Investment Contrarians

Austerity Measures

An austerity measure is an official action taken by a government in order to reduce the amount of money that it spends on its citizens. Following the worldwide credit crisis of 2008, austerity measures became popular with high-debt governments. For countries with a high debt-to-GDP ratio, austerity measures often become a necessity. Examples of government austerity measures include an increase in the official retirement age (to reduce government retirement payments), a reduction in the number of days garbage is picked up (to reduce municipality costs), and a reduction in school days for children (to reduce government employee costs).

What Caterpillar’s Big Drop in Earnings Means for the General Stock Market

By for Investment Contrarians | Oct 28, 2013

General Stock MarketWith the S&P 500 hovering around its all-time highs, I think it’s quite interesting to read some of the latest corporate earnings reports and get a sense of what’s really happening in the global economy.

One of the most international companies within the S&P 500 is Caterpillar Inc. (NYSE/CAT). The firm recently released its third-quarter 2013 corporate earnings report, in which the firm poured some cold water on expectations. Revenue during the quarter was down 18% year-over-year, and corporate earnings were down 44% year-over-year. (Source: Caterpillar Inc., October 23, 2013.)

That’s not even the worst part. The company also brought down guidance for both revenue and corporate earnings for the foreseeable future.

In its corporate earnings release, Caterpillar cites several issues that it’s worried about, including uncertainty regarding U.S. fiscal and monetary policy, the health of economic regions globally (including the eurozone and China), and a lack of demand from customers.

Because revenue and corporate earnings growth is questionable, the company is taking the only smart action it can—reducing its own cost base. Obviously, no company can force a customer to buy their product, but it can keep its operations as lean as possible. To that end, the firm has cut 13,000 jobs globally over the past year, reduced pay and incentives, and initiated the “implementation of general austerity measures across the company.”

Considering Caterpillar is a large firm within the S&P 500 and it has its fingers on the pulse of the global economy, do any of these comments give you hope or confidence that either the domestic or international economies are about to surge upward in growth? Not … Read More

Detroit the Beginning of a Trend in Municipal Debt?

By for Investment Contrarians | Jul 24, 2013

Municipal Debt“Motor City,” USA is in trouble. Detroit, straddled with close to $20.0 billion in debt, simply could not move forward and was forced to declare bankruptcy late last week—the largest bankruptcy in U.S. municipal history.

The news was not unexpected, as the city had already faced a massive migration of people along with industries. The migration’s end result was a significant decline in revenue base—this means unpaid bills, projects put on hold, mounting interest payments, and just general malaise within the community. Mind you, Detroit wasn’t always like this. My wife grew up in middle-class Detroit when it was beginning to show cracks in its foundation, but nothing like its recent cracks.

You hear about the 45,000 street lights that have to be replaced, but there is no money to do so. There are also the tens of thousands of empty and crumbling houses and buildings.

The bankruptcy move by Detroit was necessary, but this former industrial powerhouse by the lake has many hurdles ahead of it that might make the austerity measures in Greece seem like a walk in the park.

First, the debt holders have to deal with losing the majority of their capital. Next, the city will need to come up with a plan of action that can build a sustainable Detroit, but this will not be easy. Investors in new bonds to rebuild the city will also be needed, but the expected return will likely be insignificant. I just can’t think of many reasons why anyone would take that chance.

The problem with Detroit was created by decades of mismanagement and uncontrolled spending, given the massive … Read More

Time’s Running Out; Fiscal Cliff Needs a Resolution

By for Investment Contrarians | Dec 6, 2012

Fiscal Cliff Needs a ResolutionAmerica is fast approaching the $16.4-trillion limit in national debt that is legally allowed under the current debt ceiling. With the current debt at $16.24 trillion, time is running out, which is why we need to either resolve the fiscal cliff or, as the President wants, hike up the national debt ceiling in order to allow the government more flexibility in its spending. Failure to raise the national debt limit would mean that the government would need to access emergency funds to avoid a default and initiate the fiscal cliff cuts and tax increases in some form.

So far, the talks between House Speaker John Boehner and President Obama have resolved little. Just last week, Boehner offered up a new 10-year, $2.2-trillion strategy that entailed adjustments to Medicare and Social Security benefits but also avoided a return to higher taxes for the nation’s top income earners. In response, the President is willing to look at reviewing the highest tax rate for the rich, but at the same time, he wants to cut loopholes.

With just over three weeks left in the year, something will need to be done. In the event that a resolution is not achieved, the government will have to access emergency funds until a deal is agreed upon. This is the dilemma that we are at now; but something has to be done, or America could be leaving a much worse financial mess for the generations ahead, including a possible recession and massive national debt.

Moody’s Investors Service warned it may cut the U.S. triple-A debt rating for a second time in 2013, should the government not … Read More

32 Days: Countdown to the Fiscal Cliff

By for Investment Contrarians | Nov 30, 2012

Countdown to the Fiscal CliffThere were two winners of the Powerball lottery jackpot of $588 million Wednesday night. I was wondering if there was any chance they could help out with paying down some of the country’s burgeoning $16.2 trillion in national debt, its out-of-control deficit, and its runaway spending. Hey, isn’t that what the fiscal cliff is all about?

With 32 days remaining in the year to resolve this financial crisis, President Barack Obama and Republican House Speaker John Boehner are hard at it, trying to come to a compromise.

The reality is that, like many of you, I’m growing weary of hearing the “FC” term: financial crisis. Let’s just deal with the financial crisis stalemate and work out a deal that makes both parties happy, and slows down the frivolous printing of money that has allowed America to spend endlessly and create the financial crisis that is now lurking.

When I think about it, the government is operating a Ponzi scheme. They’re printing money and using it to pay for the undisciplined spending; when the money runs out and payments are due, they go out and print more money to cover them, and so on. This Ponzi scheme must be halted.

Just take a look at the market action. We are seeing a ridiculous number of U.S. companies declaring “special dividends” to try to help investors avoid higher dividend taxes in 2013 if the fiscal cliff is allowed to move forward.

From the end of September to mid-November, Bloomberg reports that 59 companies belonging to the Russell 3000 Index announced special cash dividends, versus 15 companies in the same timeframe in 2011. … Read More

For the 50th Time, the Eurozone’s Digging Its Own Grave

By for Investment Contrarians | Nov 28, 2012

Eurozone’s Digging Its Own GraveGreece finally received approval for its austerity measures and, in the process, will get another $70.0 billion or so in loans. The money is not earmarked for growing the Greek economy out of its deep recession; rather, it will be used to keep the lenders away as the country tries to get out of its financial crisis. What is happening in Greece and the eurozone is absolutely an economic farce that will likely take years to rectify. For Greece, the country will be stuck in its own economic abyss for years, even decades. The problem for Greece is that the deep budget cuts are occurring at a time of fiscal confusion, massive unemployment, and negative gross domestic product (GDP) growth. The deep cuts will hurt the country more in the short term, but they are needed to help Greece become a contributing member of the eurozone. As I said, it could take decades. Don’t believe me? Just take a look at the two-decade drought in Japan.

The Organisation for Economic Co-operation and Development (OECD) just suggested the global economy was on shaky ground again, with weakness in 31 of 34 member countries. (Source: Matt Nesto, “The Five-Year Funk: OECD Slashes Global Growth Estimates,” Yahoo! Finance, Breakout, November 27, 2012.) The report “Global Economy Facing Hesitant and Uneven Recovery” called for the eurozone to experience another two years of mild recession. GDP growth in the U.S. is estimated at a mere two percent for 2013, which is not unexpected, given the current conditions in America. Failure to resolve the fiscal cliff will make the growth worse.

The way I view it … Read More