“Past Performance is No Indication of Future Results”. Its a statement attached to every financial salespitch ever offered.  So why is it no one believes it ?

Turn on CNBC, Fox Business, Bloomberg, and every other comment from the “experts” mouths are “historically when the Dow ….fill in the blank….” or “for the last X years, every time the market did X, then Y has happened within Z months”

Folks, it is different this time. Until this past year, at no other time in the history of the US Markets has there been Investment Banks investing for their own accounts to the tune of 30 or more to 1 leverage.

At no other time in the history of the Markets are there 17k mutual funds and more than 10k hedge funds. All competing with each other for the right to make a ton of money off of your money.

At no other time in the history of this country did savings fall as far below zero pct of income

At no other  time in the history of this country were net effective interest rates as far below zero

At no other time in the history of our markets have the words “blue chip” completely lost their meaning.

At no other time in the history of our markets has the money of consumers been so portable and movable between hedge funds and mutual funds. Which means that at no other time have mutual funds and hedge funds been so susceptible to redemption runs.

At no other time have consumers been so in the dark about what is happening with our funds. At least George Bailey could see the line at the bank and know what was happening. We as consumers have zero transparency as to whether or not there is a run on our funds, so we run to take out our money first, just in case. The result is a virtual run on the fund where we hold our money, except that no one knows about it but the fund itself, and they aren’t going to say a word for fear of making it worse.

At no other times have financial engineers and investors been so in the dark about how bad the runs on funds have been, so we sit on the sidelines, dribbling in cash, not wanting hedge and mutual funds to dump their shares into our bids.

At no other time have their been 3 financial news networks and thousands of websites providing so much financial information and opinion. The sum of which  has definitely lead us into a situation of  “Paralysis by Bullshitalysis”.  Everyone is afraid to buy. Everyone is afraid to sell or short.  Sales forced by de-leveraging is the catalyst for the market.  However, there are so few buyers, the de-leveraging sales are taking forever.

Who knows what the new normal is. No one has any idea what is going to happen in this market. NO ONE.  Personally, I am completely hedged. I bought puts, sold them. Sold Puts, bought them back, then decided to hedge every long dollar and then some with big puts on the market. This allowed me to be protected on the down side, and tip toe on the long side. As stocks go down, my hedge allows me to buy more of the stocks I like. If the market takes off on the up side, hopefully my longs will more than cover the cost of my puts. If the market does nothing. I’m stuck right where I am, with my puts losing time value every day.

Maybe it will work, maybe it won’t.  What I do know is this, everyone is a genius in a bullmarket. The last 5 years, that wasn’t a stock market. THIS is a stockmarket. This time it is different. This may just be the new normal.

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Lets say I owe the bank behind my credit card  1k dollars and Im paying  10pct interest because the best I can do is a little bit more than the minimum payment.

You come to me and tell me you are going to take out a loan for at least  25k dollars, get me to cosign for it, and garnish the taxes I will pay in the future to pay back the loan.  Then you tell me you are going to take the 25k dollar loan proceeds  and give it to the bank that I have my credit card  with and charge it 5pct plus some warrants to in turn loan that money back to me if i want to increase my balance.

The problem isnt that the Fed is doing this (Yes I know we could argue this, but its too late now). The problem is that they are not asking for more from the Banks for doing it.

The same banks they are pumping money into, the same banks they want to work with to help save people’s homes, are many of the same banks that are pounding credit card holders with 10pct plus interest rates and fees that can pump up effective interest rates  past 40pct !

In exchange for Bailout Funding, the TARP should require banks that issue credit cards, whether in their names or others, to limit interest rates and fees.

The usurious rates and charges in place today increase credit card defaults, which in turn increase mortgage defaults, which in turn cause people to have their live’s turned upside down and put the banks that we are bailing out in court to sue , garnish wages and all the other terrible things that can happen when a user defaults on their credit cards. All of which extend and deepen the recession we are in.

Its not like the Fed trusts banks that offer credit cards. They had to pass laws trying to protect consumers from banks trying to rip us off. You would think they would have recognized that the BailOut is the way to protect consumers even further.

If our country thinks the velocity of the decline in the housing market was fast. If our country thought the impact of banks , homeowners and hedge funds deleveraging was bad, what does the Bail Out BrainTrust think will happen when a quickly growing number of people default on their credit cards ?

Think compounding 10pct plus credit card interest rates on cards will extend or contract the recession ? Would we rather see families buying food and consumer items, or spending the money on interest and late fees ? Which will help the economy more ?

Normally, there would be no standing to ask banks to reduce their interest rates and eliminate their fees. Credit card junkies would just get what they deserve. Normally  those same credit card junkies wouldn’t see their tax dollars loaned to banks at 5pct so they can borrow it at 10pct plus.

Now is the time for the Bail Out BrainTrust to be proactive. Tell Banks that when they take bailout money, they must limit interest rates to 6pct, eliminate late fees on balances under 1k dollars, and create extended term payoff options as an alternative to default. The TARP has evolved, it has to evolve to deal with consumer credit card debt.

I realize that this could lead  banks to  be less likely to issue new cards because of the reduced profit opportunity. I think we should take that chance.

I also realize that this will reduce profits for banks that need every bit of profit they can get to pay the 5pct interest on the preferred stock they are selling the Fed.  This is not  a problem at all.

There is 962 Billion dollars in credit card debt outstanding. Lets guess that the average effective rate is 10pct and 1/3 of people pay off their bills every month . Lowering that to 6pct means that the banks will lose about $25 Billion Dollars in interest and fees per year.

I would be ok with crediting lost interest against the 5pct coupon  the Fed is getting from them. I would be happier if we said that if they dont do this, the next dollar we give them will pay us 9pct instead of 5pct.

When the  Fed buys down credit card rates and fees there is a long list of benefits:

It acts as an immediate fiscal stimulus by putting money in the hands of people who need it the most and more importantly, are most likely to spend it. This will help the economy and hopefully limit the depth and duration of the recession we are in.

It reduces the number of mortgage defaults. People who cant pay their credit cards, cant pay their mortgages.

It reduces the write offs of credit card debt that banks would have to take. I know 100 to 200 Billion in credit card write offs may not seem like much these days, it is. More write offs means more BailOut money lent to them . It also eliminates the ultimate privacy disaster. Could you imagine if the Fed decided they needed to buy defaulted credit card debt?  Could you imagine having the IRS calling you about your credit card debt ?

Of course there is the undesired consequence that more people will use their credit cards which readers of this blog know i think is a mistake. Unfortunately, desperate times call for desperate measures. This is credit crack and we are begging consumers to sample it and become addicted. I guess this is where my self interest takes over. Lower rates, and more people using credit could lead us out of the recession.

What if the Fed doesnt buy down credit card interest rates and fees ?

If you think its bad today, you ain’t seen nothing yet. Deleveraging of the consumer society we live in will QUICKLY take more money out of the system then we can possibly imagine and thats not good. In a nutshell, the people who can afford to spend using credit cards, will use their credit cards less and spend less because the interest rates are too high, their is uncertainty about jobs and they fear not being able to pay it off in 30 days. Those who can’t afford to use credit cards and are in a bad situation, will use their credit cards more, because they have no choice, and a quickly growing number of them will default on those growing balances. All of which is a negative for the economy.

Please call your state representative and senator and ask them to act on credit card debt. Tell them we want them to be proactive. Before its too late.

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I would hate to be the winning Presidential candidate. Both candidates are delusional  in thinking  their economic policies will drag us out of a recession or even improve the economy.  The reality is that the solutions offered by both are the equivalent of shuffling the deck chairs on the Titanic. They are meaningless.

You can cut taxes for 95pct of Americans and raise taxes for the rest. You can cut taxes for businesses and retain the Bush Tax Cuts. You can increase or decrease the capital gains tax 5 or 10pct either way.  Under both programs the deficit for the country will increase,  we will borrow and print more money.  5 or 10pct variance either way, given the big hole  our economy is in wont matter.

The cure for what ails is us the Entrepreneurial Spirit of this country.  We are a nation of people who encourage , support and invest in those of any and all age, race and gender who will use their ingenuity and come up with a new idea.

Its always the new idea that re energizes this country.  Industry, manufacturing, transportation, technology, digital communications, etc, each changed how we lived and ignited our economy and standard of living. Tax policy has never done that.  The American People have.

Entrepreneurs who create something out of nothing don’t care what tax rates are. Bill Gates didn’t monitor the marginal tax rate when he dropped out of Harvard and started MicroSoft (btw, it was a ton higher than it is today). Michael Dell didn’t wonder what the capital gains tax was when he started PC’s Limited, and then grew it into Dell Computer.  I doubt that any great business or invention started with a discussion or even a consideration of what the current or projected income or capital gains tax was or would be.

The impact of tax rates on productivity and development is something economists masterbate about,  enterpreneurs don’t waste their time thinking about it. We have business to do.

Entrepreneurs live to be entrepreneurs. I have never had a discussion with anyone about starting a business that included tax rates. Ever. If anyone that wanted an investment from me made a point of discussing tax rates as an impact on their business, I wouldnt invest in them. Ever.

Entrepreneurs live for the juice of making their dreams come true. Of having a vision and fighting to see it come true. The joy of mission accomplished and the scoreboard of the financial rewards.

We are in an economic mess right now. It doesn’t matter who caused it. It’s here. It doesn’t matter what our Presidential candidates and their economic advisors come up with. Its meaningless.

The cure to our economic problems is the Entrepreneurial  Spirit of All Americans. Instead of bitching at each other, could one Presidential  candidate please show even the least bit of leadership and character and stand up for and encourage the entrepreneurs in this country ?

i dont care who is friends with whom, who preached when you went to church, whether you know the actual role of the Vice President, whether you voted with President Bush. I dont care about any of the mudslinging going back and forth. All it does is waste the time of every potential voter.  All of that is meaningless.

What we need is our candidates to stop yelling at each other and starting looking at the American people and encouraging the best of who we are.  That is who I want to get behind. That is what I would like to see for our country. That is what will energize and motivate people to create companies and invent products that will  turn the economy.

The best time for little guys to start a business  is when the big guys are worrying about surviving in theirs. You dont need to raise money. You need to be smart and be focused.  I had no idea until this current financial crisis that when I started MicroSolutions, my first company, it was in the middle of a very bad recession. I had no idea whatsoever. I didnt know what the tax rates were, and I didnt care. I had an idea, a floor to sleep on and a lot of motivation.

Now is the time for Entrepreneurs to step up and do our part for our country. Its up to us to start businesses and create jobs. That is the cure to this country’s economic problems.

To stick with this theme, I want to republish, again, one of my favorite previous blog posts:

The Best Equity is Sweat Equity

Jun 8th 2004 8:58AM

The Rules of Success

As MicroSolutions became more and more successful, and as I paid attention to the common traits of businesses that I saw succeed and those I saw fail, I came to realize that there are “Rules of Success” that I saw in companies that excelled. Where companies failed to follow those rules, inevitably, they failed. I found myself checking with “My Rules” before I made decisions. When I traded stocks or considered investments in companies, I applied The Rules to their business before I made a decision.

The Rules are not infallible. They have their limits. I’m an entrepreneur. My businesses have had hundreds and now more than a thousand employees. My world has been limited to starting, building, growing and running businesses that are never going to make the Fortune 500. My dreams were never to build the biggest corporation in the world. So, if you are a middle level manager in a Fortune 500 company, these rules may not help you manage your department. If you are the CEO of a Fortune 500 company with tens of thousands of employees, some rules will apply, some won’t, but where they will help you is to know how little guys coming out of nowhere are going to disrupt your business.

Where The Rules will help you is if you are considering starting, or currently run your own business. There are always exceptions to any rules, but I can assure you that those exceptions will be rare. Entrepreneurs that don’t follow the rules are far more likely to fail. There is no doubt about it.

So let’s start at the beginning.

Rule #1: Sweat Equity is the best start up capital.

The best businesses in recent entrepreneurial history are those that have been started with little or no money. Dell Computer, MicroSoft, Apple, HP and tens of thousands of others started in dorm rooms, tiny offices or garages. There weren’t 100 page long business plans. In all of my businesses, I started by putting together spreadsheets of my expenses, which allowed me to calculate how much revenue I needed to break even and keep the lights on in my office and my apartment. I wrote overviews of what I was selling, why I thought the business made sense, an overview of my competition and why my product and/or service would be important to my customers, and why they should buy or use it. All of it on a piece of yellow paper or in a word processing file, and none of it cost me more than the diet soda I was drinking while I was writing it up.

I remember the foundation for each of my businesses. MicroSolutions was very simple. To use microcomputers and software to help our customers become more productive, profitable and gain a competitive advantage. AudioNet, which became broadcast.com was simple as well: use the internet to enable real-time, worldwide communications of entertainment and business applications. HDNet is to create great entertainment, originated in High Definition format to allow our distributors to compete for the highest margin customers.

Once I could put the idea on paper, I gave the company a name. From there, I took the most important steps: I tried to find people to shoot holes in it. When we started AudioNet, I remember getting an appointment with Drew Marcus of Alex Brown (it could have been Larry, but I think it was drew :), an investment banking company. Drew followed the radio industry and I wanted to see if there was anything he saw from his experience that would blow up the concept. He loved the idea. We took it to Dan Halliburton of Susquehanna Radio. He was an executive in charge of several Dallas area radio stations. We discussed how he could broadcast his stations over the Internet using AudioNet and reach the in office market where there weren’t many radios on desks, and few of those could pick up the AM signal of his stations. He loved it. I took it to Tim and Eric Crown, who ran a newly public company called Insight Enterprises. I asked them if it made sense to broadcast their quarterly earning conference calls over the internet so their investors and the research analysts who followed them could easily listen to the calls and get up to date information, or listen to an archive of the call if they missed it. They thought it would help them reach their Investor Relation goals less expensively.

Each step cost me next to nothing to get great feedback. Each enabled me to check the foundation of my business idea to see if it was easy to shoot holes in it, and most importantly, they all served as sales calls. Each company eventually became a customer of ours.

I went through this in each of my businesses. The step gave me confidence that my business idea was valid. That there was a chance of success. At this point, many entrepreneurs think the next step is to take all this feedback, update their 100 page business plans and go out and raise money. It’s as if the missing link for success in a business is cash to get started. It’s not. Far more often than not, raising cash is the biggest mistake you can make.

Most entrepreneurs tend to think in terms of what raising money means to them. How it can get them started? How many people they can hire? How much they can spend on office space? How much they can pay themselves? They forget to put themselves in the position of the person or company they are asking for money from. They think they are considering that person’s position by making up numbers and calling them expected returns for the investor. If you only give me X dollars, you will get X pct back in X years. You will double or triple your money in X years. Any investor worth anything knows you are just making these numbers up. They are meaningless. Worse, if you tell a savvy investor that the market is X billions of dollars and you just need one or some low percent to make zillions, you are immediately kicked to the curb.

These investors, including myself, know what you don’t, and they are not telling you. The minute you ask for money, you are playing in their game, they aren’t playing in yours. You are at a huge disadvantage, and it’s only going to get worse if you take their money. The minute you take money, the leverage completely flips to the investor. They control the destiny of your dreams, not you.

Investors don’t care about your dreams and goals. They love that you have them. They love that they motivate you. Investors care about how they are going to get their money back and then some. Family cares about your dreams. Investors care about money. There is a reason why venture capitalists are often referred to as Vulture Capitalists. The minute you slide off course from the promises you made to get the money, your dreams fall in jeopardy. You will find yourself making promises to keep investors at bay. You will find yourself avoiding your investors. Then you will find yourself on the outside looking in. The reality of taking money from non family members is that they are doing it for only one reason, to make more money. If you can’t deliver on that promise, you are out. You will be removed from the company you started. You will find someone else running your dream company. If this sounds like a scene out of the Sopranos or an episode you would watch on TV about a loan shark, you are right. The only difference is that it’s all legal.

There are only two reasonable sources of capital for startup entrepreneurs, your own pocket and your customers pockets. I personally would never even take money from a family member. Could you imagine the eternal grief and guilt from your mom, dad, uncle or aunt because you blew your nephews college money or the money for grandmas last vacation… I cant.

You shouldn’t have to take money from anyone. Businesses don’t have to start big. The best ones start small enough to suit the circumstances of their founders. I started MicroSolutions by getting an advance from my first customer of $500. The business didn’t grow quickly in the first couple years. We didn’t grow past 4 people in the first couple years, and we all worked dirt cheap.

So what’s wrong with that? It’s OK to start slow. It’s ok to grow slow. As much as you want to think that all things would change if you only had more cash available, they probably won’t.

The reality is that for most businesses, they don’t need more cash, they need more brains.

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Transparency is key to the success of the Bailout and related loans and investments the government makes with our tax dollars. Without complete transparency, we will get from our government what we always get when it comes to finances, confusion. To do my part, I’ve worked with the folks at Sharesleuth.com to create Bailoutsleuth.com

Its job is simple, keep an eye on our taxpayer dollars and call Bullshit when necessary.

if you take a trip over to Bailoutsleuth you can see that its already time to call BS. In the first contract handed out, in this case to Bank of NY Mellon Corp, the compensation section is blacked out.

Sad. So very sad, that we couldnt make it a week without being afraid of the very taxpayers who are footing the tab for all of this.

Bailoutsleuth will try to publish every day in keeping up with how our taxdollars are spent and the people and companies that are impacted by this program. We are still a work in progress and look forward to your comments , feedback and tips.

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This is for anyone who has under 250k dollars in stocks and bonds and also has debt.

If you listen to me, I GUARANTEE YOU that you will earn a greater return than 90pct of the richest, supposedly smartest money managers ON THE PLANET. All those Wall Street fat cats, they can’t earn as much on their money for you as I can help you earn.

Sound too good to be true ? Read this and decide for yourself.

First thing to understand is that Wall Street wants you to believe that if you give them money, every month, forever, to buy stocks, that you will most likely will earn 7 or 8pct per year. When compounded, your money will double every 9 or 10 years. Sounds great, right ? One problem with it. You know what you would call someone on Wall Street who made you 7 or 8 pct a year, every year without ever losing money in a year ? Non Existent. Those managers don’t exist.

You can however do what they can’t and even better if you do the following:

1. Write down a list of every penny you owe to anyone and the interest rate that you pay on that amount. Your mortgage, your car payment, your student loan, the Rent A Center TV and Dell Computer Loan, your loan shark, your uncle or grandparents and most of all your credit cards

2. I’m willing to bet that you have absolutely no idea what your true, effective interest rate is on any of the above. Between penalties for using the wrong type of stamp, being 37 seconds late, and moving interest rates that are triggered by every crazy thing, its hard for anyone to know. However, a glance at Citibank Platinum Select Mastercard details as an example, would tell you that if you are late on your payment, your rate is:

“All default APRs equal the greater of (1) the Prime Rate plus up to 23.99% or (2) up to 28.99%. PLUS LATE FEES of 10pct OR MORE ON BALANCES UNDER $250 !!!! (There may be something in the fine print that asks you to bend over too, but my eyes couldnt focus on print that was that small….) “

All of Wall Street would give you the choice of either testicle to be making returns that high. A quick glance at IndexCreditCards.com tell us that not only are the average rates for any card, higher than the biggest promises from the best Wall Streeters, but they have been trending higher.

So in a nutshell, while the interest rate on your credit cards is going up, the return on your investments has been going down. You know what they call someone who keeps on giving money to their stockbroker, mutual fund or 401k, but doesn’t pay off their credit card balance in full every month, BROKE AND STUPID !

The first thing you do with your money is if you have money market funds, you take the money out and pay down your credit card debt. If that doesn’t pay it off. This is what you do next:

You make a list of every stock, bond, fund, whatever you own, and mark what your cost is, the current market price, the current dividend yield on your cost basis, if any and whether it is in a 401k, fund or brokerage account. For any stock or bond at a brokerage account that is yielding less than what you are paying in interest rates on your credit cards, and for which the current price is less than what you paid for it. YOU SELL IT. When you call your broker to get the prices, you do not let them give you a bunch of BS about why you shouldn’t. YOU SELL IT.

You dont hold it to see if you can make money with it. If you love it, you immediately fall out of love with it. ITS A FRICKING STOCK, not a family member, and you sell it. You take that money and you pay down your credit card debt.

Then you start with the stocks/bonds you have made money on. Beginning with the stock/bonds you have made the least amount of money on, if it isn’t yielding you more than the interest rate plus late fees that you pay, you start selling, and selling and selling. Sell as much as you need to until you can pay off your credit card balance.

Once you have sold enough to pay off your credit card balance, you RIP UP YOUR CREDIT CARDS and replace it with a debit card. The only way Credit Cards cost you less than 9pct, or possibly as much as 40pct or more is if you pay it off monthly. Debit cards make that happen automatically. You cant afford to pay 9pct, 40pct or more. Both are far more than you can expect to make in the stock market, or any market. If you have gotten here to this point, and you just tore up your credit cards, YOU HAVE JUST EARNED A GREATER RETURN ON YOUR MONEY IN THAT PERIOD OF TIME THAN ANYONE ON WALL STREET COULD EVER EARN YEAR IN AND YEAR OUT.

If you still arent to the point of paying off your credit card, its time to borrow against your 401k. Switch all your money from whatever funds to insured, guaranteed funds like money markets. Then find out the rate of interest you pay, how long you have to pay it off (usually 5 years), and then borrow the money to pay off your credit cards. I have never seen a 401k that charges more than credit cards in interest. Credit cards accrue interest and penalites a lot faster than you can earn and accrue interest and returns in your 401k. So borrow the money, pay off the credit card, and start paying back your 401k with what your credit card payments were. You will have your 401k loan paid off a lot faster than you could ever pay off your credit cards.

Once your credit card is paid off, then you go to your debt list and pick out the next highest interest rate and start the process all over again until all your debt except your mortgage is paid off.

If after paying off all your non mortgage debt, you still have money left, then you need to sit down with someone who knows your tax situation. Since mortgage loans are usually deductible, ask them to help you figure out what your effective interest rate is on your mortgage and what your outsanding balance is. If you are fortunate and your net effective rate is less than 7 or even 8pct, and you can make the monthly payments, then you probably don’t need to do anything with your mortgage.

If you have a mortgage that is variable in any way , shape or form, you are probably paying more after tax in effective interest rate than you can earn on your money anywhere that is legal. With this information in hand, you and your accountant or whoever you turn to for help (and please make it someone who really knows what their doing, not someone who got a refund using some tax software) can set up a meeting with your banker, or whoever happens to own your mortgage if you can find that person, and start discussions on how to buy down, pay down , buy out, or pay off your mortgage. They may say no, but if you can get them to renegotiate, and these days thats a very real possibility, you should be able to get a greater return from this process than you can get from the money being in stocks, bonds, or any thing else for that matter. This is particularly applicable if you have a subprime , ARM, or any type of variable rate mortgage.

If you have read this far you have hopefully picked up on the basic principle of debt vs investments. The people who lend you money can guarantee you that they are going to charge you a ridiculous percentage, and throw on top of it, any and every fee they can, thereby increasing the effective interest rate you pay. They can do it every year forever.

On the other side, no one in the universe can guarantee you that they can earn you more than what Consumer lenders like credit card companies charge you in interest. No one. If they could, the lenders wouldnt lend the money to you, they would give the money to those people to invest, right ?

If it takes selling every stock, bond and whatever you have to pay off your debts, do it. If it means borrowing against your 401k and paying back yourself instead of the credit card or finance company, do it. It is a far better return than you will ever make putting that money elsewhere.

If none of this applied to you. You kept your debt at levels that you could afford and at rates that were fixed and low, congrats. Hopefully this just reinforced what you already knew.

If on the other hand, this set you on the right path, and you still have money in stocks and bonds, you are fortunate. You probably need to make sure that what you own is very, very safe and not at risk. My recommendation is 6 month CDs, you can probably go to your bank and convince them to pay you 4 or more percent. If you havent heard, there is a bank liquidity crisis. Banks want your money. They have been ripping you off with credit cards all these years, go take some of their money…

One last point. It would not be out of the realm of possibilities to see a collapse of credit card debt like we saw in mortgage debt. Default rates are going to go up. That means credit card company income is going to go down. You know what banks do when their income goes down ? They try to figure out more ways to charge you more money to make it up. Which of course pushs up default rates. Its a viscious circle and you pay the price.

Get out now while you can.

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