Victor1212a's  Instablog

Disclosure: I have no housing sector investments.

There's an interesting story in The New York Times today that illustrates why throwing money at a problem isn't always a solution and often creates more numerous and deeply seated problems.

It talks about the exploitation of students by vocational schools like ITT, which routinely burden them with $40,000 in debt for a two-year degree. The hook is the idea that they're going to make big bucks after graduation as chefs and IT professionals. The reality is very different.

The bigger issue is that fiduciary duty - the legal obligation of executives at publicly traded companies to maximize profits - dictates that every lasting profit opportunity in this nation is rapidly exploited until the resources no longer serve the purpose for which they were originally intended. It's a race to kill the golden goose. In the case of the Times story that goose is for profit vocational instruction.

We could just as easily be talking about undergraduate and master's degrees in poor paying fields like social work, art and journalism. Those fields were widely viewed by their practitioners as nonprofit enterprises for decades - even centuries - and still are in many parts of the world. However, rising tuition costs for them here in the U.S. mean that a new social worker making $30,000 a year could very easily graduate with more than $100,000 in student loan debt if they attended a top private university.

That optimistic scenario assumes they can find employment in the middle of the deepest economic contraction since The Great Depression at a time when hiring has been frozen in so many states. Those who can't find work are sentenced to bankruptcy and a room at mom and dad's house for 20 more years, or worse.

A similar situation exists in agriculture and housing - industries where profits have been inflated by generous government subsidies - tax dollars. We've all heard of predatory lending in the housing industry, which former Fed Chairman Alan Greenspan routinely noted, but refused to police. (Greenspan preferred to allow the market to regulate fraud, which is a policy that encourages predatory behavior).

Well, the Times story is really talking about predatory lending by vocational schools. The uninformed are being exploited by the informed, who are saddling them with loans they may never be able to pay off. It's a perverse form of corporate welfare in which elite citizens parasite on the needy, instead of trying to aid them, by exploiting their dreams of upward mobility.

Those of you that enjoy the role of Devil's Advocate (and it's a wonderful role) might point out that this kind of behavior has been with America since the Pilgrims landed at Plymouth Rock. I disagree. What's different now is that government has become complicit in this behavior because it only responds in a meaningful way to individuals and interests that can afford a political lobbyist in Washington, D.C.

There's an old saying in Washington that you're either at the table or on the menu. Well, the middle class has been on the menu since the days of Ronald Reagan and Gordon Gecko. They don't have a lobbyist.

The dominant position of lobbyists for the monied elite has become a kind of modern-day poll tax that excludes the average American voter from playing a meaningful role in their own life and their own government. Middle-class Americans have also been priced out of the market for legal services, which guarantees they are screwed and exploited at every level.

The only exception occurs when middle class voters act together, but people are too distracted to do that by wedge issues such as abortion, immigration, school prayer, urban firearms possession and illegal drug use.

(I don't consider health care reform a wedge issue so much as one of intellectual captivity as there are only three notable groups in the debate: those who benefit from the current system, those who don't and those who don't and are being misled).

To get back to the Times story - the reality for those vocational grads who secure employment in their chosen field is that it's usually at an entry level wage inconsistent with repaying their student loan, even if they forgo personal aspirations like a decent place to live, a new car, marriage, children and personal travel.

I can relate as someone who lived on $13,000 a year at the Pekin Daily Times as a baby journalist in 1992, while paying $300 a month on my undergraduate and graduate student loans. Try doing the math on that one.

The numbers add up quite differently for ITT Educational Services Inc., a publicly traded, for-profit company. It's based in Carmel, Ind., and trades under the ticker ESI. You won't find any mention of their profits on the Web site page for prospective students.

However, you will find some damning details if you dig into the separate web site for ITT's investor relations team.

It's latest quarterly earnings statement goes into great detail on the degree to which ITT executives have succeeded in fulfilling their fiduciary duties on the backs of their students.

1. Revenue (aka sales) in 4Q2009 (the fourth quarter or final three months of last year) increased 34 percent to $374 million from the same period of 2008.
2. Profit rose 49 percent to $94 million.
3. Earnings per share (aka EPS) of ITT stock - a metric dear to investors - rose 59 percent to $2.56.
   

Clearly, it's not a sin for revenue and profit to rise along with enrollment as more unemployed workers enroll at ITT to learn new skills. Sustained profit growth is not an inherently bad thing from a Societal perspective. It all depends on how it's being done.

It's being done badly at ITT because the vocational giant didn't grow its profits with some innovative new gizmo, like the iPhone. It grew its profits by spending less tuition money on educating each of the students paying that money to be educated at ITT. And that is a damn sin and a terrible thing from a Societal perspective.

To add insult to injury, much of those tuition dollars come from government backed student loans and grants. In short, middle class taxes subsidizing the exploitation of middle class students.

What's missing? If you said enrollment growth and expenditures per student you're right on target. We have to know that and here it is:

1. Revenue (aka sales) in 4Q2009 (the fourth quarter or final three months of last year) increased 34 percent to $374 million from the same period of 2008.
2. Profit rose 49 percent to $94 million.
3. Earnings per share (aka EPS) of ITT stock - a metric dear to investors - rose 59 percent to $2.56.
4. Enrollment rose 30 percent
5. Revenue Per Student rose 4 percent to $4,727
6. Education costs (as a percentage of revenue): 32 percent, down from 36 percent.
7. Student services and administrative expenses:  26.8 percent, down from 27.3 percent

Net income, revenue and earnings per share all outpaced ITT enrollment growth by a great deal in 4Q200. Yet the amount of money spent on students is down.

ITT has given us a lesson in how a company can boost profit beyond enrollment growth. One way is to spend less tuition money on students and that's exactly what appears to have been done here even as ITT was charging those students more and wallowing in a bonanza of cash from new students.

OK, now what am I really saying? I'm saying ITT was set to increase profit tremendously just on the basis of all its new students - by 30 percent if everything stayed the same. Most investors look for sustained profit growth of 8 percent to 12 percent. So, that's fantastic, but it wasn't good enough for the "Masters of the Universe" in charge of ITT. It never is.

Net income, revenue and earnings per share all outpaced ITT enrollment growth by a great deal in 4Q200.

The executive leadership team at ITT wasn't content with increasing profit, they had to screw students at the same time to show how really talented they are as corporate managers. This is akin to Neo turning with his leg in the air during the climactic scene at the end of "The Matrix" after he had obliterated Agent Smith. It's like saying "look how badass I am."

Non-traders need to remember that information like this is often right in front of you on the Web in reports and statistics. The savage elites are betting you're too stupid to figure it out. They're right most of the time.

Traders need to ask themselves if they want more from a company than predatory conduct like this. Warren Buffett does and he seems to be doing quite well.

The rest of us need you guys to raise your sights and punish the ITTs of the world. Of course, you have to decide whether you're a citizen of the world or an American first and whether it matters to you if your children, relatives and neighbors are exploited by companies like ITT.

If you're still an American, the rest of us are looking to you for help. We need the working-class-done-good out there to let their hands go already and stop bemoaning the terrible beating we're taking.

Disclaimer: ITT Technical Institute, which trades under the ticker ESI, is not the same as ITT Corp., which trades under the ITT ticker and is a high-tech engineering and manufacturing company.

Disclosure: I have no direct ownership of any stock.