Welcome to American higher education.

More Americans are wising up to the fact that college is a big fat waste of money. Sure, if you’re lucky enough, and smart enough, get into a big-name school, college is just fine. But for millions of other students, a four-year degree often puts them in a mountain of debt and doesn’t give them the skills they need in the job market.

First, let’s consider how long it takes many students to finish college. Even after six years, only 54% of college students even get a degree. For high-school students in the bottom 40% of their class and who go to a four-year college, an amazing two-thirds hadn’t earned a diploma after eight-and-a-half years. Sheesh, that’s worse than Bluto! I can’t think of another industry that has such a dismal record.

David Leonhardt recently wrote at the New York Times: “At its top levels, the American system of higher education may be the best in the world. Yet in terms of its core mission—turning teenagers into educated college graduates—much of the system is simply failing.” He’s exactly right.

Still, tuition costs continue to skyrocket. Between 1982 and 2007, tuition and fees rose 439% compared with just 147% for median family income. The trend shows no sign of stopping. One year at Yale now goes for $47,500. The University of Florida system wants to raise tuition by 15%, the maximum allowed.

Much like the housing bubble, the Higher Ed bubble is being driven by cheap, government supported credit. The problem is compounded by the fact that hugely important financial decisions are placed on the backs of 19-year-olds, many of whom simply don’t have the life experience to weigh the implications of a gigantic, 20-year debt load. Heck, at least the irresponsible mortgage borrowers during the crazy days were adults (even though many acted like infants).

One report shows that students from lower-income families need to pay 40% of their family income to enroll in a public four-year college. That’s a lot of coin to have some Marxist feminist theorist tell you the about atavistic nature of late-stage capitalism. Please, you can watch the Oscars to learn that. Don’t think community colleges are a bargain, either. The average tuition is up to 49% of the poorest families’ median income from 40% in 1999-2000.

The pro-college crowd likes to repeat the claim that college grads earn $1 million more, on average, over their working lifetime. Sure, this is true, but college grads start out in a big hole. On average, they don’t even catch up to high school grads until age 33.

The debt load piled on students is scandalous. One in five students who graduated in the 1992–93 school with over $15,000 in debt defaulted on his or her loan within 10 years of graduation. We’re setting young people up for failure and ruin credit records. Thanks to the recession defaults are up 43% over the last two years. Many students go to grad school and pile on even more debt. The average law grad owes $100,000. Plus, many schools often use grad students as greatly underpaid professors in order to cut costs. Think of Lehman Brothers. Now imagine if they had a football team.

The loans fall especially hard on minorities since colleges love to boast their “diversity.” For African-American students, the overall default rate is more than one-third. That’s five times higher than white students and over nine times higher than Asian students.

What makes things even worse for many colleges is that the recent bear market put the squeeze on their endowments. Harvard’s endowment dropped by $11 billion and they announced they’re laying off 25% of their investment staff. Cornell’s endowment plunged 27% in the final six months of 2008. Yale lost $5.9 billion, or one-fourth its value. Lower endowments means… you guessed, higher tuition.

School financing has exploded in recent years, doubling in just ten years. Total student debt now stands at over half a trillion dollars. The average borrow took out a loan worth $19,200. That’s a 58% jump since 1993.

Naturally, the government is set to make a bad situation worse. Last week, the House of Representatives voted to elbow Sallie Mae (SLM) out of the student loan biz and shift all student loans to a government-run, taxpayer financed system. So instead of government subsidized loans run through banks to students, we’ll now have a government monopoly. Hmmm…what could possibly go wrong?

I got a better idea. It’s a real simple government program. I call it, “Dude, you really shouldn’t be going to college.” Best of all, the program is very cheap. The costs are solely a postcard and my consulting fee. If don’t want to listen to me, fine, then listen to the folks at the ACT who say that only 23% of students have the skills to do well in college.

The good news is that Americans are catching on to the college scam. Admissions applications are dropping at elite school. Applications are off by 20% at Williams College. Middlebury saw a 12% decline and Swarthmore had a 10% drop. I believe this is just the beginning.

The reason I’m so confident is that these are boom times for the for-profit education sector. Long derided as diploma mills, these companies are raking it. Already this decade, shares of Strayer Education (STRA) are up over 1,000% and shares of ITT Educational Services (ESI) are up over 1,300%.

Business is so strong that the schools are having difficulty even making earnings estimates. In January, ESI issued 2009 EPS guidance of $6.25 to $6.45 which well above the Street’s view of $5.73. Since then, the company raised guidance three times. The current EPS range is now $7.55 to $7.85. In other worlds, no bailouts needed here.

These schools are ideal for older students who are attending school on their own initiative instead of doing what their parents expect. Many of the schools have comprehensive programs but students often go there to take a few courses to round out their job qualifications. Businesses also like to use the schools for employee training. The graduation rates tend to be high and the default rates are low (though still not ideal as some members of Congress have noted).

I also like the fact that the school has an efficient business mode. Operating margins tend to be high and they businesses don’t drain capital.

Look at the success of a company like Lincoln Educational Services (LINC). A few weeks ago, Lincoln reported blowout Q2 earnings. Check out these digits. Revenue rose 51% and earnings-per-share jumped an astounding 440%. The company netted 27 cents a share which schooled the Street’s consensus of 19 cents a share. On top of that, Lincoln boosted its full-year EPS guidance to a range between $1.40 and $1.45 from their prior range of $1.25 to $1.30. Who’s laughing at the diploma mill now?

Lincoln is hardly alone. Last month, Corinthian Colleges (COCO) issued 2010 EPS guidance of $1.30 to $1.36 which was well above the Street’s view of $1.14. If COCO hits their range, then we’re talking about a growth rate of over 50%.

The big kid on the block is Apollo Group (APOL) owner of the University of Phoenix which has more than 200 campuses and over 400,000 students. Apollo has a market cap of $10 billion and it’s the only for-profit stock in the S&P 500. The shares have vaulted nearly 100-fold since the IPO 15 years ago. Apollo is doing more than any bureaucrat to reshape the landscape of American higher education. Make no mistake how serious they are. Three years ago, the company shelled out $150 million to turn the home of the Arizona Cardinals into the University of Phoenix stadium.

The for-profit sector still contains many risks. Loan defaults rates are a problem which doesn’t look so good considering the schools have healthy operating margins. The industry was dreading a recent GAO report which turned out to be milder than expected.

Of all the for-profit schools, I think Lincoln Educational Services offers the best value right now. The company just gave a big earnings boost and the shares are now going for about 12 times 2010’s forecast. Strayer, on the other hand, is the one to avoid. The stock is up to 23 times next year’s consensus. For a school stock, that’s not very smart.

The jobless-recovery theme re-emerged on Friday with the arrival of a disappointing employment report. The daunting number was the unemployment rate, which jumped from 9.4 percent in July to 9.7 percent in August. This is a big-versus-small-business issue. Sort of the haves versus the have-nots.

The large companies are gradually recovering as a result of major cost-cutting, inventory reduction, and a lean-and-mean return to profitability and high productivity. So the payroll survey registered a 216,000 job loss, the smallest drop in over a year.

However, the household survey, which picks up small, owner-operated, LLC/S-Corp-type businesses, registered a devastating 392,000 job loss, which follows losses of 155,000 and 374,000 in the prior two months. This is the source of the unemployment-rate jump, as 466,000 newly unemployed were scored in the report.

So while the big companies are getting healthier, the smaller firms are being left in the dust. Unfortunately, small businesses provide most of the new job creation in the United States.

Veep Joe Biden is out there saying the Obama stimulus plan has saved or created 150,000 jobs in the administration’s first 100 days and another 600,000 in its second 100 days. But he sure isn’t talking about small-business jobs.

In fact, it’s hard to know what he’s talking about. Uncle Sam has borrowed $388 billion in the second quarter and is scheduled to borrow $406 billion in the third quarter and nearly $500 billion in the fourth. In order to provide $152 billion in so-called fiscal stimulus, the government is draining close to $800 billion from the private-sector savings supply — $800 billion that will not be invested in new-business enterprises, including small businesses.

Borrowing from Peter to redistribute to Paul is not fiscal stimulus. It’s a fiscal depressant. Small businesses are having enough trouble getting their hands on credit. And now they can’t find enough capital for new start-ups. The government prospers, but the small-business sector sinks.

Then there are all the tax and regulatory threats related to health-care and energy reform. Until Mr. Obama retreats from his plan for a government takeover of the health-care sector, and a cap-and-trade program that will cripple the energy sector, the cost of hiring the new job will continue to rise.

The threat of higher payroll taxes and energy costs is more than enough to deter new hiring. Taxes on upper-end investors are going to rise, too, and there may be a health-care surtax on top of that. And don’t forget that small businesses pay the top personal tax rate, which is going up. Oh, and how about the recent minimum-wage hike? Yet another business cost.

So while the government doles out money for transfer payments and one-time temporary tax credits, the ensuing increase in the private-sector tax-and-financing burden becomes a complete deterrent to new job creation, as well as capital formation.

We’re going to recover. Improved ISM reports for manufacturing and services, along with better profitability for big corporations, suggest we’re looking at a mild, V-shaped recovery of 3 percent. But it will be a jobless recovery.

Of course, if Mr. Obama pulls the plug on his new government-insurance plan, and all the spending, taxing, borrowing, and regulating that goes along with it, the stock market will rally at least 500 points — at least. Investors understand that an Obama retreat on government-run health care will lead to stronger economic growth for America’s vibrant health-care industry — and small businesses in general.

With all this, why is Wall Street so shocked by the recent gold rally, with the yellow metal marching back toward $1,000 an ounce? The run into gold is a clear revolt against paper money and financial profligacy.

The Federal Reserve’s monetarist experiment to balloon the money supply will backfire with much higher future inflation unless the economy is capable of generating enough new investment and jobs to produce the goods to absorb all the new money. Indeed, this is a worldwide problem. Too much cash chasing too few goods.

The G-20 finance ministers are meeting in Pittsburgh this weekend, although nobody there has an exit strategy from the money explosion that has been aimed at solving the financial meltdown. None of the big countries have plans to reduce marginal tax rates to promote economic-growth incentives. There is no golden anchor of currency value, and no exit strategy from the potential inflation effects of the new-world monetarism.

The bottom line is that governments today have no financial discipline. And while growth will reappear, it may be a meager sort, with incipient inflation pressures plaguing the new recovery.

 - FOXNews.com

 - September 01, 2009

I was the first pundit to predict that Barack Obama would become president. Here's what I think we can expect from this administration in the next six to eight weeks. 

Never has an administration had more political firepower at their disposal yet been set to so totally fail in the next six to eight weeks. It is nearly a foregone conclusion. It is nearly unavoidable. And it defies all logic given the sizable majority the administration has in both houses of Congress.

Since I was the first pundit to predict Obama's presidency (back in December 2006) it behooves me to tell you the course I believe the next few weeks will take. Just think, it was only a few months ago that the left looked unstoppable in bringing about their plan to radicalize, nationalize, and federalize America.

1. Health Care's Long and Painful Death

Barring the existing possibility that the Democrats cram a reform bill down the throats of actively protesting Americans through an ultra-partisan process that would shut out conservatives and Republicans from even being allowed to contribute to the discussion, health care reform is dead. 

It actually died a good while back when the president decided to pivot and create a new issue that no one had been discussing--health insurance reform. The American people will want to know why we should spend $4 billion to cover everyone in America "efficiently," when we already do so with inefficiencies like people using the emergency room as their general practitioner for $2.5 billion. 

Deep thinkers on the issue also want to know why the president hasn't entertained one item of tort reform-- protecting his friends, the trial lawyers-- yet is willing to claim that doctors are eager to lop off feet, tonsils, and other body parts just to make a buck.

2. Cap-and-Trade Will Be the Largest Tax Increase in American History

With the 2010 election cycle just around the corner, it won't be too long before the campaign ads are drafted. With cap-and-trade still sitting in legislative limbo (and the president's own adviser--Warren Buffet-- now opposing it openly in the media), with anti-tax Democrats, Republicans, and Independents coming to Washington on September 12, and with "Blue Dog" Democrats getting hammered by constituents during the August recess, the chance of an ultra-partisan "ram through" victory on the legislation would not be wise. 

Cap-and-trade, if passed, will contribute to unemployment, Wall Street stop and starts, and ultimately reduced treasury revenues. It would serve as the single largest tax increase on the average American in all of American history. 

Even President Obama admitted as much, predicting that electric bill prices, in his words, would, "skyrocket." Those that have looked at the specifics tell us that the average utility bill in America will go from $167 to $307 per month, per family.

3. Unemployment Will Remain

By now several Washington organizations, from left and right, and one of note consisting of both--the Congressional Budget Office, predict that unemployment will not shrink from the predicted "Obama high" of eight percent. Instead, nearly without fail, economists are predicting that unemployment will be at or over 10% for up to the next 24 months.-- That is a nearly 250% increase in the unemployment rate under Bush for nearly the duration of his two-term presidency. We did not see the unemployment climb this high during President Bush's entire two-term presidency. 

If more people were working, higher taxes and possible new health care entitlements could be considered, but with at least ten percent of the population out of work, it is political suicide for Democrats to even think of it.

4. Obama's Integrity Has Been Tarnished in August

Not a great deal has been made of the whoppers that the president has been spewing while Congress has been away during the summer recess but it turns out that more people than I realized have also noticed the president wildly "exaggerating" in his talks on health care. For instance, the president confused the $500 physicians actually get to amputate a foot as opposed to the $50,000 that he claimed they got. He also showed an utter disregard for the reputation of those doctors he talks about, the "facts" he uses to make his argument, and is highly overly optimistic about the results of his policies. Long story short, at the beginning of the summer Americans mostly trusted him, his passion index was at +10, he heads into the fall at -14.

5. A $3 Trillion Dollar Budget

There was lots of new spending for this and it sure added up. And that brings me to number 6.

6. A Coming Middle Class Tax Hike

The Obama administration will hem and haw about hiking taxes. -- There will be an official, and arrogant, explanation given by Robert Gibbs from the podium in the White House briefing room about why they must to do this to be "good stewards" and to be a "responsible administration" that "pays as it goes." 

But the truth is, in order to pay for everything the Obama administration has promised (and budgeted for), a tax hike is looming for small businesses and the working families that President Obama promised would never come. 

And as an aside, the president was going to break that promise all along. Because the minute the Bush tax relief measures run out in 2010, middle class taxes would be going up in the Obama administration. That means that, fundamentally, that Obama's "not a single dime" pledge on the campaign trail was just hot air from start to finish.

Of course, the president, the Democrats, the left, and Congressional leadership could surprise me. They could show up in September and endorse the Coburn health care bill in the Senate and steal all the credit for it. They could show up next week and fight with all their might to not allow the tax rates to skyrocket in 2010. They could decide to scrap cap-and-trade and re-think the use of public money for a true job-based economic stimulus.

But I'm not holding my breath, and I'd advise you against it as well.

They've awakened the American worker, the American small-business owner, and the American voter.

All three of which are now wondering aloud, "What on earth have we done?"

By Cristina Alesci

Sept. 1 (Bloomberg) -- Paul Tudor Jones, the billionaire hedge-fund manager who outperformed peers last year, is wagering that Goldman Sachs Group Inc. and Morgan Stanley got it wrong in declaring the start of an economic recovery.

Jones’s Tudor Investment Corp., Clarium Capital Management LLC and Horseman Capital Management Ltd. are taking a bearish stand as U.S. stock and bond prices rise, saying that record government spending may be forestalling another slowdown and market selloff. The firms oversee a combined $15 billion in so- called macro funds, which seek to profit from economic trends by trading stocks, bonds, currencies and commodities.

“If we have a recovery at all, it isn’t sustainable,” Kevin Harrington, managing director at Clarium, said in an interview at the firm’s New York offices. “This is more likely a ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later.”

Equity and credit markets have rallied on hopes that government intervention is pulling the U.S. out of the deepest economic slump since the Great Depression. The Standard & Poor’s 500 Index jumped 51 percent from its 12-year low in March through yesterday.

The economy will expand at an annualized rate of 2 percent or more in four straight quarters through June 2010, the first such streak in more than four years, according to the median estimate of at least 53 forecasters in a Bloomberg survey.

Tudor, the Greenwich, Connecticut-based firm started by Jones in the early 1980s, told clients in an Aug. 3 letter that the stock market’s climb was a “bear-market rally.” Weak growth in household income was among the reasons to be dubious about the rebound’s chances of survival, Tudor said.

Yields Drop

Yields on corporate bonds relative to U.S. Treasury benchmarks have sunk to levels unseen since before the collapse of Lehman Brothers Holdings Inc. in September, a positive sign for credit markets. Spreads on junk bonds fell in July to within 10 percentage points of Treasuries, lifting them out of the distressed category for the first time in almost a year.

“We think the recession is ending right now,” Abby Joseph Cohen, senior investment strategist at Goldman Sachs, said in a Bloomberg Radio interview Aug. 17. The New York-based bank forecasts 2 percent growth in U.S. gross domestic product in 2010.

Economists at New York-based Morgan Stanley in the past month have incrementally raised their GDP growth estimate for the current quarter to 4.8 percent annualized from 3.5 percent.

President Barack Obama said a decline in July’s unemployment rate signaled “the worst may be behind us.” GDP shrank 6.4 percent in the first quarter and 1 percent in the second, after a 4 percent contraction in the second half of 2008.

Different Jobless Rate

A focus on misleading indicators is driving markets, macro managers say.

Clarium watches the unemployment rate that accounts for discouraged job applicants and those working part-time because they can’t find full-time positions, Harrington said. July joblessness with those adjustments was 16 percent, according to the Department of Labor, rather than the more widely reported 9.4 percent.

The housing data isn’t as rosy as some see it, Harrington said. As existing U.S. home sales rose 7.2 percent in July from the previous month, distressed deals including foreclosures accounted for 31 percent of transactions, according to the National Association of Realtors, a Chicago-based trade group.

A report by the Mortgage Bankers Association, based in Washington, showed the share of home loans with one or more payments overdue rose to a seasonally adjusted 9.24 percent in the second quarter, an all-time high.

Loaded for Bear

Clarium, which oversees about $2 billion, is positioned for an equity bear market through investments in the U.S. dollar, Harrington said. Falling stock prices will strengthen the currency by forcing leveraged investors to sell equities to pay down the dollar-denominated debt they used to finance those trades, he said.

High unemployment, lower wages and potential missteps by policymakers around the globe may stifle economic growth in 2010, Tudor said. The firm, which manages $10.8 billion, is at odds with 55 economists projecting an average of 2.3 percent growth next year, according to the Bloomberg survey.

Macro managers’ pessimism is fueled in part by the U.S. government’s response to last year’s financial crisis, which they say fails to address the root cause. Banks still hold hard- to-sell assets on their balance sheets, the managers said.

Subdued Credit Growth

“Some critical initiatives have been cut short,” Tudor said. “As a result, toxic assets remain on balance sheets and credit growth is likely to be subdued for a long period.”

Some firms, including Brevan Howard Asset Management LLP, see the recession at its end while dismissing the likelihood of robust growth.

Brevan Howard, Europe’s largest hedge-fund manager with $24 billion in assets, told clients the U.S. could stumble when stimulus spending fades after the current quarter. The London- based firm, whose macro fund gained 20 percent last year, said consumer wealth erosion, scant bank lending and troubled world economies may result in a lackluster recovery.

The U.S. Federal Reserve and other policy makers took unprecedented steps in the past year to stave off financial disaster. The Fed’s Board of Governors used emergency powers to rescue markets for commercial paper, housing bonds and asset- backed securities. The Fed’s balance sheet swelled to $2.08 trillion last week, more than doubling from a year earlier.

Accounting Effect

The Financial Accounting Standards Board voted in April to relax fair-value accounting rules. The change to mark-to-market accounting allowed companies to use “significant” judgment in gauging prices of some investments on their books, including mortgage-backed securities that plunged with the housing market.

Banks are reporting better earnings because they haven’t been forced to account for their losses yet, Clarium’s Harrington said.

“We haven’t fixed the problem,” he said. “We’ve just slowed down the official recognition of it.”

Hedge funds rose in July for the fifth consecutive month, returning an average of 2.4 percent as stocks advanced, according to data compiled by Hedge Fund Research Inc. Bearish stances prevented some macro funds from joining the rally. The category lagged behind the industry average in July, rising 0.6 percent.

Fund Performance

Clarium, whose assets were mostly in fixed income, dropped 6 percent this year through June. Horseman’s fund slid 16.3 percent. Tudor’s BVI Global Fund Ltd. returned 11 percent.

The funds held up in 2008 amid the industry’s record 19 percent loss. Horseman’s Global Fund USD, which focuses on stocks, made HSBC’s private bank list of top 20 performers by gaining 31 percent. Tudor’s and Clarium’s funds fell 4.5 percent.

Macro managers are examining China for hints on how to place currency and commodities bets. Tudor said the country’s spending spree on raw materials inflated commodity prices and weakened the U.S. dollar.

A government mandate forcing banks to make about $1 trillion in loans during this year’s first half is spurring short-term growth that may not last, according to Clarium. China’s banking regulator drafted capital requirements Aug. 19 that may lead banks to rein in lending.

Horseman, with $4.1 billion under management out of London, was investing in long-term U.S. Treasury bonds. The firm believes interest rates will stay low for longer than the market expects, benefiting the asset class.

“Despite every effort by government in North America and Europe to avoid deflation,” Horseman wrote, “the current numbers suggest they are losing the battle.”

To contact the reporter on this story: Cristina Alesci in New York at calesci2@bloomberg.net