Beating Buffett

If legislators would think about our country’s problems in terms of their own family’s we’d be more likely to get better solutions and results.

The National Debt:  Over $13 trillion and growing fast.

If your own family was buried deeply in credit card debt what would your options be?

·         First and foremost you would cut spending to the bone. Eliminating all discretionary items from your budget. Next you might hold a ‘yard sale’ to sell any valuable assets you held that could be liquidated to pay down your debt. You might also take a second part-time job to create more revenue.

What have our politicians actually done? They have ratcheted up spending. They have bought up ‘toxic assets’ from others. They have created more new entitlements (COBRA subsidies, new home buyers’ credits etc) than they’ve increased revenues.

They are doing the exact opposite of what any rational family would do in the same circumstances.

·         If the debt was so large that there was no chance to ever pay it down you would consider personal bankruptcy.

This is not taking the high moral ground or the first choice. However, if it’s the only way to survive you might do this. General Motors and Chrysler were forced to go this route and they both continue to operate today even though many of their creditors didn’t fare too well in their reorganizations.

If the PIIGS [Portugal, Ireland, Italy, Greece and Spain] were smart they would have gone this route. Default on their national debt and start over as GM and Chrysler did. Many states in America are teetering on the verge of bankruptcy due to outrageous pension promises for civil servants [think California, NJ, PA] but instead of taking the necessary steps to fix things they are delaying action because of Stimulus money from the Federal government that allowed them to keep up their old destructive spending habits. This allowed them to fall deeper into debt while avoiding the hard decisions that were needed but politically unpopular.

Temporary stimulus funds are akin to financial heroin- a great short-term high that causes addiction and ruins lives.

The Solution:  America should cut spending, sell off assets and pay down debt before it becomes impossible to accomplish without default. Our leaders need to defuse the pension crisis by refusing to hire even one more new worker with a defined benefit pension plan. Make civil servants function like all the rest of society instead of treating government workers as the ‘Golden Children’ to be subsidized by all non-government workers.

Closing virtually all foreign military bases and pulling out of the Middle East wars would make a huge difference in our spending needs. We’re not accomplishing our goals overseas and we can no longer afford to be the policemen of the world.

The Housing Crisis:

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In another example of how ‘Government Motors’ - the old GM,  gets special treatment, it was announced that Fisker Automotive will be buying GM’s  excessed and closed Wilmington, Delaware plant and property.

This $20 MM sale to Fisker, a company hoping to build and sell elcetric vehicles, is being bought with Federal financing. Fisker expects to price its cars, projected for sale in 2012,  for $39,900 after federal tax credits.

Let’s see… federal money to buy the plant and land, federal funds to stimulate sales of cars that people might not buy at the true cost of production and removing unwanted assets from the old GM with taxpayer money. Oh, and don’t forget federal job creation credits. Does anyone else see a pattern here?

It’s exactly this type of government spending to create government subsidized jobs that only exist because of government rebates to buyers that makes me pessimistic on America’s prospects.

Our leaders need to back off all these ‘artificial sweeteners’ and let only economically viable businesses emerge instead of continually creating unprofitable ventures that can only survive via permanent subsidies (Think ethanol).

The Insider Trading Index has been as good a predictor as anything else recently. Just a quick look at the Thompson Financial chart of this indicator and the movement of the indices shows the relationship clearly. Heavier than typical insider buying occurs at good  buying opportunities while lighter than normal insider buying has often coincided with short-term tops.

Most recently the December bearish indicator forecast the January sell-off.  So, also, did the mid-April quite bearish figure predict the late-April to early June pullback. Conversely the Early February and late March insider buying levels were good signals prior to the big rallies in March and April.

Right now, we’re back in bullish territory.

After reporting flat May quarter earnings PAYX [$26.40] is trading at its lowest point in quite a while. Their business of computerized payroll and accounting services has been hurt by the general economic malaise but PAYX is debt-free, has a big yield and appears to have little risk left from today’s quote.

Here are the per share numbers since 2002 as reported by Value Line:

The dividend has been $0.31 quarterly since Q3 of 2008 and is unlikely to rise again until earnings pick up. It does look secure as the company has plenty of cash flow and no debt. The current yield is a juicy 4.69%.  

Zacks sees $1.45 for FY 2011- the current fiscal period ending May 31, 2011. That puts the forward multiple at 18.2x which is very low for PAYX based on all historical experience. A return to even 19 times this year’s estimate would bring PAYX back to $27.55. Standard and Poors has a 12-month target of $30 /share.

Here’s a nice 19-month buy/write combination that will provide a good total return even if PAYX shares do very little over that time frame.

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When Pennsylvania State Senator Anthony Williams got around to filing his campaign finance report [late] it showed that the bulk of his donations came from three men –

Joel Greenberg - $2.07 million

Jeffrey Yass - $1.86 million                            

Arthur Dantchik - $1.45 million.                                                                              

All are high-ranking officers of Susquehanna International Group of Bala Cynwyd, PA.

These are extraordinary dollar amount donations, particularly in a primary election. The publicly spoken reason for the support? The three men liked Mr. Williams views on educational issues.

Mr. Williams ran third so any influence that was promised will not be forthcoming but it strains the imagination that over $5 million could have been given to this campaign without something much more valuable than that being sought.

That Sen. Williams missed the deadline for disclosing these donations is another disturbing, but probably less important item.

General Motors is expected to announce plans for an IPO that may take place quickly for up to 20% of the company as presently configured. They hope to raise between $10 - $20 billion which would value the company at a remarkable $50 - $100 billion implied market cap.

               At the time of the bankruptcy filing that same equity was valued at $700 million. Taxpayers paid off the union health plan with about $30 billion of our money to help GM cut employee retirement costs. The UAW also received a large chunk of the new company’s shares even as unsecured creditors, ahead of many secured lenders.

US taxpayers also bailed out GMAC which has continued to facilitate GM’s sales with subsidized auto loans, often to buyers of dubious ability to pay back their debts.

Now, President Obama  wants this IPO to go forward prior to the November elections so he can show that this was not wasted money. The U.S. Treasury owns 60.8% of the common shares as their stake for turning billions of bailout loans into equity.

        Are you silly enough to buy into this IPO? Do you really think the new GM is worth $50 - $100 billion?  Have you heard that the unions are already antsy to reclaim all the concessions they made to keep GM from being liquidated?

While I would love to see U.S. Taxpayers get their money back I can’t imagine who will be naïve enough to buy the IPO.

Caveat emptor.

Dr. Paul Price

Fortune magazine’s July 5^th issue features a story about “The $600 Billion Challenge” from Bill Gates and Warren Buffett to other billionaires. They are soliciting pledges from the other super wealthy people to give at least half of their net worth to charity in their lifetimes or at death.

These are the same billionaires that keep championing the Death Tax [Estate Tax] that will once again start confiscating up to 55% of large estates for those who die after December 31, 2010.

Estate taxes penalize ‘Good behavior’. Society is better off when its citizens save and invest, rather than spend and consume all their income. These retained earnings are used to fund growth in America. Those who have private wealth do not burden the rest of its citizens with supporting them in their retirement years.

What do our laws promote though? People who die with little to nothing in lifetime savings can pass their meager assets to their families or others of their choice with no additional federal tax burden. In others words… if you spend/squander all your net lifetime earnings you are rewarded with no taxes upon death.

On the other hand, those who save, invest and grow their net worth throughout their lifetimes are penalized by up to 55% for not spending the money they did not consume.

When you reward bad behavior and chastise good behavior, which do you think you will get more of? This is very similar in our present social security system. We give disproportional benefits to those who contribute little to nothing into the system during their working lives while those who paid the most into the system during their working years will get much less back in relation to their personal contributions.

It is almost a given that ‘means testing’ is just over the horizon as a way to trim future social security deficits. When that takes full effect the people that paid in the very most will likely see little to nothing at all because they ‘don’t need’ the help. Our crazy system once again sends the message that you have to be crazy to work hard, save and invest. You’ll get much better treatment if you have nothing saved when you retire than you will if you have substantial assets and income.

Back to the headline topic. Gates and Buffett have pledged or given almost all their wealth to tax exempt foundations that effectively protect their enormous wealth from ever being taxed- in their lifetimes or even after their demise. Yet they want others, with much lower estate values, to have to forfeit over half their lifetime savings to the federal tax man.

Just as our politicians should be in the same health plans and social security system as they are dictating for us, billionaires should subject their estates to the same treatment they are touting for those with less than them (and without their teams of lawyers to avoid paying taxes).

Dr. Paul Price

www.BeatingBuffett.com