Archive for Economics

WHAT THE RISE OF ROBO–CARS MEANS FOR EVERYTHING ELSE Recommended by Paul Ferraresi

Adam Smith wrote about the “Invisible Hand” in 1776 explaining about the free market economy.

Later in 1942 Joseph Schumpeter wrote about “creative destruction” as free market’s way of delivering progress.

Both of these economic principles were presented beautifully in a May 20, 2017 article in Barron’s. The title, What the Rise of Robo–Cars Means for Everything Else.

http://www.barrons.com/articles/how-robo-cars-will-impact-everything-else-1495858783

2016 Election and the Stock Market

People have been calling me and cornering me at social events asking:

“What will happen to the stock market after the election”? In the short run of a day or a week there may be a bit of an adjustment. The real issue is the next four years.

Avoiding any political statements I address this strictly from an economic stand point and as a business owner. Unfortunately, I find most Americans cannot connect the dots when economic policies are presented.

Let’s examine things in light of Economics 101. What moves stock prices? Answer: Earnings (or some call it profits). As a simple example lets say we want to buy a “pizza shop.” The present owner has been earning (making a profit) of $100,000 per year. Lets say the profit equates to “cash profit.” Assume there are 100,000 shares outstanding so the pizza shop’s earnings per share are $1 each ($100,000 profit divided by 100,000 shares). A general rule of thumb is that one would pay about 4 – 5 times earnings (or profits) for a small business like the pizza shop. This is known as the PE ratio or the price earnings ratio. In our case that would equate to a selling price of $400,000 – $500,000. Thus, without changing anything and earning the same $100,000 per year, we, as the next owners, could get a return on investment in 4 – 5 years, or, in other words we are demanding a 20% – 25% annual return (simply divide the selling price $400,000 – $500,000 by the $100,000 profit to get the return number). The present owner would be selling each of the 100,000 shares to us at $4 – $5 per share ($400,000 – $500,000 sale price divided by 100,000 shares).

Now let’s assume after we buy the pizza shop we institute some changes, i.e., getting discounts for buying in larger quantities, teaching employees to be more productive or adding technology so we are able to now earn $200,000 in profit after tax in the next year.

What are some of the outcomes of our changes and hard work: (1) With higher profits more in taxes now go to the government. We see the need to begin advertising since we can now handle more business so the advertising company hires more people (who pay income taxes) to handle our account. We also hire more people to handle the anticipated new business (and the new employees pay income taxes). We ask for more products from our vendors they do the same and so forth and so on. This is known as the multiplier effect. By the way I am not advocating a love of taxes but rather showing the outcome of a growing business and economy. So, with Adam Smith’s “Invisible Hand” principal more people are working, which means they are off the Government dole, more taxes are flowing into the Treasury and more of our new customers are happy.

As a side bar, since our business is now making $200,000 per year (or $2 per share on 100,000 shares) the next buyer would be willing to pay us between $800,000 and $1 million or $8 – $10 per share under the classic 4 – 5 times price earnings multiplier. If we decide to sell the business we would owe taxes on the difference between the selling price of $1 million and what we paid originally of $500,000. So, it is the INCREASE IN EARNINGS that push up the stock prices. By the way the P/E ratio for the S&P 500 has averaged around 12 – 13 times since large companies are more stable and you would demand lower rates of return. I am using a small business example to explain the concepts. Keep in mind the companies that make up the stock market act similarly in concept to this small pizza shop.

Here is a major input to help you understand companies and the stock market. If you took all the companies in the U.S. from the small pizza shops, to grocery stores to Apple computer and added up their profits, the average profit for all the companies in the U.S. comes out around 4.8% (before tax). Yes, it is not the gigantic number people think exists. Grocery stores work on 1% profit while the “sin” companies like alcohol, tobacco etc. have much higher profit margins.

As any business owner, just like any employee, I want to maintain my income (earnings) and lifestyle. Let’s say we are able to maintain the earnings or income of $200,000 per year (or $2 per share) as noted above.

Next, let’s say my expenses skyrocket overnight because the government imposes higher income taxes on our profits, imposes costly new regulations and forces me to buy expensive health care insurance for employees. So, without any change in sales, expenses have gone up and my profits drop back down to the original $100,000. Please keep in mind it is not just our pizza shop that is hit this way. The advertising agency and all of our vendors are hit the same way plus all the other companies in the U.S.

So to maintain our lifestyles we have 3 options: (1) Raise prices, which will make us uncompetitive and is purely inflationary. (2) Cut costs by laying off employees which will restore our profits and lifestyle and make our employees miserable, or, (3) shut down the business. In all 3 options the Government will lose tax revenue and many people lose their jobs who now become a burden on society again by going back on the Government dole. How about selling the business? Well at $100,000 in profits we might get our original money back of $400,000 to $500,000 but the new potential owner has looked at our books and seen profits dropping plus costs going up, so I doubt we can get our money back in a sale.

Who loses here: The Government, employees and entrepreneurs.

Remember small businesses produce 70% of all new jobs created in the U.S. In the past year, for the first time in U.S. history, more small business are shutting down each month than are opening. Tragic!!
Small businesses are just a reflection of large businesses that make up the stock market.

Are you connecting the dots yet?

I hope you have the answer after this long winded explanation of what will happen to your wealth in the stock market after the election.

One candidate wants to (1) lower taxes on business (we have the highest corporate tax rate in the world. That is why many companies are leaving the U.S. and we lose jobs). Every time the Government reduces tax rates more tax revenue is generated. (2) This same candidate wants to reduce costly regulations that stifle the ability to start and maintain a business. (3) This same candidate wants to revamp the out of control costs to business of Obamacare. If this candidate can do this, it will lead to an explosion upward in business growth, employment, tax revenue and the stock market going through the roof which means your wealth will skyrocket.

Who wins here: The Government, employees, entrepreneurs and society as a whole.

The other candidate wants to increase taxes, regulations and health care costs.

This simple article has only covered a few policies that are on the table that separate the candidates. My desire was to answer the question on what will happen to the stock market.

Well, I hope you now can calculate and understand where the stock market will be in the next 1 – 4 years based on who wins the election.

In the great words of Mayor Daly……

“Vote early and vote often.”

Saving a Dollar

Travel for Less
October provides a powerful bang for your travel buck. Because tourist demand is down in this “shoulder season” (which also features nice weather and smaller off-peak crowds), some resorts offer discounts of up to 70 percent, reports Travelzoo.com. It’s also the only month in which cruise prices are consistently extremely cheap,” adds DealNews.com. And October is among the years cheapest times to fly – and a good time to book holiday flights.

FYI for DIYers
Do-it-yourselfers: Before buying a tool that you may never need again, visit localtools.org for a list of more than 80 “tool-lending libraries” across the U.S. Some require a membership fee, but it’s often less than the cost of that specialized tool you need for plumbing, carpentry and other home repairs. Or try one of the chains such as Pep Boys or AutoZone, where, with a deposit that’s refunded on return of the gadget, gear heads can borrow a wide range of automotive tools.

Curb College Costs
Need money for a child’s college? Find free information about available scholarships at FinAid.org and Fastweb.com. You can also get free help at FAFSA.gov with filing the application that determines eligibility for all federal student aid. Beware of any financial-aid consultants or services that require advance “application” or “processing” fees, or guarantee a scholarship. These financial aid scams bilk some 350,000 families per year.

How Arthur Laffer Would End Trade Warfare

Laffer argues that currency manipulation is as much an obstacle to free trade as tariffs and protectionist regulations. Politicians promote currency devaluation in the mistaken belief that it will boost their country’s economy through increased exports. In fact, he argues, their subsidization of exports causes long-term economic damage. This, he argues, is why Japan’s stock market valuation nowadays is only 7% of the world’s total, versus 42% in 1988.

So why do countries keep doing it? When he was asked Laffer, who is as driven as a preacher, the partisan hackles rose on his neck. “Ask yourself about Obama! Why does he keep doing what is silly? Whoever heard of a poor man spending himself into wealth? It’s dumb. But we try stimulus spending all of the time. Whoever heard of an economy being taxed into prosperity? The only place you can find this is among professors at Princeton. It’s crazy!” says the Stanford University Ph.D.
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Extra Tip:

Use GasBuddy. The mobile app helps you find the cheapest gas in the area.

What the Rising Dollar Means to You

Over the past year the U.S. dollar has had a remarkable recovery.

A strong dollar does have some advantages:

    • When the dollar goes up things bought with it become cheaper – one reason that oil, gas and gasoline prices are plunging.

    • With oil and gas prices down the average person has more money to spend on clothes, boats and big screen TVs.

If the dollar rises too quickly it will create head winds for the U.S economy and corporations. True, the U.S. economy is just bumbling along but it is stronger than Europe that is still flat on its back.

The strong dollar does have disadvantages:

    • American exports are more expensive.

    • Companies in the S&P 500 get about 33% of their sales from overseas and those sales are worth less when converted back to dollars. Hence, profits will drop leading to a falling stock market.

    • U.S. priced products become more expensive against imports. Thus, Ford and GM products would be at a disadvantage to those made by Toyota.

    • U.S. companies may have to cut prices overseas to be competitive thus making profits lower and further hurting the stock market.

So many people complained about the weak dollar. They all wanted a super strong dollar but did not realize how it hurts competition and the stock market.