Dave Neverson and team in spirited debate

We asked the team to select a list of their favorite stocks that they wanted to invest in. As you would expect the list included the makers of those products that the kids use on a regular basis. The usual suspects: Microsoft, Sony, and Apple Computer. One company I had not heard of which was popular with the kids was GameStop. We eventually whittled the list down to three stocks – Apple, and GameStop, and Phoenix Companies.

The team had its recent investment meeting on Sunday July 30, 2007 and just as I suspected --- the kids > Coach Baker!  A year later, the stocks picked by the kids (Apple and GameStop) have trounced the performance of Coach Baker's stock (Phoenix Insurance).  Apple achieved a 112% return, GameStop an 82% return, compared to Phoenix's negative 1% return.  It appears that Apple and GameStop have been the beneficiary of new technologies and trends that are popular with kids.  Whoever coined the phrase "out of the mouths of babes" was a genius, because truer words were never spoken.  The results just go to prove that it is nothing short of amazing what our kids know about what's hot and what's not and which companies will benefit.

Shock Exchange Profiled in July Issue of Black Enterprise 

The Shock Exchange had its recent invesment meeting on March 16, 2008 and it was truly a star-studded event.  Jessica Jones and Jerry Jack of Black Enterprise were on hand to meet the team and to get a better understanding our investment process.  In her article Round ball and Round Lots, Ms. Jones documents the various enticements used to teach kids about saving and investing, with sports being one of them.  The article goes in depth about the Shock Exchange's basketball program and the performance of the Shock Exchange Fund.  I encourage everyone to pick up the July issue of the magazine.  

Foreword

There has been a lot of changes to the economy since July 2006 when the Shock Exchange made its first investments.  At March 2008 the US is suffering from declining economic activity, rising unemployment, and record foreclosures caused by real estate speculation.  The economy is in the midst of "stagflation" - rising unemployment and rising costs (oil), which is the economic equivalent of the perfect storm.  Rising oil prices are caused by external forces such as (i) the war in Iraq and which has lead to a decline in Iraqi oil production, (ii) reduction in oil production from key producers such as OPEC, Russia, and Venezuela, and (iii) some say oil speculators who may be influencing the price (I'm not sure I buy this one).

2008 represents one of the worst U.S. economies since the last time we experienced stagflation - the 1970's when Richard Nixon was in office.  Though it is also eerily similar to 1990 which experienced (i) a declining economy and rising unemployment, (ii) the Gulf War which also involved Iraq, (iii) oil price shocks due to a cut in Iraqi oil production, and (iv) the after effects of irrational exuberance from the LBO lending craze and defense spending of the mid to late 80's.  What makes the situation even more dire is that there does not seem to be any relief in sight.  Our presidential candidates have not acknowledged the situation or devised any concrete steps to address it.  If the next President wants to accomplish something concrete then he/she should: 

Reign in U.S. Oil Consumption

We cannot control price shocks caused by OPEC or price increases caused by demand from developing countries.  However, we can control our own use of oil and gas consumption.  With gas prices at $5/gallon in some places, it is almost wasteful to have some Americans driving Hummers and other SUVs through our inner cities.  There is a limited supply of oil and such conspicuous consumption costs everybody.  Oil/gas is an inelastic good in that demand is not sensitive to its price.  

High oil prices hurt lower income consumers even more because unlike a Mercedes Benz or a pair of Air Force 1's, purchasing oil/gas is a necessity in order to heat homes, drive to work, etc.  I am not sure if the solution is a gas guzzler tax or higher emissions standards for automobiles but somehow those who use it inefficiently should pay more for it.  

Reign in Healthcare Costs

Healthcare costs are spiralling out of control, with almost no end in sight.  Healthcare benefits are some of the largest costs borne by employers and companies are  limiting some employees to less than a 40 hour work week in order to avoid paying for healthcare.  Healthcare professionals would respond that (i) people are living longer, so they require more complicated healthcare procedures over longer periods as compared to previous generations, and (ii) several procedures, laser eye surgery for instance, have been developed that do not address life threatening illnesses but help people live better and are billed as "in-network" procedures. 

The first issue is sort of a fact of life.  The second issue is a case where certain individuals are "taxing" the healthcare system to improve their quality of life, in this case, a procedure to allow them to forgo having to wear glasses.  Yet the increase in healthcare costs due to such procedures are borne by everyone, including low income individuals who can bare afford the cost of basic healthcare.  Again, healthcare is another inelastic good where demand is not much affected by the cost.  I am not suggesting that certain quality of life procedures be paid for "a la carte" outside of the HMO network, but what I am suggesting is that that a plan can be implemented to make basic healthcare more affordable. 

Invest in Infrastructure

The U.S. infrastructure, bridges and levees in particular, is in disrepair.  Hurricane Katrina, in which the levees protecting New Orleans broke and flooded the city should have been a wake-up call for America.  But everyone was too busy assigning blame than to look ahead to attempt to prevent potential future disasters.  Repairing our infrastructure should be a high priority for the next President.  It is embarrassing that with the U.S. financial might and engineering prowess we are witnessing bridges and levees falter from poor engineering or disrepair.  It does present thorny issues as to who will pay the cost for such investment - the federal government or state goverment(s).  Get creative - reallocate some of the federal budget to this initiative in the form of low interest loans to the states which can be paid back over time.  

Reign in Rising Cost of Education

The cost of college is increasing at three times the rate of inflation.  This would imply that the inputs (professors' salaries, maintaining buildings & grounds, cafeteria costs, administrative costs, etc.) is also increasing at three times the rate of inflation - this is clearly not the case.  What differentiates the U.S. from the rest of the world is our ability to take the best and the brightest and give them access to education and access to capital to allow them to create better and more efficient products and services than are currently available in the marketplace.  If the cost of college keep increasing at its current rate, the only people with access to education will be those from the monied class.

What is really behind the rising cost of education?  The administrators I have spoken with say it is the additional costs of amenities that top students demand.  Current prospectives look not only at the quality of the education but also demand gourmet meals three times per day, a best in class wellness center, etc.  This implies that students who want a basic education, basic amenities and the "option" to eat gourmet meals or join a health spa are being "taxed" by those who not only demand them but whose parents can afford them. 

I have another theory on another key driver as well - the availability of credit.  When I went to college (way back when) there were a couple of student loan marketing agencies.  Today there are too many to count.  A college education is another one of those inelastic goods - you may not be able to afford college but you cannot afford not to go either.  Moreover, a student's ability to pay for college is often directly related to how much he/she can borrow.  A student's borrowing capacity has increased dramatically, hence so has the cost of education.  A similar phenomenon is LBO lending in the '80's.  Oftentimes the amount buyers would offer for a target company was tied to the amount they could borrow - if a bank would lend them $300 million they would offer $375 million . . . if a bank was willing to lend $400 million then they would offer $475 million, and so on.

A solution to these conumdrums (and others) will require having to tell the American people that they cannot have their cake and eat it too.  This is obviously not what the American public wants to hear and the presidential candidate who suggests  such a plan will need backbone and the courage of his/her convictions . . . key attributes of great leaders and of people who have never gotten elected.