Many Americans primarily hold stock through Mutual Funds and Exchange Traded Funds. This fact is proven by the percentage of ownership of companies by Institutional & Mutual Fund companies. Let’s take a look at the Dow Industrial 30 and their percentage of ownership by Institutional & Mutual Fund companies (as of 1/12/2010, information gathered from Yahoo Finance).

Company : % Owned by Institutional & Mutual Fund companies
3M : 68%
Alcoa : 68%
American Express : 80%
AT&T : 57%
Bank of America : 63%
Boeing : 60%
Caterpillar : 70%
Chevron : 63%
The Travelers Companies : 87%
DuPont : 65%
Exxon Mobil : 48%
GE : 50%
Cisco : 70%
Hewlett Packard Company : 77%
Intel : 65%
IBM : 61%
Johnson & Johnson : 65%
J.P. Morgan : 72%
Kraft : 57%
McDonalds : 71%
Merck : 80%
Microsoft : 63%
Pfizer : 59%
Wal-Mart : 37%
Disney : 67%

Out of the Dow 30 stocks only 2 (Exxon Mobil at 48% and Wal-Mart at 37%) have under 50% ownership Institutional & Mutual Fund companies. Over 93% of the Dow Industrial stocks have 50% or greater ownership by Institutional & Mutual Fund companies. Many of the Institutional & Mutual Fund company owners where the same for the Dow 30 stocks.

The above data shows that most individual investors have chosen to hold stock in the Dow Industrial 30 stock through Exchange Traded Funds and Mutual Funds. But who has the real shareholder control over these companies? Do you have shareholder voting rights as a fund holder with these stocks in it? The answer is no. The fund manager makes the decision for you, theoretically for the best interest of the fund holder. One thing is for sure, Wall Street hold the vote and therefore the control.

Wall Street nearly collapsed the US economy last year with their excessive risks. What type of risks are they forcing these companies to take?

First let’s look at how those institutions paid off their tarp funds. Goldman Sachs is believed to be at the apex of Wall Street with their proven track record. How did Goldman Sachs pay off their TARP debt so fast? Last year the US government bailed out AIG by giving them a large chunk of tax payer money. Most of those funds given to AIG passed directly through to institutions that they owed due to bad bets with credit default swaps. Goldman Sachs was the top recipient of $12.9 billion of those tax payer dollars. Goldman Sachs owed TARP $10 billion. Shouldn’t the house be responsible for the bets they take?

They made a lot of money, right? The question is at whose expense. These institutions make a good share of their profits off the consumer. Since credit card rates have gone up and the banks cost of money gone down (fed funds rate), it would seem some of the TARP funds where paid back by the same tax payer who bailed them out.

Who should decide whether these institutions give their executives bonuses? I personally believe that the shareholders should be making the decision, since they are the ones who own the company. Let’s take a look at Goldman Sachs’s top 10 institutional shareholders as of September 30th, 2009 considering 76% of Goldman Sachs is owned by Institutional & Mutual Fund Owners.

4.62% AXA – They provide insurance and asset management services through their subsidiaries around the world.
4.41% Barclay Group – They provide financial services to United States and Europe.
3.72% State Street Corporation – Provides financial services around the world.
3.40% Wellington Management Company – Institutional investment managers.
3.29% Vanguard Group – Provides mutual funds and other financial services.
3.20% FMR LLC – Otherwise known as Fidelity Investments is one of the largest mutual fund providers in the world.
2.14% Price (T. Rowe) Associates – Large mutual fund provider.
2.07% Marsico Capital Management – Financial services and mutual fund provider.
1.76% Janus Capital Management –Asset management and mutual fund provider.
1.70% J.P. Morgan and Company – Large financial services provider.

All of the above institutions have one thing in common and that is they are all investment managers. If you hold a mutual fund or ETF (exchange traded fund) that owns Goldman Sachs, do you vote as a shareholder? The answer is no, the fund manager makes the decision. Do you think the fund manager is going to say no to bonuses?

Whether Wall Street deserves the bonuses or not, one thing is for sure they will do what they want since there is no one to stop them.

Over the past 25 plus years, rates on mortgages and most debt have fallen considerably. The cause of this decrease in rates is mostly attributed to the Federal Reserve’s action of lowering rates and raising rates to control inflation in the US economy. Clearly the Federal Reserve has viewed the past 2 plus decades as having relatively low inflation thereby lowing more than raising rates (Fed Funds Rate).

Lowering rates more than raising them creates cheaper costs of borrowing thereby making room for more. This cheap money also creates more of a demand for credit. This excessive credit demand led to fierce competition among banks. Competition is definitely a good thing until demand starts to wane. As soon as the credit demand let up this led to banks acting as their own Federal Reserves by creating products that artificially lowered the cost of lending thereby stimulating borrowing.

Most home buyers view a home purchase not by the sales price, but by the down payment and monthly obligation. Now let’s look at the buyer from the early 1980’s with he or she’s $25,000 to put down and the ability to afford $1184.87 monthly payment. This buyer today could afford a $225,000 home with $25,000 down with $1183.08 monthly principle and interest payment with an interest rate of 5.875% and relaxed down payment restrictions. Identical down payments and same monthly, but twice the debt, was the growth in value or debt?

This rather rapid reduction in the cost of money over the past two plus decades has led to an equal increase in the price of cars, education, utilities, etc. Inflation seems to have been masked in credit. The credit markets in the US and around the world nearly collapsed because they had “maxed out their credit”. With the rapid expansion of debt at the end of the road with the Fed Funds rate at 0 to .25% target and lending rates increasing because of diminishing credit quality (except for mortgages because the Federal Reserve is supporting the rates), what’s next? Deflation?

This trauma was caused by a bubble in the credit markets. America and the world essentially took on too much debt. The US and most of the world have attempted to solve this crisis by filling the credit and demand gaps with stimulus and cheap money.

GDP in the 3rd quarter did showed its first positive growth (2.8%, revised down from the 3.5% first estimated) quarter of quarter since the 2nd quarter 2008. Most of the US consumption growth (in GDP) has been attributed to the Government’s cash for clunkers program and the first time homebuyer tax credit (along with the Federal Reserve supporting low mortgage rates). The “cheap money” has reduced the value of the US dollar thereby improving exports, which also has spurred some growth in the US GDP.

The question still remains whether government stimulus and cheap money can truly carry us over the hump. Most of this growth has come at the expense of more credit and reduced buying power. Matter of fact, most the Government’s programs seem to have targeted the only individuals left who had room to expand their credit. Who owns a car worth less than $4000 and typically is a first time home buyer? These programs look to have wrung out the credit from the last remaining source in the US economy, the youth, our future.

What happens when the credit towel is dry?

The Chinese government is notorious for embellishing their economic numbers. Is the US government taking a page out of their red book on crowd control.

One possible sign of the potential sugar coat could be in economic data revisions. When data is released the markets react based on whether they meet, miss or exceed expectations. If a market rallies on exceeded expectations, shouldn’t that same market give back those gains if that data is revised down the following month? Most of the time the market ignores these revisions and may actually rally again if the data shows another exceeded expectation even though the data may have actually been negative.

For example; if monthly retail sales went up month over month 1.4%* then the next month they revise this number to -.4%*, but the current month over month sales went up 1.8%. Has retail sales really gone up that much? The markets probably would have rallied the 1.4%* and the 1.8%* if they exceeded expectations. But the data is misleading. Lets simplify this information by using small numbers:

Month 1: $100.00 in retail sales
Month 2: $104.00 in retail sales (1.4% improvement over the previous month)
Month 3: $107.57 in retail sales (-.4 revision plus 1.8% improvement)

*The numbers from the above example are made up and are not real.

So on the surface retail sales going up 1.8% looks good, but retail sale really only went up 1.757% over 2 months. This data becomes even more confusing if it is revised the following month.

Economic data did not predict the beginning of this financial crisis, what makes you think that it will predict the end?

My belief is that economics needs to be broken down into the smallest piece to the individual US citizen. What works for an individual should work for the economy as a whole.

To date the US government has taken the position that the government needs to fill in the demand holes with stimulus by borrowing money. If the US government borrows 1.5 trillion dollars and then spends it into the economy through stimulus, this “growth” in the economy (gdp) should bridge the gap according to the current powers.

What if an individual did the same thing as the US government? Okay so Suzy gets a pay cut and the she decides to adopt the same philosophy as her government. Suzy takes her credit cards and decides to go on a spending spree matching her lost income. Suzy does not just use her credit cards to pay current bills, but she also uses it to redo her kitchen. Suzy lost $30,000 in pay, but she spent $30,000 on her kitchen and other none essential items to make up for the lost income. Did Suzy make up her lost $30,000 in income? Is her situation better after spending the $30,000? Did she reduce or increase her risk?

The answer to the above questions seems relatively obvious to me. If you lose income a budget is the solution not a spending spree. If 70% of the US economy comes down to the US consumer, shouldn’t our rules be their rules?