Wednesday, December 31, 2014

Long Live 2015

As we are ruled, collectively and individually, by time, it is appropriate to mark the end of each year.  Since 1422 when French king Charles VI died and was replaced by Charles VII, the expression of "the king is dead, long live the king" has been used to assure us that the throne is never empty.  We remain ruled by time --- 2014 is dead, long live 2015 ---

As 2014 dies, don't forget 2015 is a fresh start, a time of new opportunities.  Take the opportunity to forgive somebody who has hurt you.  It will help you more than it helps them.

From an investment standpoint, only once since 1885 has the stock market gone down in any year ending in the number 5, as in 2015.  That doesn't mean it won't be a rough ride, because it will be, given all the geopolitical uncertainty.  In addition, the third year of a presidential term is historically the best, and 2015 will be the third year of Obama's second term.

Party on . . .

Tuesday, December 30, 2014

Advice For Your Grandchildren

I have been reading The Kiplinger Letter most of my career and appreciate its optimistic, plain-talk outlook.  They have just published a letter of advice to their grandchildren, and it is excellent.  I recommend giving it to your grandchildren.  You can find it at: 

Monday, December 29, 2014

Paying The Piper

The current president of Turkey is Recep Tayyip Erdogan.  He once said the "democracy is like a streetcar.  When you get to your stop, you get off."  I've wondered about this for a long time.

That quote came to mind when reading about the snap election just called in Greece.  The Greeks were arguably the most pampered people on the planet, with universal health care and very, very liberal retirement packages.  It was a classic case of generational irresponsibility, where one generation puts the following generations into debt.  Retirement at age 55 at the government's expense is probably immoral.  It is clearly imprudent financially.

The Greek economy has already been rescued twice by the European Union, who demanded increasing austerity.  Now, the Greek voters have said they have had enough austerity and want to return to their profligate ways.  It jeopardizes the third and final tranche of help from the EU.  The Greek stock market gave a prompt response -- it dropped 10% in one day.  Imagine the Dow dropping 1,800 points in one day!

The Greek voters have been so spoiled for so long that they cannot vote in their own best interest.  Is this the stop that Erdogan identified as the end of democracy?

Or, is democracy just another social welfare program that can never be removed?

Saturday, December 27, 2014

Lessons Not Learned From TV

Other than business shows and news shows, there is little I watch on television.  However, in 2007, I became fascinated by a show on CNBC called American Greed.  It described true stories about how innocent people got cheated, usually by a financial advisor running a Ponzi scheme.  At first, I was amazed that investors didn't realize how essential a custodian is, to independently hold the assets managed by the financial advisors and to prepare honest financial statements, which are sent directly to the investor.  But soon, it became tiring to watch the same mistake repeated over and over, and I stopped watching.

A few years later, I started watching it again.  This time, I became focused on the financial advisor and occasionally researched the advisor after the show, to see if there were any clues to predicting their dishonesty but never found any meaningful clues.  Again, it soon became tiring -- watching financial advisors doing the same dishonest things, and I stopped watching.

Recently, I returned to the program . . . for the last time, hopefully.  This time, I was struck by the asymmetry of punishment.  Most of the victims were damaged for the remainder of their lives.  In addition, their children and grandchildren were cheated out of their inheritance.  Yet, most of the criminals received only 8 to 14 years of prison time.  They will be out of prison while their victims are still suffering.  There is something patently unfair about this!

But, what is the point of locking up everybody forever, especially at a cost of $50 thousand per year per inmate?  The taxpayers also become victims.  Existentialists argue that modern society is overly-reverent about life under any and all circumstances.  There has to be a point where the benefit of life outweighs the cost of maintaining it, but where is that point and who gets to decide?

How about putting the death penalty for dishonest financial advisors on the ballot, for everybody to vote?  If so, I'll be going door-to-door soliciting votes for passage!

Let us vote!

Friday, December 26, 2014

HO HO HO . . . NOT

Congressmen should never be allowed to decorate a Christmas tree, as they would hang or hide the most ugly and most dangerous ornaments both on and under the poor tree!

As a minor example, the latest budget bill repealed limits on the number of hours a commercial trucker could work.  As someone who spends way too much time on interstate highways, I am not happy that the guys driving these huge monster trucks will still be sleepy.  It was repealed before it even took effect and is an ugly holiday ornament indeed.

More importantly, following the global financial collapse in 2008/9, it was obvious that collapse was made larger and more dangerous because of the lack of transparency and the unsupervised nature of derivatives.  Congress tried to contain the problem, but the big money-center banks hired every lobbyist on Connecticut Avenue to combat Congress.  Four years after passage, the Treasury Department has still not be able to even define the problem, due to the intensive and expensive lobbying.  No, nobody is saying that the money-center banks want to destroy America.  They just want to maximize their personal incentive plans.

Alan Greenspan, ever the libertarian, believed corporations would never do anything that threatened their own existence.  He recalled a bygone era when employees mirrored the loyalty of their employers.  Unfortunately, that two-way loyalty is very bygone, and the loyalty of employees now lies with their incentive plan, not the employer.  "If the company craters, I'll just go somewhere else and take my money with me."

Thus, another ugly and dangerous ornament on the 2014 budget Christmas tree is a repeal of the limits on derivatives, so we can avoid knowing which banks are exposed to which risks.  It is like lending money your next-door neighbor without knowing anything about him.

However, in the shadow of that poor mistreated Christmas tree, there is always more to hide.  Congress is trying to require that the Congressional Budget Office (CBO) use "dynamic scoring."  The CBO has earned a good reputation for non-partisan estimates of the costs of legislation.  Congress now wants to require CBO to use Supply-side economics to make those estimates.  To economists, that is like Congress telling Presbyterians, Catholics and Jews that they all have to be Baptists (no disrespect to any religion intended).

There is a time and a place that Supply-side economics works better than Austrian or  Keynesian economics, but it is not always and not everywhere.  Dictating "religion" to economists is just stupid and counter-productive!  Doing unpopular things under the cloak of the holiday season is just rotten, even if predictable.  I can't hardly wait to see what is done under the cloak of the 2015 holiday season!

Happy Holidays to Congressmen has a very different meaning . . . it is a time for skullduggery!

Wednesday, December 24, 2014

With Open Arms

Merry  Christmas 

Happy  Hanukkah

Happy  Kwanzaa

Warm  WinterFest

Tuesday, December 23, 2014

Your Homework Assignment

Some have described the U.S. economy as the only clean shirt in the dirty clothes hamper, meaning the rest of the world is in worse shape than we are.   True!  While I wish nothing bad on the people of Russia, their current economic woes do give me some unseemly degree of satisfaction.  And,while I wish nothing bad for the people of Venezuela, I have described that country as "circling the drain."

Wells Fargo has prepared an interesting study, which ranks the emerging markets most likely to default on their national debt, taking into consideration (1) the ratio of externally-held debt to Gross National Income, (2) the ratio of external debt to foreign exchange reserves, (3) the ratio of debt service on external debt to exports, (4) the percentage of depreciation in their currency against the dollar since September 1st, and (5) the ratio of their current account divided by GDP.  It is an impressive study, indeed!

Their conclusions are surprising.  The five nations most likely to default are Ukraine, Serbia, Turkey, Hungary, and Belarus.  I'm a little surprised by Ukraine but very surprised to see Turkey in such bad shape.  The five nations least likely to default are China, Philippines, Nigeria, Thailand, and Vietnam.  China is certainly not a surprise, but it is a little distasteful that oil-exporter Nigeria, which doesn't even protect its school girls from thugs/terrorists, can be so strong economically.  Of course, I'm simply speechless that Vietnam now has such a good economy . . .

As the world in general and emerging markets in particular adjust for lower oil prices, it is clear to me that those investors who invest primarily for income and have a weak stomach for volatility should make sure they don't have any global bonds or, even worse, bond funds in their portfolio.

Are you that type of investor?  Then, why are you just sitting there??  Go check your portfolio -- NOW!

Saturday, December 20, 2014

Human Capital

In survey after survey, we see that the concentration of wealth in fewer people continues to increase.  The latest Pew Research study shows the net worth of the top 20% of Americans doubled from $318,000 in 1983 to $639,400 last year, while it actually dropped for the bottom 20% of Americans from $11,400 in 1983 to only $9,300 last year.  In a rare moment of agreement, nobody thinks this trend of increasing concentration is good for our nation.  At some point, social instability becomes inevitable.  Unfortunately, that is the end of agreement.

Some say that the rich are just working harder, while the poor are getting lazier, but that is not very helpful.  The Christian religious community does not help very much.  Some point out that the Bible reminds us that the poor will be with us always, so why worry about it.  Other Christians maintain we are our brother's keeper.

In economics, the supply-side disciples argue another tax cut for the rich would free-up capital which would be invested to produce more jobs . . . maybe.  Keynesian disciples pose the double-negative rhetorical question of "how can we NOT help the poor?"  Austrian disciples argue the problem is not about economics but about politics -- just don't create any new regulations.

In politics, the always-persecuted Republicans ask how can we be sure we don't help one single undeserving poor person?  The always crybaby-Democrats insist the poor are merely victims of Republican indifference.  (Then, there was the stunningly simple assertion of 1972 presidential contender George McGovern that people are poor because they don't have money, so let's give every poor person one thousand dollars.)

It may be more useful to look thorough the lenses of social science, where they study social or human capital, which are non-quantifiable, non-monetary assets of some people.  Nobody disagrees that intelligence is better to have, than to NOT have.  It is a type of human capital and has value, but cannot be expressed in dollars.  Other types of human capital include being raised by educated parents, so that children can absorb education, perspective, and even speech patterns.  Being taught traditional manners has a value to certain humans that is likewise not measurable.  Does anybody doubt the value of connections or the power of a fat Rolodex?  Likewise, you cannot measure that value nor put it on your financial statement.

French/Swiss philosopher Jean-Jacques Rousseau wrote The Social Contract in 1762, saying that a person is merely the product of his environment.  (The immortal opening sentence is "Man is born free, and  everywhere he is in chains.")  We can look at environmental capital as human capital.  It is non-monetary and non-measurable.  Environment can be a type of predestination.  While it doesn't necessarily have to be a predestination into chains, it usually is.  

Now, what should be the policy response to the social problem of increasing concentration of wealth?

No, "let them eat cake" is not a policy option!  Ask Marie Antoinette . . .

Friday, December 19, 2014

Waiting At The Altar

Free Enterprise is the happy marriage between the economic system of capitalism and the political system of democracy.  They are a cute couple and look like they belong together, but apparently not everybody agrees.

For those of us who worship at the altar of Free Enterprise, we were excited with the introduction of capitalism into Russia and China, confident that it cannot exist in the long-term without its connection to democracy.  Yes, we know that democracy was happily married to socialism in Israel for many years before moving on to capitalism, which only proves our belief that capitalism and democracy just naturally belong together.

In Russia, that marriage was never consummated, as democracy was stillborn and capitalism subverted into something else, i.e., "crony capitalism" or a "thugacracy."  In China, capitalism successfully brought hundreds of millions of people out of poverty, while waiting impatiently for democracy to show up.  There have been sightings of democracy, such as in Tiananmen Square in 1989 and more recently in Hong Kong, but capitalism is still lonely in China, waiting to meet democracy.  Unfortunately, it looks like a very long wait.

Now, it appears that capitalism is a camel with its nose under the tent of Cuba.  Those of us who are still worshiping at the altar of Free Enterprise are still hopeful that democracy will eventually follow.  But, we have learned that the value of capitalism is more apparent to thugs and dictators than the value of democracy.

Thursday, December 18, 2014

Santa Cheats

Gifted and/or cursed with the "early to bed, early to rise makes a man healthy, wealthy, and wise" and/or sleepy metabolism, I get to watch the European stock markets open most every morning.  It is like watching the sun come up, where one witnesses renewal of the physical universe, only that I witness renewal of the commercial universe.  It is a living, breathing phenomenon.  (On weekends, I use the quiet of early morning to simply write.)

However, during the last two weeks of December, I usually enjoy the "Santa Claus rally" by sneakily watching The Golf Channel, instead of CNBC or Bloomberg.  So far this month, there has been serious question whether Santa was coming or not, and I have been cheated out of my annual golf fantasy.  Now that it looks like Santa has just arrived tardily, I'm going to watch The Golf Channel and start working on my annual New Year's Resolution to play more golf next year . . . which I secretly know I will never do!

Replace or Repair

Conservative pundit Michael Gerson has written an excellent column about the need for compromise in Congress.  Please read: 

Crashes Are Transitory?

Back in 1980, I was doing graduate study in international finance at the University of Dallas when I took a course in the economics of energy (which is not surprising in Texas, I guess).  I learned that oil is the most competitive commodity in the world, as well as the most regulated.  Most of all, I learned that oil is the most important commodity in the world, even more important than gold.

So, it was surprising to me when I heard Fed Head Janet Yellen describe the impact of oil's recent crash as "transitory."  As we know, this commodity has caused a massive shift of wealth to the Middle East from the rest of the world.  The lack of that commodity nearly brought our economy to its knees in the early 1970s.  It accounts for 10% of all construction in this country, larger than government or office buildings or shopping centers.  It is largely responsible for the robust job growth we've seen this year, due to fracking.

How many national economies have we seen rise or fall with the price of oil?  How many national leaders have we seen replaced, when their oil-based economy suffered?  There is even a remote possibility of Russian president Putin being deposed in the near future.  How many wars have we seen fought over oil?  How many people have died?


I guess the way to look at this unfortunate choice of words is that she was not under-estimating the importance of oil.  She was just suggesting that the price of oil will rebound within three months, agreeing with Goldman Sachs, and that the geopolitical changes will also be short-term.  Now, is that good or bad?

Wednesday, December 17, 2014

The Squid's 2015 Outlook

Self-esteemed investment bank Goldman Sachs has released their outlook for next year.  In no particular order, they expect:

1.  The S&P will rise to 2,100 over the next three months and stay there for the rest of the year.
2.  The European stock markets will rise 12.3% by 2015 year-end.
3.  Interest rates will start moving up quite soon, with ten-year Treasuries going from 2.1% to 2.5% within three months and ending the year at 2.85%.
4.  The dollar will rise 7.8% against the euro.  (Think European vacation!)
5.  The dollar will rises 9.5% against the yen.  (Think Japanese vacation????)
6.  Oil will recover within three months, with Brent Crude hitting $85/bbl before stabilizing.
7.  Gold will continue falling, reaching $1,050 by year-end.
8.  GDP in the U.S. will rise from 2.2% this year to 3.1% next year, which is impressive.
9.  China's GDP will continue to decelerate slowly, dropping from 7.3% this year and 7.0% next year.
10.  "The geopolitical condition is often quite difficult to quantify and unpleasant to summarize.  Although turmoil in Russia and Ukraine and in the Middle East bears watching in 2015, the majority of geopolitical hotspots are, in our view, regionally tethered and of limited broader economic consequence."

Reflecting the respect I have for their research department, I can see the logic of all these predictions except #3 above.  With the high level of uncertainty and nagging level of U-6 unemployment and Yellen's dovish nature, I cannot see interest rates rising so soon.  It is also surprising to me that they expect strong GDP growth of 3.1% but without a more significant increase in the stock market.

Tuesday, December 16, 2014

"Considerable Period"

The friendly wagering on Wall Street last week was whether the phrase "considerable period" would be removed from the language describing the remaining time the Fed will keep interest rates at historic lows.  It is an important distinction.

The Street is expecting it to be removed, at the Federal Open Market Committee (FOMC) this week.  This reflects the market's expectation that the Fed will initially raise interest rates modestly in the second quarter (Q2) of next year.  If it is removed, it will put modest downward pressure on the market.

My bet is that the Fed will retain that magical phrase, because uncertainty has increased so much within the past week.  Few, if any, analysts predicted this collapse in oil prices.  Fewer, if any, analysts predicted the huge subsequent impact on Russia, where their currency is collapsing dramatically, along with their stock market (which is down a whopping 14% so far today).  Retaining the language will put upward pressure on the stock market.  However, with so much downward pressure, it may not even be noticed.

When most people think about market crashes, they think of the horrific, iconic 1929 crash.  Most can actually remember 1987, when the market dropped 24% in one day.  My expectation is that, if this continues, the crash will look more like 1997-98.  Remember Long-Term Capital Management, the collapse of the Thai baht, and chaos in Russia?  If so, then you must also remember that the stock market got over it and moved upward to new record highs within two years?

Some thought-leaders say that the Days of Globalization are over.  The United States is an economic fortress, comparatively speaking, to the rest of the world.  Yet, the troubles of the rest of the world continue to wash up on our shores, and that sure looks like globalization to me.

It is still unthinkable that the egocentric, egomaniac, ex-KGB, intensely nationalistic Russian president will take his country to war . . . but only barely unthinkable!  It might be the only way Putin can survive.  Otherwise, unlike the Fed, he does not have a "considerable period" before he disappears into history.

Sunday, December 14, 2014

An Individual Duty

Senator John McCain is right.  We should renounce all forms of torture and should abide by the Geneva Convention . . . as a nation.  If we are to ever become the "shiny city on the hill" that President Reagan wanted us to be, we must renounce torture and once again embrace.the Geneva Convention . . as a nation.

However, in the wildly unrealistic situation that I am holding the hostage who has the code to prevent an explosion killing Americans in one hour, I would immediately begin severing fingers, toes, and all other appendages until I get that code.  Afterwards, I would throw myself on the mercy of the court, because serving time in prison is a cheap price for serving my country . . . as an individual.

Sometimes, what is wrong for a country is justifiable for an individual.  The Chinese argue that Americans suffer from the "cult of the individual," placing the good of the individual above the good of many.  I would argue with them . . . not always. 

Thursday, December 11, 2014

Short-Term Pain

You are really, really old if you can remember the TV show entitled The Millionaire.  It ran from 1955 to 1960 and illustrated possible effects on normal, unsuspecting people when they were suddenly given a million dollars, which was an unimaginably huge amount of money at the time.  Some people quit their jobs and therefore lost their identity.  Some people watched their family spin apart as they all had strong ideas what should happen to the money.  Some people became jerks, alienating those who loved them.  Some found ingenious ways to just give away their money.

Right now, the stock market is convulsing over the sudden, dramatic 40% drop in oil.  It reminds me of the old TV show -- adjusting to a good thing can be quite painful.  Make no mistake:  a drop in the price of oil is good for the economy in the long run.  However, we must adjust to it in the short run.  The market angst is whether the drop is due to oversupply or to falling demand, which would indicate weakening economic growth worldwide.  Oversupply is a good problem.  Weakening economic growth would be a bad problem.

Another short run adjustment is the damage to fracking industry in the United States.  This has been such a growth industry and has really helped lift the economy out of recession.  It has also brought us closer to energy independence than we have been in my lifetime.  I hope we will protect that industry, as well as minimize any environmental damage.  Related to this, the growth in this industry allowed many of the smaller companies to issue high-yield or "junk" bonds, which powers the portfolio income for many income-needy investors.  The value of these bonds have dropped rather dramatically.  (The value of MLPs have dropped but not as much.)  Banks with heavy lending exposure to the energy sector have also dropped in value.

Another complicated adjustment is with international relations.  When Russia confiscated Crimea and invaded Ukraine, it did not know that the price of its primary source of hard currency was about to drop 40%.  China did not know that its most expensive import would be blessed with the gift of a 40% decreased cost.  The already-shaky oil-exporter Venezuela is now circling-the-drain.  The list of affected international relations is long and complex.  (Maybe, the leaders of all these countries could star in a new reality show called The Trillionaire?)

But, all this assumes the price of oil will stay low.  Over the last seventeen years, oil has traded within a channel.  Take a look at this graph:

Chart of the Day

Now, it appears that oil is close to rebounding, which will also upset the stock market.  Some argue that this drop in oil price is a "black-swan" which unexpectedly resets all relationships, making this graph of past relationships meaningless.  

A little stability would be a big blessing, don't you think?

Wednesday, December 10, 2014

What's Wrong With This?

Quoting from the front page of the December 5th issue of The Kiplinger Tax Letter:

The final bill (new tax law) will contain a significant new break for disabled individuals.  Tax-free ABLE saving accounts, similar to 529 college savings plans.  Starting in 2015, states can set up ABLE programs so families can set aside funds to help the long-term disabled maintain their health, independence, and quality of life.

Nondeductible contributions to ABLEs of up to $14,000 a year will be allowed for those who became blind or disabled before age 26.  Lifetime payins would be capped at the same level as the state's 529 plan.  Account owners would remain eligible for Medicaid.  And account balances of $100,000 or less wouldn't affect SSI benefits.

Withdrawals would be tax-free if the funds are used for housing, education, transportation, job training and the like.  This includes payout of account earnings. 

Tuesday, December 9, 2014

Austrian Pantsuit

My late mother always told me that name-calling is bad.  She was right, of course, but she was looking at it from an etiquette standpoint.  I think she was also right from an economics standpoint.  If you are going to invest precious resources, like time and effort, into another person, relationship, or situation, then name-calling is a risk to your investment.  I avoid calling anybody by any name worse than "dork" or "geek," which are both terms of endearment used to describe myself.

Still, I nearly collapsed with laughter when CNBC Jim Cramer referred to Chancellor Angela Merkel as "Herbert Hoover in a pantsuit."

During the stock market crash in 1929 and the subsequent economic collapse, all we understood about economics was that surplus budgets were good and deficit budgets were shameful, with even moral implications.  Therefore, President Herbert Hoover raised taxes and slashed spending, which seemed logical at the time, but the economy promptly went from recession into depression.  He took precisely the wrong action at the wrong time, and history has been unkind to him because of that.  (No, I'm not endorsing either the Keynesian or Supply Side approaches, but either would have worked better in that particular situation than the simplistic Austrian approach of Hoover.)

Not surprisingly, the Austrian approach is still taken as gospel in its home of Germany, where the hyperinflation following World War I is still a vivid, relevant memory.  As the European economy remains stalled, in desperate need of lift-off by its economic engine (Germany), Merkel wants higher taxes and less spending, like Hoover.  Compounding the problem is that she is pushing hard to impose the same solution on "basket-cases" like Greece, which makes recovery from their depression even more difficult.  European history will be unkind to Merkel, I'm afraid, but Greek historians will be even more unkind.

There is a time for this Austrian approach, but not when the economy needs a kick-in-the-pantsuit.

Sunday, December 7, 2014

Sunday Thoughts

Construction is a pro-cyclical industry.  That means it makes the business cycle more pronounced.  It makes good times better and bad times worse.  Right now, commercial construction is doing well.  Residential construction is limping along.  But, one area of construction is a drag on the economy.

Construction of churches has fallen to the lowest level since 1957.  It is down 80% from its peak construction level in 2002.  It totaled a mere $3.5 billion in 2012.

Some explain that churches are now more concerned with their ministry than their buildings.  Certainly, that might explain part of it.  Of course, there are other things going on as well.  The percentage of the population that never attend church was 25.3% in 2012, up dramatically from a mere 5.1% in 1972.  Financial giving has also changed dramatically.  Religious groups received half of all giving in 1990, which has now fallen to only one-third.  They simply don't have as much money to build new facilities.  They are a smaller portion of the GDP.

Rather than looking at this change from a religious standpoint, it may be more helpful to look at it from an economics standpoint, which is unrelentingly honest.  Benjamin Graham was the father of value investing and the mentor of Warren Buffet.  He famously argued that, in the long run, the marketplace is a weighing machine, i.e., determining the substance of an idea or product.  I think he would argue that marketplace for traditional religious thought and practices finds that it weighs less today than it used to weigh.  The marketplace is sending a disturbing message to religious leaders but what is it?

In the economy, if a product is not selling well, the seller has to make a decision:  (1) stop selling the product, (2) lower the price, (3) change the merchandising, including advertising campaign, or (4) change the product to meet changing consumer needs or preferences.

Ask your rabbi, priest, or preacher what he or she thinks.  Then, tell them to really help the economy by building a giant new building . . .

Saturday, December 6, 2014

Too Good ?

The December "Jobs Report" was better than expected, with 321 thousand jobs being created.  That brings the three-month average up to 278 thousand, which is certainly respectable.  This will likely be the most jobs produced in any one year since 1999.  (Average weekly earnings, reflecting slight higher earnings per hour and a few more hours, are also up a relatively modest 2.1% over last year.)

Republicans immediately pounced on this release as politically motivated to spur Christmas shopping, which is ridiculous.    I have met many economists at the Bureau of Labor Statistics (BLS), which publishes this report, and cannot imagine a career technocrat or bureaucrat throwing away his fringe benefits and lavish retirement package for any slimy, non-intellectual political hack.  (Of course, Democrats made the same unfair, biased allegations against the BLS during the Bush Administration.)

Normally, I would feel confident that this number of 321 thousand is an anomaly and would be revised downward next month, as it is a relatively volatile number, produced from a survey of corporate payrolls.  However, the survey of households also indicates a three-month average of 289 thousand, confirming the payroll survey.  It may be the economy has shifted gears into faster job growth.

So, how did the market react?  It was up -- but not as much as one would expect from such good employment news.  Because the job numbers were so good, that would mean the Fed will start raising interest rates sooner than expected.  Therefore, interest-sensitive stocks, such as utilities and REITs, lost value with this news, holding down the overall market.  If you are an income-investor, this was a preview of what will happen as we approach that day when the Fed actually does it.  The Street still believes it will be mid-2015, while I think it will probably be late-2015.

In the meantime, let the good news be just that . . . good news!

Thursday, December 4, 2014

Bulls And Bears Are Different

Every time we have a bull market, there is another study that confirms what a similar study during the last bull market showed, i.e., index-investing out-performs active-investing.  A new study by Lipper shows that 85% of large-cap mutual funds failed to beat the S&P.  A confirming fact is that 2014 saw a record number of hedge funds, who are always active investors, closing and sending funds back to the clients, because their investment performance was so poor.

Index-investing means buying exchange-traded-funds (ETFs) or mutual funds that simply mirror indexes, such as the S&P.  Their fees are usually lower, because they don't try to "beat the market."  Active-investing means trying to outperform the indexes or beating the market.  If index-investing outperforms active-investing and costs less money, why not be an index-investor?

One huge problem with this study is that this out-performance by index investors only works during bull markets but not during bear markets, which are far more scary.  Active investing usually outperforms index investing during bear markets.  Active investors allocate a larger proportion of their funds to cash during a bear market.  Index investors do not.  Active investors can also shift allocation toward consumer defensive stocks, which usually retain more value during bear markets..

Another problem is there are plenty of examples of mutual funds outperforming ETFs, which demonstrates the importance of picking the right mutual funds, especially during bull markets.

Lastly, it assumes there is no value to financial planners besides making investments.  Serving as a chief financial officer to a client obviously has great value, such as advising on estate planning, college planning, gifting programs, divorce planning, etc.  Little things like taking care of annual minimum required distributions (MRDs) from IRAs is one example.  And, just "being there"  when there is a death in the family brings tremendous value to a client or their family.

While there are no guarantees in investing, I do guarantee that there will be yet another study during the next bull market, confirming the Lipper study in this bull market, which confirmed a similar study during the last bull market.

Wednesday, December 3, 2014


One normally thinks of Europe as a hotbed of left-leaning governments, more concerned with over-work than their budgets.  So, it seems odd to thank them for protecting an old-fashioned American value.

For generations, privacy was expected in the U.S.  We had the right to control most information about ourselves and our families.  Then, Google came along, and privacy was no longer important to anyone.  Or, at least, it was no longer available to anyone.  People were so happy to see advertisements targeted to them individually that they surrendered their privacy.  Some trade-off!

The Calvary may be the European Union, who is locked into an anti-trust battle with Google, threatening a break-up.  Part of the battle is the "right to be forgotten" or the right to withdraw from Google's "data-mining" on every individual.  Go E.U. -- beat GOOG !

George Orwell's 1949 classic entitled 1984 described a world where the government watched everything that everybody did.  Who knew that it would be a giant tech company instead?  Raise your hand if you think the government doesn't have access to the private details of your life that Google collects.

My grandson will never know the concept of privacy or why it was even important.  Sad!

For now, I'll just paraphrase John Kennedy's famous 1963 speech in Berlin . . . ich bin ein European!