February 2011

Buy GS

Buy NFLX. I’m not real confident on this stock, but, for the moment I’ll hold it long.

The bottom line on USA Inc.? Cash flow and net worth are negative, profits are rare, and off-balance-sheet liabilities are enormous. The “company” has underinvested in productive capital, education, and technology—the very tools needed to compete in the global marketplace. Lenders have been patient so far, but the sky-high rates on the sovereign debt of Greece, Ireland, and Portugal suggest what might lie ahead for USA Inc. shareholders and our children.

By our rough estimate, USA Inc. has a net worth of negative $44 trillion. That comes to $143,000 per capita. Negative.

To be fair, the net worth calculation leaves out some assets, including, most importantly, the power to tax. Which simply means that the government can improve its own finances by worsening those of its citizen-shareholders.

The government is operating in a market economy. This by definition is a capitalistic process. In a market economy, these losses would have ensured that this company no longer existed.

A company can only thrive in a market economy when it provides goods and services that consumers value: they indicate this value through their exchange of goods/services, expressed in money, for the goods/services being supplied.

Ignoring all detail, that the Company USA, is losing money hand-over-fist, requires that it be wound up. That it can only keep going through theft [taxation] and increasing those depredations, is the strongest argument for winding it up.

Medicare and Medicaid are the crushers for USA Inc. Excluding them and one-time charges, the “core business” shows a median net profit margin of 4 percent over the past 15 years. USA Inc.’s core operations were in surplus nine of those years. In the early years of the Republic, the only entitlements were military pensions. The big change came with the 1930s and World War II, when the federal government substantially expanded its role in the economy (in effect, its “business lines”).

Which of course was the abomination known as “The New Deal” under Roosevelt. A move away from the market economy, to one that modeled itself on a totalitarian socialistic model.

Why are Medicare and Medicaid so bad? Partly due to the cartel that has been formed for the pharmaceutical companies through government. When market competition is curtailed by law, the result are spiraling costs to the consumer.

Entitlements experienced a surge in the Great Society of the 1960s. Since 1965, the nation’s gross domestic product has increased about 2.7 times over, but entitlement expenses have increased 11.1 times over. What do Americans have to show for it? Evidence suggests that when the government provides, families do less for themselves: There is an 82 percent correlation between rising entitlement spending and falling personal savings rates. With the aging of my baby boom generation, things will get even worse.

The Welfare State. England’s experiment with the first welfare state ended so badly, that to balance the books, the Workhouse had to be introduced. This was to separate the truly lazy from the truly needy. There is no human right to ease: there is only the right to own your own property. The Social Contact, Social Democracy, are simply redistribution away from the productive, to the non-productive. Under that basis, is it any surprise that wealth is being consumed?

Let me share one statistic that shocked me, from the Long-Term Budget Outlook published last year by the nonpartisan Congressional Budget Office. If current trends continue, the CBO says, entitlement spending and net interest payments combined will equal all of federal revenue by 2025, just 14 years from now. (This is based on the CBO’s alternative fiscal scenario, which assumes extension of the Bush tax cuts and other actions, such as a gradual increase in Medicare payment rates to physicians, that are widely expected to occur.) Back in 1999, the crossover point was not supposed to happen until 2060.

Parasites will bleed the host to death. Loss of the parasites, is no loss at all.

Imagine: no Army, Navy, Air Force, Marine Corps, or Coast Guard, no federal courts or prisons, no National Park Service, no Food & Drug Administration, no embassies, no salaries for Congress. That’s what it would take to balance the budget by 2025 and still pay interest on America’s debts, without either raising revenue or reducing entitlement growth. That’s certainly not a recognizable America.

And it sounds like an excellent idea. Because of course, the free market can provide all these services if they are demanded by consumers, Courts, Police, Prisons, etc. This has always been the basis of the Social Contract: protection by a Sovereign, from the outside depredations of another Sovereign. Substitute a purely defensive armed forces for the current offensive model, and see costs fall, with productivity rising.

Nothing much happening atm, but earnings are due Wednesday, which was the catalyst [hopefully] for some volatility. To the upside.

Police and security officials displayed a massive show of force here and in other Chinese cities Sunday, trying to snuff out any hint of protests modeled on the uprisings in the Middle East. In Shanghai, several hundred people trying to gather were dispersed with a water truck.

Officials have used state-run media outlets to dismiss any comparisons with China while at the same time stepping up public comments on the need to address “social conflict” and to tackle problems such as the growing income disparity between the rich and poor. They have also detained a number of activists and human rights lawyers, blocked Internet search terms considered sensitive, such as “Egypt,” “Tunisia” and even U.S. Ambassador Jon Huntsman Jr.’s Chinese name. And they have issued warnings to foreign journalists to be mindful of reporting restrictions.

A previously unknown group has used an overseas-based Chinese language Web site to call for a series of peaceful, silent protests, named “jasmine rallies” after the Tunisian uprising, on consecutive Sunday afternoons in cities across China. The rallies were called for heavily trafficked commercial areas, public squares and parks, ostensibly so silent protesters could blend in with ordinary passersby to avoid arrest.

However, police on Sunday were out in huge numbers in Beijing, Shanghai and other cities at the sites where the rallies were supposed to take place.

At the Wangfujing protest site in Beijing, a foreign journalist shooting video for a news agency was reportedly punched and kicked in the face by plainclothes Chinese security officers who confiscated his camera. The Foreign Correspondents Club of China reported that more than a dozen other journalists were roughed up at the site.

“I came here today to see how people protest against the government, which is corrupt and rules in an authoritarian way,” said a 71-year-old man, who asked that only his family name, Cao, be used. “Democracy is the trend in the world. No country in the world can be an exception to the process.”

Another man, named Xia, 64, said there were about 400 to 500 people gathering at People’s Square when he arrived around 1 p.m., but they were dispersed by the spray from the water truck. He said he would keep returning to try to protest because he was already in his 60s and not afraid.

On Sunday, Premier Wen sat for two hours for an Internet chat, with the Xinhua news agency and the central government’s Web site, http://www.gov.cn, addressing common complaints and answering questions submitted online. It was Wen’s third such Internet chat session, coming just before the March opening of the National People’s Congress, China’s nominal legislature.

In the session, Wen discussed the problem of corruption, following the recent firing for “discipline violations” of Liu Zhijun, the minister of railways and the top official in charge of China’s rapidly expanding high-speed rail development.

Wen also said the government was adjusting its rapid growth targets to an average of 7 percent for the next five years — and to make sure the growth was balanced and wealth more evenly distributed.

From The Big Picture

Max Gunther set forth basic trading principles called The Zurich Axioms:

On Risk:
– Worry is not a sickness but a sign of health – if you are not worried, you are not risking enough.
– Always play for meaningful stakes – if an amount is so small that its loss won’t make any significant difference, then it isn’t likely to bring any significant gains either.
– Resist the allure of diversification.

On Greed:
– Always take your profit too soon.
– Decide in advance what gain you want from a venture, and when you get it, get out.

On Hope:
– When the ship starts sinking, don’t pray. Jump.
– Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.

On Forecasts:
– Human behaviour cannot be predicted. Distrust anyone who claims to know the future, however dimly.

On Patterns:
– Chaos is not dangerous until it starts to look orderly.
– Beware the historian’s trap – it is based on the age-old but entirely unwarranted belief that the orderly repetition of history allows for accurate forecasting in certain situations.
– Beware the chartist’s illusion – it is characteristic of human minds to perceive links of cause and effect where none exist.
– Beware the gambler’s fallacy – there’s no such thing as “Today’s my lucky day” or “I’m hot tonight”.

On Mobility:
– Avoid putting down roots. They impede motion.
– Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia.
– Never hesitate to abandon a venture if something more attractive comes into view.

On Intuition:
– A hunch can be trusted if it can be explained.
– Never confuse a hunch with a hope.

On the Occult:
– If astrology worked, all astrologers would be rich.
– A superstition need not be exorcised. It can be enjoyed, provided it is kept in its place.

On Optimism & Pessimism:
– Optimism means expecting the best, but confidence mean knowing how you will handle the worst. Never make a move if you are merely optimistic.

On Consensus:
– Disregard the majority opinion. It is probably wrong.
– Never follow speculative fads. Often, the best time to buy something is when nobody else wants it.

On Stubbornness:
– If it doesn’t pay off the first time, forget it.
– Never try to save a bad investment by “averaging down”.

On Planning:
– Long-range plans engender the dangerous belief that the future is under control. It is important never to take your own long-range plans or other people’s seriously. In essence these axioms point to the benefit of having an investment strategy and sticking to it, regardless of what other investors say or do. If you don’t have an investment strategy, you could do worse than adopt these principles. However, don’t be afraid to add or subtract ones according to what works for you.

Wood’s system is making excellent returns to date: Wood also runs a subscription, so go visit him if you’re interested in short-term swing trades lasting 2/3 days.

Both aggressive models have roughly doubled the return of SPY so far this year.

20% of Equity per Trade

Net % Profit: 9.86%

Annualized: 91.05%

Average Trade: 1.42%

Winning %: 73.53%


10% of Equity per Trade

Net % Profit: 2.23%

Annualized: 16.42%

Average Trade: 0.38%

Winning %: 70.31%


ATR Position Sizing

Net % Profit: 7.96%

Annualized: 69.45%

Average Trade: 0.75%

Winning %: 71.74%

.01/share was included for commissions.

Two months ago the federal government issued a 268-page Financial Report of the United States Government. It doesn’t have a glossy cover with photos of smiling employees, and a lot of the numbers are in trillions. Except for that, it looks a lot like the corporate annual reports of the companies I have followed. You can see how the various lines of business are doing—Social Security, Medicare, etc. There’s even a mission statement: “to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare and secure the blessings of liberty to ourselves and our posterity.”

The United States isn’t a corporation, of course. It can’t exit from underperforming territories (pick your state) or auction off lines of business (the Army, Medicare). And its “customers” can reward themselves with unaffordable services because they’re also the shareholders.

Still, the idea of the U.S. as a corporation is more than a thought-experiment. It’s a way to reposition our approach to long-term problems. What would USA Inc. be worth? Who would want to buy its shares? And what would a turnaround expert recommend for a company that lost more than $2 trillion (“net operating cost”) in 2010?

Hardly original, however, is it even a valid thought experiment?

The US operates in a market based economy, under the division of labour. Thus, the capitalistic process is, and must be used. Government can fall under democratic, or Totalitarian, Communistic government.

An economy is either capitalistic, or socialistic: there is no such market as a mixed market. The means of production can be either owned privately, or publicly, or a mixture, but if money is used as a basis of economic calculation, you then have by definition a market economy.

Therefore, the thought experiment proposed by Mary Meeker will be valid, as, the US government is part of, and cannot escape being part of a market economy. This means that the government is subject to the economic axioms: government cannot escape, or stand above economic reality as dictated by the market.

I took a deep dive into these questions a little more than a year ago, and I’m finally up for air. I reached three conclusions. First, USA Inc. has serious financial challenges. Second, its problems are fixable. Third, clear communication with citizen-shareholders is essential. If the American people embrace the need for bold action, their political leaders should find the courage to do what’s right.

Political leader is an oxymoron. They are whores. Their raison d”etre, is to be voted back into power. The function of government, the faceless institution, is to expand and gather unto itself ever more power. If you are expecting government to essentially commit suicide, we might be waiting for a very long time.

What you’ll see on the following pages is hard to misinterpret: We have big issues, but the U.S. is in sounder shape than Apple (AAPL) was in 1997, when it lost a billion dollars. That’s the year Steve Jobs returned as CEO and took extreme measures, including agreeing to make Internet Explorer the Mac’s default browser. Jobs also got Microsoft (MSFT) to buy $150 million in nonvoting Apple shares—a lifeline for a company that, according to Jobs himself, was 90 days from bankruptcy court. Apple is now the second most valuable company in the world.

What was Bill Gates investing in? Was it Steve Jobs or AAPL? Entrepreneurs and Capitalists place their own capital at risk for a reason: they see the potential to serve customers more efficiently, or to provide consumers with something that they didn’t have before. The consumer is the final arbiter of success or failure. Bill gates felt, in hindsight, correctly, that Steve Jobs was worth investing in.

Are we wanting to invest in the US, the private sector, viz. Steve Jobs? Or, are we being asked to invest in the US government? Essentially Mary Meeker has confused her metaphors. She [we] want to invest in the private sector of the US: not the government, the government must be relieved on all fronts of its mandates, particularly and foremost its control of the money monopoly.

I’m the lady whom Barron’s called the Queen of the Net in 1998. Over the past quarter-century I’ve covered tech companies that have created more than 200,000 jobs worldwide, including Apple, Microsoft, Dell (DELL), Amazon.com (AMZN), Google (GOOG), and eBay (EBAY). I worked for Morgan Stanley (MS) from 1991 until November 2010, when I became a partner at the venture capital firm Kleiner Perkins Caufield & Byers.

I don’t pretend to be an expert on government finance, and I’m not interested in taking sides in the political debates over spending and taxes. Pragmatism is my trade, and information is my toolbox.

If pragmatism and information are your tools, then government finance should pose no problems, and neither for that matter should political debate.

Since 2007 I had been salting my annual Internet forecasts with slides about trends in the broader U.S. economy. (Occasionally Silicon Valley needs to be reminded that it’s not a sovereign nation.) For the Web 2.0 Summit in San Francisco in October 2009, I zeroed in on the financial health of the federal government and asked one of the savviest members of my research team, Liang Wu, to pull together a pro forma income statement for what we called USA Inc.

So, anyway, you have some help.

Declan Ganley, the Irish businessman who led the 2008 No vote to the Lisbon Treaty, said Ireland must “have the balls” to threaten debt default and withdrawal from the single currency.

“We have a hostage, it is called the euro,” he said. “The euro is insolvent. The only question is whether Ireland should be sacrificed to keep the Ponzi scheme going. We have to have a Plan B to the misnamed bailout, which is to go back to the Irish Punt.”

Ireland is getting ready to default, pull out of the Euro, and let the banks eat the $85 Billion in losses. And why the hell not.

The banks made the bad loans, let them eat the losses. Time to become accountable. Two years of bailouts, and they still can’t balance their books. They no longer deserve to be in business. Cretins.

The Bulls, after last weeks declines, are still seemingly in charge.

I’m going to post an excerpt from Berkshire’s Annual Letter from Warren Buffett. Of course, a single excerpt rather runs the risk of taking the passage way, way out of context. Be that as it may:

Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.

I have highlighted the offending sentence.

Who were the people that provided this human potential? To find out, we go back in history:

Two main kinds of people fled Europe to live in North America in the 16th, 17th, and 18th centuries: individualists who sought freedom from the political interference they were accustomed to dealing with in Europe; and religious zealots who sought to create and maintain a puritan theocracy on these shores without interference from the selfsame European political authorities who were interfering with the individualists.

A third group of individuals left Europe in the 16th, 17th, and 18th centuries to take up residence in North America, but these colonists were not fleeing anything or anyone. They had no reason to do so. They were neither individualists nor puritans. Nor did they harbor any other fringe ideas that would make them unpopular in the home country. They were in the European mainstream. They sought, first, to establish a beachhead on this new continent on behalf of European civilization, and then to keep it that way — keep it European, that is.

And a study conducted in the more recent past:

As the sociologist Herbert J. Gans put it in his 1988 study of “middle American individualism,” individualism is “inherently, if selectively, anti-government.” In a word, individualists are libertarians: they believe in small, severely limited government. Puritans are authoritarians: they believe in strong government, government powerful enough to make sure all their fellow citizens are leading lives of rectitude whether they want to or not.

So, America was built on the foundations of individualism, on laissez-faire principals, on capitalism. Capitalism requires small, non-interfering government, where, individuals compete in the market place to create wealth. Wealth if it increases, lifts all boats. Some rise higher and faster than others, but they do so by providing either goods/services that are more highly valued and demanded by their customers.

What is the trend of government?

With this growth in government, what has happened to wealth? How do you even measure wealth? I am measuring wealth in trade. If you provide goods/services that customers want, you will have a profit, or surplus after all costs. If you do not, you will have a loss, as accounted for in terms of money. Thus money is not wealth, it is simply the tool of economic calculation.

So, what’s happened during the increase in government?

The wealth is decreasing, and being consumed. Thus Warren Buffett’s claim, rather founders on the shores of the empirical data. The system, that built America, the people that built America, are not positioned for growth.

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