April 2010

April 29, 2010 03:30 p.m.
Wild week of headlines and more

For many months volatility was declining in the investment markets, and investors were secure in the belief that the economy was solid and asset prices would continue rising. Things have changed a bit. On Tuesday afternoon, the headlines were not to rosy. Here’s what I saw in the online edition of the Wall Street Journal:

? The Dow Jones Industrial Index was down 1.9% for the day; other indexes decline more than 2%.?

? Goldman Sachs was “under siege” at a Senate committee hearing.

? Federal Reserve Chairman Ben Bernanke said the U.S. needs a deficit-cutting plan. We can’t continue to have significant and rapidly-rising debt.

? Standard & Poor’s downgraded Greece debt to junk status.

? Home prices remained under pressure.

? Investors shed risky assets.

For now, investors continue to ignore bad news, valuations, and the potential for trouble down the road. In our portfolios we’ve remain balanced and have emphasized income-generating investments. These investments provide solid returns and also should provide a cushion in case the market turns south.

There’s a mini-scandal brewing over the recently-enacted health care reform. It seems the Chief Actuary for Medicare and Medicaid prepared an estimate of the cost of the legislation before it was enacted, and that report concluded the legislation would cost the government more than the forecasts being used at the time. The report also concluded overall medical costs will not be reduced by the law. The costs would rise and could result in shortages of medical care. You can read the full report here and a summary of the political arguments over the report here.

The revived stock market and higher retail spending don’t indicate that all is back to normal, especially among the wealthy. They were scarred and changed by the financial crisis, the same as the rest of us. Even the ultra wealthy aren’t feeling so secure and are making permanent changes in the way they think, act, and spend. The Economist Intelligence Unit prepared a report summarizing seven key changes it identified among the wealthy. Like the rest of us, the wealthy learned to “trust no one,” especially the major institutions of finance and government. They’ve also adopted one of our long-time investment principles: Simple is beautiful. Interestingly, three of the seven changes are about philanthropy. Read a summary of the report and a link to it.

April 22, 2010 08:30 p.m.
Retirement fears, earnings, and more

Middle income Americans aren’t the only ones worried about their retirement finances, especially the cost of retiree medical care. The latest survey of upper income investors by Merrill Lynch Bank of America showed that even the well-off are more concerned about their retirement fiscal health. Now, 56% are concerned about the effect of medical expenses on their retirement finances, versus 40% only last December. The percentage of those worried about outliving their retirement finances increased from 53% to 61%. More details about the survey are here.

We’re now well into corporate earnings season. The market hasn’t corrected as it did in the last three earnings season, but it also isn’t making much upward progress. Expectations are high for this earnings season, and stocks had a strong run up before the earnings announcements began. More details about the headwinds in this earnings season can be found here.

The pending financial regulation bill in the Senate generated a lot of new discussion about the causes of the financial crisis. A thorough but succinct presentation is from Robert McTeer, former president of the Dallas Federal Reserve Bank. McTeer’s key point is that many of the decisions people are complaining about were good decisions for normal times but turned into bad decisions because of the financial panic and liquidity crisis. He also believes people and politicians are bashing banks when they should be bashing Fannie Mae, Freddie Mac, and Congress.

Analysts are excited about the economic data, but only part of the economy is pushing up the data. Large companies, especially global ones, benefit from stimulus spending and the current economy. But smaller businesses are having problems. For details, take a look at the latest survey of small business owners.

April 15, 2010 10:00 a.m.
Income taxes, health care reform, and the economy

This is income tax day, the day federal income tax returns (or automatic deadline extensions) are due. But there’s a lot more happening this week. There seems to be a consensus developing on the economy, which usually is not a good thing. Of course, new information about the health care reform law is coming out regularly.

Let’s start with a light item. This New York Times article shows 10 little-known but simple things you can do with the Google search engine. Take a look at it, and some of your tasks could be easier.

I review highlights of the new medical insurance law in the upcoming May issue of Retirement Watch. Here are a couple of other items on the law’s effect. Forecasts are the law will result in an acute shortage of doctors and other medical professionals. It’s not a surprise. Increase the demand for a service, and there will be a shortage unless you increase supply. There’s no plan now to increase the amount of doctors, nurses, and other medical professionals. The only dispute seems to be the timing and extent of the shortages.

The critics of the new law during the enactment process didn’t focus on many of the more important issues. Here’s a good after-passage review. The main criticisms of the law are that it doesn’t do what the American medical delivery system needs. It doesn’t do anything to improve the quality of care or reduce costs. It simply gives more people access to the current system. This interview is of a doctor at the cutting edge of providing higher quality, lower cost medical care.

Is the economy out of the woods? Do we have a sustainable recovery? You can find positive answers to those questions in a lot of places. As we usually do, let’s look deeper and expose some arguments that get less attention. Martin Feldstein of Harvard University is concerned that the recent economic growth results from government stimulus and artificial supports. What will happen when the real economy has to perform on its own, he asks. Meanwhile, home foreclosures continue to rise. This is especially interesting, because many lenders are choosing not to rigorously follow the foreclosure process. They don’t want to own all those homes, so they let people stay even after they stopped paying their mortgages.

What is to be done to reduce unemployment? University of Chicago professors Gary Becker and Richard Posner have an interesting blog on issues of the day. One of their recent entries addressed this question. Their answers are that the usual raft of government programs won’t help. The way to reduce unemployment is to raise economic growth. Cut taxes and regulations, encourage risk taking and entrepreneurship.

Finally, let’s take another look back at the financial crisis. This series of articles exposes the details of one trade during the crisis. It is a good prototype of what happened on a large scale and also shows how the actions of some players exaggerated and exacerbated what was happening on a fundamental level.

April 9, 2010 03:00 p.m.
Government profits, taxes, and more

Various federal officials are emphasizing the government’s successes from its financial crisis “investments” made in 2008 and early 2009. The government did make a few dollars from the TARP funds put into the major banks. But that overlooks a range of other bailouts that are costing taxpayers a fortune and will continue to do so. Fannie Mae, Freddie Mac, AIG, and the auto industry took hundreds of billions of taxpayer dollars and are likely to take more. Here’s one summary of the full picture.

Of course, it doesn’t often get mentioned but only a few taxpayers are bearing the burden. About half of U.S. households don’t pay any income tax, and the highest 5% of earners bear most of the income tax burden. That’s why the new spending and deficits can’t be paid by “the rich.” The government is laying the groundwork for a broad-based tax on the middle class and the poor, such as a value-added tax.

One defense of their behavior before the crisis by government and finance leaders is that “no one saw this coming.” I know that’s not true, because I talk to money managers who were forecasting a severe housing crisis. They told me they gave their presentations to government officials to no avail. Here’s an entertaining story by one money manager who made a lot of money from the crisis because he saw it coming.

There’s some interesting and contradictory economic data being generated. As you know, most of 2009 was dominated by positive economic surprises, which spurred the investment markets. More recently, the economic surprises have been negative. One such negative was a reduction in consumer credit in February. The economy can’t grow very fast if consumers continue to deleverage and don’t borrow. But one positive surprise, among the few lately, is that state tax receipts actually increased. State tax receipts have been declining for a long time, and they sorely need higher tax revenues.

Finally, here’s an interesting summary of the best retirement locations for boomers. I don’t put much stock into these listings. The best place for someone else isn’t necessarily the best retirement location for you. These listing are only starting points in your search, if you are considering a move in retirement. Take a look at the factors discussed and consider any others that are important to you.

April 2, 2010 10:30 a.m.
Aging Well and a Financial Round Up

Let’s start with a positive, nonfinancial story. Former President George H.W. Bush (the father) turned 85 recently. Forbes had a detailed story and interview with him. The focus was not on politics or policy but on how Bush has managed to maintain mental and physical health and a high level of activity. The article is instructive, if not surprising. One ages well by staying active and engaged. The former President was active on both fronts in middle age and stayed that way after leaving the Presidency. He’s had to make some adjustments and accommodations, but he finds substitutes instead of retreating.

Alan Greenspan returned to the headlines to warn that U.S. government debt may have reached a level that finds investor resistance. He also told Bloomberg in an interview that the economic recovery was triggered and supported largely by higher stock prices. Other activity flowed from the stock market’s rise. Greenspan also sees bubbles in China.

One of the more confusing and complex episodes in the financial crisis was AIG and how it exploded. A good summary of the mechanics of AIG’s demise is in this article. It’s as clear as any article involving these financial instruments can be and shows the inter-relationships between different parts of the financial markets.

The big mystery for the coming months will be how mortgage rates and the housing market react to changes in Federal Reserve policy. The Fed just ended a year long program of buying a lot of mortgages from lenders. This action had two effects. One was to keep mortgage rates low and provide money for lenders to make new mortgage loans. The other was to circulate a lot of cash, a lot of which made its way into the investment markets. Here’s a good review of the situation and possible effects of the Fed’s decisions to let the program expire.

Businesses have been able to maintain profit margins and avoid hiring people because of extremely high productivity. Here’s a good review of the recent past and what might happen in coming months.

Low interest rates are good for the economy and good for banks. They aren’t good for everyone. This article is a reminder of how low interest rates hurt conservative investors, especially silver investors who are trying to live off the income generated by their portfolios. Low interest rates also are a reason why more people aren’t buying immediate annuities to help fund their retirements.