A Commercial for Singapore

I am still a little jet-lagged after a two-week stint in Singapore teaching an intensive executive class in equity investment management. This was part of the M.S. in Finance program run by the Zicklin School of Business at Baruch College. The students were all business executives. Some were working for large international companies, including Credit Suisse and Barclays. Others were working with local companies. All of them were experienced, smart, hard-working, and motivated.

This was my first visit to Singapore and I was extremely favorably impressed, so please excuse the somewhat promotional nature of this post. I had heard a lot about this small pro-business city-state before going, but nothing beats seeing it with your own eyes. Singapore is very modern, clean, and safe. There is very little crime and you can walk where ever you want without worrying about your safety. Because the country is near the equator, you should be prepared to sweat if you plan to do a lot of walking. Unlike in most American cities, I spotted no litter or graffiti. Of course, the authorities are famous for cracking down hard on violators, but it simply is not in the nature of the population to deface property or throw trash into the streets. People seem to be extremely conscious of how their actions affect others.

I found that most prices were quite similar to those in the U.S., but a few things were clearly much more expensive. For example, a small (or should I say tall) plain cup of coffee from Starbucks costs more than $3.00 U.S. And don't even think about buying a car. A small Toyota would set you back about $80,000 U.S. This is the government's way of controlling traffic. Nonetheless, there were still plenty of nice cars on the streets. However, a car isn't even necessary since public transportation is readily available and taxis are reasonably priced.

Of course, Singapore's biggest draw is its pro-business climate, which includes low taxes. I met with Will Adamopoulos, who heads the Forbes office in Singapore. Will and his family have been living in Singapore for many years. He stressed the rising number of billionaires in Asia. I also met with Mykolas Rambus, CEO of Wealth-X, a company he founded in New York City in 2009. Wealth-X now has eight offices around the world. Mykolas moved his family to Singapore about six months ago. Other well-known residents include Eduardo Saverin, co-founder of Facebook, and billionaire investor Jim Rogers.

Singapore often shows up at the top of the world rankings of best places to conduct business. The International Finance Corporation and the World Bank rank Singapore #1 in their Doing Business 2012 report. Anyone interested in getting started can refer to the website, Guide Me Singapore.

Unfortunately, I missed the famous Singapore Airshow. It got underway the day after I left to return home. I probably would not have been able to get a ticket anyway. They sold out quickly. Fortunately, the Airshow was extremely profitable for Boeing, which scored a $22.4 billion contract with Indonesia's Lion Air for 230 new jet planes. This deal certainly highlights the growing importance of Asia in the global economy. And with the rest of the world in an economic slump, American companies that want to grow must increasingly turn their focus to Asia.

Review of The Vig

The internet is changing all kinds of businesses. It seems that no industry can escape its disruptive force. Publishing is perhaps one of the hardest hit industries. The internet's transformation of publishing started with how books were sold. It then transformed how newspapers and magazines are published and read. Now it is affecting the actual publication of books.

Not long ago, a would-be author would submit a manuscript to a publishing company. If he wanted to increase his chances of being taken seriously, he would hire an agent to try to sell the book on his behalf. However, traditional publishers don't want to take chances on unknown authors unless they feel fairly sure that a minimum number of books can be sold. If the author is a motivational speaker with a strong following or a celebrity with many fans, publishers know the book has a ready audience. A book by these kinds of authors will sell whether it is good or bad. For anyone else, however, it is almost impossible to get published by the traditional route.

However, today's promising authors are no longer at the mercy of the traditional publishing houses. Instead, they can self publish their works and put them up for sale through online retailers such as Amazon.com. Of course, many self-published books are of poor quality. Yet every once in a while, you come across a gem. That's how I would describe John Nuckel's new book, The Vig. In full disclosure, I probably would never have read this book if I did not know the author personally. While this makes me less than perfectly objective, I have to say that despite some minor flaws, I really did enjoy reading The Vig.

For those not in the know, "vig" is short for "vigorish," a term traditionally used to describe a bookie's commission. Nuckel, a former options trader at the American Stock Exchange, uses the term to describe an illegal scheme designed by the characters in his book to skim a little out of the accounts of the traders every day.

The book begins on September 11, 2001. Nuckel, who was present when the World Trade Center towers came crashing down, actually witnessed the horrific scenes of death and destruction that he describes through the eyes of the book's protagonist, a floor trader whose mind is as sharp as a calculator. When the trader is able to return to work, he realizes that something is not quite right with his accounts. They seem to be just a little off. He starts asking questions, which result in a whirlwind of murder, mystery, and intrigue. The author is especially deft at character development. One unsavory criminal doesn't hesitate to murder his own brother. A sexy female assassin is as cold blooded as any assassin literature has produced.

The book's flaws mainly involve minor copy editing issues that do not prevent the reader from enjoying the read. In fact, the book really is hard to put down. It grabs your attention immediately and it doesn't let go. At 194 pages, The Vig is a relatively quick read. While some readers may find the details of floor trading and arbitrage a little hard to follow, anyone interested in investing will enjoy those sections as much as the others. I liked this book very much and I recommend it strongly.

Mitt Romney and Taxes

I have a tendency to avoid watching presidential debates, primarily because I'm convinced that the best debater does not necessarily make the best president. Of course, debates can be quite entertaining; however, they tell us more about how well a candidate can think on his feet than they do about what he really stands for. In addition, one mistake in a debate could kill an entire campaign. Witness Rick Perry's inability to recall one of three departments he would shut down if elected president.

Nonetheless, the topic du jour is Mitt and Ann Romney's taxes. It has become a big issue, largely due to Mitt Romney's unwillingness to release information about his tax returns earlier in the campaign, as well as his inability to properly defend what he actually pays in taxes.

So instead of relying on what is being reported in the media, I decided to take a look at the Romney's just-released tax returns. In 2010, Mitt and Ann Romney reported interest income of $3,295,727. Interestingly, only $557 of that amount was non-taxable. Obviously, they are not big buyers of municipal bonds. The Romneys also reported $4,923,348 in dividend income. Of this amount, $3,327,678 were considered qualified dividends, meaning they were taxed at the lowest rate of 15%.

The Romneys also had quite a lot of capital gains, in fact $12,573,249 worth. Most of the capital gains were of the long-term variety, which means they, too, were taxed at the lowest rate of 15%. Making some relatively minor adjustments, the Romney's total adjusted gross income for 2010 was $21,646,507. That's certainly a lot of dough by almost anyone's standards.

It turns out the Romneys are also very charitable people. In fact, they donated $2,983,974 to charity in 2010. Their total allowable itemized deductions came out to $4,519,140. Including their exemptions, their taxable income was $17,120,067. Their total tax bill (which includes the alternative minimum tax, self-employment tax, tax on IRA or 401(k) income, and a credit for foreign taxes paid) came out to $3,009,766. In other words, their tax rate was 17.6% of their taxable income. This is higher than the 14% tax rate widely reported in the media. The difference is explained by the fact that the media is calculating the tax rate on adjusted gross income rather than the tax rate on taxable income. But the media's calculation is misleading because it ignores things such as charitable contributions.

The Romneys also released projections of their tax return for 2011. Even though they increased their charitable contributions, their tax rate on taxable income is actually expected to rise to 21.2% for 2011, quite a bit higher than it was in 2010.

Here are two points that Mitt Romney needs to articulate better: 1) One reason the Romneys' tax rate appears low (as a percentage of adjusted gross income) is because they have been extremely charitable. If the Romneys had not donated so much money to charity, their tax rate would be substantially higher. 2) A second reason their tax rate appears low is because the vast majority of their income is in the form of qualified dividends and capital gains.

Some will argue that it isn't fair to tax capital gains and qualified dividends at a lower rate than ordinary income. I would argue that it isn't fair to tax this kind of income at all. Why? Because it has already been taxed at the corporate level. Taxing corporations is exactly the same thing as taxing shareholders directly. When corporations pay taxes, there is less money left over for the shareholders.

When a corporation hires an employee, that employee's salary is a tax-deductible expense for the corporation. As a result, it is perfectly fair to tax that employee's wages at the ordinary rate. However, when a corporation pays dividends, that money comes from after-tax earnings. When the stock price rises creating capital gains, those gains represent the after-tax performance of the corporation. If corporations were not taxed at all, the sum of the dividends and capital gains would be much larger than they are now. In that case, it would be perfectly fair to tax dividends and capital gains at the ordinary rate.

As things currently stand, the effective tax rate on dividends and capital gains is actually much higher than the effective tax rate on ordinary income. This is because the effective tax rate is actually equal to the tax rate that corporations pay plus the tax rate that individuals pay on dividends and capital gains, a figure that is closer to 50%, and much higher when state taxes are taken into account.

I have long been an advocate for a simplified tax code. Our current tax code has become so convoluted and confusing that only expert accountants can make heads or tails out of it. Furthermore, our current code fools large numbers of people into believing that the rich pay less taxes than the poor. In my perfect world, I would eliminate the tax on corporations (which would also eliminate the incentive that corporations currently have to finance themselves with tax-deductible debt). I would also eliminate ALL tax deductions (including those for mortgage interest and charitable contributions). Finally, I would introduce one low flat tax rate on all income. Although I would hate to do it, I would even be willing to go along with mildly progressive tax rates. All of this could be done in a revenue neutral manner. Yet I wouldn't hold my breath. With so many groups lobbying Congress for one exception or another, I don't really expect any of this to become reality. On the contrary, if I had to bet money, I would bet that the tax code will only get more and more convoluted as time goes on.

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Discounting the Trade Deficit

Today, the Census Bureau released trade figures for the month of November. The deficit grew to $47.752 billion in November, up from $43.271 billion in October and much larger than the consensus expectation of $44.0 billion. A larger deficit is a subtraction from GDP, but a larger deficit does not necessarily mean the economy is in trouble. For example, the deficit would increase if the increase in imports is greater than the increase in exports. Yet if both are increasing, the economy could be doing fine. Unfortunately, that wasn't the case in this report. The report showed that imports increased by $2.947 billion in November while exports decreased by $1.535 billion.

The good news is that the report tells us what happened two months ago. As a result, it may not be giving us a good indication of what is happening now. Other economic figures indicate that the economy is improving. Nonfarm payrolls, housing starts, and consumer sentiment are moving in the right direction. While today's trade report is not consistent with an improving economy, we shouldn't put too much weight on it.

2012 Should Be Better Than 2011

I spoke with Tracy Byrnes at Fox News about a couple of issues including the tendency for stocks to rally in January and why I think 2012 could be a better year than 2011 was for U.S. stocks. You can see the discussion here.

RIMM Hangs Up on Amazon, Microsoft, and Nokia

It is difficult to find a stock that is more out of favor than Research in Motion (RIMM), the company best known for the BlackBerry smartphone. RIMM is led by a pair of co-CEOs, a highly unusual arrangement for any publicly-traded company and one that has proven extremely ineffective in recent periods. This dysfunctional structure has resulted in one misstep after another. In particular, the company has delayed the launch of key new models and new software a number of times. RIMM also had a disastrous launch of its tablet computer dubbed the PlayBook. Although some experts claim the PlayBook is technologically superior to other tablets, consumers complain that there are too few apps.

It turns out that at least a few companies thought RIMM was worth buying. While it isn't clear if any formal offers were made, Amazon.com, Microsoft, and Nokia were all recently mentioned in press reports as possible suitors. In any case, it seems that RIMM's co-CEOs weren't keen to be bought out. They apparently refused to entertain any offers. Instead, they continue to believe that they can orchestrate a turnaround by themselves.

Whether they will succeed or not remains to be seen. What is clear, however, is that RIMM is no Lehman Brothers. Although the company is losing market share in the U.S., it is still a leader in several key international markets. In fact, the company's subscriber base actually surged 35% year-over-year during the most recently completed quarter. The board of directors will release a report in January that is widely expected to recommend some drastic changes.

Management has been begging investors to exercise a little more patience. Instead, investors have been selling the stock. Today's news caused the stock to rally. The fact that any company sees value in RIMM is giving investors some assurance--at least for now. In any case, it is much too early to write RIMM's obituary. Despite reduced earnings expectations ($4.10 per share for fiscal 2012), with absolutely no debt on the books, well over a $1 billion in cash, and the real possibility of a management shake up, RIMM is worth a second look.

Disclosure - Vahan Janjigian holds RIMM in portfolios he manages.

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Unemployment vs. Participation: Which Shows a Truer Picture?

Equity futures were up strongly this morning thanks to reports that the International Monetary Fund would get involved to help resolve the European debt crisis. Futures remained strong when the U.S. employment report came out showing a big drop in the unemployment rate. The unemployment rate, however, is misleading and by early afternoon, stocks gave up much of their gains as investors looked deeper into the numbers.

According to the Bureau of Labor Statistics, nonfarm payrolls rose by 120,000 in November. Nonfarm private payrolls rose by 140,000. Both figures were close to the consensus estimates and they show that the economy is creating jobs, albeit at an anemic pace. The big surprise, however, was the dramatic decline in the unemployment rate. It fell to 8.6%, much better than the consensus estimate of 9.0%. While this grabbed the headlines, things beneath the surface don't look as rosy.

The unemployment rate is defined as the number of unemployed (but looking for work) divided by the civilian labor force. As a result, the unemployment rate can improve simply because fewer people are looking for jobs. This can happen when they get discouraged and drop out of the labor force.

A better measure of the state of employment is the participation rate. This rate divides the civilian labor force by the civilian noninstitutional population. The denominator includes everyone aged 16 and over who is not institutionalized, meaning that they are not in the military, jail, mental institution, or home for the aged. Everyone else is considered capable of working. Of course, some people have legitimate reasons not to work. Perhaps they are still in school, or they prefer to stay at home with the kids, or they have retired. As a result, the participation rate will always be below 100%; however, in a healthy economy, it should be somewhere near 70%.

The bad news is that the participation rate fell from 64.2% in October to 64.0% in November. In fact, as shown in the figure below, this rate has been declining steadily for quite some time.


I don't want to throw cold water on today's jobs report. The nonfarm payroll figures are somewhat encouraging and at least they show that the economy is moving in the right direction. However, don't get fooled by the lower unemployment rate. It may make some people in the White House feel a little better, but the economy won't be out of the woods until the participation rate improves significantly.

I had a discussion in late October about this with Karen Gibbs in Chicago. Interestingly, MoneyShow decided to release the video today in conjunction with the employment report. As you'll see in the video, I stress the importance of focusing on the the participation rate.

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Retail Investors Staying Away From Stocks

Bank of America recently conducted a survey of about 1,000 "mass affluent" investors. The results are found in its Merrill Edge Report: November 2011.

The mass affluent are defined as people who have $50,000 to $250,000 in investable assets. These people are not rich. In fact, they are solidly in the middle class. They are extremely important because there are so many of them and they form the backbone of the investing public. An estimated 28 million households fall into this category. That's about a quarter of total U.S. households.

Some of the findings are encouraging. For example, about a quarter of those surveyed said their financial situation is better than it was a year ago because they are spending less, paying bills on time, and sticking with a budget. Other results, however, are worrisome. More than a quarter of the respondents said they are dipping into savings to meet short-term needs and they are neglecting their long-term goals. Almost half think they will retire later than they had hoped just a year ago, and more than 40% have become more conservative with their investments.

Interestingly, these people are taking less risk with their investments at a time when the Federal Reserve is trying to encourage risk taking. These people would rather hold cash, which pays little or no interest, than take the risk of losing money in the stock market. I discussed some of this with Tracy Byrnes today on Fox Business.

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How Much Cash Does Apple Have?

Commentators sometimes make exaggerated remarks about the amount of cash Apple Inc. holds. The figure often cited is that Apple has about $80 billion in cash. That's not quite right, but this is how they arrive at that number.

According to the company's recently filed 10-K, Apple actually has $9.8 billion in cash and cash equivalents. It also holds another $16.1 billion in short-term marketable securities. Although these securities are not exactly cash, they can be converted into cash rather quickly if needed. Including short-term marketable securities in the mix is not unusual. So that brings us to about $26 billion. In addition to this, Apple also has $55.6 billion invested in long-term marketable securities. These securities are less cash-like than short-term marketable securities. It is true that they could be sold and converted into cash, but so could any long-term asset. It isn't quite right to classify long-term assets, even the ones that are marketable, as cash. Nonetheless, the total of cash, cash equivalents, and marketable securities (both short and long term) does come out $81.6 billion, or approximately $87.70 per share of outstanding common stock. Any way you look at it, that's a lot of dough.

Where is all this money invested? Apple holds U.S. Treasury and agency securities, foreign government securities, certificates of deposit, commercial paper, corporate securities, and municipal securities. The company's 10-K states that in fiscal 2011, the entire amount earned a weighted average interest rate of 0.77%! Can Apple find no better use for this money? Perhaps a dividend is in order.

By the way, Apple says $54.3 billion of the total is held by foreign subsidiaries. This money would be subject to U.S. taxes of as much as 35% if Apple ever tried to repatriate it. But the tax would not end there. If Apple repatriated the money and then paid a dividend, shareholders would have to pay an additional tax. Is it any wonder that the company is sitting on so much money earning next to nothing? It is high time for Congress to revisit this inane tax policy.

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Defense Stocks Could Rally on Supercommittee Compromise

The so-called supecommittee, tasked with finding a way to reduce the national debt by at least $1.2 trillion over 10 years, is facing a looming deadline. It it fails to agree on a proposal by November 23, there will be automatic spending cuts. There are those who would welcome such a dire outcome. The problem is that some of those automatic cuts would put our national security at risk. Defense Secretary Leon Panetta warned that such cuts would be devastating.

For this reason, I am still hopeful that the committee will find some resolution. It is difficult to believe that even the most partisan politician would be willing to put our nation at risk. If a compromise is reached, defense stocks could rally. Some of my favorites include Raytheon (RTN), ManTech International (MANT), and ITT Exelis (XLS). All three also pay generous dividends.

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Should You Mimic Buffett?

A few years ago, a couple of academic scholars did some research on Warren Buffett's trades. Their paper, entitled Imitation is the Sincerest Form of Flattery, concluded that investors could indeed have earned excess returns simply by buying the same stocks Warren Buffett bought for Berkshire Hathaway. This is true even if they bought the stocks after the information became public.

In today's interview with CNBC I discuss some of Buffett's recent investments, including IBM, and explain why it matters if Buffett is actually buying the common stock or if he is making a private investment in public equity (PIPE).

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Supercommittee Rally?

The conventional wisdom says the Supercommittee, charged with finding a way to reduce the deficit by $1.2 trillion over 10 years, will not be able to reach a compromise. If they don't, automatic spending cuts will go into effect. Cuts to defense spending would put this nation's security at risk. That's why I believe (at least hope) that the committee will put forth a reasonable proposal. The result would be a surprise rally in defense stocks. Read more at MarketWatch.

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Market Continues to React to Europe

The stock market has been paying more attention recently to events in Europe than to economic numbers in the U.S. This may continue for some time. Click here to watch and listen to a recent discussion I had about this with Tracy Byrnes of FoxBusiness.

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Berkshire Buffeted by Financial Weapons of Mass Destruction

Warren Buffett is a critic of derivative securities. Soon after his company, Berkshire Hathaway, acquired General Reinsurance, he discovered a boatload of derivatives that took years to unwind and resulted in massive losses. That's what prompted him to label derivatives, "financial weapons of mass destruction."

So it's a bit of a surprise to see Berkshire report $2.44 billion worth of derivative-related losses (on a before-tax basis) for the third quarter. These derivatives are European style equity index put options. A European option is one that can be exercised only at maturity, but never before.

Berkshire received a premium for selling these options to investors. Buffett is making a bet that stock markets will rise over time. If he is right, Berkshire keeps the premiums. But if he is wrong and stock markets fall, the investors can force Berkshire to buy the indexes from them at higher prices.

The outcome will not be known until the actual expiration dates; however, Berkshire must mark the derivatives to market every quarter. This can introduce a tremendous amount of volatility to the company's earnings. The large derivatives-related losses in the third quarter were a direct result of falling stock prices.

The good news is that Berkshire's operating businesses are doing fine. If not for the derivatives, the company would have earned close to $4 billion last quarter. Instead, it earned just $2.3 billion or $1,380 per share. Still not too shabby.

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Poverty in U.S. Lower Than Reported

We are frequently bombarded by reports about how bad things are in America for the poor. Nations not friendly to the U.S. often use our own statistics to convince their populations that life in America is intolerable. Well, it turns out the statistics are flawed.

As reported in the The New York Times, those compiling the numbers for the government have ignored all the benefits, such as food stamps, that the poor receive. It turns out that when the calculations are done correctly, the rise in poverty since 2006 is less than half of what was previously reported.

This is not to say that poverty is not a problem. It is. We should continue to make serious efforts to address the needs of the truly needy. Yet poverty in the United States is not the same thing as poverty in most parts of the world. The average American who officially lives in poverty eats regular meals, has a place to live with heat in the winter time, and owns both a car and a color television set. In many places of the world, this person would be considered very well off.

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The Power of Competition

On October 6, I wrote about President Obama's ridiculous attack on Bank of America for its plans to impose a $5.00 monthly debit-card fee, and I explained how competition is the best way to limit profits. Specifically, I said, "Bank of America may have made a mistake by introducing this fee. If so, its competitors will pounce. They will begin advertising debit card services with lower fees or no fees at all. Bank of America will notice that it is losing customers."

This is exactly what happened. Several competitors said they would not impose debit-card fees and some customers started switching banks. Here's the latest from Bloomberg: Bank of America Eliminates Plan for $5 Debit-Card Fee. It wasn't government regulation that convinced Bank of America to scrap the fee. It was competition.

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Greece Continues to Rock the Markets

In my September 1 post, I wrote about the increasing level of volatility in the markets, which continues to be one of my major concerns. The S&P 500 plunged 7.2% in September then surged 10.8% in October. Although few investors complain about upside volatility, I see it almost as problematic as downside volatility. Upside volatility provides further evidence of the high level of uncertainty currently plaguing the markets, and it does not provide comfort to the average retail investor who is sick and tired of seeing his/her portfolio balance jumping around like the electrocardiogram of a heart attack victim. And without a critical mass of retail investors, who are more likely than institutions to invest for the long term, the market is not likely to calm down.

Clearly, there were some good economic reasons for October's gains. Most importantly, the advance GDP estimate for the third quarter was better than expected. Although the 2.5% growth figure might eventually be reduced when more data becomes available, it was a pleasant surprise to many economists and investors. However, most of October's gains can be credited to growing optimism that Europe would actually be able to appropriately address its debt problems. I continue to believe this optimism is premature.

Europe's problems are serious and they are beginning to have a negative impact on U.S. companies in unexpected ways. C.R. Bard (ticker "BCR"), for example, a $7 billion (by market cap) medical device maker, took a $7 million write down in the third quarter for the impairment of Greek bonds. I have no doubt that there will be more companies taking similar write downs in coming quarters.

Despite the recent jubilation about Europe, we are already seeing trouble ahead. The latest news that the Greek government wants to hold a referendum on the bailout package it has already agreed to, has really shaken the markets. Greek politicians hope the referendum will pass and put an end to street demonstrations and riots. However, austerity measures are extremely unpopular and not likely to be approved by popular vote. This all but assures that the markets will remain incredibly volatile.

Volatility may be a trader's best friend. Those nimble enough to jump in and out of the markets can make a quick buck. (Quick bucks, by the way, are good for the government because they are taxed at higher rates.) However, volatility does not mean that long-term buy-and-hold investing is dead. But it does make entry points more important than ever. If you are a long-term investor, I suggest taking the big selloffs as good opportunities to add to positions in high-quality, profitable, dividend-paying stocks.

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Pay to Go Away (Kind of)

As most of my readers know, I am not a fan of the "Occupy Wall Street" movement. In fact, I've been quite critical of these people. But I do have to agree with OWS on one thing: Executive compensation has gotten out of hand. The latest evidence comes from Nabors Industries, which has just named a new CEO. What happens to 81-year old Eugene Isenberg, the former CEO and Chairman? Well, he's not exactly going away. He will remain Chairman. But since one of his titles is being taken away, he will get $100 million to help soothe his sorrows. Nice gig if you can get it. OWS would be right to be irate about this. I just wish those protestors felt the same way about overpaid athletes and entertainers, too.

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Obama Goes After Starbucks

Rising commodity prices are taking their toll on all kinds of manufacturers, but the latest news that Starbucks will be raising prices anywhere from five cents to a quarter per cup of "joe" has customers really worked up.

Some coffee lovers are even asking for a consumer coffee protection agency to prevent this kind of predatory pricing. They want the government to act right now. One latte lover who asked not be identified said, "I can't live without my coffee. It is completely unfair for Starbucks or any other coffee shop to just raise prices whenever they want to."

President Obama even got into the fray. While clutching a caramel macchiato with both hands, he said, "Starbucks doesn't have some inherent right just to get a certain amount of profit." He urged Congress to immediately pass legislation that would require fully transparent coffee pricing and limit by how much any coffee brewer could increase prices. He said consumers need to know exactly how much money they are paying for their coffee.

Starbucks CEO Howard Schultz defended his company. He insisted that Starbucks is already very transparent in its pricing. He said, "Every purchase is rung up on a state-of-the-art cash register. Each customer is told exactly how much he or she must fork over for our coffee. If they don't like it, they can drink that stuff from the diner down the street." Furthermore, in a complete rebuff to the President, Schultz insisted, "We at Starbucks believe we do have a right to make a profit!"

When informed of Schultz's remarks, President Obama admitted that he doesn't actually buy his own coffee anyway. "Joe Biden usually picks it up for me on the way to the office every morning."

Note to readers: In case you lack a sense of humor, this blog post was completely fabricated from my own imagination.

Competition is the Best Way to Limit Profits

A few observations:

1. Steve Jobs, who passed away yesterday, was one of the greatest innovators in the technology sector. He was also one of the world's greatest business executives. He became a very rich man because his company, Apple Inc. made tremendous profits. He was admired by those on the political left.

2. Warren Buffett is one of the greatest investors of all time. He became a very rich man because his company, Berkshire Hathaway, made tremendous profits. He is admired by those on the political left.

3. When asked about Bank of America's plan to charge its customers a fee for using their debit cards, President Obama said his administration could stop this service charge "If you say to the banks you don't have some inherent right just to get a certain amount of profit." President Obama is admired by those on the political left.

It is true that no company has a right to make a certain amount of profit, but it is also true that in the United States we don't limit how much profit a company can make. A competitive free market capitalistic system does that for us automatically. High profits invite competition. Competition drives profits down.

Bank of America may have made a mistake by introducing this fee. If so, its competitors will pounce. They will begin advertising debit card services with lower fees or no fees at all. Bank of America will notice that it is losing customers.

That doesn't mean government has no role. We need regulations to make sure the banks don't take excessive risks that leave taxpayers on the hook for their mistakes. But we don't need the government telling banks what fees they can or can't charge. As long as those fees are transparent and as long as the market is competitive, consumers can decide for themselves which services they value and where they want to maintain their accounts.