A Short Account of the History of the Corporation: PART 3 (The Rise of the American Business Corporation)

In Part 2, we saw the rise of vast trade corporations, which built tremendous wealth through slave-produced goods and through the trade of enslaved human beings. There was no regulatory body to monitor corporate behavior then, and so, in the slave trade example, consumers through boycott were one of the primary means to reprimand unethical business practices. Businesses largely remained unfettered through much of American history too, requiring, as will see other forms of reprimand such as labor protests, environmental protests, consumer boycotts, and shareholder activism. But before we review the interchange between public protests and American business, it is useful looking at how the American business concept legally developed in the first 100 years. The first legal development we will discuss is the transition of the "special charter" to "general incorporation statutes."

The earliest forms of the corporation in American colonies were established through special charter “directly from the King of England.” The first wholly U.S. corporation was The Bank of North America, which was given a special charter by the Continental Congress in 1781. The federal government would eventually charter a second bank, The Bank of the United States, but for the most part the early states took the lead in business incorporation. North Carolina, for example, became the early leader in transportation by being the first to grant canal companies the opportunity to incorporate. For the most part, however, the earliest entities in the U.S. to incorporate were religious and charitable organizations. Empowered to take “the business of religion from the state,” churches were incorporated in South Carolina in 1778, New York in 1784, and in New Jersey in 1786.

By 1800 there were only about 300 businesses incorporated in the United States, two-thirds of these were situated in New England. One reason there were so few corporations at this time is that the early states lacked general incorporation statutes. Instead, “special corporate charter” obtained through a petitioning of one of the thirteen state legislatures was the only means that a businessperson could gain access to the corporate legal form. This was an inefficient process at best, dysfunctional and fraught with corruption at worst. The first functional general incorporation statutes would not surface until the state legislatures of Pennsylvania and Connecticut enacted them in 1836 and 1837, respectively; New York’s narrowly-tailored incorporation statutes of 1811 were not adopted as a template by other states.

The vast majority of the early state-issued chartered businesses were established for banking and to build canals, toll bridges, and turnpikes; almost every one of these companies enjoyed a monopoly. In 1800, manufacturing consisted of a grand total of 8 companies, not more than 4% of the total number of chartered business entities. It wasn’t until the 1820s that there arose a significant shift in state-issued corporate charters for manufacturing purposes. Manufacturing in the U.S. would not aggressively expand until Pennsylvania and Connecticut provided the legal framework, legislating that a corporation could organize without “special legislative enactment” and without a requirement to be “engaged in public works to be awarded the privilege of limited liability.” The 1840s and 1850s would witness the continued mass migration of state legislatures moving to adopt similar general incorporation statutes. The trend toward general incorporation carried momentum through the Civil War, and by 1875 the U.S. reached “a point of uniform availability of incorporation under general laws,” with 44 of the 47 existing states offering general incorporation statutes.

We need to step back, and have a bird's eye view of the context of 1800s America to understand why the transition from the special charter to general incorporation statutes is important. The United States was a very young country with virtually no infrastructure and as we saw, almost a non existent manufacturing base. The many states started a race to the bottom to enact general incorporation statutes, which were designed to make it much easier and faster to bring a business entity into existence. In further discussions, we will see that this race to the bottom had a major flaw: in decades and centuries prior, a corporation was brought to life to fulfill a specific public service - to provide a public good; not only did general incorporation statutes no longer mandate that a corporation must serve a public function, because the many states raced to provide the most liberal version of corporate law to attract more businesses, what we were left with was a corporate legal system that gave a great deal of power to the corporation and majority shareholders, while minority shareholders and the communities in which these corporations actually reside, possessed very few rights.

Next, we look at a significant U.S. Supreme Court decision in 1819, which officially recognized the corporation as an "artificial being" possessing certain rights.

Peace

Jeremy

Refreshing Engagement Between President Obama and House Republicans

What the country saw yesterday -- a fully televised engagement between President Obama and House Republicans -- we need to see much, much more of. One of President Obama's campaign promises was to open up the negotiating rooms of Washington DC, so that the American public can more accurately weigh for itself which politicians are really representing the interests of the common good, and which ones are merely representing parochial special interests. Not fulfilling that promise was a failing of Obama's first year as President. He admitted that failure in recent speeches.

Yesterday, he took a major step forward toward bringing more transparency to the public debate.

Last year, when President Obama spoke at the annual House Republican retreat, only his speech was televised. This year, both the speech and the important Q&A -- the give and take and verbal push and shove -- were televised. It is reported that prior to the event, an Obama staffer contacted House Republican leadership and asked if they would be willing to allow cameras to stay in the room and keep rolling during the Q&A portion. According to knowledgeable insiders, Republican leadership was not enthusiastic about the idea, but accepted the proposal nonetheless because one of their recent public critiques of Obama is that he has not fulfilled his campaign promise of transparency. I wonder if they are regretting that critique. President Obama delivered a remarkable standup performance. Admitting cameras into the Q&A was the writing was on the wall for those House Republicans hoping to score a political victory. When confronting a highly skilled orator like Obama, the last thing you want to do is give him a nationally televised platform to do pile-drives, flying ddt's, and other WWF moves on your arguments.

Obama scored points with quick and sharp responses to tough Republican questions ranging from taxes to healthcare to budget spending. But the real winners were the American people. It was evident from the dialogue that there is much more common ground between the President and House Republicans, than there is disagreement. This common ground - if nurtured - has the potential to realize important legislative developments over the next 3 years. We can only hope.

Peace

Jeremy

I SMELL A TURD! -- Geithner and Poulsen Defend Backdoor Bailouts of Goldman Sachs and Other Wall Street Banks

There's a rule of thumb that guides common sense thinking, hard working taxpayers -- if it looks like a turd and smells like a turd, it's a good bet, it is a turd.

When the history books are written on what has transpired this past decade -- from a Dot Com bubble to ginormous corporate frauds to unprecedented levels of federal stimulus (tax credits, tax cuts, interest rates cuts, etc) to a Real Estate bubble to the bailouts of Bear Stearns, Fannie Mae and Freddie Mac, AIG and the backdoor bailouts of Goldman Sachs, to auto bailouts of GM and Chrysler, to more bank bailouts of Citigroup and Bank of America, to even more government stimulus and money printing -- the history books will confirm what we thought we were smelling and seeing all along, a gigantic turd of Kong-like proportions.

Geithner and Poulsen are playing revisionists, trying to convince us that what we thought we were smelling - a huge turd, is actually a bouquet of roses. Their claim is essentially this: "The backdoor bailouts of Goldman Sachs through AIG were necessary, and beneficial - trust me."

Umm, ok... sure, I guess I can... trust you...

But NO! I smell a turd.

Here's the story. A couple of Wall Street cronies meet up with their Wall Street buddies behind closed doors, and make a unilateral and secretive decision to use billions of dollars of taxpayer equity to payoff an enormously bad investment decision by Goldman Sachs and other investment banking firms. The basis for their decision, they claim, is that had they not done so, the situation would have been worse. Really?.

There was no question that some version of a bailout was needed -- but was it necessary to bailout failed securities investments? No. Bailout money could have been used as Poulsen originally told Congress it was going to be used, to directly purchase actual mortgage assets to stabilize the housing market. Instead, the funds were used to buy securities that are derivative of those assets. What's the difference between buying the actual underlying asset as opposed to purchasing Goldman's securities through AIG? The difference is that Goldman Sachs and other investment banking divisions would have gone under -- whoopty whoop, and instead, the liquidity would have been injected directly into smaller, local banks where the mortgages originate. That decision wasn't made and as a consequence, well over a hundred smaller, regional banks have collapsed. Meanwhile, Goldman Sachs pays its employees the highest bonuses in the history of the U.S.

Wall Street just dropped a ginormous turd on the forehead of the American public. That's what it smells like. That's what it looks like. That's what it is - A BIG TURD.

Peace

Jeremy

Nanotech, Biotech, and Other Frontier Technologies Will Play a Critical Role This Century and Beyond

It's late and I've been digging for a set of number projections for global population growth over the next 50 years, and what the estimated industrial output must be to sustain the projected population, and further, what the increase in technological advancements must be just to maintain our current level of environmental impact. I can't find the numbers. I will find them later and put them up at another time. If memory serves me right, it goes something like this... Over the next few decades, industrial output will have to increase 10-fold in order to sustain a projected global population of 10+ billion. At that level of industrial output, our advances in technology must increase 20-fold in order to maintain the current level of environmental impact; that increase doesn't even begin to reduce our environmental footprint from current levels.

In a nutshell, what these projections tell us is that if there is going to be any hope of a sustainable future on this Earth, advanced technology research must be an international policy priority, now. As investors, what these numbers also tell us, is that the biotech industry, the nanotech industry, and other frontier technology industries, will be the areas that you want to have some skin in the game. In decades past, the railroads were the prime drivers of investing returns, then it was autos, later computers, and next the Internet. In this century, it will be biotech, nanotech, and who knows what other advancements.

Earlier, I confessed of my ignorance when it comes to advanced technologies, and for that reason, I admitted that in the past I have tended to steer clear of such investments. But, I also stated that these industries will be the key drivers of growth for the U.S. economy in the coming years. For that reason, despite my lack of understanding of these markets, I continue to challenge myself to gain a better grasp of the implications of these critical technologies, and, which companies present compelling investment opportunities. There is a list of such companies I am researching, but because of the risks involved in each, I am going to refrain from sharing their names, at least for the foreseeable future.

One of the unique attributes of humanity is our God-given ability to create. At no other time will this power be put on greater display than the one we are entering. In biotech, for example, we are identifying technologies that have the potential to eradicate disease. In nanotech, we are researching materials that have the potential to be lighter than balsa wood and stronger than steel. The possibilities are literally as endless as our imagination.

The possibilities will also present significant ethical questions that we will have to wrestle with as a society. For instance, one area of the biotech industry may be on the verge of discoveries that will dramatically increase existing life expectancies -- for those that will be able to afford it. Such advancements, if they are not distributed in an equitable fashion, will lead to further differentiation in economic classes where the rich live longer and grow wealthier, and the poor lag further behind.

The ethical dimensions these advancements present, is another area that I will be focusing my attention on in the coming years.

Peace

Jeremy

Racist and Inexcusable Remarks by the Lt. Governor of South Carolina, Andre Bauer

South Carolina is a beautiful state, ideally located and situated to be a place of long term economic growth. But it will continue to fall short of its potential so long as it is run by incompetent politicians. In the latest example of the state of public affairs in South Carolina, Andre Bauer, Lt. Governor of South Carolina and current GOP candidate to replace Governor "Sex Scandal" Stanford, made these remarks regarding those who use public welfare to survive:

"Quit feeding stray animals. You know why? Because they breed. You’re facilitating the problem if you give an animal or a person ample food supply,” he said. “They will reproduce, especially ones that don’t think too much further than that.”

Unbelievable, right? I can't make this stuff up.

But should we be surprised by the state of public of affairs in South Carolina? Here is a state who plasters the name of the racist Strom Thurmond on the buildings of its largest public university. In opposition to the Civil Rights Act of 1957, Strom Thurmond implemented the longest filibuster by a single U.S. Senator in history, going for 24 hours and 18 minutes, nonstop. What a way to be remembered. (By the way, after he died in 2003, it came to light that Thurmond and Carrie Butler, a black maid that worked for Thurmond, had a daughter together, whom Thurmond never publicly acknowledged).

Join the 21st Century, South Carolina. Your future is bright. Move forward from your checkered past, take Thurmond's name down from public buildings, and stop electing ignorant and racist politicians.

"Racism isn't born, folks, it's taught. I have a two-year-old son. You know what he hates? Naps! End of list." - Dennis Leary

Peace

Jeremy

A Short Account of the History of the Corporation: PART 2 (The Emergence of (Slave) Trade Empires)

Previously, we looked at important business concepts that developed in early recorded history up through the Roman Empire and the rise of the Church and into the 12th century with the formation of merchant organizations in Europe. Next we will take a brief look at the continued evolution of the business enterprise in the 16th and 17th centuries with the rise of vast trading empires. Of particular importance, we will see that with the corporation's great increase in power built in large part through the slave trade or through the trade of goods produced by slaves, the lack of a legal framework to combat these moral and social failures resulted in public protests and consumer boycotts to change business behavior.

The 16th and 17th centuries witnessed the emergence of chartered trade-oriented enterprises that were multinational in character with operations in various territories -- these were the first multi-national corporations. Such widely known institutions as the Dutch East India Company, the British South Africa Company, the Hudson’s Bay Company, and many other corporations representing various regions of the world were founded. Here's one example -- incorporated in England in 1670 and subsequently playing a vital role in the development of Canada, the Hudson’s Bay Company is still in operation today, now focusing its business pursuits primarily in home merchandise and apparel. Further displaying the multinational quality of these potentially immortal entities, the English East India Company at the height of its power extended out to as far as Hong Kong, “covering a fifth of the world’s population.”

A great deal of this early international business growth came from the slave trade industry or in the trade of goods produced by slaves. With the rise of corporate power and abuse came calls for responsibility to public interests and the first recorded public backlash to corporate misbehavior. Aside from striving for fairness with business partners, ethics, practically speaking, were not a part of the equation for these early multinational corporations. Further, government regulation was virtually non-existent. Indeed, the only real legal restraint on the corporation at this time was defined by implication of the purpose of its charter. So, as in one case involving the corporate chartering of land, the corporation was thereby limited to the duty of renting land and “not to any other.” But this mechanism proved insufficient in regulating business. In fact, this policy resulted in giving to corporations expansive freedoms to operate as they saw fit.

Not only were corporations given great license to operate freely within its chartered purpose, which continuously resulted in corporate abuses, in many cases the charters themselves were unethical to begin with. In addition to its struggles with France, inflation was another major concern for Queen Elizabeth’s 16th Century England. One of the primary drivers of inflation was Spain’s access to large quantities of bullion from the Americas. One consequence of Spain’s gold rush was the great loss of life of native inhabitants perishing from germs carried by Spanish soldiers and traders; the natives also perished by organized genocide. Consequently, Spain turned to the continent of Africa for a source of forced labor. Spain initially began transporting over 800 African slaves a year to the Americas, but by the end of the 16th century, over ‘70,000 captives had been shipped across the Atlantic.’ To counter Spain’s economic exploits, many Protestant hard-liners saw the slave trade as a way for England to regain its footing against its Catholic nemesis.

In response, the Protestant English Crown shifted its economic policy by adopting slave trading, making the Queen the first monarch in England to charter a slave trader. John Hawkyns became the first Englishman to be chartered to operate in the “triangular trade market,” a three-way trading system where England brought goods to the African continent to be sold, then loaded the ship with slaves to be taken to the Americas, and finally brought back commodities from the Americas to England. While Spain attempted to control the slave trade, even sanctioning that no more than 4,000 slaves could be transported from 1562 to 1568, England’s clandestine slave operation through Hawkins enabled it to transport 2,000 slaves during that same period. Elizabeth would deploy 2 naval ships to assist Hawkins’ slave hunting enterprise, and would further employ political measures to protect Hawkyns’ operation from the demands of Spain and Portugal, rival powers infuriated by English infiltrations into Africa.

With the state in bed with business, and both participating in a profit-driven genocide of unimaginable proportions, responsible citizens eventually turned to public protests and boycotts. The first known consumer boycott was launched in 1790 in England by Elizabeth Heyrick. Organizing her efforts in Leicester and urging others to refrain from purchasing “blood-stained” sugar from the West Indies, the East India Company would be forced to change its distribution operation, from there on supplying “sugar from slave-less sugar producers.” Not until 1834 would legislation finally be introduced in England abolishing slavery “across the British Empire.”

Some public outcries have not been vocal enough: by 1888 the British South Africa Company and its subsidiary operation De Beers controlled 90% of the world’s diamond production. To this day De Beers holds a monopoly of the diamond market, an industry that continues to be widely criticized for unjust business practices in the continent of Africa.

Next, we will look at the rise of the business corporation in early America.

Peace

Jeremy

Investing Intelligently: Part 4 (How much cash and debt is it carrying? What's the inventory telling you?)

In Part 3 we looked at the company's gross and operating profit margins, to make sure we find investment opportunities that are not only increasing sales at a rate of 10+% but also are increasing net earnings at a double-digit rate. Before we turn our attention to the Balance Statement, I want to make a couple more points off of the Income Statement.

Previously, I mentioned that Research & Development expenses are a part of the formula for determining a company's operating margin for the period. R&D is something that you will want to pay attention too when you are searching for companies to invest in. Specifically, you will want to see how the company's R&D expenses compare with its competitors. If a company is not spending nearly as much as its competitors on R&D that could be a sign that in the coming months, quarters, and years ahead, it will also lag behind in the technology gap. R&D is all about improving existing products and developing new ones, so if a company isn't investing in its future, you shouldn't either. A little tidbit -- if you see a company pouring a ton of capital into its R&D (especially in comparison to its competitors), this can be a positive sign that it plans to unveil a host of new products in the very near future.

A second point I want to briefly make concerning the Income Statement, has to do with the number of shares outstanding the company currently lists. Usually, at or near the last line on an Income Statement, you will see a line that lists the total number of "Diluted" shares outstanding for the period. Compare this number against the prior 3 to 5 years and get a sense of the trend. Is it issuing a lot of new shares every year? Or is its share dilution fairly moderate like low single digits? This is important to follow, because as a shareholder, you own a certain number of shares in the company - that is your percentage of ownership. That percentage of ownership declines whenever the company issues new shares. So you will want to keep track of how many new shares it is issuing each period. If it is in the low single digits, you can live with that. If it is consistently in the high single digits or even double-digits, I wouldn't rule the company out entirely, but it certainly raises a red flag.

Another point regarding shares, sometimes you will see a company buying back its shares. As a shareholder, this means your share of the overall pie increases with each share that is bought back by the company. If a company is buying back some of its shares (often called a stock buyback plan) this can be a sign of a number of things: (1) the executives feel that the stock is undervalued and it is a good use of the company's cash to buyback some of its shares, (2) the company wants to juice its earnings-per-share (we will discuss ratios and different measurement formulas later), by reducing the number of shares outstanding, (3) the company doesn't see a better use of its cash like issuing dividends, or investing in new facilities, or spending R&D, or buying a competitor, or (4) all of the above. Some investors love it when companies buy back shares. I have no opinion on it either way. I don't necessarily think it is THE best use of cash, but I also don't think it is THE worst use of cash either.

Enough on that. Turning to the Balance Sheet, there is a couple things that I am always on the lookout for. First, does the company have a nice cash cushion? On a Balance Statement, you will see a line that reads "Cash and Cash Equivalents" and "Short-term Marketable Securities." These two lines tell you how much cash the company has on hand (in the former), and how much cash it has immediate access too (in the latter). Here, it is useful comparing the company's cash and short-term securities positions with its competitors. Second, does the company have control over its long-term debt? The usual definition of long-term debt is a debt obligation that is not set to mature for at least a year or more (as opposed to short-term debts that mature within a year). Again, comparing the company's long-term debt to its competitor is a useful exercise. Investors are all over the map on this one too and whether the company should be carrying any debt at all. Some investors prefer companies with little or no debt on its books. Others prefer companies with some debt on its books because it is a sign that the company sees substantial growth ahead and it is doing all that it can to realize that growth as fast as possible. I lean more to this latter view. In a society inundated in debt, the term rightfully carries a negative connotation. In reality, debt, when used smartly, can be a very useful thing as it can give a company access to more capital to do more business with -- in this sense, it gives a company "leverage." I like to see companies using some leverage because it shows that the company is confident in its future growth prospects.

Third, what is the company's inventories telling you? Compare the company's current inventories against its inventories in the prior period. Is it increasing? Is it decreasing? If inventories are increasing (especially substantially) it can be a sign of one of two things: (1) it may indicate that consumers are not buying as much of the company's goods as the company expected; this is a bad thing because it usually means that in order to reduce the inventory to normal levels it has to sell the goods at fire-sale prices which then impacts the company's gross and operating profit margins. Or (2), it may indicate that the company is just about to hit the stores with a new product line; this is a good thing because it means higher sales growth is just around the corner. So how do you know if it is the first scenario or the second scenario? The only way you can know is by listening in on the company's latest quarterly earnings conference call. Every investor (that includes you) can listen to the company's CEO and CFO talk about the state of a company through the quarterly conference call. If you go to the company's website and click on its Investor Relations page, frequently it will have a link directing you to either a webcast of the company's latest or upcoming call, or a phone number that you can call and listen through your cell phone. Other websites like Yahoo Finance also provide links to conference calls. In my opinion, conference calls are one of THE BEST WAYS TO LEARN ABOUT A COMPANY. I cannot over-emphasize that point enough. Frequently, you will gain information in a conference call that you just cannot gain from the cut-and-dry data of financial statements. This is the only way, for instance, that you are going to know whether the sharp increase in inventories is a sign that it has an overstock of unwanted product, or whether it has a new stock of product about to hit stores.

Next, we will turn our attention to the Cash Flow Statement. We will also go over a couple measurement tools that you will want at your disposal like EV/FCF (Enterprise Value to Free-Cash-Flow) and ROIC (Return on Invested Capital).

Peace

Jeremy

Supreme Court Rules on Corporate Political Speech; And a Short Account of the History of the Corporation: PART 1

On Thursday, the U.S. Supreme Court ruled in Citizens United v. Federal Election Commission, that it is unconstitutional to put spending limits on corporate spending for political speech. Only five justices ruled in favor of overturning two precedent decisions, with the remaining four justices opposing the new ruling; the court split along conservative and liberal lines. At its essence, what the ruling does is equate First Amendment rights of a corporation with the First Amendment rights of a U.S. citizen.

Over the last two hundred years with the formation of the modern corporation, our laws have wrestled with the nature of rights a corporation should receive. In simple terms, our laws recognize the corporation as an "artificial individual" with much the same rights of a human individual. As the latest decision (which received validation from only 5 justices) suggests, however, the law on this issue still remains unsettled.

At another time, I will explain why I think the Citizens United decision is a faulty one both from a First Amendment standpoint, and from a Delaware Corporate Law standpoint (the majority of the largest corporations in the U.S. are incorporated in Delaware as it provides the most favorable law to businesses). I will just say briefly here, that it is dangerous to equate the rights of an artificial being with that of a human being, and further, as business law demands that corporations drive to increase profitability on behalf of shareholders, how this is reconciled with unlimited spending on political speech is unanswered.

In this blog I want to offer a short account of the history of the corporation through the modern era. Much of my research over the years has been on the role of the corporation in society, so some of what I will offer below comes from my own research and some comes from excellent books out there on the subject; one of the best concise books on the subject is "Corporation: A Short History of a Revolutionary Idea."

The historical shaping of the corporate entity reveals much about its place in the public square today and what role it is anticipated to play in the global affairs of tomorrow. For the public to chart a course to where the corporation ought to be in the coming years, it is useful identifying its current status in society and how it arrived here. A number of variables have helped shape the corporation into its current role, including legal developments, consumer demands, government regulation, technological advancements, and labor pressures, to name a few. The following discourse will offer a cursory view of the corporation’s short history, identifying key developments transforming this entity from a novelty in its earliest beginnings to a place of great power in the present.

EARLY HISTORY

The concept of the business enterprise and business contracts trace back to the earliest annals of recorded history. In ancient Mesopotamia dating as far back as 3000 B.C. there is evidence of complex business negotiations that extended “beyond simple barter.” Sumerian traders were able to define property ownership through the utilization of contracts. Around 2000 B.C., Assyrians employed partnership agreements where at least one example is strikingly similar to a modern venture capital fund.

Athenians further developed contracts by framing it around the rule of law; previous types were merely subjected to the interests of whoever ruled that particular jurisdiction. Ancient Rome built upon this legal framework, adding two important features. First, many Roman firms used a form of what we would now refer to as limited liability. This reduced the risk to parties invested in the enterprise, making it a more attractive business model. Second, Romans developed a feature that has been a common trait of corporations ever since: “the idea that an association of people could have a collective identity that was separate from its human components.” In theory this development could be considered the beginning of the modern concept of the corporation - a legal body possessing a perpetual life. In reality most Roman corporations were sanctioned by the state with a very short life span, existing just long enough to fulfill a specific function and then were dissolved once its public purpose was achieved.

After the fall of the Roman Empire, it was the church that firmly established in Western Civilization the idea of the “perpetual life” of a corporate body. The Greek word that would later come to be synonymous with “church” is εκκλησία (ecclesia), literally translated as “ones gathered together.” The idea behind ecclesia is that people are gathered together for a common purpose, becoming an identity distinct from any one person or building or city or state. Monasteries and abbeys would eventually acquire the legal version of this corporate entity in order to protect property interests so that land would remain within the group despite the death of members.

It wasn’t until much later in Europe – with the merchants of Italy and then state-charted operations in northern Europe – that the complex business organizations reminiscent of its Roman counterparts returned for good. In 12th century Florence, the merchant community utilizing joint-liability partnerships began using the Latin term 'compagnia,' translated as “breaking bread together.” In 12th century England the Corporation of London was formed. This municipal corporation remains in existence today with ownership of a “quarter of the land in the City of London.” Most of the earliest corporations, however, were ecclesiastical in nature.

We can see from the term compagnia as well as the state's use of limited charters to demand that business fulfill a specific function for the public, that the early concept of the corporation was very much communal in nature, that its means and ends were to serve the interests of the public's well-being. Keep this in mind as we go forward in this discussion.

Peace

Jeremy

President Obama Unveils the Most Significant Wall Street Banking Reform Since the 1930s. What does it actually do?

Yesterday, President Obama took the offensive and unveiled the most significant Wall Street banking reform since the Great Depression. Investors were blind-sided by the announcement, and Wall Street bank stocks took it on the chin; JPMorgan dropped 6.5%, Citigroup was down 5.5%, Bank of America was down 6%, and Goldman Sachs dropped 4%. There is a good reason for the selloff -- if Obama's proposals make it intact through the gauntlet of the legislative process, profits from Wall Street banking firms will not be as robust as they have been in years past. And, the economy should finally be free of certain highly risky Wall Street investments.

Before I get into what exactly President Obama's banking proposals will achieve, let's discuss how the proposals came about. Up until yesterday, it was the general consensus that the two people that had Obama's ear on financial activity was Treasury Secretary Timothy Geithner and Lawrence Summers, his chief economic advisor. Under their influence, Obama was slow to act on Wall Street banks, and what action he had taken, was largely of little effect. Unbenownst to many, Obama was also privately meeting with Paul Volcker, at least a dozen times over the past year. What Obama unveiled yesterday, was largely influenced by Paul Volcker. Who is Paul Volcker? He was the Chairman of the Federal Reserve under Presidents Jimmy Carter and Ronald Reagan. After his years of public service, he headed a prominent Wall Street banking firm. His background is important because he is widely respected by those in both public and private finance.

Now, let's take a quick glance at the historical context. For a few years now, I have been advocating that the Glass Steagall Act (also known as the Banking Act of 1933) be reinstated; recall, it had been largely repealed in 1999 by a Republican-led Congress under the Gramm-Leach-Bliley Act. In 1933, a Senate Dem and House Dem sponsored the Glass-Steagall Act, that was a reaction to the major commercial banking failures that largely contributed to the Great Depression. Prior to the Act, it was lawful for commercial and investment activity to be conducted under a single banking firm. This model was problematic, however, because risky investment activity on Wall Street put at risk commercial deposits. So, this Act separated investment banks from commercial banks and established the FDIC that insures banking deposits.

Fast forward to 2007 and 2008, Wall Street banking firms were investing in yet another of a long line of so-called "innovative" securities, this one called an MBS (mortgage backed security -- which basically turns a traditional mortgage into an investment that can be traded on Wall Street; it is a form of derivative). Had investment firms simply invested in MBS' with actual capital they had on hand, everything would have been fine. Because of greed, however, bankers were investing in MBS' with enormous amounts of leverage (debt). Lehman Brothers (which was one of many to collapse in the crisis, collapsed after 158 years in business), for example, was leveraged at a ratio of 31:1, which means that for every real dollar or real asset or real collateral it had on hand, it was using 31 times as much debt. Think about that one for a second; and Wall Street investors have the reputation of being the 'best and brightest' of America... uhh, yeah, something like that. Other investment firms were similarly over-leveraged. [Some day I will recount a story of another over-leveraging catastrophe that took place in 1998 when Long Term Capital Management nearly collapsed our financial system]. The effect of Wall Street's over-leveraging, was that it ballooned the MBS market into a monster amounting to roughly $16 trillion at the height of the financial crisis. That amount put enormous risk on our economy because if their bet was wrong, all of the banks combined could not come up with the collateral needed to pay the bill. And wrong they were. As housing prices fell sharply, banks started seeing huge losses from their MBS investments. And you know the rest of the story, the American public had to foot the bill to bail them out.

Volcker's Wall Street bank reform proposals are important as it removes this kind of illogical risk taking out of our economic system and goes a long way toward preventing future market bubbles. The Glass-Steagall Act is thought to be a contributing factor for why we had a relatively stable market for 50+ years (historically, markets were experiencing major bubbles at least once every 20 years); "in the spirit" of Glass-Steagall, the new "Volcker Rule" which prohibits Wall Street banking firms from doing highly-leveraged "proprietary trading" and putting at risk commercial deposits, should have a similar effect as the 1933 Banking Act. This is one part of Obama's proposal.

The other part of Obama's proposal is that banks will see further limitations on the amount of liabilities any one bank can hold. The effect of this rule is to stop any one bank from becoming too large and having too significant an impact on the economy should it fail. Used in conjunction with other banking reforms currently working through the system, it should effectively put an end of "too big to fail" firms. Thankfully.

We learned another important revelation yesterday. Not only was Obama working with Volcker behind the scenes, Obama has also been working very closely with financial regulators overseas. Yesterday, we learned that not only will American banks have to operate under these new rules, so too will such foreign banking powers as Barclays and UBS. The BBC is reporting that London, Switzerland, and other financial centers will be enacting similar banking rules so that all major banks are playing on a level field.

Brilliant work, President Obama. Brilliant.

Peace

Jeremy

Big Bankers Complain About a New Tax Levy. [Laughable]

Big Bankers come out swinging against a newly proposed levy against Wall Street financial institutions, threatening to take the tax proposal to court on the basis that it is unconstitutional. What a joke. I hope they do take it to court so the public can subpoena records from former Treasury Secretary Poulsen and current Secretary Geithner, and we can learn what constitutional basis the two former Goldman Sachs execs were operating on when they bailed out banks with billions in tax payer funds. This should be good.

President Obama's Administration is proposing a new "responsibility" tax against big bankers -- what does it actually entail? Actually, not much, when you consider how profitable these institutions are. Basically, over a 10 year period, the public will receive an extra $9 billion for a total of $90 billion from big bankers. Sounds like a lot of money for 99% of the U.S. population, but for big banks it is a drop in the bucket. This year, Goldman Sachs alone will pay its key employees $23 billion in bonuses -- one bank, $23 billion in bonuses (that doesn't include the rest of Goldman's operating profit which has averaged around $50 billion a year). Also, consider the fact that the tax will actually bring the U.S. banking policy up to speed with the rest of the world -- other major world banking centers have already passed a "responsibility" tax against their banks because of similar bailouts.

Big banks have had it too good for too long, and when they screw up, they benefit from a free insurance policy where the American public bails them out. It's a bullshit system. I'm sorry, but that's bullshit. No more. The public should declare, no more free money for big money bankers; it's time to put an end to bail outs for the "too big to fail" banker -- it's time to reinstitute the Glass-Steagall Act that was originally passed in 1933 [A Republican majority repealed key portions of the Glass-Steagall Act in 1999... following party lines, Senate Republicans repeal it by a vote of 54-44; Senate Dems -- it's your turn to reinstitute the Act]. No more putting the public at risk with risky over-leveraged trading practices -- it's time to break up the big Wall Street banks and end the oligopoly.

By 12 to 1, big bankers donated to President Bush's reelection campaign in 2006 in comparison to what they gave to Democrat counterparts. President Obama, House and Senate Dems -- you do not owe big bankers a thing. Take it to them.

"Earth provides enough to satisfy every man's need, but not every man's greed." - Gandhi

Peace

Jeremy

House and Senate Democrats Move to Repeal the Anti-Trust Exemption Favoring Healthcare Insurers

Recently, I kicked the House and Senate versions of the Health Care Reform bill to the curb for not including a repeal of the anti-trust exemption that healthcare insurers have benefited from since 1945. I've been doing more research on the issue and have learned a couple important revelations that oddly have gained little press from big media outlets.

First, in late October 2009, a House panel voted IN FAVOR of repealing the anti-trust exemption from the McCarran Ferguson Act originally passed in 1945. While some of my original sources indicated that this repeal had not been included in the House version of the healthcare reform bill, other sources I am now reading indicate that in fact IT HAD BEEN INCLUDED (but with qualifications it seems... the language I'm reading is that it removed "most" of the exemption; I haven't seen an adequate description of what "most" means in this context). That's good news. But there is better news...

Second, over the past two weeks House Dems as well as a group of Senate Dems have once again moved on senior leadership to repeal the anti-trust exemption, articulating that it is vital that the FINAL version of the Health Care Reform bill must include the repeal. Not surprisingly, according to sources I am reading, lobbyists representing healthcare insurers have been contacting certain senators (not identified) to persuade them to not repeal the exemption. The lobbyists argue that the anti-trust exemption is not all that important and that Dems are barking up a tree with no squirrel in it. Dems are not convinced, and neither am I. The exemption permits insurers to share competitive information in order to determine what the appropriate rates should be for services; there's a word for that -- collusion. A letter from House Dems cites to a public opinion poll where Americans overwhelmingly favored "health insurance companies [playing] by the same rules as every other company in America.”

Someone in Washington is listening to the public. Finally.

Peace

Jeremy

Augustine, Niebuhr, and their Confrontation with Misguided Idealism and Misuse of Power

In a previous blog regarding President Obama's speech in Oslo, I reference St. Augustine’s and Reinhold Niebuhr’s realism worldview, and its influence on Obama and the content of his message. I thought it might be useful to explain in more detail, about where these theological giants are coming from.

St. Augustine wrote "City of God" in the early 5th century, following the catastrophic events that culminated in the fall of Rome to the Visigoths in 410. In the wake of the loss (one that was extremely traumatic for many Roman citizens of his day) Augustine writes arguably one of the most influential books in the history of the western world. Reinhold Niebuhr was known to carry a copy of "City of God" with him wherever he went. Among many other important books, Niebuhr penned "The Structures of Nation and Empires" in equally climactic times – post two global wars and at the height of the Cold War when two superpowers were staring down the barrel of a nuclear holocaust.

While both figures speak to a particular time and place, and natural differences arise because of these variables, there is much in common between the two. The nature of each writer’s context is different, yet the nature of humanity that shape their context is the same – a nature bent toward corruption. This nature distorts both human intent and human action, confusing humanity’s understanding of the ultimate end and the means by which to attain it. Such were the sentiments of these two thinkers.

By the time Niebuhr pens "The Structure of Nations and Empires" in 1959, he had fully moved away from his earlier idealized convictions of communism. (Earlier in his career, Niebuhr was influenced by socialist thinkers; in the 1930s he was involved with the Socialist Party of America.) By the 1950s, he had exchanged his socialist ideals for what is termed as "Christian Realism" – St. Augustine is considered the father of Christian Realism.

Niebuhr’s newfound skepticism of humanity's potential is understandable given the time in which he writes. The subtitle of Niebuhr’s book speaks of this context, “A study of the RECURRING patters and problems of the political order in relation to the unique problems of the nuclear age.” (emphasis added) The 20th Century was witnessing one terrifying conflict after another, upheavals and revolutions, a holocaust, Communist claims for world domination, the emergence of the United States as a superpower, structural racism, and an emerging and escalating Cold War with its Nuclear Cloud casting a shadow over all of humanity. With global crisis and catastrophe looming there was little reason to be hopeful.

In the face of this context, Niebuhr turns to “Christian Realism” to inform his understanding of the current state of affairs in a world divided by two superpowers with enough firepower at their disposal to destroy the world many times over. Consequently, Niebuhr’s work is primarily addressed to a western audience wrestling with a Communist enemy as well as its own newfound super-influence in global affairs and the awesome power of its nuclear arsenal. [Keep Niebuhr’s Western influence in mind when considering his work].

In the face of crisis, Niebuhr believed that it was important to understand the lessons from powers past to discern “the structure of nations and empires,” and within that framework make modest attempts to implement measures of peace – all the while understanding that utopian aspirations for a final peace were unrealistic. In essence, his book attempts to identify patterns of past and present powers, the subsequent problems of these political orders, and how these relate to the current context. While each age has its own set of characters and circumstances and faces its own unique challenges, in his view there was a pattern in history that ultimately pointed at a human nature that was bent toward continually corruptible actions.

In Niebuhr's view, history does not show evidence of an idealized philosophy being realized as real progress toward a utopian end. Recall, in Niebuhr’s day the Western world faced the philosophical and social development teachings of Karl Marx. Marx’s work heavily influenced Vladimir Lenin, who would later attempt to bring Marx’s ideals into fruition with the Bolshevik Revolution and the subsequent formation of the U.S.S.R. The aim was to use Soviet policies and power to push the world toward its understanding of humanity’s teleological end, which entailed among other things the idea of a uniform and classless society. This idealistic worldview is one that Niebuhr writes against.

For Niebuhr and Augustine there is the recognition that on one level, yes of course, society as revealed in history, does offer evidence of progression toward higher and more complex forms of operation; there is evidence of ever greater excellence and achievement in all areas of society. At the outset of Niebuhr’s book, he states: “The communities of mankind, like every human achievement and contrivance, are subject to endless variety and progression.” But by progression he is not meaning it in a positivist sense that human pursuits are steadily moving us toward a higher, moral end. Rather, he is referring to the progression of structures from the primitive, nomadic communities to city-state, empire, nation, and modern super-states and the developments of sub-structures within these systems of governance. As for this endless variety, he asks, “Is there any consistency, any perennial pattern or permanent force in man’s search for community?” He is seeking to identify whether, in the midst of structural progression of empires, there are ‘historical constants and variables’ in empires that can shed light on the current struggle between the U.S. and U.S.S.R.

One area where Niebuhr and Augustine differ from utopian-driven philosophies is that for them, human corruption is ever present even in the midst of one achievement to the next. Take, for example, nuclear physics with its potential to unlock previously impossible levels of new energy – but in the same vein has the power to unleash terrible horrors. Niebuhr would argue that because of pervasive human imperfections, the idea that humanity, even with its impressive faculties made available to it, is capable of pushing toward and ultimately achieving a utopian vision is not logical and is not evidenced in history. From his realistic and pragmatic framework of thinking, any evidence of progression toward higher good must be checked by evidence of equally more complex forms of evil. So, in Niebuhr's context, as global society stepped beyond the mistakes of the League of Nations into a better form of world organization in the United Nations, even still, a greater threat had arisen through nuclear weapons and the proliferation of these monsters around the world.

Niebuhr also denounced theories advocating historical recurrence which essentially argues that there is a kind of meta-history that points toward an identifiable recurring pattern, a rhythm if you will, in the rise and fall of civilizations. Niebuhr, while recognizing there are some similarities that can be identified from comparing one age of empires to the next, he ultimately concludes there is not a synthesis, a common DNA strand in the make up of empires, that is applicable for each case, save one perhaps – and that is human corruption. Relying on Augustine, Niebuhr rejects cyclical theories of history, arguing that the pattern of history was abruptly interrupted with the entry of Christ into history and the “radical newness” he introduces.

Challenging the idealism that dominated the intellectual dialogue of his day and even the idealism he once aligned with, Niebuhr responds with an adaptation of Augustinian thought. Niebuhr argues that if there is a common strand to the DNA of human history it isn’t progression toward ever higher forms of good and perfection, it is the corruptible nature of humanity that is the common denominator of both time and space in all of human history. Niebuhr’s realism recognizes the absolute corruptibility of humanity and its pervasive character upon all spheres of public life. This reality check on humanity casts a skeptical eye on any claims of human capacity to achieve idealized ends. Consequently, the ultimate end of humanity is both beyond our comprehension for understanding and our capacity for pursuit.

St. Augustine similarly portrayed humanity as ever-corruptible. He saw this nature even in himself; in “Confessions” he writes in prayer to God, “Who will grant me that you come to my heart and intoxicate it, so that I forget my evils and embrace my one and only good, yourself?” His thoughts in Confessions are evident in “City of God.” While Platonist thinkers of his day would look at human rationality as THE guide toward higher ends, Augustine was not convinced. He certainly recognizes the power of human rationality but concludes it alone cannot be relied upon as it is continually corrupted by ‘certain dark and ancient faults.’ Because humanity’s foundational essence is weakened by cracks and fault-lines, this human essence (which Aristotle relies upon in his philosophical framework) isn’t enough by itself to push us toward our utopian end of happiness and wellbeing.

Note, however, that despite Niebuhr’s far from optimistic view of human nature, he is not entirely pessimistic about the state of global affairs. He writes: “The peril of nuclear war is so great that it MAY bridge the great ideological chasm between the two blocs and make them conscious of having one thing in common: preference for life over death. It is too early to predict in what form and by what arrangements this sense of a common humanity may be institutionalized. But if it is institutionalized and the enemies achieve some kind of accord on the edge of the abyss of mutual annihilation, it will once more be proved that history is as full of unpredictable developments as of recurring patterns of community.”

This quote highlights the realism he is operating with and the recognition of the potential catastrophe enveloping the world -- but it also isn’t entirely pessimistic. In it he leaves room for hope that both sides might recognize common ground in the desire for life. And if such an accord were institutionalized, it would represent in his mind, further evidence of the variability of humanity’s development – creatively adapting, applying new solutions to new problems. This is the balance that Niebuhr is working with, what he later refers to as “moderation.” While Niebuhr has a very low view of human potential given the stranglehold of corruption and our constant drive toward self-serving means and ends, it is interesting that in the midst of the looming nuclear cloud and humanity’s darkest hour, Niebuhr holds fast to an inkling of light. Despite the pervasive nature of human corruption, he recognizes our capacity for good and strong desire for justice and peace. So, he wants to couch this capacity in the reality that while we may have potential, we alone are not fully capable of realizing a perfect end. Said another way, while we may have our good moments, we do not have a sustainable behavior of good moments to propel us toward an idealistic aspiration of a utopian ultimate good and a total eradication of evils and injustices. This is a careful balance between recognizing the total pervasiveness of human corruption, while also maintaining we have in our very essence the desire toward a better and peaceful day.

St. Augustine also reflects this careful balance. In “City of God,” he writes: “Anyone who joins me in an examination, however slight, of human affairs, and the human nature we all share, recognizes that just as there is no man who does not wish for joy, so there is no man who does not wish for peace. Indeed, even when men choose war, their only wish is for victory; which shows that their desire in fighting is for peace with glory. For what is victory but the conquest of the opposing side? And when this is achieved, there will be peace. Even wars, then, are waged with peace as their object, even when they are waged by those who are concerned to exercise their warlike prowess, either in command or in the actual fighting. Hence it is an established fact that peace is the desired end of war. For every man is in quest of peace, even in waging war, whereas no one is in quest of war when making peace. In fact, even when men wish a present state of peace to be disturbed they do so not because they hate peace, but because they desire the present peace to be exchanged for one that suits their wishes. Thus their desire is not that there should not be peace but that is should be the kind of peace they wish for.”

Despite the total depravity of humanity, there is within our fabric, strands of higher qualities that compel us toward good. However, these positive characteristics of human character are not enough to lead us toward an end of lasting peace, complete happiness, and total wellbeing. At best what can be achieved is a temporary peace in a temporal place. Augustine reflects this temporal goal that is attainable in earthly affairs when writing ‘all man’s use of temporal things is related to the enjoyment of earthly peace in the earthly city; whereas in the Heavenly City it is related to the enjoyment of eternal peace.”

Niebuhr picks up on Augustine’s theme of civitas terrena and civitas dei, the two cities concept. Augustine attempts to show that the former (the City of Earth) is not capable of achieving the full expression of the latter (City of God, or the Perfect City), as the Stoics of the day believed. The Stoics, influenced by Plato’s forms and Aristotilian conceptions of teleological ends, would argue that the Earthly City is a working toward the Perfect City achievable through the essential qualities of humanity and the institutions and technologies it creates. Niebuhr quotes the Stoic Roman Emperor Marcus Aurelius to highlight this thought: “Every man’s interests consists in following the lead of his own constitution and nature. Now my nature is a rational and civic nature; my city and my country, so far as I am Antoninus, is Rome; but so far as I am a man, it is the universe. Whatever therefore is to the advantage of these two cities, and that only, is good for me.” Augustine rejects the Platonic notion that civitas terrena is progressing toward the higher other – cititas dei. Augustine argues that throughout history the earthly city is continually separated from God and goodness because of the ever-presence of corruption leading to self-destructive events.

Niebuhr points out that the Church eventually corrupted St. Augustine’s view of the two cities to support a concept of papal supremacy over the state. Later, beginning in the 14th century, scholars began drawing upon Augustine’s City of God to reject the concept of papal supremacy over the state and uphold the distinctions between the political and the ecclesiastical, nature and grace, rationality and faith. Post-papal supremacy worldview, the world entered an age of reason and idealism. Niebuhr writes: “The 18th and 19th centuries did not anticipate the tragic predicaments of nuclear warfare. Man’s conquest of nature was assumed to contribute directly and inevitably to human welfare. The idea of progress gave meaning to life, and utopia supplanted the “eternal blessedness” of Dante’s vision. This optimism prompts the final question in our consideration of the uniqueness of Western Christendom. The question concerns the fate of the realism which Augustine first introduced to western culture and which he laid in the foundation of that culture in his doctrine of the “two cities.” From the ideal vantage point of the “City of God” he was able to survey and analyze the political realities of the “earthly city” with penetrating realism, discovering all the conflicts of interest and power in any historic community. This was a new note of realism…”

Working from Augustinian realism, Reinhold Niebuhr confronts the misguided idealism of his day. He writes: “It should have been obvious long before the nuclear age that the mastery over natural forces increased man’s power; and that this greater power could be used – and in a sense was bound to be used – destructively as well as creatively.” Because of our nature, ‘“our reach is beyond our grasp.”’

Thus, for Niebuhr the only hope for political harmony between the U.S.A. and U.S.S.R., rested upon an “ability to observe the limits of human freedom even while we responsibly exploit its creative possibilities.”

This is the framework that Obama was operating from in his speech in Oslo.

Peace

Jeremy

CNBC Big Mouth Says You Should Buy Citigroup. Think Twice Before Banking on that Advice.

In December 2009, CNBC Jim "Crapshoot" Cramer once again reiterated his buy recommendation for Citigroup (Ticker: C); as far as I am able to tell, he previously recommended the banking giant in August 2009 and August 2008 -- the stock is down roughly 80% since his August 2008 stock pick. There is a saying, even a blind squirrel finds a nut every once in awhile -- it could very well be that Cramer finally has it right on Citigroup. That is possible - but I wouldn't bank on it.

There are reasons to be a little bit optimistic for a Citigroup recovery. First, because it has laid off over 100,000 former employees over the past two years (yeah, you read that right... tragic isn't it?), the company has been able to substantially reduce its cost structure. Second, the bank recently announced a plan to pay off the remainder of TARP funds it received during the bailout frenzy. Third, it has made efforts to simplify its business model by divesting itself of certain assets; one account states that Citigroup has made 20+ divestitures since 2008 amounting to a reduction in assets of roughly $300 billion.

To rebut these: (1) even after cutting 100,000 employees from its payroll, according to new numbers released today, the company is still unable to turn a profit; (2) the only way the company is able to pay back TARP is that it had to issue $17 billion in new shares (that means it had to greatly dilute ownership) and take on an additional $3.5 billion in a mixture of equity and debt; and (3) because of past banking practices (supposedly set to change with new banking rules to go in effect this year), investors still do not have a clear picture of the nature of its assets not recorded on the balance sheet (referred to as off-balance sheet assets).

There is another reason to avoid Citigroup for the foreseeable future (and for that matter, just about any other bank): according to the latest figures from the Federal Reserve, loan delinquency rates remain at all-time highs. In 3Q-2009, residential real estate loans had a delinquency rate of 9.81% and commercial real estate loans were at a delinquency rate of 8.74%; in 2006, both of these rates were less than 2%. Further, in the same quarter, consumer credit card delinquency rates stood at 6.58%; in 2006, this rate was less than 3%. As unemployment remains very high, there is no reason to assume these figures will improve any time soon.

Citigroup's stock has not rebounded as well as other banking stocks have in the past year; Fifth Third Bank, for example, is up almost 900% since February of last year. This suggests that large investors with industry-specific knowledge, have so far shown an aversion against Citigroup's stock. I wouldn't bet against the "smart" money on this one.

I could be wrong on Citigroup - and I hope I am, but I can tell you that right or wrong, the risk involved does not warrant gambling on Citigroup -- and a gamble it is.

Lesson: I will say again, take what you hear on CNBC with a grain of salt.

Peace

Jeremy

A Political Race in Massachusetts and the Implications for Health Care Reform

Martha Coakley (a Democrat, lawyer and former Attorney General of the state of Massachusetts) is in a tight race with Scott Brown (a Republican, lawyer and a member of the House of Reps in Mass) for the U.S. Senate seat that was previously held by Ted Kennedy for 46 years until his death. To win the race, both parties are pulling out the big guns. At this point, it is unclear who is going to win (for what it's worth, my guess is that Coakley will win). This much is certain, there are enormous implications on both health care reform and banking reform, depending on which way this seat goes.

Currently, Democrats hold a 60 seat super voting majority in the Senate. The race between Coakley and Brown could change that. If Brown wins, one likely result is that the House version of the Health Care Reform bill will die. The only way that any version of the House bill remains is that both House and Senate Democrats shotgun a version of the bill through the system before Brown is sworn in. This is conceivable, but the likely negative impact of that move could cost Democrats many more seats later in the year. The other option is that the House version of the bill is given the ax completely, and since the Senate has already voted on its version of the bill, the House would then vote for the Senate version as is, and then it is taken up to President Obama as is for passage.

So, regardless of who wins, some version of Health Care Reform is going to pass barring a complete split on the issue among Democrats (which is possible). I've read up on House version H.R.3200 (America's Affordable Health Choices Act of 2009) and Senate version H.R.3590 (Patient Protection and Affordable Care Act), and I can tell you that both versions have significant flaws. I favor the idea of extending health care to those who cannot afford it, because I believe such a policy is in the spirit of what the American society is all about. From our foundation at the Declaration of Independence we have promoted a sweeping view of human rights whereby all people "are created equal" and "endowed" by God with identifiable and specific "unalienable Rights that among these are Life, Liberty and the pursuit of Happiness." I would argue that our current health care system, which is unaffordable to millions of Americans, denies them life and liberty and their pursuit of happiness.

That's where I stand on the issue. But I will also tell you that I do not believe in taking a big dump on a piece of paper and passing it as a landmark bill because "that's the best that can be done right now." Both versions of Health Care Reform are just that... a piece of poop on paper. The most glaring flaw of each is that neither adequately addresses the market forces that contribute to escalating health care prices. For instance, as it is currently structured, health insurers enjoy a system that favors oligopoly and collusion. What I mean by this is that the healthcare system in the U.S. is structured such that a small number of insurers have been given the legal "green" flag to go out and dominate the marketplace; this absolute dominance allows the key players to collude with each other and fix prices as they see fit. In Montana, for example, Blue Cross-Blue Shield is the dominate player with 75% market share; United Health Group dominates the remainder of the Montana health care market. In Connecticut, Well Point dominates with a 55% market share; go down the list and it is virtually the same in every state. This un-free market system bars true competition that is needed to drive down costs to an affordable rate.

Since 1945, healthcare companies have benefited from a anti-trust exemption that legally makes it possible for the oligopoly and collusive system now in place. What's amazing is that both Libertarians on the far Right and Progressives on the far Left are opposed to the notion of healthcare enjoying such an oligopoly, yet neither side has gained any momentum whatsoever in putting a provision forward that will forever remove this exemption. Why is no one pushing for this common sense provision? Because money talks -- big insurers have bought off both sides of the aisle. Health care insurers have long contributed heavily to Republicans, and now, over the past year, the same insurers have targeted a handful of Democrats in the Senate to buy them off too. Lieberman (now an Independent), Baucus, Nelson, Landrieu, Lincoln, and Conrad have been the recipients of millions of dollars in campaign funding from the healthcare industry. Nice system we have, huh?

Because neither version of Healthcare Reform bills remove the anti-trust exemption for insurers, the expansion of healthcare to some 30+million Americans who currently cannot attain health insurance, essentially pumps a ton of new money (much of it public money) into an oligopoly where insurers will reap record profits. Investors are aware of this, and for this reason many of the insurers set to benefit most from the Senate bill have seen 52-week highs in their respective stocks in recent weeks; 90% of healthcare stocks in the S&P 500 are near 52-week highs. Healthcare stocks are on a sharp rise because the so-called healthcare reform is a boon for insurers (particularly the Senate version because it does not permit competition through at least a public option as the House version does).

[There are other pricing forces affecting healthcare affordability that need addressed as well, such as ultra-high education loans for M.D. and J.D. students; $150,000+ student loans in these two fields have adverse effects on the healthcare marketplace. Sound tort reform and education reform would also help reduce healthcare costs].

Peace

Jeremy

Investing Intelligently: Part 3 (Does the company have a track record of increasing profitability?)

In the previous installments of this series, we looked at whether we had a sufficient understanding of a company's business model, and whether the company had a track record of meaningful sales growth. The third step keeps us on the company's Income Statement, and assessing the company's ability to improve profitability.

A publicly-traded company will report two forms of costs and expenses that affect whether it is able to increase its profitability from one period to the next. For convenience, let's stick with Apple's (Ticker: AAPL) most recent 10-K filing and the Income Statement contained therein (page 56). Here you will see that in Fiscal Year (FY) 2009 its sales increased to $36.5 billion from $32.5 billion in the same period a year ago. If we go up to page 45 of the report, the company reveals that this sales growth was driven largely by iPhone sales and Mac laptops sales; it also reveals that its iPod sales and desktop sales lagged behind the growth of its iPhone and laptops.

The first form of costs that are deducted from the top line (its net sales) is the cost of goods or what it titles as "cost of sales." These are the costs necessary to actually produce the goods it sold. You will see that in FY2009 its cost of sales increased to $23.4 billion, up from $21.3 billion in the prior period. When we deduct these costs from the top line, we see that its gross margin in 2009 was $13.1 billion. With this data we can compute its gross profit margin by taking its gross margin of $13.1 billion and dividing it by its net sales of $36.5 billion -- for FY2009 its gross profit margin was roughly 36%. This figure by itself doesn't tell us a whole lot. But if we compare it to its gross profit margin in 2008 we see that its profitability at the production stage of its operation increased from roughly 34% in 2008 to 36% in 2009. That's good. We want companies that are able to improve production profitability from one period to the next.

The other expenses taken out of net sales is "Selling, General, and Administrative" (SG&A) and Research & Development; these are the additional costs to run the business that are on top of the direct costs to produce goods. We want to determine what the company's operating profit margin is in comparison to previous periods. For Apple, by dividing its operating income of $7.66 billion by its net sales of $36.54 billion, we find that its operating profit margin in 2009 was roughly 21%; in 2008, its operating profit margin was 19.3%. Again, this is good -- Apple's gross profit margins and operating profit margins are both showing improvement.

Because of Apple's efforts to improve its production and operating profitability, net income increased substantially in 2009 by all almost 18% to $5.7 billion, up from $4.8 billion in the year ago period. We want companies that are showing double-digit revenue growth, AND, double-digit earnings growth. This indicates that not only is there a strong market for the company's goods and services, but also that the company knows how to properly run its business.

Now we are done with the Income Statement. Once you do this a few times, you will find that to do step 2 (identify sales growth) and compute step 3 (identify profitability), will only take a couple minutes at most. In the next step we will turn to the Balance Statement to identify its financial health (cash/debt), and determine what its inventory levels are telling us.

Peace

JM

As Haiti Prays With Its Voice... and Hands and Feet...

A catastrophic earthquake has struck Haiti, the most impoverished nation in the western hemisphere. Amid the rubble and chaos, those on the ground report hearing prayers:

"It's 8:44 p.m. and we're still getting aftershocks! Can hear people gathered in the distance singing prayers," wrote Richard Morse, a hotel manager at the Oloffson Hotel in the capital, Port-au-Prince. Throughout the night, "singing and praying intensified and then waned," Morse wrote.

Morse didn't hear helicopters or ambulances.

As the people of Haiti pray with their voice, and hands and feet, laboring to save those buried in the rubble, may the nations of the world be charged with doing the same.

"If the misery of the poor be caused not by the laws of nature, but by our institutions, great is our sin." - Charles Darwin

Peace

Jeremy

Investing Intelligently: Part 2 (Does the company have a track record of sales growth?)

In Part 1 of Investing Intelligently, we looked at determining if we have a reasonable understanding of what a company does as a business enterprise. Once we understand its business model, the next logical step is determining if the company has a track record of sales growth. Sales growth isn't everything, but it is important. We want to be a part owner of companies that are growing and should continue to grow.

In future lessons, we will see why sales growth alone is meaningless when set a part from its ability to actually generate cash. What may look like an Einstein of a business concept and have off the chart sales may in reality be a complete loser of an investment. Remember Enron? They say they make 'em bigger in Texas -- and that includes one of the biggest bankruptcies ever. Enron had solid revenue (sales) growth, but its ability to generate cash -- not good. Toss in a fraud or two later and the company collapsed with billions of dollars of investor equity wiped out. Or take for another example, Krispy Kreme Doughnuts. Now, if you ever had one of their glazed morsels of yum made hot right off the conveyor belt (when hot off the conveyor they are by far the best doughnut ever), you would think that it is a great place to become a part-owner by purchasing a few shares of its stock (Ticker: KKD). Well, it is not. It's a disaster of an investment, because it annually destroys shareholder value. Lesson: If the company has a proven track record of losing money, it will most assuredly find a way to lose your money.

Nonetheless, we'll begin by looking for sales (also called revenue) growth because every business must generate sales growth if it is to stay in business over the long term (unless you are GM and receive a get-out-of-bankruptcy free card from the government... or airlines which are notoriously crappy investments). So, where to start? At SEC.gov any investor (that includes you) can pull up the mandatory financial filings of publicly traded companies... for free. Once on the website, click on 'Search for Company Filings' located under sub-heading 'Filings & Forms.' Next, click on 'Company or fund name, ticker symbol...' From here enter the ticker symbol of one of the company's you are interested in from the screener list of investment possibilities (remember, you got this list from a stock screener... Motley Fool CAPS offers a free one that is very useful).

Let's stick with Krispy Kreme as an example. Enter 'KKD' and you will get a laundry list of its financial filings. The filings that will interest you most as a beginning investor are 10-Ks (annual reports) and 10-Qs (quarterly reports). Go down the list to locate its most recent 10-K filing, which you should see filed on 4-17-09. Click on the tab, and when a new list of docs pulls up, click on the first one titled 'Annual Report.'

With KKD's latest annual report, scroll down to page 25 where you will see a side-by-side comparison of the company's reported financial data taken from its Income Statement (you can find its Income Statement or Statement of Operations on page 62). KKD is kind enough to provide useful comparable date for the previous five years. Frequently, you will have to pull up each annual report for the past 5 years of a company in order to create a side-by-side comparison. It is important to have at least the past 3 years (preferably the past 5 years) of financial data so you can identify whether its sales and earnings trends are trending up or down and by how much. For Krispy Kreme we see that its total revenues in 2005 were $707.8 million; by 2009, its total revenues were down to roughly $384 million. Not good. You want to put your money in a company that is growing sales at a healthy clip year after year; I prefer companies growing at a double-digit rate year after year.

Compare KKD's year-after-year decline in sales to Apple's (Ticker: AAPL) year-after-year revenue growth. On page 35 of Apple's latest 10-K filing you will see its net sales in 2005 were $13.9 billion; in 2009 its net revenues had rocketed to $36.5 billion. That is AWESOME growth. Again, you want to find a company that has at least a three to five year track record of increasing sales because this is a good indicator that the company will continue its sales growth into the foreseeable future. Apple meets that requirement.

In the next lesson we will stick with the Income Statement to identify companies that not only have a track record of revenue growth, but also a track record of improving profitability.

Peace

JMac

Sarah Palin Set to Speak at the National White People Party Convention

Sarah Palin makes headlines again by rejecting an offer to speak at the annual Conservative Political Action Conference, and instead has agreed to terms to speak at the first ever National White People Party Convention, otherwise known as the National Tea Party Convention. Political pundits are calling the move a shot across the bow of the Republican leadership in Washington, DC., and a sign that Palin is attempting to establish her political base with the ultra-conservative (ultra-white) wing of the party.

This should come as no surprise, but I do not follow the logic behind Palin's strategy. In the near term, by locking down votes of the far Right she will effectively destroy any chance of a Republican beating President Obama in 2012. It's a Ross Perot-maneuver all over again. Obama can only hope that Palin runs for office.

But more problematic is the long term failure of the move. In 2008, President Obama won by appealing to moderates across a wide range of races and ethnicities. His voters reflected the rich diversity of the American landscape, count me as one of them. After Obama's win and the gains by many Democrats in the House and Senate, the Republican Party went into self-reflection mode to figure out how it must adapt its message to reach out to people not white. As the Bush-era recession worsened in early 2009, far Right radicals were able to incite a following consisting of... a lot of white people. What does the Tea Party represent? I can respect the political positions of reasonable taxation and limited government, but as far as I can tell from every picture and video I have seen of Tea Party protests, these political messages are completely lost in a sea of whiteness. The Republican Party was already suffering from white people flu, but the Tea Party takes it to a whole other level. Until the Tea Party, and for that matter, the Republican Party, can prove that its message connects with a diverse range of races and ethnicities, it will continue to be marginalized in the public square and at the polls.

This is the trend of the American population...

Blacks, Latinos and other non-white races currently make up over one-third of the U.S. population, which overwhelmingly vote Democrat. Moreover, 45% of children under the age of 5 belong to 'minority' groups. This means that 'minority' groups will continue to outpace the growth rate of their white counterparts. This also means, that until the Conservative message adapts, it will find it increasingly difficult to win the Presidency and regain a majority of Congress.

My guess is that after a series of continued defeats and many lessons learned, including Palin's latest gaffe, the Republican leadership will finally find a voice that can connect with the rich diversity that is and always will be America.

“It is time for parents to teach young people early on that in diversity there is beauty and there is strength.” - Maya Angelou

Peace

JMac

Why President Obama's Speech in Oslo is One of the Most Important Presidential Speeches In U.S. History

Topics of justice and peace and conflict resolution will come up from time to time in these reflections. Today, I want to spend a little time on why President Obama's speech on December 10, 2009, before the Norwegian Nobel Committee in Oslo-Norway, is one of the most important deliveries in the history of the U.S. presidency.

First, let's set the stage. On October 9, 2009, Obama was informed that he was awarded the Nobel Peace Prize. I think it is fair to characterize the general response from the public as WTF!?!? Some former winners include Mother Theresa, Elie Wiesel, Desmond Tutu, Martin Luther King, Jr., Albert Schweitzer... and now Barack Obama? I mean, here's the President still deliberating on how many more bad ass American combat troopers to send to Afghanistan to kill terrorists, and then he's awarded a prize given to people that for the most part spent their lives practicing non-violence as a form of conflict resolution. It didn't add up. Several theories have been put out there as to why the Norwegian Nobel Committee gave Obama the award. These theories do not interest me. What interests me is how President Obama handled the situation by giving a masterpiece of a speech.

The speech is a remarkable piece by itself set apart from history and context. It is all the more remarkable set in history and context: it was delivered by a sitting Commander-In-Chief in the middle of two military conflicts against a Jihadist ideology several hundred years in the making, in the context of a world that increasingly views American might with scepticism, and in the context of a President who's black heritage had endured centuries of slavery and injustices that were finally overcome by the high practices of W.E.B. DuBois, Frederick Douglas, Mary McLeod Bethune, and of course Martin Luther King, to name a few. It is also remarkable for the theological context that runs rich throughout the speech, connecting with such giants of theology as Reinhold Niebuhr, Thomas Aquinas, and St. Augustine, and the intersection of this theological worldview with the philosophical framework of non-violent action trumpeted by Mahatma Gandhi and King. It is this context that makes his speech a remarkable work. I encourage everyone to read the entire speech delivered in Oslo. I provide a snippet below.

Now, while both Gandhi and King are cited in the speech as examples of non-violence teachers, the just war teachers of Augustine, Aquinas, and Niebuhr are not cited -- yet the entire framework from which Obama is coming from is very much constructed by the latter three. Reinhold Niebuhr's pragmatic and realism teachings springing from his work in "Moral Man and Immoral Society" and "The Irony of American History" contributed to modern just war theory. While Niebuhr is writing in the context of a new world with nuclear weapons, he maintains much of the realism and justice teachings of his predecessors Aquinas and Augustine. The issues of peace and justice and conflict resolution and war and non-violent action will probably never be settled, just as Obama acknowledged in his speech. But this does not discount the value of his contribution to this difficult topic. Please read...

"I do not bring with me today a definitive solution to the problems of war. What I do know is that meeting these challenges will require the same vision, hard work, and persistence of those men and women who acted so boldly decades ago. And it will require us to think in new ways about the notions of just war and the imperatives of a just peace.

We must begin by acknowledging the hard truth: We will not eradicate violent conflict in our lifetimes. There will be times when nations -- acting individually or in concert -- will find the use of force not only necessary but morally justified.

I make this statement mindful of what Martin Luther King Jr. said in this same ceremony years ago: "Violence never brings permanent peace. It solves no social problem: it merely creates new and more complicated ones." As someone who stands here as a direct consequence of Dr. King's life work, I am living testimony to the moral force of non-violence. I know there's nothing weak -- nothing passive -- nothing naïve -- in the creed and lives of Gandhi and King.

But as a head of state sworn to protect and defend my nation, I cannot be guided by their examples alone. I face the world as it is, and cannot stand idle in the face of threats to the American people. For make no mistake: Evil does exist in the world. A non-violent movement could not have halted Hitler's armies. Negotiations cannot convince al Qaeda's leaders to lay down their arms. To say that force may sometimes be necessary is not a call to cynicism -- it is a recognition of history; the imperfections of man and the limits of reason."

I raise this point, I begin with this point because in many countries there is a deep ambivalence about military action today, no matter what the cause. And at times, this is joined by a reflexive suspicion of America, the world's sole military superpower.

But the world must remember that it was not simply international institutions -- not just treaties and declarations -- that brought stability to a post-World War II world. Whatever mistakes we have made, the plain fact is this: The United States of America has helped underwrite global security for more than six decades with the blood of our citizens and the strength of our arms. The service and sacrifice of our men and women in uniform has promoted peace and prosperity from Germany to Korea, and enabled democracy to take hold in places like the Balkans. We have borne this burden not because we seek to impose our will. We have done so out of enlightened self-interest -- because we seek a better future for our children and grandchildren, and we believe that their lives will be better if others' children and grandchildren can live in freedom and prosperity.

So yes, the instruments of war do have a role to play in preserving the peace. And yet this truth must coexist with another -- that no matter how justified, war promises human tragedy. The soldier's courage and sacrifice is full of glory, expressing devotion to country, to cause, to comrades in arms. But war itself is never glorious, and we must never trumpet it as such."

....

"This brings me to a second point -- the nature of the peace that we seek. For peace is not merely the absence of visible conflict. Only a just peace based on the inherent rights and dignity of every individual can truly be lasting.

It was this insight that drove drafters of the Universal Declaration of Human Rights after the Second World War. In the wake of devastation, they recognized that if human rights are not protected, peace is a hollow promise.

And yet too often, these words are ignored. For some countries, the failure to uphold human rights is excused by the false suggestion that these are somehow Western principles, foreign to local cultures or stages of a nation's development. And within America, there has long been a tension between those who describe themselves as realists or idealists -- a tension that suggests a stark choice between the narrow pursuit of interests or an endless campaign to impose our values around the world.

I reject these choices. I believe that peace is unstable where citizens are denied the right to speak freely or worship as they please; choose their own leaders or assemble without fear. Pent-up grievances fester, and the suppression of tribal and religious identity can lead to violence. We also know that the opposite is true. Only when Europe became free did it finally find peace. America has never fought a war against a democracy, and our closest friends are governments that protect the rights of their citizens. No matter how callously defined, neither America's interests -- nor the world's -- are served by the denial of human aspirations.

So even as we respect the unique culture and traditions of different countries, America will always be a voice for those aspirations that are universal. We will bear witness to the quiet dignity of reformers like Aung Sang Suu Kyi; to the bravery of Zimbabweans who cast their ballots in the face of beatings; to the hundreds of thousands who have marched silently through the streets of Iran. It is telling that the leaders of these governments fear the aspirations of their own people more than the power of any other nation. And it is the responsibility of all free people and free nations to make clear that these movements -- these movements of hope and history -- they have us on their side."

...

"The non-violence practiced by men like Gandhi and King may not have been practical or possible in every circumstance, but the love that they preached -- their fundamental faith in human progress -- that must always be the North Star that guides us on our journey."

Peace

JMac

The Case for Nationalizing the U.S. Banking System

From the outset of this discussion, I'll preempt my thoughts by saying that while this is a topic I've deliberated over, it is not one that I claim any special knowledge or expertise. That said, from what I've read and heard from other commentators on the subject, I have not seen a compelling argument for keeping the U.S. banking system as is. To the contrary, an honest survey of history on the subject suggests that the right course of action for our policy makers in the midst of yet another financial crisis largely created by poor banking practices may indeed be to initiate the process of total nationalization of the U.S. banking system.

Before discarding the proposal outright as socialistic and anti-American, note that the very first bank to be granted corporate status in the U.S. was the nationalized Bank of the United States established in 1792. This fact is important to understanding that the current status quo of a privatized system is not the way it always has been, and need not be the way it inevitably must be. The U.S. Government has the power, and can, if it so chooses, use that power to nationalize the U.S. banking system in order to protect her interests and the interests of her citizenry.

The U.S. has frequently used nationalization and quasi-nationalization models to provide critical services to the public. Some public needs deemed too important to put private profits ahead of have been taken over by the government (or are heavily regulated and are in effect government controlled) even though conceptually these services could have been privatized, these include: policing, the military, public transportation, fire service, mail, certain aspects of the health care system (and perhaps one day - the entire healthcare system), water services, electricity, education, libraries, social services, at times - the railroad system, and most recently through the Transportation Security Agency - airport security. In each of these cases, policy makers made the decision that these services are too vital to a modern functioning society to be beholden to the profit motive. As it currently exists, the U.S. banking system has the luxury of being backed by the U.S. Government - public funding - but yet has the freedom to put this asset (public backing) at extreme risk by making self-interested investment decisions driven by the greed for higher and higher profits. Banks are the only type of business that I can think of that has such a cozy and convenient deal.

This poor structure has been the primary culprit to the majority of financial turmoils in the United States. The argument has been made and it is one that I agree with, that the financial crisis of 1819, 1836, 1857, 1873, 1893, 1907, 1929, 1987, and 2008 were largely created by bad banking practices. The regularity of these events is striking. It is also striking just how much we have dragged our feet in addressing the elephant problem in the room: a banking system headed by extremely wealthy and powerful people but yet benefit from a system that bails them out when they make a decision that puts the economic system on the brink of collapse.

There is something deeply troubling to me that in 2009, not even a year removed from federal bailouts saving it and every other bank in the U.S., Goldman Sachs insiders were set to receive $23 billion in bonuses, the largest bank pay-out in history and double what Goldman Sachs employees received as compensation in 2008. Remember, through a backdoor bailout deal of AIG, Goldman Sachs received full compensation for its failed derivatives contracts with AIG. Who paid AIG's full bill to Goldman Sachs? You did - the U.S. Government did. The U.S. put $182 billion through AIG to pay off counter party banks around the world; Goldman Sachs was paid roughly $13 billion through this back-end deal - a bad deal that Timothy Geithner (a former employee of Goldman Sachs and current Treasury head) and others preferred to keep from public disclosure. Thankfully, the news finally came out. Hopefully, we finally have the nerve and the will to make a change 200 years in the making: the nationalization of the U.S. banking system.

Take the private profit-motive out of the U.S. banking system, and give the public back its Constitutional right to fully govern money supply free of any special strings attached for the Wall Street elite.

Peace

JMac

Learning to Invest the Intelligible Way: Part 1 (What does the company actually do?)

It has been a busy start to 2010, and this is my first chance to sit down and jot down some thoughts. The state of capital markets and how these affect the public continue to be at the forefront of my mind, so I will stick with this subject for the time being. In the previous note, I commented on the illogical analysis provided on CNBC and why the investing public would be wise to avoid the network altogether. Today will be the first of many notes to come where I will reflect on some of my lessons learned as an investor.

But before I begin, I'll start by saying that anyone deciding to invest in the stock market should first pay off all credit card and high interest debts. A return on a stock investment MAY award you with a 10% return on a good year; the interest rates from credit cards are GUARANTEED to eat up a significant portion of personal savings every year good or bad. Secondly, once credit cards are paid off, determine if the stock market is the right place for your money. The stock market has advantages as an investment vehicle as it is highly liquid with very low transactional costs (what I mean by this is, is that through a discount broker like TDAmeritrade it is very easy to put money into a ROTH IRA, for example, and buy XYZ stock instantaneously at a very low fee).

This ease of use, however, comes at the significant price of major risk. Because of corporate law (with Delaware law leading as the dominant model), common shareholders (average folks like you and I) are legally assured of getting the short end of the stick. Never forget that the system is rigged for insiders (key executive officers) and investment banks to win and to win big; it offers no guarantee for the average investor of even a nominal return. In fact, a common shareholder's investment can be wiped out entirely, and it frequently is. Think of the stock market as the largest casino in the world with lots of glitz and pizzaz, and... inherently dangerous. This doesn't mean you cannot come out a winner, just as you may at a casino in Las Vegas (or soon to come to Ohio?!?). If you approach the market with respect, discipline, and an intelligible strategy, you can increase your odds substantially to come out on the winning side.

So short-term debts are paid off and you have decided that the stock market is the place you want to put at least a portion of your long-term savings... Where do you begin to look for stock ideas? I recommend starting up a profile on Motley Fool CAPS (Fool.com), where you can begin reading what other investors have to say about specific stocks. Use the CAPS system to make some mock picks of your own so you can get a real sense about how good you are (or, are not) at randomly picking stocks and doing so without actually costing your hard earned money. By making some mock picks at the beginning (let's say over a 3 month period), you will have a better sense of where you need to improve as a stock picker. But by far, the biggest advantage of Motley Fool CAPS for me is the stock screener it provides. Input some data for the type of stocks you are looking for, and seconds later you have a list of stocks to choose from. For the stock screener alone, it is worth starting up a free profile on Motley Fool CAPS.

From a stock screener list, the real research begins. There are several steps that I go through to narrow down the list to the stock I decide to put money in. Rather than listing them all now, I will go through each step one-by-one so I can offer a better explanation for each step. The very first process I engage in is determining whether I understand the company's business model. It does me little good in putting money into a company when I am clueless as to what the company actually does and how it actually makes a profit. If someone asks you, "So tell me, what does Company ABC do?" and if you are unable to explain it in simple and understandable terms, I would caution you against putting your money in the company. There are thousands of companies out there that offer a fairly simple and straight-forward business model that requires little expertise to understand, and from which to choose as potential investments.

Because of this first step, I tend to avoid industries like biotechnology and banking. If I were asked to explain how a certain biotech company makes money, I don't feel I could do that confidently. Nor can I adequately explain what a certain bank does, as a bank's (particularly investment banks) reported data is frequently shadowy in order to protect their business strategies from competitors. For example, Bank of America's stock (BAC) traded above $50 per share in 2007. Do you think the millions of Bank of America investors truly understood the bank's business model? Of course not. If they had, they wouldn't have invested in the bank in 2007 with the knowledge of the extreme risk it possessed and which was realized by a collapsing stock falling into single digits in 2009; Bank of America required the federal government to pump $45 billion into it through the TARP program with additional guarantees of $118 billion -- these were done to save the bank from collapse in 2008 and 2009.

Stick to companies you can comprehend at some reasonable level. Pull up the company's latest annual report (10-K filing) on SEC.gov. Included in a 10-K report is a detailed description of a company's business model. Read it carefully. Does it make sense to you? Go to a company's website. Read about the company and its products or services. Are you able to make sense of it? If so, then the company passes your first step as a potential investment. If not, toss it in the trash and go to the next stock on your list.

Peace

JMac