Federal Sales Tax

I really think that the federal goverment should replace the income tax with a sales tax. This will make things simple, free up time, and make government less intrusive in our lives. It will also encourage earning, saving, and investing.

Here is how the system could work:

1. The government would set one rate (i.e. 17%).

2. The government would decide how much spending should be exempt from taxes (i.e. $10,000 per adult, $5,000 per child, so $30,000 for a family of four).

3. At the beginning of the year, the government would mail checks or direct deposit to everyone with social security numbers. (i.e. $10,000 x .17 = $1,700 for adults, $5,000 x .17 = $850 for kids, so $5,100 for a family of four).

4. Whenever someone buys something from a store, sales tax would be collected.

5. Since most states already collect sales tax, the government could contract with the states to handle the federal tax collection as well. The states could be allowed to keep say, .2%, for the trouble. For non-sales tax states, the federal government would probably collect it.


The exemptions will make the sales tax fair to low income families. The tax rate will show everyone how much government is costing us.

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Frugality

Before I got married, I wasn't frugal. In fact, I spent a lot: eating out, traveling, etc. However, I had an modest townhouse in a well-developed suburb of Chicago, where the property tax was relatively low.

Then, I got married and my wife is sort of the opposite. She likes to travel once in a while, but she doesn't like to eat out often, or spend money on experiences. Her main expense priority is having a nice house, and spending money on the house.

We bought a nice, large, relatively new house, at the outskirts of the Chicago area - where suburbia meets farmland, and the farmland is losing. The disadvantage is higher taxes due to demand for infrastructure creation. Our property taxes were high when we bought the house, but still went up 23.6% last year, due to an exploding demand for schools. This means that my mortgage payment (principle + interest + taxes) is about 3 times what it would be at the townhouse.

Now that we have a 15 month old son, we really don't go out to restaurants,
movies, or travel too much. My wife stays at home, so she tries to cook most meals, to keep us healthy.

So I realized that we are pretty frugal. The three of us live in a large house, live off one paycheck, and still save a lot.

But, I just went thru some numbers and realized that wow! We ARE pretty frugal (except for the house):

1. My net pay is my gross minus insurance, taxes, 401K, and commuter (train) benefit.

2. 45% of my net pay (34% of my gross) goes to the mortgage.

3. I then save 21.6% of my net pay (this is in addition to my 401K, which is accounted for).

4. So, we live on 33.4% of my net pay (25% of my gross)!!!

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Interesting But Dangerous Lawsuit Against Microsoft

One of the last Microsoft lawsuits remaining is a 6-year old class action lawsuit in Iowa.

 

In this suit, the plaintiff lawyers want Microsoft to pay "pain and suffering" to consumers for "lost innovation" in the marketplace.

 

Basically, they are saying that Microsoft crushed competitors with better products, and so they created an inferior computing environment.

 

Its been proven that Microsoft abused its monopoly power, but this lawsuit should be dismissed.  If the plaintiffs win, it would set a very dangerous precedence.

 

Its one thing to rule based on facts, like Microsoft did something specific to a certain company.  In fact, most of the lawsuits that Microsoft settled were about Microsoft overcharging for specific products or services.

 

But its downright dangerous if a judge or jury gets to decide historical "what ifs", and what a marketplace "should be".  This would be a form of "central planning" in hindsight.

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How Siebel Avoided Taxes When Selling To Oracle

Forbes magazine has an interesting article on how Tom Siebel avoided $58 million in taxes when he sold his company, Siebel Systems, to Oracle.

 

Normally, the way to avoid taxes in a merger is if the buyout consists of at least 40% stock.  But Oracle did not want to issue that many shares.

 

The solution was to use a legal entity called the "horizontal double dummy".  This technique was first used by Unilever in 1978.  A tax expert said, "Back in 1978, this was the tax equivalent of inventing penicillin".

 

The way the Oracle-Siebel thing worked is that a holding company called Ozark Holdings was set up.  Ozark then created two subsidiaries (the "dummys").

 

Oracle merged with one of the dummy subsidiaries in a 100% stock deal, so Oracle stock was swapped for Ozark stock.  At the same time, Siebel systems merged with the other subsidiary - this deal was 30% stock / 70% cash.

 

At that point, Ozark owned both companies.  Finally, the subsidiaries were dissolved, and Ozark Holdings was renamed Oracle.

 

 

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Net Neutrality

Net Neutrality is a big issue in Washington. 

 

Basically, the telcos and cable companies, like AT&T, want to be able to charge companies like Yahoo or Google a fee for routing their traffic over their lines.  In return, they would offer more high speed.

 

So, for example, if you get your internet from AT&T, and then go to Yahoo's home page, you would get a faster speed, but Yahoo would get charged.

 

The web sites (Google, Yahoo, etc) oppose this and have pushed lawmakers to adopt a net neutrality law, which says that the internet providers have to charge the same price, no matter what web site you go to.

 

So, the telcos/cable companies are lobbying against net neutrality, while the web sites, and a lot of internet users, are pushing for it.

 

Republicans are tending to side with the cable/telcos, while Democrats are siding with the internet companies.

 

So far, the telecos/cables have kept net neutrality out of two bills, but Forbes magazine views the politicians as the real winners  - they have incentive to drag it out and collect lobbying fees from both sides.

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Joseph Schumpeter

Joseph Schumpeter was an Austrian economist who believed in entrepreneuralism, and that it was the cause of society's innovation and technology, by upending the status quo.

 

He coined the term "creative destruction".

 

Rich Karlgaard, the Forbes publisher, wrote a commentary on him.

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Chris Botti

I read an article in Forbes about Chris Botti.  His studio, based in Evanston, Illinois (near Chicago), designs/restores/preserves stained glass, mosaic, marble, paintings, and sculptures.

 

For example, he was hired to reconstruct the stained glass ceiling over the skylight at the Plaza Hotel in New York.

 

His studio has its roots going back to 1600's Italy.  His father's family started a studio in 1684, and his mother's family started theirs in the 1780's.   The families moved their studios to New York in 1923, and 1864, respectively.  The studios got merged in 1948, when Botti's parents married.

 

The interesting thing is that he has to bid on projects, just like architects or construction, except that, since the art is one of a kind, it is tricky to judge the labor costs, material costs, etc., and then stay on budget.

 

The article says that, if he bids well, he can net 3% - 5% pretax.

 

The article goes on to describe some other projects of his.

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Entrepreneur of the Week

Yahoo has a story on Gary Hirschberg and his Stony Field Farms.

 

Back in the early '80's, he and his partner were running a farm school in New Hampshire.  They were struggling for money, and then decided to sell the organic yogurt that they were producing.

 

They intially got funding from an order of nuns, who saw that ther business would give a boost to the local dairy farmers.

 

Today, they are the world's leading organic yogurt maker, and now are 2.5 times the size (in sales) of Kraft's yogurt business.

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6 Interesting Trends for Retirement Spots

Today Yahoo had an article about the top retirement spots for today's retirees.

 

It looks like retirees today are considering more options than just moving to Florida to golf. 

 

They listed 6 interesting trends:

 

1. Small Towns - living in a friendly small town like Mt. Airy, NC.

 

2. Downtowns - living in places like Chicago, where they can do activities and use public transportation.

 

3. Mixed-use Developments - these are "live-work-play" projects with housing, businesses, and activities together - they bridge city and suburban life.

 

4. Hobby Farms - small scale "lifestyle" farms that are mainly run for pleasure.

 

5. Co-housing - a concept borrowed from Denmark, where people own condos, but have a common "central house" for a taste of commune living.

 

6. Rail Trails - thousands of miles of old railway lines are being paved into hiking/biking/walking trails, to allow retirees to have an active life.

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Ruby on Rails

David Heinemeier Hansson doesn't think of himself as a programmer.  But, in his native Denmark, he dabbled with PHP, which is a web language.

 

He later moved to Chicago, where he was asked to devleop a web application.  He decided that, instead of PHP, he would try Ruby.

 

Well, he fell in love with Ruby because he thought it was simple, minimal, and beautiful.  He then went on to develop a toolbox for Ruby, which he called Ruby for Rails.  He and his company released it as open-source, and now he is hailed as a big celebrity.

 

Ruby on Rails should further feed the cheap revolution.  It allows small teams to create quick web applications.  It should help small companies compete against the likes of IBM, Oracle, and Microsoft.

 

For example, after Hurricane Katrina, a small team from Earthlink used Ruby on Rails to set up a website for survivors to re-connect.  It was up and running in less than one day.

 

 

 

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Rolling Stones and Taxes

If the Rolling Stones were ever an anti-establishment Age of Aquarius type band, they are certainly not that now.  They are a big, savvy business.

 

The Daily Telegraph did a story earlier this year that Keith Richards, Mick Jagger, and Charlie Watts paid only 1.6% tax on earnings over $120 million.  They did this thru tax shelters and offshore trusts.

 

Turns out they belong to Rolling Stones, Inc., which is a private corporation managed by a Netherlands financial house.  Recently, their finances were made public by Dutch law, because they were doing their wills.  Richards is worth $345 million and Jagger is worth $390 million.

 

Keith Richards explained to an interviewer that all their business activities are based on tax laws.  For example, they do all their rehersals for North American tours in Canada, not the U.S.

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My Stock Trading System

I became a very successful trader after I developed my trading system, which is based on constant value investing.

I have made a double digit annual return for years now.

My complete system, along with information on possible variations, effects of commissions, and beneficial tax strategies, are detailed in my book, Stock Trading Riches, which is available on Amazon.com.

You can read more information about my book (including testimonials) here.

Remember that this is my system for implementing constant value investing. Here, I explain how my system answers the Questions for Building a Trading System. Future posts will give ideas about even more variations.

I only invest in stocks, ETF's, or closed-end funds.

I don't want you to just follow my system - I want you to start thinking critically, and develop your own system, that you feel comfortable with.

My system is like zen or tao. The market fluctuates and I am at peace with whatever it does. The system has no optimized parameters - it simply uses the formula for each stock to see how many shares it should own NOW. It makes no assumptions about the future or remembers the past.

I am "one with the market" in the present moment, and buy low - sell high.

Here is an example with Amazon.com yearly prices. Just imagine having a whole portfolio, where you buy some stocks at the top, some in the middle, and some at the bottom, all feeding and pumping cash, as the markets cycle over years!

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New Ford CEO Highest Paid

Alan Mulally, who was hired away from Boeing to become the new Ford CEO, may become the highest paid executive in the auto industry. 

 

Ford filed a document with the SEC that states that Mulally will recieve a $2 million base salary, a $7.5 million signing bonus, and $11 million to offset bonuses, stocks, etc. he gave up at Boeing.

 

He will also get restricted stock and options that could push his total compensation to $35 million for the year.

 

Morale is low among Ford employees, so some think that the United Auto Workers will complain.

 

Compensation experts, however, doubt that Ford could have lured any big stars without a package like this.

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Sonic Drive-ins Coming to Chicago

Sonic, the Drive-in restaurant chain with 3,000 restaurants, mostly in the South and Southwest.  Is planning to enter the Chicago area.

 

Sonic brings back the old "Happy Days" era, with 1950's style drive-ins, where roller skating carhops deliver food to your car.

 

Some think that, as Sonic expands to the Northern United States, it could be a serious challenger for McDonalds.

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United Airlines Double Boarding

United Airlines is going to experiment with a dual boarding ramp at its Denver hub.

 

The idea is that the bridge will be Y-shaped.  Once customers enter the bridge, they can go down two ways: One doorway will connect to the front door of the plane, while the other ramp connects to the back door.

 

This way, passengers in both the front and back of the plane can board simultaneously.

 

United is saying that this move is about improving customer service, but it is probably aimed at reducing turn-around time.  Airlines always want to cut down on the time it takes to board an aircraft, so they can sneak in one extraround-trip flight a day.

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Chicago is Hotest Hotel Market

The Chicago hotel market is the hottest in the U.S. 

 

This is because Chicago hotel prices, which were underpriced compared to other big cities, are appreciating rapidly.  This is causing investors, who recently bought properties, to become "unintentional flippers", because they are hitting their return requirements years earlier than they expected.

 

For example, JER Partners recently agreed to sell the Westin O'Hare in Rosemont (near O'Hare airport) to Ashford Hospitality for $125 million.  JER had bought the Westin 11 months earlier for $106 million.

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Ford to Sell Aston Martin?

Ford is exploring the sale of luxury car maker Aston Martin. 

 

This sale would make sense because Ford needs to concentrate on its turn-around plan, and Aston Martin does not share and platforms with other Ford cars.  Also, it has its own designers and dealer networks.

 

The only downside is that new technology tends to trickle down from high luxury brands.  So, Ford may be cutting off future reasearch and development.

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GM Warranties

It looks like GM will offer 5 year, 100,000 miles warranties on their 2007 models.

 

I guess, instead of financial incentives like 0% financing, they want to try to increase sales by showing that they believe in the quality of their cars.

This is a good move to try because, even though most studies have shown that Ford, GM, and Chrysler have increased the quality of their vehicles in the last 2 decades, the public's perception is that Japanese and German cars are still more reliable.

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Ousted CEO Pay

Unlike when regular employees get fired, CEO's who are forced out seem to get rewarded well.

 

Roger Deromedi, former CEO of Chicago-based Kraft, was let go with $14 million.  His co-CEO, Betsy Holden got $12 million.

This doesn't include their restricted stocks and options.

 

Other former CEO's, like HP's Fiorina, got more.

 

I think this shows that CEO's know how to negotiate their packages when they are first hired. 

 

Also, corporate boards want to hire someone Wall Street and funds will respect, so they have to offer competitive packages to attract the short list of "stars" in the marketplace.

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Interview with Guy Kawasaki

The writer of a Swiss blog on start-ups and innovation recently visited Silicon Valley. While there, he got to conduct a breakfast interview with Guy Kawasaki, the former Apple Fellow and start-up guru, who is now a managing director of venture capital firm "Garage Technology Ventures".

Kawasaki is famous for speaking about technology innovation, risk taking, and starting tech businesses. He was the marketer of the original Apple Macintosh.

Kawasaki is big on promoting the idea of evangelism for hi-tech companies - i.e. creating passionate users who become advocates for your product.



You can click here on Podcast: #7 with Guy Kawasaki to hear the podcast of this interview.

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Illinois Electricity Deregulation and Auction - Bad for Consumers?

My home state of Illinois is de-regulating its electricity.

 

The 10 year rate freeze on the price that utilities can charge customers is ending, and the utilities, such as ComEd in Chicago,  will now purchase power at an annual auction.

 

The auction will be conducted over the internet, in a "descending clock" format.  This means that the utilites will get bidders offering more electricity than they need, and will keep lowering the price until enough bidders drop out, and the electricity being offered meets their needs.

 

No matter what else happens, everybody agrees that Illinois electricity rates will increase because of the ending of the price freeze. 

 

The controversy, however, is over whether the auction will keep the increase down, or whether consumers will pay needlessly to enrich Wall Street companies like JPMorgan Chase.

 

Excelon (the parent of ComEd) owns nuclear reactors and is the largest generator of electricity in Illinois.  Under the terms of the auction, Excelon can only sell a limited amount of electricity.  These rules were designed so that the auction would be competitive, and drive down prices.

 

Critics say the competition is an illusion because the auction is open to anyone, even if they cannot generate electricity on their own.  So, they think that firms like JP Morgan and Shell will buy cheap electricity from Excelon and re-sell the power at a mark-up during the auction.

 

New Jersey started using the same type of auction in 2002, and electricity prices have increased 100%.  State officials say that bidding by financial companies hasn't caused any problems, and that the prices would have gone higher without the auction.

 

The critics think it will be cheaper to scrap the auction and have Excelon sell its power directly.

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Now What Are the Bad-Boy Hedge Funds Up To?

According to an article I read in the Chicago Tribune, hedge funds have found a new trick - shaking down companies that are late with filing their earnings reports.

 

These days, because of Sabranes-Oxley and the recent SEC investigations into back-dated options, a lot more companies are filing late.

 

In many cases, the bonds of these companies have covenants, buried in the fine print, which state that a bond-holder can technically demand payment if the filing is late.

 

The hedge funds pore through the companies' bond prospectuses, find these loopholes, buy the companies' bonds, and then try to enforce the clauses.

 

Since the companies can't easily raise new money (because they haven't filed an earnings report) to pay off the bonds, they might agree to a "special fee" to the bond-holders to not enforce the clauses.

 

You have to admire hedge funds - they are willing to read thru pages and pages of boring legalese, just to find an edge to agressively exploit.

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Small Business and the Export-Import Bank

The Export-Import Bank, is a federal agency that is responsible for increasing America's exports.  It helps companies get bank loans and uses tax money to help U.S. businesses compete with heavily subsidized foreign competitors.

 

However, critics think that the bank has neglected small businesses that want to export abroad, and have focussed on big deals, like helping Boeing sell airplanes.

 

Congress is now thinking about creating a small business division inside the bank, to handle loans up to $10 million.

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Coke Plant Opens In Afghanistan

A new $25 million Coca-cola plant opened in Kabul.  Some in Afghanistan say that hospitals, etc, are needed more, but the president of Afghanistan praised the investment, because he thinks economic growth and jobs are the keys to rebuilding Afghanistan.

 

I actually think that economic development and jobs are keys to combatting radicalism and terrorism all over the Middle East, and in Africa. 

 

I think that terrorist groups will have a tougher time recruiting young people who feel that they have an economic future.

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Real Estate Futures and Options

According to the Chicago Tribune, the Chicago Mercantile exchange will start offering futures and options contracts on commerical real estate.

 

The purpose of futures contracts are for businesses in an industry to pass on market risk to speculators, who try to make a profit on the fluctuations.

 

So, for example, businesses that buy or sell gold could buy or sell gold futures/options to try to lock in a stable price over a certain time period.

 

Southwest Airlines used futures/options hedging with oil to control its fuel costs.

 

I think it will take time to see if real estate futures and options grow into an active market.

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Retirement Living

John Erickson founded Erickson Retirement Communities.

Like Tom Scott of Plum TV, Erickson spotted a niche TV market - in this case that seniors watch a lot of TV and networks cater to younger tastes.

So, Erickson created Retirement Living, which is a niche channel on some Comcast Cable systems, that provides informational programs for seniors.

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