February 2011 was an interesting month in U.S. financial markets as continuing optimism about an improving U.S. economy led to 3 weeks of gains on the three major indexes of U.S. stock markets. Concerns about a supply shock in oil because of unrest in the Middle East led to a 2-3% correction during the last week of February.
The most publicized event currently gripping the U.S. economy is the dispute taking place in Wisconsin which revolves around the government’s desire to cancel collective bargaining rights with public unions. The fight is center stage for the same principle in 17 other states across the country. I think the central issue facing the country, which these arguments are a byproduct of, are the massive deficits local, state, and federal governments have burdened the public with, and more importantly, how to rectify them. For more information on the deficits, look at this article in the Wall St Journal-
http://online.wsj.com/article/SB10001424052748703408604576164441153633876.html?mod=WSJ_Election_LEFTSecondStories#project%3Dstates_110224%26articleTabs%3Dinteractive
Many states have budget deficits of 20% or more of their total revenues. If one compares private enterprise in the U.S. to public entities, it is an exercise any junior high student can understand. Private businesses (small non public companies, public companies, and large private companies) currently have balance sheets full of cash, are generating more operating and net income than ever before, and are run with greater efficiently than maybe any other time in our country’s history.
Conversely, the public sector is loaded with debt, unfunded pension liabilities, and enormous health care costs at every level-local, state, and federally. What is disconcerting for many private workers is public sector employees make more money than comparable jobs in the private sector, and in many cases for doing less productive work. This is why the battle in Wisconsin and other states across the country regarding the collective bargaining status of public unions is critical. It represents an opportunity for government to reduce costs to a more manageable level in order to balance budgets. The bottom line is governments at all levels need to look at the private sector, and work with all businesses, to help get the public sector’s fiscal house in order.
In looking at private enterprise, I see the ‘Digital Decade’ as massively changing how businesses can operate more efficiently and grow at much quicker rates than ever before. With the rise of social networking, smart phones, tablet computing and connected sites like Facebook, Twitter, LinkedIn, and many others, connected tools help businesses improve all areas of their enterprises. Companies make their supply chains more efficient, customer acquisition costs are far lower, sales productivity through customer relationship management is much more productive, and customers and businesses maintain much closer contact. As a result, investors see much higher growth rates for both old and new businesses.
Moreover, many pre public companies grow at enormous rates, making investment in these situations potentially very profitable, but also with large risks. An investor must consider the new digital reality when thinking about placing capital. One only has to look at a company like Groupon, which started in 2008 and has achieved nearly 1 billion in sales, or Zynga, a software game developer based on Facebook, generating 800 million in sales and 400 million in profit, to understand how quickly it is possible for a business to reach scale using the current digital tools.
As always, on any company mentioned here, past performance is not a guarantee of future returns. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charterholder.
Yale Bock, CFA
President, Y H & C Investments
No comments:
Post a Comment