Deal To End The Partial Government Shutdown Reached

            President Trump, in a live announcement broadcast from the White House around 2:20pm today, announced an end to the partial government shutdown that has gone on for the past 35 days. The deal is that a bill will be signed to open all of the government for the next three weeks, and pay all back pay, while more negotiations take place on the budget and ‘border security’. The expectation is that some part of the final deal will involved a border barrier in some areas as part of funding for the department of Homeland Security border package.

            President Trump claimed that he never asked for or wanted a total barrier from the Pacific to Atlantic oceans, but some supporters may have thought that was what “Build the Wall” campaign slogan meant and expected. It is possible that Trump’s political base may insist on such a barrier going forward and make it harder to complete any deal in the future that does not result in such a full sea to sea border barrier.

            While not much in the way of specific details were provided in the announcement, at least some kind of deal has been made to keep negotiating , open all parts of the government, and pay all government workers while a final deal is negotiated.

            President Trump did say that if nothing was done about a border barrier then there could be another shutdown when the current partial funding ran out in three weeks on February 15.

            Hopefully, there will not be another one of these government shutdowns and all parties can work together to keep the government operating as it should be.

Good Luck and Take Care,

Louis J. Desy Jr.

Friday, January 25, 2019

Would Economic Development Be a Better Use for Mexico Border Wall Funds?

            As I write this, 2pm on Saturday, December 29, 2018, parts of the US Government are still shutdown from since December 22 due to not passing a Continuing Resolution (CR) to fund all of the government, that includes funds for a border wall with Mexico. While the House of Representatives did pass a CR with some border wall funds, there has been no vote in the Senate, plus the President has said that he would not sign any bill that did not have the border wall funds of around $5 billion. At the moment, it does not even look or sound like there are any negotiations even going on to resolve the impasse between the administration and Congress.

            While this has all been going on, it occurred to me that maybe a better use of boarder wall funds would be a program of development for the areas of Mexico that are next to the border with the US so that people would be able to find work in Mexico and not want and/or need to somehow get into the United States to survive. A border wall with Mexico, if and when built, will not really do much to help anyone get a job or develop anything and even cost money to maintain for the decades to come. Economic development on the border areas has the possibility of making the areas in Mexico much better off than they are now, and the program could even turn some kind of a profit if done properly. In some quick research on the internet, it looks like the cost of a border wall is on the order of about $21 billion USD and expected to take 3.5 years, but some sources seem to think the total boarder wall would be around $75 billion USD in total.

            It seems that with all of the money spent on various government programs, that maybe spending $20 billion per year to improve the areas of Mexico that boarder the United States would be a good program to try. The hope is that at some point people arriving in Mexico or in Mexico would be able to make a decent living in those areas, plus maybe once the areas are improved there would be demand for good and services from the United States to those areas at some point. I also expect that spending money in Mexico to improve the areas in Mexico would get a lot more purchasing power and benefit from the money than building a boarder wall with much more expensive labor and material sourced from the US side.

            While this may all take a while to see how it works out, I expect the end results would be worth the effort and settle the arguments on the issue instead of having  the current budget and legislative grid lock with nothing getting done by anyone.

Good Luck and Take Care,

Louis J. Desy Jr.

Saturday, December 29, 2018

Is There a Problem with Stock Buy Backs?

Is there a problem with stock buybacks or are stock buy backs always bad?

The standard answer is no, there is a place and time for stock buybacks. The problem with a lot of recent stock buybacks is that a lot of them were not done following what I would call the ‘old standards’ on when to do them and were mainly done with the objective of boasting the stock price by reducing the number of shares to boast the earnings per shares. i.e. Less shares for the same amount of earnings means higher earnings per share. The hope was that would cause the price of the stock to rise as a result.

A typical company, especially large ones that have been in business for a long period time, are usually profitable. The company then has to decide and see what to do with its profits. In the past there was an expected order or priority as to what to do with the profits in the following order of logical priority:

1: Save enough cash to last through the next expected downturn.
Companies would make sure there would be enough of a combination of cash plus available borrowing to make sure the company would be able to survive the next recession. Some companies, especially cyclical companies like car companies or heavy industry concerns, would have a plan in place as to what to do when sales started to drop in order to be able to ride out the next economic downturn.

2: Make sure all needed capital spending needed to maintain sales and profits is made. After the company has enough cash saved or available to make it through a recession, a company needs to repair and replace all equipment needed to maintain sales and profits. Without such spending, the companies’ tools, equipment and machinery will simply wear out and their employees will be unable to do the work needed. While companies can put off replacing equipment for a few years, eventually all machinery will break down and be unrepairable, equipment will wear out and completely break leaving workers unable to do work the company needs done. As such, while capital spending can be put off for a few years, it does not ‘go away’ and will eventually have to be spent, maybe in an emergency situation after revenue is lost.

3: Expand operations, invest in new products, research and development for the future; in short, investments in future revenue and profit. Once a company has taken care of a reserve of cash to survive a downturn, and made sure that its equipment is all in order and working, the company can take a look at expansion for the future. As long as the expected long term return on new project, no matter what it is, exceeds the long term cost of financing, then the company should take on and fund new opportunities to increase revenue and profit.

4: Return funds to the shareholders.
Once all of the above three items are done; cash saved for the next economic downturn, done needed capital spending, invested in new opportunities that the profit will exceed the cost of financing; THEN the company should look at distributing PROFITS to the shareholders and decide how to do it. One very important item to note, is that this distribution to shareholders should only be done with PROFITS from the company, NOT from borrowing.

There are two methods to deciding how to distribute profits of the company to shareholders; share buybacks or dividends.

The more ‘tax friendly’ option is a share buyback since the profit on shares held for more than one year would be typically taxed at the lower capital gain rate instead of the margin income rate for the shareholder. The disadvantage of a share buyback is that for a shareholder to get any cash they would need to sell some of their shares, which if done all the time, would result in the shareholder having no more shares. The company could partly offset this problem by doing a stock split from time to time, especially if the price of the shares are rising. In this way, the shareholder could sell a few shares from time to time to get cash but would get more shares that would enable them to sell off a little every once in a while. (It is also possible that a shareholder could use the shares for a margin loan but that is not a good idea since now you have to make sure the shares do not lose their value or you will have to repay the loan.)

The other option is that the company can pay dividends to the shareholders from the company’s PROFITS. Note that I put profits in capital letters since if a company is not generating a profit it should NOT be paying out dividends or doing share buybacks since it would need to be borrowing to make the payments. Borrowing to make payment does not make any sense. People are investing in companies because they want to invest in a business for the future, they are NOT looking to be repaid with, in effect, their own money that put into the company to finance it. i.e. If there are no profits, the company is paying out money borrowed from everyone financing the company, which is NOT the reason people invest in companies.

While a number of companies in recent years are having problems because they made large share buybacks with borrowed funds, most of these companies can work their way out of their situation over the course of several years. As long as they are making a profit, and stop payments to shareholders that are not made from profits, these companies will improve as time goes on, be able to build up a cash reserve, do all needed capital spending, invest in new opportunities and then start to make distributions to shareholders from profits.

It will be a long road for many companies, such as GE, GM or IBM, but it can be done as long as they are making a profit and over time things will improve dramatically.

Good Luck and Take Care,

Louis J. Desy Jr.
Wednesday, November 28, 2018