Small Cap Stocks

For those of of you who have been following my stock picks, I wrote up CALC awhile ago.

Tomorrow the stock is getting delisted, but this could create a tremendous buying opportunity in the stock.

CALC is currently in bankruptcy, but in reading the plan to emerge from bankruptcy, it appears as if creditors will not take an equity stake in CALC, but will simply extend maturities of the debt and ask for a higher interest rate. In other words, equity holders will retain their current ownership in CALC. Given that the tangible book value of CALC is significantly higher than the current stock price, it would seem that CALC offers exceptional upside, should the bankruptcy court approve the current plan. A failure to approve the bankruptcy plan, is of course the big risk for CALC at this point. The court should provide a decision soon, though.

Importantly, my confidence regarding a favorable outcome for CALC in bankruptcy proceedings is strengthened by the fact that the largest shareholder of CALC, Hovde, is also one of the largest holders of the company’s debt. So it seems reasonable to expect that Hovde will push forward and support a bankruptcy plan which will retain significant value for shareholders.

At the same time, institutional investors who I’ve spoken with remain convinced that CALC’s current bankruptcy plan will pass and that the equity will retain significant value. I guess we’ll see…It will pay to keep a close eye on PR released by the company regarding the bankruptcy proceedings. Since few analysts cover the stock there will likely be plenty of time to build a nice position in the stock, once news of a final plan is released.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in CALC. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

As I’ve pointed out on past posts, and what is inherently obvious to anyone who thinks about the topic for a few seconds, there is obviously no need for a sovereign government, like the US federal government, that has a monopoly on paper currency issuance to ever need money. They can just print it.

However, if the federal government doesn’t need our money to finance itself, then why do we have federal taxes (note: I leave out state taxes here, since that’s a different story altogether)?

The answer, as pointed out in a recent article by Warren Mosler is that Federal Taxes serve several purposes, none of which has anything to do with revenue. I highly encourage you to read Mosler’s article, since it has a great article called “Taxes For Revenue Are Obsolete”, written in 1946 by Beardsley Ruml, the former Chairman of the Federal Reserve Bank of New York.

Basically, Ruml believes taxes are needed to:

” 1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;
3. To express public policy in subsidizing or in penalizing various industries and economic groups;
4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.”

In other words, taxes are a policy statement.

Without going too deeply into the purposes mentioned by Mosler, it’s probably best to summarize the purposes of taxes as follows: To serve as a safeguard against inflation (a persistent threat in our credit-driven economy), and more importantly to properly allocate labor in society. What the proper level of taxes should be to serve the above goals, is of course, open to interpretation, though I’m sure most would agree that it’s significantly lower than the current tax rate. Since there are ample secondary methods to control inflation, i.e. limit credit creation by banks, it doesn’t seem to me that taxes need to be the primary tool used to fight inflation. The high current tax rate is apparently the result of a misunderstanding of taxes as a means to generate revenue, and also seemingly a way to guarantee work for the accounting profession.

What the foregoing interpretation of taxation does imply though, is that taxation policies should be based not on one’s absolute income, but on how one has generated one’s income. For example, most doctors and scientists, who provide a vital service to society, should be taxed at a much lower rate than speculators on Wall Street who provide no benefit to society.

I wonder if a “taxation by trade” scheme has ever been implemented in the US in some fashion for personal taxes (it’s been used, of course, on an industry basis, as opposed to an individual basis, with certain industries receiving favorable tax benefits). I’m positive that it would work wonders to generate sustainable economic growth as entrepreneurs rush to develop businesses in beneficial industries where personal taxes are low, while shunning mostly “useless” industries where taxation is high. Ironically, this type of situation would also prove beneficial to Wall Street, by providing a host of new and ultimately real businesses to invest in and finance.

Soros has a great commentary on derivatives at his website. He says:

“This is a clear demonstration of how derivatives and synthetic securities have been used to create imaginary value out of thin air. More triple A CDOs were created than there were underlying triple A assets. This was done on a large scale in spite of the fact that all of the parties involved were sophisticated investors. The process went on for years and culminated in a crash that caused wealth destruction amounting to trillions of dollars. It cannot be allowed to continue. “

Of course, the imaginary nature of securities should be no surprise to readers of this website, as I’ve been writing about this for a few years already. The real question is why it’s proven so difficult to regulate imaginary derivatives?

The answer: Because a huge part of our economy exists simply due to the imaginary profits generated by these synthetic securities. A ban on these securities would cause widespread unemployment in the Northeast US and many other parts of the country. Having a bunch of high achievers, most of whom are also incredibly bright, out of work, is probably the last thing the government wants, though it seems like we’ll need to face this bitter reality soon, rather than later. It’s difficult to see how imaginary securities with no value can form the basis of a strong and vibrant economy, even if they’ve magically supported our economy for nearly a decade.

The fact is that the trading of imaginary securities employs 90% of the people on Wall Street (Note: Wall Street’s other businesses probably lose money overall), and all of the myriad of businesses connected to Wall Street (i.e. law firms, technology providers etc.). What will all the lawyers do when there is no need for them to review the contracts associated with these entirely meaningless securities?

An interesting afterthought to the above is that the US is bankrupt, not because we don’t have enough capital, but simply because our best minds are employed in financial derivatives, rather than in pursuits that can benefit society and create real economic growth. The object of government legislation, and taxes for that matter, should be to encourage/stimulate labor in areas that will have societal benefits. This is why the best antidote to the derivative debacle is simply to tax all profits for derivatives, and any related businesses (e.g. lawyers who prepare the derivative contracts) at 99%. I can guarantee you that such a tax would end the speculative derivative market, and properly reallocate human resources to real economic pursuits, which in the end is the purpose of having a capitalistic society, in the first place.

Awhile back I made the claim that healthcare costs in the US were soaring, because of obscene private healthcare insurance premiums, and not vice versa. More precisely, health care premiums are not rising because health care costs are rising, but health care costs are rising because health care insurance premiums are rising. Recently, I had the opportunity to test my suspicion in practice, and discovered that my theory is almost certainly correct.

Basically, without getting too detailed, my doctor recommended certain nuclear medical scans and blood tests. When scheduling the scans and tests, I was given two sets of prices, one for insurance and one self-pay (I’m on a high deductible catastrophic insurance plan, so I’m for all intents and purposes self pay). Amazingly, in nearly every case the cost for the same exact test with insurance was 2X to 6X more expensive when paying thru insurance then when paying out of pocket. So for instance a nuclear scan might cost $500 in the self-pay option, but would cost $3,000 under an insurance plan. So basically just by simply having private insurance, the cost of the same exact procedure skyrocketed a mind-boggling 400%!

So what’s going here? Rationally, in theory, the private insurance companies, by virtue of their having a large base of customers, should in fact command a lower price per procedure from providers than a single self-paying individual. So how can the cost of the tests be astronomically higher if one pays via insurance rather than with cash?

There is of course no logical explanation for this situation, even though insurance companies, hospitals and doctors will provide a plethora of explanations. For instance, some will say that the higher price reflects the difficulties in doing business with the insurance companies, i.e. paperwork to deal with, time of payment. Others will argue that the higher price is based on the fact that insurance companies will haggle with the provider to get down the price, so they need to charge higher to deal with the inevitable insurance discount. This nonsensical argument ignores the fact that in any case the provider is profitable at 50% or even lesss of the quoted test price anyhow, so what is the use of marking up the price by 5X?

Obviously what is happening here is quite simple: Private Healthcare insurance is simply a gigantic fraud. The healthcare insurance companies are so flush with cash from raising premium every year and denying benefits as much as possible, that they’re basically indiscriminate buyers. They’ll pay an obscence price for anything, under the right conditions. Healthcare providers know this and in a search for profit. “Just maybe, this time, they’ll pay this obscene rate,” the thinking goes, “and if not, we can always force the higher cost onto the patient who doesn’t have the resources or knowledge to fight the charges.” Ultimately, this pursuit of profit causes healthcare costs to skyrocket, at the cost of the health of a patient. Obviously, capitalism does not function when healthcare is in question!

Ironically, there is, of course, at this point in our society, no purpose in private healthcare insurance, except for catastrophic purposes, since your out of pocket costs are much less when you self-pay than if you went thru your insurance company. This of assumes that you are diligent in saving money in a Healthcare Savings Account (HSA) every month to pay for unforeseen non-catastrophic medical costs in the future.

So will Obama’s new plan solve the above problem? Of course not. Since Obama is using the private insurance companies to provide healthcare insurance he will add to the problem, instead of help it. The more money the private insurance companies have the higher our healthcare costs will be. Even worse, when everyone is forced to have insurance there will no longer be a self-pay option, to the joy of every medical provider and insurance company in the country, and to the detriment of every patient. It will soon be impossible to pay a reasonable price for any non-catastrophic medical expense as providers will jack up rates to meet the obscene insurance-based fees.

The solution of course is simple: Either dismantle the private insurers or limit the private healthcare insurance companies to only catastrophic insurance. How to pay for everything else? Let the government pay for it, as they do in every other civilized country. This is part of the government’s job. Print money to pay for the health of your citizens, not to buy speculative securities. As I stated above, capitalism simply does not work when it comes to healthcare. We cannot let the pursuit of profit influence our choices when it comes to our health and the health of our families.

I’ve been trying to explain to people for years already that since the federal government creates the currency, it cannot go bankrupt and can, in theory and practice, finance anything it chooses. However, it’s been difficult to defend this position, especially since the government and Wall Street marketing machine is always trying to convince people of the exact opposite, i.e. that taxes and government bond sales finance our federal government. This marketing nonsense is spewed in order to steer more capital away from the 99.9% of the population. It’s as if people really believe that money objectively exists, and there is some finite amount of it in our economic system. Of course, this is entirely false, as our current monetary system makes capital creation unlimited, and it’s only politics/theft that makes capital seem scarce. In theory, there should never be a financial or economic crisis.

In any case, today I came across a great post on the Deficit that should be required reading. It’s called: What is Responsible Fiscal Policy. It does a good job of debunking myths surrounding the deficit and explaining why deficits are a good thing! You can read the article here. It’s really a question of where we choose to spend the deficits. If it goes to bail out banks, it’s called a bonus for bankers and is applauded by both Republicans and Democrats, alike. If the deficit goes to pay for healthcare, jobs or anything else that 99.9% of the population needs to live, it’s suddenly a big problem and both political parties demand higher taxes to pay for these necessities.

As Pavlina R. Tcherneva in the article:

“Wall Street knows all too well that the government cannot go bankrupt, which is why it never objects when the government socializes its losses. Notice how financial gurus temporarily suspend their own deficit phobia until Wall Street’s balance sheets and incomes are restored. The average person, however, does not know that deficits are forever sustainable and that the government is not obligated to raise anyone’s taxes to ‘pay’ for them (see here a discussion on the role of taxes). And so the taxpayer does not demand from its government what the taxpayer genuinely wants and needs: more jobs, more infrastructure, better education, higher quality public services, and a standard of living that only a resource-rich nation as the U.S. can provide. It is time to stop buying into the deficit phobia and demand that the government deficit spend … responsibly. “