Stock Market Valuation Tool Now Indicates Undervalued

Not since October of 2010 has the S&P 500 been this low. The stock market valuator has been showing “Overvalued” until this past week.

Right now, it is indicating that the S&P 500 is undervalued by 1.56%. If the growth rate is adjusted downward to 7%, then the S&P 500 is getting close to the 1123 level indicated by the valuator tool.

The current valuation tool is hard coded to 7.25% but there will be a future javascript based one that users will be free to adjust.

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Socially Responsible Investing Pitfalls

The premise for socially responsible investing sounds great in theory but in real life it may prove to be difficult to achieve.

Gambling, alcohol, tobacco and military investments all come to mind when thinking about types of investments to avoid for the socially responsible investor. These are generally considered bad investments for the socially responsible investor.

Good socially responsible investments are one that improve society. Investments in energy efficient technologies such as solar, wind and turbine technologies. Healthy food companies such as organic food manufacturers are yet another option.

These are the most obvious types of social responsible investments but there are also many others. There are numerous mutual funds available now that only invest in areas that have positive reports for the following areas: environment, human rights, labor relations, employment equality as well as community investment. For a list of such funds, please see:http://en.wikipedia.org/wiki/Socially_responsible_investing

The extent of when such funds invest or divest in certain areas may vary to a great degree. Most large companies would most likely have violations in many areas on a few occasions. Wal-Mart has had employee lawsuits and environmental lawsuits. Even under the best management such a large company would most likely have a few of these as a result of the massive scale of the organization.

At some point, nearly every company will most likely have some negative marks. McDonalds manufactures fast food. They sell healthy salads as well as artery clogging burgers & fries. Some may say that McDonalds creates unhealthy food addition among the poor, while others may see their food as a valuable convenience when traveling or looking for free Wi-Fi.

Many companies that manufacture products now do so in China which has little transparency regarding labor laws or practices. So should all of these companies be disregarded?

Producing products generally involves using natural resources and possibly harming the environment at some level. Many people may see technology as a positive, but what about all of the toxic chemicals used and the used equipment that ends up in landfills?

Even simple things such as food manufacturing may have negatives. A food company that makes bakery products or soda may be seen as contributing to obesity & diabetes. What may have started out years ago as a nutritional product that aids in survival may now be seen as harmful.

The same may also be said with tobacco and alcohol which were thought at one time to be healthy while now they are not. The health companies of yesterday are the villains of today. Defense companies have their good and bad also depending on the perception. Defense companies may be the heroes protecting the country from harm or the wartime profiteers taking advantage of the government and harming people.

So if such companies were started with good intentions, the initial premise was good. If the science later proves that such products are no longer healthy, should they be removed from the market then as a measure of good social responsibility? Should McDonalds remove unhealthy items from the menu such as hamburgers and french fries even though customers want them? More than likely, the customers would go elsewhere and thousands of people would lose their jobs in the process. Would this still be the socially responsible thing to do?

Many of the things that are good may be things that simply aren’t that profitable or practical. Should we all invest in organic fruit & vegetable companies, solar power and bicycle companies?

Some of the good socially responsible companies may be highly cyclical. Investing in energy efficiency such as windmills is not something done by the average person everyday, while buying cigarettes or beer is for many people.

Picking good socially responsible companies seems like it is much more difficult than simply removing the seriously bad companies from the investment list. Companies with a history of bad behavior such as BP are much easier removing from the list than selecting the perfectly socially responsible company.

Software is one area that scores well in having fewer negatives than positives. Companies such as Google and Yahoo have daily customers making them less cyclical as well as producing little in the way of pollution. They are also generally helpful to society, in some cases allowing people to communicate freely by bypassing government restrictions.

Products or activities that are good is often a measure of short term perception vs long term perception. Denying a smoker a cigarette for a day or an alcoholic a drink may lead to side effects & mood that are worse than if he or she simply had it in the first place. Helping a homeless person out by giving him a dollar may seem like the righteous thing to do but if everyone did this, there would be little incentive to work. All of these people would generally be happier that day if they all had such things, however in the long term these things would be detrimental to the health & well being. Looking at companies using a long term perception starts to make it look much clearer.

Socially responsible businesses must be well-intentioned both from the start and currently. Serving the customer, then seeking payment should be the goal here. When the order of these two things gets switched, then the company is no longer well-intentioned and simply has dollar signs in the eyes.

Some examples of this are possibly BP which is in the energy extraction business. At some point, saving money at the expense of safety became pervasive throughout the organization. Rather than safely delivering the product, the company took shortcuts to save money and had some massive disasters along the way the killed people and hurt the environment.

When a company acquires another company, it often seems that the goal of serving the customer is lost in the process and dollar signs become a priority over the customer. Services that may have previously been free may no longer become free after the company gets acquired. A company that has good ingredients or quality often get watered down to save money.

Coca-Cola at one point used sugar as a sweeter for their soda products. To save money, corn syrup was added as a substitute. Studies not done by the Corn Refining Association have shown that high fructose corn syrup is broken down by the body differently than cane sugar contributing to fatty liver disease, obesity and other health problems to a much greater degree than cane sugar yet the soda industry still uses this inferior ingredient in the US. As a result, it seems hard to recommend this group as being socially responsible. If they were responsible they would remove this ingredient and use something else.
Source: Sugar: The Bitter Truth  http://www.youtube.com/watch?v=dBnniua6-oM

Socially responsible marketing by some companies may mask a company that in reality could care less about such things but are simply trying to fool customers in order to sell more. When a company has to make a commercial to show that they are being socially responsible, this could mask an underlying lack of having socially responsible goals.

The companies that are indeed socially responsible may be living this everyday and have no need to advertise it. Evidence of such activities may be found in footnotes in the annual report or buried on one of the website back pages. Google has some info on their server retirement practices at http://www.google.com/corporate/datacenter/server-retirement.html as well as other info on energy usage reports.

Software companies are not always perfect either.  SCO Group had questionable intentions from the beginning. The company claimed that it owned the rights to a particular UNIX patent and began quickly starting lawsuits against various organizations including former customers. The company failed to succeed at most of these lawsuits and failed. The company is no longer publicly traded. Rather than seeing serving the customer as the first goal, dollar signs became the first goal. This was not sustainable.

Other companies such as Microsoft appear to be playing catch up all the time with what is going on in the market. When tabbed browsing became available in competing Internet browser such as Firefox, this was shrugged off by Microsoft. When Apple came out with the iPod and iPhone, Microsoft started working on their own competing products which they are still trying to do to this day.

Was Microsoft looking at these markets with the customer first or were they simply looking at it with dollar signs in their eyes?  Companies that look at a market as too big to not be in may fail to see the big picture which is coming out with compelling products or services that customers want.

Socially responsibility often goes beyond what a company does. Executive compensation is another area that should possibly be considered. For non profit corporations such as the Red Cross and United Way, high compensation is frowded upon.

Recently,  the Boys & Girls Clubs of America executives were questioned by a group of US senators for a $1 million dollar CEO salary and high travel expenses. http://www.huffingtonpost.com/2010/03/12/charity-ceo-pay-questione_n_496317.html

At a certain point when the compensation gets to a certain level, the goals of the executives start to come into question. Is the goal of the executive to serve the needs of the community or to become super rich?

With publicly traded companies the goal should generally be to solve the needs of the customers and to be rewarded in the process. However, when executive pay becomes greater than $10 million or so, it becomes questionable if the goals of the executive are in line with the goals of the company.

It should also be noted that the executives involved in corporate fraud were also some of the world’s highest paid executives.  This included Worldcom, Enron, Conseco, Adelphi, Tyco and Healthsouth.

High executive compensation also goes beyond social responsibility but also is a question of irresponsibility regarding the improper use of shareholder money. If someone else is willing to do the job for a few million dollars vs $20 million, this would be much better for shareholders and send a better message to the low level workers who are making much less money.

In summary,  the optimal socially responsible company is one with good initial intentions that are still so to this day based on science and current consensus. The  company processes must be long term in nature and the processes must also be well intentioned with good execution and few issues such as environomental, labor issues, etc.

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Low Rates Are Not Here to Stay

The low interest rates of today may be no more long lasting than the 0% interest credit card intro offers. For many, the stock market is an attractive alternative to paying off low interest mortgage debt. After all, if someone can invest and get 6-12% in the stock market, why would someone want to pay down debt when the interest rates on such debt may only be 3-4%.

Unfortunately, such a trend may not last. US trade deficits continue to grow every year. Eventually, US treasury bonds may become less desirable and interest rates will start moving upwards. Double digit interest rates does not seem far fetched in the next 5-10 yrs.

For many, especially those in the hard hit real estate areas such as the California, Nevada, Arizona and Florida, adjustable rate mortgages are common as many owe more than their homes are worth. Paying off adjustable rate debt at 2-4% may not seem like a wise thing to do, but doing this in addition to investing may be a good defensive strategy to put in place.

The reason for this, is when interest rates do start going up, stocks may go down as people start selling stock positions to pay off mortgage debt.  For example, a borrower that is has been paying 2-4% may be shocked if interest rates go up to 10%. The natural human tendency is to predict upwards when this happens as was the case when oil reached highs in 2008 and people started buying fuel efficient cars as a result. There will be a sense of urgency in such a case, and borrowers will start prioritizing debt repayment.

For such borrowers, a worst case scenario is one where all investments are in the stock market and debt repayment has been minimized.  As interest rates move up, investors may be trying to liquidate positions while stocks are moving downward. Trying to liquidate investments that are decreasing in value to pay off debt payments that are increasing may wipe out the stock market gains.

Not investing in the stock market at all  may not be the best choice either as stocks will probably provide a greater return than the current mortgage debt rates and may continue for a number of years.  A combination of investing and debt reduction may be the best combination at providing decent returns with lowered risk.

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In Search of the Perfect Business

Finding the perfect business or industry is far from simple.  Many of yesterdays so called winners are todays dogs. Here is a list of some of the technology ones.

AOL, Yahoo,  and Myspace. All of these companies were once profitable companies. Broadband killed AOL which they were not prepared for. Google beat out Yahoo as the number one search engine and Myspace has been replaced by Facebook.

There is also Friendster. Does anyone remember Friendster? Friendster was one of the first social networks that was growing rapidly. Now it is the butt of jokes on theonion.com, Internet Archaeologists Find Ruins Of ‘Friendster’ Civilization.

It doesn’t seem unlikely that  another company may  replace Facebook and Google. This is one reason why technology companies can be so risky.

Also, the decline in these businesses is significant.  For example, how many people use Yahoo for their search and email vs Google?  Most people have moved to Google.

With non-technical businesses, changes are not typically as significant. For example, if a new cigarette company comes to the market, some people may switch, but the shift will probably not be as great as with the tech companies where the majority of people will eventually switch over.

Another example, soda sales have been falling in the United States, but the decline is in the single digits each year and the decline is being offset by other beverages sales increases such as water sales.

Tech companies are not this fortunate to have time to prepare for shifting trends. When people started moving from Myspace to Facebook or from Yahoo to Google it happened very quickly.

Some so called, non tech companies really behave like tech companies.  For example, car manufacturers sell a product that is based on style, performance and features. There is a great deal of technology and expensive equipment behind every vehicle made. In some cases the end result is new technology while in other cases it is evolutionary.

A car manufacturer must make use of and possibly develop their own technology in order to stay competitive or they will cease to exist as a companies.  Car manufacturers cannot continue to make the same thing over and over every year but have to change a product routinely which means spending money on R&D.

Making the wrong decisions can lead to disastrous results as we have seen with GM and Chrysler. Such a business model is not one that is favorable for investment because of the high risks.

Companies that produce the same product over and over with little change are ones that are easier to understand and have the potential for lower risks. Food or cigarette companies produce the same thing over and over with little change to the product. The customer may purchase these products over and over based on an acquired taste for the product and may do this so frequently that they may not shop around as much for alternatives or may be willing to pay more for such products. Large ticket items that are purchased less frequently such as cars or appliances tend to be more researched and are more subject to price comparisons as a result.

Frequently purchased consumer staples, are less likely to have large sale declines as less frequently purchased items such as appliances, cars, furniture, etc. Less frequently purchased items may be avoided entirely in some cases of economic distress.

One thing around tech companies is that they rarely meet the test of being purchased frequently. A new camera, TV, computer, of software are typically purchased once every year or so vs once a month or once a week.

Even the most stable software products, MS Windows, MS Office, Adobe Photoshop, Dreamweaver, Creative Suite, do not meet this test. These are some of the most popular consumer and business software programs, but many consumers may choose to not upgrade to newer versions of these programs if the current versions meet their needs.

These companies must continuously work to improve their products so that customers feel inclined to upgrade, otherwise customers will continue using the older versions.  Many customers of Windows are still using Windows XP because Vista and 7 may not have enough new features to justify the time and money to upgrade. Adobe faces similar problems.

Other businesses that are seemingly simple, are subject to changes similar to tech companies. Clothing manufacturers are typically dependent on styles that change from year to year. Coming out with the wrong style of clothing can mean losses, while coming out with the right style may mean competing with the numerous other companies selling a similar style.

Fruit of the Loom, purchased by Berkshire Hathaway in 2002, primarily known for producing mens underwear, is one company that does not have to worry about fashion trends. Undergarments such as mens underwear and socks are generally pretty much style-free. Probably the biggest change for companies in this industry was the introduction of color to underwear and a push to selling boxer shorts in addition to briefs. This is hardly much of a change, as the styles of the clothing tend to stay the same year after year.

This type of business is one that is most desirable. The most desirable businesses tend to be ones that you would not want to tell to a woman in a bar.  “I’m in the sock manufacturing business” is not going to raise any eyebrows but it is one that may prove to be a good investment over the long term.

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Gold as an Investment?

As the uncertainty in the US economy continues, many people are looking to gold as an investment and hedge against inflation. Is gold a reasonable investment opportunity?

Right now gold is a special opportunity that is very similar to the tulip craze, real estate boom and dot-com bubble. Gold has went from a price of $400 an ounce in 2004 to over $1200 per ounce currently. Like the tulip craze, real estate boom and dot-com bubble, most of the price of gold now is based on speculation and not fundamentals.

The recent price increase in gold would indicate that jewelery sales are booming. There should be new jewelry stores opening on every corner, but this is not the case. The price of gold is currently based on based on the expectations of others buying gold as an investment and based on fear of a collapse of the dollar.

Buying something based on the buying expectations of others is not something that an intelligent investor does. It is possible that gold may go higher, but to be involved in a fools game may lead to poor returns and possibly future speculative behavior down the road.

It is interesting how there are so many books and so-called investment advisors are pushing gold as an investment without looking at any sort of fundamentals regarding the actual physical utility of gold as a productive asset. The message is generally the same: the US economy may or will get worse and therefore gold is a good investment.

The gold pusher may go on to then state that gold has went up in the past during the depression or some other historic behavior.  My argument against this is that historic evidence of speculation does not make for a good investment decision. Following fools will not lead to good returns over the long-term.

I believe the only value of gold today is the fundamental productive value of gold which is used in electronics, jewelry and other things. In the past, gold was important as the US dollar was backed by gold. The use of gold was important not so much for its value but was important in keeping  the treasury from inflating the money supply by printing too much money because every dollar  was backed by one dollar worth of gold.

For those who believe that inflation will be worse in the future and faith in the dollar will falter, gold will never be a currency or means for payment for the mainstream.

Gold has a fluctuating value and people do not know what it is worth. During times of inflation, it will simply take more of the currency to purchase the same thing. The idea of a gold standard or gold backed payment method will not be one that has widespread usage.

When inflation takes off or if savings start going down again, people will actually most likely sell gold for dollars so they can pay for things. In a sort of doomsday scenario, the dollar will be used and gold will not.

Warren Buffett stated the following about gold at Harvard in 1998:

It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

References:

http://en.wikipedia.org/wiki/Warren_Buffett

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The New US Stock Market Bubble

Much money has been moving back into the stock market which is troubling. It was to be expected that many investors would jump into the market near the March lows to pick up stocks at low prices. However, now many stocks are priced very high considering the poor fundamental outlook for the future.

Many of the real estate related  bubble jobs will not come back and it will take several years before many of these displaced and downsized workers find alternative jobs. This may be three years or more before the unemployment starts to turn around.

A result of this is uncertainty and uneasiness in the American market for consumer and business spending that has led to a record high savings rate in an economy that is dependent on consumer spending and not exporting.

The result of this is going to be weak corporate profits and most likely depressed stock prices. Right now, the stock market does not appear to be reflecting this but it will most likely within a few years or less from now.

The US deficit will continue to grow over the next few years as the government continues try to spend money stimulating the economy and by providing states and individuals with stimulus and unemployment related loans.

Much of this money going to pay for unemployment benefits is not going into public works projects that will help the economy more productive but is simply going to pay for people to look for jobs that will probably not appear for a few years.

The US government will need to continue to find investors to finance the deficits and investors will most likely want a higher interest rate considering the rapid increase in the deficit and weakening dollar.

The result of this is that US bond yields are going to rise which will make bonds more attractive to investors. Money will move from the stock market into the bond market as investors look for safe haven as well as higher yields.

The stock market will continue to go down as a result of rising bond yields, poor corporate profits and poor economic news such as the second level of foreclosures brought on when adjustable rate mortgages rise possibly moving upwards to 9%.

There is also uncertainty in the commercial real estate market regarding defaults and losses. These losses may lead to many large financial companies and banks continuing to fail and possibly the government stepping in once again and bailing out firms.

Out of all of this poor news there will be some obvious things that investors will be able to profit from.

  • Stock market moving lower
  • Treasury yields rising
  • Second wave of foreclosures
  • Weakening dollar
  • Commodity prices increasing

Each one of these events can be profited from. Stock market ETF’s exist which increase in value as the stock market goes lower. Treasury ETFs exist that increase in value as the treasuries decrease in value.

Increasing foreclosures will put a downward pressure on house and commercial properties giving opportunity to purchase homes or real estate at similar or possibly lower values than today. This may be especially attractive for cash investors.

An alternative to outright real estate investments is to invest in an inverse real estate ETF. These types of ETF’s are new and not very popular considering that real estate prices are still low by historic standards. As a result, outright investing in real estate will be more attractive.

One can profit from the weakening dollar by purchasing currency ETF’s that invest in other currencies other than the dollar.

Commodity index ETFs will allow the investor to invest in agriculture, metals and energy. Agriculture seems to be the most attractive one here as metals have moved up significantly already and oil is generally more tied to economic activity. As people drive less and factories close, oil becomes less attractive. Agriculture has not moved up as much as the others and should generally fare better in a poor economy because people will still continue to eat food.

Gold ETFs exist also but gold has moved up beyond its practical value. Now the value of gold prices are more dependent on speculators buying gold rather than industrial or consumer use of gold. As a result, gold should be avoided as it is now speculative and will most likely fall over the next several years.

Inverse gold ETFs will help with this but expect that your investment may lose money for a few years because speculators may continue to put money into gold, increasing its value before it finally goes back down.

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The Internet Model and Taxes

Using a hypothetical example and assuming that the internet business model could have as great of an impact on other areas of the US economy in the same way as how it has devestated newspapers, what would happen to the economy and public policy?

Job loss is the first thing that comes to mind. If the internet makes businesses more efficent by reduing the number of people required for a job, then a large number of jobs would be lost.

The large number of displaced workers would have a major impact on goverments, costing tax payers money for everything from health care cost to unemployment.

This would put so much pressure on the goverment that raising taxes, would help to solve the budget problems.

We may be entering a period in the future where such an issue becomes a reality. This will become apparent when large numbers of jobs disappear as a result of outsourcing and by efficiencies such as the internet. Such a period will generally put downward pressure on prices due to the cost savings from not needing to use as much labor to get different tasks done.

If something like this happens too quickly, the goverment will most likely  have to raise money to take care of these people. Higher taxes for those earning money or high incomes would most likely be the most likely scenerio.

This raises an important issue in the future that efficiencies may be good for some but not others. In the 80’s and early 90’s  Japan was considered to be the most promising country in the world. People made predictions that Japan’s robots would eliminate most of the manual labor jobs in the US.

Well, this didn’t happen: the US discovered China as a cheap source of labor and robots only do a small number of tasks today such as painting cars, putting on windshields and a handful of other tasks.

However, technology generally gets rid of more job than it creates. One robot, for instance, might get rid of 5 jobs. The robot itself might create one job.  So there is a net loss of 4 jobs.

Cashless registers as seen in many grocery stores today may get rid of 6-8 jobs and create one.  The person who watches all of the registers is the one job that is created. There may be other jobs created such as the people building the autmated checkout registers, but most of those jobs are most likely in China or outside of the US. So, in this example there is a net loss of jobs of probably 4-7 jobs.

Newspapers and magazines have been losing money and are laying off people by the thousands because the internet is a more efficient delivery system for news and people can often get the news for free now. Some jobs are created helping to get the newspapers online but more are lost than are gained.

The thing about efficiency is that it generally cannot create more jobs than it destroys. If it did create the same number of jobs as were lost or more, then it wouldn’t be efficient.  There must be cost savings and that means fewer workers.

In the future in the US, the next big problem is going to be one that deals with labor. It generally means lower wages for most that are working. Of course there will be exceptions: the best people in different fields will continue to do well, but a large number of people will have difficulties. This will be a long term trend of wage equilazation around the world.

The cost of living will have to go down in the US, or the goverment will most likely have to make payouts to unemployed people if the goverment wants to keep people housed and fed. Growing income gaps between the rich and poor will continue as they have in the recent past. Businesses will be able to get more work done for less money as a result of outsourcing and efficiencies.

Should the cost of living fail to decrease at a fast enough rate, the goverment will have to increase taxes to pay for the less fortunate. Some factors effecting this are crop yields, fuel prices and land prices. Crop yields will have to increase or more farms will have to be built. This seems like a stretch in the US as most farmers are old and not many new ones have been started. Also, as a result of outsourcing labor, incomes will start going up outside of the US which means those countries may start buying our food in larger quantities. This puts upward pressure on food prices in the United States.

Balancing the budget in the future will create challenges in public policy in the future. If 20% unemployment becomes the norm in the future, instead of offering tax credits for having children, maybe offering tax credits for not having children would be more fiscally responsible.  Government money for scholarships and grants will have to be more carefully scrutinized in the future. Loaning or giving money to fields where there are few jobs will have to be carefully scrutinized.

Blindly encouraging every high school student to go to college regardless of the job outlook will have to be have to be changed to fit the environment and to preserve capital.

The cost of a college education needs to go down as well. Outsourcing and the labor market will eventually lower education costs. Internet based, online courses will play a large part in this process.

The outsourcing phenomenon may last for 50yrs or more if the current laws stay in place. As the wages of countries outside of the US slowly move upwards, it will become less profitable to continue outsourcing. Poor fiscal and monetary policy will also help to keep jobs in the US as the dollar gets weaker compared to counties such as China.

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Will the Jobs Come Back?

The booming housing market helped to employ a large portion of the economy. Housing money went to building materials, construction labor, real estate companies, builders, and banks. Around all of these companies were smaller companies providing products and services.

These jobs were there because of the original lending for homes. Home equity loans provided a number of other jobs. Home equity loans from rising home prices led to all sorts of purchases from cars, clothes, jewelry to expensive Swiss watches.

All of these businesses have been effected by declining housing prices. The question is will many of these jobs come back?

Over the years, many bubbles have passed. Starting with the dot-com bubble, this period lasted from about 1998-2000 when the stock market peaked and then tanked shortly after. The growth in share prices in dot-com companies seemed to have brought many new “speculators” into the market which in turn effected the price of most other stocks.

The same thing happened in many places with real estate from about 2002-2008. During this period a rapid appreciation in prices brought more people to the market and brought up the price of other homes. As a result, others were affected by the speculators similarly as with the stock  speculators.

Now, we are in a recession period and without any major bubbles present. When the economy recovers, will the jobs that were lost come back?

The real estate bubble will most likely not recover to the bubble that we saw in 2002-2008. Laws are most likely in the works that will prevent this from happening and the bundled real estate securities are now not seen as safe investments anymore.

An interesting development has happened during the real estate bubble period. Outsourcing increased greatly during this period and has continued to this day. The first major outsourcing happened with manufacturing before the internet really took off. Shoe and clothing manufacturers became some of the early adopters of outsourcing.

The “made in China” started making its way into Wal-Mart stores in the 90’s and generated some controversy when the “Made in America” campaign led to investigations showing that some items were labeled as “Made in America” when in reality they were “Made in China”.

Large manufacturers and large retail companies started doing business with the Chinese during the pre-World Wide Web period. Next, came the call center outsourcing such as Dell. The internet has helped to make outsourcing call centers a reality.

The Internet also led to people using outsourcing for IT jobs, data entry, graphic artists, accounting, writing, and many others. Most people typically think of large companies when they think about outsourcing, but now it has found its way into the small business.

Large companies have the money to setup infrastructure for the management of outsourcing. This can be the setting up of buildings, call centers and software to manage the foreign work force.

Now, small businesses can outsource their work. Backed by venture capitalist, there is at least one company that is going after small businesses who want to lower their labor costs.

Using sophisticated software, people from around the globe can work at home from their computer doing all sorts of work such as: virtual assistants, web design, programming, data entry, customer service, telemarketing, software management, network administration, payroll, bookkeeping, legal work and many other jobs.

The employer simply signs up, posts an ad and then looks for employees or goes through the list of candidates that have responded to the ad. Each candidate has a different per hour rate or per job rate. The employer can post the job as a per hour or per project job. The employer then can interview candidates and start the job. No complex paperwork is required.

The employee (independent contractor) logs his/her hours by running an application when then start working that takes screen shots while he/she is working. The screen shots are then posted so the employer can see what the employee is doing.  If the employer isn’t happy with the work, it can be disputed.

The employee closes the application when done and the hours are automatically logged. The independent contractor receives his/her compensation each week from the employer. Each employee has a profile which  is ranked after they have completed a job. This allows employers or potential employers to pick candidate after seeing their ratings, work history, and work portfolio.

Such a system makes it relatively easy for an employer to find someone for work. It allows them to do so without requiring paperwork, unemployment insurance payments, social security/medicare and any local employment taxes. The employee typically takes care of this (if in the US) in the form of a W2.

Each candidate sets his/her own pay rate, so those with lower rates tend to get more work. This leads to more experience, so even if he/she may not have been as qualified as a higher rate candidate, after working for a while he/she gets experience. It becomes a balancing system where over time, the lower pay rate candidates increases the pay rate. On the other side of the balancing mechanism are the high pay rate candidates. They receive less work than the lower rate employees and will generally see their rates lower over time. I believe this is what we are seeing now with outsourcing. The United States is on the high side of the pay scale and it is being adjusted downwards as outsourcing continues.

The reason for outsourcing isn’t just about the pay rate but it is about the total cost. The cost of paying an employee is one thing, but there are many other factors involved. The government and health insurance fees in addition to this: social security/medicare, unemployment insurance, and local taxes.

Another set of fees come with housing the employees. Most employees don’t work from home but are expected to come in to the office. The office costs money to rent/buy along with the utilities, equipment, and insurance. These costs make having someone in the office locally very expensive.

Many small businesses will find that having employees in the office locally will be too expensive over lower priced, outsourced labor. Over time, many small businesses may outsource just as large companies have.

Some are trying to stay ahead by getting a college education or advanced degrees. This cost lots of money and many will find out afterward that their college education was not as great of an investment as it was in the past. Much of the educated workforce are moving into areas included in the outsourced job list. They are jobs that are now easily replaceable with lower pay rate, outsourced labor. Many of these outsourced candidates also have degrees but in local universities which costs much less money.

Many of the outsourced labor will be educated well enough to complete the tasks required in the different jobs. When taking into consideration the much lower costs, the decision to choose the outsourced candidate over the local makes it much more apparent. “Good enough” labor at the right price will probably work 90% of the time. The other 10% of the time may require a higher skilled person. This 10% can be handled by higher pay rate candidates
which also are available for work online.

The thing about outsourcing is that it is easy to hire and fire people. When separated by thousands of miles and no face to face interaction it is easy to fire someone if they aren’t working out. This is much more difficult to do if someone is coming in face to face everyday in the office.

When the economy does come out of the recession, many of the previous jobs may not be there anymore. Jobs that don’t require someone to absolutely be there may be replaced by outsourced labor. Jobs that require people to be there may be in higher demand as a result of this which will push wages down further.

This will lead to a gradual increase in outsourced labor rates, while the US will see a gradual decrease in labor rates. The result of this is the balancing of wages around the world making labor rates similar no matter which country you are from.

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Preparing For the Upcoming Inflation With Own CPI Index

The US continues to run budget deficits and will most likely continue this for years. Those who own US bonds are not going to be happy about this. In exchange for purchasing the bonds, the goverment will be paying back in dollars that are worth less due to the huge increase in the money supply created to fund bailouts and other spending.

In the video below, author Peter Schiff talks about these problems.

As a result of these things, the dollar will fall in value and investors will stop purchasing goverment bonds or will only purchase goverment bonds that offer a higher yield. The result will be inflation working its way into the marketplace.

Looking at the CPI published by the Bureau of Labor Statistics it measures the price of many different types of items. It isn’t specific about exactly how they are gathered, whether the prices are sale prices or regular prices.

I’ve decided to make my own little index on food related items to measure how much they will be changing.

For smart shoppers, sales prices are probably the prices that will be paid for items. As a result, listing sales prices  instead of regular prices seems like the way to go. Regular prices seems useless for people like myself and smart shoppers. Grocery stores frequently have sales items, making the prices easy to find. Regular prices may often be so high that items sit on the shelves with little movement until put on sale. Real estate prices are similiar; the asking price doesn’t necesarily mean it will be the prices someone will pay. Someone could just as easily find a cheaper house and purchase that one. So for the index, I will only list prices that are the best prices or sales prices.

Also there will be different classes of items; sales or marked down items.  The marked down items are items that a store markes down because the product is nearing expiration, or because the store wishes to stop selling the item and move in new merchandise. The first one can be indexed while the second can not because the product will no longer be around.

It is possible that sales may not occur every week for a particular item. In such a case, the price will not be listed. Just because an item isn’t on sale every week doesn’t mean that the person isn’t consuming that item or is substituting it for another item. Chicken or rice are great examples of this. When chicken goes on sale, it can be frozen for months at a time until the next sale comes along. Rice can be stored for years.

The index will consist of the following items: eggs, milk, chicken (various cuts), rice, 2-liter of Pepsi or Coke,  onions, bananas, bell peppers, celery, romaine lettuce, and spinach. They will be listed out by quantity or oz whenever possible.

The percentage changes in price will be shown for each item and annualized over time.

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Is Green Energy the Next Big Bubble?

Obama’s plan is to reduce oil consumption by making buildings more efficient through insulation, energy efficient CF light bulbs and by other means. The other part of the plan is to produce energy domestically through solar and wind.

This second part of the plan may lead to speculation as seen during the internet bubble and during the housing bubble.

Recently the U.S. recently took the lead in wind power generation surpassing Germany. http://www.bloomberg.com/apps/news?pid=20601100&sid=a5qyeN9A6LlY&refer=germany

Solar is also on the increase with massive solar energy farms being added to the desert. Without government tax incentives, these projects would probably never have happened.

In its current state, solar is expensive and has a long break even period. If the U.S. were to implement this on a large scale such as that in Germany, it would increase the cost per kwh during a recession when every dollar is important.

Everyone likes the idea of clean, renewable energy but when it comes to paying for it, we may be in for some sticker shock.

The cost to outfit just one small home with solar costs about $12K-$20,000. On a $20K system, even at a low interest rate of 5%, the interest would be about $1K a year and pricipal payments of about $1000 a year. For most, this is more than the cost of purchasing electric directly from the electric company. These payments would have to be made for about 20yrs.

While calculating the cost of solar out for my own home here in sunny Las Vegas, I found that it wasn’t a good investment. Without a lower price or govermentment incentives, my break even period was close to 20years. Even when comparing several different scenerios such as rising electric rates, the payoff period was still nearly 17years with no guarantees regarding performance.

And when the system is paid off in 20yrs, the warranty for the system goes away and the system starts to become less efficient.

So far, green energy stocks have been hit by bear market just as other stocks have been hit but that may change if more public money starts to flow into green energy projects.

Will it be the next bubble, who knows?

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