Saturday, April 30, 2016

Thank You, Warrior Lodge !

Nothing - absolutely nothing - brings a bigger tear to my eye or bigger lump in my throat than our brave American infantry soldiers!  Of course, governments always encourage such emotions among their citizens, even France.  It is a useful opiate for the taxpayers and the mothers of sons who serve.  But, those emotions can also be raw and real.   Here is a wonderful opinion by a French solder of his fellow American soldiers.  (It has been copied from the "Warrior Lodge" website, with gratitude.)

DoD Photo

A French Soldier's View of US Soldiers in Afghanistan

A French Soldier's View of US Soldiers in Afghanistan.

What follows is an account from a French ISAF soldier that was stationed with American Warfighters in Afghanistan sometime in the past 6 years. This was copied and translated from an editorial French newspaper.  Grammatical errors have been kept in-tact to preserve authenticity.

A NOS FRERES D'ARMES AMERICAINS

"We have shared our daily life with two US units for quite a while - they are the first and fourth companies of a prestigious infantry battalion whose name I will withhold for the sake of military secrecy. To the common man it is a unit just like any other. But we live with them and got to know them, and we henceforth know that we have the honor to live with one of the most renowned units of the US Army - one that the movies brought to the public as series showing "ordinary soldiers thrust into extraordinary events". Who are they, those soldiers from abroad, how is their daily life, and what support do they bring to the men of our OMLT every day? Few of them belong to the Easy Company, the one the TV series focuses on. This one nowadays is named Echo Company, and it has become the support company.



They have a terribly strong American accent - from our point of view the language they speak is not even English. How many times did I have to write down what I wanted to say rather than waste precious minutes trying various pronunciations of a seemingly common word? Whatever State they are from, no two accents are alike and they even admit that in some crisis situations they have difficulties understanding each other. Heavily built, fed at the earliest age with Gatorade, proteins and creatine- they are all heads and shoulders taller than us and their muscles remind us of Rambo. Our frames are amusingly skinny to them - we are wimps, even the strongest of us - and because of that they often mistake us for Afghans.

And they are impressive warriors! We have not come across bad ones, as strange at it may seem to you when you know how critical French people can be. Even if some of them are a bit on the heavy side, all of them provide us everyday with lessons in infantry know-how. Beyond the wearing of a combat kit that never seem to discomfort them (helmet strap, helmet, combat goggles, rifles etc.) the long hours of watch at the outpost never seem to annoy them in the slightest. On the one square meter wooden tower above the perimeter wall they stand the five consecutive hours in full battle rattle and night vision goggles on top, their sight unmoving in the directions of likely danger. No distractions, no pauses, they are like statues nights and days. At night, all movements are performed in the dark - only a handful of subdued red lights indicate the occasional presence of a soldier on the move. Same with the vehicles whose lights are covered - everything happens in pitch dark even filling the fuel tanks with the Japy pump.Here we discover America as it is often depicted: their values are taken to their paroxysm, often amplified by promiscuity and the loneliness of this outpost in the middle of that Afghan valley.



And combat? If you have seen Rambo you have seen it all - always coming to the rescue when one of our teams gets in trouble, and always in the shortest delay. That is one of their tricks: they switch from T-shirt and sandals to combat ready in three minutes. Arriving in contact with the enemy, the way they fight is simple and disconcerting: they just charge! They disembark and assault in stride, they bomb first and ask questions later - which cuts any pussyfooting short.Honor, motherland - everything here reminds of that: the American flag floating in the wind above the outpost, just like the one on the post parcels. Even if recruits often originate from the hearth of American cities and gang territory, no one here has any goal other than to hold high and proud the star spangled banner. Each man knows he can count on the support of a whole people who provides them through the mail all that an American could miss in such a remote front-line location: books, chewing gums, razorblades, Gatorade, toothpaste etc. in such way that every man is aware of how much the American people backs him in his difficult mission. And that is a first shock to our preconceptions: the American soldier is no individualist. The team, the group, the combat team are the focus of all his attention.

(This is the main area where I'd like to comment. Anyone with a passing knowledge of Kipling knows the lines from Chant Pagan: 'If your officer's dead and the sergeants look white/remember it's ruin to run from a fight./ So take open order, lie down, sit tight/ And wait for supports like a soldier./ This, in fact, is the basic philosophy of both British and Continental soldiers. 'In the absence of orders, take a defensive position.' Indeed, virtually every army in the world. The American soldier and Marine, however, are imbued from early in their training with the ethos: In the Absence of Orders: Attack! Where other forces, for good or ill, will wait for precise orders and plans to respond to an attack or any other 'incident', the American force will simply go, counting on firepower and SOP to carry the day.

This is one of the great strengths of the American force in combat and it is something that even our closest allies, such as the Brits and Aussies (that latter being closer by the way) find repeatedly surprising. No wonder is surprises the hell out of our enemies.)



We seldom hear any harsh word, and from 5 AM onwards the camp chores are performed in beautiful order and always with excellent spirit. A passing American helicopter stops near a stranded vehicle just to check that everything is alright; an American combat team will rush to support ours before even knowing how dangerous the mission is - from what we have been given to witness, the American soldier is a beautiful and worthy heir to those who liberated France and Europe.



To those who bestow us with the honor of sharing their combat outposts and who everyday give proof of their military excellence, to those who pay the daily tribute of America's army's deployment on Afghan soil, to those we owned this article, ourselves hoping that we will always remain worthy of them and to always continue hearing them say that we are all the same band of brothers".
We seldom hear any harsh word, and from 5 AM onwards the camp chores are performed in beautiful order and always with excellent spirit. A passing American helicopter stops near a stranded vehicle just to check that everything is alright; an American combat team will rush to support ours before even knowing how dangerous the mission is - from what we have been given to witness, the American soldier is a beautiful and worthy heir to those who liberated France and Europe.
To those who bestow us with the honor of sharing their combat outposts and who everyday give proof of their military excellence, to those who pay the daily tribute of America's army's deployment on Afghan soil, to those we owned this article, ourselves hoping that we will always remain worthy of them and to always continue hearing them say that we are all the same band of brothers".



Everyone complains about the quality of 'the new guys.' Don't. The screw-ups of this modern generation are head and shoulders above the 'high-medium' of any past group. Including mine.So much of 'The scum of the earth, enlisted for drink.'

This is 'The Greatest Generation' of soldiers.

They may never be equaled.

Friday, April 29, 2016

"Too Good" = Bad

A cult always ends in either sadness or ridicule.  Sometimes, they implode -- think about the Jonestown tragedy in 1978.  Sometimes, cults just lose their attraction -- think about the 1837 classic book by Hans Christian Anderson called The Emperor's New Clothes.

Most money managers insist they never invest in "cult-stocks."  At the same time, they will pay 70 times the earnings-per-share (EPS) to buy a share of a cult and then sell it for only 10 times EPS.  That is the case of Apple (AAPL).  Yes, Apple stock has made a lot of money for a lot of people.  That's because it became a cult stock, with a mystical leader named Steve Jobs.

I can offer an educated opinion on which companies will experience increased sales and EPS, but I have no idea which stocks will become a cult-stock.

Yesterday, Apple reported its first quarter's financial results, which would have been fine, until compared to earlier quarters.  Oh, no, the emperor is naked!  Apple is just another company!?!?  Then, another bombastic billionaire pronounced Apple's disappointing financial results were the fault of China and that he was selling all his Apple stock.  Not content to shut-up at that point, he then added that a "day of reckoning" is approaching for the stock market.  The Dow promptly dropped 200 points.

For the first time in years, Apple is beginning to look attractive to me, as the "true believers" get flushed away from the stock.

But, is the stock market facing a "day of reckoning?"  Absolutely!  It is called the business cycle.  A recession is coming, but not today and not in the near future.

Wednesday, April 27, 2016

A Black Problem

From my perch overlooking the Chesapeake Bay, where it drains into the Atlantic Ocean, where the first English colonists landed in 1607, and where numerous naval battles occurred during the Revolution and the War of 1812, I have seen all manner of naval vessels, from aircraft carriers to submarines, as they glide silently past our beach.

Today, the most common ships passing offshore are container ships.  But, just a few short years ago, it was coal freighters.  The worldwide demand for coal was so strong that coal freighters had to wait in line for days -- to get a place in the harbor where they could take on coal.  The demand for coal was greater than our ability to deliver the coal, most of which arrived by train from West Virginia.  I recall one Sunday afternoon counting 22 coal freighters waiting to take on coal.  Today, I see zero!

Since 2011, twenty thousand jobs have been lost in the coal business.  The combined market value of all coal companies is down a whopping 94% in those five years.  Indeed, for the first quarter of this year, coal has fallen 38% since the same period last year.

So, it is not surprising when huge companies like Peabody take bankruptcy.  Peabody was the largest coal company in the United States.  One could just shrug their shoulders and assume that is just the price of capitalism, but there is one problem -- who is going to pay for cleaning up the pollution left behind?  Some states wisely required cash bonds to clean up the pollution before the polluting could begin.  Some states unwisely did not.  Nobody knows if the cash bonds will be sufficient to clean up the mess.  The environment desperately needs to be protected by the bankruptcy courts, which is one strange state of affairs.  Only the bankruptcy court can require creditors to wait before being repaid, until the pollution is cleaned up, but how long will that take and how will that be measured.

What a mess - both environmentally and legally!

POST NOTE:  I have learned there is a new regulation, requiring coal freighters to moor somewhere else, far away from Navy sea lanes for national security reasons.  That is the reason I see none from my perch.  Nonetheless, the market value of coal companies has still dropped 94% for a reason, and there is still a risk to the environment if the coal companies disappear.

Monday, April 25, 2016

Snoozzzzzzz . . .

2016 started off the year in the wrong direction and quickly picked up speed, reaching the bottom on February 11th.  Since then, the S&P 500 is up almost 14%.  What happened?

We started the year with a worldwide collapse in commodity prices, primarily due to a suspected collapse of China.  Since then, there has been a dramatic rise in commodity prices, including oil, steel, and agricultural products.  China may indeed collapse some day due to their strange set of debt problems, as some argue, but it is not today! In fact, it's property market is showing signs of stabilization.

As a result, stock markets in commodity-producing nations (MSCI Emerging Markets index) are up 25% and still look attractive, with a 3% yield and a price-earnings ratio of only 14.  The new survey of Wells Fargo's International Business Indicator shows improved sentiment, with 64% of CEOs expecting improved international trade for their companies.

The pundits remind us that "corporate profits are the mother's milk of stock prices," which is a good reminder of what's really important.  But, 78.3% of the companies reporting for the first quarter show earning that are better than expected.

Even the internal dynamics of the market are looking positive, with all ten sectors of the S&P 500 trading above its 200-day-moving average.  This has happened four times since 1993, with an average gain over 16% over the following twelve months.  Small cap stocks are also looking stronger.

Of course, will all this be enough to avoid the "summer-swoon" we ordinarily see, beginning in May? Who knows?  But, I do suspect it will strengthen the normally weakest season of the year on Wall Street and put the market in a better position whenever the bulls do return.

Regardless, I'm sleeping well . . .

Friday, April 22, 2016

Precluding the Inevitable ?

It is hard enough to legislate or regulate behavior at any time, but it is almost impossible when wearing blinders.

No question, it is a heart-breaking waste of life when someone intentionally overdoses themselves with painkillers.  Therefore, we have made access to painkillers much more difficult for everybody.  It is far better for more people to suffer pain, as long as we keep a certain few from abusing painkillers?

At the same time, has anybody noticed the percentage of suicides committed by using guns has decreased.  A new report by CDC shows guns accounted for 55.4% of suicides by men in 2014, down from 61.7% in 1999.  For women, it has decreased even more dramatically, from 36.9% to 31.0%.

Since more people are committing suicide by using painkillers, can we then reduce regulation of guns?

The question is not serious, of course.  The question is whether people, who want to die, cam be denied.  If we outlaw both guns and painkillers completely, will we then forbid access to tall buildings or put barbed wire around every mile of railroad track or along every bus line?  Shall we put cushions around all bridge abutments?  (The Bible already says suicide is a sin, but does that really matter to anyone who wants to die.)

I remember when my mother was dying slowly.  We had take her to a pain management doctor.  Just getting into the car was a painful horror for her.  Plus, every bump in the road or turn of the road caused her more pain.  We were creating pain to get pain relief.  The doctor was obviously more concerned with following the law about pain relief, than actually relieving pain.

Since a person, who wants to die, cannot be denied, should we force them to blow their heads off or let them slip away in a pleasant stupor?

Thursday, April 21, 2016

Nice Guys ?

Nice guys don't always finish last!

So far this year, bank stocks are down about 6.4%.  Revenues are down about 10%.  J.P. Morgan was down 3%, Bank of America was down 7%, Citigroup was down 11%, and Morgan Stanley was down 21%.

Oh, yeah . . .  and Goldman Sachs was down 40%.

Wednesday, April 20, 2016

Party Hardy ??

You will recall there are two types of market analysts, i.e., technical and fundamental.  To a technical analyst, they can see the future by using charts and graphs.  To a technical analyst, looking at this chart tells them the market is behaving normally and should go higher:

Chart of the Day
You can see there is considerable room for the Dow to rise before it hits the red resistance line.  And, notice that it actually broke through the green support line but fortunately bounced back quickly.  This underscores just how vicious the downdraft was in January.  The collapse of the oil market pushed the Dow below its natural level of support.

There are two types of fundamental analysts, i.e., bearish and bullish.  (Sometimes, analysts change types but not often.)  The bears - they will be with us always.  The sky is always falling somewhere!  Their strength is that they keep more cash on the sidelines, which cushions both the tops and bottoms.  Their weakness is that they assume nobody has the answers, if they don't have the answers.

Bulls are also a constant on Wall Street, even though some pundits just call them "suckers."  Their weakness is that they keep too little cash on the sidelines.  Their strength is their assumption that things will be fine, even though they have no idea how that will happen.  Paraphrasing Warren Buffet, who said he doesn't know where the stock market will be next week, but he does know where it will be ten years, which is UP.

Today, the technical analysts are agreeing with bullish fundamental analysts - Party On, Garth!

Monday, April 18, 2016

Doomed In Doha ?

Even in an age of cynicism, hope sometimes still triumphs over wisdom.  Can you believe -- there were actually some investors who hoped something constructive would come out of the Doha conference of oil-producing nations.  Fat chance!

In a market glutted with over-supply, everyone could see production cuts are necessary.  Of course, there was no agreement on who would bear the pain of production cuts, which are nothing more than revenue cuts.  Since Iran was held out of the market for so long by economic sanctions, they feel entitled to increase production, while other nations must cut production.

It is no coincidence that the conflict came down to Saudi Arabia versus Iran.  They are the two dominant nations in their respective branches of Islam and very competitive with each other.  Saudi Arabia is the Sunni leader, while Iran is the Shiite leader.  For Saudi Arabia to accept the pain of production cuts, while Iran increases production, it would be seen as a triumph of Shia over Sunni.  Apparently, nations can compromise on economic issues but not religious issues.

Happily, the stock market did not have its hopes too high.  Even though oil has fallen 6% overnight, a huge drop, the futures market indicates only a half-point loss in stocks.  There must be more than a few cynics on Wall Street?

Saturday, April 16, 2016

Caribbean Misery

Sometimes, my inner Mr. Spock fails me.  (You'll recall him as the analytical, logical, and unemotional character in the classic Star Trek series.)  I try to channel him on any analytical work that I do, but my inner-Spock failed me when studying the problem of Puerto Rican bonds.

Puerto Rico is a small country of only 3.5 million people, whose government has issued an astronomical and unsustainable $80 billion in debt.  That population is now actually decreasing, as people "desert a sinking ship," most migrating to the U.S. and I don't blame them.  But, population or birth rate is what got them into this pitiful condition.

This is a very different situation than Greece, where voters kept voting themselves more and more benefits, until their fast-growing debt crushed their slow-growing economy.  The Puerto Rican voters didn't vote themselves too many benefits, except for the luxury of creating too many new Puerto Ricans.  Greece can survive by lowering their standard of living to Puerto Rico's current level, but Puerto Rico cannot lower their standard of living without creating empty stomachs.

The short-term solution to the Puerto Rican debt burden is force bondholders, which are mostly hedge funds, to write off some portion of that debt, but how much is enough for island nation to recover?  The long-term solution to this problem is to carpet-bomb the country with condoms.  They absolutely must control their birth-rate.

I remember listening to a debate about hunting sweet-faced wild deer.  One argument was that, no matter how large a land area, the deer will eventually over-populate it.  That was why they should be hunted, to control their population growth.  That is the case for Puerto Rico -- too many mouths, but it was not Greece's problem.  So, the difference must be sociological and not biological, but what is it?

Mr. Spock knows what to do about Greece.  Mr. Spock does not know what to do about Puerto Rico, where the human suffering could be too great without U.S. assistance.  The decision is not analytical but emotional.  Is it our job?  They are not a state, but they are a U.S. territory, and their citizens are also U.S. citizens.

Whatever we do, we should require both a balanced budget amendment and free family-planning in the future .

Thursday, April 14, 2016

Golden Predictions

There is a huge investment bank that just agreed to pay a $5 BILLION penalty for its actions in selling mortgage-backed-securities -- you know, those securities that ignited the global financial crisis in 2008/9.  (In my less-than-humble judgment, they escaped blame far too easily.)  Still, they have a great research department, which predicts:

1.  The S&P 500 will rise about 2.5% over the next twelve months.  (No collapse)
2.  GDP growth in the U.S. will rise only slightly from 2.1% this year to 2.2% next year.  (Steady)
3.  GDP growth in Japan, the U.K., and the Euro area are also essentially flat for two years.
4.  GDP growth in China will continue to slow from 6.9% last year to 6.1% in 2018. (Big deal)
5.  Interest rates will rise about half a point in Europe & Japan but a full point here within 12 months
6.  The Euro will lose 16.3%, while the Yen will appreciate 15.7% over the next twelve months.
7.  Oil with increase to $57/bbl in the same time frame.  (Let us pray)
8.  Gold and cooper will lose about 18% of their value over the next twelve months.

I would not argue with any of those predictions, except that I don't believe the Fed will have four quarter-point increases in a year when GDP growth is only 2.2%.

My prayer is that their prediction of oil increasing to $57/bbl is correct.  Yes, that would increase the price-at-the-pump for the otherwise healthy consumer sector, but it would also "save" the energy sector and lessen the likely huge loan losses at the banks, which reduces credit availability for everybody else.

Wednesday, April 13, 2016

L-T-C Financial Plan

As a CERTIFIED FINANCIAL PLANNER (R) professional, I approach the subject of long-term-care for the elderly very seriously.  There is little room for humor in this subject, but there is SOME.

Say you are an older senior citizen and can no longer take care of yourself and the government says there is no Nursing Home care available for you. So, what do you do? You opt for Medicare Plan G.

The plan gives anyone 75 or older a gun (Plan G) and one bullet. You are allowed to shoot one worthless politician. This means you will be sent to prison for the rest of your life where you will receive three meals a day, a roof over your head, central heating and air conditioning, cable TV, a library, and all the Health Care you need. Need new teeth? No problem. Need glasses? That's great. Need a hearing aid, new hip, knees, kidney, lungs, sex change, or heart? They are all covered!

As an added bonus, your kids can come and visit you at least as often as they do now! And, who will be paying for all of this? The same government that just told you they can't afford for you to go into a nursing home. And you will get rid of a useless politician while you are at it. And now, because you are a prisoner, you don't have to pay any more income taxes!


Is this a great country or what? Now that I've solved your senior financial plan, enjoy the rest of your week!

Maybe, this "joke" says more about the uselessness of obstructionist politicians or the growing need for more capital punishment, but I still got a smirk out of it!

Monday, April 11, 2016

The Panama Papers

The mysterious release of 11.5 million pages of confidential documents from a Panama-based law firm specializing in offshore trusts has, once again, focused attention of this murky world of money-on-the-run.  The popular image of such offshore trusts is disloyal Americans hiding money from the IRS.  That is seldom the case anymore, as the IRS requires disclosure of all such interests and imposes draconian criminal offenses for violations.  But, that was never the primary reason for offshore trusts.

Avoiding public scrutiny is important for offshore trusts.  Investors who want to take a major position in a stock might use it, although they would have to disclose it once they own 10% of the stock.  Investors who use a proprietary trading strategy might need a secret trust, but those are exceedingly rare.

But, secrecy is often necessary -- from governments in unstable countries -- from family, especially in anticipation of divorces -- and from creditors.  Setting up a trust to defraud creditors is illegal, but often done.  When offshore trusts are owned by other offshore trusts in other jurisdictions, then there are multiple "corporate veils to pierce," which can take many years.

In the world of financial planning, the vast majority of planners are decent and honest, although a small number will always be dishonest.  (A slightly larger number are "merely" unethical.)  My guess is that half of them operate Ponzi-schemes or commit outright fraud.  But, the other half sell "asset protection trusts" -- a type of offshore trust to both hide assets from everybody in general and to  defraud creditors in particular.  They cheat clients by taking both title and ownership of assets before disappearing or, even more galling, simply ignoring the previous owner, who no longer owns anything.  Anytime an advisor tells you that you need an asset-protection trust . . . RUN!

Offshore trusts will be with us forever, which may not be all bad, especially if they are bait for dishonest politicians.

Sunday, April 10, 2016

"Smart" Beta ??

Like fashion, some investment strategies become stylish for a while and then fade away.  A hot strategy over the last few years is called "factor-investing."

It is based on the notion that investment performance can be improved by slavishly adhering to certain base beliefs.  For instance, there are several studies that show small-cap stocks perform better than large-cap stocks over time (but don't ask about risk).  There are other studies that show dividend-paying stocks (value stocks) perform better than non-dividend-paying stocks (growth stocks).  And, there are other studies that indicate stocks are more likely to appreciate if they have already appreciated (momentum stocks).  Therefore, they buy small-cap stocks that pay dividends and are already more expensive.  That leaves a relatively small universe of stocks to study.   This is also known as "Smart Beta," suggesting it is the smart way to get stock market performance.

Indeed, one particular family of mutual funds has recruited a ragtag army of financial gurus, who are "true believers" and speak with complete confidence that factor-investing is the secret sauce for better investing.  And, don't argue with these disciples.  They are evangelical, indeed.

One of the grand old minds of investing remains the 86-year-old curmudgeon called Jack Bogle, founder of Vanguard, who is noted for his succinctness.  He said "Smart beta is stupid;  there's no such thing.  It's an idiotic phrase.  Quoting Shakespeare, I guess:  It's a tale told by an idiot, full of sound and fury, signifying nothing."  Any questions?

My understanding of Bogle's argument is that Smart Beta assumes that whatever relationships have existed in the past will continue to exist in the future.  My argument is that slavish devotion to any particular strategy over long periods leaves investors blind to reality.  Jack is right!




Q1; The Snapback Quarter

For those long-suffering readers who want to read my quarterly column for Inside Business, it lives here:

http://pilotonline.com/inside-business/flinchum-q-the-snapback-quarter/article_8a03eeff-c6dd-5750-80ca-966bd45c2059.html  

Friday, April 8, 2016

The Fiduciary Rule

Another reader asked me to discuss the new Department of Labor (DOL) requirement that IRAs be subject to the Fiduciary Rule, rather than the Suitability Rule.

Suppose you and your financial advisor decide that your portfolio needs a mid-cap growth mutual fund, but one of the funds offers an all-expense trip to Hawaii for advisors IF they put your money into that particular fund.  Under the Suitability Rule, the stockbroker is permitted to recommend the mutual fund offering the free vacation, but there is no requirement to tell the client that the broker is earning something extra, like a vacation.  If it is a mid-cap growth mutual fund, it must be "suitable."  Under the Fiduciary Rule, however, the stockbroker is required to act in the client's best interest, which would require the broker to recommend the best-rated fund with the lowest relative expenses, plus other factors like management turnover, track record, etc.  While it is still a largely subjective process to select a fund under the Fiduciary Rule, the free vacation should not be part of the process, and it must be fully disclosed to the client.

Also, suppose you want your stockbroker to buy some bonds for your portfolio, and he calls you up to say he just bought you a bond with a face value of $10,000 and only charged you $9,900.  Under the Fiduciary Rule, he has to inform you that he only paid $9,700 for the bond and made an extra $200 off you.  (This is called a "mark-up.")  Under the Suitability Rule, he doesn't have to tell you about the hidden $200 profit.

This new ruling by DOL affects stockbrokers, not registered investment advisors (RIAs), because we are already subject to the Fiduciary Rule,   Some investors just remember that there are zero hidden fees with RIAs!  

That is not true for stockbrokers.  When this new DOL requirement becomes effective next year, even stockbrokers will have to disclose ALL fees -- but only for IRAs and other tax-deferred accounts.  They will still be able to impose hidden fees on regular taxable accounts.,

Naturally, stockbrokers have been fighting this ruling.  They argue the brokerage firms will no longer allow their brokers to make recommendations anymore.  The broker might just  say "here are ten mid-cap growth mutual funds to pick from" without making any recommendation.  The brokerage firms predict that small IRAs will be orphaned or forced online without any professional guidance from either stockbrokers or RIAs.  You know . . . the sky is falling argument.

Is the new DOL ruling a good thing?  Absolutely!

But, it needs to be extended to include all investor accounts.

Thursday, April 7, 2016

Inverted Good Sense?

A reader requested that I explain the controversy about "tax inversions" but without wading through a bunch of numbers.  That's a tough assignment, but here goes:

A tax inversion occurs when a large company in a high tax nation buys a smaller company in a low tax nation and changes their headquarters to the low tax nation.  (They don't actually move their headquarters, just formerly declare it is located in the low tax nation.)  The larger company saves a great deal of money in taxes by doing this.  Just as the CEO is obligated to reduce his interest costs, rental costs, labor costs, and all the other costs, they are also obligated to reduce their tax cost.  After all, it is just another cost.  That's the Republican side of the controversy.  The Democratic side is that these fat, over-paid CEOs enjoy all the benefits of America but are too selfish to pay their fair share of the costs.

Frankly, that is the wrong argument.  The problem with tax inversions merely reflects of the problem of the corporate tax code.  We should be talking about updating that thirty-year-tax code to the modern economy.  Republicans argue our stated corporate tax rates are the highest in the developed world, and they are right.  Democrats argue that the corporate tax code has so many tax breaks in it that no corporation pays the highest marginal tax write.  In aggregate, Democrats argue that the effective tax rate for corporations is really about half the published tax rate, and they are right.  I'm inclined to agree with the Republican argument, because the success of tax inversions clearly validates their argument.  The good news is that both political parties agree the corporate tax code needs to revamped for the modern economy.

The bad news is that they don't agree on anything else.  Assuming we can "wade through" a grand total of two numbers, here they are:  25% and 28%.  Republicans argue the highest marginal tax rate for corporations should be 25%, while Democrats argue it should be 28%.  Since they are so close, a reasonable person would think they could compromise at 26.5%, but that involves a "compromise" - yuck!!

The real conflict revolves around the infamous tax breaks for corporations.  The Republicans want to preserve those breaks, while the Democrats want to abolish them.  I'm inclined to agree with the Democrats on this.

 So, what's going to happen?  In an election year, that's a silly question!

Friday, April 1, 2016

Jobs Friday

If it is the first Friday of the month, then it must be "Jobs Friday" when the Bureau of Labor Standards releases its monthly employment report.

Today, we learned that the American economy produced 215 thousand jobs last month, which is slightly more than expected.  The new jobs are largely (80%) in the service sector.  The manufacturing sector actually lost 29 thousand jobs.  Construction and healthcare gained 39 thousand jobs each.

Republicans are happy because the Labor Force Participation Rate increased, from 62.9% to 63.0%.  Of course, they wish it had been greater, but so do the Democrats.  The difference is that Republicans feel people get fat and lazy on unemployment benefits and other entitlements.  They argue a cut in both entitlements and corporate taxes would help, and they are right.

Democrats are happy because average hourly earnings increased 0.3% last month, a healthy increase. Worker incomes have been stagnant for far too long.  Remembering that inflation is relatively good, especially compared to deflation, the easiest path to inflation is thru wage gains.  We need that, almost as much as the workers need some wage growth.

Both Republicans and Democrats are unhappy that the U-6 level of unemployment, counting the marginally employed (part time workers) and those who have given-up finding a job, rose from 9.7% to 9.8%.  These are truly the saddest cases.  They justify life-long education!

But, if we remove our red- or blue-tinted glasses, is it a good "Jobs Report" or not?
It is absolutely a good report!
Our labor market is strong, indeed.

The question should be - if our labor market is so strong, why is GDP growth so slow?

Thursday, March 31, 2016

From Small Packages

Pound for pound, Janet Yellen is arguably one of the most powerful leaders in the world.  Twenty-five months ago, this diminutive economist became Chairman of the Federal Reserve, succeeding Ben Bernanke.  One of his priorities was increased transparency for the Fed, by encouraging Board members to give speeches and to stimulate intellectual discussion.  Of course, the public simply got confused -- listening to both hawkish and dovish Board members.  What was the Fed really going to do?

Tuesday, Chair Yellen spoke before the New York Economics Club and slammed the door on that confusion.  She made it clear that SHE speaks for the Fed!  As soon as her speech was released, the stock market started rising.  Single-handed, she created billions of dollars in increased wealth for investors.  Thank you, Dr. Yellen!

Additional confusion revolved around how many times the Fed would increase interest rates this year.  When they increased rates last December, for the first time in seven years, they expected four more increases this year.  (I predicted at the time the Fed could not possibly do that!)  Tuesday, Chair Yellen acknowledged one or two rate increases was all the economy could sustain.  (She'll be lucky to get one this year!)  Still, the stock market sees fewer interest rate increases this year as good news!

So, two good things happened Tuesday.  Confusion about whose opinion actually matters was reduced, and clarity was improved that the Fed is not obligated to four interest rate increases this year.  That's a lot of good news.  Good job, Janet!




Wednesday, March 30, 2016

A Too-Quick Two Years

As a teenager, one of my role models was "Mr. Spock" of the TV series Star Trek.  He tried to lead an emotion-free life.  As silly as it sounds, I thought of him often when serving in the Army.  The facts are facts, and emotions are emotions, and never the twain shall meet -- works better in theory than in practice.

It was two years ago today that my Mother died, and I still think about her frequently.   Every single day, in fact.  But, time spent remembering her is time NOT spent studying the latest financial planning techniques or breaking stock market data.  It is illogical, as Mr. Spock would say, to spend time on non-productive activities, like remembering your Mother.

While time spent remembering her kindness or her sly little grin produces no revenue, it does help me to understand my clients.  There is more to financial planning than the latest technique.  Many times, I have seen clients do absolutely illogical things -- illogical to me but consistent with their own family dynamics or their own moral code.  My job is to help them understand that pure logic is not controlling their decision, but then help them execute whatever decision they make, whatever is logical to them.

While I can try to keep my emotions in a tidy little box, it is illogical and unfair to expect others to do the same.  My job is to help them work with these emotions/demons as logically as possible.  Remembering my Mother helps me do my job.

Thanks, Mom!


Monday, March 28, 2016

Steady As She Goes

As a longtime member of the National Association of Business Economics (NABE), I closely follow their "Outlook Survey," which surveys 48 professional forecasters.  The latest one is reassuring.  While the media always frets that a recession is imminent, NABE's forecasters do not.  Most don't expect one before 2018 - another two years.  (15% don't expect one before 2020.)

According to the survey, the most likely contributor to the next recession, whenever it is, will be tightening monetary conditions.  In particular, they worry about credit becoming more difficult.  I'm more concerned about the prospect of "importing a recession" due to slowing economic growth internationally.  (I am especially concerned about Europe's ability to finance and integrate a million refugees.)

Lastly, the collective estimate of GDP growth rates has decreased.  In December, 2016 growth was estimated at 2.6%, but that has drifted down to 2.2% for this year and 2.4% for 2017.  (2015 was 2.4%)  While low by historic standards, 2.2% is still the envy of the developed world.

When I was an economics student during the last century, business cycles were considered sacrosanct - to be accepted as always true, everywhere.  Business cycles came in different lengths from 4 years to 48 years.  Today, we hear very little discussion of business cycles.  This is largely attributed to the internationalization of business.  Some attribute it to more intelligent economic management.  Some believe severe economic trauma like the 2008/9 global financial crisis causes all cycles to "reset."  All that may be true, but I doubt business cycles have been eliminated.  In fact, I hope not.  A recession can be quite beneficial, as it "weeds out" the less efficient.  You might call that "survival of the fittest" but I see it as the "more efficient allocation of resources."  Of course, a recession has the nasty side effect of causing the stock market to drop temporarily and the unemployment rate to rise temporarily.

Fortunately, the professional forecasters tell me not to worry about it - no recession in the near future.

As my Navy friends would say . . . "steady as she goes."

Friday, March 25, 2016

Perspective Is Everything

My 93-year-old father has voted in twenty-three straight Presidential elections.  As a young soldier in France, he voted for the first time in 1944, for Franklin Roosevelt.  Recently, he wrote me  that "I have never seen a Presidential election as cruel and ugly as this one."  That was before the wife-smearing.

Some historians recite ugly incidents in other Presidential campaigns, saying this is normal, which I reject.  It doesn't matter if this campaign is the worst or not.  It is simply unacceptable.  Everybody will agree this campaign does not reflect well on America  I think my father is correct.  This one is unacceptably "cruel and ugly."

There is one big difference between the current campaign and the many previous ones, i.e., the 24/7 media that is trying to sell advertising in a competitive marketing world.

A few weeks ago, the member-magazine for the Communist Party in China started comparing Trump with Hitler, an unfortunate but inevitable comparison.  Would Americans elect another "Hitler," they asked?  After all, Hitler, as well as Mussolini, came to power through the ballot box.  They were popularly elected.  Their point was that only the Communist Party can save people from a Hitler/Trump.  Americans have no such protection.

My point is that there is no room on the ballot for either barbarians or extremists, either on the right or the left.  My prayer, however, is that the Republicans can close this Pandora's Box of electoral poison.

Wednesday, March 23, 2016

Confusing Love and Pride

It is easy to love my country . . . warts and all.  It always remains a land of great beauty, great opportunity, and mostly great people.

It is NOT easy to love the stock market.  A perennial heart-breaker, it is wildly unpredictable.  But, sometimes I do love it anyway . . .  I think.  This heart-of-capitalism sometimes behaves in a classical, predictable way.  Like right now, the market is slowly churning within a relatively narrow range.  Following a bullish run, this churning or period of consolidation usually predicts another bullish run.

In addition, the stock market did NOT over-react to yesterday's terrorist attack.  The Dow only lost 42 points.  Maybe, such attacks have now become routine and are already factored into the market level.  Maybe, the Dow would have been up 60 points if there had been no attack, suggesting only a 100 point drop due to the attack.  Either way, it's reasonable.

Like the dog that did not bark, it is remarkable that the stock market did NOT over-react.

Maybe, I don't really love the heartless stock market . . . but I am proud of it right now!

Tuesday, March 22, 2016

Wrong Bucket List?

A geriatric psychiatrist, Dr Marc Agronin,  wrote an interesting article in yesterday's Wall Street Journal about the current generation of senior citizens.  Because they are "healthier, heartier, and richer" than previous generations, numerous surveys have shown Americans are happier when they get old, with thanks largely to the current entitlements and the previously-common pensions.

My take on the article is that the notion that elder Americans are happy is widespread -- but only an inch deep.  Scratch the surface, and you will find a confused, frightened old person.  As an example, he discusses the sudden love affair that the elderly develop with taking cruises.  Of course, who doesn't love taking a cruise?  We took another last year, so I do understand the narcotic pleasantness of it.  But, Dr Agronin notes modern retirees "live" for their "bucket list."  The periods between these adventures become boring interludes, when nobody wants to see your photographs.  He argues that retirement is becoming a hollow experience, without meaning.  Certainly, all of us know seniors who appear happier than they really are.

The good doctor argues that we don't spend enough time with our families.  If we must take cruises, we should take some family with us, he advises.  Of course, that assumes there is actually some family to be around.  In addition, families are often too widely distributed to really enjoy in modern America.

He gives too little attention to spending enough time with community.  Once-a-month, we deliver Meals-on-Wheels, which is very satisfying for us.  Once-a-week, I attend Rotary, where I enjoy the good company and the bad jokes.  We have held many projects to help the less fortunate or clean the environment.  Yet, the biggest problem facing Rotary, Kiwanis, Lions, and other social organizations is falling membership.  Community involvement has fallen, just like family involvement.

But, both families and communities have something in common -- people!

How do we change the model of retirement from driving a Winnebago . . . to painting the fence for the widow down the street?

Monday, March 21, 2016

Making the Sale

As someone who has long held more than a passing interest, I applaud President Obama for opening relations with Cuba.

As someone who remembers President Nixon opening relations with China in 1972, a truly historic foreign policy achievement, I deplore the media for its breathless coverage of the Cuba opening.

Of course, breathless does sell advertising . . .

A Step Forward

Traditionally, Saudi Arabia has been the "swing producer" of oil.  If the price of oil was so high that it was hurting its customers, Saudi Arabia could increase production enough to lower market prices.  If the price of oil was so low it was hurting the oil producers, as it is now,  then Saudi Arabia could lower production enough to raise market prices -- but only after extracting promises from other oil producers that they would also cut their production by some smaller amount.  It did not want to carry the cost of any production cuts by itself, understandably.

When the price of oil began to collapse at the beginning of the year, the world naturally looked to Saudi Arabia to act as the swing producer and cut its oil production.  This time, however, Saudi Arabia said it would not do so, because other oil producers were liars, promising to cut oil without actually doing so.  The price of oil then plummeted.

By mid-February, Saudi Arabia, along with Russia, Ecuador, & Venezuela, promised to freeze their production levels IF Iran would do the same, which it won't without further negotiation.  They will meet again next week to finalize details.  But, here is what is different:  monitoring!  Two companies are negotiating to actually estimate production.  This is more difficult than expected.  Satellites can now be used to keep track of oil tankers moving around the world, but people with binoculars are still required to estimate cargo loads by how deep the ships are submerged as they leave port.  In addition, the only way to monitor oil being moved by pipelines (about 30% of Russia's) is by infra-red technology, but it can now be done.

While there are lots of details to be worked out, we have come a long ways in assuaging the fears of Saudi Arabia that all oil producers are liars.

Maybe, honesty will actually break out in the Mideast . . . ??