Forget the stock market, internet, and whatever you might think is worth investing in. The good old college textbook beats them all. 

 

That boring first-semester hardcover and similar books have risen over 1,000 percent in price since 1977. Textbooks are a big business. Estimates for the total value of the textbook industry range from $7 billion to $9 billion. And just a handful of companies sell them. The five largest publishers are: Pearson Education, McGraw-Hill Education, Scholastic, Cengage Learning and Houghton Mifflin Harcourt. They have been around a long time, carry deep pockets and usually acquire any startups or smaller competitors in quick order. Some analysts compare them to drug companies because they have similar economics.

 

In the pharmaceutical sales model, for example, drugs are marketed to the decision makers — doctors, hospital pharmacies and the like. The patient, at least those with health insurance, end up paying the price, but much of those costs are paid for by the insurance company or Medicare. Medical decision makers' criteria are usually not how cheap or expensive a drug might be; instead, they select those drugs that are the most efficacious with the least number of side effects for their patients.

 

In the textbook industry, teachers (mostly professors), are the decision makers at colleges, and like doctors, could care less about the costs of a textbook to the student. They demand the most up-to-date educational information possible since they strive for academic excellence in the classroom.

 

It doesn’t help that today the information advances occur at such a rapid pace that most books are out of date by the time they are printed and in the hands of students.

 

There is another wrinkle that boosts the price of textbooks. Today, one in four colleges bundle their textbooks with an access code, which expires at the end of each semester. All the materials that a given student needs to participate in the classroom are put behind this access code paywall. Once you pay for the access code, you get your login ID. In return, the student gains access to workbooks and tests, in addition to the new textbook. It becomes essential to have this access in order to pass the course.

 

Fast forward to the next semester. For a new student beginning that same course, all the materials will have changed again, along with a new access code. The student looking to resell their old course material is out of luck. There is no re-sale market. It is simply useless. Many of the introductory courses that are part of the general education requirements for all students function in this way. These codes force students to buy books at retail prices at campus bookstores while walling off any chance to recoup part of the costs through resale.

 

Textbook prices have increased four times faster than the rate of inflation since 2006. At least 30 percent of post-secondary students buy their textbooks with financial aid money. Community college students are twice as likely to buy textbooks in the same manner.

 

Today, the average costs of textbooks per year, per student is $1,168. It is a pinch shared by public, primary and secondary education as well. Books have begun to be a major expense for every grade level. The costs are even worse for low-income school districts since standardized test requirements are based on these private-label, high-priced textbooks.

 

How does that work? It is a vicious circle: the school can’t afford the newest books, so students don’t get the information needed to pass standardized tests. As a result, the school gets lower funding because of poor test scores, keeping the new textbooks unaffordable. And on goes the cycle. It would be hilarious if we, the taxpayers, were not paying the bills.

 

Some say the system needs to be changed. As it is, the end user remains the student who bears the brunt of the cost. But since the buyer is the institution or instructor, all the book publishers need to do is maintain a good reputation, a cozy relationship with the teacher, and comparatively up-to-date new textbook editions.

 

Textbook companies, therefore, can continue to act as a quasi-cartel, if the formula of higher textbook prices is based on expanding college attendance and thus increasing demand for textbooks. Price really doesn’t come into it.

 

 

 

Student loans have now become the second-largest pile of consumer borrowing, after home mortgages. What's worse, it is the fastest growing slice of American household debt and shows no sign of slowing down.

 

Young Americans are going to college in droves. At the same time, the costs of higher education are at historical highs. That combination has become a lethal cocktail that could hamstring young workers over their entire life and along the way damage the overall economy.

 

Since the financial crisis and Great Recession over a decade ago, student loans have grown by almost 157 percent. Compare that to auto loans, which have risen 52 percent. In the case of mortgage and credit card debt, we have seen a decrease by about 1 percent.

 

At this point, the total loans outstanding amounts to $1.5 trillion, almost the same as this year's tax cut. If students graduate and land a good-paying job, so the theory goes, they should be able to service that debt and ultimately pay it off, even if it takes half their lifetime to do so. But, if you ask the 44 million Americans with student debt, that is not what's happening.

 

Many graduating students can only blame themselves for their predicament.  During the financial crisis and its aftermath, many students figured going to college would provide the skills that have now become the minimum requirement to land a well-paying job. What's worse, their parents -- who should have known better -- allowed their kids to pick and choose what they wanted to study. It turned out that many of those degrees (in liberal arts, for example), failed to provide enough money to even service their student debt load. Degrees that did, like post-graduate law and medicine, required much more study, money and effort to attain.

 

More alarming still is the rate of loan delinquencies. It is higher than all other household debt, if we measure it by failure to pay.  Over 10 percent of student borrowers have now failed to make their payments in the last 90 days or more. To put that in perspective, the delinquency rate on home mortgages stands at 1.1 percent.

 

Another problem with student debt is rising interest rates, which makes the cost of borrowing increase. Since the Fed started raising interest rates two years ago, undergrads have seen loan interest rates rise to 5 percent. It is even more (6.6 percent) for those who are working on graduate degrees.

 

Even the Fed is worried about the problem. Jerome Powell, the Chairman of The Federal Reserve Bank, explained it back in March when he testified before Congress. He pointed out that failing to pay your bills under the student loan program damages your credit. As a young person starting out, your credit rating is already shaky. Delinquencies could put you in a credit hole for a large part of your working life.

 

 As it is, 85 percent of college students work at paying jobs just to afford what their student loans don't cover. Many of them need to live with their parents because the costs of college are simply too high to manage on their own. As this debt mounts (and it will), it ultimately starts to crimp the overall economy.

 

Homeownership, for example, has declined because of student debt. "Household formations," as economists like to call it, among workers between 25 and 35 years old is stagnant, thanks to overwhelming debt payments. The entire generation of Millennials and beyond are loaded down with student debt, and it is limiting how much they can spend on goods and services. 

 

The only good news is that, unlike the mortgage debt crisis, student loans do not present a risk to the entire financial system. However, that may be small comfort to those who face a mountain of student debt repayments. My advice to parents, as well as their children, is to think long and hard before making a college decision.

 

If, for example, your child is not willing or capable of graduating with a degree in the hard sciences that have great job prospects (triple digit salaries), it may be much better to attend a vocational school. At least that way, the costs and debt load will be much lower and prospects for a good-paying job are somewhat brighter.

 

After this week's trade deal between the U.S., Mexico, and Canada, investors are waiting to see if China will now come to the table. What would it take for that to happen?

 

Mid-term elections could be the trigger. It wouldn't surprise me to see a deal before November — since the polls appear to favor the Democrats. Trump's tariff offensives, while supported by most of his base, are deeply disturbing to those who are feeling the brunt of foreign-trade retaliation.

 

Farmers, for example, and blue-collar workers in certain steel-related industries, are suffering. Many of them are also part of the 39 percent minority of Americans who support Donald Trump and his presidency. These predominantly white, uneducated voters might be swayed to vote against the GOP because of these tariff issues. That could mean a drubbing for the "Grand Ole Party" come November.  

 

A deal with China, even one that does little but save face, might be preferable to the president and his party than a big loss in the election booths. If one examines the successful deals the president and his men have negotiated thus far, we see some minor changes in the trade terms, but certainly not the massive overhaul in trade terms we have been promised practically every day for well over two years.

 

Minor fiddling around with auto manufacturing content and $40 million worth of reductions in Canadian barriers to milk imports (think American farm voters) is not a major overhaul of NAFTA. We have essentially cosmetic changes similar to those announced last week as part of the South Korea/U.S. trade agreement. 

 

It appears to me that we are simply witnessing a continuation of Trump's U.S. foreign policy of "Speak loudly but carry a tiny stick." Why should we not expect the same treatment in our on-going negotiations with China, as well as the European Community? A similar deal with China would have little to no impact on our terms of trade but would allow Trump to claim he has "solved our trade problems." It might also improve Republican chances in November.

 

As for the market's reaction, we celebrated with all the indexes soaring at the open on Monday. The S&P 500 Index, at one point, was just five points away from making a new all-time high. The Dow Jones Industrial Average did make a new high on Tuesday and another one on Wednesday. The other indexes were more subdued as investors sorted through the potential winners and losers of Trump's new U.S.-Mexico-Canada Agreement (USMCA).

 

Taking a 30,000-foot view of the markets, what I see are positive returns for six straight months. If we look back to 1928, there have only been 26 prior six-month periods with that kind of winning streak. In the month that followed these events, the S&P averaged a gain of 0.95 percent with positive returns 69 percent of the time.

 

Over the following three months, the index averaged a 3.92 percent gain with positive returns 85 percent of the time. There have been only five prior streaks where the index was up in each month from April through September. In those instances, the average gains were even better.

 

Next week, we begin the quarterly beauty pageant of earnings results for this year's third quarter. Depending on the results, we could see a continuation of the rally and a slow grind higher or, if earnings are disappointing, a sharp, short, pullback, so strap in and get ready.

 

Here is a trick question. What did Aretha Franklin, Tupac Shakur, Martin Luther King, Jr. and Abraham Lincoln have in common? They are all famous people who died without a will.

 

In the case of the "Queen of Soul," she died in August leaving $80 million and according to Michigan state law, those assets should eventually be divided up among her four children. In the meantime, the entire estate must go through the probate process, which is both expensive and time-consuming.

 

Some other famous people who failed to prepare their heirs and beneficiaries for their eventual death are: Jimi Hendrix, Bob Marley, Howard Hughes Sonny Bono, James Brown, Prince, and Michael Jackson. Some of these unclaimed estates are still going through the probate process and could remain there for years to come.

 

One might assume that those with a great deal of money would make sure that their estate was protected. After all, they have the money and the opportunity to hire the expertise they needed to put things in order. Obviously, in the above cases, that wasn't true.

 

Therefore, it should come as no surprise that roughly 64 percent of Americans don't have a will. That number is even higher for younger people (over 70 percent for those 45-54 years old). The most common answer for those questioned is that they simply have not gotten around to it. About 25 percent just don't feel that it is urgent.

 

Some other reasons people procrastinate are that it is depressing to face the eventuality of your own death. Others believe that lawyers are expensive and wills and such are costly. The same people usually underestimate the worth of their assets, believing they don't have much to distribute. In my experience, for example, many of my clients fail to include their largest asset, their home, when computing how much they are worth.

 

Typically, a will spells out who will serve as the executor, who will receive your assets, and under what terms. If you die without one, you are considered intestate. Under intestacy laws, who gets your assets is pre-determined, according to the degree of your relationships. You are also at the mercy of whatever state and/or Federal income and inheritance taxes may be due as well as the legal expenses in settling the estate through a probate court.

 

At our shop, most clients go through the estate planning process as a matter of course. We make sure that every investment account that we manage has an updated beneficiary listed but there is much more to it than just that. I asked Zack Marcotte, our financial planner, how he handles new clients without an estate plan.

 

"For most people, I like to see they have their basics covered — a will, a power of attorney, health care proxy, and don't forget to list of beneficiaries on every account that allows it, specifically your retirement accounts and insurance policies," he explained.

 

"One of the biggest issues I tend to see is neglecting to update beneficiaries after a divorce, death, or other change in circumstances; so make sure you look them over once a year. These are the basics that will cover most of the gaps people are exposed to; however, you should always seek legal counsel to provide personalized advice."

 

Today marks the end of the third quarter for stocks in 2018. But it is the fourth quarter that will determine what kind of year it will be. Let's place our bets.

 

First, we should look at what could go wrong over the next three months. Tariffs probably lead the list. More of them, (although the dollar amount is minimal in the scheme of global trade), would be bad for sentiment within the global stock markets. Mid-term elections are a toss-up, but simply not knowing the outcome I count as a negative. Quarterly earnings results might also hold some risk for investors. And finally, the latest investor sentiment readings (a contrary indicator) are as high as they were back in January before the stock market sell-off.

 

Since there is no way of knowing what our esteemed president will do on the trade front, let's simply acknowledge that risk and move on. Mid-term elections are also an unknown quantity, but my bet is that the Democrats will take the House, while the GOP will maybe hold the Senate if they're lucky. In all likelihood, after a bit of volatility, the markets will move on regardless of results.

 

As for earnings, they may be a bit different than the pleasant, upside surprises we have become used to over the last two years. Negative pre-announcements by various companies are ticking up. As of this week, 74 out of 98 S&P 500 companies, according to FactSet, have guided lower for the third quarter. So, what gives on the earnings front?

 

It is simply confirmation of what Federal Reserve Chairman Jerome Powell told us this week about Trump's trade war: "We've been hearing a rising chorus of concerns from businesses all over the country about disruption of supply chains and materials cost increases."

 

Bottom line: you don't actually need tariffs to be implemented to impact economic growth. Trump's constant threats and tweets about what he might or might not do on the trade front is creating an atmosphere of uncertainty. Corporations are becoming more cautious, guiding down expectations, and generally delaying expenditures until they see what happens.

 

Right now, investors expect third-quarter revenue growth to average 7 percent, while year-over-year earnings growth should come in at around 20 percent. Sounds good, doesn't it? But those numbers are down from second quarter results of 10 percent revenue gains and 25 percent earnings growth. The fourth quarter expectations are even lower with 6 percent revenue growth expected and 17 percent gains on the earnings front.

 

In the past, I have discussed the phenomena of "peak earnings" and how the wonderful results of the past few quarters have been artificially inflated by one-off events. The Republican tax cut giveaways to the nation's corporations were squandered on buy-backs of shares, increases in dividends, and mergers and acquisitions, but those effects are winding down.

 

Despite the effort in Congress this week to make those tax cuts permanent (in hopes of propping up the markets until after the mid-term elections), it is doubtful the Senate will go along with it. Adding another $750 billion or so to the $1.2 trillion it has already cost to cut taxes this year seems to be a "bridge too far" even for a party that has abandoned all semblance of fiscal integrity.

 

The U.S. Advisory Sentiment data now places the bulls at 60.6 percent, the most bulls counted since Jan. 18, 2018, and the seventh straight count above 55 percent.  Usually, readings above 55 percent indicate caution. Over 60 percent signals elevated risk and the need to take defensive measures. 

 

On the surface, all these arguments should set us up for a bear market in the last quarter. However, every one of these arguments has been around for at least the last three months and look what the markets have done. The Dow is up 9 percent, the S&P 500 Index up 7.5 percent, and NASDAQ gained 7.7 percent. Bottom line: the markets have shrugged off the negatives and moved higher. Why should the fourth quarter be any different?