Diary

Certain Equities Still Highly Profitable

 

Bad news about the markets has reached deplorable levels with the DOW losing almost half its value in less than a year, and the bottom still far from sight.  Although nobody yet (or almost nobody) has jumped up and down in front of the camera shrieking like an 8 year old girl, after weeks of watching the same headlines and the same politicians jawing, one can hardly come away without the impression that collectively, we are witnessing a bunch of 8 year old girls jumping up and down and shrieking about the freefall economy.

 

But there is one market opportunity which the market mavens have missed entirely.  The pundits of plutocracy have never given this market a second’s thought.  Why?  Because it’s not big, and it’s not sexy (except to those who know about it and benefit accordingly) and this industry does not send out a lot of press releases.   Even the SBA misses this industry because these businesses are not big enough to appear on the SBA radar.  There is one class of investors and businesses who look at the current market and see unlimited opportunity, and they are taking action.  Although it may not be regarded as a large class of investors (that assessment would be wrong) this class of investors is contributing more market profit, and more market stability, and the creation of more new wealth than any other force in the world or in the global economy now.

 

These investors, and their investments, represent the F-22 Raptors of today’s global business.   They fly at astonishing speeds, and are remarkably agile.   They safely and stealthily navigate past the surface threats of excessive taxation that their threat receivers reveal.   Their advanced terrain avoidance systems help them streak past the terrain of competitive disadvantage.  Hearing the klaxon that warns them of over-taxation and over-regulation, they savagely attack their own bottom line with record investments in their own corporate infrastructure.   They fly well below the radar indexes of the DOW and S&P, so their stealth is very real.  They also manage to fly well below the radar thresholds of most government scrutiny (over-regulation).   They deliver their ordnance of revenues directly on the target of their bank accounts nearly every time.  And if they miss, they are stealthy and agile enough to come around quickly and silently for a second, usually successful pass. 

 

Even the business press doesn’t know much about this class of investors because they are not big, they are not sexy (except to themselves) and they are not worth big headlines.  Except collectively.

 

But without them, our economy would be in much, much deeper doo-doo.  As a matter of fact, since these entrepreneurs have realized that globalization is for the little guy too, the world economy would be much worse off without them.   It’s an industry that is truly global in reach – both in the markets it serves, and in the employees (or contractors) it hires, and in the profits it distributes (although many are depressing profits with internal investments as a tax avoidance strategy at present).

 

But if you are a day trader flexing your fingertips over your keyboard, just waiting for me to reveal which hot issue to buy, you are going to be sorely disappointed.   Although these businesspeople are just like you, spending hours each day at their keyboards on the web, their path to profit is significantly different, and not accessible to your trades.  They keep their equity to themselves or just a few partners.  They do not call themselves ‘start ups’ because they have no plans to do an IPO. 

 

Let me take a minute out here to explain that I work for an ecommerce service provider that allows web businesspeople to quickly and simply put ecommerce on their web sites with an easy copy/paste operation.  We see from sign-ups for our services every day what a surge is occurring in new online businesses and the further online development of businesses that have been around for awhile.   So while what I relate here pertains to many new and small businesses that are not online, much of what I relate here pertains to small online businesses that are succeeding nicely on the web.  Some, owned by savvy folks with good ideas, are seeing sales surging amazingly.  We merchandising reports have already agreed that online purchasers are digging a little deeper for good deals, and in many cases, these are the businesspeople who have decided to take their bowls, and go stand under the clouds that are raining soup. 

 

The Globalized Little Guy

I’m talking here about small businesspeople, the pilots of these economic F-22 Raptors, who have decided to leverage their investments by working alongside their investment (sweat equity).   They use the old-fashioned leveraging and hedge tools that have always paid off without reliance on swaps, derivatives or other sophisticated financial tools: the hedge of their own labor, invested alongside their own small sums of cash.  At the lower end, that invested cash might be as low as $100 or $200 with annual sales of a few hundred to a few thousand – or a little more, as evidenced by the entrepreneurs you find at kiva.org, an entity that makes micro-loans to budding entrepreneurs.  In the middle, you find folks who invested $500 to $10,000 in their online businesses and see annual sales of $50,000 to several $ million.  At the top end, you see sales in the tens of millions.

 

Why do I speak of this little guy as the ‘globalized’ little guy?  Several reasons.  First of all, since they are on the web, they are consciously reaching for, and do get access to, the global market for their goods and services.  But another, even more important reason obtains today: these web site owners not only reach the global market for revenues, they also participate in the global market for the goods and services they need to operate their businesses. 

 

Most importantly, services like oDesk.com. which allows Joe Web-Site-Owner to hire programmers offshore (such as from India or the Philippines) without paying the high cost of US programmers.  My own company has used this service to hire programmers offshore for both big and small jobs.  Browsing oDesk.com, one learns you can hire offshore programmers for as low as $12 an hour, a significant savings from the $35 to $70 most US programmers charge.  In addition, they start hosting their web sites on offshore servers to save monthly costs.  Many services that web site owners need to pay for can be supplied by offshore partners for a significant savings.

 

Finally, the big idea occurs to them: why not move the entire company offshore?  And many of them do.  Even if the IRS and Treasury are grabbing headlines with moves to prosecute US taxpayers with big balances in secret Swiss bank accounts, it’s huge bank balances, not ‘minor’ revenue streams that these vigorous government actions are pursuing.  And with so many online tools like oDesk.com available, a move away from ‘tiny globalization’ to ‘tiny protectionism’ will prove impossible.

 

Today, we can suspect that the brains struggling towards effective tax, revenue and spending policy in Washington DC know nothing about the personal pay options open to small businesspeople.  They have been educated to believe that personal pay is tied to published government pay scales or union contracts. 

 

They don’t seem to realize that a small company executive can take a significant pay cut without affecting his or her lifestyle – for instance, the company can pay the car lease and then the executive can take a corresponding pay cut to get them below a given income tax threshold.   I’ll leave it to the reader to expand on ideas like that – they are manifold and manifest!

 

But many heroic US taxpayers are thinking this way, and at the lower end, they may operate a small business while they work at their day job, in order to have the small business make their car and cell phone payments which releases an identical amount of income from their main paycheck to become disposable income.  Without changing their tax liability.

 

It’s a struggle as old as organized society: the war to raise taxes vs. the strategies to lawfully avoid them.   In more modern societies, the ones that value personal liberty, and especially the ones that have globalized the information infrastructure, the prospective taxpayer has always had the upper hand in this battle.

 

Some small business may stay stuck at this level for some time, some quickly move on to the level where the owner can quit the day job and go to work for his or her own company, then build further from there.

 

Much of the capital in the markets these days is feeling risk averse as evidenced by the indexes – so if you are the day trader scrutinizing earnings reports and waiting for that next hot tip, maybe you should look carefully at the bond markets instead of hoping to catch a win with a shrewd trade.

 

The hot equities are the personal property of the executives who run them, but they don’t plan on sharing nicely.  Their shares are not available on your boards.

 

In hard times, the heroes are still the self-reliant who look to themselves for the ‘hot trade’ and who add genuine value and wealth to activities they keep under their own personal control.  They can see higher taxes coming, so they depress their profits (tax liabilities) with cash investments in their own corporate infrastructure (picture a web site owner paying an Indian programmer $19/hour to improve a web site to enhance future revenues; and it’s all done electronically: the Indian programmer is paid via credit card to perform the web site improvements via… the internet). 

 

These businesspeople who are the current heroes of our marketplace don’t think in terms of market equity values or big bank balances which can quickly lose value. 

 

They think in terms of future and persistent revenue streams that can’t be taxed in advance (at least not yet) and are not vulnerable to market declines.  Revenue streams that will persist beyond retirement and pay for the hoped-for future lifestyle that is rapidly disappearing in the equity markets.  It’s not a revenue stream that is an asset in terms of the money they could borrow against it – it’s an asset in the sense of un-provable future value that risk-averse people would never consider.

 

These F-22 pilots of small business are not risk averse.  They see participation in the entitlement/bailout mentality as the ultimate risk, for themselves and for their country.  They harness their self-reliant attitude and their self-confidence, and their absolute belief that there is not stopping an entrepreneur in the electronic marketplace to care for their families, their communities, and their future.