wearmanyhats

Yesterday, a faithful reader e-mailed me to discuss transportation stocks.  Are they good buys?  Should someone take a few thousand and invest, throw them into their IRA or whatever and hold them?  An alphabet soup of call letters accompany the list of excellent transportation stock buys. FRO, EXM, DRYS, NAT, and ESEA and many other tanker stocks. The P/E ratio on these stocks are so laughable that one wonders why anyone in their right mind wouldn’t jump in with both feet.

This kind of market is so treacherous that a person sticking in the stock for the long run can literally lose his/her shirt.  Here are a few points to consider.  I recommended Royal Bank of Scotland, and still think that at some point it will be a good buy.  But the stock fell so far that in order to keep from being delisted it did a three for one backward split.  What a wonderful way to reward those of us who believe in the company!  Now my portfolio has one third fewer RBI stocks, and not because this bank doesn’t have some good things going for it.   It is simply caught on the tidal wave of a downward financial sector.

Now I believe in RBI and at this point, I don’t have enough equity in it to sell.  At some point, I might even buy more.  But that is another story.  Right now, the market is so unstable that to recommend buying anything would be negligent.  That is one reason why the focus on this blog has taken a temporary turn to looking at all facets of investing and money.

The reader asked me, too, why the value of transportation stocks going up since the Dry Baltic Index is going up.  Great question!  We will investigate that tomorrow.

One of the reasons this blog has not featured very many “great buys” is because the fall of the market is simply not over.  There will be further declines in the overall market and we need to wait it out until  it looks as though the downturn is over.  It will happen. Collect money until then and get ready.

Hypothetical situation:  David goes to a stamp convention and finds one he likes featuring Miss Piggy.  Delighted, he buys the stamp for $10 and puts it into a special display jacket.  It looks great.  Months later, a Miss Piggy revival hits the media.  People are suddenly crazy about the pig, and when reading the Stamp Collecting magazine, he notices that the Miss Piggy stamp is now fetching $10,000 on the trading circuit.  He finds a buyer, sells and pockets the money.  Easy as pie, right?

No, no, no.   $10,000 will trigger bells and whistles from the banks to report his deposit, and soon the IRS will come knocking.  David waves goodbye to a good chunk of his money and thinks his love affair with Miss Piggy has made him brilliant.

 Rewind and plan. Let’s let him be truly brilliant. Before he sells, he needs to plan.  Suppose he contacted a 1031 agent first, arranged the sale next, and sat calmly for some 45 days after the sale to figure out what he could buy next.  He plops down an additional $100 and picks up a rare Ben Franklin stamp that just happens to be on the low side of its usual up and downs in the market.  Suddenly, Pennsylvania plans a big birthday party for old Ben and Ben memorabilia shoots up at an astonishing rate.  David sees that his Ben stamp has raced up to $20,000 a year later.  Does he sell it out?  If he does, he pays the tax from the transition before.  Instead, he shops around for a stamp on the low end that can be had for $20,000 and does another 1031 exchange.

Does poor David ever get to enjoy the fruits of his labor?  Technically, yes he can.  Remember, he’ll have to pay taxes on all of these earnings, but all he ever put down was $110.  And he can exchange that stamp as long as he wants to make even more and more money for the rest of his life. He can sell it out for full profits and pay the taxes after he retires when his regular income has become considerably less.  He can even transfer the wealth to his family when he dies.  It all takes planning.

Consider Farmer Friend who raises goats.  Let’s say that one day he sees a young male cow he likes and gets it for $100.  Thinking that this animal might some day be useful, he feeds it, plays with it and gives a great home until one day the baby turns into a bull.  Delighted, he sends it to play with some neighboring women cows, for a fee of course.  He likes the money that generates, and after a few years, realizes that all good bulls eventually go to the Great Pasture in the Sky.  He decides to sell.  Now he can get $2000 for his bull.  Does he take the money and run?  

Well, maybe if he isn’t afraid of the IRS.  But why not do it legitimately?  1031 exchange the beast for a younger bull of a special breed for maybe a hundred dollars more, and go on earning stud fees.  This type of exchange does not generate the terrific returns that other collectibles will, but it still saves you by letting you retain your assets.  But stud fees can generate immediate income and the sale of this animal doesn’t need to be eaten up by taxes.  

 Many people think that the 1031 exchange is just for real estate. This is where it works the best.  But the truth of the matter is that any asset can be exchanged for the same type of asset, which works well with the Modern Portfolio Theory .  Exchanging the right type of asset, art for art, stamp for stamp, movie poster for movie poster,  can make you wealthy by just deferring taxes. Of course you should always consult your C.P.A when considering such a move to make sure it will help at tax time.  But  it’s worth keeping in mind when figuring out your money strategy. 

My realtor and I broke away for lunch last Friday. The local restaurant, so packed in the first three years that I lived here was largely abandoned.  The students that used to pack the place rarely come in, the old folks are at the end of the month and saving every dime they have, and even the “regulars” aren’t in as often.  It’s not the food; nothing has changed there.

In between bites we talked about the economy.  Their business, bought in the past couple of years, didn’t get enough time in the high sales years to get on its feet financially.  Now his wife works checking out groceries. “She can’t believe how many people are on food stamps,” he said between bites of his burger. “Especially these past few months.”

“Well,” I admitted, “with the slowdown in December, I’ll bet we could qualify.”  It was a humbling thought.

“I’ll bet we could, too,”  he said.

It was sobering for both of us to concede that we, too, had fallen into the lower economic status, even if it is temporarily.  However, this conversation came back to my mind yesterday when the Once and Future Farmer Friend dropped by with a link to share.  He reminded us that it was Robin Landry who said that the difference between a recession and a depression was famine.

The link is to the U.S. Drought monitor , and is worth a good look.  It is startling, until you click on “archives” and get a better look at the past several years.  I realized quickly that although I had heard of the drought in the West earlier this decade, that I had no idea how serious and widespread it was.  It lasted from the early 2002 until after 2005.

Now it may not seem worth spending any time knowing about droughts, but the effect of them can affect both your pocketbook and how you eat.  The area covered in that particular drought affected the large beef farms of Colorado and nearby states.  The result was higher beef prices, and if you had land at that time, beef would have been worth considering as a side profession. This ties into the Modern Portfolio theory which advocates rounding out your investments with things other than stocks, bonds, real estate and metals.

I will make a bold assertion here that the empty shelves of the local food banks across the nation would attest to the close proximity our citizens are toward true hunger.  I will also assert that the number of families having to rely on food stamps, and how many parents admit to skipping meals so their children can eat, will give us a good indication just how close many people are to the edge financially.   For those of you who wish to scold me about the “drive by media” or the “Messiah talking,” don’t. These are simple observations from a person in the trenches of life.

Having said all of that, I think the economy is turning around, despite the free fall of the stock market.  Shipping is up, which means buying is up.  Buying is up because money is slowly coming back into the business world.  This hasn’t a thing to do with the stimulus package or any bailouts of big businesses.  It has to do with the American people cutting back and spending more sensibly.  The best thing that happened to us as a nation is that the banks quit lending to high risk businesses and overmortgaged homes.  As a result, people began to spend more frugally, and as painful as all of this has been, it’s led to a healthier nation.  That’s not to say that there aren’t individual cases of unfair pain, or instances of outrageous greed.  It’s not to say there won’t be more layoffs, but the media gives no attention to the jobs that are hiring those people that are willing to work.  Let’s face it:  some people who can’t find work in their city might have to move, or rely on family to help, or government assistance to pull them through.  But they will get through and be wiser money managers in the future.

Facing hunger during a recession is something people never forget.  It makes them think twice when spending foolishly in the future; it makes them donate more to the food banks when their own stock is replenished. It is very true that flowers only can grow once it rains.

In a small Midwestern town, a sixteen-year old boy took on his first job working in a small video shop.  After several months working there, he finally figured out that the boss had been improperly paying him for the hours he had worked.  After getting nowhere with the boss, the boy went for the top gun: his mother.  She, in turn, went in and tried to talk some sense into the old man.  The boss, unimpressed, fired the boy, and hoped the mother would fade a way.  She fought back by putting a letter to the editor in the newspaper.  In the end, no justice was served.  The boy didn’t get the money due, the mother decided to let it go or have a heart attack, and the dishonest business owner got away with it.

Right or wrong, business owners are not all born to be honest.  All too often employees find this out the toughest way through lost wages or abusive hours.  Recessions can sometimes rid this world of such business owners.  But all too often their dishonesty goes unchecked.

There are many stupid business practices, but here are few of the most pervasive.

1. Poor customer service.  Fortunately most people vote with their feet and these kinds of businesses fail even before a recession.

2.  Abuse of wages and hours.  I am amazed at the number of bosses that simply pay no attention to overtime, and the number of employees that overlook it as well.  Bosses that violate overtime laws run the risk of huge fines from the labor department when employees report the problem.  Why do bosses get away with this?  Mostly because there is not punch clock system, resulting in complaints that are unable to be proven.  Employees need to be able to show without question the hours that they worked.

3.  Poor employee safety.  Besides being morally obligated to provide for their workers safety, employers suffer through higher insurance premiums for too many accidents. Do you think this would result in smart bosses putting in safety programs?  It doesn’t happen nearly enough.  Foolish business owners see only lost time in production or simply choose to ignore risks in the workplace.  The results are avoidable accidents and higher insurance for everyone.

4. Cheating the I.R.S.  Another amazing thing about businesspeople is how many feel it completely justifiable to cheat on their taxes.  There are a remarkable number of legitimate write offs for businesspeople, but all too often business owners play Russian Roulette with their futures by deducting silly expenditures that would never be legitimate expenses.

5. Cheat their customers: There are a certain number of people who honestly have never heard that a satisfied customer will tell a couple of other people, but an unhappy customer will tell twenty other people.  To that end, some business owners will figure out ways to rip off their customers and sleep just fine at night.  There is no reasonable explanation of these kind of risk takers.

6. Have no understanding of their bookkeeping: Some business owners manage to stay afloat because their spouse brings in a good living.  Many times these people have no clue about how their business is doing, except that their checkbook looks like it has money in it, so things in the shop must be doing fine.  There are store owners that have no idea about their inventory, no concept of reading their books, or clue about their break even.  They fly by the seat of their pants, and get away with it only because they have help supporting the business.  This is an easy thing to remedy, because meeting with a Small Business Development Center counselor can help you learn to control your budget, not let it control you.

Businesses are successfully run every year, so even though it is difficult, it is not impossible.  The rewards of fixing these above mistakes will lead to the kind of success any business really wants.

A thanks to the Once and Future Farmer for the link to the Baltic Dry Index, which is an excellent indicator of global business health.  This index is a relatively stable indicator of what will be shipped around the world and is not inclined to bounce up and down based upon swings in commodity prices.  Instead, shippers must keep a handle on how many ships will be needed because of the huge expense with building them.

This indicator slid steadily last fall and then flattened out in the last quarter of the year.  However, in February, there was a little rise in the indicator, which should give some hope to the growth of the economy in the upcoming year.   Some of this is from China, which is so hungry for raw materials that a global recession may not be able to stay in effect for long.  China is sitting on huge piles of American dollars, and they can buy goods around the world.

The Weiss Research group, which keeps track of how money is being used around the world maintains that the Chinese version of a stimulus package is having an impact on their nation.  Though the Olympics did not generate the kind of follow up foot traffic that the Chinese government had hoped for, the leaders of the Communist Party are no fools.  They can see the problems that happened in their nation in the  past year and will take steps to remedy these as they can.  For example, the snow storms that shut down transportation unnecessarily last year is a learning experience for the government.  Hopefully they will take the international business community’s criticism to heart and improve on the snow removal during the next big snowstorm. Again, infrastructure changes in China creates needed jobs, and helps the whole economy.

Tthe government will be scrambling to get the young people back into making a living, after the closures of factories in some of the provinces. Fortunately, other markets such as South America are opening up boldly to Chinese products, and that will help both areas of the world to be less susceptible to getting “pneumonia ” when the United States gets the “flu.”  We’ll keep an eye on the BDI to tell us when the world will pull out of its slump.

In the last decade or so, some small towns have seen a recent influx of families move into them, primarily because of affordable housing.  One local family, struggling to find an affordable house in Minneapolis, discovered a forty thousand dollar house in Henning, a small town in mid central Minnesota.  Soon they bought and now the family has their own home.  The children attend the local school and participate in wrestling and other sports. The downside?  Most residents of small towns need to drive some distances to get to their work.  One local school counselor drives forty-five minutes southeast to her job, and her husband drives forty-five minutes north to his job.  They basically chose to live in between.

This issue of affordable housing is truly making or breaking communities across the United States. And it is affecting mid-cities in interesting ways.  In Perham, Minnesota, the school district, back in the early 1990s,  put together a projection of  student enrollment.  In response to these projections, they built a middle school.  The student population didn’t increase the way it was projected and now the district residents are saddled with heating and maintaining two school buildings to educate the same size classes that it did back in the 1970’s with one building and fewer staff members.

At a principal’s meeting in 2008, the discussion came up as to why the student population was falling.  The answer:  rents were to expensive for families, and nice houses were too costly for an average family to purchase.  It was true that the town was filled with jobs, but most paid no more than $11 an hour, and that didn’t go far when paying a $1500 a month mortgage.  The result: people bought homes in nearby towns with homes  that were half the price, then sent their children to those schools.

Smaller districts have had to become more pragmatic to survive.  Many older buildings closed as families fled to midsized cities looking for work, and the remaining children in those towns are bussed to other nearby schools.  The results are a poignant show of hometown pride.  Last night at a wrestling match at the tiny town of Bertha-Hewitt, little boys wearing many different colored uniforms wrestled their hearts out.  The tiny town of Verndale, which could have combined its team with the larger city of Wadena, chose instead to combine with Bertha. The same was true as the Otter Tail Bull Dogs were a combined team of several smaller schools.  Many of the boys wore their own uniforms with great pride, and the hometown identity remained.

Those pragmatic schools that have combined to stay open have usually already worked out the “bugs” compared to Perham.  While Perham tries to think into the next century, the affordable housing issue has burdened the community with more taxes, exacerbating the problem.  Fortunately the town has attracted a fair number of working professionals who can afford the newer homes in the subdivisions that have popped up north of town.

Understanding the dynamics of the school districts are critical to the real estate investors that sift through the millions of for sale and foreclosure signs.  Buying a small house in a dying town will bring in some revenue, but in the town with the school, the real estate may actually increase in value as the market rebounds.  The best example was in Hewitt, the town without the school.  In Bertha, a convenience store made it possible to stop and get a cup of coffee, some small groceries and fuel up after 8 p.m..  In Hewitt, the only commercial places open at night were two bars.  It is not a moral statement; just reality of what kind of places will make money in the town  that has or doesn’t have the school building.

Money invested in these small towns with carefully chosen properties can yield renters for years to come.  In the future, when the real estate market stabalizes, these properties should increase in value.  No matter what, it will be interesting to see how mid sized cities and smaller ones will change in the next two decades.

The Once and Future Farmer living at Today, urged me to grab some definitions to help clarify my Recession? Depression? topic.  Although I had resisted the urge to do that at the time, relying instead upon the individual experience of an Old Man Who Mentors Me, I decided our Farmer Friend is right. A definition, even if there are many of them to honor, would be useful.

Just because it is the Source of All Great Knowlegde (Right sometimes, and wrong other times) I turned to Wikopedia, the brain candy encyclopedia for the masses, for a basic definition.  Turns out, we have all the symptoms of our generation’s first true blue depression!  We have “abnormal increases in unemployment,” and a restriction of credit,” plus “shrinking of output and investment.”  Add to the mix “numerous bankruptcies,”  “reduced trade and commerce,” and a deflation and , yes indeed, we have a Depression.  No doubt it is not as bad as the times in which the Old Man lived, but it can be now labeled properly.

Well, phew, glad we finally got that over with.  I don’t know about you, but I was getting pretty sick and tired of hearing the older generation say things like, “Man, you don’t know how bad it can get!” or “You don’t know what it isi like to lose everything,” or “You don’t know what it is like to go hungry!”  As a child that grew up when real estate only went up in value, and stocks only went north, my good mentor is right:  I’ve never lived bad times.  Even the 1970’s were not like this.

Our good Farmer Friend recommended I head over to learn about the Baltic Dry Index.  Three cheers for this obscure but excellent indicator, which seems to show that the general global economy is still moving, still growing, mostly because of China.   This gives me heart, much like a person down with a bad flu has heard from everyone around them that the flu this year is bad, but it goes away in several days.

I’m no doubt a woman who has lived off of the fruits of our good nation and never had to pick up the tab.  I would have appreciated going through a Depression when I was younger and not responsible for our childrens’ well being, but since one “can not choose the times in which they live” (according to Gandalf in Lord of the Rings), then we must rise to the occasion and do the best we can.  Now our generation is living through the times that give us strength, the times that build our character, the times that make us appreciate saving money and going without meals so our kids can eat.  Maybe we haven’t chosen this, but it is thrust upon us, and we must rise to our better nature and survive.

Someday I may have grandchildren who come to me for wisdom.  Now I am living the acquisition of such wisdom.  I need to practice my lines for them.  Let’s see, “You don’t know how bad it can get.”  “I remember when nobody wanted to buy a home for what the people had paid for it originally.”  “I remember when the big banks went under and the government had to rescue them.”

In all seriousness, our generation will survive these bad times.  We will retire.  Our home values will go up again.  We will live to tell of bad times to drive our children and grandchildren crazy with stories of which they can not relate.  And when they suffer through this kind of cyclical downturn, they will have someone to whom they can turn, someone who will understand.  And that will be our time to have the experience, to help them know that they can make it.

Unless your business is one that thrives during recessions, such as a process server that has to serve foreclosure notices, or you’ve suddenly become the only person in town after your competitors have gone under, a recession can hurt your gross profit.  To the average non-business type, this means that sales are down, that there is less money coming through the door.  On a million dollar business, a loss of 20% can mean $200,000 of lost revenue.  This can result in staff layoffs of two or three office people, or even some production people.

A good business owner grows his/her business by sometimes going without a paycheck while adding on a new person.  Then when the added business has absorbed the new employee, the owner can once again get a paycheck.   This is fine when business is good.  But during an economic downturn, business owners scramble to figure out who has to get the cuts.  Sometimes the owner loses income and staff lose jobs.

Here are some survival tips for small businesses:

1.  Work with a mentor or a SCORE (Small Business Corps of Retired Executives) representative to determine the best staffing during this downturn. Have them help you also set realistic goals for the year.

2.  Consider keeping two part-time people instead of one full-time employee in order to best use each person’s job skills.

3.  Cross train your employees if possible.  Then if you have to let one person go, another can pick up some of the duties.

4.  Analyze your competition every six months to see whether they have an edge over your business on which you could improve.  Ask yourself if you feel they are going to still be in business in six months. If you feel they may close, prepare for the customers to begin to come to your business.

5.  Since banks are not loaning easily, consider private sources for needed capital.  However, be sure to have a realistic expectation of business in the upcoming season.  For example, a loan to pay your worker’s compensation insurance or some such loan is sensible in that the amount of money owed will be refunded if there is a decline in the number of employees during the year.  But if you are thinking that a loan will tie you over a slow season, keep in mind that the slow season may not pick up this year.  Your business may be unable to pay that loan.  Cutting back right away may be the most sensible thing to do.

6. Outsource jobs that may otherwise have to be cut, rather than adding  a new employee and then cutting that person.  A good example is a bookkeeper.  If you were thinking of adding a new person to the staff for a busier summer season, consider putting your staff bookkeeper in a new role and outsourcing the books.  Your employee could always audit the books for problems, and be cross-trained.  That person can always go back to bookkeeping later when the economy picks back up.

7,  Keep up on the innovations in your industry.  One of the the things that customers look for is current technology, and good-looking facilities.  Shabby looking stores and shops die quickly as foot traffic always goes to the places that look better.

Only the best run businesses survive recessions.  Only the businesses that are flexible enough to adjust to the needs of their customers and the market will thrive.  Hopefully these suggestions are helpful to the average business owner as s/he faces the challenges of the next year.

It was evening when the regulators came.  They pounded on the door and the man fled out the back door.  He could hear his heart pounding hard as he ran toward a small recess in a hill.  Here he could hide and still watch the farmhouse.  His wife stood outside, the kids crying at her side and the G-men scolded her for not telling where he had hidden.  They carried parts of his still, and the angry voices echoed over the pastures.  He knew his batch was gone, and with it the money he would need to make the mortgage payments for the year.

After they left, he came out again.  She didn’t say too much.  Times were hard and she was grateful for any money coming in.  A week later when he went to town to buy some flout and other items that they needed, he sat on the runner of his truck in a parking lot outside the store. Too late, he saw the government men standing nearby talking.   He carefully pulled the pickup door open and hid behind it.  But this time his hiding wasn’t didn’t work; one of enforcers came walking from a different direction.  The agent noticed the suspicious move, and soon the game was up.  After he was arrested, he served eighteen months in the penitentiary for running booze.  This, during Prohibition and the Depression.   While he did his time, the family lost the farm and had to move in with relatives.

He wasn’t the only man to make white lightening to get money.  While Dillinger shot up Chicago, and speakeasies were common in the bigger towns, small towns sold the home made liquor for a seventy-five cents a pint.  Kids collected those bottles later and turned them in for a nickel. The pint was half water and half alcohol, and if you couldn’t get to a well to water down the alcohol, rain water would do.  The alcohol killed anything living inside, and after a few sips you didn’t care.

Breaking the law to help the family survive during difficult times is nothing new.  Crime has gone up in the past eight months, especially robbery, as more men face the difficult decision to risk jail or watch a family go without.   They lie to their wives as to where the money came from, or sometimes the wife knows, and chooses not to say anything.  The poor, who already have been struggling during good times in this nation, are now hurting beyond the comprehension of most people.

It’s hard to understand why anyone would break the law until you know the desperation these people must feel to risk incarceration, the loss of their good name, and the loss of respect of the local community members.  Being without work puts the main breadwinner into a terrible mental state, forced to make choices that s/he doesn’t want.  It will be interesting to see how high crime goes during this economic downturn.

We sat and talked over coffee, sharing news about this person that we knew, and what the movie was that he was attending later that day.

“So you’ve been reading those financial e-mails I sent over?” I asked, smiling.

“Yes, and it sounds very scary out there.”

“Well,  I don’t things are all that bad.  This recession might just turn around soon,” I sipped my coffee slowly.

“Recession?” he asked in surprise. “Why, you’re not in any recession now! This country’s slipped into a depression, and you just don’t know it.  It’s going to be a while before anyone else does either, but that’s where you are.”

His reaction surprised me.  He lived through the Great Depression, the only depression in the past 100 years.  For the most part, the government has been pretty good at keeping us out of one. Still, his words puzzle me.  Is there something telling him that we’ve entered a depression that someone less experienced wouldn’t know?

The agency that actually identifies recessions and depressions doesn’t usually do it until about a year after we are fully into such a cycle.   By the time we are notified that we are in the middle of a depression, we may be fully half-way through it.

The Old Man is an active reader of Martin Weiss’ newsletter, and I’ve disagreed with Weiss a time or two.  Weiss believes that we are in a depression already. I wonder if The Old Man is influenced more by his reading than by what he sees around him.

There are reasons I say that the country is still in a recession and not a depression.  My thermometer for the nation’s fever are truck drivers.  If they are out of work, freight isn’t moving because people aren’t buying.  In December, after the Christmas rush was over, drivers suddenly stopped dead.  Companies that were constantly looking for people to train as drivers stopped hiring.  Signs saying, “Drivers Wanted!” were taken down from the sides of roads.

Suddenly, the work began to trickle in again.  The companies hired on a couple of new guys, but not many.  Truck drivers are notorious for jumping job to job.  In this economy, they weren’t jumping for that greener side of the fence.  They had a job that paid, and when one man asked for a raise at his local place of employment, the boss told him that 5000 truckers had recently been laid off.  He might, too, if he asked again.

Still, the freight slowly begins to move faster.  One trucker, sick of being away from his family after three weeks, went home to stay with them for a while.  The boss didn’t call because the man’s tractor needed fixing.  But the unspoken message was,”If the tractor had been working, I don’t care how long you have been out.  You better be on the road when I tell you.”  Up until that time, drivers could ask for time off and there was no squabble.  Now when the boss calls, you better jump.

There are certain professions where the workers tend to do a bit more of what they want, rather than what the boss needs.  Auto body technicians and painters are one of those.  There is such a shortage of skilled men, that usually if a technician asks for time off, and he is a good employee, you just let him go for that time.  Now, men are working for lower wages, looking for work, or staying put at their jobs.  Recessions have a way of doing that to people.  And watching these kinds of workers make is a great way to get the idea of a nation’s health.

Right now the nation has a slight fever.   It seems to be feeling better than it was a few months ago.  If the price of gas doesn’t go up too fast, it could recover.  We’ll see how then next few months go.