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Opening Bell: 7.14.08

InBev and Anheuser-Busch Agree to Combine, Creating the Global Leader in Beer with Budweiser as its Flagship Brand

Traitors! After much wrangline, the iconic US beer maker Anheuser-Busch has agreed to sell out to the the evil Belgians. Of course, the two parties pretend that it's no big deal. St. Louis will remain, they say, the headquarters of the flagship Bud brand. Whoo. There are a number of other details about US ops remaining intact, though there will be changes to be sure. Shareholders will be taken out at $70 per share, above the $66.50 they closed at on Friday.

Treasury and Fed Pledge Aid For Ailing Mortgage Giants (WSJ)

So do we know now that Fannie and Freddy do enjoy some special status in the eyes of the government. Is the tacit guarantee of protection a real guarantee of protection? After the news that the Fed will do what it takes to help the ailing companies, you might be tempted to say yes. On the other hand, you'd have to be sure that the Fed wouldn't do the same for other companies, and it's not obvious that in the USSA they wouldn't. So the question is unresolved. You can click the article for the full details.

Rescue plan for US mortgage giants (FT)

Here's more on it from the FT... you know, this whole thing about the US investing in Fannie/Freddie equity. Isn't that the kind of stuff they do in developing countries, where they have funds set aside to stabilize the stock market. What's next, multi-colored bills? Oh, no, we already have that. So what's next, holes drilled in the center of our coins?

Nikkei up 1.1 pct, worries eased by U.S. move (Reuters)

Well the plan to save the world at least made us through the night, as the Nikkei bounced up 1.1 percent on the news.

California--A Nice Place To Visit But I Wouldn't Want To Live There

Went out to the Bay Area for my niece's wedding. Great trip, had fun, glad to be home given the price of houses and a wee bit of overcrowding. Seems that I am not the only one glad to be out as outlined in this article at MarketMinder.com. Enjoy--if you can.

California Hates the Poor

10/5/2007 |

California hates the poor. At least the Golden State certainly seems to act that way, given the way it treats its lower-income residents.

But wait—isn’t California known as one of the most socially progressive states, spending billions of dollars on social programs and public assistance for low-income residents each year? Indeed! Yet Californian legislators uphold a policy choking off precious dollars that could go to residents needing it most. That wacky policy is the Golden State’s tax structure.

California boasts the most punitive state income tax system in the entire Union. (Not so fast New Jersey, Hawaii, Iowa, and Oregon! Though you’re all nearly as bad.) With so much wealth in the state, you might not feel much immediate sympathy for those paying the lion’s share of the state taxes. After all, California’s got Hollywood movie stars, celebutants, and Dot-Com-mega-billionaires! Make them pay! Folks tend to forget California has millions of souls—the vast majority are Average Joes.

Let’s examine the current tax structure. California income taxes kick in at a modest 1% rate for annual income up to $6,622. Not too bad—$6,622 seems a small amount to hit up for income tax, but 1% isn’t that much. But, California’s highest tax bracket of 9.3% (the highest in the nation) begins at the affluent, wallet-busting, Bentley-driving sum of $43,468.

I’ll repeat that. California imposes the nation’s highest state income tax level of 9.3% on residents earning more than $43,468. Some perspective: In 2004, the US Census reported California’s median income was $51,185—higher than America’s median income of $44,648. Translation: If you’re “middle class,” California wants 9.3% of your income. It’s a shakedown for your lunch money.

Meanwhile, nearby states Washington, Nevada, and Texas charge no state income tax at all. Arizona starts its highest tax bracket at $150,000 where residents pay 4.57%—less than half California’s top rate. It’s hardly surprising these states are some of America’s fastest growing states. In 2006, Arizona’s and Nevada’s populations swelled over 4 times faster than California’s.

If you’re a Californian with a nice retirement savings, where would you retire? California wants a hefty portion of your retirement income every year, whereas nearby Washington and Nevada want none. Add to the equation the far lower cost of living in those states, and relocating seems like a no brainer. So, folks leave and California ends up with none of their income, property, or sales tax revenue.

Those poor souls remaining in California end up with less money to fund public schools, build new roads, pay for social programs and so on. All thanks to politicians ignoring fundamental economic principles and placing too heavy a burden on its working residents and businesses.

When a state places too heavy a tax burden on its citizens or businesses, the government stifles consumer spending, business investment, and actually ends up collecting far less tax revenue. A government can maximize its tax revenue at an optimal point. Tax too much and folks don’t see much of a reason to get out of bed in the morning. Mrs. Entrepreneur fails to see the upside in launching her cutting-edge new business idea. Less business activity means less tax revenue. The Laffer Curve (shown here http://upload.wikimedia.org/wikipedia/commons/4/47/Laffer_Curve.png) demonstrates the concept.

If prohibitive taxation makes a difference between US states, one could also apply the concept to countries. When a nation imposes high hurdles for new business development and wealth creation, the prospect of strong economic growth becomes increasingly remote. Conversely, if a country slashes corporate tax rates to spur economic activity, all other factors remaining constant, that’s bullish for growth.

Take Ireland for example. The Emerald Isle slashed its corporate tax rate to 12.5%—one of the lowest rates in the developed world.

Selected Corporate Tax Rates by Country

Ireland 12.5%
Netherlands 25.5%
United Kingdom 30.0%
China 33.0%
Belgium 33.9%
France 34.4%
Germany 38.6%
USA 39.5%
Japan 39.5%

Much to the chagrin of France and other EU heavyweights, economic growth in Ireland is soaring! After all, entrepreneurs and existing businesses only need two very simple elements to justify a venture: profit and human capital. Ireland has an educated, English-speaking work force and a corporate tax rate low enough to entice entrepreneurs from around the globe. Ireland will likely attract business activity, people, and tax revenue other countries will miss out on. It shouldn’t be much surprise, then, that Irish GDP growth is expected to more than double the EU’s average. Erin go bragh!

Eastern Bloc countries are also joining the low-tax party. Estonia, Latvia, Russia, Ukraine, Slovakia, Romania, Georgia, and Macedonia all successfully introduced low flat tax structures in recent years. These moves now pressure Western European countries to either become more competitive with their business climates or face a hemorrhaging economic growth towards their neighbors with cheap labor and more welcoming tax structures.

With one of the largest gross domestic products in the world, one could only dream of the economic boom resulting from slashed California tax rates (not to mention falling federal tax rates). With the Irelands and Nevadas out there, Uncle Sam and the Golden State better act fast. Their poor depend on it.

Frustration: My savings accounts aren't keeping up

I've just spent the last four hours online, researching my finances. And I feel frustrated. Not just because I'm sick and my head feels like a giant balloon is expanding inside of it, or because after four hours of sitting on the floor, my bottom has fallen asleep, or because it's a lovely summer Saturday night and I'm stuck at home. No ... I'm frustrated because I'm working hard to every day to save my money, but my accounts are acting like total deadbeats -- unmoving, unsuccessful and quite possibly hung over.

After my last post, a reader asked me to explain exactly how inflation is affecting my bank account. So I went back to pull the numbers, and analyzed my accounts during May 07, November 07 and May 08. I expected to find that expenses for ordinary things have gone up over the last few months. But on the contrary, I've been pretty good about adjusting my purchases to keep groceries and other staples at the same cost; for instance, we've made an effort to shop at Trader Joe's more regularly vs. Whole Foods, and at the high-priced Whole Foods, we've cut back on the higher-priced items.

While I was rather impressed with my spending discipline, I knew there were more accounts to investigate.

Up next was my savings account - and that is most definitely hurting. First, the good news: I have managed to save nearly $15,000 towards my downpayment during the last twelve months! Now the bad news: During the last twelve months, my money market account has plunged from a 5.05 percent APY in May 07 to a 2.75 APY in May 08. It's not even keeping up with inflation (which is currently at 4.2 percent), which sort of defeats the purpose of a savings account.

In fact, none of my accounts are keeping up with inflation. Not my bank savings account, not my money market account and not my 401K. In response to this statement, B said, somewhat sarcastically, that if my rates of return are above zero, the accounts still doing OK, and that the only people doing well right now are those who invest in commodities. I asked him if this meant I should invest in eggs and corn and cows. He laughed for a second, and then, more seriously said, "Well, if you open a brokerage account you can. Corn and gold are up right now."

Unfortunately I don't know how, or where, to open a brokerage account. Or if it's a good idea. So I looked it up on google, and found that it's pretty much just a standard investment account, which is not on my list of things to do with my downpayment funds.

It's weird - I'm so close to where I want to be with that account, but it still feels so far away. I'm probably a year to 18 months away from buying a place -- I have about $25,000 saved up right now -- and I have a plan for the next twelve months that involves home buyer education and real estate market analysis. So I should feel good, or great, about my progress. But instead of feeling like my money's doing well, I feel like my accounts aren't working as hard as I am to help me reach my goals.

But given the economy, I guess everyone's in the same boat. Maybe I should be happy that despite my savings accounts, I'm still managing to sock away money. Maybe I should also be happy that I haven't lost any money, or any equity (since I don't own a house). My net worth has steadily grown, despite the "market contraction." All very positive things. So what's bugging me?

I think the problem is that I feel helpless to do anything about the fact that my accounts aren't keeping up. On the downpayment account, I shouldn't move into higher risk, higher yield accounts, because I'm not planning on keeping money there five years or more. On the retirement account, a 1.9 percent rate of return is actually better than where my account was in November 07 (-4.5 percent). Truth be told, I wouldn't want to make any bold moves in this economy; there's too much uncertainty. And really, the difference between a 5.05 percent APY and a 2.75 percent APY probably only boils down to about $20 per month for me. So the best bet is to sit here and continue to save, like I always do.

I don't know, maybe it is the weekend cold talking. Let me get a little better and tell you how I feel next week.

Will we really be able to retire?

This morning I logged onto Vanguard to look at my husband's Roth IRA as well as my own, and was in for a surprise. Since October 31, my Roth account has lost $1100 in value. My husband's Roth, invested in an entirely different fund, has lost $2300 in the same four weeks! OMG! We should withdraw all the funds and put them into cash or something more secure, shouldn't we, rather than risk losing any more?

Are you kidding me?

My husband and I are 25 years old, and by law, with a couple of exceptions, cannot enjoy the fruits of our retirement accounts for another 34 years. Surely the markets will have rebounded by then. Heck, they may rebound by Christmas, which would keep us from regaining our losses if we pulled out. Another important tidbit I failed to add is that despite my $1100 dive, I'm still up about 13% for the year. So my gain wasn't 28% or whatever. Big deal. I'm still not going to sniff at anything over 6%. My husband's funds have gained as well, though not as much as mine have (his are a lot more volatile and have been dippier this year). We haven't lost any of our initial investment, but isn't that a risk you take when lending money?

There are two lessons to be learned here. First one is don't panic. The market fluctuates, your investments can go up or down, and if you realize that you won't act irrationally and sell off before a big rally. The second lesson is not to follow your retirement accounts too closely (provided you're at least several years away from retirement). Vanguard, for example, sends a quarterly statement. When you're more than 20 years away from retirement, glancing over your funds every three months is about all the monitoring they need.

The Poor Enjoy More Leisure Time?

When you think of being “wealthy” what comes to mind? Playing 18 holes of golf on a weekday? Traveling abroad without having to worry what it will cost? Living in a big house and being able to hire help to take care of it?

Wealth has traditionally been synonymous with leisure. The wealthy elite were free from the bondage of work, chores, and even childcare.

Time have apparently changed. According to this Wall Street Journal Online article, the rich are more likely than ever to spend their time stressed.

According to research by Daniel Kahneman, the Nobel Prize-winning behavioral economist, quoted in an article in the Washington Post, “being wealthy is often a powerful predictor that people spend less time doing pleasurable things and more time doing compulsory things and feeling stressed.”

Now I don't doubt that the rich spend more time than they used to feeling stressed and doing compulsory tasks; they probably work more on than they used to, and more than your average poor person as well (hence their higher salaries, perhaps). But I have a serious problem with this article comparing the ultra-poor (those making less than $20K a year) to the “rich” who make more than $100K. Those groups seem arbitrarily chosen to prove a weak and ridiculous point: that poor people enjoy much more true leisure time than the rich.

People who make less than $20,000 a year, for instance, spent more than a third of their time in passive leisure, like kicking back and watching TV. By contrast, those making more than $100,000 a year (I would call them affluent, not wealthy), spent less than a fifth of their time in passive leisure. “The richest people spent nearly twice as much time as the poorest people in leisure activities that were structured and often stressful — shopping, child care and exercise.”

So the Americans out there making less than $20,000 a year are spending more than a third of their time in “passive leisure” - i.e. being couch potatoes. That sounds like a personal problem to me, not something that should make the rich long for that lifestyle. Maybe if they get off their bumps they would be making more than $20K a year.

[Note: Passive leisure can also include things like getting a spa treatment, traveling, etc., but people in that income bracket are spending the majority of their passive leisure time in front of a TV or video game - not on the golf course or at the spa].

And those unfortunate rich people are spending twice as much time as the poor in “structured and often stressful activities” such as shopping, child care, and exercise. Seriously? So rich people spend more of their time shopping and exercising and taking care of their kids, and that's supposed to be stressful and less preferable than the “passive leisure” activity of watching 6 hours of TV a day like the poor in the study?

I for one would rather be making more than $100K a year, be a little stressed about having to juggle it all, but still having plenty of time to shop, exercise, play with my kids, and afford passive leisure luxuries like travel and spa treatments than to be making under $20K a year and have no resources or leisure options other than to sit in front of a TV for a third of the day.

More from Meg at The World of Wealth

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House Flipping In The Real World-Part 6-Fixing Things

When we last left the smashed up house, Cynthia was working away, scraping and painting the inside of the house. Alice was having tests for liver cancer and things weren't looking good. I was reduced pretty much to buying supplies and staying out of Cynthia's way.

I got a few calls generated by the dyslexic 'For Sale' sign in the front yard. Two separate individuals wanted to see the house, set up appointments and neither showed. Then two Sunday afternoons ago I got two calls. One from my realtor handling another house (I have three) saying we had an offer and then a call from Marion. Marion sounded like 'Mame' and wanted to see the house that Cynthia was working on. Made an appointment and they showed up--three generations of Mame. Marion, her daughter Patricia, and Patricia's daughter.

In the real estate business, you indulge in some rental profiling and can size up your customer pretty fast. Given my track record, I wasn't very good at it but learning fast. Marion, late 50's, loud, no ring, no husband, Toyota, pretty well dressed but not my style. May have a few dollars laying around. Patricia, blond, young, 23-25, four year old daughter, no ring. She was a nanny. Not exactly Bill Gates but then I figured out I didn't really need to care because I was not going to carry the credit risk. No more playing banker for me. If they didn't get financing, no sale.

I stood outside and let the trio take a look around after I told Marion the price. They came out and I told them about everything that had been done within the last three years--new electrical service, basically new plumbing, heating and air conditioning (originally the house had space heaters--stay away from those), new paint in and out, and all new windows. Marion indicated they had seen every house in the neighborhood and the price was right and they took it, full price. Patricia wrote a check for $500 as earnest money and we agreed to sign some document later.

Patricia called three days later and we met. She had a document that basically said everything would be working in the house when she took possession. I xed out a few things and signed. Patricia looked concerned but signed it. Sue assured Patricia that the house would be in order.

Later I told Sue that I think I gave away the store to Patricia. Sue said, "She's just a nervous kid that knows nothing about houses or buying a house. You were pretty nervous when we bought our first house." I said I had a lot of reasons to be nervous. (See Category 9-Buying a House for 30% Off.)

So that's were we stand. I have a check for $500, a one page contract, and Patricia is working with her lender. The good news is that the lender called yesterday to discuss the closing. We traded messages. So if the whole thing goes through, great. If not, not really out anything since Cynthia is still working. As for the $500 I'll just give it back if the deal falls through--I'm not that big a jerk.

Tomorrow, we'll figure out the financial return.