Here are several investment related questions that burn in my mind every day, I would love to develop conviction regarding the answer to one or more of them:
 
1. Is it possible to have the sovereign debt of the United States continue to grow relative to the current or even prospective GDP of our economy without eventually having to pay higher and higher interest rates on its re-funding?

2. Are the actions of the Federal Reserve (or inaction) likely to result in a devaluation of the U.S. Dollar and cause prices to rise faster than any increased productivity in labor’s output generated as a result of managerial action or improved technology?

3. Some respected money managers predict that the U.S. and other developed economies are moving into what they call a “New Normal”. When asked what does that mean they respond: slower growth rates in domestic industrial production and even a greater shift of emphasis to services requiring intellectual as opposed to physical skills. Asked to give an average growth rate for normal, their response is 1-2% per annum. Can the U.S. maintain its contracted entitlements and pay interest and principal on the projected debt they will cause with this growth rate?

4. We are in a massive rationalization of individual and corporate balance sheets, primarily due to continuing real estate devaluation. At the same time the chaos in Europe and fears elsewhere in the world are contributing to inflows supporting demand for the U.S. Dollar and pushing the U.S. Treasury security bubble ever upward. This apparent circumstance is contributing to the Fed’s ability to keep its low interest rate policies in place without increasing its security purchases. Question, is the risk of this reversing such that interest rates could explode if and when management and individuals decide to invest their huge cash horde? 

5. How can we invest comfortably in China, Southeast Asia and Eastern Europe, the emerging and dynamic growth areas, with some degree of confidence that these countries are protecting investor rights and assuring transparency in shareholder financial information?  

6. The basic question I think about is: “How do we protect the purchasing power of our wealth without losing reasonable,or at least comfortable, levels of liquidity and convertibility?” I have written on the subject of Gold, but are the other investment vehicles, stocks, bonds, notes, CD’s, Money Market Funds, Commodity ETF, Foreign Currency, Real Estate, Annuities, etc.,more likely to preserve wealth? I don’t know! But I feel less uncomfortable with one or the other and so I have tried to diversify among those with good marketability and liquidity until I am able to develop greater conviction for just where we are going.

7. Of course here is the most important question: “Are Obama, Reid, and Pelosi leading this country down the path of becoming more of a social egalitarian society at the expense of its freedoms and individual’s liberty? I think you know my opinion on that. What bothers me the most about it is that there doesn’t appear to be a real leader in the conservative camp who is strong enough to turn those misguided beneficiaries of redistribution around in their understanding and conviction of which system is best for them in the long run- Free market capitalism (with all its potential exploitive risks) requiring individual responsibilities or a state controlled, highly regulated beauracratic social capitalist system with its loss of freedom and liberty to pursue and benefit from individual aspirations.

These questions keep me awake at night (or rising early in the morning) and motivate my watching and learning from “Squawk Box”.

One Man’s Opinion–Bud Brewer

Is Gold a good investment? Over the 50 years of my investment experience, the potential for price appreciation of gold has always come into consideration by investors when the dollar is experiencing devaluation either through inflation or through excessive monetary policies of the Federal Reserve.  From 1970 when President Nixon took us off the gold standard until 1980 when Ronald Reagan was elected and Federal Reserve Bank Chairman Volker instigated harsh restrictive monetary policies, Gold rose in price from $200 per ounce to $850 an once ($2359 adjusted to today’s dollar value).  Speculators made or lost a lot of money as they traded futures which gave them huge leverage.  The gold bubble was much like the housing bubble, the 2008 oil futures bubble or the U.S. Treasury bond bubble today.  It just kept going up day after day and the Gold bugs were out there telling everyone the price was going to rise to $2000 or $2500 per ounce.  The parabolic curve was frightening when in juxtaposition to the prices on the stock market.  But like all speculative moves, when holders wanted to get out, they found that they were trying to sell to each other and the downward pressure saw the price of Gold fall by 75% in a matter of a year.  There is no investment (if measured by comparison to a business that earns a profit and shares some of that profit in the form of dividends to their shareholders) in holding gold.  There is only the hope of price appreciation.  Like raw land or other inert commodities, there is a cost to store such property and over time this negative cash flow eats away at the perceived appreciation that takes place due to price changes.  In the period from 1980 to 2000, the price of gold fell 90% from its high in 1980 while the Standard and Poor Stock index rose over 400%. 

Now we are at a place where some of us are concerned about the prospects for interest rates to rise to double digit levels again as the U.S. Treasury tries to finance higher and higher amounts of debt during the coming decade and the outlook for economic growth sufficient to pay the interest let alone repay some principal is more moderate than it has been before the 2007-09 recession.  If one believes that the Federal Reserve will monetize some or most of the increase in this huge debt then I suppose Gold or any commodity including oil, will rise in price.  But remember this, if the Fed prints money and dollar costs of goods and services go up, those managements that are able to adjust quickly to the cost of doing business and raise prices because their product or service is inelastic to demand, the company will be able to maintain their profit margins thus producing higher and higher nominal dollar income.  There are plenty of good investments with inelastic demand or semi inelastic demand and their earnings and dividends will rise in an inflationary period.  I find it more comfortable to hold investments in these kinds of companies than a “claim ticket” for a measure of an inert product like Gold stored someplace in a depository, speculative price volatility not withstanding.

One Man’s Opinion-  Bud Brewer

June 27,2010:

Homeowners in Washoe County, Nevada, are finding out just how different the Nevada real estate laws dealing with foreclosure are from most other states.  When facing foreclosure, one of the methods being used by lenders to speed the foreclosure sale process is to use a method called the “short Sale”.  By taking this route to settle their mortgage debt, homeowners expect to stave off the negative effect on their personal credit that would occur if they went through a lengthy foreclosure and trustee sale of their property.  In 2009, almost a fifth of all private residences in the Reno-Sparks area received a notice of default, were in foreclosure or going through a trustee sale.  But some have learned much to their surprise that their liability under the mortgage was not completely eliminated even though their property was sold and the trust deed note canceled.  An added risk is being discovered in those cases where the holder of the Mortgage follows up the short sale with a “notice of deficiency” to the homeowner advising them that they are liable for the difference between the proceeds received from the foreclosure sale and the amount due on the mortgage.  In California as well as some other states, real estate law provides that a lender accepts the home as full collateral for the mortgage note and proceeds from its subsequent sale are all that they may receive in settlement of a foreclosure sale.  But this is not the law in Nevada.  As a result, the price the lenders are willing to receive for a short sale in some cases may depend not on the market for a home in foreclosure but more on how healthy are the lists of other assets on the homeowner’s balance sheet outside their ownership of the home.  Thinking they have settled their obligations with regard to the settlement of the mortgage debt on the foreclosed residence, homeowners are shocked to receive a notice of deficiency, which in some cases is hundreds of thousands of dollars.  The lender does not want to force the homeowner into bankruptcy but if the homeowner has other tangible and marketable assets sufficient to pay the deficiency, they are likely to go this way.  This unexpected liability has caused some homeowners to declare bankruptcy in order to protect some interests in their other personal assets. Furthermore, if the homeowner does not pay the deficiency, they will have to declare that amount as taxable income. Last year the Nevada legislature passed a law designed to prevent homeowners from having to pay the potential liability of this deficiency obligation but it took effect prospectively thereby exempting only those purchasing a home after October 1^st 2009. But even this exemption is for money purchase mortgages only, not those from refinancing or from a second trust deed.  For properties bought before October 1, 2009 and sold in foreclosure, the lender may at any time within 6 years of the sale seek to recover the amount of deficiency realized in the process.  In the Reno-Sparks area, 11,000 homes, or almost 17% of the total, received either a notice of default, foreclosure, or trustee sale last year.  In the Las Vegas area, 94,862 homes received foreclosure notices last year.

These numbers are staggering and even though huge, Nevada places 14^th among 200 metropolitan areas surveyed last year.  What is the effect going to be upon the Nevada economy as we go forward?  There has been little if any commentary about the effect of these sales upon future real estate tax revenue, but if you do the math, Nevada almost certainly will suffer significant decline in real estate tax revenue, current or prospective in the coming years.  This along with consumers reducing their spending levels should put terrific pressure on our legislature to reconsider the state’s personal income tax policy.  I wonder if anyone has taken these foreclosure numbers and done an estimate of just how much tax revenue will be lost among the 50 states as a result of reduced property appraisals.  Nevada has an almost $1 Billion shortfall in its budget now and prospectively it could get a lot worse.  It seems highly probable that the Federal government will be asked to bail out many of the states, counties or municipalities experiencing sharp declines in tax revenue and where spending has risen beyond their ability to achieve fiscal balance with their budgets.  What impact will this have on our Federal Deficit?  Have our most “capable leaders” a plan to deal with this probability?  If so I certainly hope that it is better than the one they have demonstrated for the BP oil disaster.

 One Man’s Opinion—Bud Brewer

It is difficult to develop high conviction that the recovery of the U.S. Economy has now passed beyond a point where it could still be impacted by the “subprime mortgage” phenomena.  Actually it is more than an impact. These securities had the financial sector of our economy by the throat and were squeezing with all the force imaginable.  What Congress thought was a benevolent idea to make home ownership readily available to the “working poor”, (their term, not mine), cascaded into a Tsunami of debt and over leveraged balance sheets of almost every investment and commercial bank in the world.  The modern cowboys of Wall Street came up with a way to increase return on the plethora of mortgages being issued to anyone and everyone who wanted to buy home (the subprime mortgage) by securitization of them. Underwriters just bundled these mortgages together into a bond and after convincing Moodys, Fitch or Standard and Poor to rate them based on a skeptical formula for determining the credit value therein, they would sell them as a bond holding Government backed securities, an AAA security. As the demand for income yielding or income enhancement securities continued to grow, Wall Street (or at least some of the more ingenious young Turks in the bond underwriting departments) came up with the idea of selling something, a derivative, called a Collateralized Debt Obligation (CDO).  They piled a range of mortgages backed bonds into these instruments and sold them as investment grade vehicles or quasi money market instruments.  Then they created a security described as a Credit Default Swap (a transfer of risk that the covered bond would fail). The CDS would be bought by holders or a portfolio to protect them in the case that one or more of the mortgages in the Bond or CDO bought by qualified institutions would fail.  At first, the CDS would be available only from an insurance agency like AIG Corporation but in the belief that real estate never declined in value but always appreciated, the Banks, and some money market funds decided to sell credit default swaps to enhance the yields they were receiving on their portfolios. Investment banks like Goldman Sachs, Morgan Stanley, Bank of America, Deutche Bank, and so on, just created these instruments out of thin air.  The buyer would pay the seller a certain percentage annually of the par value (or adjusted FMV from time to time) and he would receive a mark to market adjustment if the value would rise or fall from a baseline value.  While the underlying sub-prime mortgages were originated for 30 years, they usually had a teaser rate of 4-5% per annum for the first two or three years and thereafter they would become an adjustable rate mortgage with interest at some 4-6 points over the base rate (usually LIBOR, the London interbank offered rate).  The logic of issuing a mortgage to someone who is unqualified financially for this obligation is the belief that real estate values always go up and the borrower will be able to refinance the property when the sharp increase in Adjustable rate kicks in.  How many of these derivative instruments were written by Wall Street can only be guessed at because there is or was no regulatory control of them.  In effect it was just a bet between two parties that the FMV of the mortgage would or would not change.  Mortgages were offered to buyers who in no way could qualify under normal standards.  Financing for homes was available no matter what the price.  The government would guarantee 80% of these mortgages since everyone expected payback when the rate adjustment kicked in. Wall Street began to figure that it was crazy to sell all these derivative instruments to hedge funds, other commercial banks, and money market funds, when they could just keep them and leverage their capital to buy more. The stupidity of this decision is beyond understanding but it was happening throughout the Financial Industry. After all real estate values always appreciated, right?   

As anyone without their head in the sand should have known, the real estate market was in a bubble formation with prices advancing far beyond the expected normal demand supply relationship.  When prices stopped appreciating the value of these mortgages would fall like a stone as marginal home owners began to default in the payment of their loan.  The sub-prime mortgage based securities began to unravel as the mortgages therein began to go into default.  Transfer of mark to market securities on balance sheets of major Wall Street firms caused huge declines in their capital base overnight.  The 100 year old firm of Bear Sterns closed at $30.00 per share on Friday, lost all counterparties over the weekend and was bought by Morgan Stanley for $2.00 per share on Monday. Lehman declared bankruptcy. Merrill Lynch was bought by Bank of America. Countrywide was taken over by Bank of America and Washington Mutual was absorbed by Chase Bank.  Others fell by the wayside or were bought out by a survivor.  Hank Paulson, President Bush’s Secretary of the Treasury and Timothy Geithner, President of the N.Y. Federal Reserve, realizing that the financial system worldwide was freezing up, got together to organize a massive capital infusion plan into the financial markets, including AIG. This controversial “bail out bill” was passed by the Congress over the weekend September 19, 2008 and on Monday the financial markets began to function again.  Now, in June of 2010, we have come to the point where our financial institutions are fairly healthy again but they are still deleveraging and are not making loans to smaller businesses even those that have good strong balance sheets.  Why?  Well one reason is that risk management in our banking and other financial institutions is concerned about the Obama Administrations fuzzy tax and regulation policies.  They are reluctant to commit money to anything they are not sure of.  Cap and trade is a big unknown; Healthcare is yet to be understood; Consumer Protection law about to be passed is confusing.  The full effect of the BP disaster is uncertain and the President’ rhetoric sounds too political to allow confidence.  The economic damage from the destruction of business, and fisheries is unknown but must be huge. 

From this uncertainty the investor must make plans and execute strategies designed to fulfill their objectives.  I believe Mohammad A. El-Erian, of PIMCO Investment Management, has it about right.  He believes that the adjustment of the global economies will take several years. He expects the U.S. Economy will continue to recover but only grow at about 1½ to 2% per annum for several years. When the time comes when European, American and Japanese economies have completed their rationalization and consumer and commercial deleveraging, wonderful buying opportunities will exist.  For that reason half invested and half reserves is appropriate at the present time.    

One Man’s Opinion-Bud Brewer

June 3,2010: Good investment strategies always call for some cash reserves. In todays real estate markets, those who have cash reserves and are willing to take some unusual risk, the “short sale” offerings in more modest priced neighborhoods could make it possible for those who are looking to buy a home to live in or for investment to make a good relative value purchase. A short sale is a real estate transaction in which the price for a property is below the total amount of morgage loans that exist on it. It is a process by which the lender takes control of the property in cooperation with the legal owner to sell it, usuallly well below the value of the mortgage(s). In some regions, short sales are by far the majority of transactions that are being done in the current real estate market. This is much like 1994-5 when it was common to find properties “under water” due to the recession and the fact that many homeowners had loans taken out during the super high interest period of the early “Eighties”. One case in point was Budor’s purchase of a condominium in Newport Beach in 1995. The property was purchased on a “short sale” for $435k using a personal guaranteed $180k mortgage loan. The existing loans on the Condo totaled $575k so the property must have cost the prior owner $650k or thereabouts. After a $100k remodel and 12 years of net lease income of $24,000+ per year Budor sold the property for $1.3M at the peak of the bubble. Of course we didn’t know it was the top but the demand for Newport real estate was causing some pretty high prices so we elected to take advantage of it. The result was that Budor experienced a solid return on equity over the eleven years of ownership. The key was that the property fit the location, location, location pre-requisite and was purchased for a reasonable replacement cost or 60% of its last sale price. When this criteria fits a real estate property (or stock prices for that matter), it is always worth while having some cash reserve in order to be able to take advantage of any investment selling at a distressed price or where the current fair market value has strayed significantly away from its mean price trend. You want to stick your toe in the water when someone is forced to take big discounts on what they want to sell. In this market nobody is anxious to buy because they are not confident where this Administration is leading the economy. There is plenty to be concerned about regarding the future consequences from fiscal policies of this government, but mortgage rates are artificially low and if the offering prices of a property fit the rental value providing 6-8% cash flow on market value then with a 50% mortgage (reasonable but conservative leverage) an investor could expect to experience an annual cash return of 8-10% on equity even after property taxes and Association fees if any. I wouldn’t speculate that we will have sharp price appreciation soon especially given the probability of high debt caused inflation or currency devaluation in the foreseeable future. Housing prices may even go down in the future discounting higher interest rates, but rental values should hold pretty well, notwithstanding.

Applying the same point of view to the stock market

As I said, the same potential risk investment in stocks would be to buy British Petroleum on the theory that even after paying all the adjudicated damages for the oil spill, the residual value of BP would be worth more than the current market price. Prior to the spill, BP was priced at $60 per share paying a dividend of $3.36 for a cash yield of slightly over 5%. The company has 3.6 billion shares and earned $38.7 Billion EBIDTA in 2009. It currently is $36-7 per share and the decline since April is over $75 billion in market value. That is a pretty big loss in anticipation of damages, law suit awards, clean ups costs, etc. Last year, the company had $265 Billion revenue and a book value per share of $33.00. Now if you believe that the cost and damages attributed to the spill will severely hamper the company’s future profits of $38 billion from producing, refining and distributing oil and oil products, then the company may see its stock price continue to erode, but given their cash position of $6.8 billion, it is hard to conclude that the ability of this company to survive and recover isn’t more likely than not. I think, although clearly a risk given the politics operating, this company will not only recover but in several years will be benefitting from higher oil prices and, strangely, benefitting also from the likely restriction upon deep water drilling by our all knowing government since it will cause the company to stop exploration in this area which is currently causing negative cash flow to the company. BP is doing deep water drilling now even though they are losing money with the oil price at $70 per barrel. Like all oil companies that are successful, they continue a business plan expecting the trend for oil prices to increase to levels where current investment in deep water exploration will enable profitable production in the future.

The risks are that our populace government policies cause Congress to enact higher corporate tax rates, penalty taxes, and some sort of insurance reserve charge or fees for potential spills on all future oil revenue. Our government and most consumers don’t like the oil companies anyway so they may support some pretty drastic(stupid) legislation regarding them especially since the average person thinks oil companies profits are obscene. All these negative risks still don’t seem to justify the severe decline in the price of British Petroleum. But what do I know “I’m only the 200 pound gorilla in the room.

One Man’s Opinion -Bud Brewer

I read an article by Arthur C. Brooks in the Washington Post, Sunday, May 23, 2010 and thought the words so profound and illustrative of my personal fears for the future, I wanted to have them read by every reader of this blog. America is facing a new type culture proposed by a minority of its citizens. This narrative is long but every word is important.

“This is not the culture war of the 1990s. It is not a fight over guns, gays or abortion. Those old battles have been eclipsed by a new struggle between two competing visions of the country’s future. In one, America will continue to be an exceptional nation organized around the principles of free enterprise — limited government, a reliance on entrepreneurship and rewards determined by market forces. In the other, America will move toward European-style statism grounded in expanding bureaucracies, a managed economy and large-scale income redistribution. These visions are not reconcilable. We must choose.

It is not at all clear which side will prevail. The forces of big government are entrenched and enjoy the full arsenal of the administration’s money and influence. Our leaders in Washington, aided by the unprecedented economic crisis of recent years and the panic it induced, have seized the moment to introduce breathtaking expansions of state power in huge swaths of the economy, from the health-care takeover to the financial regulatory bill that the Senate approved on May 20th. If these forces continue to prevail, America will cease to be a free enterprise nation.

I call this a culture war because free enterprise has been integral to American culture from the beginning, and it still lies at the core of our history and character. “A wise and frugal government,” Thomas Jefferson declared in his first inaugural address in 1801, “which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government.” He later warned: “To take from one, because it is thought that his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to every one of a free exercise of his industry and the fruits acquired by it.” In other words, beware government’s economic control, and “woe betide” the redistributors.

Now, as then, entrepreneurship can flourish only in a culture where individuals are willing to innovate and exert leadership; where people enjoy the rewards and face the consequences of their decisions; and where we can gamble the security of the status quo for a chance of future success. Yet, in his commencement address at Arizona State University on May 13, 2009, President Obama warned against precisely such impulses: “You’re taught to chase after all the usual brass rings; you try to be on this “who’s who” list or that Top 100 list; you chase after the big money and you figure out how big your corner office is; you worry about whether you have a fancy enough title or a fancy enough car. That’s the message that’s sent each and every day, or has been in our culture for far too long — that through material possessions, through a ruthless competition pursued only on your own behalf — that’s how you will measure success.” Such ambition, he cautioned, “may lead you to compromise your values and your principles.” I appreciate the sentiment that money does not buy happiness. But for the president of the United States to actively warn young adults away from economic ambition is remarkable. And he makes clear that he seeks to change our culture.

The irony is that, by wide margins, Americans support free enterprise. A Gallup poll in January found that 86 percent of Americans have a positive image of “free enterprise,” with only 10 percent viewing it negatively. Similarly, in March 2009, the Pew Research Center asked individuals from a broad range of demographic groups: “Generally, do you think people are better off in a free-market economy, even though there may be severe ups and downs from time to time, or don’t you think so?” Almost 70 percent of respondents agreed that they are better off in a free-market economy, while only 20 percent disagreed. In fact, no matter how the issue is posed, not more than 30 percent of Americans say they believe we would fare better without free markets at the core of our system. When it comes to support for free enterprise, we are essentially a 70-30 nation.

So here’s a puzzle: If we love free enterprise so much, why are the 30 percent who want to change that culture in charge? It’s not simply because of the election of Obama. As much as Republicans may dislike hearing it, statism had effectively taken hold in Washington long before that. The George W. Bush administration began the huge Wall Street and Detroit bailouts, and for years before the economic crisis, the GOP talked about free enterprise while simultaneously expanding the government with borrowed money and increasing the percentage of citizens with no income tax liability. The 30 percent coalition did not start governing this country with the advent of Obama, Nancy Pelosi and Harry Reid. It has been in charge for years. But the real tipping point was the financial crisis, which began in 2008.

The meltdown presented a golden opportunity for the 30 percent coalition to attack free enterprise openly and remake America in its own image. While Republicans had no convincing explanation for the crisis, seemed responsible for it and had no obvious plans to fix it, the statists offered a full and compelling narrative. Ordinary Americans were not to blame for the financial collapse, nor was government. The real culprits were Wall Street and the Bush administration, which had gutted the regulatory system that was supposed to keep banks in line. The solution was obvious: Vote for a new order to expand the powers of government to rein in the dangerous excesses of capitalism.

It was a convincing story. For a lot of panicky Americans, the prospect of a paternalistic government rescuing the nation from crisis seemed appealing as stock markets and home prices spiraled downward. According to this narrative, government was at fault in just one way: It wasn’t big enough. If only there had been more regulators watching the banks more closely, the case went, the economy wouldn’t have collapsed. Yet in truth, it was government housing policy that was at the root of the crisis. Moreover, the financial sector — where the crisis began and where it has had the most serious impact — is already one of the most regulated parts of our economy. The chaos happened despite an extensive, intrusive regulatory framework, not because such a framework didn’t exist. More government — including a super-empowered Federal Reserve, a consumer protection watchdog and greater state powers to wind down financial firms and police market risks — does not mean we will be safe. On the contrary, such changes would give us a false sense of security, especially when Washington, a primary culprit in the crisis, is creating and implementing the new rules.

The statist narrative also held that only massive deficit spending could restore economic growth. “If nothing is done, this recession could linger for years,” Obama warned a few days before taking office. “Only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the cycle that is crippling our economy.” This proposition is as expensive as it is false. Recessions can and do end without the kind of stimulus we experienced, and attempts to shore up the economy with huge public spending often do little to improve matters and instead chain future generations with debt. In fact, all the evidence so far tells us that the current $787 billion stimulus package has overpromised and under delivered, especially when it comes to creating jobs.

If we reject the administration’s narrative, the 70-30 nation will remain strong. If we accept it, and base our nation’s policies on it, we will be well on our way to a European-style social democracy. Punitive taxes and regulations will make it harder to be an entrepreneur, and the rewards of success will be expropriated for the sake of greater income equality. The new statism in America, made possible by years of drift and accelerated by the panic over the economic crisis, threatens to make us permanently poorer. But that is not the greatest danger. The real risk is that in the new culture war, we will forsake the third unalienable right set out in our Declaration of Independence: the pursuit of happiness.

Free enterprise brings happiness; redistribution does not. The reason is that only free enterprise brings earned success. Earned success involves the ability to create value honestly — not by inheriting a fortune, not by picking up a welfare check. It doesn’t mean making money in and of itself. Earned success is the creation of value in our lives or in the lives of others. Earned success is the stuff of entrepreneurs who seek value through innovation, hard work and passion. Earned success is what parents feel when their children do wonderful things, what social innovators feel when they change lives, what artists feel when they create something of beauty.

Print this out or save it to permanent files. When you begin to think that a Government managed economy is not too bad, take it out and read it again!

One Man’s Opinion-Bud Brewer

Thursday, May 19,2010: Highlighting the failures of this administration becomes more and more redundant given the rising tide of better understanding by the American voter for just how dangerous this Presidency and his Democrat Congress really is. Continuing to Point this out may seem like trying to close the barn door after the horse is gone, but I just have to say again how little he, his Chicago buddies and most members of Congress understand about how a capitalistic free market economic system works. This is particularly true with regard to the business of banking, finance and Wall Street. Does that mean that Wall Street is without sin? Of course not, but in a market based economic system, there has to be a mechanism to transfer capital from the saver to the risk taker. In this way the underwriter or investment banker is the intermediary and carries the risk of failing to meet the contracted expectation of savers, investors and the issuer during any public offering. Granted this statement is a pretty simple explanation of how our system works but it is as it is. Because the Government is a guarantor of a certain level of depositor’s account value, the investment bank has less concern that their depositors who qualify for government protection might be concerned with whatever strategy the Bank implements. In other words, there is no reason for the depositor to be concerned about the risks the banker is taking since any loss won’t affect them. This attitude made it easier for big investment banks to assume greater or more unusual risk than they did historically in the management of the commercial bank’s business strategy. This unbridled risk assumption led to the excess leveraging of the bank’s capital base and the erosion of that base through the securitization of unsound mortgages offered to their clients seeking a money market like investment vehicle. This left them with huge amounts of toxic assets on their balance sheet and a limited if any amount of credibility to assure counterparties in ongoing derivative transactions. The large purchasers of mortgage loans, Fannie Mae and Freddie Mac were urged by members of Congress, mostly Democrats but some more liberal thinking Republicans too, to make it easier for lower income family to buy a home. This attitude resulted in the sub prime mortgage bubble built upon questionable credit ratings issued by companies like Moody’s, S& P, etc, finally reach the edge of the cliff and the word “Wall Street Bailout” was born.Now because the financial markets and Wall Street underwriters were saved (“bailed out”) by “hard working American taxpayers”, President Obama and his Democratic majority in Congress have decided to rewrite how free market capitalism will be regulated to assure equity and fairness. Of course the legislation does nothing to solve insolvency ($500 Billion) of the two federally backed mortgage companies FNMA and FREDDY MAC, but it does throw sand into the mechanism by which capital is raised in the market place and distributed to issuing companies of all sizes. The process of administering a public offering is complicated. It requires extensive due diligence by the Underwriter, and considerable risk of capital should an offering fail for any uncontrollable reason. The issuing company receives the negotiated amount and the Underwriter depends on willing buyers to achieve their profit. They also have a legal responsibility to support the security’s price in the after market. To do so they often oversell the issue thereby creating a short position, and purchase or cover these short positions over time from shares that come into the market thus stabilizing the price somewhat close to the initial offering price.It is this process that members of Congress and the Committee chairman opined that the Underwriter was telling their clients to buy when in reality they were selling the very same shares short. So now the new Financial and Consumer Protection Act has been passed and it will make it more difficult for small and large companies to raise capital through the Wall Street underwriting process and in many cases will make it impossible for soliciting companies to obtain initial or secondary financing through present day underwriting system.Thank you members of Congress and Mr. President for poking those guys in the eye. “Take that Wall Street!”. You made a big mistake paying out contracted bonuses prior to the resolution of this problem. We surely will have more jobs and get to a balanced budget sooner with legislation of this type. Wont we? Huh?One Man’s Opinion – Bud Brewer

In the pursuit of our Reno Youth Bridge program to teach middle school students how to play the game of bridge, it has become apparent that 12-14 year old students no longer walk or ride bicycles to school. As I arrive at our schools to help teach their after school bridge activity, I am struck by the fact that of the 900+ students attending each day less than a handful, if that many, use the bicycle to get to school and return home. It is typical to see ten or more school buses lined up to carry the kids home and along side the school bus are 50-60 suburban vehicles, or other automobiles with parents or assigned care takers at the wheel, waiting to pick up their charge. I got to thinking the other day when I noticed the traffic jam at one of our schools and began to recall the days when I attended what we called “Junior High School”. Our school had an area the size of two tennis courts laid out with bicycle racks and everyone was full each school day. The bicycle was our means to explore the city or county side. I rode it to work on the weekends. I rode it to friend’s houses to visit and hang out. I rode it to the movies and frankly, I can’t remember whether or not I had or used a lock to protect it while I was inside. When I had a hiatus from school during a period recovering from an illness, I began to play golf and I would ride my bike to the golf course over 4 miles away without a thought that I shouldn’t stray this far from home.

The bike I had was equipped with balloon tires for comfort. The handlebar was called a steer horn handlebar so I could sit tall and yet keep my hands on the wheel so to speak. When I got an early morning paper route for the Los Angeles Times, I would place a flat rack on the back attached to the seat post and the rear axel. I had a canvas bag that fit over the rack in which I would place about 60-70 morning newspapers. I got up at about 4:00AM, went to the pick up point, prepared the paper, and then rode around my various neighborhoods throwing the papers on the porch, driveways or other locations. I was an independent business man but didn’t really know it at the time. The deal the Times made with their carriers was one that wouldn’t stand the test of fairness in today’s world. The way it worked was that The Times would charge me $1.20 for each subscriber on my route and then I would have the responsibility to collect the full $1.50 price for the subscription each month. Come rain or shine, I would show up at the drop off, wrap the paper plastic if raining or fold it and put a rubber band around and then place it in my carrier bag along with the other 60+ papers. The problem I had was that at least 4-6 subscribers would stiff me on the collection every month and I would have to absorb the $1.20 loss for each one that I had to paid the Times. This procedure was the subject of great complaint and eventually the company decided to adopt new policies. As a matter of fact after a few months, the system was changed for the better and I would only have to deliver the paper for a fixed fee. I didn’t even have to collect. That was done by mail. But this early participation in the business world was a great source of cash flow for me to use to go to the movie or buy some gadget for my bike, buy War bonds or for personal pleasure.

When I graduated from Junior High, I assumed that I would use the bike for transportation to high school but upon arriving at the North Hollywood High campus, I found that there were few bike racks and less and less students riding a bike. It was beneath them, not cool. So not wanting to look foolish and wanting to be one to the guys or gals, I started to walk to school (exactly 2 miles). After a few weeks of sore feet I began to notice the same cars traveling on the road between my home and school, so I thought I would try to hitch a ride. The first car that came by was a Model T Ford driven by a senior student at North Hollywood High. From then on I would ride with him and walk home each day. And so, my trusty bicycle began to collect dust as it lay stored in our garage between rare usages. In my second high school term, my folks and I decided that I should enroll at the Army and Navy Academy in Carlsbad, California. From that time on I had little use or ability to use a bicycle so during the summer of my second year at ANA, I not only decided to sell my trusty balloon tired steer horn handle bar bike, but at the urging of my father, I took up flying lessons. But that is a story for another time.

In today’s world there seems to be a general lack of individual enthusiasm for using any form of transportation that requires physical effort to motivate. Perhaps the skateboard is in use but I don’t see it during my rounds of visiting the schools. No it is the parent or caretaker sitting in the car lined up for blocks waiting for dear Johnny to be released so he can jump in the back seat and be chauffeured wherever he wants to go while listening to I Tunes on his I-Pod or watching film on the DVD player. Riding the bus is no different as the students become conditioned to expect others to care for their every transportation needs. Wouldn’t it be wonderful to have one day a week requiring students to walk to school from distances that are practical. Buses could be used for longer travel distances. If all those in a neighborhood could collect into groups that walked to school together on that one day week who knows what changes in individual appreciation and responsibility it would create.

One Man’s Opinion—Bud Brewer

March 9, 2010: Today we celebrate the bottoming of the market crash of 2008-2009. With Dow Jones Industrials Average index up 60% from that low, the experienced observer of market price appreciation in a recession is becoming wary that the underlying forces working in our economy like: The Government Stimulus($780 Billion most of which is questionable and is yet unspent), Open Market Strategy(buy all the mortgges any generator offers pumping money into economy) by the Federal Reserve, potential consequences of Federal and State fiscal policies(Spend more than we have) leading to huge deficits as long as the eye can see, and a prospective mammoth government health care plan (a couple of $Trillion of new debt over ten years) being passed by Congress may put the brakes on the recent pace of GDP growth in our economy. Yet there continues to be active demand for stocks and bonds by institutional and private investors. Pundits talk about how the stocks in the Dow Jones Averages seem to be fairly priced given their recent earnings and PE multiples. Bond prices are inching up in a period when even the most ardent “bull” says that by 2011 interest rates should begin to rise reflecting the huge amounts of investor capital that is going to be required to finance and service Federal and State debt thereafter. Furthermore, this year we will probably see the end of benefits from the afore mentioned 2009 stimulus. Fed Chairman Bernanke says that the Federal Reserve Bank will stop purchasing mortgages by the end of this month and that suggests they will or should become a seller thus sopping up some of the excess liquidity out there now. Our biggest creditor, China, is making noises about diversifying their reserve investments away from the Dollar and today we heard their National Bank Director complaining about Obama-Bernanke politicizing our currency. So what is the problem?

The American securities market looks pretty robust but is it really? After previous recessions, like 1980-83 we started with inflation at 15-20%, interest rates in the teens and tax rates in the stratosphere. All it took to get the economy zooming was a principled President, lower taxes, consistent pressure against hyper-inflation and disciplined money policy by the Federal Reserve Chairman Volker. Then fueled by new and dynamic high technology, the economy generated 23 million jobs in the 1980-1990 decade. Hit with financial excesses in the junk bond markets and the residue of our ejecting of Saddam Hussein from Kuwait, the Hillary Health plan, and the passage of severe tax legislation, we had a minor recession in the early 1990s. But once again after the Clinton presidency turned right and the Republicans took control of the house, spending became subduedand tax revenues started to grow again. Then, after targeted business tax relief, firm control of the money supply, commercialization of the Internet, an explosion in consumer buying of real estate and other hi tech goodies, etc. the economy settle back into a solid growth pattern creating 14-15 million more jobs while producing higher tax revenue from lower rates. So what is different this time?

We start out with interest rates being artificially very low, The corporate, dividend, capital gain and income tax rates are the lowest since 1986 (except for the effect of Alternative Minimum tax), little or no inflation, and as a matter of fact, this period is more deflationary since the housing and commercial real estate sectors are still deleveraging.

This background looks like the toothpaste may already be out of the tube and the Bear opinion that we should have a retracement of at least a third of this rise in stock prices looks reasonable. Short term traders and hedge fund managers have accumulated large short positions in stocks and commodities in anticipation of that happening.

They are expecting a “Double Dip” decline reversing the rise from the lowsof 2007-2009. But the market refuses to go down so they can’t cover their short positions (Having sold securities and borrowed them to deliver to buyer and later expecting to repurchase the borrowed security at lower price). There is nothing more uncomfortable than being short in a rising market. More big money investors are riding the systematic periodic investment strategy by those planning for retirement and the huge amount of liquidity provides the ammunition to do dirt to the short positions. This can squeeze the courage out of the short seller to stay fundamentally correct but practically wrong in their position. So what will happen?

Other than a major event occurring, we could see the short seller capitulate and cover their positions causing a brief but sharp rise in the market. It would be an opportunity to adjust one’s investment strategy to hold positions consistent with a more subdued long term GDP growth rate expectation.

One Man’s Opinion – Bud Brewer