Gold Is Not An Investment

This article, published in the New York Times, calls gold a speculation, not an investment. 

http://bucks.blogs.nytimes.com/2011/05/23/gold-is-not-an-investment/

The Times article makes many of the same points that I made a few days ago in the post below:

http://labradorinvestments.blogspot.com/2011/04/is-gold-good-investment.html

What is a Fiduciary? Why You Should Care.

As an investment advisor registered under the Investment Adviser act of 1934, I am required to put my clients' interests first.  This is known as a fiduciary standard.  Brokers are not held to the same standard, unless they happen to hold the CFA (Chartered Financial Analyst) designation.  (The CFA Institute's Code of Conduct and Standards of Professional Conduct require CFA charterholders to act as a fiduciary by putting their clients' interests first.)  The CFA Institute's Code and Standards may be found at the following link:

http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2010.n14.1

This short article reviews the confusion, even among investment advisors and brokers, about what it means to be a fiduciary.

http://www.advisorperspectives.com/newsletters11/When_is_a_Fiduciary_not_a_Fiduciary.php

Another good article on this subject may be found here:

 

http://www.labradorinvestment.com/uploads/tdw.pdf

What does "putting your client's interests first" mean?

• A fiduciary puts himself into the other person's shoes.  He/she makes investment decisions as if he were the client, taking into account the client's investment objectives, including risk tolerance and need for income, among other factors.
• A fiduciary places trades in their clients' accounts before they place a trade for the same common stock or other investment in their own accounts.
• Similarly, a fiduciary will sell a common stock or other asset out of client accounts before he places the sell order in his own account.
• A fiduciary does not sell common stock or other investments out of their own account to clients, as brokers often do.  Brokerage firms often earn significant undisclosed profits by trading as principal (buying or selling stocks or bonds for the brokerage firm's own account) with their customers.
• Investment advisors do not sell clients mutual funds or other so-called "proprietary products" -- their own brand of mutual funds or investment vehicles.  Some brokers will sell their own brand of mutual fund or other investment vehicle that pays a higher commission rather than mutual funds run by a rival firm that pay lower commissions.
• Investment advisors who do not take commissions (and instead charge fees based on a percentage of assets, a flat rate or an hourly rate) do not have an incentive to buy and sell stock to produce commissions.  In other words, they do not have an incentive to "churn" the client's account.
• Investment advisors are under a continuing duty to assure that the investments in client accounts, taken together as an entire portfolio, are appropriate for the client.  As time passes, the client's investment objectives may change, and if that is the case, adjustments to investment holdings may be appropriate.  Brokers are only held to a "suitability" standard, in which they are only responsible for assuring that the investment is appropriate for the client on the day that the investment was purchased.

Top 10 Thriving Industries

This Wall Street Journal blog post in the Real Time Economics blog lists the top 10 thriving industries.  Interestingly, they fall into two major categories:  Technology (Information Technology and Biotechnology) and government supported/sponsored/influenced industries.

The top 10 are:

Voice Over Internet Protocol Providers (VoiP)

Wind Power

E-Commerce &  Online Auctions

Environmental Consulting

Biotechnology

Video Games

Solar Power

Third-Party Administrators & Insurance Claims Adjusters

Correctional Facilities

Internet Publishing & Broadcasting

http://blogs.wsj.com/economics/2011/05/16/top-10-thriving-industries/

17 Products That Were Invented By Accident

This article discusses seventeen products that were invented by accident -- ranging from the microwave to Kellogg's Corn Flakes and chocolate chip cookies.

http://www.thestreet.com/story/11122700/1/17-products-that-were-invented-by-accident.html

Is the US Falling Behind on Quality of Infrastructure?

The answer to this question depends on who you ask.  In one article, published by the Washington Post, the thrust of the story is that the U. S. is falling behind dramatically vs. the major emerging market countries such as China, India and Brazil.  The Urban Land Institute published a report indicating that the U. S. should invest $2 trillion in rebuilding its transportation network in order for it to continue to drive efficiency and global economic leadership.

The Washington Post story can be read at the following link:

http://www.washingtonpost.com/local/study-2-trillion-needed-for-us-infrastructure/2011/05/16/AFyppB5G_story.html?hpid=z3

This piece from the Wall Street Journal paints a different picture, albeit solely related to China:

http://online.wsj.com/article/SB10001424052748703421204576328640297396406.html?KEYWORDS=heard+on+the+street

The Wall Street Journal article suggests that China's infrastructure is so inefficient that logistics costs are around 21% of GDP (total economic output), compared to 10% for the U. S. and 13% for India.  The piece blames China's focus on manufacturing, a fragmented transportation system, high tariffs for road transport, and multiple providers "piling on fees."

The truth is probably somewhere in between these two vastly differing views.  

Transportation infrastructure is one key area that helps the U. S. maintain its global economic dominance and its ability to a maintain higher-than-average standard of living for its residents.

Transportation infrastructure is a natural place for government and private industry to work together for the betterment of U. S. residents and business interests.

Three Million Job Openings

There were 3 million job openings available at the end of March, according to this short piece from a Wall St. Journal blog that focuses on economics.

http://blogs.wsj.com/economics/2011/05/11/more-than-3-million-job-openings-in-march/?mod=djemRTE_h




United States Oil Fund (USO)

This article from the Wall Street Journal discusses how poorly the United States Oil Fund has performed (up 19%) versus the commodity it is supposed to track, the price of a barrel of West Texas Intermediate crude oil (up 123%) since the beginning of 2009.  It just goes to show you that you can try to use ETFs (exchange traded funds) to attempt to track the performance of an actual commodity, but the performance results that you receive may not be what you expected.


http://online.wsj.com/article/SB10001424052748703864204576317481454589652.html?mod=djemheard_t

Exchange traded funds are mutual funds that trade on an organized stock exchange, such as the American Stock Exchange.  Unlike regular mutual funds, whose prices are established at the end of each trading day, and which can only be traded once per day, ETF prices float throughout the day and can be traded during normal business hours for the stock exchanges.

Oil and Gasoline Inventories Above Expectations

As this article in the Wall Street Journal explains, oil prices and prices of oil stocks are declining today on reports that inventories of crude oil and gasoline are above expectations heading into the summer vacation/driving season.  This correction in commodity prices is healthy.  With gasoline prices hovering around $4/gallon, a decline in the price at the pump would be a welcome relief to cash-strapped consumers.

http://online.wsj.com/article/SB10001424052748703864204576316830036397882.html?mod=djemTAR_h

Commodities Prices Take a Tumble

As I wrote in a previous blog post about the price of gold, gold appears to be a crowded trade.  The following quote from a Bloomberg article today confirms my suspicions, and generalizes the notion to take in other commodities as well, such as oil and silver:

“It’s panic,” said Michael Shaoul, chairman of Marketfield Asset Management, which oversees $1 billion in New York. 'You have those super crowded trades. Now you’re in liquidation mode. There’s nothing to do with weak U.S. economic data. It’s not a global financial crisis. It’s a classic liquidation move in a crowded trade.' "

The full article is on Bloomberg, a free Internet web site devoted to investments:

http://www.bloomberg.com/news/2011-05-05/oil-metals-fall-as-slowing-global-growth-drags-down-stocks-euro-climbs.html

As I have mentioned to clients many times, "the cure for high prices is high prices".  The meaning:  when prices get too high, counterbalancing takes place.  In the case of commodity price inflation, the following tends to occur:  (1.) economies slow down as commodity prices cause businesses and consumers/employees to cut back on purchases of other goods and services reducing overall demand, (2.) consumers of the commodity will try to find substitutes for the commodity whose price has risen (again, reducing demand), (3.) consumers of the commodity will cut back on their purchases, since their dollars only stretch so far (reducing demand yet again), and (4.)  as the price of the commodity goes up, producers of that commodity tend to produce more to take advantage of the price spike.  In other words, high prices cause an increase in supply of the "hot commodity", alleviating the imbalance between those who would like to buy the commodity, and those who sell the commodity.


In the case of commodities today, part of the price rise should be blamed on emerging market economies that are demanding more and more of everything, as their economies grow and develop.  The other part of the recent price spikes that we have seen in commodities is speculators driving up prices by buying commodities that they really do not need.  Instead, speculators are buying commodities because they believe that the price momentum will continue to rise.  Again, this is the bigger fool theory:  bigger fools buy a product not because they need it or because the price is a bargain; rather, they buy because they believe that there is a bigger fool out there who will buy the product at an even higher price.

Are Oil Industry Profits Really Excessive?

With gasoline prices at $4.15/gallon or so, politicians have been calling for investigations into the pricing of a barrel of oil, which feeds into the price of a gallon of gasoline.  But are the industry’s profits really excessive?

It is instructive to look at the revenues, expenses, taxes and profits of a variety of industries to determine whether or not “big oil” is, in fact, as profitable as the politicians seem to think. 

When reviewing the information below, it is helpful for the reader to understand the definition of each of the line items, so a definition of each is as follows: Revenues (also referred to as Sales) is defined as all sales to end customers.  Expenses includes all expenses of the company except for interest payments on debt and taxes.  Pre-tax Income is income after all Expenses are deducted from Revenues, except for taxes.  Taxes includes all income taxes plus any other taxes that might be charged (for example, taxes levied by political subdivisions that an oil company must pay for each barrel of oil extracted from oil fields located in each political subdivision).  Net Income is the income after all Expenses, Interest and Taxes are deducted from Revenue, and is the amount available for shareholders for dividends payments, stock buybacks and reinvestment into the business.

Take, for example, four well-established companies:  Exxon Mobil, Wal-Mart, Johnson & Johnson and Intel Corporation.  Revenues, taxes and profits for 2010 (and fiscal 2011 for Wal-Mart), are shown below (all amounts are in billions of dollars):

Wal-Mart: Revenues $421.8, Expenses $398.3, Pre-tax Income $23.5, Tax $7.6, Net Income $16.4.

Wal-Mart’s Expenses were 94.4% of Revenues, Pre-tax Income was 5.6% of Revenues, Taxes were 1.8% of Revenues, and Net Income was 3.9% of Revenues.  Wal-Mart’s tax rate was 31.7% of Pre-tax Income.

Johnson & Johnson:  Revenues $61.6, Expenses $44.6, Pre-tax Income $16.9, Income Taxes $3.6, Net Income $13.3.

Expenses represented 72.4% of Revenues, Pre-tax Income represented 27.4% of Revenues, Income Taxes represented 5.8% of Revenues and Net Income represented 21.6% of Revenues.  Johnson & Johnson’s tax rate was 21.3%.

Intel Corporation:  Revenues $43.6, Expenses $28.0, Pre-tax Income $16.0, Income Taxes $4.6, Net Income $11.5.

Expenses represented 64.2% of Revenues, Pre-tax Income represented 36.7% of Revenues, Income Taxes represented 10.6% of Revenues and Net Income represented 26.4% of Revenues.  Intel’s tax rate on Pre-tax income was 28.8%.

Exxon Mobil:  Revenues $383.2, Expenses $294.2, Other Taxes $36.1, Income Before Income Tax  $52.9 (which is after Other Taxes), Income Taxes $21.6 and Net Income $31.4.  Pre-tax income before any taxes are applied:  $89.1.

Exxon Mobil’s Expenses in 2010 were 76.8% of Revenues, its combined taxes (Other Taxes and Income Tax) represent 15.1% of revenues and its Net Income (the “bottom line” available to shareholders) is 8.2%.  Another way to look at this is that Taxes represent 64.8% the income before any taxes are applied!  It is hard to fathom how politicians can believe that Exxon Mobil is the one profiteering, when various governmental entities take almost 2/3 of the pre-tax profits!

So to summarize:  Wal-Mart’s Revenues exceed Exxon Mobil’s by $38.6 Billion. Wal-Mart’s Income Tax is 1.8% of Revenues as compared to Exxon Mobil’s 15.1%.  Johnson & Johnson’s tax rate on Pre-tax Income was 21.3% as compared to Exxon Mobil’s 64.8%.  Intel’s Net Income as a percentage of Revenues is 26.4% as compared to Exxon Mobil’s 8.2%.

Exxon Mobil’s Net Income figure seems large because it is a large company, not because it is gouging motorists at the pump.  Exxon Mobil needs large amounts of capital to drill oil wells, and the company spends many years developing these properties before it receives any payback in the form of oil and gas flowing from the completed wells.  Government’s take is extraordinarily large, which takes capital from the company when it could be reinvesting those dollars in finding more oil and gas to alleviate the supply and demand imbalance that is driving up gasoline prices.

Implications for your investments: If you own an S&P 500 index fund, Exxon Mobil represents 3.2% of your money invested, and Energy stocks (many of which are paying a similar percentage of their profits to the tax collectors), represent 11.8% of the S&P 500 index.  The taxes levied on these companies are being levied, indirectly, on you.