delete

Federal Reserve Notes of March 19, 2014

The Federal Reserve Bank (Fed) has kept interest rates very low for over 3 years now with the intent of keeping them low until the economy has a true recovery. Thus to date, it has been a largely jobless recovery. The economy cannot have a true sustained JOB creating economy until banks begin to lend these huge reserves. Banks will NOT lend at these extremely low rates. Today, Fed Chairwoman Yellen completely reversed policy by stating that the jobless number is not the primary driver of what will be considered an economic recovery. They intend to raise rates and begin steady tapering of operation twist. This will increase the money supply and provide a stimulus for potential real inflation. Inflation will cause a contraction and potential increase in unemployment. There are four major reasons why the Fed has culpability in the very slow recovery as a direct result of their planned policies: The FED is paying banks interest on their reserves. This action, coupled with low rates, discourages lending, Feds encouraged/allowed too Big to Fail to become policy, Fed led the way in over regulation of the banks via Dodd/Frank which demands much higher reserve requirements and places onerous regulations on lending, The Fed drove rates so low as to place banks into the classic Liquidity Trap -rates on lending/bonds are too low and there is an expectation of rates rising in the future. This discourages bond buyers from investing in bonds. Savings are held and therefore no lending occurs. The Fed ordered banks to raise reserves to much higher levels than in the past and discouraged lending via Dodd/Frank and other regs that place enormous demands/requirements on borrowers. These large reserves are not inflationary until they are lent. Lending will not occur until rates...
delete

The Minimum Wage

Increasing the Minimum Wage Increases Unemployment The argument for a continuously higher minimum wage is based on the premise that “a working man deserves a decent living wage” and therefore the solution is to raise the federal minimum wage to a so-called decent level. The problem is that it doesn’t work when viewed from a realistic economic perspective. For sake of argument, let us agree that the objective of raising the minimum wage to a decent standard of living is a laudable goal and that it is the responsibility of the Federal Government, that is to say that it will be paid for by the American Taxpayer. The argument for the minimum wage is based solely upon some notion of fairness and the goal of raising the working poor’s standard of living. That is a noble endeavor but unfortunately it will have the negative effect of raising unemployment within the very class of people that the proponents of the federal minimum wage law have targeted. Their unemployment must rise as a matter of simple economic truth. Labor as a percentage of total costs is a material amount. In manufacturing, total burden labor (which is overhead that includes wages, vacation, sick leave, 401k matching, etc.) exceeds 30% of total in-house costs. The remainder of overall expenses includes raw materials and parts (which have labor embedded in those costs too), and the cost of operations like rent, utilities, etc. In the food stuffs industry labor is typically 40% of total costs or higher. Doubling the amount of a single component of overall costs will have a dramatic impact on the Cost of Goods Sold (total costs). Can the McDonald’s franchisee absorb these costs? Not likely, so they’ll have to pass them along to the consumer in the form of higher retail prices. McDonalds is in a highly competitive world and the market forces there can be very brutal and swift. If we are to agree that a decent minimum wage is desirable and that it should be effective, why set the wage at only $6 or $7 per hour? A $7 per hour wage, for a 40-hour work week, will yield $280 per week or about $14,560 per year (assuming no vacation time). No family man can raise a family of four on those wages. At best, you would be renting a box in a poor neighborhood in a poor city or town. Currently the protestors in New York City (NYC) are demanding $15 per hour. That equates to $30,000 per year ($15 * 40 hours * 50 weeks, assuming 2 weeks non-paid vacation). Where in NYC can one live on that amount? You can’t so is the solution to raise the minimum wage even higher? Let us say that in order for a family of four to have a reasonable shot at the American dream of owning a car, a home and living in a decent town/city/neighborhood, will require him to earn say, $50,000 per year for a family of four. $50,000 / 50 weeks / 40 hours = $25.00 per hour. That sounds great! Okay, the minimum wage is now $25.00 per hour and all employers must pay their employees that wage. But here’s where the argument runs off the rails. The average employee at McDonalds, Burger King, Target Stores, etc. starts at the minimum wage. Currently the minimum wage is approximately $7.00 per hour so with the increase we jump to 3.57 ($25 / $7) times the current...
delete

Investment Opportunity or High Risk Adventure?...

The Dow Jones Industrial Average (The DOW) first crossed and closed above 10,000 back on March 29, 1999 more than ten years ago.  The DOW’s all time high (closing value) was set on October 18, 2007 at 14,146. Since then the markets have been very volatile posting enormous single day gains and losses.  On October 13th, 2008 the DOW closed up more than 11% with a record point gain of more than 936.  In the past few weeks we have had a number of near record single day gains and losses.  Just what is the source of such record volatility and how do you maintain a rational investment portfolio in such an irrational setting? The source is fear: Banks fear Federal Reserve action/inaction and central government regulations that force banks to act outside their normal functions. Small Business owners fear the HC law and its unintended consequences and are NOT hiring new employees and cannot borrow to expand/improve operations. Debt: both private and public debt is rising and dramatically so. Europe, specifically Greece, Portugal and Spain.  Greece is likely to default on billions in loans made by EU banks and American Banks.  What does that mean to the average American? It all comes down to what is right for you and your objectives and how do we best address those fears and implement a plan to attain your individual goals. There are a number of investment styles such as: Value, Growth, Income, Wealth Preservation, etc.  Large Cap companies, Mid-Cap and Small Cap, Cap referring to the market capitalization of a particular corporation (number of shares authorized times the price per share) as opposed to debt financing. We have for the first time in decades the opportunity to invest, carefully, in large, multi-national companies (that do business in USA and overseas) that are traditionally viewed as a Growth style investment that are now paying very high dividend yields (% of dividend relative to the current price per share).  The combined opportunity to received 1.5% dividend yield up to 6% on DOW and other companies plus the opportunity to grow the price by more than 10% is highly unusual.  Most investments either offer stable or valued income with very modest growth, such as a phone company stock or public utility. The danger of investing in or ‘chasing yield’ is that a corporation’s board of directors and management can reduce or eliminate their common stock dividend in times of cash shortages.  That is why we must analyze the balance sheet and income statements of each company that we may consider investing our hard earned money with. What are the major investment styles? Growth: Where investors seek companies and industries with a strong growth trend in sales and earnings.  Growth is defined as beating the growth of the economy or GDP.  These types of investments have typically much higher P/E ratios and pay little if any dividend.  These stocks generally have a much higher volatility relative to the market and have little tolerance for earnings ‘disappointments.’  Value Investing:  Is essentially bargain hunting.  Buy great performing stocks that have had significant sell-off of late and as a result major decreases in current prices.  The price of the stock is trading at a closer relation to its book value than normal.  Here one must buy into these positions early on in order to reap the benefits of price appreciation as the price returns to ‘normal’ price ranges.  Income: Investing in stocks and bonds that pay...
delete

European Banking Crisis

We now know that the banking and debt crisis in the European Union is here to stay and it has placed a black cloud over the world-wide market!  The cause is simple and one that the American Left refuses to acknowledge: decades of socialism that has created massive entitlement programs for their peoples, especially amongst their immigration classes that have virtually no credible job skills other than manual labor.  Yes, they too have a significant legal/illegal immigration problem and these people demand even more. After decades of entrenched socialism that permeates their entire economy coupled with the highest tax rates in the world, the EU[1] is created a massive underground economy.  Proponents of the Fair Tax in USA believe the underground economy can be taxed with their approach of taxing all consumption.  The EU’s massive underground economy proves that theorem wrong, again. The underground economy throughout the over taxed EU rivals the legitimate economy and pays virtually no income tax.  The heavy burden of the central authority has created significant incentives to break the law and simply violates the Laffer Curve. The underlying financial problem is simple: European banks are heavily exposed to bad debt of Greece and Portugal, and Italy to a lesser extent.  These major banks such as Societe General, Credit Agricole SA and BNP Paribas have more than $55 billion (USD) exposure to Greece alone.  These banks are going to need significant cash infusion from the ECB.[2]  Will Germany, France and the UK be willing to go along with more bailouts? The last round of bailouts to Greece with the massive IMF[3] intervention cost more than $145 Billion USD.  The USA owns about 17.09% of the IMF; therefore, the American tax payer was forced to pay out more than $24.7805 billion to bailout Greece due to its failed socialist policies.  Remember, much of the EU lambastes America for our economic problems and ALWAYS blames our greedy system of capitalism as the root cause of THEIR problems.  The real objective of Greece bailouts is not the saving of the nation itself but the private banks that lent so much money to Greece that is the target of the bailouts.  If Greece defaults these banks will be decimated and this failure will effect America and our banks directly as we have lent billions and guaranteed countless billions more from the Federal Reserve. What are the EU citizens’ reactions to the current wave of austerity programs launched by the UK, Germany, France and elsewhere?  Riots: yes, the entitled class of citizens and non-citizens burn cars and kills policemen, and burn down whole city blocks doing billions in property damages.  Who pays that tab? the EU taxpayer. Where did this all begin, with European and American banks being forced, by government regulations and policy, to make loans to entities and individuals that did not qualify under normal lending practices?  Iceland whose major driving force of their GDP is fishing was invaded by bankers from the UK and Netherlands who were flush with cash due to the Federal Reserves super low interest rates. Soon Iceland’s banking sector’s input as percentage of GDP more than doubled in short order. These banks began lending money to anyone in Iceland that had a pulse creating a huge boom in real estate, both commercial and residential.  Alas, 2006 came and the ponzi scheme was revealed, devastating Iceland’s economy. Iceland’s three largest banks, Kaupting bank, Glitnin Bank and Landsbanki had total debt exceeding $160 billion more...
delete

My first blog

Hello everyone! My name is Thomas Zaleski and this is my first attempt at blogging. I am an economist and experienced money manager and will be sharing my thoughts with everyone. I welcome feedback and can be reached on the web at http://www.Thomascapitalmgt.com or via email Tom@Thomascapitalmgt.com PLEASE SHARE YOUR THOUGHTS WITH ME! About Me At Thomas Capital Management, LLC we provide our clients with individual, customized portfolios of equities and fixed income securities. From retirement funding and planning to college savings, we handle 100% of our client’s money. Shift away from risky high-tech portfolios to a properly diversified portfolio based upon Modern Portfolio Theory. In the investment marketplace, the difference between a customer and a client is dramatic. Customers receive little, if any, “added value” services from the financial vendors, and are left to fend for themselves in an investment world full of pitfalls. No one truly qualified is available to help them understand their investment goals, evaluate their portfolio structure and risk attributes, track their investment performance, or help them avoid making critical mistakes. TCM’s clients have a significant relationship with their adviser that understands their dreams and objectives, their risk tolerance, and their overall financial situation. The added value comes in the form of skills that are uncommon, resources that exceed those of the average investor, time dedicated to helping you, and knowledge based on experience that gives you access to proven investment techniques. Most Financial personnel are Stock Brokers or insurance salesmen and are commissioned based! Our objective is to provide you with quality service and sound advice. Planning begins when we meet to discuss your goals and resources, and continues throughout our relationship. Keep in mind that, most importantly, this is a process during which the steps may be taken more than once as your plans, goals, dreams, and circumstances change. Thomas Capital Management, LLC was formed in 1999 encompassing the above philosophy and values. We are independent investment advisors with our only bias being the attainment of our clients stated objectives. Please contact us if you are interested in a comprehensive review with no obligation with the intent of determining if joining our distinctive family will meet your goals. Trust in Thomas Capital Management, LLC for your customized portfolio needs...