The Flinchum File

The Open Gates

2012-02-02T18:05:00.000-05:00

For the list of the Top Ten Best Lifelong Public Servants, I nominate Robert Gates, former Secretary of Defense. Fresh out of college, he started with the CIA, eventually becoming the first head of the Agency to have worked his way up thorough the ranks and later the 22nd Secretary of Defense. A moderate Republican, he served seven different Presidents, both Republicans and Democrats.

I was fortunate to hear him speak today at a conference of financial advisors. He spoke at length about the wars in Iraq and Afghanistan. He was remarkably candid in saying that ten years is not enough time. While I understood and agreed with him that the Taliban will likely take control of Afghanistan if we leave too soon, it is nonetheless something we cannot afford to continue UNLESS we raise taxes AND/OR cut entitlements to pay for it. The "Sophie's Choice" facing us is between allowing radical Islamists to have their own nation and attacking us another day or bankrupting America and handing it over to the Chinese.

He also lamented that our nation has become ungovernable and wondered when the word "compromise" became a dirty word. He listed three causes making our government dysfunctional. The first one was redistricting. The only real elections to purge our system of extremists are the primaries, but they actually favor the extremists -- when the district voting lines are drawn to make districts safely Republican or safely Democrat, either very conservative or very liberal. There is no room for moderates, who don't think compromise is a dirty word.

Lastly, he apologized for being somewhat pessimistic today but then emphasized that he is as bullish on America long-term as ever. And, I believe him! He is a good man, and I appreciated his openness today.

A Romney Rally ?

2012-02-02T03:46:00.000-05:00

Years of presidential elections are usually positive. Most of the upside occurs when the market "thinks" it knows the winner. Regardless of the party winning, the market tends to rise as uncertainty goes down.

However, the market tends to do better that year if a Repubican wins. Over the four-term term of the presidency, the market tends to do better if a Democrat wins.

After Romney's convincing win in the Florida primary Tuesday night, the Dow rose over 130 points at one point and closed up 88 points. While the lack of bad news out of Europe helped a great deal, it was a reminder of just how much the market wants Romney to win.

One Gestation Period Away

2012-02-01T07:30:00.000-05:00

My mother always told me "if you can't say anything nice about a person, then just shut up," which I still think is good advice. As a result, it has been painful for me to be in Florida the last few days and watching the attack commercials on TV, leading up to yesterday's Republican primary. As a whole, they have been brutal, deeply personal and intellectually offensive.

If I still had kids at home, I would be indignant they could watch this behavior on TV. Such diatribes should be late night and only on cable.

I already had some reservations after the Citizens United decision by the Supreme Court to allow unlimited money into the election cycle. But, my respect for conservative intellectual George Will is so great, I deferred to his absolutist argument that freedom of speech should not be constrained by money.

After seeing the impact up close and personal here in Florida, I've changed my mind. Freedom of speech does not permit yelling "FIRE" in a public theatre. Freedom of speech does not permit someone to give pornography to children. How then can we excuse the behavior of ad-men airing such commercials?

Certainly, it has been written many times that negative campaigning works, but the effect of Citizens United has been to unleash a tsunami of deeply personal negative advertising. While that was an unintended consequence of the decision, it has clearly been a consequence of now permitting unlimited money into American elections. Another consequence is that there is now unlimited money to convince people of all ages that politicians are all slimy crooks. Is that good for the country? Isn't there more to life than merely electing a particular candidate?

I dread the fall campaign. Whatever happened to intellectual debates, like the famous Lincoln-Douglas debates, when important things were argued.

The good news is that it will all be over in nine months . . . before it starts again . . .

The Golden Cross

2012-01-30T13:11:00.000-05:00

Market technicians put a great deal of faith in the "Golden Cross," which occurs when the 50-day-moving average of the market rises above the 200-day-moving average. It is thought that momentum is then changing for the better. Many technicians consider that cross to be a strong BUY signal.

We are getting close to that point. It has happened 26 times since 1962. Based on that experience, there is an 80% probability the market will rise 7% in the next six months.

I would normally be very bullish because of that, except for the European financial crisis. As fit as the U.S. economy is getting, we could still have a "Jim Fix" moment, referring to the great runner who suffered from a heart attack.

Of course, we should be grateful it is not a "Death Cross," when the 50-day-moving average falls below the 200-day-moving average. That is almost always a SELL signal.

Gold is better than death, right ??

The Summit-of-the-Month Program

2012-01-30T09:40:00.000-05:00

Let's see . . . 24 divided by 17 equals 1.4.

There have been 17 summit meetings of European leaders in the last 24 months. That sounds more like regular monthly meetings instead of important summit meetings.

Another is being held today, and it is important! This crisis could take a major turn for the better if the Germans don't over-reach and try to take control of Greek fiscal policy. The Greeks are understandably furious about this. Imagine Canada, who has been more prudent and is in better financial condition than the U.S., trying to tell Americans how much they can tax and spend.

In addition -- and this is a little tricky -- when the ECB and World Bank starting supporting the bonds of Greece by buying them, they paid market prices. Once this deal with bondholders is worked out, the value of those bonds will increase substantially. The other bondholders, all private, will lose 60-70% in face value of the bonds. Understandably, they don't think they should take all the losses when the public bondholders (ECB & World Bank) make a profit on the same investment.

I'm getting more optimistic they might actually pull this crisis out of the fire . . . let us pray!

Advance Estimate of GDP for Q4

2012-01-27T09:42:00.001-05:00

On the last Friday of each month following a quarter-end, we get the advance estimate of GDP growth in the past quarter. For the third quarter, the final estimate was 1.8%. For the fourth quarter, which was just announced this morning, GDP growth was 2.8%. While that was a substantial improvement, the market was expecting 3% . . . thus, a disappointment.

Closer examination reveals the shortfall was in government spending, which is not altogether a bad thing. While it is not yet clear, the suspicion is that it was mostly Defense spending, which is not altogether a good thing. Still, with the U.S. spending more on defense than the next twelve largest spenders combined, maybe it is time.

Nike says "Just Do It."

I say "Remember the Nike Swoosh," as that is the shape of our economic recovery, i.e., a long slow recovery . . . but definitely a recovery.

Toe-Dipping Time?

2012-01-27T04:42:00.001-05:00

Readers with gray hair may remember Jim Fix, the father of the "running revolution" and author of numerous books on running. They will recall he was the paragon of fitness, very lean and trim, with a low resting heart rate. Everything was fine, until the day he dropped dead from a heart attack while running. (Those were the days before all males routinely began taking statins with their vitamin pills.)

I had Jim Fix in mind in December when I did my 2012 forecast, seeing great danger in the first half of the year. While the U.S. economy is definitely improving, it doesn't matter how good the economy is -- if the financial system has a heart attack, like we did in 2008 when Lehman collapsed. Likewise, there is a real possibility of a sovereign collapse in the European financial crisis.

Fortunately, the European financial system has received some imaginative "stints" in the last few weeks. First, the ECB introduced a new three-year loan program, that effectively bought time to hopefully resolve the fiscal policy issues. Second, we learned that 90% of the credit default swaps on Greek debt are already collateralized, meaning minimal shock to the system if Greece has a sovereign heart attack. Third, the widely-hyped "troika" talks over Greek debt collapsed over the weekend, and the stock markets remained calm nonetheless. Finally, the Fed on Wednesday announced they were also extending the period of artificially low interest rates another 18 months, until the end of 2014. More importantly, they indicated a readiness to deploy the third round of quantitative easing if necessary.

All of this has considerably reduced the risk of financial collapse in the near term. At the same time, the U.S. stock market has been enjoying a minor bull run so far this year. That introduces a new risk, i.e., the risk of NOT having a caridac event in Europe and missing a major bull market in the U.S. As is customary, as one risk has been decreased, another has increased. To hedge this new risk, I suspect it is time to begin the incremental deployment of cash.

The Real Class Warfare

2012-01-26T07:49:00.001-05:00

A friend gave me a copy of an article that appeared in The Wall Street Journal last week called "The Great American Divide" by Charles Murray. He looks at the world of non-Latino whites between the ages of 30 and 50, normally the prime working years, and sees it dividing into the two parallel universes of "white collar" (WC) and "blue collar" (BC). While the existence of these two universes is not new, Murray's contribution is how quickly they are growing apart.

94% of WC America was married in 1970, but that dropped to 83% by 2010. 84% of BC America was married in 1970, but that dropped to 48% in 2010. In other words, marriage dropped 10 points in WC America but 35 percentage points in BC America.

An important aspect of marriage is single parenthood. 1% of births were out-of-wedlock in WC America in 1970, which rose to 6% by 2008. In BC America, the percentage rose from 6% to 44%.

In BC America, the percentage of males "out of the labor force" grew from 3% in 1968 to 12% in 2008. (Remember; these are the 30-50 age demographic.) In WC Amerca, the ratio remained constant at 3%.

The number of people in WC America who identified themselves as disconnected from religion rose frm 29% to 40%. In BC America, it rose from 38% to 59%.

The implications from this increasing class stratification are immense and not altogether positive. One is political. This morning, Politico announced a survey of those attending rallies for the Republican Primary next week. It found WC Republicans at the Romney rallies and BC Republicans at other rallies. (In his study, Murray found there are 50% more BC Americans than WC Americans, which doesn't auger well for Romney.)

I would like to see a similar survey between WC and BC Americans in the Democatic Party . . .

The big question is NOT what should the government do about this alarming trend but SHOULD the government do anything at all. Ever the Libertarian, Murray says we as individuals have a moral responsibility to reach out to the other classes and mingle more.

Maybe, there is more to discussing classes than mere tax rates?

The Fed as Co-dependent Enabler

2012-01-25T16:00:00.000-05:00

Don't you love it? The Fed throws a wet blanket on the good economic data recently and openly frets about the damage to the U.S. economy from the European financial crisis. Wouldn't you expect the stock market to go down?

Nope, it was down about 50 points at the announcement but then closed up 85 points. The reason for this irrational behavior is that the Fed said they would likely keep interest rates low until 2014, instead of mid-2013. More importantly, Chairman Bernanke strongly hinted that QE3 is always an option.

Like a street junkie spying their next hit, the market then got overly-excited and bid up the prices.

Good Advice in 1968

2012-01-25T07:58:00.000-05:00

A client in Texas emailed me a week or so ago, asking why I don't discuss politics on this blog. I remembered the last few weeks of Officer Candidate School in the Army, when they tried to make gentlemen of their almost-graduated new officers. They told us that a young officer should NEVER discuss politics, religion, or child-rearing. (They never said if that advice applied to old men as well, or just young officers.)

That was back in the day when debate was more than spinning points, when opponents argued with each other, instead of merely reaching past their opponent for the hot buttons of their base.

Following the State of the Union address, it is tempting but wasteful to discuss it. Both the Republicans and the Democrats have many good ideas that would really help our country. Sadly, that doesn't matter.

I read an analysis recently, recalling there have always been a few conservative Democrats and a few progressive Republicans, who were the key swing votes and kept government relevant. However, now the most conservative Democrat is far too liberal for the most liberal Republican and vice versa. The swing votes in the center have been destroyed by redistricting.

Redistricting is the source of all evil in Congress. Letting politicians set the ground rules for their own districts is like letting players on a football team act as referees of their own game. Creating safe districts, which are then dependably Republican or Democrat, eliminates any room for moderates or swing votes necessary to keep government relevant.

When there is room for moderates in Congress, when redistricting is taken from the hands of politicians, and when debate becomes intellectual again instead of merely theatrical, it may be time for old men to discuss politics, but until then, I'm still a young Army officer.

Who's Afraid of European Headlines?

2012-01-24T12:03:00.000-05:00

A few weeks ago, I wrote about the shape of bottom for the European financial crisis as being similar to the last U.S. recession, which was not V-shaped, nor U-shaped, but looked more like the Nike Swoosh, i.e., bumping along the bottom before beginning a long, slow recovery.

After such high expectations for a deal to be announced yesterday, the market has been very well-behaved and has not over-reacted to the disappointment. Six months ago, the market would have dropped 200 points. Market volatility has definitely decreased but why?

Sure, it may simply be crisis-fatigue. Fortunately, this has been such a slow-motion train wreck that companies have had time to prepare for a modest financial collapse. There have also been a surprisingly large number of small "stopgap" measures taken by the EU and ECB. Or, it may be the way credit default swaps are collateralized. The holder of the swap has the right to demand additional collateral under certain circumstances. At this point, it is estimated that 90% of the swaps guaranteeing Greek debt have now been collateralized. When the collapse of Lehman sent the U.S. financial markets spiraling down, almost none of the swaps on Lehman's debt were collateralized. This could minimize the damage of a disorderly Greek default.

Once we get past the baby bull market of January, when new funds flow into retirement plans, we may see a market that is even more resilient to European news. I hope so!

Good Morning, Mr. Stockman

2012-01-23T05:44:00.000-05:00

President Reagan's Director of OMB was David Stockman, a life-long Republican. I've always had a good deal of respect for him. He was on CNBC this morning, saying that although "Obama is a failure, the Republicans are even worse."

Because of that, he predicts the U.S. will face the same financial crisis next year that Europe is facing right now. He warned we should keep our finger on the SELL button.

What a depressing way to start a Monday morning . . . the futures market indicates the Dow will lose twenty points at the open.

The Latest View of Economists

2012-01-23T05:33:00.000-05:00

I've been a member of the National Association of Business Economists (NABE) for years. One of the benefits is their Industry Survey,which was released this morning.

Overall, it indicates a slowly improving economy, with the percentage of economists expecting sub-2% GDP growth decreasing from 70% to only 28%.

A year ago, there was considerable concern about deflation. This year, the majority of economists expect neither deflation nor inflation. I don't think I've ever seen such a strong belief in price stability before. (The survey doesn't discuss the possibility that the pendulum was dropped from deflation and is passing through stability before swinging into inflation again.)

Nearly one-third foresee increasing profit margins, which should be good for the stock market.

Almost none see any significant improvement in jobs. That's the bad news!

Most surprising, many economists don't expect significant damage from the ongoing European debt crisis, and I really pray they are correct.

Adult-Onset Fantasies

2012-01-22T14:58:00.006-05:00

It is said the fantasies of young men involve "wine, women, and song." The fantasies of a much older man look like this:

Monday: The European Union, ECB, IMF, and Greek government announce a definitive, binding deal to supply liquidity and institutionalize austerity in Greece. The Dow rises 500 points!

Tuesday: The European Union, ECB, and IMF announce a definitive, binding agreement to stimulate growth, supply liquidity, and institutionalize austerity in the PIIGS. The Dow rises another 500 points.

Wednesday: Congress and the President realize the cost of NOT passing the Simpson-Bowles Compromise last year is ALREADY $130 billion and rising. They announce unanimous support for immediate implementation of that bipartisan deal. The Dow rises another 1,000 points.

Thursday: Our AAA credit rating is restored. The Dow rises another 500 points and passes 15,000 for a new record high.

Friday: China announces they will "forgive" the $900+ billion we owe them. The United Nations annouces there will be "peace on Earth and goodwill toward men." The Dow rises yet another 1,000 points into record territory, passing 16,000.

Saturday: The whole world spends a well-deserved day celebrating! There is much hugging, back-slapping, and high-5ing around the globe!

Sunday: The world spends a day praying that we don't wake up and realize that this is just another old man's fantasy . . .

Pop Test

2012-01-21T09:54:00.000-05:00

United Capital is a California-based financial services company that has developed a pleasantly short online exam to determine your attitude toward money, which obviously has investment implications. Understanding yourself is the first step to investing. Are you a Giver . . . a Protector . . . or a Pleasure Seeker? Now, to find out, go to:

http://findyourmoneymind.com/

You don't have to enter any personal information or get any phone calls from anybody. It is just a free perspective on your attitude toward money.

To comply with the non-existent Truth-in-Blogging Law, I am a Protector. What are you?

A Little Optimism ?

2012-01-20T16:14:00.000-05:00

The second, third and fourth weeks following a quarter's end are called "earnings season," when corporations report their quarterly earnings. We are in the middle of that season right now. So far, earnings have been strong, although the rate of increase is slowing.

The stock market is often considered a predictor of the economy. (Of course, January is usually the best month of the year, as new retirement money flows into the market.) The stock market is indicating an improving U.S. economy

The stock market is becoming increasingly sanguine about the possibility of a European solution, with the notion that a Greek default is already priced into those companies that would be most affected. Importantly, the negotiations between the Greeks and their bondholders, which broke down last week, are going much better now. They are under pressure to wrap up a deal this weekend, before the European summit of finance ministers on Monday.

The Greek deal is important because it would be a template for future deals. This could be a decisive weekend . . . keep your fingers crossed!

The real drop-dead date will be before March 20th. That is the day Greece will have to have new funding. But, the lawyers say it will take eight weeks to do the paperwork, which means we must have the deal very soon. Also in March, the Italian government goes back for a huge bond re-financing.

One way or the other, I suspect we will have more certainty very soon . . . and that's a good thing!

Living With Volatility

2012-01-20T08:03:00.000-05:00

This is an interesting chart. It shows that the earnings history of the S&P 500 companies since the Great Depression.

At first blush, it appears that an all-time high is approaching and is a good reason to be bullish on the stock market. But, if you look at it awhile, you'll also notice that volatility is greater than anything we've ever seen before.

Warren Buffett believes his ideal holding period for any investment is "forever." That is the "buy and hold" strategy of investing, where you just hold it until the price/economy recovers. The current argument is whether increased volatility makes this strategy more or less useful.

My thinking is that the level of cash in a portfolio should have some relationship to the level of anxiety about the market. As anxiety increases, so should cash.

A Green Shoot

2012-01-19T09:59:00.000-05:00

During the last quarter, one of the best performing sectors was homebuilders, such as Pulte and Ryland. Last week, Jamie Dimon, CEO of giant JP Morgan, said the housing sector had hit bottom and was improving. Yesterday, the Builder Sentiment Index rose to its highest level since June of 2007. This morning, housing starts were down, which helps to clear the supply of competing foreclosed homes.

Since most economists agree that a vigorous economic recovery is not possible until the housing market stabilizes and turns around, this could indicate the U.S. economy has indeed found a bottom and the recent bull rally is sustainable.

Now, if only Europe would find its bottom . . .

The Joy of Inflation

2012-01-18T09:04:00.000-05:00

The third week of the month is often called "Inflation Week," because we get data on both the Producer Price Index (PPI) and Consumer Price Index (CPI). Wednesday is PPI-Day, and Thursday is CPI-Day.

This morning, we learned that producer prices actually fell 0.1% last month, while core prices were up 0.3%, the highest since July. The first number was a little weaker than expected, while the core looked a little hot. But, overall, inflation looks pretty sanguine right now. For last year, PPI rose 4.8%, which is high, but it has been trending down. Tomorrow's CPI is expected to be up, by a mere 0.1% as well.

What this tells me is that the Fed was right in being so scared of deflation two years ago. They embarked on a quantitative easing program on a scale that would have produced serious inflation in normal times. Deflation is much more self-reinforcing than inflation, which makes it much harder to control.

Frankly, I was hoping to see more inflation. That is one way to manage our debt burden. We can pay off the debt, grow out of it, or inflate it away. Right now, we are not really doing any of these . . . just adding to it.

Thin Air

2012-01-18T06:47:00.000-05:00

Thanksgiving Day comes once a year, but being thankful everyday is very good.!

I was reading a survey by Yahoo! Finance. As we know, Yahoo is a troubled public company that owns the highly-popular web portal, Yahoo! A related website is an excellent financial research tool, called Yahoo! Finance.

Although not discussed in the survey, I would expect Internet users of the portal would be younger and more technically proficient than the general population. Further, I would expect users of their financial website would also be more financially aware than the general population. That suggests a more optimistic sample for this survey, maybe even the best and brightest?

Yet, over 40% believe the "American dream" is out-of-reach for them. One-third believe their financial situation is poor. One-third have less savings now than last year. 37% have no retirement savings and plan to live on Social Security alone.

63% think the U.S. economy is doing worse, which is clearly untrue. 62% have serious concern for their own job security, while 90% are worried about overall unemployment. Only one of four are confident the government has any ability to fix the economy.

Because my circle of friends is older and more affluent, it was shocking to see such despair among the young, technically proficient, and financially aware. Maybe, the air becomes too thin as our comfort level rises, but the loss of the "American dream" is a great loss indeed . . . for the whole world!

While I am thankful, I also feel confident there is nothing wrong with these young Americans that a good, long bull market wouldn't fix . . . at least, I hope so!

Gears Shifting

2012-01-17T04:30:00.000-05:00

Europe is going thru a well-publicized transition from a welfare state to forced austerity. At the same time, China is going thru a barely-publicized transition from an export-driven economy to a consumption-driven economy, like the U.S.

Despite the credit downgrade of nine European nations last Friday, the European markets are up nicely overnight. In fact, sovereign bond rates actually dropped slightly this morning, and the Euro has firmed against both the dollar and the Yen.

Also overnight, China released its fourth quarter (Q4) GDP growth rate. The bad news is that China is growing at the slowest rate in 2 1/2 years. The good news is that the actual growth rate of 8.9% is better than the expected 8.7% growth rate. The risk of a "hard landing" has decreased. Not surprisingly, Asian markets were up nicely overnight as well.

At 4AM, it looks like the Dow will open up about 120 points. Absent bad news out of Europe, it should be a good day on Wall Street.

The risk to today's market is that we see a repeat of the bad earnings report we saw on Friday from JP Morgan, when Citigroup and Wells Fargo report today. Readers know I have been negative on money-center banks for some time. If we have another Lehman-style financial crisis, it will show up in the money-center banks first, which would be a propitious time to increase cash.

The risk to the long-term market is how does the world's first capitalistic engine adjust to a weakened Europe and a changing Asia? To shift gears and become the primary exporter to China's consumers, we need the dollar to weaken. QE3 (quantitative easing) would actually help that. To compete against newly-lean European companies, we need the dollar to weaken. QE3 would help that as well. To "inflate-away" our own huge soverign debt, we need inflation, which weakens the dollar. In other words, we need QE3

Quarterly Column

2012-01-16T12:03:00.000-05:00

For those who do not receive the print edition of Inside Business, you can read my latest column here:

http://insidebiz.com/news/sp-500-1257-1257

Yes Ma'am !!

2012-01-16T08:01:00.001-05:00

As every husband knows, women are definitely the smarter gender. Years ago, I studied some research that showed all-female investment clubs signficiantly out-performed all male investment clubs. That difference was attributed to overly-confident males who make investment decisions too quickly.

Last night, I was studying some more research that showed women are less likely to sell. A study of single-party investment accounts at a discount broker showed men have an annual turnover rate in their portfolios of 77%, compared to only 53% in the portfolios of women. In other words, women are more likely to study a stock longer before buying it and then stick with it during downtowns. Again, women showed higher investment returns than men.

Now, what would your mother say about this research?

A Golden Oldie Newsletter

2012-01-14T17:50:00.000-05:00

Decades ago, I enjoyed reading The Kiplinger Letter, as it was passed around the office. When I left that job, I didn't read it again until recently, when an old friend asked me if I'd like to read his copy. Since then, he has faithfully shared each copy. I always appreciated the clarity of Kiplinger's expectations, which means it was not written by a lawyer.

Today, I read the most recent issue. They expect the economy to grow slowly in 2012. While they expect unemployment to rise in the early part of the year, they expect it will be below 8.5% by year-end. Consistent with that, they believe full year GDP growth was 1.8% last year but 2.5% this year. Not so consistent with that, they believe the benchmark 10-year Treasury bond rate to rise from 1.9% to 2.5% by mid-2012. Either they do expect greater GDP growth or they expect inflation to break out. I just do not see serious inflation breaking out that soon, especially since the Fed is still worried about deflation.

Separately, they expect Obama to approve the Keystone pipeline after the election, either as a second-term President or as a lame-duck. Either way, I see that as a good thing.

Also, they addressed the problem of election spending, after the Citizens United decision by the Supreme Court. They believe the expense of the presidential election will increase from $1.6 billion in 2008 to $2.5 billion this year. You can only give $2,500 to a candidate and $5,000 to conventional PAC, but anybody can give any amount of money to these new super-PACs. Most importantly, donors to super-PACs are not disclosed. And, I thought sunshine was good . . . for everything except politics, I guess.

Rearing An Especially Ugly Head

2012-01-13T11:25:00.000-05:00

As you know, I've been expecting the market to suffer in the early part of this year, which has been generally good so far. Today, negotiations have broken down over the Greek debt. The probablility of disorderly default has increased considerably. This afternoon, it is expected that France will also lose its AAA credit ratings and rumored other European nations will also be downgraded.

As a result, all the European markets (except Greece??) are down, and the Dow is down almost a hundred points. The Euro has dropped below $1.27, which drives up the dollar, which drives down gold and, over the long-term, our exports.

Is this the beginning of the bear market I feared? Nobody knows . . .

Walking Away From Responsibility

2012-01-13T11:06:00.000-05:00

Last night, I listened to a juvenile court judge describe his job, mentioning how painful it was for him to remove a person's parental rights or taking away their child.   Before removing a parent's rights, it is customary to order the individual to go thru psychological counselling or drug counselling. Failure to do so is grounds for removing the child permanently. He even mentioned one father who stated clearly that he preferred taking drugs than having a child.

He further remarked that, the more poor the parent, the more likely they are to lose the child, primarily because they couldn't afford the counselling or transportation to counselling or whatever. In that case, he normally puts the burden on social workers to find the dollars somewhere, but it usually is not enough to change the outcome.

The discussion reminded me of an old college professor who often remarked that "you have to have a license to have a dog, but anybody can have a kid."  However, could any action by the government be more intrusive than telling a person they may not have children?

Still, I am bothered by paying any tax dollars for counselling people who probably never should have had a baby in the first place.   (It is not even clear to me whether this is discretionary spending or entitlement spending.)

Clearly, no child should suffer for the sins of their parent! But, should we allow parents simply walk away after dumping their kid on the welfare rolls or another parent? (Should we allow them to have more kids?) Obviously, we cannot extract money from them (you know, blood out of a turnip), but why not extract labor? If we can require some offenders to provide a certain number of hours for community service, why not these people? There is always a roadside with litter to be picked up or something . . .

Maybe, this is unfair as it is more likely to impact the poorest citizens, but there still should be a non-financial penalty other than jail-time.

Just A Reminder . . .

2012-01-12T20:44:00.000-05:00

If you haven't been to http://www.usdebtclock.org/ lately, it is your duty to check it periodically. Of course, it might be useful to keep a supply of barf-bags handy.

A Movie Review ??

2012-01-12T07:37:00.001-05:00

Over the years, I'm confident I have written over a million words, probably way more. But, I've never written a movie review . . . until now.

Last night, we went to see The Descendants starring George Clooney. The only reason I went is because Investment News magazine did their first-ever movie recommendation, urging wealth managers and trust officers to see the movie.

The law against perpetuities was well established under common law, going back to the 17th century in England. The general rule was that trusts must terminate not later than 21 years after the last person dies, who was living when the trust was created. It was later decided that the time would include gestation period, and the rule become "lives in being plus 21 years and 9 months. (There has been substantial changes in this general rule since the development of dynasty trusts.)

In the movie, George Clooney is a beneficiary of a large trust owning a large, valuable piece of real estate that needs to be sold soon, as the trust is coming up against the law against perpetuities and must distribute either cash or undivided interests in the parcel.

Because Clooney is the sole trustee of the trust, he is under pressure from his large extended families to make the decision to sell the property quickly.

And, Clooney's wife suffers a boating accident and is put on life support. Fortunately, she had executed a Physician's Directive or Living Will giving her husband the right to "pull the plug."

As a long-time trust officer who has settled many estates and managed hundreds of trusts, I was fascinated by the easy portrayal of complex subjects. Any person who sees this movie will have a better understanding of the law against perpetuities. They will better understand the importance of picking the right trustee, as trustees have so much power and responsibility. Lastly, they will have a more nuanced appreciation of why everybody should have a Physician's Directive.

Of course, I doubt many women need a recommendation to see George Clooney?

Shape of the Bottom

2012-01-10T10:40:00.000-05:00

A few years ago, economists argued over what shape the bottom of the recession would be. Would it be V-shaped, which suggested a quick recovery? Or, would it be U-shaped, which suggested bumping along the bottom for awhile before starting the recovery? I argued the bottom would look more like the Nike Swoosh, which suggested bumping along the bottom before starting a slow recovery. I think I was right.

It is not too early to ask the same question about the European crisis. Because it is a financial type of crisis, it has terrified the financial markets. We have been hoping for a V-shaped recovery, which would only happen if Merkel, Sarkozy, Draghi, and Monti walked into a press conference and shared a big, sloppy kiss. Let us pray for that bazooka-approach.

Or, the trajectory may have changed with the decision of the ECB a few weeks ago to guarantee liquidity in the banking system by virtually eliminating any near-term debt when they issued three-year loans at low rates to member banks. Now, Merkel has finally realized that economic growth will do more to resolve the crisis than austerity will. That is not to say austerity is not necessary. It is saying austerity is only one half of the one-two punch.

I suspect she is using this growth discussion to cloak the transfer of budget approvals for the weak nations into the care of the stronger nations, like Germany. If so, she is mighty smart indeed.

This is a good example of why portfolios should not be all-cash right now. Resolution of this financial crisis may also resemble the recovery of our economy, i.e., a Nike Swoosh.

Over-Regulated But Under-Punished

2012-01-07T18:51:00.000-05:00

During the current Congressional recess, the President used his authority to appoint the head of the new Consumer Financial Protection Bureau, whose appointment has been languishing in Congress for months. Immediately, there was much huffing and puffing, which is all that Congress does anyway.

The Republicans justifiably objected that this recess appointment bypassed the Senate's constitutional responsibility to "advise and consent." The President justifiably responded that Congress was opposed to the Bureau and wanted to cripple it by leaving it headless. White House sources say the President has concluded it is simply a waste of time to negotiate with Congress, which would be a tragedy for the country, especially if is true.

My thinking is that we don't need another agency to protect consumers, nor do we need more laws. We like to think we are a nation of laws. Instead, we are a nation of lawyers, and their first response to any problem is to throw more paper at it.

If we create ten million new laws, we will have created no new protection unless the punishment is swift and certain. The ethically-challenged will take a chance and commit a crime, since there is scant chance they'll be caught and will only serve relatively short jail terms, even if convicted. Besides, with prisons overflowing with minor drug-related criminals, paroles are quite common.

Did you, for example, read the agreement you signed for your credit card? If you did try, I seriously doubt you understood it. Now, will you be better protected if the credit card agreement is twice as long?

Because financial crimes are hard to prove and because the criminals tend to be educated white males, the punishment should be more horrific, more public, and more common.

I'd vote for fewer regulations with greater punishment . . . because we're over-regulated and under-punished!

2012 Forecast Redux

2012-01-07T15:16:00.000-05:00

For anyone who would rather read my forecast directly from the editor instead of reading it here, the link is http://www.insidebiz.com/news/inside-business-story-263

Saving the Services

2012-01-06T15:48:00.000-05:00

As a former Army officer, I feel very protective of the military, especially the Army. When I read of major re-organizations, especially by a Commander-In-Chief who is not a veteran, I become very worried, indeed.

But, when I put on my economist hat, I understand the urgency. The inability of Congress to either raise taxes or cut entitlements strangled our military. We could preserve the military if we raised taxes or cut entitlements or preferably both.

Still, the military has to do its own soul-searching. It was recently described as an HMO that occasionally kills a terrorist. They too must cut their entitlements.

In addition, we cannot afford to fight two traditional heavy-metal wars on different fronts, like Iraq and Afghanistan, even if the Chinese are willing to lend us the money. When I was in Special Forces school in 1968, I was taught the ultimate weapon is not the nuclear bomb, nor aircraft carriers, nor bombers, nor heavily-armored tanks. The ultimate weapon is the guerrilla fighter, which is what we've been fighting, in both Iraq and Afghanistan. The military has to stop "fighting-the-last-war."

Fortunately, this gutting of the military will be a slow-motion train wreck, and I'll be watching it carefully.

Good News For 200 Thousand Americans

2012-01-06T08:52:00.000-05:00

The most closely watched economic report each month is the Jobs Report, which was just released, and it was good news. A survey of economists expected 155 thousand jobs were created in December. Instead, it was 200 thousand.

Most of us were expecting the unemployment rate to increase from 8.6% last month to 8.8% this month, as discouraged workers returned to the labor force. Instead, last month's rate was revised upward to 8.7%, and the current rate is 8.5%.

The average number of hours worked per week also increased, as well as average hourly earnings.

The U-6 rate, which includes those workers working part-time because they cannot find full-time work, dropped from 16% to 15.2%, which is a BIG drop. (This is a better measure of economic distress than the headline number of 8.5%.)

Over the last year, 280 thousand government workers have lost their job, which would have been hard to imagine just a few years ago.

Interestingly, the number of people quitting their job now exceeds the number of people laid-off, which suggests increased confidence among workers that they can find another job.

All-in-all, it was a good day for anybody named Barack and a not-so-good day for anybody named Mitt or Newt or Rick or . . .

Too Good To Be True ?

2012-01-05T08:45:00.000-05:00

The most important economic data is jobs. Tomorrow will see the release of the all-important monthly Jobs Report by the Department of Labor. A survey of economists shows expectations are that 155,000 thousand jobs were created in December. This morning, the Challenger, Gray headhunting firm said the number of job cuts continues to decease. After that, ADP, the huge payroll company estimated a whopping 325 thousand jobs were created in the private sector, over twice what economists are expecting. Then, the BLS announced initial jobless claims dropped about 15 thousand more than expected. It marked four straight weeks of declines.

While I hope all this data is correct, I'm suspicious. First, December is historically the hardest month to predict due to the Christmas hiring/firing season. Second, the ADP doesn't include government. Normally, at this point in a recovery, government would be hiring 20-25 thousand a month. However, in this recovery, that sector has been steadily losing jobs. Third, most of the new jobs were created by small companies (148 thousand), which is typical of every recovery except this one. Is this recovery becoming more normal, I hope?

Still, the evidence is clearly that the job market is improving, albeit slowly.

That doesn't mean the unemployment rate will necessarily decrease tomorrow. Last month, it decreased from 9.0% to 8.6%, which was hard to accept at face value. Normally, when the job market starts to improve, many people who had given-up looking for a job will then return to the labor force, which drives up the unemployment rate until they finally get a job.

Not surprisingly, the market likes this data, as Dow futures improved from an 80 point loss at the open to only a 25 point loss.

Sometimes, the trend is your friend!

The January Effect

2012-01-04T06:00:00.000-05:00

Historically, January is the best performing month for the stock market. When the S&P is up for the month, history tells us there is a 90% probability, it will be up for the year. When it is up the first five days of the year, that is also a favorite bullish indicator. Yesterday, the Dow was up almost 180 points. So, we're off to a good start . . . or not.

Trading volume was light yesterday, mostly the inflow of new IRA funds. Still, the economic data was also good, with manufacturing up for 26 straight months. More importantly, there was no bad news out of Europe.

At this hour, futures suggest a slightly negative opening. I expect this week to trend listlessly upwards, marking time until the next meeting of Merkel and Sarkozy on Monday. But, when the warm after-glow of the holidays collides with the continued intransigence of Merkel and the ECB, I expect the downtrend to start next week.

307 and counting . . .

2012-01-04T05:18:00.001-05:00

The Iowa caucus is over. The long-expected winner won, albeit barely, proving once again the importance of money and organization. Whether you approve or not, I'm sure you're exhausted by the withering 24/7 breathless news coverage. The bad news is that there are still 307 days of that 24/7 breathless news coverage ahead, before the presidential election. Can't we just vote tomorrow and get it over with?

Is it really any less intellectual to mindlessly watch NFL football games on Sunday afternoon?

The Spanish Perspective

2012-01-02T09:40:00.000-05:00

The United States is the only nation that embraces Supply-Side economics seriously. Thus, the debate in this country is framed in terms of whether we can reduce the deficit by increasing the tax on "job creators".

Now, compare that framework with Spain, where they take Keynesian economics more seriously. Spain is a nation in a severe recession with extremely high unemployment and crushing national debt, having their credit downgraded several times. Their debate is framed in terms of whether too much austerity will prevent an economic recovery, which is a legitimate question for nations without a crushing national debt.

Spain has a written goal, i.e., to reduce their budget deficit to 6% of GDP. (The U.S. has no such agreed-upon goal.) When the latest reports showed the deficit was running closer to 8%, they didn't take the Supply-Side approach of cutting taxes on high-income earners. Instead, they increased those taxes.

Wisely, they also cut spending but unwisely took the Tea Party approach of slashing discretionary spending instead of entitlement spending. In fact, they even preserved inflation adjustments for pensions, which is inexplicable to me.

I wish them well but worry they have framed the debate incorrectly and taken the wrong road. The well-travelled and well-maintained road of Austrian economics would have raised taxes on everybody and cut both discretionary spending and entitlement spending.

2012 Forecast -- A Year of Two Halves

2012-01-01T09:20:00.000-05:00

For the second year in a row, the United States will be the best-looking horse in the glue factory, which means the dollar will remain strong for awhile. For the fourth time in the last five years, the political tail will wag the economic body of the world, meaning politicians are more important than “job-creators.” But, the first half of the year will be very different than the second half.

The Economics

The U.S. economy will not go into recession, unless pulled into one by a depression in Europe, (which is already in recession). Our GDP will continue to grow, albeit slowly at about 2 percent during the first half, increasing to 3 percent in the second half. Our unemployment picture will continue to improve, despite the fact that the unemployment rate will actually increase. Residential real estate will be only marginally improved. The emerging nations will continue to enjoy operational advantages over the developed nations, but inflation will become a bigger problem, which the U.S. will begin importing with our imports from those nations.

The Politics

The government of the U.S. is almost as useless as the “government” of Europe. Our Fed Head Ben Bernanke recognized the uselessness of our government and acted alone to save the U.S. economy. The new head of the European Central Bank is Mario Draghi. When he recognizes the uselessness of European government, he will have to act alone to save the European economy. Unfortunately, the bond vigilantes will not give him much time. Within six months, he will be forced to “save” Europe.

In the long run, however, good monetary policy can never fix bad fiscal policy.

Secondly, the stock market hates the uncertainty of presidential election years. Historically, presidential election years tend to be good years for the market, but the market rise begins later in the year. The sooner the winner becomes obvious to the market, the sooner the market will rise. How much it rises will be influenced by who the winner is.

The Stock Market

Modern investment theory tells us that different asset classes, e.g., large companies, bonds, commodities, etc. will not change value at the same time or in the same direction. That theory will be wrong for the fourth time in the last five years, as the precarious state of world politics overwhelms everything else.

Before Europe pulls out of its nose dive and the U.S. presidential election reduces uncertainty, I expect the Dow will approach 10,000 points but not below, and that the Euro will drop to $1.22, driving up the dollar. Both currencies will reverse before year-end.

The Year-End

While 2012 will be an emotional roller-coaster, the politics, the economics, and the stock market will all look much better late in the year.

Thank You Blog

2012-01-01T09:11:00.000-05:00

For those of you who share the same curiosity about the world of investing, who can chuckle at life's many absurdities and still face the future with caution instead of fear, I thank you for reading my blog during 2011 and especially for sharing your thoughts with me.

For each of you, I wish a happy, healthy, and prosperous New Year . . . in that order!

Connect the Dots

2011-12-29T10:14:00.000-05:00

Consumer confidence is up. The rate of unemployment is down. Today's weekly jobless claims have dropped below 400 thousand for four straight weeks. The PMI shows manufacturing is up. Now, pending home sales are at a 19-month high.

Make no mistake: the U.S. economy is puny, but it is improving. The greatest threat to our economic recovery remains Europe. The "chattering class" of pundits say that German leader Angela Merkel will determine our presidential election. If she fails to contain the European crisis, the U.S. economy goes back into recession, and Obama loses. If she is successful, the U.S. economy continues to improve, and Obama is re-elected.

And, you thought your vote mattered . . .

The Joy of Flatness

2011-12-29T07:09:00.001-05:00

The U.S. stock market has been pleasantly snoozing along over the holiday season, but was rudely awakened yesterday, and the Dow dropped 140 points. You don't need to ask who woke up our market so rudely, as you already know all bad news comes from Europe.

Even though there was good European news that interest rates paid on Italian government bonds dropped significantly, the ECB also announced a large increase in deposits. The market immediately assumed this indicated a lack of demand for loans in Europe, which suggests immediate recession. The Euro promptly plummeted, taking gold with it. (By the way, Europe is already in recession.)

Closer examination, however, suggests the large increase in deposits at the ECB is just an echo of the huge new three-year lending program of the ECB, which was heavily subscribed. That tells me that European banks know a good thing when they see it and took advantage of the cheap funding; borrowing as much as the ECB would lend them. As this just happened this month, they haven't removed all the funding the ECB provided from the ECB. They're trying to figure out what to do with this windfall. I'll bet next month's report will be much more sanguine.

The fact that the Dow lost 140 points by selling before anybody even understood the report shows me just how "jumpy" the stock market is. Sell first, ask questions later. Europeans will return from holiday next week and will make some more bad news. The European debt crisis ain't over yet . . . darn it!

Today, the Dow looks flat for now . . . enjoy that! It beats the alternative, coming soon to a portfolio near you . . .

A Bored Santa Claus

2011-12-27T08:07:00.000-05:00

One of the benefits (maybe the only benefit?) of having a childless Christmas is time to read, and I spent this one studying Currency Wars: The Making of the Next Global Crisis by James Rickards.

It is not an easy read and is dense with historical detail. We tend to think of WWI and WWII as the pivotal events of the last century. Instead, Rickards takes us thru CWI and CWII, for Currency Wars I and II. There are numerous examples of near-violence and bullying, especially by the U.S. He also discusses the "game-playing" by governments to plan moves if another nation starts a currency war. Make no mistake: A currency war is a very bad thing!

Of course, the relationship with gold is an important factor in any discussion of currencies, but certainly not the whole story. It is simplistic to say we can stabilize currencies simply with some direct linkage to gold.

The take-away for me is that Modern Portfolio Theory is fine as a risk-on/risk-off portfolio management tool but not as a "buy & hold" tool. The alternative is more active market-timing, which introduces a whole new risk, i.e., how do you know when to pull-the-trigger to get in or get out of the market?

This week will be as boring as last week, with portfolio managers around the globe on vacation. The weak Santa Claus rally doesn't reflect any news. Indeed, it reflects a lack of news, especially out of Europe. The market wants to rise. Unfortunately, when Europe returns to work next week, there will be more headlines, and the U.S. stock market will suffer again.

Today's futures market suggests the Dow will lose 20-30 points at the open; no big deal. However, this minor loss would break our string of four up days in a row, the first since September. On Thursday, there is another sale of U.S. debt. If the sale goes badly in this lazy market, we could see a significant sell-off.

My advice this week is to take the week off and enjoy some holiday beverages! I'll bet Santa Claus is doing the same . . .

Republicans vs Whom?

2011-12-23T09:06:00.000-05:00

The media hyped a contest over the payroll tax extension as a Herculean battle between Republicans and the President. I saw it more as a struggle between the Republicans and the Tea Party.

And, did it really matter anyway? This two-month extension is trivial in comparison to the battle this summer over the debt ceiling, which caused a loss of our AAA, a thousand point drop in the Dow, and the Fed to more actively manage interest rates.

Would the economy have been hurt without this extension? Yes, but not much, and the Social Security Trust Fund would have actually been better off.

The market seems to have the same ho-hum attitude about it, as futures indicate the Dow will gain about 30 points this morning, no big deal. (Could it be the Dow will have four consecutive positive days?)

The only lingering annoyance about this battle was the role uncertainty played. Both sides argued the economy was crippled because of high uncertainty. They make it sound like uncertainty is something we are not familiar with. Business and individuals deal with uncertainty everyday. That is part of life. Of course, any modest increase in uncertainty is not good, but it is also not that crippling . . . or new.

Today's Data Dump

2011-12-22T08:55:00.000-05:00

Today's economic data was mixed but generally encouraging. Weekly jobless claims were better than expected for the third straight week. Even better, the number of workers on continuing claims dropped from 3.63 million to 3.55 million. (Of course, that number could drop for the wrong reason, if the current legislative impasse is not broken by year-end.) The jobs market is definitely improving, albeit s-l-o-w-l-y.

Also, inflation came in a little hotter than expected, 2.1% versus 2.0%. Most economists worry about inflation. I consider the creation of some inflation to be a moral imperative at this point. It would be good for us! Historically, stocks do best when inflation is running between 2% and 4%.

More worrisome is that the GDP growth for the third quarter was only 1.8%, lower than the expected 2.0%. Of course, everybody knew Q3 was lousy, just not that lousy. Expectations for the fourth quarter are 3-4%, which would be a great improvement.

One word of caution in the GDP growth estimate is that the decrease was almost entirely in the consumer consumption of services, which is much more difficult to measure than their consumption of products.

Nothing problematic today . . . now, go help the economy and buy some gifts for your family!!

Waiting for Santa . . .

2011-12-22T07:38:00.000-05:00

Monday, the Dow was up over 300 points. Yesterday, it was flat. Today, it looks to gain about 40 points at the open. Yea--the market has changed direction and will be moving back up?? No--as discussed last week, the trading volume or number of shares bought/sold is so low this week and next, that daily market movements are meaningless. So--pay no attention this week or next week.

But, what about a "Santa Claus Rally?" Normally, stocks do rise the last half of December. This may be because the pessimists have gone on vacation. More likely, it is because investors are positioning themselves for January, which is the market's best month historically. This time, it all depends on Europe.

Jeremy Siegel taught me at Wharton and was economics advisor during John McCain's presidential run in 200. He is a nice guy and one of my favorite thought leaders. This morning, I watched him on CNBC and enjoyed learning that we have very similar forecasts, i.e., that the stock market is spring-loaded for a major bull rally, once the European fears subside.

I'm also more confident that these European fears will subside, after reading an analysis of the Great Depression, which made the case there were two halves to the Great Depression. The first half can be associated with the 1929 stock market crash and the U.S. economy. However, that depression was made both deeper and longer by a European banking crisis, creating the second half. Of course, that is so similar to our current situation.

But, here is the difference . . . during the first European banking crisis, liquidity was allowed to dry up. That is clearly not the case this time, with the Fed and ECB flooding the banking system with billions in liquidity. No doubt--we avoided that fatal mistake!

Bottom Line: Pay no attention this week or next. Be prepared for big scares on Europe, but don't be afraid because this is NOT a repeat of the Great Depression! I expect to see Santa Claus next year . . .

Information = Money

2011-12-21T08:03:00.000-05:00

The Wall Street Journal ran a front-page article yesterday that is guaranteed to enrage both the "Occupy Wall Street" movement and the Tea Party. It describes how hedge funds routinely prowl the hall of Congress to gain advance knowledge about the many thousands of new laws and regulations produced every year. Based on what they learn during their prowling, they make investment decisions.

Of course, it can be argued that the making of sausage should be transparent and subject to public viewing. Should my elected representative refuse to meet with me, just because I represent a hedge fund? Of course not! But, what information should be shared? Sharing information is like giving away money.

Coming on the heels of the unbelievable revelation that members of Congress and their staff are immune from insider trading rule, one must ask the question of HOW will we know when our system of representative democracy needs to end? What has to happen before it must be euthanized?

Building a Bazooka

2011-12-20T06:04:00.000-05:00

Years ago in the Army, I can remember straddling my bunk, methodically taking apart my M-14 rifle and then re-assembling it . . . blind-folded . . . with a buddy counting off the seconds. It was not unlike watching the Europeans wrestle with their financial crisis. They are trying to fend off the bond vigilantes by assembling a bazooka, with no idea how to do it and with the clock ticking.

First, they prayed austerity programs in the PIIGS would be enough, but they were not. Then, they prayed that the ECB would act more like the Fed, but they refused. Next, they established the European Financial Stability Board (EFSF), which was not big enough. So, they tried to increase it by leverage, but the Austrian economists torpedoed that plan. Now, the ECB president has said they will backstop the individual banks that conduct quantitative easing in behalf of the ECB. Lastly, they are developing a plan to increase the lending capacity of the IMF, which would act as an additional EFSF.

I have to give them credit. They remained in denial for a long time but are now fully engaged. If they can assemble the EFSF, with the IMF, QE and austerity . . . they may yet build a bazooka!

Hmmmmm . . .

2011-12-19T08:00:00.000-05:00

In preparing my annual forecast for Inside Business, I predict the European Central Bank will be forced to engage in quantitative easing in order to end the crisis. This means they will buy any and all bonds issued by European governments, just like our Fed bought all bonds issued by our Treasury.

The new head of the ECB, Mario Draghi, has said he will not do this, but I don't believe he will have a choice. The bond vigilantes will force it. However, he made an interesting statement this morning.

While the ECB will not buy all bonds, they will not object if the banks buy all the bonds. So, the ECB loans the banks all the money they want, and the banks use it to buy all the government bonds they want . . . very interestng! It would probably not work quite as well, because individual banks may come under pressure from both the government of their country and their own shareholders. But, it shows that he sees the need for quantitative easing, whether carried out by themselves or the individual banks.

This is a hopefull sign.

Media Observation

2011-12-19T06:56:00.000-05:00

It has been fashionable to malign the media for many years. While generalizations are usually wrong, my perspective is different. Ignoring the obvious extremes of Fox, MSNBC, and HDNet, I find the majority of media to be well-meaning but hapless in the face of increasing complexity.

As an example, last night about 10PM, I was watching the Asian markets on Bloomberg. It was ugly, with most down 1.5-2.0%. Then, there was the breaking news that the psychotic despot of North Korea had died.

When I got up this morning, the headlines were "Asian stocks fall on death of North Korean leader." That is not true. The markets were already down before the news broke. In fact, the Asian markets had improved during the interim, curbing their losses. In addition, Dow futures were down 47 when the news broke but up 48 this morning.

Q -- What did I learn from the death of Kim Jong Il?
A -- That the vast majority of media are indeed well-meaning but hapless.

2011-12-18T16:09:00.000-05:00

At a Christmas party last night, I was amused when a good friend and loyal reader reminded me that I once said that I expected a "rip-your-face-off" recovery, whenever it happens. That comment does reflect my belief that the U.S. stock market has become entirely headline-driven and does not reflect the underlying U.S. economy, which is better that most people realize. At some point, economics will matter again!

Of course, there is a bit of hyperbole in "rip-your-face-off." Maybe, I should have described the coming market rally as "strong" or "muscular" or even "impressive" . . . but maybe I learned to use hyperbole from reading too much Ayd Rand . . . or just by listening to politicians, of both parties?

Checking on China

2011-12-16T09:32:00.000-05:00

Last year, I made my second visit to China. Readers will recall my interest in the very different cultural attitude toward disagreement. We think it is shameful for a person to suffer-in-silence. They think it is shameful for a person to disagree-in-public.

The greatest fear of the Chinese government is not the U.S. Their greatest fear is civil unrest. Considering the vast numbers of people they must placate, you can understand why the government is quickly ramping up their entitlement programs.

Imagine their horror that a small coastal village is now in open revolt. It seems like an opposition leader who was arrested and allegedly suffered a heart attack in jail also had three fractures in his skull. The military has surrounded the town, cutting off both food and water. They have vowed to "strike hard" against the villagers, and I believe they will.

As the economic growth engine of the world has slowed, unrest among the Chinese people has increased. This is the worst fear of the government. They just delayed the new capital requirements for banks, in order to keep the money flowing. They are now less likely to their currency appreciate, as they have in past two years.

Freedom is a scary thing, indeed!

Green Lights at a Dead-End

2011-12-16T08:22:00.000-05:00

Yesterday, the economic data suggested stronger-than-expected improvement in both jobs and manufacturing. That should have been good for at least a hundread points on the Dow, and it was! But then, Angela Merkel made a few despondent comments, and the Dow lost over half its gains.

It just reinforces my belief that the U.S. economy is doing better than realized, but the U.S. stock market is being "hammered" by Europe. Solve Europe, and the U.S. stock market will roar.

The Dow looks like it will open up about 80 points this morning, but we are seeing very light trading volumes, which means an up market could turn into a down market in a matter of minutes. We will not see any meaningful volumes until the holiday season is over . . . or there is a crisis.

But, don't expect anything to happen in Europe anytime soon, as they are busy throwing holiday parties on the deck of the Titanic. For decades, Americans have coveted the overly-generous vacation schedules in Europe, but our stock market is now paying a price for them to "rest". Maybe, we should just declare Christmas over and celebrate New Year's Eve early??

Regulation for Dummies??

2011-12-15T12:50:00.001-05:00

In the aftermath of the Bernie Madoff scandal, investment advisors are being crushed with new, often-confusing regulations. When I read the Obama Administration is killing the American economy with regulation, I tend to believe that.

The Wall Street Journal is required reading for investment advisors, but its editorial page is so predictable that I seldom read it. However, something piqued my interest yesterday about excessive regulation. It cited a study by a professor at George Mason University, who analyzed "major new regulations," i.e., rules that impose more than $100 million in new costs. It found Obama has issued 84, compared to Bush at 62 and Clinton at a mere 56.

Should I believe that? Bloomberg News (which is also owned by a Republican) found that "the Obama Adminstration has not reviewed or issued significantly more rules than its predecessors." In addition, the World Bank just published its report on "Doing Business," which ranked the U.S. as the 4th easiest market to do business in. And, the annual analysis by the World Economic Forum ranked us in 5th place. (Those nations ahead of us are smaller countries, like Singapore or Finland, that are largely irrelevant.)

Maybe, all the new regulations mentioned in The Wall Street Journal apply only to investment advisors . . . and the rest of the economy is doing just fine??

Keep The Faith

2011-12-14T10:10:00.000-05:00

Since the stock market is obviously losing steam with the continuing European crisis, a client asked me if we should just sell everything and stay in cash until "it" is over.

There have been numerous academic studies that show "market timing" is a poor strategy for investment managment, which requires perfect knowledge about the future. Most investors prefer "buy and hold" as a strategy. After all, America has seen worse problems many times and always succeeded in overcoming them. However, I believe a far better strategy than either of those is to simply increase cash gradually as anxiety/fear increases.

In addition, I don't think it is ever wise to be 100% out of stocks. Nobody can assure me that the European heads of state might not walk onto a stage at any moment and announce "the" agreement, in which case the Dow would probably jump a thousand points, setting the stage for another bull market. Besides, the U.S. economy is doing better than the U.S. stock market, stongly suggesting upside potential!

The European crisis is not going away anytime soon. Like most parts of the Christian world, little will be accomplished in Europe for the rest of this month. This looks like one of those rare years when we do not get a "Santa Claus Rally." Still, January is historically the best month of the year for the stock market.
Keep the faith!

The Vietnam Advantage

2011-12-13T02:46:00.000-05:00

One of the few benefits to come out of that national nightmare known as Vietnam was a wariness with "escalation" or taking an incremental approach to solving difficult problems. Fortunately, one young lieutenant with the name of Colin Powell developed the "Powell Doctrine," which he employed in the spectacular opening to the first war in Iraq. It calls for "overwhelming force, suddenly applied."

Another example is when the Secretary of the Treasury Hank Paulson got on his knees and begged, literally, then-Speaker Nancy Pelosi for the $700 billion TARP to save the U.S. banking system. When asked why he needed such a huge amount, he correctly explained he needed a "bazooka" to fight the bond vigilantes.

The Europeans lack this advantage, and the result is a long, drawn-out incremental approach to solving this difficult problem. Admittedly, they have a huge problem of "herding cats," but they desperately need a bazooka, and they need it quickly. Certainly, they are finally moving in the right direction . . . at the rate of a tortoise.

The irony is that the brake on progress is primarily the Germans, who know that "he who has the gold makes the rules." Germany stands to benefit the most from any new power-sharing arrangement. As stated many times in this space, this financial crisis will do for Germany what World War II could not. Yet, they make the problem worse by dragging their feet . . . that's irony?

The Sky Is Now Less Cloudy . . . Too Bad About the Stock Market

2011-12-12T08:52:00.000-05:00

The market has spoken. The verdict is in. Last Friday's agreement to resolve the European credit crisis is just another disappointment, kicking the can down the road . . again! At this hour, the Dow appears ready to lose about 80 points at the open. Investors are fleeing the Euro, driving up the value of the dollar, which temporarily drives down the value of gold.

Well . . . duh?? Did anybody expect a silver bullet, where 27 nations agree on every detail upfront? The good news is that the nose-dive has ended. On Friday, those nations who use the Euro began the long process of surrendering their fiscal sovereignty. That does not mean financial disaster is no longer possible, but the arc has been changed.

If nothing else was accomplished, Friday's agreement gives political cover for the ECB to begin quantitative easing, which would help Europe at this point.

The sky may still fall, but at least it is more blue . . . the macro-environment has indeed improved!

Learning From Others . . .

2011-12-11T08:10:00.001-05:00

Art Cashin came to work at the New York Stock Exchange in 1959. That's correct, he has worked there for 52 years and is now the chief floor trader for giant UBS. Self-made and even self-educated, he has become one of Wall Street thought leaders, especially on market behavior.

As no hint of scandal has ever tarnished his reputation, he is a folk hero to me, and it was an honor to shake his hand last week in New York.

He was asked what he would do if he was given a $1 million bonus right now, whether he would put into stocks, bonds, or what . . . until next March. I was a little surprised but quite pleased when he said he would hold the whole thing in cash. (I was pleased because I have been holding relatively large positions in cash and short term bonds.)

His logic was that his worry about the European debt crisis, which was not surprising, and the "Arab Spring," which was surprising. The question was posed to him on Thursday, when anxiety over Europe was the highest, before they signed the tepid agreement for the first steps in resolving the crisis. I wonder how his thinking may have changed, since the agreement was signed but suspect he might be willing to increase his stock exposure only a small amount now.

I was more surprised that he was so worried about a collapse of the Mid-East as we know it; taking away our desperately needed energy supplies. Certainly, a religious takeover of Egypt would be bad, and failure to remove the Syrian despot would be bad . . . but the world would go on. I suspect his fear is that Iran will explode. If somebody I respect is that worried, I will have to re-think my exposure to the energy sector and probably increase it.

Thank you, Art!

The Tragedy of MF Global

2011-12-10T08:19:00.000-05:00

It would have been hard to spend any time on Wall Street this week without over-hearing conversations on the tragedy of MF Global and it's famous CEO, former U.S. Senator Jon Corzine. While I overheard mere conjecture and speculation, I do have a suspicion about what happened.

For my clients, their cash is kept separate from mine, and they receive any income earned from their cash balances. For MF Global clients, their cash was also kept separate (although there is a report this was not the case), but MF Global received the income earned from the client cash deposit. In other words, the clients could not receive income earned on their cash balances.

Apparently, this worked fine for MF Global as long they could invest the cash into U.S. Treasury instruments and earn a decent rate of interest. When the Fed drove down the interest rate earned on Treasury debt, income to MF Global dropped. With regulatory approval, they were then permitted to invest in sovereign debt of other nations, like Canada and Switzerland. Unfortunately, I suspect MF Global invested in sovereign debt of nations like Greece and Italy, whose bonds quickly became worth less than invested. When everything had to be sold, there was a loss of $1.2 billion, all borne by the clients.

If this is the case, it would mean MF Global and Jon Corzine were toweringly stupid or imprudent but NOT criminals. The tragedy is that they may have followed the law, but they did not act in their client's best interest. This is yet another example where brokers are different from Registered Investment Advisors, who are held to a higher standard, i.e., to act in a fiduciary manner with all client funds. Stated another way, we are required to act in the client's best interest, not our own. This is not true for stockbrokers!

I doubt more regulations would help, except requiring anybody holding client funds to act only in the best interest of the clients. But, the army of stockbrokers is opposed to this!

Caveat: This is my best guess of what happened at MF Global under Jon Corzine but is mere conjecture.

Motherly Advice

2011-12-09T10:11:00.000-05:00

Yesterday, a very famous economist from Switzerland made some cutting comments about Fed Chairman Ben Bernanke. Being educated in Europe, it is not surprising that he belongs to the Austrian or "Tough Love" school of economics. Like all economists, he was judgmental and intellectually intolerant, as well as bombastic.

For the record, my thought is that Bernanke did a great job keeping the U.S. out of a depression. He is innovative, pragmatic, and well-intentioned.

When the famous Swiss economist was asked what he would do if he was Bernanke, he responded flippantly that he would resign. Later, he admitted he would have let the banks fail and the U.S. financial system freeze. The Austrian view is that a quick depression is better in the long run than a long, slow-speed recession.

Yet, it reminded me of the George Allen fundraiser I attended recently, where a different candidate was asked how he would fix a particularly difficult problem and responded he would simply get rid of Obama. When pressed what he would do after he got rid of Obama, he said he would appoint Republican policy-makers. Otherwise, he had no ideas.

I understand why it is necessary to pick a fight sometimes in order to get attention or sell books, but at some point, it certainly becomes a tedious time-waster. My mother always told me "if you can't say something nice about somebody else, then shut your mouth!" That's good if quaint advice for politicians and economists.

Slow Motion Train Wreck?

2011-12-09T04:43:00.001-05:00

No, the world is not coming to an end! Besides, that can only happen once, and there is no way to prepare for it.

However, the European Union may be coming to an end. With the latest agreement, it appears that the Euro will survive among the 17 nations that use it, which would be great news. However, it is not clear what will happen to the ten nations that are members of the EU but do not use the Euro, such as England.

When I woke up at 4AM, I was expecting chaos in the European markets, with the value of the Euro plummeting. (That would mean gold would be falling further, and I was expecting to buy some today.) Sure enough, Asia was down sharply, but Europe is mixed at this hour, apparently more focused on the downgrade of three French banks by Moody's. The fact that Europe is not collapsing this morning comes as a pleasant surprise.

It looks like Europe will now work on the next Grand Plan. You'll remember the first one, i.e., that austerity programs in the PIIGS would stop the contagion. Then, there was Grand Plan 2.0 to establish the EFSF (European Financial Stability Fund), which will morph into the ESM (European Stability Mechanism) next year. I think Grand Plan 3.0 was for the ECB (European Central Bank) to issue Eurobonds, guaranteed by all 27 member nations. Then Grand Plan 4.0 was to create an alternative union of the members willing to submit their fiscal policy to Brussels. A version of this, call it 4.1, is the latest tenuous agreement. It calls for automatic measures to be taken when any of the 17 nations using the Euro violate their deficit covenants. The previous agreement contained similar sanctions, but they were not automatic and were never implemented.

Don't ask me what Grand Plan 5.0 is, because nobody knows. I just know it is out there. The Europeans desperately want to keep it together. Helpfully, they are no longer in denial and are really working to prevent this train wreck and save the EU. I'm beginning to believe there will be no Eureka moment, when we know the EU will survive. And, the agreement last night may be the subtle change in momentum, which will finally liberate the U.S. stock market.

The Big City . . . In a Little World

2011-12-08T06:10:00.001-05:00

Today, I'm attending a conference in the New York Stock Exchange on the rapidly changing commodities markets and looking forward to it. I haven't been inside the NYSE in almost 8 years and expect to see major changes.

But, I don't expect to see any major changes in the stock market today. The world continues to watch the incredibly high stakes drama in Europe. The European Central Bank meets today and is expected to cut interest rates again, which is no big deal. A big deal would be if the ECB announced a round of real quantitative easing.

This morning, the futures indicate little change in the stock market and low trading volumes.

Tomorrow will be a different story . . . so, stay tuned!

Suspended Agony

2011-12-07T07:44:00.001-05:00

When jumping out of airplanes, it is advisable to be wearing a parachute. The only problem is that parachutes require two large straps to go between your legs. However, when the parachute opens and the rate of fall slows suddenly, there are certain anatomical challenges for males.

To prepare paratroopers for this sensation, there is a building in Jump School known as "suspended agony," where each trooper hangs from the ceiling with all his weight on the two strategically placed straps between his legs. The minutes tick by like hours.

The wait until the European summit this Friday has become a form of suspended agony. The world stock markets need relief from the spectre of financial collapse in Europe, followed by a break-up of the Euro. The world was already emotionally over-invested in the outcome of this summit, but the over-investment increased dramatically with S&P's announcement that 15 EU nations, as well as the all-important EFSF, may possibly lose their triple-A credit rating very soon. Since then, the stock markets have drifted, with a slight positive bias.

Dow futures suggest it will gain about 20 points at the open. I expect little volatility in the market until Friday, which is already the most volatile day of the week. That afternoon could be exciting or terrifying but certainly interesting. The minutes will tick by like hours for investors!

Frankly, I expect the "can to be kicked down the road" but only a short distance. That delay will be disappointing to the market, and it is not nice to disappoint the market.

No Pressure . . . NOT!

2011-12-06T07:12:00.000-05:00

Yesterday, the Dow was cruising along, having gained 156 points. Suddenly and without warning, Standard & Poor's (S&P), who did so much to create the last crisis, announced that the individual nations of Europe, including mighty Germany, were being put on "credit-watch" for a downgrade from AAA to AA, pending the outcome of Friday's political summit.

The stock market immediately started losing steam but held onto about half of that gain. Asia was negative overnight on that news. Europe is mixed this morning, and the Dow looks like it may gain about 20 points at the open. The powerful momentum of the past week was clearly broken.

There is a strong sense of deja vu. It was S&P who downgraded the U.S. because of our inability to deal with the deficit politically. That had minimal impact on our borrowing costs because the Fed will buy everything the Treasury wants to sell. However, the ECB has not promised to do the same for Europe, making a credit downgrade potentially more damaging to Europe.

My first thought was that this action by S&P greatly increased the pressure on European leaders for Friday's summit, increasing the probability of finally putting this crisis behind us. My second thought was that S&P did the same thing to the U.S. prior to the disgusting debt negotiations in Congress in August, and it made absolutely no difference. The elected children in Congress, who prefer purity to productivity, did nothing, and S&P promptly downgraded our credit.

The hardest part in making economic predictions is knowing which of the myriad economic variables are controlling the outcome. I feel comfortable making those predictions. The hardest part in making political predictions is knowing whose bundle of emotions will control the emotions of others. I feel clueless making those predictions.

Tell me what happens Friday at the European summit on the financial crisis, and I'll tell you how the stock market will close that day.

For What It May Be Worth

2011-12-05T09:24:00.000-05:00

I just listened to the chief U.S. economist for Barclay's Capital. He is predicting the S&P, which is now 1244 will drift down to 1150 by next summer but end the year at 1330, which would be a dramatic turnaround indeed.

Earlier this morning, I listened to the chief European economist for Barclays in Europe saying they do not expect a "bazooka" approach to calming their financial crisis. Without that, I think Europe has no chance of resolving the crisis.

Although he didn't say it, maybe the U.S. economist expects the S&P to drop almost a thousand points because the Europeans will not take a bazooka approach??

A Coalition of the Willing . . .

2011-12-05T06:54:00.000-05:00

Overnight, Asian markets were mixed but generally up. The European markets are decidedly positive. The futures indicate the Dow will gain about 90 points at the 9:30AM opening. After a record-breaking week, it is encouraging to see investors are buying risk, before the European summit this week. You will recall the European leaders promised resolution of their financial crisis this week. If they don't . . . there could be a dramatic reversal.

At the same time, notice the bond market is telling us something different. Widely considered more wise and less emotional, the bond market is telling us to beware. Interest rates on European bonds have increased, even on German bonds, as bond buyers are buying bonds in the U.S. and Asia instead of Europe. Sarkozy correctly believes this problem could be solved by the ECB issuing Eurobonds, which would obligate all nations of the EU, not just one.

Merkel says the problem with the ECB issuing Eurobonds is that the rich nations like Germany could be paying for profligate nations like Greece and Italy. I don't see how they can negotiate such differences by Friday. While Germany and France are the loud voices in this debate, don't forget there are 25 other nations in the European Union, fifteen of which use the Euro as their currency.

Sarkozy wants to create a parallel universe of European nations to bypass the long EU approval process, a sort of economic "coalition of the willing." We shall see . . .

The Little Russian Girl Who Changed America

2011-12-05T06:26:00.001-05:00

1957 was an important year for investment analysts. That was the year that Harry Markowitz published his Modern Portfolio Theory and later won the Nobel prize. It was also the year that Ayn Rand published Atlas Shrugged and changed America. Perhaps, that was a hyperbolic over-statement but Ms. Rand would have loved it, as she often used them.

Fifty years ago, in 1961, I read Atlas Shrugged for the first time and became a fan. It is a story of America in 2016 where the most successful businessmen keep disappearing, only to find they had gone "on strike" to protest the ever increasing corruption and over-reach of the government.

It became the intellectual basis for conservative Republican politics and helped launch the Libertarian Party in 1971, the survivalist movement in the late 1970s, and the Tea Party in 2008. For a brief time in the very early 70's, I even considered using my Special Forces training as a survivalist to combat the government takeover that I presumed was imminent.

I realized how much her writing has influenced America when it was pointed out to me that every supply-side economist was an ardent fan of Ayn Rand.

In 1992, the film rights for this book were sold, but the film didn't get released until April 15th of this year. Unfortunately, the film promptly bombed, and theaters stopped showing it almost immediately. I was finally able to buy a copy on DVD and watched it last night.

One explanation for the poor performance of the movie was that it only covered the first half of the book, and the viewer is left hanging; a not very satisfactory ending to any story. Another explanation is the increasing disdain for partisan issues among the wider population, which is understandable. Of course, serious Ayn Rand fans allege a government plot to release other movies at the same time, that were better than this one, which I consider ridiculous.

I thought the film was technically great, with good acting and great imagery. Yet, it showed government not as an oppressive force, which was Rand's belief, but more as a tool for corrupt business leaders to use against other business leaders.

As much as I appreciate her work and the thoughts she gave me decades ago, I drifted away from her philosophy when I watched it being hijacked for political purposes. Ayn Rand was a small girl when her wealthy family fled Communist Russia for the United States, carrying the memory of an oppressive Communist dictatorship. She saw the rise of unions in this country as analogous. She could foresee America going the route of Russia. But, don't we all know that Russia and Communism have both failed? The chances of that happening in the birthplace of Capitalism is zero.

The philosophy of Ayn Rand is called objectivism and is similar to existentialism in that it places great emphasis on the individual, whose path to greatness is not possible without maximum freedom from government control. But, she wrote with hyperbolic over-statements for dramatic purposes, not for political purposes?

A hammer is a tool. It is neither good nor bad. It is just a tool; sometimes useful, sometimes dead-weight, but just a tool. Governement is just a tool. It is neither good nor bad, just a tool. It deserves neither love nor hate. It just needs to be controlled, like a hammer. And, Ayn would agree!

Drum Roll, Please . . . Ho Hum

2011-12-02T08:44:00.000-05:00

The monthly Jobs Report issued by the Department of Labor is the most closely watched economic report every month. It is issued the first Friday of each month, i.e., Today!

Before the Report was announced, the futures market indicated the Dow would gain about 130 points at the open.

Economists were expecting 125 thousand jobs were created in November, and it was 120 thousand instead. Dow futures dropped ten points to 120 points at the open. Then, it was announced the unemployment report dropped from 9.0% to 8.6%. Also, it was announced that September and October produced 72 thousand more jobs than earlier reported. Then, the Dow futures jumped to 155. Then, we figured out the drop in the unemployment rate to 8.6% was not meaningful, because the labor participation rate dropped.

After the Report was announced, the futures market indicated the Dow would still gain about 130 points at the open.

Still, it was a good report . . . the U.S. is not going into a recession . . . unless Europe drags us kicking & screaming into one!

Happy December

2011-12-01T07:10:00.000-05:00

Yesterday, the market closed out a very volatile November with a roaring 490 point gain in the Dow. Today, we start the month of December, which is historically kind to the market. In fact, December is positive 80% of the time. The average gain is an impressive 2%. The last time we had a negative December was in 2007. Often called the "Santa Claus Rally," behavioral psychologists attribute the increase to investors appreciating more important things and therefore NOT listening to investment analysts.

Now, start preparing for a December gain by saying . . . "HO . . . HO . . . HO"

Enjoy the Euphoria

2011-11-30T09:20:00.000-05:00

Earlier this morning, the Dow looked to gain 85 points at the open. Now, it looks to gain 285 points. It has been getting better all morning. In addition to the ten-day deadline on resolving the European crisis, the primary central banks of the world just announced a huge new liquidity measure. This should reduce the liquidity risk if not the credit risk, which still reduces overall risk.

Is it time to deploy cash? No!

Today is euphoria. So, just enjoy the good feeling. If this is the real bottom, there will be time to catch up tomorrow or Friday or even next week. There will be some sort of bad news out of Europe that will catch the market by surprise. Ten days is a very long time!

While you're enjoying the good news in Europe, savor this morning's ADP report, which indicated 206 thousand jobs were created in the U.S. by the private sector last month, much more than expected. After netting out government layoffs, Friday's all-important Jobs Report by the Department of Labor might be less unpleasant, for a change.

A Change of Pace . . . or a Change?

2011-11-30T06:56:00.000-05:00

At 5AM, the futures market indicated the Dow would lose about 25 points. By 6:30AM, it looks like it will gain 85 points at the open. Why was there a turnaround of 110 points? Some of the talking heads out of Europe said the crisis would be resolved, one way or the other, within the next ten days. Coming on the heels of the announcement that the EFSF would be leveraged to become more bazooka-like (although they haven't announced how much it would be leveraged), this new time "certainty" was refreshing. I have no idea if it is true but doubt that European pontificators, I mean politicians, could agree on lunch within a mere ten days.

Another hopeful sign is that the summit on December 9th (ten days from now) will develop rules of the new Stability Pact. Make no mistake -- members of this pact will surrender a huge degree of sovereignty, i.e., fiscal policy. When EU nations surrendered their monetary policy with the Maastricht Treaty signing almost 19 years ago, it was joked it would take a crisis before they surrendered fiscal policy. They didn't say it would take such a big crisis!

In addition, China just annouced they would cut their bank reserve requirements for the first time in three years. During this time, they have been more concerned with inflation and have been restraining growth. Today's announcement to pump up growth is a very bullish sign.

In the U.S., we will be getting job data over the next three days. If today's data at 8:15AM is better than expectations, we will have received bullish data from three continents, and it should be a very strongly bullish day in the market.

Enjoy all the good news today . . . but keep watching!

Apologize to your kids?

2011-11-29T15:12:00.001-05:00

Because I see the world thru the prism of economics, it is helpful for me to be around investment advisors who see the world thru the prism of financial planning. Every month or two, a group of 8-10 of us do just that, which we did this morning.

Given the world investment markets, there was an over-arching sense of gloom, which shouldn't be surprising. However, there was also a sad agreement that America's standard of living MUST decrease, i.e., that our kids will not have as good a world as we have enjoyed. The reason is that they must reduce the debt incurred to pay entitlements to The Greatest Generation and, to some extent, the Boomers as well.

The only hope for our kids is for the economy to grow so fast . . . that the U.S. standard of living can be maintained, but how is that possible without real political courage among our elected leaders? Entitlements MUST be controlled now, and our leaders are too afraid to admit that. So, the problem grows . . .

I think I'll call my daughter tonight and apologize to her!

The Deaf Coach

2011-11-29T07:05:00.000-05:00

Everybody has seen a football movie where the young player keeps begging to "send me in, coach!" That is how I see the U.S. stock market. It wants to reflect the underlying U.S. economy but is over-shadowed by European headlines.

Yesterday, the rumors out of Europe suggested an alternative universe of European nations could save the Union and the Euro. That allowed the U.S. market to notice that retail sales for the four-day opening to holiday season were up 16% over last year. And, the Dow gained 291 points.,

Today, the rumors out of Europe are that European Financial Stability Fund (EFSF) can be leveraged, to give it some "bazooka" strength. Plus, nobody is denying conversations about an alternative universe. The futures market at this hour indicates the Dow will gain another 85 points when it opens, for a two-day rally.

The U.S. economy is doing better than expected and keeps begging the U.S. stock market to pay attention. When it does, there will be a great rally . . . if the quarterback doesn't get sacked by the European team!

What a Difference a Weekend Makes

2011-11-28T06:37:00.000-05:00

After the worst Thanksgiving week since 1932, the futures market indicates the Dow will gain about 230 points at the open. This impressive turnaround is due to several things. First, holiday sales in the U.S. appear to be remarkably strong. Second, Sarkozy and Merkel are talking about a "second European Union" that can coordinate fiscal policy and move more quickly. Third, there was an unconfirmed rumor that the IMF was bailing out Italy, which made absolutely no sense and was subsequently denied by the IMF.

Once again, it illustrates that the U.S. economy is trying to dig its way out of the last recession and that we will go back into recession only if Europe pulls us into it.

Our stock market is reflecting hope out of Europe, which I expect will be temporary. The only way to kill bond vigilantes is with a bazooka, and this piecemeal approach just irritates them. The more we isolate our economy from Europe the better.

The big news this week will be the monthly Jobs Report on Friday, when we expect to see about 125 thousand jobs were created, after a continued loss in government jobs. Anything better than 125 thousand will move the market higher. Keep your fingers crossed!

Good Foolish Advice

2011-11-27T10:05:00.000-05:00

The Motley Fool column in today's newspaper deserves emphasis as we sweat out the financial crisis in Europe. It asks the question "What should I do if the stock market crashes?"

It answers with "Above all, don't panic. Remember that the market always goes up and down, and sometimes it moves sharply . . . In the near term, anything can happen, including a crash. Over the long run, the market has recovered from all its crashes and has gone to set new highs . . . Market crashes have a big upside: They can offer terrific bargains. Remember Warren Buffett's advice: Be fearful when others are greedy and greedy when others are fearful."

The next time you read a frightening headline about the European financial crisis or the impotent U.S. Congress, remember this good advice from a Fool . . . The Motley Fool.

Time to be right?

2011-11-27T09:27:00.000-05:00

Although I have been a member of the National Association of Business Economics (NABE) for many years, I usually pay little attention to their economic forecasts, which invariably tend to see the future as a mere continuation of the past. Most economists just extrapolate the present into the future . . . it is always "more of the same."

This time, I agree with the majority of economists.

They predict the odds of a second recession are low, that GDP will grow 2.4% next year, that unemployment will improve very slowly, consumer spending will remain weak while business spending remains strong, and that housing starts will improve about 10% next year.

This is a typical recovery from a financial crisis. While a recovery from a normal recession can be rapid, it takes a longer time to recover from a financial crisis because debt is reduced over a longer period. Consumers are spending less because they are reducing debt and saving more, which is good for the overall economy in the long-run but bad in the short-run.

The NABE forecast was silent, however, on the most pressing issue of our time, i.e., the financial crisis in Europe. That could change everything, plunging the U.S. back into recession but unlikely to plunge us back into another financial crisis. That is an important distinction, because we would recover more rapidly from that recession than Europe would from their financial crisis.

I think the majority of economists are right this time, just like a broken clock is right twice a day.

Black Friday

2011-11-25T07:20:00.001-05:00

Today will be boring . . . be thankful!

Trading volumes have been low all month and minuscule this week. Both Asian and Europe were down somewhat overnight. The news out of Europe is disappointment that the meeting between Sarkozy and Merkel produced nothing, except an agreement not to disagree in public. Ominously, interest rates continue to rise in Europe. The futures market indicate the Dow will lose about 70 points at the open.

I confess to being very worried about a European collapse. It will take real political courage to connect their common monetary policy with their individual fiscal policies, and political courage is a rarity among elected politicians everywhere.

It is tempting to ignore the tax consequences and sell everything, to remain in cash until there is greater clarity. Yet, at any time, Sarkozy and Merkel, as well as the heads the EU and IMF and ECB might walk onto a stage to announce their "bazooka" agreement, and the stock market would roar. Cash levels should be high now but certainly not 100%.

The U.S. stock market will close early today, at 1PM . . . be thankful and then go shopping!

A Day of Thanksgiving

2011-11-24T07:50:00.000-05:00

Yes, I am thankful today . . . thankful for my good health and good fortune. I'm very thankful for both my blood-related and business-related families. They show me the reason for my work everyday! I'm also thankful to live in such a great country, where freedom of religion is guaranteed.

(I am especially thankful this particular morning that the European stock markets have stabilized and are not crashing, when the U.S. stock market is closed!)

But, thankfulness and forgiveness are not the same thing. Since there is no Day of Forgiveness, we should do both today. Therefore, I forgive all those who did hurtful things this year . . . except those elected children who serve in Congress, especially those who failed us on the SuperCommittee.

And, thank you for taking your time to read my thoughts!

Free Floating Anxiety . . . or Thankfulness

2011-11-23T10:55:00.000-05:00

I hate to be a scrooge as the holidays begin, but I do wish we could postpone Thanksgiving tomorrow.

The European financial crisis smouldered in Iceland and Ireland before igniting in Greece. Then, the first "too big to save" country (Italy) came under attack from the bond vigilantes. Last week, Spainish interest rates rose dangerously, and France barely held onto its AAA rating. Most worrisome, the German bond auction nearly failed today, with their rates rising. The German AAA bonds are paying higher interest rates than our AA bonds.

I will be thankful for many things tomorrow . . . but not that the stock market in America is closed when Europe's market is open.

The market is down about 170 points as I write this, reflecting continuing anxiety about Europe, as well as the desire of day-traders not to hold stock over the long weekend, especially when Europe is open . . .

Historically, the market is up 70% of the time during Thanksgiving week. Welcome to the 30%! This too will pass . . .

Does the Euro Matter?

2011-11-23T06:39:00.000-05:00

In this column and many others, there has been much gnashing of teeth over the break-up of the Euro. Yesterday, a friend and client sent me an interesting blog by Charles Hugh Smith, which makes the important point that a nation's currency is an important throttle on that nation. Without that throttle, the nation will easily get out of control.

He said it well: "The euro supporters forgot or ignored the primary purpose of national currencies:to account for differences in transparency, productivity, trust, money creation and risk between nations' economies and their Central Banks/States. If you remove this means of accounting for these fundamental differences, then you have removed a feedback loop from a dynamic system, and thus removed an absolutely essential flow of information and transparency."

He was arguing that the world will survive the loss of the Euro, as it should have never been created in the first place. While I expect the Euro to survive, I do agree the world would survive losing it, ignoring the immense pain of getting rid of it.

But, what makes the Euro unsustainable was never expected to be sustained. Creation of the Euro, along with a common monetary policy, was expected to be the first step in a long process of both fiscal and political integration. Unfortunately, the politicians predictably waited on the second and third steps until there was a crisis.

We are already seeing calls for greater fiscal integration. To issue Eurobonds (the silver bullet to solve this crisis), Germany has already made clear that EU headquarters in Brussels would have to approve all national budgets, which is a huge loss of sovereign power and national identity by each nation.

My prediction remains that the Euro will survive and that this crisis will do for Germany what the two World Wars could not. Since I see that as inevitable, I wish it would happen today and permit the U.S. stock market to once again reflect the U.S. economy.

2011-11-22T15:08:00.000-05:00

Investors have been steadily moving assets from stockbrokers to Registered Investment Advisors (RIAs) over the last six years. This is despite the fact that most of those people cannot repeat the advantages of dealing with an RIA instead of a stockbroker. Here is a handy little video from YouTube that helps . . . enjoy!

http://www.youtube.com/watch?v=yz7NEVtJaUY

"Bottom Fishing?"

2011-11-22T06:56:00.002-05:00

A longtime investing principle is that only a fool invests his money based on market-timing. The number of unknowables is infinite. A market-timer cannot know what he doesn't know that will ruin his expectation.

That said, why does everybody keep asking if "this" is the bottom? In a word . . . No!

I cannot say it often enough -- a financial crisis is much worse than a recession. Europe is having a financial crisis that may push the U.S. into a recession, but that is still unclear. The U.S. had a financial crisis in 2008 with the fall of Lehman, and subsequently went into a deep recession.

Even though the U.S. economy shows signs of life, the U.S. stock market is weakened by the European financial crisis. So, when will the financial crisis in Europe end? Of course, nobody knows, but here is my best guess: when the ECB commences quantitative easing on the scale of the Fed.

That is not the best solution. Here is the best solution: Give the EU authority to coordinate the fiscal policies of all 27 member nations, plus give it authority to issue Euro-bonds, backed by the full faith & credit of all 27 nations. Then, make huge cuts in entitlement spending, i.e., make drastic cuts in retirement and health care, which takes more courage than is reasonable to expect from elected decision-makers. Since this is not going to happen, only the ECB can save Europe. (Maybe, the ECB should hire Ben Bernanke?)

When that announcement is made, it will be time to get aggressive again.

But, what about the failure of the elected children on the SuperCommittee? The market was expecting it and is not that big a deal. However, that is based on the expectation that the draconian budget cuts scheduled for the first of next year (2013) are postponed. President Obama wants to keep the pressure on Congress to compromise and promised to veto any postponement of those draconian cuts. That is a hollow threat! The prospect of pending budget cuts will slow the economic recovery and keep unemployment high in an election year. The cuts will be postponed.

At 4AM, Dow futures indicated a minor loss at the open. Now, it indicates a gain of about 55 points. No, this is not the bottom . . . be patient.

Thanksgiving Week

2011-11-21T08:37:00.000-05:00

As I look out the window from my hotel and see the dreary weather in Dallas this morning, I suspect it looks just as dreary on Wall Street, as well as all-across Europe, regardless of the weather.

In Europe, five governments have now fallen as a result of their debt crisis, with Spain being the latest. The bond vigilantes are busy circling Italy and have started circling Spain. France seems likely to lose their AAA credit rating soon. Their best hope would be for the EU to issue real euro-bonds, but Germany is dead-set against this. (They remember their pain a decade ago from bailing out just East Germany alone.)

In the U.S., the remaining investors who clung to hope of a SuperCommittee compromise are giving up and selling. The Dow is expected to lose over 160 points when it opens. I expect the U.S. to be down-graded by at least another of the three credit rating agencies soon. We won't be paying the price until the Fed stops buying bonds from the Treasury, but delayed pain is the same as instant gratification, isn't it?

The stock market will be very volatile this week, as trading volumes are low during the Thanksgiving week, which amplifies price movement. Still, it is a time for Thanksgiving, even on Wall Street and in Europe.

I came to Dallas to help a widow deal with her financial issues. That has a way of making you realize there is much to be thankful for . . .

Bittersweet

2011-11-17T20:54:00.000-05:00

Losing a client is bad enough, but losing a friend hurts far worse. I lost one last month in Dallas. His widow asked that I skip his funeral, in order to help her with all the estate issues later. Early tomorrow, I will leave to help her, returning late Monday.

I have been thinking about his life quite a bit. He lived life on his own terms and died young (age 69) as a result. He loved his family, completely and unconditionally. He was the original macho-man on the outside but a warm-nosed puppy on the inside. I will miss him!

So, this blog may run dry for a few days, and I apologize . . .

Between the Devil and the Deep Blue Sea

2011-11-16T15:21:00.000-05:00

Who worries about running off a cliff . . . when a grizzly bear is breathing down your neck?

At a meeting yesterday, I was asked why I was not more concerned about America running off a cliff if the SuperCommittee doesn't produce a deal one week from today and Congress doesn't approve it by Christmas before draconian cuts in government are made New Year's Day?

The stock market is busy fleeing the European grizzly bear and starting to accept that the SuperCommittee will fail, and that the U.S. credit rating will be reduced again, but the draconian cuts which are a creature of Congress will be postponed by Congress. This explains much of the slow leakage we've been seeing in the stock market.

A pure financial crisis is much more scary than a pure fiscal crisis.

Suppose the SuperCommittee does produce a workable plan, the market will rally strongly. But, if Congress continues to confuse intransigence with courage instead of stupidity, the leakage will resume. Of course, none of this matters in the short run if Europe self-destructs.

Protecting the Investor?

2011-11-15T08:57:00.000-05:00

It was three years ago that Bernie Madoff was exposed and sentenced to 150 years in jail. That only took a few months. However, it has taken the Securities and Exchange Commission three YEARS to investigate themselves and discipline eight of its employees for lousy work in auditing Madoff, despite having proof delivered to them by Harry Markopolos.

Does anybody see a problem here?

Thank God for the Tea Party and "Occupy Wall Street"

2011-11-15T08:23:00.000-05:00

Yesterday, the Dow dropped about 76 points. The futures market suggests it will lose another 70 points this morning, following the pattern of Europe, where Germany and France are both down about 2%.

It is easy to think the world is just waiting to hit the SELL button as soon as the market opens. Actually, there are very few active players in the market now, mostly the automated high-frequency traders that I distrust. The total trading volumes are remarkably low. This is the primary reason the markets have been so volatile recently.

Most human investors are sitting on a large amount of cash right now. Many of us can predict the economy reasonably well, but nobody can predict the next breaking headline out of Europe. As the economy matters again and as earnings matter again, I'll reduce the cash levels.

Frankly, I think Wall Street is more interested in "Occupy Wall Street" than Wall Street right now. I have not seen the resentment against the demonstrators that I expected on Wall Street but cannot explain it. They were also indifferent to the Tea Party demonstrations as well. Perhaps, both have entertainment value when the stock market is too volatile to trade prudently.

Thoughts on Veterans Day

2011-11-14T16:36:00.000-05:00

I participated in a Veteran's Day Parade this weekend and found it a little hollow. As society has tried to overcome its shameful treatment of Vietnam veterans, it has now become almost too effusive. I listened to a lot of pretty words about service and protecting families back home and making the world "safe for democracy," whatever that means. It was all very well-meaning, and I'm very appreciative of the effort it took and the sincerity of the words. But, I decided there will be no more parades in my future.

Yet, when I returned home to Virginia Beach, I read that 4,243 people become entrepreneurs. In the face of the worst recession since the Great Depression, over four thousand people decided to start a business in this city last year. It is not fair to say they were entirely people who couldn't find a job, so they started a business. The fact is that it is down only 22% from four years ago. So far this year, over 3,400 people became entrepreneurs.

That is the America I'm proud of and love! Fearful but fearless people who take chances . . . God bless'em!

The incredibly important intellectual god-mother behind Republican ideology is Ayn Rand, who extolled the virtue of supermen who were entrepreneurs that changed industries but were persecuted by government. While the mega-wealthy don't look persecuted to me, I do share her great respect for entrepreneurs.

Veterans of all countries fight for the wives and children back home. Maybe, it is only the American veteran who fights for the entrepreneurs back home. And, I think that is worth fighting for. Maybe, I will go to another parade one day, but I don't know.

"Smart Money" and Interest Rates

2011-11-14T07:30:00.000-05:00

U.S. banks are required to have a certain amount of capital for each investment. European banks are not required to have capital in order to hold certain investments, such as sovereign bonds of European governments. That means a European bank can take in funds from depositors and buy bonds of some European government. They pay the depositor next to nothing for the funds to buy the bonds and receive the higher interest paid on the government bonds. Since there is no capital requirement there is no limit on the amount of government bonds they can purchase, as long as depositors continue to deposit money. This policy was designed to hold down borrowing costs of European government but actually increases the amount of leverage in the banking system, which is a big part of the current problem.

To protect themselves, banks and other holders of the bonds can buy protection or "insurance" called credit default swaps (CDS). As the market perceives a particular government to be more risky, the cost of buying a CDS goes up. Take a look at http://www.cnbc.com/id/38451750

The cost of insuring Greek debt is astronomical. Judging from the news, one would expect Italy to be the second highest. However, the "smart money" thinks Portugal, Ireland, and Hungary are worse credit risks than Italy. While a bankruptcy for any of those nations would hurt investors around the world, Italy is different because it is so big.

Italy has the third largest economy in Europe and could destroy those banks across Europe who have loaded up on higher-yielding Italian debt without needing any capital to buy that debt. More capital will cure many ills!

The good news is that Italy was able to sell $4 billion in new debt this morning. While they had to pay a relatively high interest cost, albeit below the systemically important 7% level, it is significant that somebody was there to buy it. I'll bet the banks were not buyers today, which increased the cost of borrowing.

Italy will live to spend another day . . . maybe two.

Mr. President, That's My Chair

2011-11-11T10:36:00.000-05:00

On Wednesday, the sky was falling, and the Dow lost 389 points. Europe was killing us. Then, Greece elected an economist as Prime Minister to take the place of the third-generation professional politician. Then, Italy made real progress in passing a budget, when uber-politician Berlusconi will resign. It is widely reported his replacement will also be an economist.

With the replacement of two career politicians by economists, the stock market has recovered all its losses on Wednesday and is heading up. Maybe, there is a lesson in this that we should learn . . .

A Good View from 35,000 Feet

2011-11-11T08:11:00.000-05:00

Most of my public speaking for the last few years has been on the subject of globalization, which fascinates me. One of the primary thought leaders on the subject is Pulitzer-winning Tom Friedman. Anything written by him is required reading. His latest book, co-written with Michael Mandelbaum, is That Used To Be Us.

It is a bittersweet walk down Memory Lane beginning with the happy days following the collapse of the Soviet Union and the fall of the Berlin Wall. The U.S. was the undisputed leader of the world, our economy was booming, the budgets were balanced, and the dollar really was King Dollar.

In a very short time, we have fallen far. To his credit, Friedman barely touches the subject of fault and looks to the future. His analysis is that we have four problems to attack simultaneously, i.e., (1) globalization, (2) changes caused by the IT revolution, (3) chronic deficits, and (4) the consequences of rising energy demand in the face of climate change. I think Republicans and Democrats would agree on the first three and quibble on the fourth.

He reminds us of what Winston Churchill said to the British people during the depths of World War II, when he said "we have not journeyed across the centuries, across the oceans, across the mountains, across the prairies, because we are made of sugar candy."

The U.S. clearly has problems to attack, but let's not forget the "five pillars of our prosperity" that put us on top before and will pull us back to the top again. They are (1) good public education, (2) infrastructure, (3) immigration, (4) government support, and (5) implementation of necessary regulation on private economic activity. I suspect the Republican response would be chronic deficits preclude any of the above, and the Democratic response would be to plead for one last gasp of deficit spending. My response would be the bond vigilantes won't permit "one last gasp." They didn't hesitate to attack Italy, the world's eighth largest.

I have immense appreciation for Tom Friedman's ability to see the trends from 35,000 feet, but we do not live in a rational world. We cannot fund the pillars of our prosperity before we deal with the heart-breaking problem of entitlements, which Friedman barely touches.

Just as one small example, Medicare spent $55 billion in 2009 paying for the last two months of life. Was it worth borrowing from the Chinese? And, which of the five pillars of prosperity would benefit most from $55 billion? It is a terrible trade-off.

Dealing with the problem of entitlements is indeed heart-breaking!

The View from Wells Fargo . . . and Europe

2011-11-10T06:10:00.001-05:00

I enjoy reading the economic forecast from Wells Fargo, which inherited the highly-respected Economics Group of Wachovia when that bank failed. In short, they expect to see continued slow growth in the U.S. with no recession. However, they point out that Europe is already entering recession.

Several months ago, I predicted there was only a 33% probability of a recession in this country, unless Europe pulls us into one. Now, it looks like that will happen. The question becomes how severe and how long will it be, as those answers drive investment planning.

The answer to those questions depend on how Europe responds. Yesterday's loss of 389 points on the Dow is a somber indicator of how grim it is. Make no mistake: We are now watching the battle for Europe. The few remaining World War II veterans will experience deju vu.

Overnight, Italy was able to see about five billion euros worth of short term bonds at slightly lower-than-expected interest rates, which was a small victory over the bond vigilantes. More importantly, comments by both Sarkozy and Merkel show they are thinking about a new "two-speed" Europe. In other words, it shows they are ready to cut off the PIIGS and go on without them. While that would be painful, the market is comforted that there is at least some plan!

At 6AM, futures indicate the Dow will recover about 55 points at the open. However, like any day since the European crisis began, it could be a wild ride on Wall Street until 11:30AM here, when the European markets close. Pray that Rome can pass their budget today and that Greece can pick new Prime Minister . . . is that too much to ask??

Does anybody care that Wells Fargo predicts fourth quarter growth will be a respectable 2.5% in the United States of America?

Wear Your Neckbrace

2011-11-09T05:58:00.000-05:00

Late yesterday, Berlusconi promised to resign. U.S. markets started to rally, with the Dow closing up 101 points. Overnight, the Asian markets also rallied. Then, the European bond markets opened, and interests rate on Italian bonds promptly shot well above 7% for ten-year bonds, a critical level historically. (Short term interest rates rose even more, inverting the yield curve, which usually predicts a recession.)

The "cat is out of the bag" now, and the bond vigilantes are attacking Italy as they did Greece. This is the last stand against chaos in Europe, and it will be not be easy. Italy may be too big to save. If the ECB flinches, it will be ugly indeed!

Futures indicate the Dow will lose about 200 points almost immediately. Whiplash is possible, so go find your neckbrace now!

Wrong + Wrong = Right?

2011-11-09T05:33:00.000-05:00

Yesterday was election day in America. Across the country, there were numerous union-weakening measures, ALL of which went down in over-whelming defeat.

My experience with unions is that they produce armies of political zombies by smothering the individuality of their members. They help perpetuate the entitlement culture that is a cancer on our country. Yet, I was glad the union-weakening measures were defeated.

The irresponsible elimination of unions would be a unilateral disarmament before the corrupting flood of corporate money into politics. The recent Citizens United decision by the Supreme Court made it even worse.

My favorite conservative intellectual is George Will, longtime columnist for Newsweek. He has argued that corporations are entities which are denied the right to vote but easily victimized by the political process. He argues the unlimited flow of corporate dollars into lobbyists to protect the corporation and employees is only fair.

Like two drunks holding each other up, we need the smothering unions as much as we need the corrupting corporate money and lobbyists. I would gladly support a measure to eliminate both but not one nor the other.

Wax On, Wax Off

2011-11-08T14:37:00.000-05:00

The gold standard for investment management has been Modern Portfolio Theory (MPT) for most of my career. It was mathematically proven to maximize return while minimizing risk over the long term, because it required money to be invested in multiple different asset classes, i.e., long, short, and medium term bonds: big, small, and medium company stocks: foreign stocks; commodities, currencies, etc. The reason MPT worked so well was because each asset class had its own investment dynamics, which means all asset classes would not move the same direction at the same time. In our language, the asset classes were not closely correlated.

In 2008, the asset classes became correlated. With only two exceptions, all asset classes lost value. Since then, many investment advisors have abandoned MPT and adopted a Risk-on, Risk-off approach to investing. When uncertainty is high, you increase cash. When uncertainty is low, you decrease cash. I've used this approach for years and am quite confident with it . . . but only as part of an overall blended approach.

However, there are few absolutes in life and certainly no silver bullets. Abandoning MPT completely to practice Risk-on, Risk-off makes no sense to me. Both have great wisdom and can be used simultaneously, along with value investing and the other popular approaches. Don't trust anybody who says they have seen the light and practice the one tried & true approach.

Remember the kid in the movie "Karate Kid," who applied wax to a car in a mindless fashion. Exclusively applying Risk-on, Risk-off to a portfolio is equally mindless.

Meanwhile, Back in Paris . . .

2011-11-08T09:39:00.000-05:00

The world is transfixed by what is going on in Greece and Italy. It is uncertain who will be the leader going forward. Can the new Greek leader adopt the EU offer, in the face of increased rioting over increasing austerity? Will the wily but incompetent Berlusconi finally throw in the towel and let reform begin, before the market for Italian bonds evaporates? Right now, the futures market seems to think Berlusconi will be voted out today, and the Dow looks to gain about 65 points at the open.

But, look at France. They are actually concerned about keeping their triple-A credit rating . . . who knew? When we faced that prospect, we took a one-handed approach of cutting discretionary spending, ignoring both entitlement spending and tax increases. The French just instituted their second austerity plan in less than three months. They accelerated the change in their pension retirement age by one year. They cut health care spending by 1.2 billion euros. They cut housing subsidies by 400 billion euros. They increased the VAT by 1.5% to bring in 1.8 billion euros. They stopped indexing their tax brackets, so that taxpayers with rising incomes would be forced into higher tax brackets. And, they put a temporary 5% increase in income taxes on their biggest corporations, raising 1.1 billion euros.

While I take issue with certain parts of this new austerity program, I marvel that they are actually able to do something. It is especially remarkable that they took this action before their elections next Spring. That took a degree of political courage and willingness to compromise that deserves respect! At least, they are trying to save their AAA . . .

After all, nobody ever accused the French of being impotent . . .

Twisting in the Wind . . .

2011-11-07T05:31:00.001-05:00

The U.S. stock market is not in control of itself. It is twisting in the wind, blown by breezes out of Europe. Nobody knows what the Greek outcome will be. We can see what increased political instability in Greece is doing to stock markets worldwide. Now, political instability is rising rapidly in Italy, which is "too big to fail."

Overnight, Asia was down almost 1%. Europe is now down almost 2%. At 5AM, futures indicate the Dow will lose about 130 points at the 9:30AM open. It could be a long day.

Meanwhile, back at home, America keeps lumbering along, growing slowly, producing some jobs, but burdened with political impotence, not political instability. We actually look pretty good, relatively speaking.

Important economic data from China, the world's growth engine, will come out on Wednesday and Thursday, which will give us something non-European to fixate on. We need the Chinese to do well, to save the world from Greece and Italy and Spain and Portugal and . . . ?

Another One Bites the Dust

2011-11-06T15:53:00.000-05:00

One of the earliest values I remember being taught as an inquisitive boy was to "mind your own business," which is difficult for the intellectually curious, but I have have tried to hold onto that value and have been annoyed by those nosey people who do try to mind my business for me. Maybe, that is why I have lamented the loss of privacy so many times in this space. In fact, I've marvelled repeatedly that young people don't seem to understand the concept of privacy at all, because they have never experienced it. Their eyes glaze over, like they're forced to listen to Latin.

Hoping that privacy is still possible, I just read How To Be Invisible by J.J. Luna. The book is a treasure trove of techniques, ranging from burning your garbage to having utilities in different names to avoiding the internet. There is even a website http://www.howtobeinvisible.com/ .

My conclusion is that privacy is indeed a historical relic and that this book is more useful for criminals and people-with-nothing-else-to-do. For the average person, privacy is dead. I'm sad . . .

Jobs Report . . . not so bad after all

2011-11-04T08:54:00.001-04:00

The monthly Jobs Report came out this morning. Expectations were that 95 thousand new jobs were created in October, with 120 thousand new jobs in the private sector and a loss of about 25 thousand in governments.

The headline is that only 80 thousand jobs were created, with 104 thousand in the private sector and a loss of 24 thousand in the government. Also, the unemployment rate dropped from 9.1% to 9.0%.

However, the good news is that last month's report was revised upward. As it turns out, the private sector produced 191 thousand jobs instead of the 137 previously reported.

The closely watched U-6 report, which counts both unemployed and those forced to work only part-time or under-employed, dropped from 16.5% to 16.2%, which is a nice improvement.

The stock market rallied on the good news but quickly sank back to a minor loss at the open. The extra strength last month caused the rally, but weakness returned when we realized we really need 150 thousand just to stay even.

Since passage of the Stimulus Bill, the economy has gained 2.7 million jobs. Was that because of . . . or in spite of the bill? All I know is that there are 24 million people who need work to do, most of whom are miserable.

In a "Lighter" Vein . . .

2011-11-03T11:06:00.000-04:00

Everybody has heard this before: With 30% of Americans now considered obese (BMI > 30), it now costs America $147 billion annually. Obese Medicare patients cost taxpayers an extra $1,723 every year and is rising more rapidly than other medical costs. There has been serious discussion that Medicare premiums be increased for obese patients.

Now, there is debate among financial planners whether it is ethical to NOT discuss this with obese patients, making sure they are aware their annual health care expenses will be $1,429 greater than a non-obese client. Plus, should we advise them they need less retirement savings, since they will not live as long as the actuarial tables suggest?

Speaking for myself, I don't plan to discuss the subject with anybody. First, everybody who is obese already knows all this. Second, I live in a glass house . . .

Tail Wagging the Dog

2011-11-03T07:07:00.001-04:00

Greece is less than 2% of the European economy and far less than 1% of the world economy, but it is beating the world stock market like a dog. What makes it so important is that world banks, mostly European ones, could quickly be bankrupted if Greek bonds are worthless. (And, because nobody knows who is really holding the bag or has sold the credit default swaps, nobody knows what banks are safe to do business with.)

Still, when Americans 401(k)'s lose 5% of their value in only two days because of the Greeks, it is more than annoying. Even more annoying, there is almost nothing the U.S. can do. Europe was late dealing with the problem but is now doing a credible job. Greece is the problem.

Now, the Greek tragedy is morphing into a Greek comedy . . . almost. Yesterday, the EU told Greece you get no more cash until this insane referendum is over, and the Greek government accepts the handout, along with the new austerity programs. It is pure power-politics, as Greece is not thought to have enough cash to survive until the referendum. Overnight, the Greek finance minister broke with the prime minister, who proposed this referendum. Two other ministers have broken with the prime minister, who is now unlikely to win the no-confidence vote tomorrow

So . . . then what?

At 3AM, Dow futures were down 162 points but up 53 at 7AM, reflecting the worldwide confusion.

When is enough . . . enough?