July 2010
July 26, 2010 12:30 p.m.
A Week of Surprises
Last week was filled with surprises in the economy, markets, and media. Here are some items that grabbed my interest during the week.
For some time the stock market moved based on surprises in economic and financial data. Positive surprises and a rising stock market dominated from March 2009 to early 2010. More recently, the economic data is surprisingly negative to most investors, and the stock market followed the data down. Here’s a summary of how the data from the last two weeks broke down into above, below, and in line with expectations.
We now have a new financial regulation regime. I’m not a big fan of it. The law doesn’t deal with any of the events that really caused the financial crisis and is likely to increase costs and reduce choices for consumers and businesses. Here, a couple of prominent economics professors explain what they think are the shortcomings of the law.
It’s no secret that con artists often seek seniors as their victims. The silver generation is believed to have the money and also be vulnerable to scams. Recently, studies here and here reported that seniors are also likely to be the perpetrators of scams against seniors. You need to be on your toes when being pitched something by a contemporary who is trying to sympathize with you and offer a solution to a common problem.
Every couple of months a new study explains how unprepared most Americans are for retirement. Usually these are issued by financial services firms with an interest in persuading people to save more. The report last week was from a non-profit group that has a bit more objectivity. Unlike the financial firms’ reports, this one doesn’t conclude retirees are likely to run out of money. Instead, it argues that people reduce their standard of living and downgrade their lifestyles as retirement progresses.
Medical costs too high? Ask the doctor or hospital to give you a 25% discount. This article explains how it works.
How bad was the economic downturn in 2008? One real and objective measure is tax return data. The IRS recently released its statistics on 2008 tax returns, and they aren’t pretty. Floyd Norris of the New York Times does a good job summarizing them. For example, the number of tax returns tax returns with incomes of $1 million and more declined by 22%.
The EU subjected its banks to financial stress tests, just as the U.S. did in early 2009. The idea is to give investors a jolt of confidence in the banks and the system. Should you care? Chris Whalen, a premier bank analyst doesn’t think so. He explains how the EU tests differ from the U.S. tests and why the European banking picture is not pretty.
July 16, 2010 11:30 a.m.
The Fed Finally Gets It
This week the Federal Reserve issues its periodic economic forecast, and it finally agrees with our outlook. The Fed said it now anticipates it will take four to six years for the economy to recover to its pre-crisis levels. The Fed was late to identify the true nature of the crisis and how deep it could be. Its good news that it now realizes this is not a typical business cycle.
The potentially bad news is the Fed announced it doesn’t see a reason for additional stimulus. There are clear signs the economy is slowing. The growth since March 2009 was dependent on fiscal and monetary stimulus. Despite hopes of many, the economy is not strong enough for growth to be self-sustaining yet. Unfortunately, much of the fiscal stimulus to this point was ineffective and wasteful. Stimulus that provides incentives for real economic growth is needed, not unproductive spending and payoffs to special interests. Since the previous stimulus ran up government deficits, we aren’t likely to see much fiscal stimulus. Instead, the Fed will have to decide at some point to go back to buying mortgages and other assets to keep money flowing through the capital markets. We’ll see how long it takes for that to happen. You can see more details of the Fed’s forecast here and here.
The crisis among European banks is not over. They own a lot of the bonds issued by the governments with credit problems, such as Greece and Spain. Their latest problem is they owe a lot of debt that is coming due in the near future. They’ll have to refinance that debt to stay solvent, and this article argues it’s not clear they’ll be able to.
There’s still a lot of danger out there. That’s why we’ve remained conservative and focused our portfolios on income-generating investments with low stock market risk.
July 8, 2010 03:30 p.m.
Bulls Start to Waver
Barton Biggs was a prominent bull throughout the market rally that began March 9, 2009, and even a little before that. Recently, however, he reported that he sold heavily his stock positions, especially U.S. stocks. That’s a big step for Biggs, because he was unabashedly bullish not too many weeks before. (One lesson is that it’s not a good idea to invest because of a professional’s forecast in the media, especially when he’s with a short-term trading operation such as a hedge fund.) Take a look at Biggs’ explanation.
Biggs isn’t alone in this change. Many investors see that governments are pulling back their stimulus programs, because taxpayers are turning against debt and spending. They also see that all the stimulus didn’t create a self-generating economic recovery. Instead, each sector that benefited from the stimulus slumped after the stimulus ended.
It’s unfortunate that government put a lot of its deficit spending the last two years into wasteful projects. The economy needs government spending to substitute for the deleveraging going on in the private economy. But the spending has to be done intelligently. Money must be spent on items that will help the economy, such as infrastructure and returning money to productive members of the economy. The spending also must be scheduled to automatically end when the deleveraging stops and the economy is returning to normal.
One of the best analysts of banks and the banking sector is Chris Whalen. He was ahead of most before the financial crisis and has been warning about the condition of banks and the financial economy. Hear his latest assessment of the financial regulation and the pitfalls to avoid.
One way I try to keep you focused on the important aspects of estate planning is by identifying real stories of estate planning gone amuck, or the consequences of not planning. Here’s a story of a billionaire family that’s fighting in the courtrooms and board rooms, and threatening their financial security.
July 2, 2010 10:30 a.m.
New Bank Rules, and more
IAU Update: The iShares COMEX Gold Trust declared a 10 for 1 stock split on June 24. That means to follow our sell signal you have to divide the signal by 10. That gives us a new sell signal of $10.40.
Portfolio Update: Cohen & Steers Realty Shares fell through its sell signal with its close on Friday, July 2. It should be sold from the portfolios holding it. Keep the sale proceeds in money markets funds for now.
I hope each of you has a great Independence Day weekend and your personal financial independence is enhanced in the second half of the year.
The steady overhaul of banking regulation continues to affect consumers. The initial effects in 2008 and 2009 were reductions in credit card and home equity line of credit limits and sometimes cancellation of the credit. The next phase regards overdraft checking. You’ve probably received a notice from your bank, because the new rule is banks can’t charge overdraft protection and fees unless customers specifically opt to have them. In the financial crisis, banks generated a lot of revenue through fees earned from overdraft protection that no one asked for. Here’s a review of the rules and how to analyze your decision.
Most people think paying for retirement medical care will be their big health care issue. I’ve been saying recently that finding someone to treat you will be a bigger problem. Medicare pays so little for most care that more doctors are either not taking new Medicare patients or declining to treat any Medicare patients. Here’s more proof of the trend. In college I had a management professor who said the first rule of running a business is to find a banker and keep him close. In the future, the first rule of retirement might be to find good doctors and stay close to them.
Jeff Gundlach, manager of DoubleLine Total Return Bond, made a lot of headlines recently. He gave the keynote presentation at the Morningstar Investor conference in late July and gave some interviews at the conference. He adjusted the portfolio, purchasing long-term bonds with a portion of it. That purchase is a big reason for the fund’s recent surge. You might want to review this and this for more details of Gundlach’s current forecasts.
