The Independent Investor: NCAA Up Against Ropes on College Pay for Athletes
This week the Board of Governors of the National Collegiate Athletic Association (NCAA) met at Emory University in Atlanta to hear the pros and cons of allowing athletes to accept money for endorsements. It has been a long time coming.
This is an issue that has been around for as long as I can remember, but it has only been the recent moves by certain states, as well as the Federal government, that has forced the NCAA to at least acknowledge that the status quo is no longer working for them or for their students.
It is currently illegal for athletes to receive gifts or income related to their college athletic activities. If they do and get caught, the offending student and the college program can expect harsh punishments. That means students can't make money from signing autographs, can't sell any merchandise or memorabilia, nor can they cash in on charging money for the use of their likeness in everything from sports video games to college commercials.
At least that was the case until recently. California introduced a bill this year that makes it illegal for colleges in that state to penalize athletes for doing any and all of the above. If the bill passes, it would be effective in 2023. The bill states that any California college that makes more than $10 million in revenues from media rights would have to allow students to make money from their likeness. Students would also be allowed to hire an agent or attorney to represent them in business deals.
Mark Emmet, the president of the NCAA, has argued that this legislation would give an unfair advantage to California colleges over schools in other states. The NCAA would therefore bar California schools from competing in college championships. The problem is that California is not an isolated case. Twenty additional states (plus two members of Congress on the national level) are proposing similar legislation.
Finding a solution that is acceptable to the athletes as well as the 1,100 schools that make up the NCAA (including 353 in Division I) is not going to be easy. But it is necessary if the NCAA wants to preserve their franchise.
The pros and cons on both sides of the debate make a compromise difficult at best. Overall, recent polls of college students by College Pulse, a student-focused analytics company, found that 53 percent of all students polled support compensating college athletes. Sixty percent of the students thought college sports students should be paid salaries, allowed to profit from their likeness (77 percent) and/or be paid if their image is used to sell merchandise (83 percent).
Those who argue for compensating students for their sports efforts say that being a college student-athlete is a full-time job, not an extracurricular activity, as the colleges claim. Sports schedules leave no time for students to earn money by taking part-time jobs, for example, plus playing in tournaments require so much time that students are often forced to miss class, which is the very reason they are supposed to be in school in the first place.
And it is not as if the money schools earn from the efforts of their athlete-students go toward academics, critics claim. Instead, much of the profits ends up in the hands of multi-million-dollar salaried coaches. athletic directors and some administrators.
Winning college sports teams also bring an enormous amount of free advertising, good will, and alumni contributions into the school coffers that benefits all the students, the faculty and the staff of the school. Why shouldn't sports students be compensated for that?
There is also the issue of injuries. There have been repeated and numerous cases of serious injuries where college athletes have put their bodies on the field and now face the prospect of life-time injuries that end any hopes of a professional career while never ever earning a cent from their efforts.
From the NCAA's point of view, students are already (and always have been) compensated in the form of scholarships and other benefits. In addition to free tuition, plus room and board, many athletes receive stipends for books and other basics. This is a form of compensation, the NCAA argues, which sets them apart from the rest of the student body.
Remember too, that most other students will have generated an enormous student loan debt while in school that will plague them for years after they graduate. The college athlete, on the other hand, will be largely debt-free and possibly on the verge of a lucrative professional sports career.
Colleges also argue that only a few college sports programs are actually profitable, and that the money from sports such as football and basketball are often used to subsidize other athletics programs on campus. Finally, there is no ready formula on exactly how college compensation for athletes would work. How and by how much would compensation to athletes at one school be fair and equitable without, at the same time, be putting some other colleges and students at a disadvantage?
Whether offering cash compensation is better or worse than the present system of scholarships, free tuition, lavish sports facilities, and multimillion-dollar sports programs remains to be seen. One thing is for sure, the future economics of college sports is about to get a big overhaul in my opinion.
The Independent Investor: Will Trump Ruin Thanksgiving?
Nov. 21 will mark the deadline for the nation's lawmakers to approve a government budget for next year. Given the animosity between the two parties, the present all-encompassing focus directed at an impeachment inquiry, and the rage of many congressmen towards Trump's handling of the Syrian Crisis, is there any hope for a meeting of the minds when it comes to a budget resolution?
Right now, I would say it is a good bet that Congress just does not have the time to pass all of the 12 annual spending bills that are required to fund the portions of the government that Congress controls. Some of those bills will come up for a vote next week. That should give us an indication on whether there is enough good will between the two parties to do anything more than pass yet another short-term spending bill.
However, none of what Congress might do will matter if President Trump decides not to sign it. Trump has already said he is not interested in signing any domestic spending bills until there is an agreement on additional funding of his border wall. If this sounds familiar, it is, because the same thing happened last year.
In December 2018, the U.S. Republican-controlled Senate unanimously approved a resolution to keep the government funded, but they postponed a decision on funding a wall between Mexico and the Unites States. Trump wanted $5 billion to pay for some of it, which would have fulfilled one of his campaign promises but broke another one (his promise to have Mexico pay for it).
Trump might have signed it anyway, but criticism from some of his hardline media supporters (like Rush Limbaugh and Ann Coulter), who called him "weak" and a "loser," stung Trump's fragile ego. The rest is history.
The federal government shut down from Dec. 22, 2018, until Jan. 25, 2019. It was the longest government shutdown in history. It ruined both Christmas and New Year's for an enormous number of Americans. Federal workers suffered the most from Trump's actions. And yet, after 35 days of misery, Trump agreed to sign the same deal he could have had five weeks earlier and avoided the shutdown altogether.
After over two years of turmoil, it seems clear that when cornered, the president tends to strike out, attempting to cause the most damage to all those who he believes are against him. Almost 50 percent of Americans support removing him from office. Republicans are criticizing him for handing over Syria to his "great friend," Vladimir Putin, and no one liked his self-serving efforts to hold the next G-7 meeting at one of his Florida hotels.
How better to alter these story lines than by once again threatening to shut down the government, unless he receives more money to buil his wall? Washington insiders believe his game plan could be to Divert attention from his problems. He could resurrect the image of ravenous immigrants attacking our southern borders, while blaming the Democrats for being weak on border security. He could even pin his failure in Syria on Congress for not spending enough money on national security.
Of course, the real victims in such a scenario would be the American people. But maybe I worry too much. Maybe the president will have learned from his past mistakes; but then again, how can someone learn from something he has never made?
The Independent Investor: Was There Really a Trade Deal?
Last Friday a "phase one" trade agreement between the United States and China was announced with great fanfare. The problem is that nothing was written down, nor were the terms agreed upon. In the end, we only have a gentlemen's handshake. Will that be enough?
With the stock market up by over one percent, President Donald Trump spent most of the that day in front of the cameras crowing that China had agreed to buy $40-$50 billion worth of food imports from our nation's farmers. He repeated those numbers over and over, throwing in comments of how famers were going to have to buy bigger tractors to handle the business.
China's Vice Premier Liu He smiled in the background, yet he never backed up those numbers, preferring instead to deliver a note by his boss, President Xi Jinping, that simply referred to a "healthy and steady relationship."
However, before the weekend was out, the official, government-backed news agencies in China disputed the Trump's take on what was accomplished or agreed upon. For example, China wants the U.S. to drop all the tariffs the White House has imposed on them thus far in exchange for Trump's $40-$50 billion in imports.
And by the way, that was a number that could be imported over three years, not next year. And no, the Chinese have not "already begun buying," as President Trump claimed. Many on Wall Street believe that the entire announcement was little better than a public relations stunt to woo Trump's farming base of voters back into the fold. Unfortunately for the president, few farmers or ranchers seem to be falling for the ploy. It may be that they also know who will benefit the most from these additional exports and it won't be the family farmer.
If we take pork, for example, (one of the products that China is interested in importing), the lion's share of benefits will go to global mega producers that are domiciled in the United States. Eleven of the world's 26 such producers are in the U.S.
And guess what company dominates pork production in this country? Smithfield Foods. And guess who purchased Smithfield back in 2013? WH Group LLC; and who are they? WH Group is a publicly traded food and meat-processing company owned by and headquartered in China.
As for soybeans, another potential target of additional Chinese imports, can you guess who controls 90 percent of U.S. production? No? I will give you a hint -- the same company that is up to its eyeballs in 13,000 lawsuits over Roundup -- the Monsanto Corp. I could go on down the list naming companies such as Cargill, Dow, and Dupont, but you get the drift.
Thanks to the outbreak of the deadly African swine fever last year, China's domestic hog production has been decimated. As a result, China's pork prices have climbed 69 percent, while overall food prices in China gained 11.2 percent in September. That's not something you want to see happen when you have one quarter of the world's population to feed on a daily basis.
As you might imagine, China's sources of food production are a critically important strategic concern. Since they are nowhere near self-sufficiency in food production, the Chinese are reliant on other nations for food. And they also have a long memory.
Most readers probably forgot that back in the 1980s, the U.S. targeted the food security of the then-USSR, establishing a partial grain embargo in retaliation for Moscow's invasion of Afghanistan back in 1979. The embargo was finally lifted when our politicians realized that the only losers in the embargo were our farmers, since Russia quickly established alternative supplies of both corn and wheat.
Imports of American grains to Russia have never recovered. Fast-forward to today where Donald Trump (most likely not an avid reader of U.S. post-war history) is either ignorant or failed to learn from that lesson. But the Chinese have.
I believe that China may increase food purchases from America in the short-term, because it is expedient to do so and suits their purpose for now. But over the longer-term, China, like Russia, will seek to develop more reliable (less political) sources of food supplies.
It is already happening as China imports more from Brazil and other food producing nations around the world. Reducing their over-reliance on the U.S. for food will most assuredly hurt our agricultural sectors a few years out, but hey, by then it will be another president's problem and who knows, maybe we can blame the Democrats.
The Independent Investor: Brokerage Business Not What It Used to Be
Last week, Charles Schwab, the mega-discount broker, disrupted the brokerage industry yet again by dropping its per-trade commission rates for U.S. and Canadian stocks, exchange traded funds (ETFs), and options for both mobile and internet trades. It was inevitable and simply recognizes what the future holds for that segment of the financial industry.
Since Schwab's announcement on October 1, three additional big brokers — TD Ameritrade, E-Trade and Fidelity Investments — have thrown in the towel leaving only Vanguard (among the big houses) left out of the zero-commission trend.
The stock market reacted in shock. Traders hit the sell button on their computers sending the brokerage stocks down in double-digit losses. E-Trade, for example, fell 17 percent on the announcement. Many pundits predicted the end of the brokerage business, but those forecasts, in my opinion, were based on an antiquated notion of where the brokerage business is actually heading.
The internet and the introduction of smart intelligence has changed financial services forever. Personally, I cannot remember the last time I actually called a broker to place a trade. It is all done through the internet now, so why should I be paying Schwab (or anyone else) $4.95 per trade?
I'm not the only one who must have felt this way. The recent success of upstart retail brokerage businesses such as Robinhood, which promises commission-free trading, social media, cryptocurrencies, etc., was not lost on Charles Schwab. Neither were the offers by more serious competitors like Bank of America's Merrill Lynch and JPMorgan Chase that are offering free trading on a limited basis.
So how can Schwab, or any of the other discount brokers, make money when they aren't charging commissions? The answer is simple. Commissions mean less and less when it comes to the bottom lines of most brokers. Most of us still have an image of a three-piece business suit, tasseled loafers and cufflinks when the word "broker" is mentioned, and I am sure there may still be some of those dinosaurs left out there in some corner office or another.
However, nowadays, it is more likely than not that the markets move too fast to dilly dally on the phone with a broker, or worse still, to waiting on the phone listening to Muzak while the stock skyrockets past you (or is dropping like a rock). Since just about all trading is done electronically, (by people in hoodies and sandals) the costs of executing those trades have dropped too.
Sure, cutting most commissions will hurt the bottom line, but not nearly as much as you think. The way brokers make money today, for the most part, is using the cash in your account until you need it. They invest the money in whatever high-yielding instruments they can find for as long as they can. It is called net interest income and last year Charles Schwab, for example, made 2.6 percent on average from doing so. That may not sound like much, but it amounted to $5.8 billion or 57 percent of the company's total revenue. Investment management and administrative fees accounted for only 32 percent of revenues. Commissions, trading and such accounted for the rest.
Throughout the financial services sector, commissions, fees, and other charges are shrinking as more and more retail and institutional clients demand a better deal. As electronics and automation increasingly become the lion's share of the services provided by the financial industry in the future, investors can expect to see this trend continue.
The Independent Investor: Markets Bogged Down by Politics
Recently, financial and economic events have taken a back seat to politics. Whistleblowers, United Nations speeches, White House tweets, and the on-going trade wars seem to be moving markets far more than unemployment or earnings reports. Is this simply a short-term phenomenon, or is something else happening that is becoming a longer-term trend?
As readers are aware, over the last three years, financial markets have been increasingly governed by what is happening in Washington. At first, markets keyed off big developments like the tax cuts and what they would or would not accomplish from an economic point of view. From time to time, markets would also focus on the possibility of infrastructure spending, or a new health care plan for the country.
However, as the months wore on, more and more of the market's ups and downs were dictated by the trade war, the Russian investigation, and recently, the mid-term elections. The time horizon for investors, given the uncertainties of politics, has become shorter and shorter. That happens to work out well for the high-speed, computer-driven trading platforms of Wall Street. Those "Algos" now represent upwards of 80 percent of all equity trading on any given day.
As an example, if you were to track the markets' moves last week, based on political developments, as CNBC and other financial news outlets did, you would see an extremely high correlation between politics and market moves. The president's comments and tweets on Chinas, his speech at the United Nations Assembly, and House Majority leader Nancy Pelosi's news conference on the launch of an impeachment inquiry against President Trump by the Democratic-controlled House, impacted all sorts of financial instruments.
Trading in currencies, bonds, stocks, commodities, even commercial credits gained, and lost value based on political events. It is almost as if the tried and true market determinants — the strength of our economy, prospects for inflation, earnings data, and the unemployment rate — are secondary, at best, to the drama in Washington.
Last Friday, the president and his cabinet seriously considered forcing the U.S. financial exchanges to de-list Chinese companies on their stock exchanges. In addition, Trump is considering placing controls on U.S. citizen's ability to invest in Chinese markets. This week, he is slapping tariffs on European goods ranging from single malt scotch to French wine.
Is the new normal? Are we entering an era where financial markets are no longer governed by fundamentals, but instead by governments and the whim of politicians?
A lot of people would like to blame the present government interference in the economy on Donald Trump, but the transition from free markets to what I believe is a nascent form of corporate socialism predates the Mad King. The truth is that government in this country has taken a larger and larger stake in what we still like to think of as our free market economy. It has been happening for years right under our noses, but we can't see the forest through the trees.
The fortunes of the health-care sector, for example, are an area where politics and government are in the front seat, while earnings and growth are almost an afterthought. The banking sector, as a result of the Great Financial Crisis of 2008, is another sector that has felt the heavy hand of government. And then there is the myth of the American farmer and rancher, stalwart symbols of free-markets and capitalism, whose homesteads and businesses have been subsidized by massive government doles for decades.
Today, we are focused on the trade war and the severe impact it is beginning to have on global growth worldwide. What we fail to see is that these tariffs are also moving more and more of the country's economic control of the markets and its pricing mechanisms from the private sector to the Federal government.
"Big Brother" is now deciding on an almost a daily basis, what products will be exempted from tariff controls, and which will not. How are these decisions being made and by whom? These decisions have an enormous impact on the cost of goods sold and even more on the companies that produce them.
This week, we placed tariffs on some European products, such as single malt-scotch whiskey and French wines. Do you really think a Scotch or fine wine drinker will switch to an American whiskey just because of a tariff? And why are Italian wines and olive oil exempt?
And like a socialist (or communist for that matter) economy, the government is now dictating which companies will be protected (compensated) because of the impact of tariffs. Why are the nation's farmers, who are largely U.S. mega-cap corporations, given taxpayer money, but the manufacturing sector is not?
The manufacturing sector is suffering deeply from the trade war where business has dropped back to a 10-year low. Who is deciding that farmers deserve more help than manufacturers? How is controlling prices, deciding who benefits (and who does not) any different from what a communist or socialist state would do?
The point is that while Wall Street rants and raves about an Elizabeth Warren or Bernie Sanders socialist presidency, much of what they fear is already happening right before our eyes. As it is, we have already become a society where nearly every Orwellian prediction in the book "1984" has come to be. We have passively allowed our government to monitor our every movement, conversation, or phone call — all in the name of protecting us from another "9/11." On the economic front, it's the trade war and Trump. When are we all going to wake up?