Spending Limitations vs Free Spending Tax Payers

Here in Colorado in the early 1990's the voters enacted both tax and government spending limitations. These two acts in tandem worked for more than a decade to set the state on a prosperous course. Today these limitations are threatened. If you believe our politicians and even our newspapers, these limits are the cause of the state's currrent budgetary problems. Yet, limits are not the problem as chronicled in today's February 28th editorial in the Wall Street Journal. The problem is free spending from an unlikely source, the taxpayers themselves.

A few years ago the voters of Colorado approved Amendment 23. Amendment 23 is a noble effort to increase education spending by one percent increments over a ten year period. You see Coloradans love noble causes. Mandated education spending to help the children, a lottery system that benefits parks and recreation. The problem is that the education spending mandate, unlike that for parks spending, was unfunded. Like the legislature, when given the chance, Colorado voters proved to be undiciplined spenders. Never was a thought given to how the state would fund this spending, and why would it, this was for the children.

As the legislature today evaluates the task of fixing this mess, Amendment 23 has become a sacred cow. Politicians who were too weak to campaign against the Amendment are now facing the task of dealing with its consequences. But, we in Colorado should not fear for our education initiatives are in safe hands. After all, for the common law maker, this is the opportunity to slay the two headed monster of tax and spending limitation, which was taking all of the fun out of their job. Once tax and spending decisions are back in the hands of our politicians, happy days will be here again.

Our Courts and Death

Our Courts have a long history of embracing death over life. Back more than a century ago the Court made rulings allowing slavery and many died. The Supreme Court ruled for abortion in the 1970's and new life ends everyday in America. Recently the Florida Supreme Court ruled that Terri Schiavo, a Florida woman in a brain damaged and vegetative state, should be allowed to die by a medical order of her husband, and the US Supreme Court refused to hear an appeal. When one digs into the facts of this latest case, you have to start asking why do our Courts prefer death over life. Why do they favor a man who has abandoned his wife to live with another woman and create a new family? Why do they look down on the parents who gave life and have cared for and loved their daughter to this very day?

In this case the law was abandoned long ago. Terri has left no instructions that she wanted the type of actions her husband, Michael, is trying to take. Michael may have many motives for denying care to his wife and bringing her life to an end. There is the question of whether Terri's faith would have allowed her to take such action. The undeniable truth is that Terri has two loving parents that have not given up on her, and that are trying desperately to gain a right that should have aways been theirs. For the Courts should not be judging this case as an either or decision. The Courts' role should be to give Terri the best chance for life, comfort and care.

Again the question comes forward, why do our courts embrace death? Why does our Supreme Court run so often from making true decisions. They run from the Terri Schiavo case because there is a living, breathing woman with a name involved. Better to let that decision be made by another Court. Its easier to take on a case like that of Oregon's assisted suicide law. This is a completely different case from that of Terri Schiavo. This a case that involves terminally ill patients who have received medical information and advice and are making their own decisions. More importantly, this case does not have a single innocent face attached to it. Unfortunately, is there any doubt how this case will be judged? Bet on death, because in cases of life over death in our Courts, death always trumps the pursuit of life and liberty.

Fixing Social Security

"These accounts, properly constructed and managed, will create ... a sense of increased wealth on the part of middle and lower-income classes of this society, who have had to struggle with very little capital," - Greenspan told the House of Representatives Financial Services Committee.

As I have posted in the past, the greatest gift that we can give those in future generations is to teach them that anyone in America can create wealth. Home ownership, retirement savings and now maybe a fundamental change in the way we view Social Security. Yet the polls are out there leading us to believe that the American people are not ready for this shift as highlighted by the following post from Professor Bainbridge. This simply highlights how far we must go to educate people on how to achieve financial freedom.

Yesterday, Hugh Hewitt in the last hour of his show conducted a simple exercise with his audience in politics and compromise on this issue. Looking at how people may trade off the pain of increasing the withholding base for Social Secuity taxes from the current $90,000 per year to a higher number as the President hinted at yesterday. It was easy to see just how much fear has to be overcome. High income earners do not want to pay the higher tax of this change. Employers do not want to face this change. AARP is lobbying away from privatization in the belief they are protecting their constituents. Yet we need to think of the alternatives. The withholding base has been rising and will continue to rise. The rates could be increased. The retirement ages could be adjusted up so that we need to work into our 70's. These are the alternatives just to make the system as it functions today work. They are not great solutions for those that make lower incomes or have spent a life doing tough manual labor, and the mechanism is already in place to raise the wage base and taxes of higher income wage earners.

The time has certainly arrived to look at the alternatives of the Social Security system, and how we will make it work in the future. Social Security has always demanded sacrifice by all to benefit those that are challenged to provide adequately for all their years. If our only concern is how the system will work for ourselves, it is unlikely that it will truly work for everyone.

When The Gatekeeper Lies

It has always been my contention that the one of the keys to good investment decisions is to pick companies with good management. But, knowing good management isn't always easy as pointed out by this article from Reuters - Witness in WorldCom Trial Admits to Lies. Ex-CEO of Worldcom, Bernard Ebbers is currently on trial in New York for his part in the financial collapse of his former company. Mr. Ebbers is a former poster child of the great managers of the 1990's that led us to the stock market crash of 2000, 2001..... The CFO of Worldcom, Scott Sullivan, was also a darling of the financial press during this time. For the better part of last week, Mr. Sullivan who has already plead guilty to financial fraud, has been testifying against Mr. Ebbers. As the article chronicles, Mr Sullivan came under cross examination yesterday. Judging by this and other articles Mr. Sullivan lies. He loves to lie. And, there is no one he evidently won't lie to. He lied to the Board, shareholders, analysts, the press, the government and who knows who else. This brings us to the question we need to ask our selves as investors. If Mr. Sullivan were committing his crimes today, what law, or control system, regulation or agency would stop him. How much money and diligence would it take? If I gave you the books of Worldcom with its millions of entries, would you be able to pick out the few fraudulent entries? Remember this, their outside auditing firm didn't. And finally, remember that Mr. Sullivan would be the gatekeeper over all this sophisticated, expensive new internal control.

Can Politicians Stop Fraud - Part 1

When Enron, Worldcom, etc., etc. broke to the headlines our Congress undertook to stop corporate fraud dead in its tracks at enormous cost to investors. Laws have been enacted, regulations created, new bureaucracy created and the same large public accounting firms who couldn't catch this mess the first time are collecting the lion's share of the fees to watch over this. Should we believe that our investments are safe when we see headlines like this from the Associated Press - Elections - AP

Ex-Democratic Aide Admits Stealing Checks

This enterprising young man plead guilty to stealing $360,000 in campaign contribution checks from the Democratic Senatorial Campaign Committee. When politicians cannot safeguard their own money, how safe is yours?

The National Media's Fear of Blogging

Last evening my wife took command of the remote, and I was forced to watch Hannity and Colmes. I don't care much for argument TV, but she wanted to see Drudge. Following Drudge's segment they covered Eason Jordan's termination at CNN. For guests, they had a Journalism expert and a Democratic Consultant. One guest discussed the right and wrong of Mr. Eason's termination, while the other attached the Bloggers who brought Mr. Eason down. What right do these citizen journalists have to hold the elites in the media accountable? It has always been a rule for me that when the Democratic Party starts sending their attach dogs after a person or group, we the people should start to listen and respect those under attach. A new day is dawning in the top national media. It is a day of accountability. A day when bias and manipulation are being shown in the light of day for all to see. More importantly, it is a day when the power to influence national opinion is being stripped away.

In a related event the Wall Street Journal chose to also attach the Blogging community as a group of amateurs on their opinion page in an story about Mr. Jordan's termination. They want to ignore Mr. Jordan's history of hiding or making up stories. They feel that their reputation has been tarnished along with CNN for not being diligent on a minor transgression. So they attach the messenger and further prove the point of the Bloggers. I have read and respected the Journal for all of my adult life and this opinion piece was pure disappointment. They have done more to prove the Blogger's point than to defend their own image.

In my own professional life as I have started to chronicle, I have had to start to reach for a new ethical level. After all, how the officers of Enron conducted themselves has little to do with the ethics that I practice in my own personal life. I have to shine the light of day on every decision I make, and make it transparent to those who trust me to be a steward of their invested capital. I would like to welcome those in the national media to this world. Unfortunately, Talk Show Hosts and Bloggers may now be becoming competitors, but trust me, they have every right to evaluate the product that the national media produces. If the national media cannot reach a higher level of ethical standards, you can trust that there are those that will help this industry to get there.

Churchill's Fame

Colorado can hardly hold a candle to places like California for sheer numbers of headline grabbing nuts, but when we do produce them they really do us proud. Ward Churchill is yet another grabbing his fifteen minutes of fame. The nutty professor wants to give the impression that he stands for those in the minority or who might be oppressed, but in the end he simply hates people who are more successful than he is. He is preaching hate and violence. In the past week he has been accussed of lying about his Indian heritage, avocating violence against America, academic fraud and teaching the Weathermen of the 60's how to make bombs. If he is guilty of any of these things the University of Colorado needs to move this character out. Unfortunately, people like the professor will always be amoung us, but we don't need to make it easy for him to preach and teach his hate.

Sarbanes - Oxley

Time to move on to a subject that is consuming the professional life of myself and others like me. The Feb. 10 edition of the Wall Street Journal ran an article that the head of the SEC, William Donaldson, was starting to moderate his position on certain reforms for public companies including the new internal control rules that evolved from the Sarbanes-Oxley Act. The article then went on to hardly mention this area, which points at two problems. As we near the first annual filing date for our largest corporations we are about to find out just how much trouble they are having meeting these rules, and secondly the Commission really does not know how to set these rules in terms of their cost and reward.

This problem may become the problem of all of us who invest heavily in stocks for our retirements. While the SEC has been making cheerleading statements for the past 6+ months on the state of these efforts raising investor expectations, the fact is that almost 700 companies have reported finding major weaknesses in their control systems through the end of the year. Is this the tip of the iceberg? As the these Annual Reports on Form 10-K, with their auditor and management reports on internal control, start to flow out in late March and through April we should focus our attention on the smaller companies involved in this reporting cycle. When we look at the reports of the accelerated filers ( greater than $75MM market capitalization), what I expect we will find is that as we get closer to the bottem end of the company size range the percentage of companies with reportable weakness will go up dramatically.

The truth is that we probably should not be that concerned. We cannot legislate away criminal behavior completely. Bad people will find ways to do bad things, and people under extreme financial pressure will sometimes turn to fraud and stealing in an effort to resolve their problems. The fact that the cookie jar is being watched through internal auditing will deter a certain percentage of those who might commit embezzelment and fraud, but the most commited and innovative will still find a way.

The second truth is that the internal contol efforts of Sarbanes-Oxley are more likely to focus in and deter the smaller frauds and embezzelments. In the major Enron and Worldcom type frauds, there was much colusion amoung officers and this is nearly impossible to stop. Much of the money defrauded came from investors outside the company and was the product of inflated stock prices. These types of massive stock frauds can only be perpetrated at the largest of companies. The smaller the company, the smaller the reward and economic damage.

The current average cost for compliance now exceeds $2,000,000 per company. If an experienced executive was deciciding the value of this insurance premium in relation to the potential for fraud, these amounts would probably never be paid. As we start to look at the results we have produce in our first efforts, it is time for Mr. Donaldson and the SEC to step up and show some leadership. It is time to slow this train down and evaluate what we have received for our time and money.

Medicare Drug Benefit Surprise??

As I covered before CNN reports that our lawmakers are surprised by the cost of the prescription drug benefit they rushed to bestow upon us before last year's elections. But why are they surprised? Is this simply this week's invent-a-scandal? Shortly after the bill was passed the Washington Times reported that the cost of this program would exceed 1 trillion dollars in the second ten years of the program, and that the cost could go as high as 2 trillion dollars if all the gaps were filled in future legislation. Maybe our friends in Washington don't read the local papers. Maybe we could all chip in for a subscription so they don't have to wait for the White House to report the news to them. At least there is some good news, Viagra has made the list of drugs to be covered by the plan. There is something to look forward to in our old age!

Medicare Drug Benefits

As I was driving home last night, CNN news carried a story of how some in Congress are dismayed at how expensive the new prescription drug benefit is going to become over the next ten years. I cannot find the story this morning, but it is still worth a few minutes to ask the question, what part of this spending plan did they not understand. Maybe they didn't understand that prescription drugs are expensive. Maybe they didn't understand that almost everyone over age 65 takes prescription drugs. Maybe they missed taking economics in college and didn't learn that demand for a product rises inversely to price. Our intrepid Democratic House Leader capped the story with her call for Congressional hearings into the matter.

For what Nancy, to prove that our elected representatives have no clue how much they are spending.

I believe that if CNN takes a poll we will find what at least 90% of us already know that and that the remaining 10% have aspirations of working in Congress.

What is Wealth?

Speaking of wealth, why do so many mischacterize it? Is wealth your neighbor's expensive car or your brother-in-law's upscale home? Maybe wealth is exclusive vacations or six figure incomes. Well not if the car is leased, the home is motgaged (especially if it has a large ballon payment), the vacation is charged to a credit card to be paid over time or the income is spent long before it is earned. Politicians believe that the wealthy are simply people with higher than average incomes. Yet, none of these things are wealth. Wealth is the accumulation of assets. That which has been saved and not yet spent. Almost anyone in America can become a millionaire if they wish, since the key to accumulating wealth is not earning a high income. the real key is your ability to save. For those of you under the age of forty I would recommend the book "The Millionaire Next Door." The book does not describe any get rich quick schemes or 50 ways to make money in the market. It simply describes the characteristics of the typical millionaire and will give you a model that can help you attain your goals.

Your Ship, Their Ship

When I was a young child we would go to my grand parent's home for holiday dinners and my great grandmother would always tell my dad that one day his ship would come in. Years later as a young adult running finance for a struggling new company with less than a million dollars a year in sales and almost as much in loses, the president's wife would tell me to remember that if I wanted my ship to come in I was going to need to send out some boats. So I took heed of this advice, and I must say that it is always nice to see new sails arriving on the horizon. It is now time for Congress and the AARP set to do the same for our children and grandchildren. I heard a poll number yesterday that 55% of Americans are against private Social Security accounts, and it is hard to understand. Social Security as it is run today is like government housing, we know we need to have it available, but who would live in it if they didn't have too. Private Social Security accounts are still more of a concept rather than a plan, and we may need to sail up wind, but it is time to send out the boats. We can start to create wealth and more importantly start to teach the coming generations how to create wealth, rather than collect a large pile of money that does nothing more than tempt politicians into needless current spending. The ability to develop wealth is what has made our country into such a wonderful place today, which is why one of the most selfless gifts we can give the next generations is the knowledge and ability to build their wealth. This is a gift we must give to as many as possible so that their ship will one day come in.

Colorado Ski Train

For those of you who love to ski there is no better way to do it than taking the Ski Train to Winter Park here in Colorado. This past weekend I had the opportunity to spend the day riding the Ski Train and sking with the good people of Federal Express here in Denver. My experience was surely better than average due to the private cars and free food and drinks. No matter where in the train you travel be sure of this. You will be treated to a relaxing trip with no traffic, beautiful scenery, great service and a trip back in time. For those of you that have never skied Winter Park, you will enjoy a resort that is favored by Colorado locals and that provides every type of terrain you may want to ski. If you want to ride the train simply go to the ski train web site for more info. A word to the wise, be sure to bag your skis and pole, it will save you a short search for your equipment when you get off the train.

Thanks to the great people of FedEx for a truely wonderful day!