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This site provides first-page excerpts of recent editions of the Stockboy, with the current edition's first page featured below. To subscribe to the newsletter and receive the entire print copy, please contact brian@columbiaasset.com



A Disconnect Between Stock Prices and Company Prospects The third quarter was tough for stocks all the way around – the Dow and S&P 500 were down in the low teens and most other equity indices were down closer to 20% for the quarter. Many stocks, particularly cyclical ones such as Dow Chemical, Caterpillar, Ford and GE, were down even more. To me, this indicates a buying opportunity (please note that I bought or added to all four of the above-mentioned stocks this quarter in the Stockboy Fund).

It appears too many investors gave into fears of what might transpire in Europe and concerns of a double dip recession here. Yes, these are reasons for concern and it’s hard to predict where the market will go from here in the short run. However, in general, companies are doing pretty well in this environment and their earnings are generally staying steady or increasing.

Well-financed and managed companies in solid industries can withstand a variety of market conditions and still come out looking pretty good. In fact, one could comfortably argue that blue chip companies are currently, in many cases, better off financially than most governments around the world. They’ve got a lot of money in the bank, good profit margins and strong worldwide customer bases.

In this volatile and fragile economic and investment environment where interest rates are also at rock bottom, you could do a lot worse than owning a variety of blue chip, dividend paying stocks.

Back in the summer of 2010, I predicted the following: “I believe the Detroit Lions, mostly bad since the 1950’s, are (finally) on the road to respectability. It has yet to show in their record and this year (2010) might not show a lot, but management and personnel have notably improved…for the first time in decades. It’s like a bad company putting things together….finally. Most people will take a wait-and-see attitude, but I’m going out on that historically very shaky limb. Perception often lags reality.”

I believe this same concept – perception lagging reality – currently applies to companies such as Ford, Cisco, Corning, and Microsoft: they’re improving more than investors are giving them credit for.

The markets are working through some big issues of late -- deleveraging of the economy, continued low real estate prices, worrisome government debt, etc. These issues will resolve themselves with time, even if things are rather ugly during the process.

The more significant issues Americans must wrestle with long term are the tectonic economic shifts occurring within American society. Regardless of your political views, these issues affect everyone one way or another.

Our middle class is shrinking and getting hit from many sides. First and foremost, too many people are facing unsustainable cost increases of the basic elements of a healthy modern economy. The costs of health care and education (particularly college) routinely rise annually by high single digits (or even double digits). Fewer families can afford to send their children to college from their savings or income and thus many students are saddled with huge student loans that burden them with debt for years, if not decades (even doctors and lawyers with loans are not immune from this problem).

A recent article in Investment News stated that while the overall inflation rate for the past 25 years totals just over 100%, the average college tuition has gone up over 450%! Not only is this a huge imbalance, but it is a ‘big ticket budget item’ for most any household. Healthcare deals with similar wallet-busting numbers and increases. It’s no wonder many in our middle class (much less lower classes) are struggling.

Over the past 30 years, the top 1% of wage earners’ income has gone up about 300% while middle class incomes have gone up about 40%. Clearly, the math just doesn’t work for most Americans. If your income only goes up 40% over a generation but college and healthcare costs go up much, much more, the middle class budget will get squeezed to oblivion. This is the same math problem that doesn’t allow many city and state pensions (and Medicare) to continue on with their generous benefits; after a while, big increases to already large costs end up squeezing out other important things. For states and cities, pension costs end up squeezing basic services. For less wealthy individuals, education and healthcare costs squeeze out discretionary spending and savings.

It’s easy to see how these realities, on a large scale, hurt the American economy and its strength on a global level.

Taxes have been a point of contention in the U.S. even before the American Revolution. There have always been differing views. One thing is for sure -- there are certain things only a government can provide. One, as we know, is maintain an army. Another basic function – that is critical today yet underappreciated – is to maintain and enhance our infrastructure. As I stated in the Fall of 2010 issue, we need a modern infrastructure to stay competitive globally and to allow our citizens to maximize their efficiency, efforts and skills. As we look to cut government costs, we should be very careful to not impair this long term need.

Taxes have become so incredibly political that common sense seems to be pushed aside. As an independent voter, I see some patterns in the tax arguments that seem flawed.

First, tax rates and jobs are not highly correlated historically. As a former tax economist for President Reagan stated recently in BusinessWeek: “Cutting taxes on upper incomes may have economic benefits, but it’s not [a great way] to create a lot of jobs quickly.” In the ‘90’s the American economy added over 20 million jobs with a top tax rate of almost 40%. The greatest percentage increase in jobs was during the ‘50’s when the top tax rate was as high as 90%. (BusinessWeek, Oct 3).

To state that putting more money in the pockets of small business owners (or corporations) will result in a lot more jobs doesn’t seem clear either. As a small business owner, I know that demand dictates jobs, not cash in my pocket provided by tax cuts. We see this with large corporations too. Some politicians believe if we reduce taxes for companies repatriating cash to the U.S., these companies will create more jobs. This is doubtful. The tax rate to repatriate was temporarily reduced a few years ago and studies show it created very few jobs. Many companies are making record profits currently yet are not necessarily hiring as they find they can get by with their current staffing; they’re keeping their profits by and large. That’s fine – they’re free to do that. But we don’t need to offer them more money in the form of tax cuts to add to their piles of cash.

Demand for products and services create jobs. Demand comes from more people having more money in their pocket to spend. This means you need a middle class that is relatively large and relatively well-off. This is why China’s demand is growing – their lower and middle classes are moving up and have relatively more money to spend. For America to remain healthy--and for the markets to go up over time--our middle class needs to be reasonably strong and growing – not shrinking. Citizens need opportunities to ‘get ahead’ and have the money to spend AND save. This ultimately benefits everyone. If the opposite occurs, we all suffer eventually.