Industries to Avoid, Industries to Buy

While some of the recommendations in this commentary may seem like no-brainers, its real purpose is to illustrate how investment themes relate to the bigger picture.

U.S. Auto Industry: AVOID

Most of you are familiar with the history of the U.S. automotive industry. If you aren't, all you need to do is look at Detroit's decline since the 1950s when it once stood as a great city with a strong economy. Once the world's envy, the Big Three became embattled in a struggle between labor unions and foreign imports in the 1980s. Yet, with more than two decades to respond to competitive threats, the Big Three has shown nothing but disregard for consumer demand. Meanwhile, the bargains struck with the UAW have hastened the effects of free trade. Today, the U.S. auto industry is fighting for a place in line with the airline industry for the next government bailout. At the best of scenarios, they will be bought out and restructured. As it stands today, the U.S. automotive industry is among the worst possible investments in the capital markets. In fact, it has held this title for many years, as the financial statements confirm. Market growth has been MIA, as have growth in dividends.

After the initial flood of foreign autos into the U.S., labor unions responded with demands for job security and higher wages at the worst possible time. The UAW was able to negotiate a jobs bank and other guarantees that provided full wages in the event of layoffs. A decade later, President Clinton signed NAFTA, which all but ensured the beginning of the end of American manufacturing. After the oil crisis of the 1980s, America became spoiled with very low oil prices; so low that the Big Three overlooked the fuel-efficient strategy of Japanese imports. Instead, they were focused on combating labor unions.

Gradually, foreign autos became known for more than fuel-efficiency. Soon, styling and reliability combined with the toxic effects of unfair trade drew a larger market share. Early on, the Big Three (GM, F) realized it could not compete with the cheap labor overseas. But instead of meeting the competition head on, they chose the route of strategic retreat, which served as a clear indicator of defeat. Soon, the Big Three came to resemble financial institutions more than auto manufacturers. In fact, their financing divisions grew so large that they accounted for most of their profits. Rather than improve the quality and fuel-efficiency of their autos, their strategy was to take advantage of the explosive growth of America's consumer finance industry in the 1990s. As well, they embarked upon a huge marketing campaign promoting big trucks and SUVs - something foreign peers had not yet addressed. Slick marketing ads promoting big trucks and SUVs served to make many consumers feel "tough." For many, it worked. But over the past several years, foreign competitors have caught up to the Big Three's marketing gimmicks. Now even Toyota makes large trucks. Now the Big Three focuses on making interest more than making autos. "No money down," and "zero percent financing" serves as the line by most U.S. auto dealers.

With gas prices on a strong upward trend for several years now, the Big Three continue to run away from viable solutions. Instead of designing stylish, fuel-efficient autos, they are now producing hybrid SUVs as a solution to the oil crisis! The fact is that hybrids are for the most part a scam. Consider these facts. Although there are a few exceptions, most hybrids only offer an additional 5 or 6 MPG, while costing thousands more. And you can't count on breaks since they are limited to the first 50,000 to 60,000 vehicles sold. As well, Bush phased out tax incentives for hybrids. Needless to say, it's a poor consumer decision to buy a hybrid given the poultry benefit and the uncertain risk of the new hybrid technology. But it gets worse. The MPG listed on U.S. autos has been proven to significantly underestimate the actual MPG for a variety of reasons. This has fooled consumers into thinking that their truck or SUV gets better gas mileage than in reality.

Now the latest scheme is Ford's offer to cap the price of gas to new buyers of their trucks for three years. The price has been set at $2.99/gallon, regardless where gas goes over this period for up to 12,000 miles per years. How many of you drive only 12,000 miles per year? Basically it's another gimmick to entice consumers to be stuck with a huge financial liability. Let's do some simple math. Let's assume that over the next three years, gas averages $4.00 per gallon. That's about 700 gallons covered per year or about $2100 savings. We all know how auto dealers play games with prices and promotions; trim the price here a few thousand, while increasing the financing, etc. They manage to juggle the promotions so the net cost will be the same. But since the average annual mileage driven in the U.S. is about 25,000 miles, you're still going to feel the pain of higher prices at the pump to the tune of over $2200 each year (assuming gas averages $4.00/gallon). And what are you supposed to do after three years? I suppose U.S. auto dealers will have a "loyalty program" for you to trade your truck in for another similar deal. We all know that the more frequently you sell an auto, the higher percentage of your lifetime auto costs go to sales commissions. Anyway you look at it, the U.S. auto industry is a big joke. It's become an embarrassing reality that Americans have come to accept over the years. In contrast, foreign auto makers don't need to offer 0% financing because consumers are drawn to their autos for the right reasons – styling, quality, reliability, fuel-efficiency, and value.

But labor costs have also hit the Big Three hard for many years. Certainly their pension plans are hurting while GM and Ford report massive losses. And they've had to buy out thousands of workers who had guarantees despite plant closings. And they still haven't fully dealt with the jobs bank liabilities. As a result they are paying thousands of laid off employees NOT to work. It's remarkable they have been able to stay in business this long. If this weren't enough, the biggest labor costs of the Big Three are healthcare benefits. For each auto that rolls off the assembly line, GM is already in the red by over $2200, most for healthcare benefits; the remaining for pension payouts.

So how is it possible the Big Three has been able to survive this long? After all, they have unmanageable labor costs while their products have continued to ignore consumer demand. If it weren't for their financial units they may have been gone long ago. But perhaps the main reason why the Big Three has continued to exist is that it has been able to sell cars Americans don't want to government entities, police departments, corporations, and car rental companies. Have you ever wondered why for so many years it was impossible to rent a Japanese car at one of the big car rental companies? Only recently have they been made available. But still they don't have many foreign cars. According to the Detroit News, Enterprise Rent-A-Car alone accounts for about 7% of the Big Three's auto sales each year. Imagine if these deals weren't struck with car rental companies, police departments and other government bodies to encourage them to buy American autos. When you have a certain amount of guaranteed auto sales from government entities, car rentals and corporations, it doesn't exactly make you have a sense of urgency to address consumer demand. Certainly, the previous deals stuck with the UAW, as well as the unfair trade laws have made the U.S. auto industry a losing proposition. However, the management has been lazy and irresponsible, focused more on protecting their jobs.

Oil Industry: BUY

Recently, we've heard Hillary and McCain's "solution" to soaring gas prices. They want to give Americans a federal gas tax vacation over the summer. That would be a savings of $0.18 per gallon. Over the proposed three-month period, a total savings of about $60, assuming one drives 25,000 miles per year in a car that gets 20 MPG. These quick fixes are a slap in the face to all Americans. And it confirms the position of these candidates. They refuse to go up against corporate America. All they do is pander. A couple of years ago Bush used a similar gimmick to avoid addressing the extortion by oil companies – mandating an ethanol gas blend. And we all know what that has done to food prices. In fact, not only has the use of ethanol NOT decreased the price of gas, but it's even caused gas prices to rise since corn prices are so high now. It seems to me that a real solution would be to regulate the profit margins of the oil industry. How is it possible that oil companies are recording record profits under record oil prices? The only way it's possible is if they're keeping the same profit margins amidst the oil crisis. Since oil is absolutely needed for consumers and businesses, doesn't seem as if during a crisis, oil companies should absorb some of the pain and reduce profit margins? Why should oil companies be permitted to earn record profits while the rest of the economy gets abused?

The distribution of basic necessities should be controlled by the government or at least highly regulated to minimize consumer exploitation. Cities understand this. That's why they run water services rather than leave it up to for-profit companies. It is also why the government controls the agricultural industry via subsidies. We already saw what happened to the utilities industry when Washington let the free markets take control – Enron. If you permit for-profit companies control the distribution and sale of a basic necessity, should you allow these companies to hoard profits during the most severe oil crisis in the history of the U.S.? Oil companies already enjoy the most generous tax breaks of any industry. They want it all and they're getting it. Meanwhile, consumers are getting abused. And Washington sits around pretending they don't like it but no one is doing anything about it. They aren't even coming up with reasonable solutions! In conclusion, America's oil industry resembles a monopoly. And monopolies always control their profits because we have no choice but to pay what is asked since rationing has its limits. If you haven't already invested in oil, you need to because we have seen the end of cheap oil for a long time.

Healthcare: BUY

The strategy of the Big Three reminds me of how Bush has addressed the recession with $600 checks – money that must be borrowed from China. And of course, most of that money has already been spent on higher gas prices. Washington addresses America's oil and healthcare crisis in the same manner, confirming how stupid they think we are. Bush did the same thing when he passed Medicare Part D. His implied message was "seniors, I feel your pain from the high price of prescription drugs so I'm going to let all Americans subsidize the cost of drugs while letting the drug industry (RXL, PFE, MRK, BMY, GSK, KG) continue to charge what they want." Yet, the only ones who stand to benefit from Part D are the drug companies. Bush did the same thing with Medical Savings Accounts (MSAs). Rather than address the hyper-inflation in medical insurance premiums, he offered a tax deduction to those who contribute money to these accounts. You don't fight fire with fire. Taxpayer subsidies do nothing to address the biggest problem with healthcare – rising costs. Already, America spends 18% of GDP on healthcare costs, and roughly half of this comes from government spending. What about Americans who lost their jobs to outsourcing? If you think they will automatically qualify for Medicaid you are very wrong. According to the CMS website, "Medicaid does not provide medical assistance for all poor persons. Even under the broadest provisions of the Federal statute (except for emergency services for certain persons), the Medicaid program does not provide health care services, even for very poor persons, unless they are in one of the designated eligibility groups."

This, my friends is why 50 million Americans have no access to medical insurance. And if you think you are covered because you have full insurance (IHF, PTJ, XLV, WLP, WCG, UNH, HUM, AET, CI, HWAY), consider that 30% of medical bankruptcies are with consumers who have insurance. Are we that stupid not to see what's going on?

While McCain is absolutely clueless as to the dire consequences of America's healthcare crisis, Obama and Hillary have fooled most Americans by offering what they have labeled as a universal plan. The fact is, neither of these plans is universal; period. A universal healthcare plan is a single-payer plan, meaning there is only one payer, such as the government or a private provider. Whether you are in favor of a universal plan or not, the fact is that promises of healthcare access are quick fixes that are not sustainable without some level of price controls. Thus, the issue that must be addressed is cost containment. Some form of price controls is absolutely vital. Without price controls, Americans will continue to subsidize costs of prescription drugs for the rest of the world. Money to feed America's inefficient profit-driven healthcare machine has to come from somewhere. If it comes from Washington, you'll see higher taxes in some way shape or form. If it comes from employers, you'll see the effects in terms of lower wages (slower raises) or decreases in other benefits.

You can't cheat the system. Along with the oil industry, America's healthcare system controls the distribution of services that are considered basic necessities for a modernized world. When for-profit companies are free to control pricing of goods and services absolutely needed by consumers, this will ultimately result in unrestricted price hikes and diminished quality. That is the current state of healthcare in America, now ranked 37th by the World Health Organization. But America's healthcare does hold one distinguished title – it's the most error-prone system on earth. In fact, medical errors now account for the number three cause of deaths in the U.S.(1) Similar to the oil industry, America's healthcare industry resembles a monopoly more than a free market system. Thus, investments in the drug and medical insurers are positioned to do quite well over the next several years, especially when 80 million aging baby boomers develop chronic disease – the most costly of all medical expenses.

Airline Industry: AVOID

Before government deregulation in the late '80s, there were over 200 U.S. airlines. That's right; over 200. That was at a time when you had a lot of competition. Since that time, most have gone bankrupt. Today, we have a small handful. And each one is flirting with bankruptcy without government help. A few years ago, the airlines already received a government bailout and another is just over the horizon. There is no way the airlines will be able to stay in business with oil at over $100 per barrel.

Not only is the airline industry (AMR, DAL, NWA and LUV) subject to the vulnerability of oil prices, but the management is pathetic. Other than Southwest Airlines, they have a terrible corporate culture and they aren't even able to effectively lock-in oil prices using futures. If you take a look at the balance sheets of the airlines you will see that they do not build equity. They don't even own their jets. They're mostly operating leases. So what are buying when you purchase these stocks? Are you getting a real business with real assets with the prospect of real growth? Or are you investing in ticket sales for the next flight? Wall Street isn't going to tell you the reality – U.S. automotive and airline industries are absolutely terrible investments, because they want the big investment banking business these industries provide.

Friends, you won't find a person that embraces the free markets more than me. I have worked on Wall Street, run my own business and I currently work in the venture capital industry. These are among the most entrepreneurial settings on earth. But I support a free market system that is fair and without the extreme corruption we see today. Without a proper system of capitalism - one that is regulated appropriately to ensure fraud is punished - the system is no good because it only benefits the guys at the top, while serving to keep everyone else down.

How long will consumers allow Washington to unfairly enrich corporate America using taxpayer dollars at the expense of working-class Americans? Maybe now you know why the U.S. media continues to dumb-down Americans. Perhaps if they are constantly talking about Paris Hilton or the he-said-she-said between Hillary and Obama, maybe Americans won't stop to realize they have lost their nation to mega-corporations and their jobs to Asia, as they struggle to pay for basic necessities.

Government bailouts reinforce a moral hazard. Companies take on huge risks or else sit on their butts knowing that taxpayers will be forced to bail them out. Yet, they benefit from an unregulated free-market system that promotes taxpayer and shareholder fraud, huge executive payouts, and virtual monopolies. The recent bailout of the financial industry will only ensure another catastrophic meltdown in the future because the banks know there is no real penalty for failing. Washington should let the banks that acted irresponsibly fail, as it should the airlines and auto industries. Real free market entrepreneurs would come in and run these industries the right way, knowing that their money is on the line. The fact is that our previously great system of capitalism has been transformed into a gravy train for large corporations. Today, America's economic policies resemble fascism more than capitalism. Industry lobbyist groups have cemented this dysfunctional economic policy, buying off politicians with billions of dollars in donations and bribes each year. Take a look at the amount of money flooding into Washington over the past few years from the 3 most profitable industries in America.

Lobbying By Industry, 1998-2004: (2)

• Oil & Gas Companies: $343,896,623

• Total Healthcare: $1.38 Billion

•Miscellaneous Health Interests: $53,028,250

•Health Professionals: $307,285,813

•Pharmaceuticals & Other Health Products: $673,701,988

•Total Finance: $760 Million

•Commercial Banking Institutions: $216,732,440

•Finance & Credit Companies: $94,313,706

•Miscellaneous Finance: $118,451,264

•Securities & Investment: $330,514,589

War Profiteers: Let Your Moral Compass Decide

If you already haven't gotten in on more of Washington's monkey-business and you don't have an ethical conflict, you might want to consider investing in some of the war profiteers supported by Washington: HAL, KBR, LMT, BA, CAI, LLL, and FLR. I'm actually surprised no one has created an Iraq-related ETF consisting of these and other companies. I personally refuse to profit from the fraud and extortion exhibited by some of these companies. However, I'll take pleasure in possibly shorting them if Hillary or Obama wins the election, as that might put an end to their string of record earnings due to the conflict in Iraq.

In conclusion, I have never recommended the purchase of any U.S. auto or airline stocks to any of my clients, nor have I ever purchased them even for a trade. And I don't ever plan to. There are simply too many investment/trading opportunities with better risk-reward ratios. Once again, I prefer the oil trusts (PGH, PWE, PBT, and HTE) to provide income during a volatile market. Some even represent decent opportunities for short-term trading. As well, long-term investors will stand to benefit by building positions in the beaten-down HMO and drug stocks. If you are going to get abused as consumers by the effects of hyper-inflation seen in America's oil and healthcare monopolies, you may as well seek to make back some of this money by investing in them. But there's no rush. Be patient, as the market is sure to head lower over the next few months. And a correction in oil prices of 20-30% over a 3-month period is certainly consistent with the volatility characteristics of this commodity.

Sources
(1) http://www.bostonreview.net/BR30.6/starfield.html
(2) Center for Public Integrity

Disclosures: as of the date of this article submission, Mike owned the following stocks mentioned: PGH, PWE, HWAY, PFE, and KG (only on valuation, intended for intermediate-term trade). Other asset classes not mentioned here but recommended: precious metals, Asian and Latin American funds, and foreign currencies.

Comments

[Gob:]

[It seems to me that a real solution would be to regulate the profit margins of the oil industry.]

I stopped reading here. Brush up on your history, and get back to us.

2008 May 12 11:47 AM

[Econ Teacher:]

For someone who dispenses investment advice for a living, the author exhibits little understanding of economics, business practices, government policy, international trade and foreign affairs. Remarkable.

2008 May 12 11:53 AM

[Keltorttruth:]

Wow. They let communits post stories on this site? This guy actually believes that letting the gov't regulate something, anything, is a good idea? If you want to talk about increased dependance on foreign oil, just let the gov't step in. What people fail to realize is that exploring for oil is extremely risky business; the moment you take some of the potential reward away is the moment that many projects fall off the table, from a risk/reward scenario. Wake up liberal wacko! We don't need the gov't to do everything for us, let the market decide. If it was such a good, low risk business that required no specialized skills and anyone could do it and reap massive rewards, everyone would. At some point, if the price rises too high, that will happen and we will be flush w/ oil, until then, we take what we can get, but artificially constraining the price through regulation will only lead to less oil and thus higher prices.

2008 May 12 12:12 PM

[Bhakta:]

Hey, IMHO the GOVT is the cause of all the troubles and LESS govt is better govt. I agree on the trusts, PGH, HTE, PWE, PMT.To, AAV, etc.

2008 May 12 12:25 PM

[Cicero:]

Glad to see from the responses that intelligence is alive and well outside of D.C.. Socialism is much more the problem than solution. Enron was the antithesis of the free market run amuck. They had cronies on the inside writing laws and lawyers whose full time jobs were to take advantage of the maze of regulations. Enron was one of the first big corporations promoting the Global Warming, "problem" and hyping the fedgov "solution" because they planned once again to take advantage of the ensuing gov't regulations.

2008 May 12 01:12 PM

[Cicero:]

The war profiteering and lobby money are both examples of how a bloated, unconstitutional fedgov attracts corruption. Both are reasons to return to the Constitution and minimize the size, scope, and power of the fedgov, which would minimize the damage the fedgov could do. The corruption won't go away - it's embeded in human nature. Keep gov't as local as possible. It's hard enough to watch our towns and city councils, much less the theives in D.C..

2008 May 12 01:17 PM

[Matt Goldseth:]

Wow...the author initially seems to lament market interference in the auto industry, but then quickly changes direction...seemingly prescribing government regulatory benevolence upon an evil, greedy, ruthless and hopelessly inefficient private industry.

Aside from trimming the pretentious fat from the actual substantive points, I would recommend considering the underlying philosophy responsible such confusing and contradictory viewpoints...basic economics has obviously been cast aside for some populist view of reality.

Looks like the Keynesian faith, alive and well in secondary universities, continues to infect real world policy.

2008 May 12 01:54 PM

[Mike Stathis:]

Response to Economics Teacher: For you to make such a rash ascertain tells me you are of the school of traditional economic thought in America – the same school of thought that advocates the Federal Reserve’s destruction of our currency; the same school of thought that believes that a 2-decade plus period of overconsumption is somehow good for the U.S. economy; the same school of thought that promised free trade would bring better jobs to Americans. Look at the effects of this reckless economic policy. America is mortgaging off its wealth to foreign nations. And the weakness of the dollar is a reflection of this reality. Finally, my investment track record speaks for itself. Back in 2006, when virtually every U.S. economist glamorized the strength of the economy, I uncovered the realities of the illusion created by Greenspan and predicted the events we see today. I also provided numerous investment ideas such as shorting the mortgage, homebuilder, bank stocks, buying gold, oil, etc. I suppose you think GDP, inflation, and employment numbers, as reported, are not manipulated. Finally, if economists really understand the things that enable one to provide valuable investment advice, why is it that I have never heard of an economist who has become wealthy from investing? With all due respect, if in fact you possess a superior understanding of the topics you mention that are critical for investments, perhaps you should exchange your teaching career for an advisory role with a hedge fund.

2008 May 12 01:56 PM

[So?:]

"Buy oil and healthcare! Sell airlines and autos!" Bold calls! Tell us something we don't know from watching Jim Cramer

2008 May 12 02:02 PM

[Mike Stathis:]

Response to keltorttruth: Actually, I am very far from being a liberal. All I want is for more equity in America. We have given the oil industry many chances to deliver. And all it has managed to do is deliver record profits. Meanwhile, OPEC nations now enjoy enormous trade surpluses due to oil export revenues. What are they doing with all of this cash lying around? They are buying up U.S. assets, mainly hard assets – real estate, factories, and banks. Combined with the effects of free trade, America is selling off its most vital assets in exchange for oil and consumer goods which used to be made in America. The current system isn’t getting the job done. There is a much better way. I am not so naïve as to think that blanket regulation would solve the problems. The government needs to be held more accountable. Clearly, we need to commit to a formidable alternative energy policy. Why is that you think Exxon refuses to invest a single penny into alternative energy? Because they have a monopoly. If you want to play the “liberal vs. republican” game that tells me you have let the media brainwash you. The fact is that both parties are essentially the same. America’s economic problems are not party-centric, they are Washington-centric. This is why Washington makes it extremely difficult for a third party candidate to run. They don't want anyone to spoil their party. It’s all about big money. And unless you are part of that boys club, you stand to suffer, along with the rest of us.

2008 May 12 02:08 PM

[Mike Stathis:]

Response to Bhakta: I agree – Washington is responsible for the current problems. I could also argue that our badly damaged free market system is responsible for many of our economic problems, but that does not mean that we should scrap it. Accountability is key, and right now very little exists. The government has a role in resolving many of the problems if voters demand it. They must be held accountable for their actions. But as it stands today, most Americans are kept in the dark with the help of the media so they really do not understand what is going on. All they see are higher prices and lower quality jobs. And when they listen to the radio or watch TV, they are told these problems are due to the democrats or republicans. In reality, the problems are due to both parties. Like it or not, the government will always be involved. We must accept this fact and focus on making sure their involvement is beneficial to Americans. That is their responsibility.

Response to Cicero: If you think I am advocating socialism then you have misinterpreted my article. Government involvement does not necessarily imply socialism. It’s not about WHETHER the government is or should be involved because they are. What is more important is to define their role and make sure they do what they are supposed, no more, no less. I agree that corruption is part of human nature. But that does not mean we cannot strive to minimize it. Arguably, the level of corruption seen today is unprecedented in U.S. history.

For those of you who have concluded that I am a socialist or liberal, you are way off base. I can only conclude that those who would label me as such do not understand the complexity of the problems in America. Once again, my work experience celebrates capitalism at its highest reach. I am an entrepreneur at heart and I have always been compensated via merit-based performance, which is consistent with capitalism at it purest form. Capitalism is the best system, but only if it is functional. That said, I urge you to reconsider my views because they come from someone who supports capitalism as the only path for America. But it has many problems that must be fixed.

2008 May 12 02:23 PM

[icandoitdon:]

"I'm actually surprised no one has created an Iraq-related ETF consisting of these and other companies."

great idea. it could be called the "iraqi freedom fund."

2008 May 12 03:06 PM

[Vox Rationalis:]

Wow, what a rant full of nonsense - I couldn't even get through it all. Just a few nuggets:

"President Clinton signed NAFTA, which all but ensured the beginning of the end of American manufacturing."

Nonsense. NAFTA was enacted at the beginning of 1994. Between 1993 and 2007, U.S. motor vehicle and parts manufacturing output increased by 50%. For comparison, in the 14 years ending in 1993, motor vehicle and parts manufacturing increased 27%. Overall US manufacturing profits rose by 154% between '93 and '06, while from '77-'93 they rose only 46% (Economic Report of the President, Tables B-53 and B-92).

"Soon, styling and reliability combined with the toxic effects of unfair trade drew a larger market share."

Unfair trade? You mean how certain foreign manufacturers were able to produce cars much more efficiently than others? Or do you mean like the ridiculous import duties assessed on light trucks that punished consumers and protected the auto industry?

"...it's a poor consumer decision to buy a hybrid given the poultry benefit..."

I think your analysis of this is fowl.

"The MPG listed on U.S. autos has been proven to significantly underestimate the actual MPG for a variety of reasons. This has fooled consumers into thinking that their truck or SUV gets better gas mileage than in reality."

You make this sound like US cars were given a marketing advantage here. ALL car manufacturers have been overstating their mileage for years, which is why a new standard is coming out this year.

"How many of you drive only 12,000 miles per year? [T]he average annual mileage driven in the U.S. is about 25,000 miles..."

Nonsense - I know very few people who drive 68.5 miles per day, and know lots who drive much less; cite some sort of evidence. Here are a few that put it at much closer to 12k than 25k: www.eia.doe.gov/emeu/r..., www.epa.gov/oms/climat..., msl1.mit.edu/Mar2Lectu....

"How is it possible that oil companies are recording record profits under record oil prices? The only way it's possible is if they're keeping the same profit margins amidst the oil crisis."

First: nonsense. It's certainly possible for profits to increase as margins decrease. Ever hear of Wal-Mart? But even so, how could they NOT have record profits in such a market? Those companies are in business to MAKE MONEY; this is called capitalism. If management is not maximizing returns for its owners (shareholders), management should be replaced.

"Since oil is absolutely needed for consumers and businesses, doesn't [it] seem as if during a crisis, oil companies should absorb some of the pain and reduce profit margins? Why should oil companies be permitted to earn record profits while the rest of the economy gets abused?"

"Permitted"? Seriously? Why stop at oil companies - what about grocery stores? What about drugstores? What about banks? Why not control ALL industries with a product that's "absolutely needed"?

"The distribution of basic necessities should be controlled by the government or at least highly regulated to minimize consumer exploitation."

Nonsense. The marketplace for such things should have the smallest degree of regulation necessary to foster efficiency and competition. This is a far cry from government control. Much as I hate it when folks throw this phrase around, yours is the socialist path, and it ALWAYS results in a less efficient, more expensive marketplace.

"We already saw what happened to the utilities industry when Washington let the free markets take control – Enron."

And we already saw what happened when the government broke up AT&T - WorldCom. Oh yeah, and that pesky Internet thing.

"If you permit for-profit companies control the distribution and sale of a basic necessity, should you allow these companies to hoard profits during the most severe oil crisis in the history of the U.S.?"

So just let me understand this - we need to add "petroleum distillates" to food, water, clothing, and shelter in the "basic necessities" category? Funny, in my history books, there seem to be a lot more years leading up to the internal combustion engine than following it. Are automobiles on the "basic necessities" list as well, so the government should be controlling that industry? It's a slippery slope, isn't it - where do you draw the line?

"In conclusion, America's oil industry resembles a monopoly."

Nonsense. The "oil industry" is quote varied, with many kinds of businesses from exploration to refining to transport to wholesale and retail. NONE of them behaves like a monopoly. Oligopolies, perhaps. But there is not a single segment of the industry with a single dominant player.

"Before government deregulation in the late '80s, there were over 200 U.S. airlines... That was at a time when you had a lot of competition."

Nonsense. If there had been "a lot of competition," there would not have been such a significant drop in airfares following deregulation. The one source I researched places the savings to customers due to deregulation at between 10-18% (www.econlib.org/librar...).

"Friends, you won't find a person that embraces the free markets more than me."

Nonsense.

From what you've written here, I'd place you to the left of Obama and Clinton.

Do you get paid for this? How do I get one of these gigs?

2008 May 12 03:23 PM

[Econ Teacher:]

Well, you're a bit touchy for someone who hopes to make their way in the public eye, but OK - it's a free country (unless there's something you're not telling us).

I'll limit this to two items - trade and cars. First, trade is good. Period. Even the msot dyed-in-the-wool 'managed trade' economists now accept their reduced role of advocating for more, vice less, assistance to the very few who suffer from trade, such as workers (and capital) employed in dying industries. Even they acknowledge that countries that trade benefit the vast majority of their citizens. The freer the trade, the greater the benefit. Think about this: If trade is so bad, then "un-trade" must be good, right? We shouldn't just ban international trade, we should outlaw interstate trade! That way, EVERY state would have a thriving aerospace industry, car industry, textile industry, black and white tv industry and buggy-whip industry, with jobs galore for all. No?

Cars: US carmakers in the 80s made a lousy product, not because they spent all their time fighting labor - quite the opposite; because they appeased labor's wage and benefit demands too readily. Why did they do this? Well, they figured they could pass on the costs to consumers because...car makers had no competition, especially no FOREIGN competition (see 'trade' above). So the industry went to the brink. When they returned they began to make a slightly better product and eventually turned all their attention to large-margin vehicles (when you have a lot of overhead, you need to increase your unit margins). Cheap gas helped. Their mistake was believing that gas would remain cheap, and that's hurting them now. But their competitive position is drastically better today than it was 30 years ago. They make a much better product. It costs too much, true, but they're working on that as well. In your vitriol you neglected to mention the health-care benefit swaps the car-makers have been negotiatiing with their unions. It's innovative and makes a lot of sense - not at all the sort of thing car executives of 30 years ago would have imagined, seeing as they were protected so effectively from foreign competition, i.e. trade.

A last point, you can fault Detroit for making (some) bad cars; but it's laughable to criticize them for going into the financing business. I ask you, investment guru, if you owned a company that identified a fast-growing, highly-profitable business that complimented your core business perfectly and put your retained earnings to work at an above-market rate of return, would YOU be angry at management? I don't think I would, but then again, I'm not an investment advisor.

2008 May 12 03:39 PM

[Vox Rationalis:]

You're going to be busy, if you insist on trying to respond to everybody. You should just stop and take your lumps for writing a weak piece.

"Response to Economics Teacher: For you to make such a rash ascertain [sic] tells me you are of the school of traditional economic thought in America – the same school of thought that advocates the Federal Reserve’s destruction of our currency; the same school of thought that believes that a 2-decade plus period of overconsumption is somehow good for the U.S. economy; the same school of thought that promised free trade would bring better jobs to Americans."

Tell me, which school do you think this is? The Monetarists? Neo-Keynesians? Neo-Classicists? Chicago? Friedman? Galbraith? Mankiw?

"America is mortgaging off its wealth to foreign nations. And the weakness of the dollar is a reflection of this reality."

Actually, it's closer to the other way around; the weak dollar makes all US assets less expensive and more attractive, so capital flows into the US to take advantage of higher expected returns.

But so what? Can you tell me what's bad about foreign investment in the U.S.?

"Finally, my investment track record speaks for itself..."

And is irrelevant.


"Finally, if..."

Wait, you already had a "finally." How many "finally"s do you think you can have?

"...if economists really understand the things that enable one to provide valuable investment advice, why is it that I have never heard of an economist who has become wealthy from investing?"

How about Warren Buffett? MS in Econ from Columbia. And, as I recall seeing somewhere, he's done pretty well.

"With due respect..."

You might want to can the attitude - it will bring you nothing but grief. Just a throught.

2008 May 12 03:42 PM

[Just Say Whoa!:]

Mike Stathis--THIS IS THE BEST SUMMARY OF THE MODERN AMERICAN CONDITION I have seen!

Don't listen to the Purple Kool-Aid drinkers on this forum.

Most are part of the 18% "DEAD ENDERS"--people who support a DEAD and DYING regime.

They can only see to the end of their noses! If something doesn't affect them---THEY CANNOT SEE IT!

Plain and simple--these losers are STUCK IN THE 80'S.

The 80's were all about "ME".

Me. My family, My neighborhood. My religion. My friends. My political party. My church. My interest groups. My investments.

"Me, me, me". It's all about Me to "these people".

Their eyes are closed to all but the most hate-filled ideology that they have been brainwashed with for the past 27 years.

They put their interests, their political party's interests ahead of America's interests.

One example--the Constitution says THERE SHALL BE NO RELIGIOUS TEST OF A CANDIDATE.

Guess what?

They fall all over themselves trying to GIVE A RELIGIOUS TEST TO A POLITICAL CANDIDATE'S preacher.

We can all agree--a religious test for a political candidate is UN-AMERICAN.

That doesn't stop them. They put the interests of the Republican Party ahead of America.

According to Howard Dean, the Democrats are going to teach them a lesson this November:

THE INTERESTS OF AMERICA COME BEFORE THE INTERESTS OF THE REPUBLICAN PARTY.

And when it happens, I'll be laughing all the way to the bank!
Guess what?

2008 May 12 03:55 PM

[icandoitdon:]

i want to give my "fair and balanced" view of the comments to the author's post.

the principle objections focus on his belief in the need for regulation and his specific suggestion that oil company profit margins be regulated. for this he has been called...evil of evils...a liberal, a populist, a socialist and a communist. and ignorant ones at that.

i do agree in principle that in a market economy, direct regulation of company profits should be undertaken only under conditions of pure monopoly. other than that, regulation in a capitalistic system is not only reasonable but it is necessary..even if we don't always do the best job...and i'll explain why momentarily.

as for regulating oil company profit margins, never mind my idealological view....i just don't think it would make a nickel's worth of difference to the consumer. if it isn't effective, why bother? i don't give a damn about saving a nickel or dime on gasoline when i'm already paying $3.50 a gallon.

here's why i believe regulation is a necessary evil:

it is the nature of a free market capitaist to charge as much as he can and gives as little as possible of his product in exchange. competition is what keeps the predatory side of capitalism in check and it is why monopolies must be regulated.

but the system doesn't work perfectly. it doesn't always protect against fraud or even abuse. a scammer can scam the public before he or a regulator knows he's been scammed.

take, for example, the roots of the current credit crisis:

there was a time when most home loans were given by banks under federal or state charter. they had strict regulatory requirements as to capital, loan to capital ratios, etc....and the system worked fine for many years.

but things change. enter unregulated "mortgage companies" equipped with new financing vehicles like variable-rate loans, teaser interest rates, no money down, home equity loans, etc. etc., ad infinitum. then enter securitization, where these financial institutions sold the loans in packages to investment houses looking for better yields, made possible by rating agencies who slapped AAA credit ratings on instruments that they had never before rated.

the demand for housing exploded as new homeowners crowded into the market. prices escalated. some homeowners traded up...many tapped some of their equity to buy "stuff."

the music stopped when prices started to fall. and that's where we are today.

for those who say....tough....let it happen....that's what capitalism is all about....i'm with you. i could care less about the moron who bought a house he couldn't afford for no money down. but that's not what our government thinks.

ben bernacke has urged congress to bail homeowners out just as he bailed out bear stearns. (and yes he did bail out bear stearns...not to save bear stearns....but to save the counterparties who would have been decimated by a bear stearns bankruptcy.)

what would you rather have? bailout? or enough regulation to have prevented the problem in the first place. such regulation might have included:

1. minimum requirements of downpayment, e.g. 10%. can't afford it? tough...find an apartment.

2. restrictions on variable rate financing. allow them with higher downpayment, e.g. 20%....or permit them for a maximum term of 1 year to minimize the risk of getting buried because of a surge in interest rates.

3. limit home equity loans to require a minimum of 20% equity interest in the property.

4. eliminate tax deductibility of mortgage interest for second homes.

etc etc etc

anyone who doesn't like this should find a country that practices pure capitalism. trouble is it doesn't exist, so you'll have to start your own.

2008 May 12 04:24 PM

[Mike Stathis:]

Response to Economics Teacher: Your last response was much preferred. Although I disagree, at least you explained your views. It is appreciated. However, let me first say this; I agree with you about the auto industry in the '80s, but only in the early '80s. By the late '80s it had to have been clear to management that foreign imports would only increase. So yes, they were fighting the unions. I apologize if I did not make that clear.

As for trade, I certainly agree that it's good for all involved. However, the fact is that under our current economic system, America has entered a system of unfair trade with the rest of the world. As a result, the only beneficiaries are corporations and foreign workers. And we are seeing the results of this job transfer - no real wage growth since 1999, a weak dollar, and soaring inflation for basic necessities.

How can America expect to have fair trade with nations that manipulate their currency (China) with no ability to counteract (due to the control by WTO), nations whose corporations do not face the costs of EPA and OSHA standards, and whose governments cover the costs of the fastest growing expense in cororate America today - healthcare? U.S. companies simply cannot compete with this and that is precisely why millions of jobs have been sent overseas. As well, most large corporations have moved operations to Asia, taking jobs along with them.

Also note that America has been unintentionally transferring its innovation secrets to its trade partners. I won't go into the details here but as an example, India now produces F-16s under contract. This has catalyzed the growth of its own airline industry. You can check he Dallas Federal Reserve website for an excellent article on this topic.

And yes, I do fault the auto makers for jumping on the consumer finance bandwagon. In fact, I actually use that as a benchmark for companies that have achieved the limits of growth. When companies shift their focus from making cars to makig interest, I think that paints a dim picture for U.S. manufacturing. The fact that many large U.S. companies now have huge consumer finance divisions tells the story of the U.S. economy. And now we are seeing the effects of excess consumption.

Finally, I never claimed to be an "investment guru" and I'm certainly not perfect. I welcome all comments and criticisms. The only thing I ask is that people provide me with the same respect they deserve so we can all mutually exchange our ideas and viewpoints.

2008 May 12 04:48 PM

[ler:]

There are so many things wrong with this article, I will not even begin to describe them. It's also interesting to read his responses to comments posted by readers. After reading his bio notes I will just say that his arrogance is typical of a Bear Stearns trader and his ignorance is typical of a Berkley grad.

2008 May 12 06:44 PM

[simplesimon:]

Brother, did you stir the pot! Let me complement you on a few things. The Big Three auto makers summary is accurate. "Disregard for the consumer" you mention on their part may go down in history as something pandemic among our "latter day" corporate mind set/conspicuous status conciousness...no need to belabor the golden parachute for execs who ran the company in the ditch. I'm pointing to what I would call the mind disease of this turn of the millenia. The American Indian had it right when they described the pale face as "Wasichu"-which means spider= busy spinning webs of deceipt for the purpose of capturing and sucking dry the hapless churl, the brand racists, and the body worshiping desperate hosuewives, drooling over 'the lives of the rich and famous'- and damn morality, full speed ahead. I wonder if anyone ever really took their "Business Ethics" class seriously.
Today we watch with glazed eye as thousands of homes are systematically destroyed by fire, flood, earthquake, tornado, hurricane, and mortgage meltdown...and think it will not happen to us! A clue...it will keep happening, and even accelerate until we all fall back and rethink this whole thing. Is it really important to buy the Hummer, and the million and a quarter home, on lots "starting in the low $300,000"? Has anyone really evaluated why we are called "the great Satan"? Porn anyone? How about a trip to Vegas where nothing you do will ever come to light...a clue...every move you make in Vegas is recorded on video. And the whole world is tune in to be entertianed by our stumbling, wretched collapse.

2008 May 12 10:30 PM

[feather mer...:]

It obviously took a extremely well educated individual to generate such a simple article written thoughtfulness and depth of a mud puddle!
Did someone take your lollipops away and make you angry?
Oh wise sage - please provide more enlightenment as you see fit.

2008 May 12 11:17 PM

[carlivar:]

A few thoughts:

-Quit the tiresome left-right finger-pointing. Mike is obviously neither a Rebublicrat or a Democan. Anyone who thinks either party can fix things is seriously deluded. Ironically the real problem isn't a monopoly by Big Oil -- it's a monopoly by the Big Parties in Washington. I would quote the Constitution, but I think America is more interested in American Idol.

-Government regulation of Big Oil would be a completely unnecessary, harmful, knee-jerk reaction. The market is already fixing the problem. Hybrids are the short-term fix. Electric cars will be the long-term fix. Even GM finally woke up and is working on the Chevy Volt. Look at Tesla Motors. The free market fixes stuff, but you can't expect it to happen overnight. We've had $3 gas for less than a year! Sheesh, give it a little time. Doesn't anyone think past the next 3 months anymore?

-No one is forcing you to buy gas. Buy a diesel car and convert it to run on bulk vegetable oil from Costco. Or, and I know this is just *crazy talk* - we could divert the money from Iraq into public urban transportation (or at least maintenance on bridges in places like Minnesota).

-One reason that healthcare is broken is because our legal system is broken. We need to stop trying to fix symptoms and start fixing core problems, like out-of-control litigation. The hospital has to charge $28 for aspirin in order to pay for its liability insurance.

2008 May 12 11:21 PM

[Mike Stathis:]

Response to Simple Simon: Very well said! You get it Simon. And yes, for some reason I seemed to have made some people upset. All I was trying to do is relate some big picture trends to investment themes.

2008 May 12 11:26 PM

[Joyful Alte...:]

Entrepreneurial activity will blossom beyond any libertarian's dreams if only this country somehow manages to establish single-payer health insurance.

2008 May 13 08:50 AM

[CLH:]

You are right you are not a liberal but instead a socialist. The oil companies ARE doing their job. Back in the early 1970s the gov controled the oil price and there was no oil to be had. Keep the gov out.

2008 May 13 09:34 AM

[interested ...:]

Good discussion, minus the rants and insults. Personally, I agree with most of what the author has to say, but there's one issue that has been left out: The oil industry has HUGE barriers to entry! Can anyone name a new player in the refining/oil discovery/ gas retail business? No, there are none. So there goes your free markets. Those who control oil are labeled cartels, rightly so, as pricing behavior is now tantamount to that of a monopoly controlled industry.

The fact that there are record profits during record prices bears this out. If anyone could enter the market to get a piece of the action, they certainly would. Instead consumers are left to fend for themselves.

The person who wrote that cars are not necessary items is simply deluding himself. I, like many, live 10 miles from the nearest bus stop or food store. How am I supposed to get to work or feed my family without a vehicle? Or has food and a salary become optional in today's society? (And no, biodiesal is not an option. We just don't eat that many french fries in my house.)

So, we have a necessary commodity being sold by a monopolyish industry where prices are spiraling out of control. Yes, the markets will eventually deliver us fusion energy and electric cars, but there's a lot of people out there who could lose their homes and families before that happens.

Those who say the government is useless -- that makes sense to you except in Iraq, right? I spent 11 years in the Air Force, and I know that there are some things the government does really well, and some where it needs to stay clear. The FCC has a pretty good track record for breaking up monopolies (yes they're not perfect). The government should be acting now to provide some defense for the now gas-addicted public until the market sorts things out.

There've been few decent ideas IMO. The gas tax holiday is preposterous. A windfall profit tax, in and of itself, will not be helpful. The government can and should develop an energy policy (it really has none, now) that includes a system of taxes, credits, and perhaps some regulation to reward behaviour that stimulates alternative energy. There's more need for carrot than stick. Those of us that are paying nearly $4 a gallon are already getting the stick.

One area in which I would look at direct regulation would be the energy futures markets. These markets were sold to the public on the basis that they would stabilize prices in the long run by allowing large users to hedge their costs. That no longer happens -- look at the airlines, nearly all of whom are minimally hedged, because their pricing models don't anticipate the kind of behaviour we currently see in these markets. Yes, those managements are partly to blame in not realizing that the models have broken down, but a manager should not be required to be clearvoyant to run their business (at least not all the time). The futures markets have become corrupted by the codependant relationship they enjoy with the retailers of energy, and the consumer is left holding the bag. It's not a free market. It's not fair. And it's not in the best interest of our country or economy. Just my 2 (okay 3) cents worth.

2008 May 13 10:57 AM

[stonebluff:]

l. It's a little naive to suppose that it's harmful to the US for foreigners to buy property from us. I represented foreigners investing here for years, and usually they seemed to me to be overpaying. We Americans do a pretty good job of pricing our stuff.

2. How can anyone think that the interposition of an insurance company between the patient and doctor or hospital do anything but add to the costs of medical care? The first thing we should do is make medical expenses deductible for income tax calculations again. Then we should recognized that we're all going to die. Then we should recognized that medical people are humans dealing with
mechanisms of which they have little understanding. Then one can begin to discuss healthcare rationally.

2008 May 13 11:30 AM

[Dikidikido:]

If Ford is offering the "gas cap" why is Chrysler spending all of the media money. I think I got the wrong batch of "kool-aid".........

2008 May 13 02:10 PM

[Christopher...:]

While the author's prescriptions are eyebrow-raising in themselves, it seems that they're based on some fundamental misunderstandings of what underlies the situations he sees.

For example, cities don't regulate or manage water for consumer protection; they do it because a water utility is one of the special cases (almost all in infrastructure) where competition is impractical.

Additionally, he begs the question on ExxonMobil profits. In fact, most of the recent upward trend in earnings has been due to increased consumption. Despite the author's ex cathedra assertion to the contrary, businesses can make more money without necessarily improving profit margins--by increasing the volume of sales. In fact, XOM's profit margin is below the average profit margin of most banks and (pre-collapse) investment firms, and it's about half that of pharmaceutical companies.

Finally, it seems that those who call for a "windfall" tax or the even more confounding "regulation of profit margins" seem to studiously ignore two major points: Not only is the big, bad corporation owned (directly or indirectly) by pretty much everybody with a retirement plan, but XOM also paid the highest income tax ever last quarter.

2008 May 14 01:00 AM

[User 36747:]

Interesting view point. One question regarding the notion that price controls can help to solve the health care situtation in the U.S. "What happens to the supply of doctors, drugs, etc. when price controls (i.e., price caps) are implemented?" Let me help you, the supply will fall and with it, access to health care. And just so you know, there will be a "honeymoon" period when price controls are in and supply is ample. But it takes 10-20 years for new drugs and 7-12 years for a M.D. to enter the system. What happens when you're middle-aged and the supply of docs/drugs is down by half? Oops!

2008 May 14 06:26 AM

[Uneasyrider:]

If you believe that repeal of the gas tax or more government regulation will bring the price of gas down,you need a lesson in economics.Only a decrease in demand or an increase in refining capacity will bring the price down.Refiners have been unwilling to make the capital expenditure due to the time and cost of building a new refinery without a guarantee that demand will remain high.

2008 May 17 04:02 PM

[Froggie:]

After reading the first few comments, I would like to suggest that some of the commentators read book "The Squandering of America" by Robert Kuttner. "Free trade" in theory is unlike "free trade" in practice.

2008 May 19 01:05 PM

[pachanguero:]

Man,

The quality of this type of trash rant is well below what is normal for this website.

2008 May 20 05:46 PM

[Barb:]

Whew, narrow views for sure. You have some growing up to do, and a bit more study.

2008 May 23 12:38 PM

[User 199851:]

Your comments re: Medicare Part D...
The majority of meds will be generic. The 'takers' with no risks taken, no path to production factories, no indication of what's in their product other than a USP # to 'claim' it's the drug without the brand name.
Kaiser's used generics for years. Mom complained that her generic vicodin was hurting her stomach (can't tolerate aspirin). I had product analyzed: contained aspirin, acetominophen, caffeine; NO narcotic. How many will die, have adverse reactions, lose disease control (seizure disorders, diabetes, hypertension, angina, etc) because NO ONE is monitoring generics or factories.
Anderson Cooper 360 on CNN did story on this last fall, 2007.

2008 May 26 05:26 PM

[carlita74:]

since we are in a global economy ,whatever happens in China will be felt in the US and viceversa ,at some point in the future the standard of living in China will be close to that in the US ,their standard of living will certainly improve ,think about it you will be able to solve a big piece of this puzzle

2008 Jul 06 02:28 PM

[Pax Americana:]

Never dull reading , Mike , excellent retort to "Econ-teacher" No economist to my knowledge as made his money in the markets.
"Those who can do! those who can't teach!

Jun 22 09:03 AM

[Mike Stathis:]

Yes well Pax, as you can see I don't publish on Seeking Alpha much anymore...not because 99% of the readers and authors are clueless (although they are), but because Seeking Alpha censors me. When they do publish my pieces they deemphasize them so they won't get many reads. It's easy to see their tricks.

But the facts speak for themselves. The fact is that I'm in a much different league than the authors of SA and a completely different universe than most of the readers. I serve institutions. All of the other authors on SA and elsewhere herd sheep. I thought I could lead these sheep on the path towards investment wisdom, but it's a lost cause.

Jun 25 02:50 AM