RichardCYoung.com » Real World

Who Is Our President?

Dave Hammer — Wed, 17 Nov 2010 14:14:30 +0000

Since I was born, there have been twelve U.S. Presidents. I’ve been in the homes of two, one has been in my home, and some have sent me personal, handwritten correspondence. They include JFK, Jimmy Carter, Eisenhower, and both Bushes.

Ever since I was a child, I knew quite a bit about our country’s current Presidents, as did most people. But, regarding our existing President, I know little. So, to tell the reader why that is, I will paraphrase an open letter to Obama sent to (but not published by) the New York Times from a well-known corporate executive.

Here are just ten things Dave Hammer does or does not know:

1) Although born in Hawaii, Obama did not spend his formative years in the U.S., so I question his ability to understand the “American Dream.”

2) I don’t know by what means he paid for his Ivy League education, since I don’t know anything about where he, or his family, earned income.

3) He was never in the military, but he is our Commander-in-Chief.

4) He never ran a company or had to meet a payroll and has had no training in economics but he and his appointees direct the country’s economic future.

5) He has never seemed sincere or humble, despite his talent for political rhetoric, and only blames his predecessors for the country’s woes.

6) He spent many years aligned with radical extremists and frequently blames America for many of the world’s problems.

7) He is a control-freak who, along with Pelosi, rammed socialized healthcare down the throats of a public when the majority was against government control.

8) He has shown all the evidence necessary to prove that he strongly believes in a bigger government sector of the economy and smaller private sector.

9) He seems to believe he is omnipotent and omniscient and won’t listen to intelligent people who know more about economics and world politics if they hold an opposing view.

10) He wants to penalize risk-takers and hard workers and reward those who are just, “along for the ride.”

Barack, Nancy and Harry’s “No Stimulus” Plan

Dave Hammer — Thu, 29 Jul 2010 17:17:38 +0000

There were three earth-shaking events in the year 1776: The American Revolution, the publication of Wealth of Nations and the invention of the “cocktail.” The latter was invented by my great-great-great-grandmother (originally from a small village in Denmark) who owned a New York tavern catering to Revolutionary soldiers and decided to decorate her alcoholic concoctions with a rooster’s feather.

As for Adam Smith’s book, Wealth of Nations, it was, and still is, the foundation of the economics behind capitalism. After its publication, economic theory went through a 150-year dry spell until John Maynard Keynes came up with the brilliant idea to smooth out the inherent economic cycles of capitalism by using fiscal policy. In other words, have the government spend more than what’s coming in from taxes during a recession and spend less (and repay the debt incurred during the recession) during prosperity. Keynesian economics is that simple.

Sounds great, so Franklin Roosevelt gave it a whirl in 1933 and 4 years later, despite the PWA, WPA and many other revival programs, it still hadn’t worked. By 1937, unemployment was just as high as it had been all throughout the Great Depression. FDR’s answer was “more stimulus.” But that didn’t work either. It was World War II, as we all now know, that got us out of the Depression.

Then, economist Milton Friedman came along and proposed using monetary policy (managing the supply of money) as a better alternative to fiscal policy (managing the federal budget deficit). When I was getting my degree in economics, the academic community was equally divided between the two theories. Until Obama came along, I thought Friedman had eventually won, based on Reagan’s and Clinton’s success in promoting business and/or reducing government deficits.

Here is the key. Government spending has no “multiplier effect.” For every dollar the Feds spend on creating wages, GDP grows by no more (and sometimes a lot less) than one dollar. But, if the Feds give business or other investors a dollar to add capital to the economic base, then GDP not only receives the immediate dollar shot in the arm, but also all the dollars (and jobs) that will be generated from the products that the new plant, equipment and research produce. That’s the “multiplier effect.” Reduce government spending to allow more money to go into capital, both to get the country out of a recession and to create more permanent jobs instead of increasing spending that, unfortunately, reduces capital and promotes the hoarding of non-productive cash.

Would you rather have the Feds give away money for temporary jobs and to people who might spend the gift on lottery tickets and fancy rims for their cars; or give it to people and firms that will actually invest the money in the capital base of our economic future? Remember, the former is accomplished by raising taxes and the latter by cutting taxes.

Equity Risk Premiums Still too High

Dave Hammer — Fri, 30 Apr 2010 19:35:34 +0000

If the equity risk-premium (versus Treasuries) were to return to its historic average of 4.5%, the S&P would be 50% higher than it is today. Now, I don’t know when or if that will happen, but my numbers are based on real facts: the historic spread between corporate bonds and Governments, the least-squares regression of historic S&P earnings, today’s yield curve, etc. All of the inputs are FACTS, with NO subjective data whatsoever and no voodoo numbers regarding where the market might be next week (if the market is so undervalued, who cares where the market MIGHT BE next week?)

The equity-risk premium is still over 10% like it was when we loaded up on stocks a year ago when everyone else was running scared. I’m not even worried about a possible trend toward socialism, because the market may, already, be telling us about likely changes in Congress next November. Forget the technicians’ point about the market going up on lower volume. Volume has nothing to do with stock prices, since stock prices are NOT set by supply and demand (except in the short-term); they are a function of intrinsic value, unlike wheat, gold, oil, etc. After all, again looking at FACTS, a lot of money came OUT of the U.S. stock market over the past 12 months based on mutual fund redemptions), but the market still went to the moon.

I don’t know how much longer this bull market will last, but it seems to me that an equity-risk premium of more than twice the historic norm will not last forever. People are afraid of the new Congress (fear and greed are the only things that affect the equity-risk premium), but that won’t last forever because the same people have the capability to change (reverse) things at the ballot box. I only mention change in politics because that’s in the future; I do not mention economics because those numbers are in the past, and the stock market is a LEADING, not lagging, economic indicator.

The opinions expressed are the author’s.

The Liberals Are Still Whining

Dave Hammer — Thu, 31 Dec 2009 22:28:05 +0000

When the Republicans controlled the legislative, judicial and executive branches of our government, the conservatives always pointed out how the liberals were “whining” about everything. Now the Democrats are in charge and the liberals are still whining. But, this time the whining is coming from the top. Congress moaned about having to work on Christmas Eve. There are 10-20% of Americans without good jobs who would feel blessed for being able to work on December 24. Then there’s the president himself. He repeatedly claims he is faced with the biggest challenges since Franklin Roosevelt. YOU’VE GOT TO BE KIDDING ME!!!!!

Either Obama doesn’t know his history (maybe he’s too young and inexperienced to remember his predecessors) or, more likely, he thinks the average American is not as smart as him and his elitist crew. Here’s a president who has appointed 92% of his gang from the ranks of government-only backgrounds, compared to his predecessors of the past 100 years (including FDR) who appointed 50% from private industry. Obama’s elitists must think they can distort U.S. history and fool the rest of us. Not me!

Here are a few examples of what the presidents since FDR had to confront. The reader can compare these enormous issues with the relatively few problems of today:

1)Harry Truman- the problems of post-WWII Europe and Mid-East regarding those countries’ political and economic future, the Soviet total disregard of the agreements at the Yalta Conference, the creation of the United Nations and determination of the powers of its Security Council, Russia getting the atomic bomb, the creation of Israel, the massive labor strikes where the unions wouldn’t accept a 24% wage increase, the Korean War, etc.
2)Dwight Eisenhower- ending the Korean War, McCarthyism, the problems created by the earlier communist revolution in China including the protection of Formosa (now Taiwan), the communist infiltrations all over southeast Asia, the Suez Canal Crisis where France/England/Israel went to war with Egypt, the U-2 spy-plane fiasco, inflation during a recession, agricultural commodity prices sinking so far that farmers were going broke, political revolutions in most Latin American countries, desegregation of public schools, etc.
3)John Kennedy- the fight against corruption within the same unions that helped elect him, the botched Bay of Pigs invasion, the Cuban Missile Crisis that could have resulted in another world war, the steel industry (the backbone of economy at the time) being shut down by the unions, etc.
4)Lyndon Johnson through Jimmy Carter- the horrible dilemma of the Vietnam War, the Arab Oil Embargo, the unusual event of double-digit inflation while the economy was going nowhere, racial tensions all over the country, ending the Vietnam War, the proliferation of anti-American Americans, Watergate, etc.
5)Thanks to Ronald Reagan and his economic and political policies, life has been much easier for the politicians who followed him, including the “Whiners.”

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What Are Liberals Saying Now?

Dave Hammer — Fri, 30 Oct 2009 22:46:48 +0000

Do you remember the Liberals’ biggest complaints about George W. Bush? They were:

1) Bush spent too much of our tax money. Well, HELLO? Obama has increased the federal budget deficit and debt way beyond anything previously imaginable.

2) Bush had too many troops in harm’s way in the Middle-east. Well, HELLO? Obama not only hasn’t brought our men back from Iraq as promised in his campaign, but is now in the process of committing more soldiers to Afghanistan.

3) Bush tried to acquire too much power for a President, and many even referred to him as King George (even though he didn’t use his veto power). Well, HELLO? Our current President is trying to ram his programs (e.g., healthcare, cap-trade, etc.) down the throats of a public that doesn’t want them. He has also created a non-accountable “Cabinet of Czars” to help him run this country.

4) Bush gave an unnecessary and unfruitful handout (tax rebate) to low-medium income families. Well, HELLO? Obama plans to give Social Security recipients a handout because they didn’t get a cost-of-living increase this year, even though there is no inflation. Yet, retirees on private or government pensions (defined-benefit plans) have a guaranteed income, unlike now-ill-fated business owners.

5 )Bush had too many friends in industry (like Cheney’s Halliburton) that were reaping unjust rewards from the Government. Well, HELLO? Under Obama, we have witnessed more industries receiving handouts, and in greater amounts, than ever imaginable. The banking industry needed saving, but this has become absurd.

6) Bush used the 9/11 terrorist attacks as a way to gain popularity. Well, HELLO? Obama knows when the poll numbers are plummeting, there is nothing like a crisis to bring people around. So, why not create a few, like the global warming farce, health care, maybe Afghanistan and whatever will scare Americans? Public confidence is now lower than it was during the Great Depression. Thanks a lot!

7) Bush was a poor communicator. Well, HELLO? Even though Obama is a personable, excellent speaker himself, with good command of our language, he never explains what is really going on inside the White House and what his reform proposals will really entail. Plus, the other members of his crew, including his mumbling press people, sound insincere, uninformed or just devious.

8) Bush let the U.S. Dollar slide. Well, HELLO? Look at the drop in the Dollar since Obama became President! I’m sure a lower Dollar is part of Obama’s economic plan to encourage domestic spending. But, there will be a big price to pay in the future with horrible inflation, high interest rates and the disappearance of foreign governments as the financiers of our ballooning federal debt. That’s scary!

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My Stimulus Plan

Dave Hammer — Fri, 21 Aug 2009 22:51:18 +0000

1) Obama’s Energy Policy/Program – TRASH IT! Every recent President or Congress has had an energy policy that didn’t work. During the 1970’s when energy prices first went to the moon, we initiated a Windfall Profits Tax on the oil companies thereby taking funds away from the very entities we needed to find more reserves. Jumping ahead 35 years, the Government is doing everything to discourage the production of the very types of energy in which this country is vastly endowed. If you added up the energy content (in BTU’s or Joules) of what North America now has below ground in the form of oil, natural gas, coal and shale, we would have a greater supply of energy than the entire Mid-East. That doesn’t even include uranium where we have about one-BILLION pounds of proven reserves. Keep in mind one pound of U235 equals 300,000 gallons of gasoline, which equates to 119 years of U.S. total energy use per capita. With the right energy policy, the U.S. and Canada could be producing energy long after the Mid-East oil has dried up!

2) Obama’s Healthcare Reform – TRASH IT! Employ healthcare insurance reform instead. Reduce health insurance costs by encouraging competition amongst the providers to reduce premiums. That might mean federal regulation versus today’s state regulation; but where I live now, I have few competitive sources of A&H insurance, yet when I lived out west (where the state wouldn’t allow insurance carriers to sell highly profitable lines unless they also offered less profitable lines) my health insurance cost was less than one-fourth of what it is now.

3) Obama’s Stimulus Package – TRASH THE REMAINDER! Sure, we needed a quick injection of federal funds into the banking business to avert worldwide financial disaster. But now, any future handouts will be politically oriented, not economically motivated.

4) Obama’s Global Warming Solutions – DO MORE STUDY! The biggest thing the Government tried so far, was the ethanol fiasco. Adding more ethanol to gasoline increased the price of gasoline, raised corn, bean and meat prices (to starving countries as well as the U.S.) and actually added to greenhouse gases because I guess the Feds forgot that more corn production means more fertilizer production. Now the new “panacea” is the electric car; but I guess the Feds are forgetting how much carbon-based fuel we use to produce that electricity. Why not limit the emissions of particulate carbon instead of carbon dioxide gas (the air that earth-cooling plants need to survive)? Adding more filtering of carbon particles (that retain heat) to smokestacks of factories, utilities and diesel trucks would be much cheaper and more environmentally productive than where we are headed. Coal, natural gas and uranium produce virtually all the power in this country; so even if eventually we quadrupled the generation of non-nuclear, non-polluting sources, it wouldn’t make a meaningful addition to our total energy needs.

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Common Stock Diversification

Dave Hammer — Thu, 30 Jul 2009 22:51:59 +0000

In 1990, John Wiley & Sons, the second largest publisher of business books, asked me to write the first book dedicated solely to the subject of asset allocation for investment professionals. The book, Dynamic Asset Allocation, was a big seller, having been in print for eleven years. The following are some of my thoughts back in 1990 and they still hold true today.

Most people believe the more stocks a person holds in an equity portfolio, the lower the volatility (risk) of the portfolio because of the advantages of diversification. If that were true, then how come the Dow Jones Industrial Average (consisting of only 30 stocks) is no more volatile than the Standard and Poors 500; and why is the S&P 500 even less volatile than the Wilshire 5000? The answer is: the important thing is the correlation of price changes between the stocks, not the number of stocks in the portfolio.

Imagine a portfolio that consists of only two stocks, both of which are expected to double in ten years. But what if (in the short-term) every time Stock A went up by x-percent, Stock B went down by x-percent and vice versa. The portfolio would have an annualized, expected return of over 7% (plus dividends) yet have no volatility (short-term risk). Even if both stocks are expected to double in ten years, most people still care about short-term risk. This is because not everyone is going to buy a portfolio of stocks and close their eyes for the next ten years, even if they don’t plan on touching the money for a long time. Things usually change. The fundamentals of the stocks in the account can deteriorate or the investors’ level of risk-aversion can increase due to the possibility of having to withdraw money from the portfolio sooner than expected or wanting a decent night’s sleep when the market is gyrating all over the place.

At my firm, Hammer Asset Management LLC (Gilford NH), and at Young Investments (Naples FL and Newport RI), we manage stock portfolios using only 16 to 32 securities. Dick Young likes 32 as a good discipline that extends the benefit of using two or more stocks from the same industry; and I use no more than 32 equities, even for my largest institutional clients. Here is why Dick and I use only 16-32 names (compared to dozens, if not hundreds of securities used by many mutual funds).

When you own a stock, there are two types of risk (reasons for volatility). The first is called systematic risk, caused by economic or sociological changes that affect all stocks, such as a change in interest rates, in the economic outlook, in investor confidence, in taxation, etc. Systematic risk cannot be reduced no matter how many stocks you own, which is why it is called non-diversifiable risk. This type of risk accounts for 50-70% of what makes an individual stock go up or down on any given month, week, day or hour.

The other type of risk is called diversifiable risk, the cause of a stock going up or down based on fundamentals affecting only that particular stock or its industry. For example, if the CEO of XYZ Corp. dies, that incident may have no effect on most other companies; or if the price of steel drops, that would be very detrimental to a steel producer but have almost no effect on a toothpaste manufacturer. It is this diversifiable risk that a portfolio manager can attempt to eliminate. If an investor owned nothing but oil stocks in the portfolio, the diversifiable risk would be high. But, if the portfolio owned stocks each in a totally different line of business, the diversifiable risk would be low.

With today’s computer capabilities, a professional portfolio manager doesn’t even need to look at the industries in which the stocks are involved or how closely their businesses are related to determine the diversifiable risk. The manager can measure the cross-correlation of periodic price changes between any two (or more) securities. The idea is to build a portfolio where the correlation of price changes between all the securities that make up the portfolio is at a minimum.

A portfolio of two stocks that have virtually zero correlation to each other would have half the diversifiable risk of a one stock portfolio. A four stock portfolio, where all four stocks had little relationship to each other, would have half the diversifiable risk of the two stock portfolio, and so on. So, if you own 16 stocks that are uncorrelated, the diversifiable risk would be half-of-half-of-half-of-half of a single stock portfolio. At that point, the investor has eliminated 94% of the non-market risk. In a 32 stock portfolio (assuming all 32 stocks were uncorrelated, which may be an unrealistic assumption in the real world) the diversifiable risk would be next to nothing. But with today’s technology, it is quite possible to find a dozen or more stocks that have little cross-correlation. In addition, the more stocks you own in your portfolio, the greater the likelihood that the portfolio will have an expected return no greater than that of the overall market.

So, why is the Dow Jones 30 less risky than the S&P 500 that, in turn, is less risky than the Wilshire 5000? The answer is, because the indices with the fewer components are actually more diversified than the indices with the greater components.

Therefore, I must conclude: a portfolio manager would be unproductive in trying to be an expert in hundreds of stocks if a 16-32 stock portfolio can have an above-average likelihood of beating the market and simultaneously have below-average risk (volatility).

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The Real Nature of Investment Risk

Dave Hammer — Fri, 08 May 2009 22:52:49 +0000

When I got into the investments business well over 40 years ago, nobody had figured out a way to actually measure the risk of an investment. But several people, notably some professors at well-known business schools, were working on the idea that risk could be considered the same as variability of periodic return. Even better, if these academics could prove investment returns were “normally distributed” over time, i.e. if the periodic returns (daily, weekly, monthly or annually) could be put on a time-chart with the results looking something like a bell-shaped curve, then risk (variability of return) could be accurately measured. As it turned out, investment returns, over time, looked almost like a bell shaped curve, except that there were more periods of excessively high or low returns than expected. But, the results were close enough for these mathematicians to believe they could measure risk by looking at the average (mean) long-term return and compare it to each of the individual periodic returns, then compute the average difference between the two (variance). This became known as mean-variance analysis (or what might be called return/risk analysis).

Standard deviation is a fancy statistical term meaning the maximum variance that takes place no more than 68% of the time. The other 32% of the time the variance would be greater. For example, if common stocks have a mean (average) long-term, annualized return of 10% and a standard deviation of 15%, then 68% of the time the annual returns for stocks will be between +25% and -5% (10% plus or minus 15%). The rest of the time the annual returns will be greater than 25% or less than -5%. Bonds might have a mean annual return of 5% and a standard deviation of 5%, implying 68% of the time the annual return of bonds will fall between 10% and 0%. Under this definition of risk, even supposedly risk-free T-bills have risk. The average return of T-bills might be 3% per year, but in any given year, the return may be more or less than 3%.

The fascinating thing is, when you compare the average return of all individual classes of securities (including real estate, gold, foreign currency, etc.) to their respective risks (variance of returns), they are all proportional. That is, the greater the return, the greater the risk. So, there is no magic to the investment business. The more risk you take, the greater the expected return; BUT, not necessarily the greater the actual return. If a person makes an investment that historically (say, based on 40 years of data), has provided a return of 10% (like common stocks), this does not mean that the annual return will be 10% per year over the next 2, 5, or 10 years. That’s where variance comes in. Fortunately, variance-of-return is a function of the square-root of time. So, the annualized variance of a class of securities held for 4 years will have only twice (not 4 times) the annualized variance (risk) of a holding period of 1 year. If stocks have an annual variance of 15%, but someone holds a stock portfolio for 40 years, then the annualized variance of return (risk) will turn out to be 15% divided by the square-root of 40, or only 2.4%!

This is why an investor’s portfolio should always be allocated between high-risk and low-risk securities according to their time-horizon (expected investing period).

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What If You Were President?

Dave Hammer — Thu, 09 Apr 2009 15:38:23 +0000

If you were the person in charge of this nation would you do any of the following?

1) While corporate profits are sinking (causing companies to be less likely to create future jobs), would you raise corporate taxes like Obama wants to do, or cut them as I would do?

2) Would you reduce or limit the tax deduction for home mortgage interest (when home prices have collapsed) like Obama wants to do, or allow everyone the normal tax break on mortgage-interest as I would do?

3) Would you increase taxes to pay for social programs yet, at the same time, limit the tax break on charitable contributions like Obama wants to do, or would you still allow those big contributors to have the tax break they have always received?

4) Would you appoint a Secretary of the Treasury who had been in charge of the New York Federal Reserve (whose job it was to oversee Wall Street investment and commercial banks as well as insurance companies like AIG)?

5) Would you and your Secretary of the Treasury go on public television several times per week if almost every time you did so the stock market collapsed immediately following your speeches and interviews? Would you not realize the stock market is the best leading economic indicator in addition to being a major determinant of the folks’ standard of living during retirement?

6) Would you publicly declare that the “wealthy” can afford to pay for all the government spending increases when those same people (the ones who build plants, create jobs and provide the biggest support to charity) already have lost a far greater percentage of their personal savings than has the average worker?

7) Would you give a tax “refund” to people who don’t pay any income taxes whatsoever or do you believe that every American should pay some income tax for the privilege of living under the Government’s protection “of life, liberty and the pursuit of happiness”?

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Simple Way of Boosting the Economy

Dave Hammer — Tue, 10 Mar 2009 15:55:55 +0000

Forget about all the increases in Government spending and taxes! President Obama’s rescue package is nothing more than using the economic downturn as an excuse to promote a socialist spending agenda and has little in the way of economic stimulus. All the Government has to do is cut the corporate tax rate to the same rate levied by most of our foreign competitors. By cutting the corporate tax rate from 35% to 25% or less, our products could become more competitively priced in the global market, fewer jobs would be shipped overseas, jobs would be created in the U.S., personal income would increase, inflation would remain at low levels, our balance of payments would improve, the dollar would increase in value thereby increasing the purchasing power of Americans, interest rates would remain low (helping home values), and capital spending on plant and equipment would increase thereby creating even more jobs.

Another benefit from reducing the corporate tax-rate would be an increase in the value of investments that would help our citizens’ retirement plans. Government workers, including politicians, have a defined-benefit plan for their retirements where the employer (i.e. the taxpayer) guarantees the amount of their pensions. So, unlike most Americans, their retirements are not subject to the fluctuations of the investment markets. No wonder the Administration makes light of the “normal gyrations of the stock market.” But, 93% of non-Government workers have retirement plans where their benefits are a function of the level of securities’ prices. The politicians talk about the questionable future of Social Security; meanwhile they have neglected the value of individuals’ primary assets, the value of their real estate and market investments.

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RichardCYoung.com » Real World

Who Is Our President?

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Barack, Nancy and Harry’s “No Stimulus” Plan

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Equity Risk Premiums Still too High

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The Liberals Are Still Whining

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What Are Liberals Saying Now?

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My Stimulus Plan

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Common Stock Diversification

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The Real Nature of Investment Risk

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What If You Were President?

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Simple Way of Boosting the Economy

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