BerkAdvisory

Democratic Economic Policies - They Don't Work Except in the Minds of Intellectuals

BerkAdvisory's ValueAligned Portfolio Up +17% Last Twelve Months

Little do many people know, the stock market is up 9% over the last 12 months. If you don't look at the market and manage it every day like we do, with all the negative news and general malaise out there, you'd be forgiven for thinking that the stock market is the last place that you would want to park your money.

But as Julia Roberts' character in Pretty Woman said to a fancy boutique clerk that had snubbed her in her store earlier in the day - "Big Mistake!".

Most investors have left the stock market due to fear. This exodus is happening when treasury bills yield less than 1% and money market funds yield even less. Those returns are not going to meet your savings' goals.

Our tactical allocation approach to buying ValueAligned® companies has yielded +17% over the last 12 months - even better than the stock market.  As you can see from the graph above we have suffered along with the market lately, but we are still up nearly +8% over the index.  

On September 8 we put out this post (Click Here) that said it was time to BUY stocks now.  Since then the market is up but you have not missed the move yet. 

The reward to risk ratio over the next 18 months is about 20% up to only 5% down - that's 4-1, about as good as it gets.

What to do? Put money into the stock market now - If you don't know how to do it call me and we'll do it for you.  It's easy to open an account over the phone and our broker Folio Institutional will transfer an account from another broker - without you doing much of anything.  

CALL ME NOW 732-800-2375 

Berk

 

It's All About Regime Uncertainty and Investment Surplus

The Reason None of the Government Intervention Works - It's Not About Putting More Money In Consumer's Pockets to Create Demand -"Consumption Spending HAS Already Recovered," 

 

 

 

 

 

 

 

 

Robert Higgs makes an important point that "Consumption Spending HAS Already Recovered," and it's private investment spending that is lagging and holding the economy back:

"Commentators and pundits, some of whom ought to know better, continue to harp on the idea that the recession persists because consumers are not spending. Every Keynesian seems to believe that because consumers are in a dreadful funk, only government stimulus spending can rescue the moribund economy, given (to them, at least) that investors will not spend more because the Fed, having already driven interest rates to extraordinarily low levels, cannot use conventional policies to drive them any lower and thereby elicit more investment spending.

People, please look at the data. They are conveniently available to one and all at the website maintained by the Bureau of Economic Analysis. According to these data, real personal consumption expenditure recovered from its recession decline by the fourth quarter of 2010 (see chart above). Continuing to grow, it now stands (as of the most recent data, for the second quarter of 2011) even farther above its pre-recession peak.

The economy remains moribund not because consumption spending has failed to recover and not because government spending has failed to increase, but because the true driver of economic growth—private investment—remains deeply depressed. Gross private domestic fixed investment fell steeply after the second quarter of 2007, and in the second quarter of 2011 it remained 19 percent below its pre-recession peak (see chart above).

Here is the true reason for the recession’s persistence.  Private investors, despite the full recovery of real consumer spending, remain apprehensive about the future of new investments, especially new long-term investments. I have argued repeatedly during the past three years that an important reason for this apprehension and the consequent reluctance to make new capital commitments is regime uncertainty—in this case, a widespread, serious fear that the government’s major policies in areas such as taxation, Obamacare, financial reform, environmental regulation, and other areas will have the effect of depriving investors of control over their capital or diminishing their ability to appropriate the income that the capital generates. President Obama’s harping on the desirability of making “the rich” pay their “fair share” of the government’s ever-rising costs only exacerbates regime uncertainty. Business leaders have spoken again and again of how the present political environment is discouraging risk-taking and entrepreneurship.

In any event, it should be crystal clear that the problem is not the failure of consumer spending to recover. Let us please have more respect for the facts than to continue singing that old, thoroughly worn-out tune."

via mjperry.blogspot.com

 

 

The Last Thing Good Ideas Need Is Government "Investment": Solyndra

Solyndra for Dummies

I consider it almost a patriotic duty to ensure that the Solyndra scandal gets lots of coverage. It is a classic case of what can happen when politicians (of any stripe) and politically-correct enthusiasts (e.g., the green lobby) figure out ways to tap the public purse to fund their favorite initiatives. Industrial policy (of all kinds) is about the only sure way to ensure that taxpayer's money is wasted, often at the expense of more promising but less PC ventures. Be sure to see the four related cartoons here. HT: Glenn Reynolds

I believe strongly that any good idea worth its salt will have no trouble locating funding. As the late Jude Wanniski often argued, the supply of capital in the world is virtually unlimited if you have a good and profitable idea. Governments should never play the role of venture capitalist.

via scottgrannis.blogspot.com

Berk:  Figure I'll do my tiny part to help Scott Grannis publicize how badly government "invests', or directs capital.  Government simply cannot invest because it has the wrong incentives, objectives and competencies.

Government Intervention: It's Not What You Do It's What You Have the Courage to Undo.

The good news is that economic intervention does not a speech make.  The bad news is that a speech does nothing to clear up regime uncertainty.

“There have been endless analyses of individual economic policies; there has been little attention to changes in policy regimes.”—PETER TEMIN

Here's another excerpt from Higgs' essay on "Regime Uncertainty" during the great depression.

...economic historians only echo the observations of one of America’s leading investors, Lammot du Pont, in 1937:

Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate.  Are taxes to go higher, lower or stay where they are? We don’t know.  Is labor to be union or nonunion?… Are we to have inflation or deflation, more government spending or less?… Are new restrictionsto be placed on capital, new limits on profits?… It is impossibleto even guess at the answers. (quoted in Krooss 1970, 200)

Why does not Obama call off his National Labor Relations Board? Can't Boeing put a plant wherever it wants in the United States?

 

BERK: The President should call off his National Labor Relations Boad's lawsuit to prevent Boeing from setting up a new production line in right to work state South Carolina.  It represents everything that is wrong with his approach to economic policy.  He says, speaks, feels, commands, but never accomplishes regulatory reform.  Either they don't believe that millions of economic actors who make millions and millions transactions and decisions everyday, see this NLRB use of law as another arbitrary attempt to restrict freedom of South Carolinians and Boeing employees and shareholders to freely contract over state lines.  Too bad that South Carolina is a "right to work state" where you are not forced to join a union before you can work.  The WSJ: 

When CEOs or entrepreneurs fear political intervention that might impose higher costs, they are more reluctant to invest or to hire new employees. That's especially true when the economy is already growing slowly, or emerging from recession.

The NLRB's assault on Boeing has been especially damaging because it violates what most Americans consider to be a core tenet of U.S. capitalism—the ability to move capital or business where you think it has the best chance of success. Boeing's executives are being punished for remarks they made long ago about strikes at their Washington plants.

via professional.wsj.com

Feeling bad about the economy? Don't worry we keep moving lot's of stuff.

Transportation Stocks & Railcar Loadings

The plunge in the S&P 500 Transportation stock price index has been extraordinary and reminiscent of the plunge following the collapse of Lehman during September 2008. This year, the index peaked at a record high of 361.72 on July 7 and dropped 19.5% by the close on Monday, August 8. It has rebounded 6.9% since then, but remains 13.9% below its recent record high. This index was a leading indicator for the sharp decline in railcar loadings that started at the end of 2008 and continued through mid-2009. That’s possible again, however not very likely unless the economy is about to fall into a recession.      Instead of a recession, the latest 26-week moving average of railcar loadings confirms that the economy may actually be coming out of its soft patch following the disruption in production as a result of the Japanese parts shortage problem during the spring. This measure of economic activity has rebounded back to the best reading since the week of December 18, well before Japan’s earthquake hit.

The recent rebound in railcar loadings has been led by intermodal container loadings, which is approaching the record high at the end of 2010. These loadings tend to carry lots of imported goods from the ports to distribution centers. This suggests that retailers are expecting that consumers will be in a buying mood during the holiday season.

via blog.yardeni.com

Buy backs no brainer - near zero cost of cash till 2013?

Expect more and more as the Fed has just given the green light until 2013, low yielding cash on the balance sheet with nowhere to go in the regular business will be used to buy back stock - that will boost earnings per share growth - some snobs don't like that kind of growth, but I am happy to own a greater share of slow growing profits without ponying up more dough.

August 17 (Bloomberg) U.S. companies are authorizing share repurchase plans at a rate that may make 2011 the third-biggest year for buybacks since at least 1985, Rob Leiphart, an analyst at Westport, Connecticut-based research firm Birinyi Associates Inc., wrote in a note Aug. 11. There were $36 billion in repurchases approved last month, bringing the total this year to $324 billion through July 31. If that rate holds up, 2011 would end with $554 billion, he projected. Only 2006 and 2007 had more, with $655 billion and $863 billion, respectively, Birinyi data show.

+13.4% YTD - ValueAligned Portfolio (VAP) from BerkAdvisory

 

This graph displays the percentage return this model achieved compared to an index or other investment.The performance figure on this page is based on the model's tracking Folio, which does not constitute a composite for purposes of AIMR reporting.  This is actual performance before fees are deducted from a client invested in our model portfolio on Folio Instituitional.

Buffett on the importance of buying ValueAligned companies

This “what-will-they-do-with-the-money” factor he calls it.  Some call it the "management quality" factor.  We call it the ValueAligned factor.  Companies that use EVA and Value-Based Management or a sytem like it are much more likely to create $2.00 out of each $1.00 of retained earnings than $0.50 out of each $1.00. 

There is a third, more subjective, element to an intrinsic value calculation that can be either positive or negative: the efficacy with which retained earnings will be deployed in the future. We, as well as many other businesses, are likely to retain earnings over the next decade that will equal, or even exceed, the capital we presently employ. Some companies will turn these retained dollars into fifty-cent pieces, others into two-dollar bills.

This “what-will-they-do-with-the-money” factor must always be evaluated along with the “what-do-we-have-now” calculation in order for us, or anybody, to arrive at a sensible estimate of a company’s intrinsic value. That’s because an outside investor stands by helplessly as management reinvests his share of the company’s earnings. If a CEO can be expected to do this job well, the reinvestment prospects add to the company’s current value; if the CEO’s talents or motives are suspect, today’s value must be discounted. The difference in outcome can be huge. A dollar of then-value in the hands of Sears Roebuck’s or Montgomery Ward’s CEOs in the late 1960s had a far different destiny than did a dollar entrusted to Sam Walton.