Wednesday, November 30, 2011

Enjoy the Euphoria

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?

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!

Tuesday, November 29, 2011

Apologize to your kids?

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

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!

Monday, November 28, 2011

What a Difference a Weekend Makes

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!

Sunday, November 27, 2011

Good Foolish Advice

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?

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.

Friday, November 25, 2011

Black Friday

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!

Thursday, November 24, 2011

A Day of Thanksgiving

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!

Wednesday, November 23, 2011

Free Floating Anxiety . . . or Thankfulness

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?

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.

Tuesday, November 22, 2011

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!

"Bottom Fishing?"

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.

Monday, November 21, 2011

Thanksgiving Week

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 . . .

Thursday, November 17, 2011


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 . . .

Wednesday, November 16, 2011

Between the Devil and the Deep Blue Sea

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. 

Tuesday, November 15, 2011

Protecting the Investor?

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"

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.

Monday, November 14, 2011

Thoughts on Veterans Day

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

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

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.

Friday, November 11, 2011

Mr. President, That's My Chair

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

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!

Thursday, November 10, 2011

The View from Wells Fargo . . . and Europe

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? 

Wednesday, November 9, 2011

Wear Your Neckbrace

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?

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.

Tuesday, November 8, 2011

Wax On, Wax Off

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 . . .

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 . . .

Monday, November 7, 2011

Twisting in the Wind . . .

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 . . . ? 

Sunday, November 6, 2011

Another One Bites the Dust

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 .

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 . . .

Friday, November 4, 2011

Jobs Report . . . not so bad after all

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.

Thursday, November 3, 2011

In a "Lighter" Vein . . .

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

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?

Wednesday, November 2, 2011

Extreme Brinksmanship

Last week, the European Union developed a template to save Greece now and possibly other members later.  But, the Greek people felt they had been ignored and abused by the process.  So the Greek prime minister made a bold call to hold a referendum in January, forcing the voters to choose between severe austerity or absolute chaos, both ugly choices.

If the Greeks choose to remain members of the European Union, they continue to use the Euro as their currency and benefit from reduced trade barriers with other members.  They also agree to pay cuts, reduced entitlements, delayed retirements, and higher unemployment.  Importantly, they also agree to actually pay their taxes, a new concept for them.

If the Greeks choose to leave and return to the Drachma as their currency, the cost of all imports will sky-rocket, as the Drachma would plummet in value immediately.  Exports would suddenly decrease dramatically (before rebounding after a great deal of damage).  The courts would be jammed on how to enforce legal agreements denominated in Euros.  The country would experience a heart-breaking paralysis.

Of course, this is not set in concrete.  Their prime minister has a no-confidence vote on Friday.  This decision to hold a referendum may well be a campaign tactic, which could be reversed immediately.

Another benefit of announcing a referendum is to increase the negotiating strength of Greece.  This current deal was largely crammed down their throat.  When the Greeks choked on it, world stock markets tanked, and nobody wants to go thru that again.

So, the decision to hold a referendum was good for the prime minister in the short run and good for the Greek people in the long run.  Political cynics would call the move "brilliant."

The European markets are relatively flat this morning, and futures indicate the Dow will open up about 90 points.  Let's pray the referendum is cancelled on Monday, so we can resume healing . . .

In a normal environment, we would be focused on the all-important Jobs Report this Friday, but this is not a normal environment, unfortunately.

Tuesday, November 1, 2011

Hold Your Britches!

Now that Greece has decided to self-immolate and to take Europe with them, the world stock markets are heading down, almost straight down.  Futures indicate the Dow will drop about 220 points at the open.

Europe is already tanking.  For example, the German market is down almost 6% today.  The Spanish market is down almost an incredible 9% . . . not bad for one day!

Last week, the leaders of Europe finally completed their Herculean effort to save Greece.  The world stock markets started to heal.  Then, Greece did the unimaginable.  They decided to hold a referendum IN A FEW MONTHS to decide whether to accept the aid or not.  Apparently, support for the ever-increasing austerity program is virtually non-existent, and the Greek politicians were afraid to proceed without some popular support.

Germany never held a vote to ditch the Mark and to hitch their wagon to the Euro.  Neither did France or the other nations of the European Union.  Voting on complex financial matters is something few voters are equipped to evaluate.  This is the outer limit of democracy.

I was relieved last week but expected there would be a few bumps before we understood the template approved last week and expected the market to be down the early part of this week.  But, nobody imagined the Greeks would refuse a handout.  It must be the first handout they ever refused.  I'm glad I had not made any changes yet!

Adding to the panic is that the MF Global bankruptcy produced a very ugly surprise, i.e., there may have been commingling of client funds and some may be missing.  The firm's CEO was one of the most respected men on Wall Street.  First, it reminded everybody of Lehman.  Next, it reminded everybody of Madoff.  That's just too many bad memories for one day!

So, hold on . . . it will be scary today!