August 2009

August 28, 2009 11:55 p.m.
Deflation, Bernanke, China and More

The deleveraging process and financial crisis led to falling prices across the globe. This is now reflected in the Consumer Price Index. The CPI shows deflation, rather than usual inflation. One result is there will not be an increase in Social Security retirement benefit payments for the next year for the first time. Since Medicare premiums will rise, and they are deducted from Social Security payments, some view this as a cut in Social Security benefits. But the benefits are locked in at their higher level and will not be reduced for deflation, no matter how low prices fall.

There are a few different views of this development. This post gives some detail about SS and inflation and asserts there might not be an increase the following year either. This article says the use of the CPI is not fair to seniors. This article, on the other hand, argues that because of some quirks SS recipients received an excessive increase last year and recipients have strong and unusual protections for their income.

Be careful about your use of social networking sites, such as Twitter and Facebook. People, including adults, put too much personal information on them. This report indicates criminals monitor the sites for news that people will be on vacation or otherwise not at home. Those homes are targeted for burglaries. Information on these sites also can be used to steal identities.

Ben Bernanke was nominated for another term as Federal Reserve Chairman this week. You have seen all the reasons this was a good idea. Here’s an argument why he should not have another term as chairman.

China seems to be driving the global economic with its large stimulus plan, massive purchases of commodities, and other moves. Here is an analysis of China, arguing the data it issues cannot be trusted, and its economy is in much more precarious shape than investors realize.

There are some strange things going on in the stock market. Stocks that should be worthless, primarily because the government now owns and controls the companies, still are frequently traded and have had very strong gains recently. Trading is occurring in GM, Fannie Mae, Freddie Mac, and AIG, all companies that have had shareholder equity wiped out.

What are these investors thinking? Are they taking advantage of manipulated markets to score gains? Are they buying lottery tickets, hoping the government eventually protects shareholders? Or are other forces at work? Here and here are some coverage and theories.

Finally, I never miss a shareholder letter from Martin Whitman of the Third Avenue funds. You shouldn’t either. The latest report is here.

August 21, 2009 1:30 p.m.
Investor Confidence Swings

Investors are optimistic one day, pessimistic the next. That is understandable. Governments, especially the U.S. and China, pumped a lot of money into the global economy to stop the slide and restore stability. The effort is successful so far. But those efforts can last only to so long. Eventually the spending must be paid for in taxes, and the government must slow its spending. The problem is the taxes and reduction in spending can choke send the economy sliding again if the private sector has not been restored.

Right now, it appears most of the good news about the economy is tied directly to government actions, such as the cash-for-clunkers program. There already are indications China will scale back its stimulus plan. The Federal Reserve is talking about reducing its efforts. It is hard to be confident the economy is on solid ground and the worst is behind us.

For more on that line of argument, view this video of economist Martin Felstein. Feldstein has had a good record calling the turns in the economy the last few years and is well worth listening to.

Here are a couple of cautions about the markets.

Mark Shenkman runs Shenkman Capital, a specialist in high yield bonds for institutional investors and also manager of Harbor High Yield Bond. In his latest monthly report to shareholders, Shenkman asserts the huge market rally is driven by technical factors, not fundamentals, and is showing signs of aging. Markets will keep rising as long as momentum continues, but that could reverse at any time.

Likewise, an article on Bloomberg.com here reports the rally in leveraged loans is petering out. Investors are getting over the relief the economy is not sliding into depression and now are concerned about rising delinquencies and defaults.

Here’s a surprise. Wall Street analyst have given investors the wrong advice during the rally. They advised buying the wrong stocks and shorting the wrong stocks. Follow their advice closely, and you would have lost money. So asserts Bloomberg here.

It will be tough for the economy to get rolling without credit, and bankers continue to tighten their lending standards, according to this report. (Subscription might be required.)

Will half of retirees run out of money before their retirements end? They will if they follow traditional planning and fall prey to the Flaw of Averages, according to a new book. Read a summary here. This picks up on a theme in both of my recent books.

The health care reform debate has brought the topic of living wills and related issues into public debate. Here is a practical discussion of the issue from a columnist who used to be a practicing physician.

August 13, 2009 04:45 p.m.
Some Reading for this Week

It has been a quiet couple of weeks both in the markets and around the web. But there are a few items to add to your reading list when you have the time.

First, let’s consider the widespread argument that there are trillions of dollars “on the sidelines” waiting to be put into the stock markets. I cannot recall a time when I did not hear some version of that argument. Yet, holdings of money market funds and other cash investments always have been large.

Only a fraction of the money in conservative investments is waiting to be put to work elsewhere. The portion held by tactical investment managers and others who change their allocation on short- to medium-term market outlooks is waiting for whatever signals the managers use to indicate it is time to buy more stocks. But most of the money in cash investments is there longer term. It is cash being kept safe for emergencies, investments of conservative investors, or part of a long-term asset allocation. I suspect a large portion of it is held by businesses as working capital.

There might be good reasons to expect stocks to climb higher, but “cash on the sidelines” almost never is one of them.

Next, we turn to a few people who agree with me that the recent stock market rally is not part of a major new bull market and investors should not chase it.

Floyd Norris of The New York Times explains why economic data that is not as bad as during the worst of the crisis is not the same as good economic data. He agrees with us that, though jobs are being lost at a slower rate, people still are losing jobs and that is not a good things. Read it here.

Hedge fund manager Doug Kass identified a “generational bottom” for stocks in March, just as the current surge was beginning. But he is changing his tune now. He believes stocks have climbed too far and there are a lot of problems about to hit the economy. Read that here. There was a problem with this link a couple of weeks ago, but it appears to be working now.

Residential real estate appears to be bottoming, and this article gives a good overview of the process. It is supposed to be optimistic, but it shows the process will take a while. It shows that lower-priced homes in the markets that became the most over-priced probably are at a bottom and perhaps above their low prices. But higher-priced homes and those in markets that were safe started price declines only recently and probably have more price declines ahead. A subscription might be required.

Consumers clearly are changing their habits. This Washington Post article explores how, instead of buying things, people are looking for ways to turn everything they can into cash.

A few weeks ago I linked to an article in Rolling Stone that explored Goldman Sachs’ role in various economic problems. It has generated quite a lot of attention and comment. You can read two or the more prominent discussions here and here.

When people ask me about the Bernard Madoff scandal, I always remark that the interesting aspect from here is what will happen with the family. Will prosecutors prove they were involved and prosecute them? Will they lose all or most of their money on some other legal theory? Ruth Madoff already agreed to give up much of the couple’s assets to the government. Here’s an article exploring the possibility that she was complicit in the fraud.

Here’s an article with an interesting argument. It argues that Warren Buffett has let down capitalism and capitalists by taking a great deal of federal aid for his companies in the last year. Read how much of the turnaround in Buffett’s portfolio depends on federal guarantees and bailouts. It also begs the argument of whether Buffett is genuine when being publicly optimistic about the economy and markets.