackRock. "We would be having a different conversation if stocks were selling at 17 times earnings."

Stocks also have gotten a bit of a lift from a perception that, compared with other destinations for investors' money around the world, U.S. corporations provide some level of comfort thanks, in part, to huge piles of cash on their balance sheets.

"There's a semi-safe-haven status for U.S. stocks," says Mr. Doll. "Investors aren't going to buy emerging markets because those economies are slowing, they're definitely not going to buy Europe, but the U.S. is most likely going to be OK."

The Europe Effect

Still there are significant challenges for stocks, starting with U.S. politics.

The November presidential election and uncertainty about year-end expiration of tax cuts and economic stimulus aren't only keeping investors wary, but may be playing a role in the slowing of the economy as businesses defer hiring and spending plans.

Others worry that analyst forecasts for 2013 earnings are too high, which would mean stock valuations based on those estimates aren't reliable. . . .

Then there is Europe. In recent weeks, concerns have been building about the ability of Spain to pay its debts. Given the size of the country's economy and the limited resources of European bailout facilities, worries have resurfaced about the ability of government officials to manage the crisis.

Last week, nerves were soothed as the head of the European Central Bank suggested it would take whatever steps needed to hold the euro zone together. But analysts say Europe's fate will continue to play a key role in determining whether stocks can hold on to their gains.

"If Europe is quiet and not on the front page," says Mr. Doll, "the market will creep higher.""

My Take

Stocks will perform well over the long run.

They may very well continue to appreciate during the short term, too.

But then again, the may not.

That's why I believe it's a foolish game to try to time the market or guess the short term direction of stock prices.

And this is especially true when short term political activity is peaking, as is the case today, both in the U.S. and Europe as well.

In the meantime, it's been a nice ~10% or so ride so far this year, and we have ample reason to remain hopeful that the rest of the year and beyond may show solid share price appreciation as well.

As always, long term I'm very optimistic and intend to stay in the game of owning a diversified group of solid earnings growing, cash generating, dividend increasing, well managed and competitively well positioned blue chip companies.

Thanks. Bob.

November's U.S. Elections and Why They Matter, or Don't Matter, to Stock Prices... Winston Churchill on the "Vice" of Capitalism and the "Virtue" of Socialism

On the difference between capitalism and socialism, Winston Churchill said it succinctly, "The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.

The election is a few short months away, and it's a biggie. But there are many other "biggie" issues on the radar screen as well.

For example, Europe continues to struggle with the decision as to whether the euro zone and the euro currency will survive intact and if so, how. And whatever happens along those lines, exactly what the impact on Germany's, Greece's, Spain's, Italy's and the rest of the world's economies will be. On our side of the street, U.S. growth is weak and our debts, deficits and rates of unemployment remain unacceptably high, to say the least.

There are countless reasons to be concerned about the future outlook, for sure. But let's focus now on the upcoming U.S. elections and what the results will likely mean to the price of stocks.

So just how much will the election really matter to the future direction of share prices and the market generally? Well, I guess the best answer to that question is whether we're focused on the "short" or "long" term.

My own guess is that in the long run, the election results won't matter much at all to the market's height or direction. It's up.

In the short term, however, there may be some fireworks going off in late 2012 and early 2013. That's called market "volatility." Could be up or down, and probably both from time to time.

In any event, here's what one clear headed independent and unconventional thinker has to contribute to the discussion in A contrarian handicaps the election:

"A Mitt Romney win would be good for the stock market?

That certainly is the overwhelming consensus on Wall Street. And that should worry anyone with a contrarian instinct.

One adviser who possesses such instincts is Norman Fosback, who has been a close student of the stock market for five decades.

For three of those decades he was head of the Institute for Econometric Research, during which he authored a widely-followed investment textbook entitled Stock Market Logic and edited several investment advisory services.

Fosback currently publishes a service called Fosback’s Fund Forecaster, and in the latest issue, published earlier this week, he argues that, regardless of what you think the long-term economic effects will be of Romney’s policies in particular, and Republican proposals in general, their short-term effect will be to depress the economy and the stock market.

Indeed, Fosback worries that their depressing effect could be so grave as to send the U.S. economy into a Japan-like “deflation-induced slow-growth mode.”

Fosback reaches this sobering conclusion after analyzing the likely impact of the three major points of the Republican economic agenda — tax cuts, spending cuts, and replacing Fed chairman Ben Bernanke. His thoughts, in turn:

• The proposed tax cuts will be bullish for after-tax stock returns, both in their own right and in contrast with what President Obama has stated he wants to do with tax rates. But, Fosback stresses, we shouldn’t make too much of this bullishness. For example, he points out, Romney’s proposed “tax cuts for businesses are largely illusory because they would, by definition, apply to statutory rates, and most publicly traded companies are already paying far lower out-of-pocket taxes... Moreover, the proposed lower statutory rates would almost inevitably also be accompanied by a crackdown on many corporate tax breaks and ‘loopholes,’ producing vastly less tax reduction on balance than superficially appears.”
  
• Slashing Federal spending, given the current economic climate, will almost certainly amount to a “negative stimulus” — more than counteracting any positive impact of the tax cuts. If the spending cuts go through, Fosback argues, “[aggregate economic] demand will go down and corporate earnings will fall.” And that in turn will lead to “lower stock prices.”
  
• Replacing Ben Bernanke with someone less inclined to bail out the banks and keep interest rates artificially low “will have more economy-depressing effects.” To be sure, Fosback concedes, Romney and his Republican colleagues are hoping that a Fed that is “more focused on private-market control will produce overwhelming long-run benefits.” The problem, however, “is that a lot of interim economic pain will probably have to be endured first. Less demand, less investment, and no bank bailouts if the plan inadvertently produces another financial crisis. It’s a high-risk gambit, and in the equity markets high risk is swiftly compensated by lower price/earnings multiples.”
  

Given the highly polarized environment in which we live these days, many will be inclined to dismiss Fosback’s arguments as nothing more than partisan attacks. But I should point out that, even though he does not reveal who he is likely to vote for in November, Fosback does not paint a particularly rosy economic scenario for a second Obama term either.

Fosback is concerned about the current record high level of corporate profits as a percentage of GDP. That percentage historically has been quite cyclical, which means that the path of least resistance when the percentage is high is for it to come back down. In fact, he argues “corporate earnings can’t really go up much more.”

All this adds up to above-average odds of a “fall” — regardless of who wins the Presidency in November.

In any case, regardless of our political leanings, we should remember that the job of a contrarian is to challenge those beliefs that we hold most dear — the very beliefs that, because of our loyalty to them, we are least likely to subject to critical scrutiny.

And, at a minimum, Fosback argues, the possibility of a Japan-style deflation being precipitated by the adoption of the Republican economic proposals “should give investors pause.”"

My Take

STOCKS WILL WIN OVER THE LONG RUN

Stocks should continue their long term winning ways over time, regardless of the election results. We'll cover many of the reasons why stocks are the place to be in future writings. And which kinds of stocks, too.

ECONOMY WILL STRUGGLE FOR SOME TIME BUT STRENGTHEN GRADUALLY

We have a tough road ahead economically, regardless of who wins the election in November.

My view is that we won't be able to solve our many budgetary, welfare entitlement and economic growth issues for years to come.

They've been building since the 1930s and the public versus private sector debate won't end soon.

Thus, maybe it won't make a whole lot of difference who wins, as long as the national discussion continues and common sense prevails in the end.

My own view is that embracing individual freedoms, free markets and the blessings of liberty will bring about the most happiness and greatest prosperity all of our citizens. It will also provide We the People with the greatest national security.

Thus, government can't possibly be the answer, no matter how much "protection and security" many of our fellow Americans may mistakenly believe it provides. In the long run, we'll all come to learn this simple truth.

Finally, it's worth repeating Churchill's summation of all this:

THE INHERENT VICE OF CAPITALISM IS THE UNEQUAL SHARING OF BLESSINGS; THE INHERENT VIRTUE OF SOCIALISM IS THE EQUAL SHARING OF MISERIES.

Enough said.

Thanks. Bob.

The Corn Shortage, Food Prices, Drought and Government Knows Best versus "Greedy" Businessmen

We're having a drought, as everybody knows.

That means a shortage of corn, as everybody knows.

That means higher prices for corn, as everybody knows.

That means higher prices for meat, milk and related food items as well, as everybody knows.

Everybody knows all that, even our government knows best elitist politicians.

The Ethanol Mandate Is Worse Than The Drought is an editorial by the CEO of Smithfield Foods and has this to say:

"This has been a cruel season for America's agricultural economy. It was partly unavoidable, as our nation's farmers are being devastated by this summer's brutal and worsening drought. The farm economy has withered along with the crops, and the American consumer, once again, will pay for it with higher food prices.

One of the hardest-hit commodities, corn, plays a critical role in our food chain. This year's crop yield could be the worst in 15 years, and corn prices have already hit record high levels.

But aggravating the problem and adding to the crisis is the U.S. government's Renewable Fuel Standard (RFS), which requires that a certain volume of ethanol (15.2 billion gallons in 2012, mainly derived from corn) be blended into gasoline. This is an arbitrary figure, set irrespective of market supplies, demands or price. It applies to corn that's desperately needed for livestock feed and food for consumers.

The RFS has diverted so much corn as a questionable substitute for gasoline that in the face of this drought-depleted harvest, major food-producing companies such as Smithfield are being forced to seek alternative markets for grain to meet the demands of their livestock and at more affordable prices. Ironically, if the ethanol mandate did not exist, even this year's drought-depleted corn crop would have been more than enough to meet the requirements for livestock feed and food production at decent prices.

To give you some idea of the magnitude of the problem, look at Smithfield. We're the world's largest pork producer. We purchase roughly 128 million bushels of corn and corn equivalents a year from U.S. farmers to feed our 16 million pigs on farms across 12 states. This makes us one of the largest consumers of corn in the country. In addition, we contract with about 2,135 U.S. hog producers.

This year, the double whammy of a drought that's ravaging crops and ethanol demand has pushed corn prices to what are now record-high levels of over $8 per bushel, a quadrupling of prices in less than a decade. This has compelled food producers like Smithfield to find ways to control skyrocketing feed costs. For the first time in memory, corn is cheaper when it's delivered to the U.S. from abroad than if it's purchased from domestic suppliers. Smithfield was forced to take the unfortunate but absolutely necessary step of buying corn from Brazil—spending money that under normal circumstances would have gone to U.S. farmers.

This is what happens when the corn market, which already has to count on the whims of Mother Nature and is governed by the laws of supply and demand, is victimized by the whims of Washington and the unintended consequences of the diversion of food to fuel.

Ethanol now consumes more corn than animal agriculture does. According to a study recently released by the Center for Global Food Issues, ethanol production currently uses more than 40% of the U.S. annual corn supply, representing a 300% increase from 2005 to 2011. The resulting impact on corn prices is stunning: Per-bushel prices jumped to a record high last week of $8.24 from $2 in 2005, the year the ethanol mandate was put in place. . . .

The current corn-price crisis demands that lawmakers and regulators immediately consider how to amend the RFS to help ease the pressure it is placing on the supply of corn for food, and to help reduce the cost to consumers.

In the short term, the Environmental Protection Agency should grant a nationwide waiver to the RFS. That will have an immediate positive impact on the corn market by removing the demand created by the mandate.

Furthermore, there is a legislative proposal backed by a bipartisan group of members of the House of Representatives that would tie the RFS percentage to free-market supply and demand. Congress should pass that immediately. . . .

The nation's corn crop is in a state of crisis. We can't control drought. But we can and must address the impact of politics on corn supplies and prices by taking steps to ease the pressure and help prevent food inflation: We can waive the ethanol mandate now, and then work on a longer-term plan."

My Take

Government knows best self serving "public servants" like to align against and then malign "greedy" business leaders and free markets. They do this under the false claim of "serving" the public.

In reality, it's often a case of private special interests and political governing factions lining up together to oppose the best interests of taxpayers and consumers.

We the People are being ill served by all this, of course. So what else is new?

How long will we be willing to take it? When will we get mad as hell and do something about it?

I hope soon. Real soon.

Thanks. Bob.

Education, Government, Productivity, Teachers, Unions and China

The public sector pretty much opposes productivity gains. Look at Chicago schools, for example.

Chicago Teachers Union and city agree to hire more teachers, avoid future strike says this:

"While talk of a potential teacher’s strike from the Chicago Teachers Union (CTU) certainly seemed like a possible reality in the coming months, the CTU may have finally made an agreement with the city of Chicago this week. . . . it was reported that the Chicago Teachers Union has reached an official agreement with the city that may help prevent a future strike. . . . each side was—interestingly enough—able to walk away with a significant win.

Chicago Mayor Rahm Emanuel succeeded in getting his longer school day, which consists of a 7 hour day at the elementary level, and a 7 ½ hour day for high schools. In return, more teachers have been promised to be hired to help fill in the extra time spent in the classroom, with a particular emphasis on the arts, including classes like music, art, and foreign languages. . . .

Backed by Mayor Emanuel, Chicago Public Schools may soon have a longer school day, but more teachers and more jobs will be available as well. Those expected to be hired for the new teaching positions will be teachers who were laid off from 2010 and beyond, further allowing the CTU to provide more much-needed placements for its members.

However, a challenging question remains. While this education news is certainly good for both parties, the school district is still in a financial crisis. The almost $700 million deficit may struggle to pay these new teachers, while the topic of pay raises for teachers in the Chicago Public Schools (as well as the CTU) also looms over the system, students, and parents.

The hiring of these rehired educators in the school system is estimated at this point to cost anywhere between $40 million and $50 million year, David Vitale, the President of the School Board, reports.

“Management will work and figure out where [the funds] will come from,” he said. “This is eminent development… and we will come up with an answer [as] this is a priority.”

Nonetheless, it is always refreshing to hear of a win-win situation that allows both sides and parties on an issue find a compromise, particularly on the key topic of education and teaching the young minds of students in the United States."

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Now let's look at what's happening in Michigan. It's a straightforward case of necessity being the mother of investion.

Going Broke for Reform is subtitled 'In Michigan, insolvency leads to school choice opportunity.'

"Muskegon Heights and Highland Park—two of Michigan's most insolvent school districts—this year are handing their classroom keys over to charter school operators to save money. That's good news for local taxpayers, but the biggest beneficiaries may be the kids.

Both districts were running deficits that approached two-thirds of their budgets, thanks to the double whammy of rising labor costs and declining enrollment. To help the districts avert bankruptcy, Governor Rick Snyder appointed emergency managers who under a new state law can break collective-bargaining agreements. While such flexibility was essential to get their books in order, it may not have been sufficient.

According to Muskegon Heights manager Don Weatherspoon, the district would have to slash salaries by 35%—reducing hourly wage rates to about $10—merely to break even. That would have likely caused a teacher walk-out. When the emergency manager for Detroit schools last month proposed extending a 10% pay cut for a year, teachers threatened to strike.

Mr. Weatherspoon and his counterpart in Highland Park figured that farming out their districts to charter school operators was a better alternative. Under their plan, the charters will receive per-pupil funding from the state like traditional public schools, but local property taxes will go toward paying down the district's debt. The charter operators will also bring some of their own money to the table.

While the fierce taxpayer watchdogs at the teachers unions bark about the government "subsidizing" private companies, the schools will be run as nonprofits.

The ones who really stand to profit are students. Both districts' schools rank among the worst in the state. Only a quarter of seventh-graders in Highland Park (in eastern Michigan near Detroit) and a third in Muskegon Heights (in the west near Lake Michigan) are proficient in reading. Fewer than 8% meet the state's math standards. While Michigan students can transfer to schools with open space, schools close enough are usually as bad, if not worse. The only option for most Highland Park students are Detroit schools, which have even lower test scores. Some "choice."

So now students will have a real alternative. School choice advocates hope (and union leaders fear) that the charter systems, which won't be bound by labor agreements, will serve as laboratories for reform. Muskegon Heights's charter operator Mosaica plans to experiment with new technologies in the classroom and pay and hire teachers based in part on their performance. As test scores improve, the charters hope to draw students from nearby cities, which could help the districts with their financial problems.

There's little to prevent other districts from converting low-performing schools to charters—other than political intransigence. A new state law uncaps the number of charters and exempts their employees from district collective bargaining agreements. Muskegon Heights and Highland Park only include a handful of schools, but ideally larger districts would authorize multiple charter operators in order to encourage competition among schools.

The two Michigan districts may be textbook cases of fiscal mismanagement, but they also highlight the opportunity that insolvency presents to innovate—if leaders will take it."

Discussion

Chicago's business as usual approach is by no means a win-win for the taxpayers, parents and students. Even if we put lipstick on Miss Piggy, she's still a pig.

Perhaps government and unions will like the Chicago outcome, but not the taxpayers, parents and students.

And what about the teachers? What's best for them?

Well, my view is that the interests of teachers are much more closely aligned with taxpayers, parents and students than with the government and teachers union.

That brings us to the charter school approach being taken in the two Michigan cities. But whether it's charter schools or not, liberating teachers, parents and students to "do more with less" would work wonders. Why it isn't happening is due to the ties between teachers union officials and governments, and especially Democratic party led governments.

If individual teachers were given a choice between earning more money and improving student performance on the one hand, and hiring more teachers to pay more union dues on the other, my own view is that most teachers would opt for earning more money and improving student performance. The taxpayers, parents and students would prefer that outcome as well. We all want to do good work and have our good work appreciated as well. That requires good outcomes and the freedom to experiment with different methods of improvement. Teachers could do a great deal to solve our educational problems if they were free and incentivized to do so.

The Chicago approach of hiring more teachers and making the school days longer doesn't assure suggest better student performance. Just higher costs, more union dues and a greater number of teachers employed.

Simple Math

We'll assume teacher A is paid $50,000 and that teacher A has 25 students. $2,000 per student is the teacher cost.

Let's pay teacher A $75,000 to teach 50 students. $1,500 per student is the teacher cost.

What about the taxpayer? Well, if the student to teacher ratio were increased by 100% and teacher pay were increased by 50%, taxpayer cost would be reduced by 25%.

And the student? Well, he can benefit as well by getting a better educational result.

Online tools make that possible. It's a simple matter of what gets measured and rewarded gets done. Incentives work.

Teachers, parents and students, one and all, will respond to appropriate incentives if allowed to do so by governmment and unions.

Taxpayers will certainly agree to try something new.

A Focus on Productivity is the Key to Success

It's all about productivity. Output for input. And if the student performance increased by 50%, we'd achieve "more output" at a "lower input cost." A double whammy. Better products cost less to produce. It's that simple. That's productivity.

Today we don't measure cost per student and don't incentivize students, teachers and parents to become more "productive."

We hire more teachers to pay more union dues and strengthen the ties between the Democratic party and public sector unions. That's insane.

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We need to have a clear sense of urgency about all this. Why? Read on and get a clear picture of the whole global competitiveness situation and the role of education.

Simply stated, global competition makes upgrading U.S. education outcomes urgent and imperative.

China's Collaring U.S. Employment makes the case for gut wrenching educational reform in America. If we genuinely want to "save the middle class," which we do, let's resolve to make huge improvements in our educational system and fast. And while we're at it, let's make things better for teachers, parents, students and taxpayers as well.

Here's what the all too sobering article says:

"The arrival of hundreds of millions of cheap, diligent Chinese workers in the global economy saw America trade blue-collar jobs for low cost T-shirts and toasters.

From 2000, the year before China entered the World Trade Organization, to 2011, the U.S. manufacturing sector shed 5.4 million jobs.

Demographic changes mean that China's labor force already has plateaued in size and soon will start to shrink. Manufacturing wages rose 20% in 2011, outstripping improvements in labor productivity. The price of U.S. imports from China has started to rise. That crimps the spending power of U.S. consumers and fuels inflationary pressure.

Rising wages also are eating into margins, reducing opportunities for U.S. investors to tap easy profits. Morgan Stanley analysts estimate Chinese exporters' profit margins have shrunk 20% to 30% since 2004. The real number could be even higher. Net margins for Hon Hai Precision Industry, producer of the iPad, fell to 2.4% in 2011 from 5.5% in 2004.

Compounding the woes of white-collar America, millions of cheap and diligent Chinese graduates will be jostling for a position in the global labor market. China is producing six million graduates a year and is expected to have 200 million by 2030, according to estimates from the World Bank.

A big increase in the global supply of high-skilled workers in the years ahead could have the same impact as the surge in low-skilled workers more than a decade earlier, denting employment and wage growth in the U.S.

None of this is immediate and not all of it is inevitable. Despite a 46% increase in manufacturing wages in China since 2008, the cost of U.S. imports has risen only 2.6%, reflecting firms' capacity to improve productivity and swallow smaller margins. Language and cultural barriers mean China's professional workers won't put a ding in the global workforce as easily as their factory worker parents did. Rising incomes in China also should boost U.S. exports.

Still, such a profound shift in the labor market of the world's most populous country won't leave U.S. workers unaffected. In the first stage of China's development, America's blue-collar workers lost their shirt. In the next stage, America's white collar could start to look a little grubby.

Summing Up

We have little time to waste in cleaning up our approach to education from K-12 through college.

We also have little money to waste.

It's time to free teachers, parents and students to do what needs to be  done.

Achieve outsized and continuous gains in productivity, both in costs and educational outcomes.

To do that we have to get the public sector unions and government bottlenecks out of the way.

Thanks. Bob.