Excellent Case Against Auto Bailout

A George Mason University professor argues against the "bailout" in the linked article (click on title above).

Let's stop calling it a bailout. The automakers do not have water coming in over the sides or through a hole. They are responsible for their situations as they have been irresponsible in their decisions in the past. The money would be a stall. The automakers are currently spending $4B(illion) more each month than they make. That means that $15B in "bailout" loans would disappear in less than four months. Then what? Are we stupid enough to believe that they will become profitable in four months?

They need to reorganize in bankruptcy. Yes, the government may need to guarantee the financing of the bankruptcy. Reorganization does not mean disappearance. Almost, all of the major airlines are in bankruptcy but they're still flying. We didn't all switch to Southwest Air when the others went bankrupt. Yes, current employees - union and non-union will lose jobs. The remaining employees will get paid less and earn fewer benefits. Retirees will lose some pension and health benefits. Some suppliers to the auto companies and some dealers will also go out of business. The government can make this better. Let's eliminate the CAFE fuel standard regulations. $4 gasoline taught us how to cut back driving and buy more fuel efficient cars. We don't need government regulation to help us save gas. Let's remove restrictions on drilling and energy development. The world will be just fine and the polar bears will survive. Maybe we could turn a few shuttered auto plants into wildlife sanctuaries or forests to offset the "environmental devastation" of energy development. Oil companies pay very well and could absorb some of the unemployment from the auto companies. Lastly, let's cut taxes and spending at all levels of government - federal, state and local. I'll leave spending cuts for another post.

Phenomenal Insight into the President Elect

The difference between business owners and employees and our elected officials laid bare.

I've decided to outsource. When someone else does it better than you, use them.

Thank You Danaher

Danaher Corporation may be the biggest and best industrial company that you don't know. I have a ten year relationship with the company. I worked for them in various finance roles for 4 years and continue to work for them as a consultant for the last six. You can see all the horrible things that former employees have said about the company by clicking on the title. I also hated almost every second that I worked there. But, like a stern parent, you don't respect the lessons you are taught until you are mature enough.

Some myths about Danaher:

• Danaher doesn't respect its employees - see disgruntled posts or Google it
• Danaher works people to death
• Danaher only cares about the bottom line, and
• Danaher is a house of cards ready to collapse
  

Let's debunk the first two. In ten years with the company, I've never seen anyone die from working at Danaher (besides an unfortunate industrial accident.) Yes, Danaher has laid off people, especially from acquired companies. The architects of the company including its founders recognized the importance of productivity. While I was involved in a fair share of lay offs, I never saw a productive person get terminated. Danaher recognizes value creation and productivity better than almost all other companies. Its execs go to great lengths to identify and reward productive people. In ten years, I've never heard an employee say of a terminated colleague, "jeez, we sure could use so and so" or "we sure miss so and so around here."

As for the third myth: DUH! I would not be working today if I had invested my money exclusively in Danaher's stock when I started and continued to invest in it throughout my employment. Instead, as a highly trained finance professional, using my professional skepticism, I fell victim to the fourth myth and invested elsewhere. Sadly, I continue to work. (Note: Mitch, Steve and Larry - how about increasing that dividend a little?)

Lastly, I've heard the "house of cards" label since I started there when the stock was a split adjusted $5 per share. The wizards of smart use this label to refer to the mountain of goodwill on the balance sheet. (Yes, Benjamin Graham wouldn't go near this stock.) Growing through acquisitions will create goodwill. It is a function of the purchase price being greater than the historical cost of the acquired company's net assets. It accounts for more than 50% of Danaher's total assets. The wizards of smart believe that goodwill is a non-productive asset. I'm going to let you in on a little secret. Goodwill is not expensed on a regular basis. Goodwill only needs to be expensed if the underlying assets become impaired (eg. non-productive). Goodwill typically accounts for the R&D spending, customer building and retention, patents and brand name that the acquired company has built. All of these things are typically expensed and lower the bottomline. So Danaher can maintain higher profit margins if it invests in companies that have already made the expenditures.

Lessons learned at this house of cards in my next post

Amoronica Part 4

(I really should be working.) Michelle Malkin has great column about the stupidity of the 2 most powerful politicians in my home state of Connecticut. The newspapers need a bailout. They can't raise prices? They can't find an audience? They need to fail. Someone with lower costs and better business sense will recognize and exploit the opportunity.

Amoronica Part 3

Nothing needs to be added.

Save the States

Here's my plan to save the States:
1) Freeze all defined benefit plans including healthcare plans for all state and municipal employees. Current workers would not accrue any additional benefits under these plans effective immediately.
2) Furlough at least 10% of all state employees immediately (and stop extending unemployment benefits, for God sakes let them see what it's like to earn a living)
3) Suspend No Child Left Behind, Clean Air regulations and similar Federal mandates.
4) Eliminate all interstate travel by state elected officials or employees.
5) Suspend funding to public television, radio and tourist boards and any other state agency other than public safety and infrastructure.

I'm using my state, Connecticut, as the model here. Yeah, the State employees will sue for their benefits but they are only suing themselves and every taxpayer in the State. Your kids won't get any dumber without NCLB and the handicapped can still get into the mall without ADA. These actions would create a surplus in CT based on its latest "revenue" and spending projections.

Amoronica Part 2

Why do we continue to elect morons? Or is it that in a democratic republic, we get the government that we deserve? Our Governors will not be ignored or outdone by the pansies running our largest financial and industrial businesses. See linked article by clicking on title.

The Governors have gone to the (phony) office of president elect to panhandle for money. This is much like the homeowner consolidation loan scheme that has contributed to our financial malaise. In the consolidation scheme, homeowners with some equity in their homes would consolidate all of their existing consumer debt - credit cards, existing mortgage, home equity loans, car loans, etc - into a new mortgage - usually with a higher interest rate and obviously a higher monthly payment. Once completed, these same homeowners would go back out and run up their newly cleared credit card balances or get new car loans. Some would even get new home equity loans to sop up any equity that was left over from the consolidation. Now many of these people are underwater on their mortgages, foreclosed or bankrupt.

Our Federal and State governments are proposing the same scheme on a grander scale. The States want the Feds to borrow money on their behalf and give them the proceeds to continue spending recklessly and irresponsibly. Unfortunately, when a government entity goes bankrupt, we the people can not fire the Governors and Legislators immediately. We have to wait until the next election when a myopic electorate will undoubtedly re-elect them.

(A)moronica Part 1

John Stossel has written a great column today about our new nation of Amoronica (click on post title). We have suddenly all become morons. When someone at NASA declared, "Failure is not an option," back during the Apollo 13 mission, he was NOT talking about bankruptcy. Men much smarter than anyone or group of people living today realized that businesses fail - fairly regularly - and gave us the finest bankruptcy laws ever conceived.

Citibank, if it can't get its house in order needs to fail (bankruptcy). The Big 3 automakers need to fail (bankruptcy). Perhaps our federal government is the only institution in the world that can get the debtor in possession financing for these bankrupt businesses. But they should all go bankrupt before getting any money that taxpayers will need to borrow (from the Chicoms, Petrotyrants or other foreigners.)

Petty Tyrant

This is the petty tyrant that "investigated" Joe the Plumber in Ohio. She should be fired and investigated. Can we expect more of this from the new administration? Keep the change.

Jobless rate at 9%

Fox News reports that Goldman Sachs believes unemployment will reach 9% by next year. Maybe this is from the same analyst who said oil would be $200/barrel right now - that prediction has since been scrubbed from the internet. Or, maybe GS was predicting the percentage of its own workforce that it will layoff. What a load of crap!

I've been trying to help a client fill a position since June. It is a great paying job for a solid company. We've only found one decent candidate and she took a job somewhere else. The unemployment figures are caused by two things: 1) A gap in relevant skills, and; 2) Too much unemployment compensation. Not everyone can be a rap star or government employee but it seems that is the scale that the unemployed (or is it unemployable) aspire to. Also, why bother getting a job if you can collect 60% thru the holidays plus not get foreclosed if you stop making mortgage payments.

Enough - stop all unemployment compensation at 4 weeks and ramp up foreclosures. We'll see the unemployment rate plummet.

Is Goodwill becoming a crisis?

Companies binged on acquisitions over the last decade or so. Look at the balance sheets or Danaher (DHR) or Cisco (CSCO) and you will find that goodwill is one of their largest assets. See also GE, TYC, and DIS. Goodwill used to be amortized to expense over the life of the company. That practice was changed by the FAF a few years ago. The current requirements are periodic revaluations of the investments that created the goodwill especially in light on an impairment event. Now that we are heading towards a recession, companies may be required to revalue assets purchased at heavy premiums in the last few years. If an impairment is determined, the goodwill is written to expense in the current period. This could lead to several earnings surprises in the last quarter of 2008.

Loan Covenants?

Stocks keep getting cheaper - by P/E, net book value and dividend yields. Is anyone looking at loan convenants? Cheap stocks with long term debt may be in violation of existing loan convenants. Stock is sometimes pledged as collateral for long term debt. Will banks force defaults on these companies?

Be careful with the stocks of highly leveraged companies.

Fire Paulson

Enough already, remove Paulson. Transfer the TARP investments into a mutual fund and allow private investors to buy stakes in the mutual fund - restrict redemptions. Return all proceeds from mutual fund sales into the US Treasury to retire debt.

Get a new plan Stan

Auto companies begging put off to 12/2
The Congress has given the Big 3 until December 2 to come up with better excuses for their failure. They are required to come up with a plan for being bailed out. How about this:
All current management starting at VP and working up are terminated with no more than 2 weeks of severance;
All current Board members are terminated as of December 1 with no severance;
All union contracts are subject to renegotiation as of December 1;
UAW is barred from contacting any employees at any Big 3 facility until all amounts borrowed by the Big 3 are return to US taxpayers with interest;
All pension (defined benefit) and welfare plan benefits are frozen as of December 1 and annuities will be purchased on December 2 to cover these obligations;
The Big 3 are prohibited from offering any defined benefit employee benefit plans or post retirment benefits;
All job banks are closed and related employees are terminated;
Dodge, Plymouth, Mercury, Lincoln, GMC, and Pontiac brands are dissolved leaving Jeep, Chrysler, Chevy, Cadillac and Ford brands, and;
Corporate planes are grounded and moth balled until all loans are repaid to US Taxpayers, with interest

Who will save the speculators?

With oil about half of what it cost at it's peak ($72 per barrel versus $150 per barrel), who will save the speculators and oil companies? Won't the speculators need a bailout now that they've lost half their money. If $150/barrel was reason for a windfall tax, do only need half a windfall tax now? At half price, will the oil companies need a bailout?

Let the markets work. Yes, $4.50 fo a gallon of gas sucks but it eventually works its way out without any government intervention - unless of course they decide to bailout the oil companies and speculators.

Employees

The most important advice that I can give to any business owner about employees is don't. This especially holds true for small business owners. The actual, real return on a small business employee is often negative. That means that you would make more money if you had invested their wages in a CD. Your business can't create leverage without employees - poppycock.

A $10 per hour employee costs you about $20,000 per year. Add payroll taxes of $1,530 and unemployment taxes of another $300 or so. Now that $10/hour employee costs you about $22,000 per year without any benefits- health insurance, retirement, etc. These are direct costs and are easy to calculate and see. But how about the indirect costs? You will need insurance - definitely workers comp and probably more property and casualty. You may need additional malpractice or E&O insurance to cover them. Space and utility costs including rent, heat, electricity, phone and maintenance all increase when you meed to pay for this employee to sit somewhere. You will also be amazed to find that office supplies and other supplies expenses seem to increase when you have employees. Based on my 17 years experience with employee costs - mine, my clients and employers, a conservative estimate of indirect employee costs is about 1/3 of salary costs. In our example, another $7000. Let's round up and say that your $10 an hour employee will now cost you $30000 per year.

How much sales do you need just to cover that employee's costs - in other words to breakeven? If your gross margin is 50%, you would need $60000 in additional sales to breakeven on that employee. That is $30 in sales every hour of every day that you do business. That employee just sold $50 - you're ahead by $20 for the next hour. That employee only sold $50 for the day - you're $190 in the hole at the end of the day. (After considering weekends, holidays, time off, there are about 2000 business hours in a year.) These are costs that can be measured.

How about costs that can't be measured like stress? Even the most laid-back, hands-off person in the world can not escape the stress caused by having to make payroll each week and deal with employee issues each day. Your employees do not care that you had to sell everything that you owned after mortgaging your house, just to make payroll. If they "worked" during the week, they want to be paid on Friday - no excuses. Even if they didn't sell anything during the week or complete any project during the week, they demand to be paid - they have mortgages and stuff to pay for too.

BTW - I started my business by myself and enjoyed it. I hired a couple of employees then a bunch more and hated every second of every day. Now it's back to just me and I'm slowly enjoying it again even when I have to answer the phones and prepare all of the tax returns.

More small business lessons to follow.

Unemployment Numbers

I contributed to this year's unemployment numbers by terminating an employee to save money and reduce stress. (Employees are not only expensive but also enormous stress generators.) He has been collecting unemployment compensation since the summer which means that he is included in the unemployment numbers released each month. He will continue to be included in those wwekly and monthly numbers until his benefits run out or he finds a job.

The financial press and MSM make a big deal about the increasing unemployment numbers of the last few weeks. Even some "economists" have been sucked in by the numbers. However, there purveyors of doom and gloom forgot one thing. Congress extended benefits on July 1. That means that people who should have found jobs by now are still collecting unemployment compensation. There is no easy way to estimate the number of extended benefit unemployed so the numbers will continue to be inflated until their benefits run dry.

To S Corp or not to S Corp

Who the hell knows? It used to be a simple question for a business owner(s) looking to save some taxes and take advantage of other benefits. It was easy to convert almost any business including a single member LLC into an S Corp for tax purposes. Now, who the hell knows?

Neither presidential candidate knows anything about business - large or small. Obama knows how to extort money, semi-legally, from both. McCain is angry at any business that isn't a plumbing business. This ignorance will be reflected throughout either's administration. The biggest tax saver for most S Corps is the legal minimization of payroll taxes. This is the John Edwards trick - the cheating, 2 Americas, ex-presidential candidate. See, if you own a small business and don't file as an S Corp, you pay the full social security and medicare taxes on the net profit of your business. Social security taxes have a maximum but medicare taxes don't. So if your business is successful enough to generate a profit of $249,999, you'll pay around $12,000 in social security tax and $7,500 in medicare tax plus exorbitant amounts of federal, state and even local income taxes. If you had an S Corp, you could cut $4000 or $5000 off the social security and another $5000 off of the medicare. That's $9000-$10000 more money in your pocket. (John Edwards used this to save hundreds of thousands in medicare taxes back when he was extorting money from baby doctors.)

Obama will slam this loophole closed by February 1, 2009 - guaranteed. This is how he will pay for all of the giveaways to all of those people who don't currently pay taxes.

McCain may let the practice continue for a few more years. But with medicare already bankrupt, he will need to find money somewhere to pay for Grandpa's Viagra. He will close this loophole also.

What will happen to the S Corp? I'm fairly confident that it will disappear with serious consequences for small business owners.

Tax Client Bill of Rights

Here is a draft of a new "Bill of Rights" for my clients:
All returns will be prepared with an emphasis on minimizing taxes to the full extent of the law, unless the client enjoys paying more tax than required.
All phone calls, emails, letters and communication will be returned within 24 hours of receipt.
All fees will be fully explained before any work is started.
No return will be extended beyond its original due date unless specifically requested by the client.
All business returns will be completed within one week of receipt of all required information, guaranteed.
All personal returns will be completed within 24 hours of receipt of all required information, guaranteed.
There will always be fresh coffee available in the accountant's office.

Tax Season Reflections

Tax Season for an accountant does not end on April 15th. April 15th is an easy deadline. If the return isn't complete, just extend it until October 15th. October is the worst month for an accountant, especially an accountant with business clients in Connecticut. October 15th is the drop dead date for personal income tax returns and for most business tax returns. October 31 is the deadline for quarterly reporting. November 1 is typically the deadline for filing assessor's reports. Assessor's reports, also known as Personal Propert Tax declarations, are the worst since they require 12 months of information to be sythesized into one manually prepared report.

Bottom line - Don't call your accountant in October unless your return is on extension, you have a quarterly return due or you have personal property taxable in your town.