President Obama, the Antithesis of Arrogance

Yesterday in Coral Gables, Florida, I met President Barack Obama for the third time. What was great about it is I was able to bring my five year old son, Bradley – his second time meeting the President.  What amazes me most about President Obama is his genuine lack of ego – the antithesis of arrogance. Despite a frenzy of people trying to shake his hand and get a photograph, he took the time in the midst of a jam packed schedule to take a personal photo with my son, creating a cherished memory for my lineage.

I’ve been active in politics for decades, but in the midst of the global financial crisis, I became much more active. The future of America requires leadership and participation by people committed to do the right thing. I can’t compare my level of service to some, but I have to do my part. Over the years I’ve met many business leaders and local and national politicians, a few traits stand out among some: selfishness and arrogance. However, in President Obama, all I see is selflessness, combined with pride and a passion to do the right thing – helping all of us win, not one of us win at the expense of others.

No More Hazing

The recent death of Robert Champion, a band member at the historically black university, Florida A&M, has created national attention on the topic of hazing. Allegedly, Champion was hazed prior to his death. The absurd practice of hazing, which from my experience is endemic in Greek letter organizations, clubs and bands, must end. Whether a verbal assault, psychological harassment, or assault with a paddle, cane or fist, hazing must go by way of the dinosaur.

Decades ago, I spoke with a Florida State University professor, the late Dr. Charles Billings, who hailed from my home town of Detroit, Michigan. Dr. Billings talked about his experiences pledging a predominantly black fraternity at the University of Michigan in the 1950’s. He spoke about how his pledge class had to carry bricks everywhere they went.  As he held a brick in his hand, a member of the fraternity pushed the brick towards his face with such force, that a tooth penetrated his lip and the brick. Though he had a physical scar, the scars from his experiences as a pledge were much deeper.

As a young man, I had the privilege of meeting Bishop Edgar A. Love, one of my grandfather’s best friends, and a founder of a predominately black fraternity. If I can be sure of one thing, it’s that no one ever hazed Bishop Love – for that matter, I’m sure no founder of any Greek letter organization was ever hazed. If peer pressure to endure hazing is applied for social acceptance, such peer pressure should be re-directed from hazing to the encouragement of academic achievement. Some traditions must come to an end.

Don’t Pay Banks Interest on Excess Reserves

The Federal Reserve pays banks interest on reserves and excess reserves. I believe eliminating the payment of interest on excess reserves will encourage banks to lend. In theory, banks will want to avoid the opportunity cost of holding excess reserves that pay them no interest.

Pursuant to the Emergency Economic Stabilization Act of 2008, the Federal Reserve started paying interest on bank reserves and excess reserves on October 1, 2008, a measure that accelerated the effective date of the Financial Services Regulatory Relief act of 2006 by 3 years. Labor statistics show that approximately 50% of American workers are employed by small businesses, and according to the United States Small Business Administration, 77% of new jobs are created by small businesses. Therefore, a greater focus should be placed encouraging small business creation, as well as helping existing small businesses expand and survive. I believe funds flowing from excess reserves towards lending will help in this capacity.

What I hear from bankers is that uncertainty and an environment in which it is difficult to comply with an abundance of regulation, imperils banks ability to increase their lending. And what I hear from small business owners and those who want to start a small business, is the banks are not lending – an impediment to the ability of many small businesses to get off the ground, expand, or sustain their existence.  Though there is no guarantee that banks will increase lending to small businesses if not being paid interest on excess reserves, the probability that banks will put the capital they hold in excess reserves to use would theoretically help spark economic activity, and potentially benefit the U.S. economy.

The U.S. Debt Crisis

Yesterday, Standard & Poor’s changed its outlook for U.S. government debt to “negative,” pummeling the financial markets.  According to The Wall Street Journal, “S&P currently rates 19 out of 127 sovereigns AAA. . .the U.S. is the only one among the 19 that has a negative outlook.”

In finance, U.S. government bonds of various maturities represent the “risk free” rate of interest. This is because it’s assumed U.S. government bonds are “risk free,” i.e. there is no chance of default.  With the massive level of U.S. debt, and attempts to slash governments budgets falling short of being able to substantially cut U.S. debt, are we now to assume there is no such thing as a “risk free” rate?

I’ll let the finance professors ponder this question, however, I won’t make any assumptions. When I was a student I learned that you don’t increase taxes or decrease government expenditures during a recession, or times of slow economic growth. However, the U.S. must plan to do so after our economy is back on track, as our current path is not sustainable. Since U.S. government debt remains rated AAA (only the outlook has turned negative), now represents the opportunity for elected officials to move forward by slashing future government expenditures, increasing taxes, and saving America from itself.

The Financial Literacy of Elected Officials

I recently read an article about a Florida city that’s down millions of dollars as the result of a fuel hedging program. In analyzing the details, a college professor gave an opinion that “the city’s only strategy appeared to be based on the price of natural gas increasing over time.” The city purchased long-term futures contracts on natural gas. However, the price of natural gas decreased over time, losing the city quite a bit of money. In finance, many high risk strategies are one directional. When you’re right about the direction of price movement, you’re a superstar, but when you’re wrong, you can lose your shirt.

A long-term one directional strategy can be a gamble. Hedging is supposed to reduce risks, not increase them. Prices can go up, down, or sideways, this is a matter of fact. Ideally, the possibility of price movement in all directions should be considered if implementing a hedging strategy. With futures, this is more easily achieved by using short-term futures contracts to help protect against short-term price swings. What’s ironic is the city pays a risk management consulting firm to provide advice on hedging risks. Just because one can lock in a future price, does not mean one will save money. The savings gained by a decrease in a commodity’s price, can be more than offset by the loss of premium paid for futures contracts.

I hate to dwell on Florida, but since I relocated to Florida from New York City, I’ll continue to do so.  In 2009, Florida’s State Board of Administration booked a 250 million dollar loss on a questionable investment in New York City real estate.  The board, which manages over $100 billion in state employee retirement assets, was apparently warned during audits about their risky 2007 investment in Manhattan’s largest rental apartment complex.  The risky investment, made at the peak of the real estate market, imploded to create a 100% loss.  Had Florida paid me $5 million for my opinion, I would have produced at least $245 million in savings by advising against losing $250 million, in one of the worst real estate transactions of all time. Note: the total cost of this blunder was closer to $266 million when you account for the fees involved – great revenue for the broker of this deal.

These are just some of the financial blunders government entities have made across the U.S.  The strategic direction set by elected officials, along with the various policies they administer, requires a greater level of financial literacy and prudence. A lack of financial literacy by individuals contributes to reckless behavior. A lack of financial literacy among elected officials is conducive to creating another global financial crisis.

Pensions are busting budgets

The long-term capital gains tax rate on Gold is 28%

People keep asking me what I think about gold. Its been on a great run, but one must be extra careful when investing in precious metals. Precious metals like gold and silver are considered “collectibles,” as are the ETFs that track them (like the ETF, “GLD”). Per the IRS tax code, “collectibles” held less than one year are taxed as short-term capital gains at one’s ordinary income tax rate, and if held for greater than one year, collectibles are taxed as long-term capital gains at 28%. Your broker probably won’t tell you this because he or she probably doesn’t know, yet will gladly take your commission.  However, a 28% capital gains tax rate can be a problem.

Investors must consider the fact that the long-term capital gains tax rate for collectibles, exceeds the maximum long-term capital gains tax rate for non-collectibles by 13%, i.e. stocks and bonds have a maximum long-term capital gains tax rate of 15%. The additional 13% in taxation might make an investment in gold a poor choice versus other investments, particularly at current price levels. Perhaps investing in precious metal mining companies can help one capture returns linked to precious metals as a hedge versus inflation, but without the high taxation. The point is moot if investing in a non-taxable account, but for taxable accounts, the high capital gains tax rate must be considered.

All Black Children are College Material

I recently spoke to a friend with whom I attended kindergarten through eighth grade in Detroit, Michigan. I hadn’t spoken to my friend Eric, for nearly 30 years. He found me on Facebook as he diligently worked to re-unite our junior high school classmates.  During our conversation, we spoke about the fact that during high school, we were both removed from a predominantly black environment, and placed in all-white environments.  Such an experience was culture shock to say the least, and quite frustrating. After living in Detroit, and attending school with almost no white students, Eric moved to Kentucky, and I moved to Farmington Hills, Michigan.  Eric and I share two common themes: we were among a handful of black students at our respective schools, and our guidance counselors told us we should not go to college – we weren’t college material.

My high school guidance counselor was a graduate of Eastern Michigan University. During a school event, the counselor advised that any senior interested in attending his alma mater should visit him. He claimed he would write a letter of recommendation for any interested student. Therefore, I added EMU to my list of potential colleges. When I went to the counselor to discuss, he told me I shouldn’t go to college. He said I was good with my hands, and a vocational school would be the right choice for me.

Needless to say, Eric graduated from the University of Michigan, earned a master’s degree at Cambridge University, and a J.D. from Columbia University. Now a practicing attorney, I’m confident Eric made a wise decision to attend college. I earned a B.S. from Florida State University and an M.B.A. from Manhattan College. I also made a wise decision, as my education is the foundation of my success. But in one respect my high school guidance counselor was correct, I am good with my hands. Every time I use the manual shifting mode in my hundred thousand dollar car, I think about how great it is to be good with my hands.

I wonder how many middle-class suburban white kids my counselor tried to discourage?  Similar dissuasion often takes place during college, and in the workplace. However, by staying focused on goals, and having access to mentors and positive role models, black youth can realize that there is no limit to their potential. Fortunately for Eric and I, we had such mentors and role models. All black children are college material.

“You were born into a society which spelled out with brutal clarity, and in as many ways as possible, that you were a worthless human being. You were not expected to aspire to excellence: you were expected to make peace with mediocrity.”

James Baldwin – The Fire Next Time

Two African American males who graduated from college: Greg Collier and President Barack Obama

Greg Collier pictured in his office in West Palm Beach, Florida

Two Degrees of Separation, James Baldwin and the power of Role Models

As I spoke to a successful businessman, I asked about someone who spends summers in Martha’s Vineyard, as he does. He was surprised I knew a particular friend of his.

I then said to him, “There are just six degrees of separation,” as in the title of the award winning play.

The gentleman replied, “With black people, there are just two degrees of separation.”

I stood silent for a moment to digest his statement. How prophetic  –  as a black man, there’s a minimal amount of separation between myself, a homeless person, or a senior corporate executive who is African American. In some respects, there is no separation at all. After all, even the most successful black men have difficulty catching a taxi in New York City.

So what separates us? Education, experience, access to opportunity, confidence, perseverance? There are many factors, but access to role models can help blacks understand our history, learn different points of view, see opportunities, avoid or overcome pitfalls, and thrive as individuals, families, and communities.

I’ve been fortunate to have many role models. I never had the opportunity to meet Dr. Martin Luther King Jr. or Malcolm X, but I had the fortune to meet author and civil rights activist James Baldwin, who knew Dr. King and Malcolm X. At the time I was 14 years old, too naïve to understand the magnitude of meeting James Baldwin, or the degree of separation between myself , Mr. Baldwin, and his elite circle of friends and acquaintances. Meeting Mr. Baldwin and his mother, Emma Berdis Jones, was an empowering moment in my life. The circumstances of our meeting is a thesis in and of itself, so I’ll digress – the confidence, eloquence and majesty of James Baldwin were apparent the moment I met him.

James Baldwin and a statue of William Shakespeare

Upon reflection, meeting James Baldwin reinforced the fact that if I work hard, I can achieve whatever I desire, and if someone impedes my ability to achieve, I must have the fire next time to overcome the obstacles in my path. As a tribute to Dr. King, Malcolm X., James Baldwin and the other African Americans who built a foundation that allows me to achieve, I must preserve their legacy by celebrating black history month, being a mentor, role model, and helping others achieve prosperity.

Working hard to make someone else rich?

As I stood in front of the world headquarters of Chemical Bank, circa 1992, a Rolls Royce stopped in front of the building. A small crowd gathered. Before a door opened, the crowd swelled. I thought it might be Elvis Presley on his way to see a private banker, or to give a press conference on the fact that he was still alive. The Rolls Royce was carrying a rock star for sure, but it wasn’t Elvis, it was John McGillicuddy, Chairman and CEO of Chemical Bank, the man who engineered the merger between his bank, Manufacturers Hanover Trust Company, and Chemical, creating what was then the second largest bank in the U.S.

I was a young employee at Chemical Bank, recently out of college and learning quickly about the real world.  Should I work hard to make someone else rich? Possibly –  by helping make someone else rich, one can get rich in the process. Also, work experience is a priceless commodity. Don’t get me wrong, CEOs are entitled to whatever their companies are willing to pay them, and what the market will bear, as are senior executives and profitable traders.

An example of why it's great to be a CEO in corporate America

As an employee in the public or private sector, few achieve the rock star status or compensation of the late John McGillicuddy. Though the same can be said of entrepreneurs, in the context of the psycho dynamics of work and organizations, not only does entrepreneurial freedom yield happiness, but it’s more conducive to allowing one to be the master of their fate, rather than the victim of their circumstances.  I can honestly say that the most miserable people I know either work in corporate America or have been displaced by corporate America. Though entrepreneurialism in and of itself does not create a utopia, the happiest people I know are entrepreneurs, and I’m one of them.

The Stock Market: How fast is too fast, how high is too high?

The stock market has been surging lately, with few moves to the downside. I’ve rarely been able to lose money for months, except when selling short.  For now I’m staying long. My simple strategy of buying “at the money” call options anywhere from 45 to 60 days to expiration has been highly profitable, and this scares me – things are just too easy now.  Almost everything I’ve bought for months or have been holding long-term is shooting to the moon, and seeing stocks hit their 52 week highs, or come close, is all too common.

What I’m going:

I’m going to continue following the market’s momentum to the upside, but I’m prepared for a big move to the downside. I’ll close any long call option positions when I either achieve my target profit, or as my gains erode due to time decay, a decreasing stock price, or other factors. For my long-term investments, I’m primarily invested in U.S. domestic equities, ETNs and ETFs. For most of my securities, I own put protection, which I usually finance by selling call options, i.e. I’ve created low cost to zero cost collars, having both covered calls and protective put positions.

To clarify, I’ve sold call options with strike prices above the current market prices of my securities to raise cash, and I’ve used the cash to purchase put options with strike prices below the current market prices of my securities. This allows me to protect profits because owning put options on a security gives me the right (but not the obligation) to sell the security at the strike price of the option  until the expiration date of the option (note: most index options are “European style” as opposed to “American style” and  can only be exercised on the expiration date).

If the market price surges above the strike price of a call option I’ve sold, I could miss out on the additional potential market gains as the  price keeps rising. This is because call options give the buyer of a call option the right (but not the obligation) to exercise the option against me, requiring me to sell them the underlying security at the strike price of the respective option.  I could avoid being exercised against by “buying to close” call option contracts, but will likely create a loss on the option transaction because an increase in price creates a more expensive call option, all other factors being equal.

Note: I like using stop orders, particularly stop-limit orders, but I’m anticipating the potential of a fast move to the downside. With a stop-limit order, if the stop price is hit, a limit order is triggered. However, if the market moves quickly below the limit price before my limit order can be executed, I’ll be stuck with the stock because I’ve specified my minimum sales price with the limit order.  And with a stop order, if an event like the “flash crash” occurs, even if less drastic, the stop price may be hit and a market order might not get filled at a price remotely close to the stop price that triggered the market order, leaving me with a large reduction in market value.

Be careful out there folks!

“If something cannot go on forever, it will stop.”

–Herbert Stein