Category Archives: Economy

Why Companies HAVE To Make Profits

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A buddy at work didn’t understand why corporations needed to try to make, what he called  “huge profits“, so I thought I’d share my thoughts on the topic.

Have you ever been to a soccer (or basketball or football) game where the opposing team looked like they were standing still, and the game was a huge mismatch?

Well, that is exactly what would happen if the companies don’t try to make a healthy profit.  Nobody invests in the company, and there is no motivation for the company employees to try. In fact, company can have a better product and still fail to an inferior product from a competing company because of the lack of profits!  The failure of a superior product to an inferior one is why profits and the abilities of the management team (CEO, etc) to achieve them are so important.

Why wouldn’t the company employees try, you might be wondering?
Well if your company isn’t profitable, your company isn’t going to give bonuses and may not even give raises (this is obvious given the past few years).  We go to work to feed our families and make money so we can use the cash to buy stuff to make our lives better.  Without the hope of future raises and bonus, we start to look for other places to get ahead in life! (Note, this doesn’t apply directly to government workers, but indirectly it does.  If companies and their employees don’t make money, governments don’t get taxes, and eventually government workers are affected too).

I think my friend didn’t really understand what happens to the profits after they are declared.  First, the profits that the companies make don’t just disappear…  They are distributed as dividends to the shareholders, used to buyback outstanding company shares or saved and used for future company growth.

Even if the money is just held in cash, that money still belong to the shareholders of the company!  Occasionally, you’ll see a company like Microsoft give a huge cash dividend.  This is because they have enough money in retained earnings to cover their future needs, so the excess is given back to the risk takers (stock owners like us) that invested money in the stock.  Actually dividends are a good wealth distributor and benefit all of us in one way or another, vs private companies like Fidelity. Private companies don’t even have to report their profits publically!

So given the choice been a company that is very profitable and one that doesn’t really care about money and isn’t expected nor even tries to earn a profit, I’m going to pick the one to invest in that cares about a profit!  And I’m betting so would you if you want to be a successful investor!

I’m writing this article today, because sometimes we don’t see all the pieces of a business process.  Just because those pieces are not in the media or communicated out doesn’t mean that they aren’t critical for a given company, and in the end society as a whole!  So yes profits are necessary…

What is your take on company profits?  Do you understand why the are necessary?

MR

US Sues To Block AT&T Takeover of T-Mobile

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Why Does the US Sue to Block the AT&T’s takeover of T-Mobile?

AT&T is the second largest cellular plan provider (Verizon is number 1).  T-Mobile is the fourth largest provider of cellular plan in the US, and is owned by Deutsche Telekom AG.  The third largest US cellular plan provider is Sprint…

Based on the snippet below from the online site of The Wallstreet Journal, it sounds like T-Mobile needs some help and wasn’t a victim.

Deutsche Telekom, unwilling to keep investing in the U.S. wireless industry, had been seeking ways to offload T-Mobile USA for at least two years before it settled on the sale to AT&T.

So the takeover of T-Mobile by AT&T would have made AT&T the largest cellphone plan provider, and give AT&T a needed shot of newer technology to help them improve their service.  So I see the synergies of such a takeover, but I also understand how it could reduce competition and drive prices up.  In my opinion, the prices of cellphone plans are already too crazy high to begin with!  It’s amazing to me that 10 years ago cell phone plans were cheaper or at least as expensive as they are today.  Usually, when a service or product is first introduced, it get cheaper as the masses jump on board, but this hasn’t been the case with cellphone plan providers.

So based on the previous paragraph, you think I’d be positive on the block by US Department of Justice, but I’m not.  My problem is why wasn’t this entire AT&T proposal nixed at the beginning when AT&T submitted their plans for the merger of the two companies?  It seems wasteful of the Department of Justice to change their mind and later go after AT&T in court.  It makes one wonder if the US is doing this move so to help someone’s career? After all, they could have denied the merger at the very beginning before money and plans for the merger proceeded forward!

Lately, I’ve noticed the US government seems to be suing more than they have ever before.  I have to wonder if other countries sue themselves as much as we do?  I think it makes us look silly when a company gets approval for a merger by the government and then later gets sued by the government.  It’s like telling a kid she can have a snack, then yelling at the kid what she unwraps it so she can eat it.

Doesn’t really instill a lot of confidence in the government huh?  And people wonder why US companies are sitting on the sideline because they are afraid what will come out of the government next.  Such actions don’t help businesses recover, and while I’m not in favor of AT&T takeover, I think it sends a bad message when a company gets attacked after getting approval from government to go ahead with their plans.  Why even have businesses submit merger or takeover plans for review by the government, if shortly there after, the government can just go and sue the company anyway?  Kind of defeats the purpose and expense of having a US review department of the government?

I know everybody is focused on AT&T, but I have to wonder if I’m the only one that thinks that the government suing AT&T makes the US government look a bit less smart than it should be?  Doesn’t flip-flop actions by the government in this case make us all lose confidence in the economic recovery, since business will be frozen until the next elections?  What if the same government stays in power, does that mean that businesses will continue to stay frozen and the possibility of a true economic recovery remains slim?

Confused by the actions of the government,

MR

 

Bye Borders, I Will Miss You!

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Borders Book Store

Borders - (Image via Wikipedia)

 

Did the Amazon technological marvel called “Kindle” kill the book store behemoth Borders?  Borders said that is exactly what has happened, I wonder if Barnes and Noble is next?  I’m sad to say that 10,700 Border employees are now out of a job!

In my previous blog entry called “Is Technology A Job Killer?” I basically summarize how we are going to lose more and more jobs as a result of technology.  But perhaps my statement isn’t really that amazing, perhaps we’ve been losing more and more jobs for a long time now and we just didn’t realize it.

Reading my above statement and previous blog post, you might think that I’m anti-technology, but that’s not true!  In fact, technology is what puts food on my table at home.  I’ve seen the Kindle and it’s pretty cool.  As cool as it is, I still prefer hard bound books, but I definitely see the value in a kindle.

 

My History With Borders

Okay, now I’m going to talk about why I’ll miss Borders so much!

Over 5 years ago, I had a small lunch group of three or four members that would go to Borders at lunch.  We would browse the magazine section and I would occasionally check out the latest computer books (see I don’t hate technology).

After about 10 minutes, we would all settle over in the small Cafe and order soup and some times coffee.  We would discuss ideas covering financial investments and plans we had in the future, to ideas that we thought would be cool to have or invent.  It was a great time, and times remembered fondly… at least until the Borders store closed 2 years ago.

Even though we don’t go there anymore (since our employer moved to a larger building far away from that particular Borders store), I still had fond memories of the place whenever I would drive by.  Occasionally I would even stop in just to experience that same old comfy feeling, buying an occasional greeting card or financial (or computer) magazine while I was there.

It was an A+ experience that my kids won’t grow up to know.  Hopefully Barnes and Nobles can hold on, it’s similar although a bit more uppity.  My family could still blend in, although it doesn’t have that same friendly everybody fits in feeling that Borders had.

I’ll admit, I’m kind of worried that some of the quaintness in the world is going to be left behind by the Amazons, eBays, Netflixes and Apple itunes of the day.  Oh year there is still Walmart, but do you really go there for the aesthetics?  Do you get a warm comfy feeling when you get a pop for their vending machine in the vestibule?

So as Borders finally closes it last few remaining store doors, I node Goodbye to the store that held so many lunch memories for me with friends I hardly see anymore.

So tell me, have you bought at a store or establishment that you would like to have around for a while?  I do, that’s why I make sure I make sure I support my local stores and restaurants and my local drive-in, because the world would be a much more generic and bland place without such unique landmarks!

Goodbye Borders, Hats off to you!

MR

President Obama Hates Me, Financially!

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Obama Bodysurfing

Some days (actually most days) it seems like President Obama hates me.  It almost like he is personally looking at all that I’ve been trying to accomplish financially, and then he totally tries to derail my efforts!

Sadly, most of my efforts have taken years to accomplish!

I feel this way because of the following:

  • The President (and current administration) gave up to $8,000 dollars to first time home buyers of my tax money.  This one still has stumped me?  After all, if they don’t have a home to begin with, they won’t lose it to foreclosure…
  • Later, existing homeowners were given a $6,500 tax incentive to become more in debt?  That is exactly what happened to my neighbor (the Joneses).  They went on to buy a house worth double the old value of their previous home.  I hope their jobs are secure!
  • Obama is working to get some of the debt on existing home forgiven?!?  The people that he is targeting aren’t even the people who had their homes foreclosed already or currently.  What kind of bizarro logic is this?
  • Now I heard that he is going to raise the taxes on dividend yielding investments.  I always though that taxing dividends was pretty unfair to begin with, and besides, it hits the boomer generation hardest.  For someone (like me) starting down the road to becoming a dividend investor, this hurts!  There are workarounds (moving all dividend stocks to Roth IRAs), but they require effort and additional tracking.
  • Speaking of boomers, they shouldn’t be very happy either.  Most of their mutual funds in their 401ks and IRAs held financial firms as prime assets.  And most of these have been handcuffed and dividends stripped away.  This will directly put a lot of retired boomers in a bad predicament that they wouldn’t be in otherwise.

I have to admit, the housing policy from this administration is a big slap in the face for me.  To me, it seems that if you went beyond your budget and got a house too big, the government will take my tax money and help you live your too rich lifestyle.  So if you make bad financial decisions, I’ll be paying your bill.

Am I wrong on how I interpret the actions of the government?  What say you?

-MR