SCSU Investment Weekly

Wednesday, March 29, 2006

More Portfolio Snapshots

China Mobile offers mobile telecommunications services using the global system for communications primarily in Mainland China. They provide voice related services, local calls, long distance calls, intrapovincial roaming, and international roaming. China Mobile also offers short message services, wireless application protocol, multimedia messaging service, and other related services. Many sales outlets and retail outlets offers services of China Mobile. As of June 30, 2005 they had over 224 million subscribers. Their headquarters are located in Hong Kong.

Capital One Financial is a diversified financial services company, that has a variety of financial products and services with its banking and nonbanking services. On May 27, 2005 Capital One became a financial holding company. Their are many, many different subsidiaries that Capital One has aquired. They are a large-cap growth company that is in the Finance sector. Capital One Financial is also expected to outperform the market over the next six months with less than average risk. Stock scouters from MSN Money gave Capital One a rating of 8.

Medtronic, Inc. is a medical technology company that provides solutions for people with chronic diseases. Their are five segments to Medtronic. Cardiac Rhythm Managment supplies medical devices that are used to treat heart conditions. Spinal, Ear, Nose, and Throat (ENT) and Surgical Navigation Technologies, offers products for the treatment of spinal disorders and ear, nose, and throat disorders. Neurological and Diabetes that has products for the treatment of neurological disorders, diabetes, and gastroenterology. The vascular segment offers products for the treatment of coronary artery disease and even aneurysms. Lastly Cardiac Surgery, offers products for the treament of artery disease and heart disorders. Medtronic, Inc is a large cap company in the health sector that is expected to outperform the market over the next six months with very low risk. Stock scouters gave Medtronic a rating of 6.

Microsoft develops, manufactures, and supports many products for many computing devices. Some of their software products include scalable operating systems, PC's, server applications, information productivity applications, business solutions applications, software development tools, and mobile devices. Microsoft also provides consulting services and product support services. They are also the makers of the XBox video games and consols. The online business of Microsoft includes MSN subscription and MSN network of Internet products and services. Microsoft Corporation is a large cap growth stock in the technology sector and is expected to match the market over the next six months with very low risk. Stock scouters gave it a rating of 6.

Precision Drilling Corporation is a Oil and Gas Equipment services company. This company is also operating in Calgary, Alberta. They are a Canadian energy services trust company. Precision Drilling provides drilling services to the Canadian oil and gas industry

PepsiCo,Inc is a snack and beverage company that operates globally. They market a range of salty, sweet, carbonated, and non-carbonated beverages, and foods. They operate in four different divisions: Frito Lay, PepsiCo beverages, PepsiCo International, and Quaker Foods. Many of Pepsi's products are brought to the market through direct store delivery, broker warehouse, and food and vending distribution. Pepsi is a large-cap growth company in the consumer non-durable sector and is expected outperform the market over the next six months with very low risk. Stock scouters on give Pepsi a rating of 6.

Pentair, Inc is an industrial manufacturing company operating in the Water and Technical Products. The Water group provides products that are used in the movement, storage, treament, and enjoyment of water. The Technical products group designs and manufactures custom enclosures that house and protect electronics. Pentair is a mid-cap company in the basic industries sector and is expected to outperform the market over the next six months with less than average risk.

(all information used in the descriptions of these stocks was taken from

Tuesday, February 21, 2006

Portfolio Snapshot

Here are four more descriptions of the stocks that we currently hold.

General Electric (GE) is involved in the Industrial sector. It also currently trades on the NYSE. GE engages in the development and marketing of various products for the transmission and utilization of electricity. This company operates through eleven different segments which are advanced materials, commercial finance, consumer finance, consumer and industrial, energy, equipment, healthcare, infrastructure, insurance, NBC Universal, and transportation. Through these segments they offer such services as cable, internet, programming, financial services, industrial financing, real estate financing, asset management leasing, mortgage services, consumer savings, and insurance services. Some of the products that GE includes are major appliances, lighting products, medical diagnostic imaging, motors, electrical distribution, locomotives, power generation and delivery products, and many, many more services. GE operates in approximately 100 countries all over the world. GE was created because of the merger of Edison General Electric Company and Thomson-Houston Electric Company in 1892. The company is based in Fairfield, Connecticut. GE is a large cap company and is expected to outperform the market over the next six months with a very low risk. The stock scouter on MSN Money gave it a rating of 6.

Home Depot, Inc. (HD) is involved with the Consumer Staples sector and is traded publicly on the NYSE. Home Depot is home improvement retailer. At the end of 2004 HD was operating over 1,890 stores. Most of the stores operate under the names of Homes Depot or EXPO Design Center Stores, depending on what part of the country you are in. These stores sell a wide variety of building materials, home improvement, lawn and garden products, and a number of other services. Home Depot is a large cap value company in the consumer staples sector and is expected to outperform the market over the next six months with very low risk. Stock scouters give Home Depot a rating of 8.

Johnson & Johnson (JNJ) is involves in the Healthcare sector and is also traded on the NYSE. JNJ is involved with selling many products in the healthcare field. The main focus of JNJ is in products related to the health and well being of people. They also are organized on the principal of a decentralized management team. JNJ is operated in 56 different countries outside the US. The two largest products JNJ markets are PROCRIT and RISPERDAL. They accounted for over 5% of JNJ's total revenues for the year of 2004. JNJ is a large cap growth company in the health care sector and is expected to significantly outperform the market over the next six months with very low risk.

Microchip Technology Incorporated (MCHP) is involved with the Technology sector and is traded on the NASDAQ over-the-counter market. MCHP develops and manufactures semiconductor products used for a variety of control applications. Some of the products they are involved with are PIC micro field-reprogrammable (Flash) reduced instruction set computer (RISC). The RISC is designed to provide a simpler and smaller set of instructions (in a computer) that take about the same amount of time to execute. MCHP also offers complementary microperpheral products, such as interface devices and application-specific standard products (ASSP's). There products target high-performance designs in automotive, communications, computer, consumer, and industrial control markets. MCHP is a mid-cap growth company in the technology sector and is expected to significantly outperform the market over the next six months with less than average risk.

Tuesday, January 31, 2006

Getting To Know Our Portfolio!

In order to make justified and well thought out decisions about our portfolio, it is good to know what stock we are investing in and what they do. Here are four of the stocks the Investment Club invests in. Provided is information on what the corporation does, what sector they belong to, and also what their stock rating is from other investors.

The first stock we hold is Americredit Corporation- ACF, own 35 shares. this corporation is involved with the Finance Sector.
Americredit Corporation is in the automobile finance business. They are able to generate revenue and cash flow through the purchase, retention, securitization, and servicing of finance receivables. Americredit transfers receivables to trusts that, in turn sell off asset-backed securities. An asset-backed security is a type of bond that is based on pools with other assets. Americredit does this because it diversifies their underlying assets. To securitize the assets, Americredit is making them look a lot more appealing and available for investment to other investors. They earn finance income on the receivables they issue and they pay the interest expense on the money that they borrow under their facilities.
Americredit Corporation (ACF) is a mid-cap growth stock in the finance sector and is expected to significantly do better than the market over the next six months with very low risk. The stock scout on MSN Money gave Americredit Corporation a rating of 8.

The second stock we hold is called Apria Healthcare Group (AHG) and we currently hold 15 shares in this corporation. Apria is involved with the healthcare sector and trades on the NYSE. This corporation operates under the home health care part of the industry. Apria Healthcare provides services like home respiratory therapy, home infusion therapy, and home medical equipment. They also provide their patients with clinical and administrative support services. Most of the services they provide are prescribed by a licensed physician. They come with the "care plan". There services are provided around 475 different branches in all 50 states.
Apria Healthcare Group is a small-cap growth company in the healthcare sector. It is expected to grow under the market over the next six months with little risk. The stock scout on MSN Money gave Apria Healthcare group a rating of 4.

A third stock we hold in our portfolio is Best Buy (BBY) and we currently hold 15 shares of stock. Best Buy trades on the NYSE and is in the Consumer Discretionary sector. BBY is involved in selling specialty items like consumer electronics, home office products, entertainment software, appliances, and many other services. There are many brand names associated with BBY that operate retail stores and also websites all over the country and internationally. There are two segments that BBY operates in and they are the domestic and international segments. The domestic sector is comprised of the United States Best Buys and the Magnolia Audio Video operations. The Magnolia stores offer high end audio and video products. The international segment consists of Future Shop and Best Buy in Canada offering almost the same similar products in United States BBY stores. Best Buy also offers the Geek Squad and an outlet store on EBAY.
Best Buy Co., is a large-cap company and is expected to outperform the market over the next few months with little risk. MSN Money stock scouter gave Best Buy a rating of 8.

The last one I am going to talk about is the Chesapeake Energy Corporation (CHK). We are currently holding 25 shares in this company. CHK is apart of the energy sector. CHK is an oil and natural gas exploration company engaged in acquiring, exploring, and developing properties for production of crude oil and natural gas from underground reservoirs. This company operates in states like Oklahoma, Texas, Arkansas, Louisiana, Kansas, Montana, Colorado, North Dakota, and New Mexico. Many of the proved oil and natural gas they get from reserves were located on the Texas Panhandle.
CHK is a large-cap growth company and is expected to extensively surpass the market and have less than average risk. The stock scout gave Chesapeake Energy Corporation a rating of 10. We will probably be holding onto this one for awhile.

Hopefully this has helped some of you become familiar with just a few of the stocks we hold just in case we come upon selling some of their shares at a meeting.

Monday, January 23, 2006


Hey Everyone!!!! Welcome back for 2nd name is Erin and I am the Investment Guru. Hope everyone has a great semester and don't forget about the's a great way to get a lot of useful information. See you all at the meetings!!!!

Tuesday, November 29, 2005

Investor VOCAB!!!

Market Cap The "Cap" in "Market Cap stands for capitalization. This is a term that is used to evaluate and compare the size of companies. A company's Market Capitalization is simply the current market value of a share of the company's stock multiplied by the number of shares outstanding. Market Capitalization is a very important number to consider when evaluating a company. For example the stock of a smaller company may be trading at a higher price than a competitor, but if the competitor has more shares outstanding, (or the company's ownership is divided into more pieces) it may have a larger market cap than the company with the high share price.

Different Types of Capitalization

While there isn't one set framework for defining the different market caps, here are the widely published standards for each capitalization:

-Mega cap - This group includes companies that have a market cap of $200 billion and greater. They are the largest publicly traded companies and include names such as Microsoft, Exxon, Wal-Mart, and General Electric.

-Big/large cap - These companies have a market cap between $10-$200 billion. Many well-known companies fall into this category, which includes names like Yahoo, IBM and Citigroup. Typically, large-cap stocks are considered to be relatively stable and secure. Both mega and large cap stocks are often referred to as blue chips.
-Mid cap - Ranging from $2 billion to $10 billion, this group of companies is considered to be more volatile than the large and mega-cap companies. Growth stocks represent a significant portion of the mid caps.
-Small cap - Typically new or relatively young companies, small caps have a market cap between $300 million to $2 billion. Micro cap - Mainly consisting of penny stocks, this category denotes market capitalizations between $50 million to $300 million fall into this category.

-Nano cap - Companies having market caps below $50 million are nano caps. These stocks typically trade on the pink sheets or OTCBB

Think about it!

How important is Market Capitalization when comparing two different companies? How will the revenues differ? Will their balance sheets be different?what about the ratios involving growth or equity?

("Market Capitalization Defined" Ivestopedia. 28 Nov 2005)

Sunday, October 23, 2005

Response thoughts on Chairman

Travis brings up a lot of good points, and I have noticed that recently "Greenspan bashing" has become a popular trend, but can Greenspan be blamed, or has the Chairman dealt with many obstacles, and still performed admirably. For a man who is so highly regarded by economists and financiers one can certainly see why so many people have blamed him for current problems. "The early 1990's real estate and banking difficulties caught him looking the wrong way. So did the excesses and imbalances of the late 1990's stock market bubble. In pushing the funds rate to 1% to forestall an imagined deflation in 2003, Greenspan hits his wall. As yields go higher and higher, bondholders will eventually hit theirs. The case against Greenspan is not that he makes mistakes but that he makes unnecessary ones. His most gratuitous was to take on the work of a de facto central planner." (James Grant) Many people believe that the chairman's attempt to bail out the stock bubble burst may have led to the housing bubble. Combined with low savings rates, this bubble could leave behind many overextended consumers, and a wave of bad debts.

Despite all the criticism, one can' t help but ask is the chairman to blame, or the system?

First, lets review the basics of monetary policy. The Fed can create and destroy money, so it can influence the money supply and in turn the interest rate. The Fed has three tools with which it can use to affect the money supply. First, it can change the reserve requirements, which means banks have to hold more money in their vaults, or in deposits at the Fed. This means banks have less to loan, in effect decreasing the supply of money. Second it can change the discount rate. This is the rate which the fed charges banks for overnight loans they may take to meet their reserve requirements. Borrowing from the Fed is frowned upon though, and is hardly ever done. The Fed simply adjusts the discount rate to track the fed funds rate now. And finally the Fed can use open-market operations. This is the buying and selling of government securities. For example, if the Fed wants to contract the money supply, it can sell government bonds. As the public buys and pays for these bonds, more money will be transfered out of banks reserves, and into the Fed. This is the most commonly used tool of the Fed.

Critics have accused the Fed of being to pro-active, and doing more harm than good. Controversial columnist Bill Fleckenstein notes that there is a "limit to central planning." He explains that "The current Fed is essentially in the price-fixing business. It has decided that it can pick the price for money (i.e., the right interest rate) that will make the world hum magically. The Fed has two choices: fix the price of money (as it now does, poorly) or do what former Fed Chairman Paul Volcker did, which was to drain or add liquidity in an attempt to achieve a specified monetary growth rate and control inflation. As ephemeral a concept as money has become in the electronic age, and as difficult as it would be to create the right growth rate for money, it's a far sounder approach than trying to pick the right rate."

Editor of "Forbes" magazine Steve Forbes said in a recent issue "For two years now the Fed has been printing too much money, which is why the price of gold continues to move ever higher, and why the price of gold continues to move ever higher and why we have a debilitating spike in oil prices. Greenspan & Co. are giving us the worst of both worlds- jacking up short-term interest rates, while fueling inflation. You'd think that after 18 years on the job Alan Greenspan would have mastered the essentials of central banking. Instead we're now experiencing the beginnings of inflation the likes of which we haven't seen in more than two decades. The inflation fires are still small. By removing excess money from the banking system, the Fed could douse these fires before they reach the destructive proportions of the 1970's. Too bad no one has yet produced the book "Central Banking for Dummies." It would be timely reading for Mr. Greenspan and his fellow governors."

Yet with all this criticism the U.S. has enjoyed low inflation, and suffered only two shallow recessions. It has done this despite a stock market crash in 1987, a large downturn in commercial property in the late 1980's, a series of international financial crises in the 1990's, a three-year bear market after 2000, and a terrorist attack on the United States.

Whether or not you agree with the Chairman's actions, there is no doubt that whoever is chosen to take over will not be stepping into an easy job. Markets are beginning to price in their future expectations of higher inflation. The 10-year Treasury yield has risen to 4.50% from under 4% less than three months ago. Equity markets are beginning to test the lower ends of this year's trading ranges. Continuing measured increases, and perhaps more drastic increases will almost surely be needed to confine the increasing threat of inflation. Unfortunately a lot of blame and responsibility will be forced onto the next chairman, regardless of how we got into our current situation.

The next Chairman also faces great odds if he is in anyway connected to President Bush. It seems the support for the president and anything he does is dwindling. Questionable response to hurrican victims, reckless spending, a botched Social Security initiative, wishy-washy tax reform and declining support for the war have not only hurt the presidents approval ratings, but also approval of any persons he appoints, including the recent picks to replace Supreme Court Justice Sandra Day O'Connor.

You can pick apart the actions of the Fed for the past 18 years but the bottom line is that hindsight is 20/20. Monetary policy is not an exact science, and it is questionable whether the Fed's goals can be met with the tools given to them. Certainly we cannot expect the Fed to eliminate all business cycles, and we cannot expect the Fed to control all the variables that affect an economy each day. Hopefully the next Chairman will bring with him a strong vision of future policy, and the humility to learn from mistakes in the past.

Colander, David C., and Edward N. Gamber. Macroeconomics. New Jersey: Pearson Education, 2002.
Fleckenstein, Bill. "My choice for the next Fed Chairman." Contrarian Chronicles. 23 October 2005. <>
Grant, James. "O Sage! O Confidence Man!" Forbes 31 Oct 2005: 102.

Wednesday, October 19, 2005

Insight on Choosing New Chairman

ON THE ground floor of the Federal Reserve building in Washington, DC, there is an electronic game which tests a visitor's skill at setting interest rates. You have to decide how to respond to events such as rising inflation or a stockmarket crash. If you get all the answers right, the machine declares you the next Fed chairman. In real life, because of huge uncertainties about data and how the economy works, there is no obviously right answer to the question of when to change interest rates. Nor is there any easy test of who will make the best Fed chairman. So who would The Economist select for the job?

Alan Greenspan will retire as Fed chairman on January 31st, after a mere 18 ½ years in the job. So George Bush needs to nominate a successor soon. Mr Bush has a penchant for picking his pals to fill top jobs: last week he nominated his personal lawyer Harriet Miers to the Supreme Court (see article). But his personal bank manager really would not cut the mustard as Fed chairman. This is the most important economic-policy job in America—indeed in the whole world. The Fed chairman sets interest rates with the aim of controlling inflation, which in turn helps determine the value of the dollar, the world's main reserve currency. It is hardly surprising that financial markets worldwide can rise or fall on his every word.

Financial markets are typically more volatile during the first year after the handover to a new chairman than during the rest of his tenure. In October 1987, barely two months after Mr Greenspan took office, the stockmarket crashed. Current conditions for a handover are hardly ideal. America's economy has never looked so unbalanced, with a negative household savings rate, a housing bubble, a hefty budget deficit, a record current-account deficit and rising inflation. Figures due on October 14th are expected to show that the 12-month rate of inflation has risen above 4%—its highest since 1991.

Monetary magic
Because Mr Greenspan is widely rated by investors as the greatest central banker ever, their confidence in his mystical powers has helped to hold down bond yields and prop up the dollar. But combine America's domestic and external financial deficits with a looming “Greenspan deficit” next year and markets could well push down the dollar and push up bond yields, thereby bursting the housing bubble. With inflationary pressures rising, the new Fed chairman will need to push short-term interest rates higher; there will be much less room to cut rates later, as Mr Greenspan did after the stockmarket bubble burst in 2001. Would any sane person want this job?

It is worth recalling that in 1987 many doubted whether Mr Greenspan could fill Paul Volcker's shoes. The skills required of a Fed chairman are indeed demanding. He or she needs to be an expert in monetary policy, have a good instinct for economic data and an insight into the big policy debates. A chairman must be respected by financial markets, able to keep a cool head in crises, and be politically independent, while well attuned to political opinion. Mere mortals need not apply.

All the main candidates commonly touted are highly respected economists who could be trusted to pursue a sound monetary policy, and yet each also has serious drawbacks (see article). President Bush said last week that he is looking for a successor to Mr Greenspan who would be seen as politically independent and who would thus inspire global confidence. Yet the leading candidates have all advised or worked for Mr Bush. Mr Greenspan, of course, also has close Republican ties, but financial markets will be less forgiving of his replacement. Any suspicion that Mr Bush has selected someone simply because he is a loyal Republican would undermine confidence in the next chairman, even before he takes office.

Expert and independent
If Mr Bush means what he says about the next chairman being politically independent, then we believe the best choice would be Don Kohn, a governor on the Federal Reserve Board, who is not affiliated to any party. Mr Kohn has another big advantage. As a staff member before being promoted to governor in 2002 on Mr Greenspan's recommendation, Mr Kohn has been attending the Fed's policy-making meetings for almost 24 years, even longer than Mr Greenspan. His vast experience of monetary-policy decisions and financial crises would be invaluable in troubled times. He is highly regarded by economists in the Fed and on Wall Street, and having worked with Mr Greenspan for so long, his thinking on interest-rate policy and financial markets is also close to the chairman's. He would offer continuity and a safe pair of hands.

Yet how can The Economist endorse Mr Greenspan's right-hand man, when we have long criticised the chairman for failing to curb the stockmarket bubble in the late 1990s, and later for propping up the economy by inflating a housing bubble? The answer is that the maestro seems to be changing his tune. In several recent speeches Mr Greenspan has expressed concern about the housing market and, in an apparent effort to talk it down, gave warning that prices could fall. There is a stronger case for restraining housing bubbles than stockmarket bubbles, because they tend to cause greater economic harm when they burst. His public view on the link between monetary policy and asset prices has also shifted. He now concedes that the Fed's success in delivering low inflation and interest rates may have made bubbles more likely, ironically, because investors are demanding less compensation for risk.

Whether central banks should respond to asset-price bubbles is one of the hottest debates in monetary policy. The Fed's failure to curb bubbles, while aggressively easing policy when they burst, is partly to blame for America's imbalances, which could give the next Fed chairman a lot of grief. Mr Kohn's experience within the Fed makes him the best man to cope with this. Mr Greenspan could help him immeasurably and enhance his own legacy by going much further, and explicitly supporting the view of many other central banks that sometimes policymakers should act to restrain asset-price booms. When you are the world's greatest central banker, after all, you should be able to admit the odd mistake.

Tuesday, October 18, 2005

Investor VOCAB!!!

Commodity Futures Contract An agreement to buy or sell a set amount of a commodity at a predetermined price and date. Buyers use these to avoid the risks associated with the price fluctuations of the product or raw material, while sellers try to lock in a price for their products. Like in all financial markets, others use such contracts to gamble on price movements.

Commodity futures contracts like other futures contracts are agreements and obligations to buy or sell a certain amount of a good at a certain price. These agreements which are traded futures exchange markets are ways for buyers and sellers of commodities to lock in prices, and can track the value and future prices of those commodities

In the early 1800s farmers would grow their crops and bring them to the markets in hopes of what they had grown. With no market to track demand, the supply during one season would often exceed demand, which drove down prices, and caused many crops to go to waste. In the mid-19th century, central grain markets were established and a central marketplace was created for farmers to bring their crops and sell them either for immediate delivery or for forward delivery. The forward delievery contract, or contract to purchase a farmers crops at a later date became the first futures contracts.

Futures contracts which at one time were only exchanged on commodities now can be found on everything from oil to bonds and interest rates. Originally the market was also dominated by the Chicago Mercantile Exchange, now there are many futures exchanges all over the world.

The majority of commodity futures contracts do not actually result in a delivery of that commodity. The obligation to sell or buy a commodity at a certain price in the future can increase in value, or decrease depending on the price of that commodity in the cash market. A seller often takes what is called a short position in a futures contract. This party is hoping to lock in a high price now, in assumption that prices will go down. While on the other hand a buyer takes a long position, or hopes to lock in a lower price of a commodity assuming prices will increase.

Think about any contract you have entered into. If you sign a contract for your cell-phone service, you agree to buy their service at set price at a future time (typically monthly, for the life of the contract). Now if the market price for cell phone service increases, by having that contract at a lower price, you have gained something of value. This is the basic principals of futures contracts.

The commodity futures market is notoriously volatile, and is very risky for inexperienced investors. One of the reasons is the leverage involved in futures contracts. Although the value of a contract at the time of trading is technically zero, the price of the commodity changes constantly. This means the owner is potentially liable for negative changes in value, which creates a credit risk to the exchange. To minimise this risk, the exchange demands that contract owners provide collateral or more commonly known as margin.

For example for an initial margin of $5,000 an investor can enter into a futures contract for 1,000 barrels of oil, valued at $50,000. With this large amount of leverage, even small price movements can create large gains or losses. In this example, if the price of a barrel of oil fell five dollars, or ten percent, the investor would not lose just ten percent, but would lose their entire initial investment. If the price falls anymore, the investor would be left to cover their losses out of pocket

All futures transactions in the U.S. are regulated by the "Commodity Futures Trading Commission." (CFTC) and the "National Futures Association." (NFA) The CFTC by law regulates all transactions, each exchange has its own set of rules. The CFTC sets maximum amounts that prices on future contracts can move each day, known as "ticks." For example a bushel of grain can only move one quarter of a cent each day. The CFTC has also imposed "position limits." These are limits on the amount of contracts or units in which an individual can invest, and ensure no on person can control the market price for a particular commodity. These rules are designed to control the volatility of the market, and to protect investors.

The futures market is a very dynamic and competitive market. It is very volatile, and too risky for many investors. The futures market is a center to manage price risks, and is an important outlet for buyers and sellers. While it may seem complicated and difficult to understand if you look at the basic idea of futures contracts, I believe you can relate the concept to many other things in your life.

Think about it!

What Futures Exchanges have you heard of?

Wednesday, October 12, 2005

Tax Reform Panel meets

As many of you know the tax code in this country has become somewhat of a mess, and in some people's eyes, a nightmare! An endless document with thousands of pages included countless deductions, exceptions and loopholes. There is an entire industrybased upon interpreting the tax code and navigating businesses through it, not to mention all the government employees of the IRS to make sure it is enforced. In January of this year, President Bush announced the creation of a bi-partisan panel to advise the nation on their proposal to revise the tax code. The Panel which met yesterday (Oct 11th), and is scheduled to meet on the 18th will issue a report on November 1st to the Secretary of the Treasury on their recommendations. The panel has been given the specific goals to:

  • simplify Federal tax laws to reduce the costs and administrative burdens of compliance with the laws
  • share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of homeownership and charity in American society
  • promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace

the panel is hoping to simplify the extensive tax code and make the system more efficient for the government and the economy.

While no specifics were reached at the meeting, the panel did agree that tax breaks to promote homeownership and encourage businesses to give workers health insurance should be re-written to give more benefits to middle to low income families.

The panel decided that current tax write-offs including the current deduction for mortgage interest, encourage wealthier taxpayers to buy bigger homes and does little to help lower income families purchase homes. One proposal suggested lowering the $1 million limit on mortgages eligible for the interest deductions to an amount closer to average housing prices.

The panel is also looking at capping the tax breaks available to businesses and workers. Current tax laws let employers take a deduction for their employees' health insurance, and employees pay no tax on the value of the insurance. They added that these incentives benefit wealthier workers at the expense of others, and contributes to the amount of uninsured workers. At an earlier meeting the panel already agreed to abolish the "alternative minimum tax." (a tax intended to prevent upper-income individuals from taking too many deductions and avoiding taxes.)

The panel is evaluating a number of other proposals. I found this article on Many of you have heard of a "fair-tax", when applied this is a "consumption-based" tax rather than our current "Income-based" tax. Rather than be taxed on your income, all taxes would be paid as a sales tax during retail transactions. This system is designed to discourage consumption by charging tax on every dollar an individual spends, while encouraging increased productivity and savings by allowing individuals to keep every additional dollar they earn. This system would provide incentive to save, and thus increase the portion of income that American's save. Some believe that a sales-tax based system also reduces the distortion effects our current tax code has on market, making the economy function more efficiently. This proposal was officially rejected at yesterday's meeting. "Ed Lazear, a Stanford University professor, and member of the panel estimated that the national sales-tax rate would need to range from 64 to 87 percent in order to replace current tax revenue from income." Chamberlain These high rates, and fears about large-scale tax evasion caused the panel to move past this proposal.

A "Value-added" tax which is similar to a "fair-tax" was also proposed. This tax is similarly imposed on the sales of good, but rather charges a tax at each level of production as the value of the good is increased. This system is widely used in Europe. The panel expressed concerns over a possible increased tax burden on middel-class families from this system. In addition both proposed taxes could offer increased complexity due to the completely new tax infrastructure that would need to be created and overseen.

One of the other popular ideas, and the one I support is called a "flat-tax." Which would simplify the tax code, completely eliminating the complicated loopholes, and more importantly for investors the capital gains tax, but more on this later. What do you think the panels revisions to the tax code should be? What do you think is the best way for a government to tax? What effects of this change are you most concerned about? What effect do you think is most important to the panel? or the president?

What we currently know is that the panel is favoring the reduction of home mortgage interest deductions, and employer provided health care tax benefits. Both these changes are sure to come under much scrutiny and opposition, especially from those special interests in the insurance and real estate industries.

Many people believe these discussions and changes are long overdue, but everybody from the left to the right seems to have different opinions. We will see what the panel decides and what the initial reaction will be from congress and the president.

Chamberlain, Andrew. Tax Reform Panel Rejects Fair Tax. The Tax Foundation, Tax Policy Blog. 12 Oct 2005.<>

Tuesday, September 27, 2005

Investor VOCAB!!!

Beta is derived from a formula that measures the volatility of a stock compared to a market index. (DJIA, S&P500, etc) Beta can provide an idea of a stocks riskiness, or sensitivity to the market.
A Beta of 1 means a stock has the same volatility as the market. A Beta greater than 1 means a stock will be more volatile than the market, and a Beta of less than one will be less volatile.

Think about it!

What does the Beta for our whole portfolio mean?

Wednesday, September 21, 2005

Despite storm FOMC raises rates

Yesterday despite Hurricane Katrina's tragic toll, the "Federal Open Market Committee" (FOMC) raised its target for the Federal Funds Rate 25 basis points to 3.75%. The Board of Governors also approved an increase in the discount rate to 4.75%. In its Press Release the FOMC noted that before Hurricane Katrina output seemed poised for increased growth, and the damage will set the economy back only in the near term.

Currently the Fed seems more concerned about inflationary pressures caused by increased energy prices, and "still-low" interest rates. The Fed's actions have drawn criticism from some including Senator Jim Bunning of Kentucky who said "Chairman Greenspan is insensitive to America's working families, Americans simply don't need another rate hike in the middle of a crisis."(IP A6)

While the increase did not come as a surprise to most, it did not help mounting concern by many about the future economic conditions especially when many forecasters have predicted a weak fourth quarter.

In light of concerns over Hurricane Rita and fuel supplies the Dow fell 76.11 points and the S&P fell 9.68 to 1221.34

Ip, Greg. "Fed Keeps Focus On Inflation And Raises Rate." The Wall Street Journal 21 September 2005: A6

Friday, May 13, 2005

First Post

Hey, just testing out the new site : )