Think About It

Year End Market and Business Notes

2012-01-16T11:23:00.000-05:00

Weekly Commentary

January 11, 2012

I'D REFER TO THIS AS A WEEKLY COMMENTARY, but my notes tell me that it's been more than three months since we sent our last thoughts to you in this form. In fact, our last comments were as of the market's close on September 30th. That day ended one of the most challenging months of the year.

For the fourth quarter, as of the market's close on Friday, December 30, 2011, the Dow Jones Industrial Average closed at 12,217, up 1304 points, or 11.9%. The S&P 500 closed at 1257, up 126 points, or 11.1%, and the NASDAQ Composite closed at 2605, up 190 points, or 7.9%.

For the calendar year 2011, the DJIA is up 640 points, or 5.5%. However, broader indices, such as the S&P 500, the NASDAQ Composite, or the Wilshire 5000, tell a different story. The Wilshire 5000, the broadest market measure, is up only 1% for the year. The S&P 500 finished the year where it started, with its 2% gain coming from dividends. The NASDAQ Composite is off 47 points, or 1.8%. Effectively, we are finishing 2011 flat, with nothing but enormous volatility to show for our efforts.

Looking at other indices and markets, domestic small caps were off 4.2%, European stocks were off 11.8%, and emerging markets stocks were off 18.8%. Therefore, an all equity allocation to anything other than the Dow was off for the year.

Bonds had a better year, with many investors moving to the perceived safety of bonds. The Vanguard Total Bond Market Index was up 7.6%, and the International Bond Index was up 6.3%. Therefore, the greater the allocation to bonds for 2011, the better a specific portfolio performed.

Gold started the year at just under $1400/oz, and finished the year at $1580/oz, briefly touching $1900/oz in the meantime. Oil started 2011 at just over $94/bbl, and finished the year just shy of $99/bbl.

One of the largest business stories of the year was the passing of Steve Jobs, who succumbed to cancer at the age of 56. Zynga develops online social games, such as Farmville, and went public a couple of weeks ago. I'm intrigued by the concept of a company that can build profitability by developing online games.

Other significant news that had a substantial impact on markets and economies was the downgrading of U.S. debt by Standard & Poors, the Japan tsunami, Europe's bad debt, and the collapse of "Madoff II", MF Global. Portugal became the third European country, after Greece and Ireland, to require a bailout, and it looks as if Italy may not be far behind.

In order to succeed in the tablet market, companies will need to introduce tablets that are either more functional than the iPad, or cheaper than the Kindle Fire, which is priced at $199. RIM is learning this lesson the hard way, amidst a year of tough lessons for the company.

Citigroup will cut 4500 jobs, beginning in Q4 2011. John Corzine doesn't know where the $1.2 billion of investor money is, according to his testimony. Given his background as a senator and governor, this is no surprise. Most politicians have no clue where the money comes from that they so freely spend. It appears Corzine was simply continuing his ways as a politician.

Looking at economic activity, the largest domestic companies continue to report increases in top and bottom line growth. Manufacturing utilization and other measures of economic activity continue to improve, though slowly. In fact, while the stock market has been flat for the year, earnings have grown by 20%. All of this would seem to be good news for the stock market.

The challenges we face are a bit larger, in both context and geography. The concern on the minds of most is the massive global debt load, and the inability or unwillingness of our elected leaders to lead us toward viable solutions. Everyone, it seems, other than federal leaders across the world (who can print money) understands that debt must be brought under control, in order to return our countries and world to economic prosperity. In addition, there are many that fear a government continually encroaching on their lives and decisions.

There appear to be several ways to address the debt issue. One is to print money, which creates inflation. A second is to simply not pay what's due, which creates strain, perhaps to the breaking point, on those institutions and governments holding the debt. A third is to raise taxes, which inhibits behaviour that generates taxable revenue. A fourth is to cut spending, which impairs re-election opportunities. None of these are appealing options, and I suspect that none of them individually will solve the problem. It would be nice however, to find a statesman among the group, who would be willing to sacrifice self-interest for the benefit of resolving the problem.

What's interesting is that the financial crises we face, at home and abroad, are not the problem, but the symptom. Financial disarray is a symptom of moral and spiritual illness, which illness is rooted in an identity crisis. We don't know who we are, or why.

As a result, we attempt to use money to: look good, have power, buy love, affection, success, re-election, comfort, image, and the list goes on. Once we are clear on who we are, why we exist, and where we fit in the story, money loses its power to define us, and we can then learn to handle it well.

So, all the externals are simply indications of lack of clarity about internal questions. As the internal questions are answered, we move toward clarity, order, and peace. As individuals in large groups begin to experience this peace, order, and clarity, they will begin demanding the same from their elected leaders. At this point, there will be change.

One of the more interesting websites we've come across recently, www.ftpgov.com, was created to give you a quick and easy way to give your elected officials your opinion on bills, before they go to a vote. We would encourage you to check it out, and learn more. We believe the developers of the site are on to something.

Apple has introduced Siri for the iPhone 4S. It will be interesting to follow how and whether consumers use Google search, as Siri becomes more widely adopted.

Quotes of the week:

"Every government degenerates when left to the rulers of the people alone. The people themselves are its only safe repositories".

"Experience has shown that, even under the best forms of government those entrusted with power have, in time, and by slow operations, perverted it into tyranny".

"I believe that banking institutions are more dangerous to our liberties than standing armies".

"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them".

"My reading of history convinces me that most bad government results from too much government".

"When the people fear the government, there is tyranny. When the government fears the people, there is liberty".

All quotes from Thomas Jefferson

Until next week, wishing you the best.

Randy Brunson

Centurion Advisory Group

770.817.0525

www.CenturionAG.com

Centurion provides fee-only financial advice and investment management services. The firm specializes in 401(k) rollovers, stock option analysis, and due diligence on real estate and private placements. If you are interested in scheduling a conversation with one of the firm's advisors please feel free to give us a call at the number provided above or email Marty Gates at mgates@centurionag.com.

Heidi's Place

2011-09-26T11:16:00.000-04:00

TRUE TO FORM, SEPTEMBER has been volatile and for the most part, down. For the three weeks ended Friday, September 23, 2011, the Dow Jones Industrial Average closed at 10,771, off 469 points, or 4.2%. The Standard & Poor’s 500 closed at 1136, down 37 points, or 3.6%, and the NASDAQ Composite closed at 2483, up 3 points, effectively flat.

What wouldn’t surprise us at all is to see a very solid week in the markets this week, as we approach the end of the month. We will know next week, when we write to you again.

Boeing has shipped the first 787 Dreamliner, three years after their targeted delivery date. All Nippon Airways appears to be pleased, however. Research In Motion continues to struggle, reporting another disappointing quarter. I like my Blackberry, though I have nothing to compare it to.

Netflix may have stepped on itself, with its recent price restructuring. This move has Redbox, Blockbuster, and others out in force to nab customers. The real competition for DVD’s however, is from the various streaming services. UBS said recent trading losses are $2.3 billion. UBS chief Oswald Grubel has chosen to return to retirement, which I suspect is not a bad personal move.

It remains to be seen whether the Solyndra story is simply classic mismanagement, or a case study in what happens when attempts are made to have the government intervene in private markets. Moody’s has cut ratings on Credit Agricole SA and Societe Generale SA, citing concerns about funding and liquidity needs.

The inability of government leaders around the world to wean themselves of promises that require cash continues to create concern, and have a negative rippling effect. These promises make perfect sense though, if we understand that the ultimate goal of those in power is to stay in power.

In economic news, residential foreclosures were up 7% in August, compared to July. Consumer credit was up $12 billion in July, with auto loans increasing sharply, and credit card debt continuing to decline. Initial jobless claims continued in the low 400,000 range. The CPI was up 0.4% in August, with gasoline and food prices leading the way.

Retail sales were flat in August, while industrial production was up 0.2%, and inventories were up 0.4%. What’s interesting is that consumers appear to be buying new autos, rather than new school clothes. This has stumped a few commentators. It makes sense though, given that alcohol, chocolates, and cosmetics were growth industries during the 1930’s. If the outside world appears to be a mess, people will do a variety of things, and spend money in interesting ways, in order to look good and feel good.

Since we wrote to you last, the FOMC has met, and their comments released for public consumption did nothing to assure investors that they had a meaningful game plan. Of course, some operate from the assumption that the government can create jobs in the private sector, which it most assuredly cannot. What government can do is create an environment that causes companies and business owners to want to deploy capital and make new hires. At the moment, both sides of the aisle in Congress, and the White House, are doing nothing of the sort, and are, in fact doing the opposite.

Perhaps the best approach would be to adopt a flat 10% sales tax, and do away with any and all income or estate taxes. Tie this to a federal legislature that meets for eight weeks a year, and mandate an 80% reduction in federal programming and employees? Something certainly needs to change.

President Obama introduced his new tax plan. The proposed plan would extend the 2% payroll tax cut for employees through 2012. The employer share of payroll tax would be cut from 6.2% to 3.1% on the first $5 million of payroll, and eliminate it entirely for any net increase in payroll. The plan would also extend current enhanced depreciation provisions, and create a “Returning Heroes” tax credit of up to $9600 for hiring unemployed veterans.

Mitt Romney has proposed a tax plan that would move some of the current percentages around, and generally lower. John Huntsman has proposed a plan with similar features, though his plan would offer rates of 8%, 14%, and 23%, do away with the AMT, and eliminate tax on capital gains and dividends. Huntsman’s challenge is that he isn’t faring well with those most likely to vote in a Republican primary.

Herman Cain’s tax plan would eliminate payroll taxes completely, cut corporate and personal taxes to 9%, and impose a 9% national sales tax.

Derivatives Explained: Heidi owns a bar in Detroit, whose customers are mostly unemployed alcoholics who can no longer afford to patronize her bar. Heidi introduces a new plan to allow her customers to drink now and pay later. Heidi tracks her customers’ drinks, effectively lending them money. Word gets out of her new plan, and Heidi is swamped with business. Since her customers are relieved from the need to pay now, Heidi gets no resistance as she raises prices at regular intervals. At year end, Heidi shows unprecedented growth in both gross revenue and net profits.

A young bank vice-president at Heidi’s bank recognizes these customer debts as future assets and increases Heidi’s borrowing limit. The bank’s underwriters express little concern, as they have the resources of unemployed alcoholics as collateral. Over at the banks trading desk, expert traders find a way to make huge commissions, and transform these loans into DRINKBONDS. These bonds are bundled and traded on international markets, and are given an investment grade rating.

Investors don’t understand that the DRINKBONDS (Symbol: DUMB) they are buying are really debts of unemployed alcoholics. The bond prices continue to climb, and soon become the hottest selling items at some of the country’s leading brokerage houses.

One day, a new risk manager at the local bank decides it’s time to demand payment on the debts incurred by the drinkers at the bar, and so informs Heidi. Heidi lets her customers know, but being unemployed alcoholics, they cannot pay their debts. Heidi can’t pay her loans and is forced into bankruptcy. She and her eleven employees lose their jobs.

Overnight, DRINKBOND prices drop by 90%. The collapsed bond prices destroy the banks liquidity, preventing it from making new loans, thus freezing credit and economic activity in the community. Heidi’s suppliers had granted her generous terms, and had invested their firms’ pension funds in the bonds. They now write off the bar’s bad debts, and face the prospect of a seriously impaired retirement plan. The wine supplier also declares bankruptcy, closing the doors on a family business. The beer supplier is taken over by a competitor, who closes the local plant and lays off 150 workers.

Fortunately, the bank and brokerage firms, and their executive suite, are bailed out by cash infusions from government loans. The funds for this bailout are obtained by new taxes levied on employed, middle class, non-drinkers who have never been to Heidi’s bar.

This is how many see the events of the last few years. Thanks to my friend David Burrell for the analogy.

Quotes of the week:

“According to the latest poll, a record 73% of Americans think the country is headed in the wrong direction. The good news: Gas is so expensive we’ll never get there”.
-Jay Leno

“The U.S. Census Bureau reports that American homes are 650 square feet larger today than they were in 1980. Unfortunately, so are most Americans”.
-Conan O’Brien

Preferred Cash Flow

2011-09-06T11:13:00.000-04:00

IN VERY TYPICAL END OF MONTH fashion, the major equity indices were up last week. By the numbers, for the two weeks ended Friday, October 2, 2011, the Dow Jones Industrial Average closed at 11,240, up 423 points, or 3.9%. The Standard & Poor’s 500 closed at 1173, up 50 points, or 4.5%, and the NASDAQ Composite closed at 2480, up 139 points, or 5.9%.

Uncertainty, and to some degree fear, seems to be dominating conversations regarding the economy and the markets. The price of gold is a good way to measure this concern in dollar terms. While it’s difficult to do anything practical with a one ounce gold coin, gold has been seen as a safe haven in the face of fiat currencies, such as those that dominate our globe.

What’s interesting is that the major equity indices have followed a very traditional pattern this year. During most years, the stock market advances from January through spring, meaning April or early May. During early summer, the major indices are down, and during late summer, the indices are down even more. September has historically been an off month. Finally, within a month, the last few days of each month tend to be good days in the public markets. A study of 2011 to date indicates that it is following a very traditional pattern. If this pattern holds, September will be off, and the fourth quarter will be one of the best fourth quarters we have had in several years.

The Federal Housing Finance Agency plans to sue more than a dozen large banks, claiming they misled Fannie and Freddie regarding mortgages. The Jackson Hole Federal Reserve meeting has concluded, with little to show for the taxpayer dollars spent.

Warren Buffet just gave Bank of America $5 billion. In return, Buffet’s Berkshire gets 50,000 shares of cumulative preferred stock with a 6% coupon, all of which can be redeemed at a 5% premium. In addition, Berkshire gets warrants to purchase another 700 million shares of BAC common at $7.14. This means that Warren and company get $75 million in quarterly cash flow, and a built in gain of at least $250 million. At the moment, the warrants are underwater, but I suspect it will all work out for Berkshire.

According to RealtyTrac, 31% of home sales during the second quarter were on properties in some stage of foreclosure. This is up from 24% for the same period last year. Homes in foreclosure or bank owned had an average sales price that was 32% less than those properties not in distress.

Over the last few weeks, I’ve seen several emails that attempt to communicate our country’s financial situation in easy to understand terms. Here’s one. If the U.S. were the Jones family, the Jones’ would have an annual income of $21,700 and annual spending of $38,200. This year, the Jones’ have added $16,500 to their credit card balances, bringing these balances to $142,700. Realizing they were in a crisis, the Jones’ had a family meeting, and decided to reduce spending by $385 a year.

On the economic front, there was no net new hiring in August, with the 17,000 private sector jobs being offset by 17,000 layoffs in the government sector. We applaud the decision of state and local governments to get their fiscal houses in order, and would suggest that the federales take lessons from these folks. The official unemployment rate continued at 9.1%.

The revised GDP report for Q2 2011 showed annual economic growth of 1%, substantially less than the 3.5% needed for robust economic health. Corporate profits rose 3% during the second quarter, up from a rate of 1% in each of the two previous quarters. Over the last year, corporate profits are up about 8%.

Auto sales are showing strength, as consumers appear to be choosing cars over homes. At the close of the market on Friday, August 26, the yield on the 90 day T Bill was showing as -0.01%. Reflecting a negative interest rate is an interesting statistical anomaly that may mean little in reality, but speaks volumes about where we are as a country.

A recent national survey of persons earning six figure incomes showed that 14% were living paycheck to paycheck, 6% said they weren’t making ends meet, 24% had missed a bill payment in the last 12 months, and 55% had either reduced retirement plan contributions, or were making none.

What’s fascinating in all this is that one third of the homes being purchased are being paid for in cash. The take away? The macro economic environment and our personal economic environment may have little correlation to each other. The key to long term financial health is a consistent discipline of no debt, consistent savings and giving, and spending less than we make. Not rocket science, but not practiced by many on a consistent basis.

Quote of the week:

“The income tax has made liars out of more Americans than golf.”
Will Rogers

Volatility

2011-08-24T09:25:00.000-04:00

FEAR HAS DOMINATED DOMESTIC equities over the last two weeks, driven by some combination of the uncertainty coming from Washington, Mideast unrest, and worldwide sovereign debt loads. By the numbers, for the two weeks ended Friday, August 19, 2011, the Dow Jones Industrial Average closed at 10,817, down 627 points, or 5.4%. The Standard & Poor’s 500 closed at 1123, down 76 points, or 6.3%, and the NASDAQ Composite closed at 2341, down 91 points, or 3.9%.

Over the last four weeks, the Dow has given up 1864 points, or about 15% of its value. The S&P 500 has given up 222 points, or 16.5% of its value, and the NASDAQ has given up 417 points, or about 15% of its value. A number of professionals are suggesting this may be the time to return to a neutral weighting in domestic equities, especially as the S&P 500 approaches 1100. We tend to agree.

At the moment, Treasuries and CD’s are offering no income. Gold, silver, and other metals, as well as food and other commodities, have been on a rocket ride. Regression to the mean suggests that these assets are up next for downward pressure on prices. Corporate America is sitting on hundreds of billions in cash, and continues to grow their top line, in spite of the uncertainties both domestically and around the world. It wouldn’t surprise us to see a major upswing in stock prices over the next fifteen months, as we head into the 2012 election season.

The Federal Reserve has said interest rates will remain low until at least mid-2013. The European Central Bank has begun buying bonds, in an attempt to pull Italy and Spain from financial ruin. English Prime Minister David Cameron has said he will consider blocking social media sites, in an attempt to reduce the riots, and their coordination.

Cisco reported a solid quarter, with $11.2 billion in revenue, and $1.2 billion in income. For the year just ended, revenue was $43.2 billion, up 8% over the previous year, while net income was $6.5 billion, down more than 16% from the previous year. The top line is growing, but at the expense of margin. Cash and equivalents year end were $44.6 billion.

Parents surveyed by the National Retail Foundation said they expect to spend an average of $603 on back to school clothing, supplies, and electronics, for each of their children. Total spending on children in kindergarten through 12th grade is on track to reach $22.8 billion. Adding spending on college students brings this total to $68.8 billion.

Gold has been on a tear over the last six weeks, closing within just a few dollars of $1900. Some suggest it’s time for a correction, others are predicting gold at $3000 to $5000 per ounce. Hewlett-Packard has decided to exit the PC market. HP appears to be deciding what it wants to be in the future, with some question about the answer.

Google has decided to buy Motorola Mobility Holdings, at a 63% premium to its recent stock price. Bank of America stock is trading near 52 week lows, with stock prices of much of the financial sector showing weakness.

Recent studies have shown that those who maintained a disciplined allocation through the turmoil of 2008 and early 2009 did better than those who attempted to move in and out of the market.

In economic news, the U.S. trade deficit was $53.1 billion in June. Initial jobless claims were down a bit to 395,000, but still in the 400,000 range, with job absorption still far below that needed to reduce unemployment.

Retail sales were up 0.50% in July, meaning consumers are continuing to spend.

According to the Congressional Budget Office, federal taxes as a function of GDP are at their lowest level since 1950, at 14.8%. This compares to a post-war average of 18.5%. We are not suggesting that taxes are too low, or even where they should be. It is very clear to us that governments collect far more than what is required to run an effective, lean, operation. Our suggestion would be to build a tax system that would have taxes at about 10% of GDP.

In other economic news, the Philadelphia Fed’s report on economic activity showed slowing economic activity, with a few bright spots. Industrial production was up 0.9%, driven mainly by auto production. Leading economic indicators rose 0.5%, the third straight monthly gain.

With the information overload many of us live with, perhaps a useful exercise is to step away, and evaluate our lives in terms of something other than a financial statement. What is the quality of our relationships? Where do we find meaning? Is there joy and peace that’s distinct from a growing portfolio or financial statement? Just a few questions to ponder.

Quote of the week:

“Worship is what we give our hearts to, hoping to receive life in return.”
John Eldredge

Budget Control Act

2011-08-09T09:23:00.000-04:00

SUMMER TIME AND POLITICAL INEPTITUDE HAVE combined to create a difficult few weeks for domestic equities. By the numbers, for the two weeks ended Friday, August 5, 2011, the Dow Jones Industrial Average closed at 11,444, down 1237 points, or 9.6%. The Standard & Poor’s 500 closed at 1199, down 146 points, or 10.9%, and the NASDAQ Composite closed at 2532, down 326 points, or 11.4%.

The last two weeks have been challenging in the publicly traded equity markets, and there is almost no escaping the news. Whether it’s around the clock cable, email alerts, the car radio, or something as simple as hitting a news report while channel surfing, bad news seems to abound. Part of that is pure business – bad news brings viewers and listeners, and sells advertising. Another piece of it seems to be our need for white noise in the background of our lives.

So what happens if you escape to silence? What are you talking to yourself about? What does life look like? Do you ever think about what you think about, or is the noise of life so constant that the idea to do so has never crossed your mind?

Congress reached an agreement on the debt limit, and Standard & Poor’s downgraded the U.S. credit rating, from AAA to AA+. The U.S. credit rating now joins the ranks of China and Spain. Netflix, one of the companies to challenge Blockbuster, is now having challenges of its own. Between a change to their pricing model, and competitors who provide streaming video, Netflix is giving up customers, and the related recurring revenue.

Many U.S. companies are having new hires agree to a social media background check, as part of the hiring process. This gives employers a more rounded view of the behaviour of potential hires, as Facebook, Youtube, and other social media outlets have a strong personal use component, and many can’t resist posting far too many tidbits about their personal lives.

ExxonMobil’s earnings of $2.18 a share for the second quarter missed analyst’s estimates of $2.30, apparently due to their natural gas exposure. The CBOE volatility index, or VIX, almost doubled in the last week, and is on its way to a 52 week high. Bank of New York Mellon is telling its best customers, those with more than $50 million on deposit, that they will start paying for the privilege of leaving those funds on deposit. Effectively, a negative interest rate?

America’s largest companies continue to show solid profits, and continue to hold large cash positions. No doubt this will remain the case until our federal politicians and their employees can articulate certainty about how they will interact with us from a tax and regulatory standpoint.

Speaking of uncertainty as fostered by the federales, the U.S. Treasury Dept appears ready to audit GM’s quarterly results. Perhaps the government should have left GM alone to start with.

On the economic front, it’s more of the same. There were new hires, but not enough to meet the demand for jobs. Consumers are paying down debt, instead of spending, which is a positive. Many consumer goods companies continue to be profitable worldwide, in spite of the domestic spending slowdown.

The Budget Control Act of 2011, the recently passed legislation that allowed the government to continue to function, will result in the formation of a bipartisan joint committee. This committee’s responsibility will be to propose tax changes to be voted on before year end, which will raise $1.5 trillion over ten years. At this point, it is unknown what tax changes may take place to raise this $1.5 trillion.

It is foolish to speculate on what Congress may do regarding taxes. The White House has long been a fan of higher income taxes for those individuals and families above the $200K/$250K annual AGI mark. Other ways to raise funds include making the value of employer provided health benefits taxable as income to the employee, eliminating the AMT, or changing the tax calculations on capital gains.

Congress could also restrict “tax expenditures” – that which the rest of us consider income. This could include restricting or eliminating deductions for property, sales or state income taxes, mortgage interest, charitable contributions, and a number of miscellaneous itemized deductions. This could also include health insurance costs above the 7.5% limit, and perhaps even above the line deductions such as tuition deductions, and deductions for self-employment taxes and health insurance. Tax credits such as the child tax credit and the unearned income credit are also up for consideration.

Keep in mind that, under the Act just passed, Congress must vote on these changes before year end. Any changes may, and most likely will, alter the extension of the current tax regime that took place in December of 2010.

In a summary attributable to Dave Ramsey, he describes the U.S. as a family, with a household income of $58,000, annual spending of $75,000, and $327,000 in credit card debt. The recent Budget Control Act would reduce spending to $72,000.

Quote of the week:

“A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement – and shall not take from the mouth of labor the bread it has earned – this is the sum of good government”.
Thomas Jefferson

Snail Mail or E-File?

2011-07-27T09:11:00.000-04:00

EQUITY MARKETS HAVE BEEN BOTH up and down over the last three weeks, yet this volatility has done little but create more uncertainty. By the numbers, for the three weeks ended Friday, July 22, 2011, the Dow Jones Industrial Average closed at 12,681, up 99 points, or 0.7%. The Standard & Poor’s 500 closed at 1345, up 6 points or 0.4%, and the NASDAQ Composite closed at 2858, up 42 points, or 1.5%.

Apple completed its finest quarter ever, reporting revenue of $28.57 billion, and income of $7.31 billion, for gross margins of 41%. This compares to $15.7 billion in income and $3.25 billion in profits for the same period a year ago. Results were driven in large part by the sale of more than 20 million iPhones and 9 million iPads during the quarter.

New wireless technology may make it easier to provide WiFi coverage in even the most crowded spaces, including sports stadiums. Look for new wireless promotions at a stadium or sporting venue near you.

The Swiss Parliament is expected to begin discussion this year of a gold franc, a parallel currency to the Swiss franc. This initiative is part of “Healthy Currency”, a campaign endorsed by politicians from the Swiss People’s Party, a conservative group, and the country’s largest political party. These discussions in Switzerland are part of a larger global question about the place and value of national currency that is backed by nothing more than the taxing or printing authority of the issuing entity. With the “full faith and credit” that supports most currencies in doubt, and the obvious inability of any elected official to make meaningful financial decisions, it is time for discussions about the meaning of currency and the value of federal reserve notes, regardless of who issues them.

The smile on JK Rowling’s face is permanent, though her place on the Forbes 400 list will vary, depending in part on her ability to manage her new found wealth. “Deathly Hallows Part 2”, the latest, and apparently the last, Potter film, brought in an estimated $43.5 million on its opening day, setting a revenue record, according to Hollywood.com.

Though Las Vegas real estate has had a tough couple of years, it appears that Las Vegas could be the best place to own residential rental property; this according to HomeVestors of America. The employment outlook remains flat, as businesses continue to find ways to be profitable without adding new hires. We expect this to continue, as long as uncertainty remains in Washington. Some analysts are suggesting an official unemployment rate of more than 10% before year end. We will soon find out. Where do you think unemployment will be at year end?

Gold has continued to climb, breaking the $1600 per ounce barrier. Silver has climbed even faster. The gold/silver ratio currently stands at 40, whereas at the end of 2010, this ratio was 46. The gold/silver ratio was set at 15 in 1792, with passage of the First Coinage Act. Since the late 19th century, the ratio has ranged from the low teens to nearly 100, with the average between 47 and 50. Historically, the ratio has dropped during precious metals/commodities bull markets.

Express Scripts is buying Medco for $29.1 billion in stock and cash, combining two of the largest pharmacy benefit managers. My grandma would have a difficult time believing or understanding the debt foolishness going on in Washington. During the seven years between my grandfather’s death and her death, she saved enough from a $350 monthly social security check to pay for her own funeral.

On the economic front, government spending in 2011 will reach about $3 trillion, with 40% of that federal spending, and 60% attributable to state and local jurisdictions. Both the Consumer Price Index and the Producer Price Index declined in June, according to the Labor Dept. Initial jobless claims remain above 400,000, and housing starts remain at about 35% of 2006 levels.

In our last commentary, we noted that debt as a function of GDP in the U.S. was approaching 350%. This number includes official debt, as well as an estimate of a number of off-balance sheet items. Official debt as a function of GDP is 99% in the U.S., with 31% of this debt foreign-owned. By comparison, Japan’s ratio is 204%, with 7% owned by foreigners, and Greece’s ratio is 137%, with 75% owned by foreigners. This offers no comfort, as both Greece and Japan are in difficult situations.

According to some economists, if the U.S. economy grows by 3.9% annually over the next decade, our debt to GDP ratio drops to 83%. If economic growth averages 1.8%, our ratio comes in at 144%. Historically, the solution to economic growth has been legislative and regulatory certainty, combined with a favorable tax climate for the accumulation and deployment of capital.

Last year, two out of three Americans filed tax returns electronically. Some state and local governments are mandating electronic filing of certain returns. The New York Dept of Taxation and Finance mandates e-filing of sales tax returns, and they want taxpayers’ phone numbers and Social Security numbers.

Generally, this is no problem – unless you are Amish. The Watertown Daily Times, in an area that’s home to the Swartzentruber and Heuvelten Amish clans, reports some challenges with compliance among the Amish business owners. The Amish furniture makers and shopkeepers aren’t intentionally trying to be difficult. It’s just that they don’t have electricity, or phones, or social security numbers. Some of these shopkeepers have received letters suggesting a $50 penalty for every return not filed electronically, though the Dept. of Taxation and Finance says it wants to be helpful. This doesn’t include their discussions with bureaucrats over photo ID’s, and other requirements that don’t gel with the Amish lifestyle. What’s your opinion on the issue? Should we let the Amish maintain their way of life, or force them to comply?

Quote of the week:

“He is no fool who gives up what he cannot keep, to gain what he cannot lose.”
-Jim Eliot

Debt to GDP

2011-07-06T11:58:00.000-04:00

APPARENTLY BUYERS WERE EXCITED about the upcoming Independence Day celebrations, as stocks reported a solid week. By the numbers, for the two weeks ended Friday, July 1, 2011, the Dow Jones Industrial Average closed at 12,582, up 578 points, or 4.8%. The Standard & Poor’s 500 closed at 1339, up 68 points, or 5.4%, and the NASDAQ Composite closed at 2816, up 200 points, or 7.6%.

Some believe the government of Greece will be able to implement and maintain austerity measures. They won’t. Weaning politicians from buying votes today with promises paid for tomorrow is some multiple worse than getting a meth head clean. The reflection in the mirror when I look at Greece is the U.S., about twenty to thirty years out. The good news? We can change that future. Do we as citizens care enough to make the changes necessary, so we can say once again that America’s best days are still in the future?

Corporate America deployed $124 billion of its substantial cash reserves, during the first quarter, buying back stock, with the goal of increasing share price. Bank of America will take a $14 billion charge during the second quarter, to settle claims related to sales of mortgage backed securities.

Microsoft launched a web-based version of its Office Suite on Tuesday, in its efforts to capture cloud market share. U.S. home prices rose in April, for the first time in eight months. This is good news according to Case-Schiller.

Frank McCourt, according to reports, has enjoyed a very comfortable, debt financed, lifestyle. McCourt, currently going through an ugly divorce, has also filed for Chapter 11 bankruptcy protection for the LA Dodgers, blaming the move on Bud Selig’s refusal to approve a long term broadcasting deal with Fox.

On the economic front, jobless claims were 428,000 for the week ended June 25, 2011. The four week average remains below the near term peak of 440,000. U.S. consumer confidence declined again in June, following a decline in May. This decline was in both the “present situation” and “expectations” components. This confidence, or lack thereof, seems driven by the continuing challenges in the labor markets, as well as the ongoing deterioration in housing prices and conditions.

Some are suggesting the end of America as we know it, with the complete deterioration in the value of the dollar, and scenes reminiscent of a Mad Max movie. These scenarios are very attractive to many, probably for the same reasons that newscasts tend to open with bad news first.

Those whose livelihood and future depend on our centrally planned economy, essentially all of Washington, will do anything necessary to prevent this. In fact, in the next few months, we expect the White House and all of Congress to introduce all manner of initiatives designed with one goal – strengthen the economy and increase employment. After all, they have an election to win in the fall of 2012.

It is very possible that the economy will drag along, with meaningful underemployment, and a tired housing market, for several years. Real inflation, meaning what actually hits our pocketbooks, will remain in the 4% to 6% range for the next few years.

What must be controlled is federal spending. During the long depression of the 1870’s, debt to GDP stood at 166%. During the Great Depression of the 30’s, debt to GDP peaked at 300%. Today, debt to GDP is 350%. A 2010 McKinsey study showed that periods of de-leveraging tend to last six to seven years. We must stop spending beyond revenue, starting with the federal government, and pay down our debts.

However, in all of this, there is opportunity. Down cycles give all of us the opportunity to sharpen our decision making capacity, to learn new skills or new ways of working, to pay close attention to the dollars that pass through our fingers. These new skills will allow us to multiply our return in any number of ways as and when the economy hits a strong up cycle.

Those who are unemployed or underemployed will continue to go through tremendous change, as they learn new ways or working, and making a living. I can think of no better reason to start and build a business than to provide employment for those who want to work.

Supply chain managers are pricing oil at $150 a barrel, as they project costs over the next few years. This will continue to bring manufacturing jobs back to the states. As much as a centrally planned economy runs counter to the free enterprise system, America remains the Golden Land. We have the best infrastructure, the largest consumer base, and overall, the most highly skilled workforce in the world. In addition, more than anywhere else in the world, we are open to immigration, being a nation of immigrants. Add these together, and in spite of our problems, America’s future looks bright, compared to much of the world.

If we will choose to turn from the European model, which clearly doesn’t work, and return to a free enterprise, capitalist model, I believe America can restore its greatness. On a side note, the Wall Street system is not a free enterprise model, as they get substantial rewards, but bear little or none of the risk, associated with their poor decisions.

Quote of the week:

“America was not built on fear. America was built on courage, on imagination, and an unbeatable determination to do the job at hand.”
Harry Truman

SpaceShip Apple

2011-06-21T10:20:00.000-04:00

EQUITY MARKETS APPEAR to be tired of late, seemingly burdened with the worry of the world. By the numbers, for the two weeks ended Friday, June 17, 2011, the Dow Jones Industrial Average closed at 12004, down 147 points, or 1.2%. The Standard & Poor’s 500 closed at 1271, down 29 points, or 2.2%, and the NASDAQ Composite closed at 2616, down 116 points, or 4.2%.

George Soros sold $800 million of his gold holdings during the first quarter of 2011. Citigroup suffered a security breach at the hands of online hackers. Expect the security breach stories to become more common.

One more step in the move toward a nationalized economy is a Federal Reserve proposal to make annual decisions regarding whether the country’s largest banks can pay dividends or repurchase stock. The rest of the financial services industry – everything from mortgage brokers to independent advisory firms such as ours – will simply be regulated out of existence.

Steve Jobs plans to build an earthbound space ship as Apple’s new headquarters. I’ve always admired creativity and originality. Here’s hoping this investment also represents a solid return for Apple shareholders. In the meantime, Ron Johnson, head of Apple’s retail store operations, has joined JC Penney as its new CEO.

It appears that Greek debt holders are about to be stiffed. U.S. banks would take about a $41 billion hit. Some question whether this could happen in the States. Some are certain it will, with our elected federal officials apparently oblivious to the long term consequences of their actions. Others aren’t prepared to give up on the resiliency, sense of fairness, and love of freedom of the American people. Personally, I don’t expect the end of our country. It seems to me though, that the Golden Age of America is behind us. Here’s hoping I am completely wrong on that last count.

Some cities are realizing that they must get their financial lives under control. Brea and San Francisco California are both reducing pensions and benefits for their employees as a way to cut costs. Illinois is choosing to deal with massive budget deficits by increasing a wide range of personal and business taxes. Camden NJ recently laid off more than a third of its firefighters and police force, as voters refused to raise taxes.

In economic news, both the PPI and CPI showed modest signs of inflation. Residential construction grew more than expected in May, though annualized housing starts are about 600,000, compared to 2 million in 2006.

Larry Elliot, economics editor of The Guardian newspaper in the U.K., recently penned an article titled “Decline and Fall of the American Empire”. It makes for interesting reading, and can be found in the Guardian’s June 6th edition. In the article, Elliot draws parallels between America in 2011, and Rome in 200AD. Some of the warning signs he cites include military overstretch, a widening gulf between rich and poor, a hollowed-out economy, consumers using debt to live beyond their means, and more.

The news isn’t all bad. In fact, the good news is that within and in spite of what may seem like trying times, there is always opportunity. There is certainly economic and business opportunity, as one person or company’s problem is someone else’s profitable solution. Even more, there is the opportunity to show by example and counsel how to live an abundant, joyous, and peaceful life in the face of what many consider overwhelming challenges. I suspect this may be one of the greatest opportunities of all, as so many are simply looking for one person to show them how to live.

Even when we don’t understand, or have no clarity about what’s actually going on, God has not abandoned us. Neither has He forgotten us, or turned His back on us. Lean hard into Him, and trust His character. He is good for His word.

Quote of the week:

“…what does the Lord require of you? To act justly, and to love mercy, and to walk humbly with your God.”
Micah 6:8

May Investment Review

2011-06-13T12:58:00.000-04:00

The mood shifted sharply in May from one of optimism about a self-sustaining recovery to one in which the myriad concerns about which we’ve been writing for some time weighed increasingly heavily on stocks and other risk assets around the globe. These concerns include Eurozone debt problems, the significant fiscal problems of our own government, weakness in both the housing and labor markets, and signs that the economy is again slowing. A final-day rally trimmed May losses a bit, but markets have continued their slide into June. Large-cap U.S. stocks lost 1.2% in May, while small-cap stocks lost closer to 2%. Mid-cap stocks held up best, losing only about 0.4% (see back cover table for benchmarks and returns). Domestic fixed-income delivered good returns, with the broad high-quality bond index up 1.3%.

Both foreign-developed and emerging-market stocks were down close to 3% in May. Emerging-market bonds were down a little over 1%, while developed-market foreign bonds were close to flat. Where does that leave us through the first five months of the year? Stocks still have good gains for the year to date, from the high single digits for U.S. equities, to the mid-single digits for developed foreign markets and low single digits for emerging markets, though those gains have been further trimmed through the early part of June.

Turned Tables

2011-06-06T11:06:00.000-04:00

A DESCRIPTION OF LAST week’s market performance offered by one journalist was “June Swoon”. By the numbers, for the week ended Friday, June 3, 2011, the Dow Jones Industrial Average closed at 12,151, down 290 points, or 2.3%. The Standard & Poor’s 500 closed at 1300, down 31 points, or 2.3%, and the NASDAQ Composite closed at 2732, down 2.3%.

Nokia is having a rough go of it. Last Tuesday, they warned that second quarter revenue would miss targets due to sliding sales and prices. In addition, they suspended their full year forecast for 2011.

Microsoft is showing off Windows 8, which appears to be heavy on touch-screen features, and is running on devices using ARM-based chips. Microsoft appears serious about catching rivals Google and Apple.

Groupon has filed for an IPO, saying it expects to raise as much as $750 million. The company will need to do better than its first quarter loss of $146 million, in order to continue to impress investors.

It appears that doctors across the country will spend an average of $40,000 on software to build digital databases of patient records, responding to government led efforts tied to the 2009 economic stimulus plan. Questions remain as to whether these efforts will allow doctors to send patient records to other doctors who could benefit from having rapid access to medical histories. Altruism aside, one key business question is how one physician directly benefits from being able to forward this information on a timely basis to another physician.

Japan’s Prime Minister Naoto Kan survived a no-confidence vote in parliament. The European Central Bank and the IMF are attempting to determine what to do with Greece. Portugal’s elections have given the winning edge to a fiscal conservative, Pedro Coelho, of the Social Democratic Party, with the Socialist government of Jose Socrates admitting defeat.

Other economic news remains consistent, with new unemployment claims staying just over 400,000 from one week to the next, official unemployment just north of 9%, and home prices very soft. This continued uncertainty is reflected in the lack of direction in the publicly traded markets.

In spite of news that could be considered disheartening, life is good for most of us, especially compared to conditions of many around the world. In addition, there is always opportunity, especially if we are inclined to look for and prepare for it.

According to CBS News, the Nyergers of Collier County Florida paid cash for their home. About five months ago, Bank of America filed foreclosure papers on their home. In court, the homeowners were able to prove they didn’t owe BofA anything on the house, and were able to confirm that they had never had a mortgage on the property.

A Collier County judge agreed with the Nyergers, and ordered BofA to pay the couple’s legal fees. Five months after the judge’s ruling, BofA still hadn’t paid the legal fees, so the couple’s attorney foreclosed on the bank. Sheriff’s deputies, movers, and the Nyergers attorney went to the bank, padlocked the doors, and began removing desks, computers, filing cabinets, and teller trays. About an hour after being locked out of the bank, the branch manager handed the attorney a check for the legal fees, with apologies for the misunderstanding.

Quote of the week:

“I don’t know what your destiny will be, but one thing I know: the only ones among you who will be really happy are those who have sought and found how to serve.”
Albert Schweitzer

Sovereign Debt

2011-05-31T11:27:00.000-04:00

THE OLD ADAGE OF “SELL in May and go away” would appear to apply so far in May, though we don’t suggest that as a strategy. By the numbers, for the four weeks ended Friday, May 27, 2011, the Dow Jones Industrial Average closed at 12,441, down 369 points, or 2.9%. The Standard & Poor’s 500 closed at 1331, down 32 points, or 2.3%, and the NASDAQ Composite closed at 2797, down 76 points, or 2.6%.

Commodities and metals have been especially hard hit the last few weeks, after peaking on Friday April 29th. In fact, during the first week of May, silver was off 27% from its high. While this sector has recovered some, professional opinions are all over the board as to the future of commodities and metals prices.

Much of this opinion divergence comes from the uncertainty and unknowns associated with sovereign debt. Around the world, including the U.S., nations are drowning in debt. In addition, the legacy or entitlement promises made by elected officials are completely unsustainable. Some politicians, including a few in the states, are finally realizing this. Most of us have known this for years, since we must balance our personal and business budgets on a regular basis.

The challenge is that no one knows how the debt issue will be resolved, or what the fallout will be. What does it look like when a country goes bankrupt? Their currency is effectively worthless, but what other negative results are there? These are the issues that economists and other macro thinkers are dealing with. There is little in modern history to give us guidance. Modeling 10,000 scenarios gives some input. Until we can accurately forecast human behaviour, in large groups and in worst case scenarios, it will remain difficult to forecast with any accuracy. Our estimates, in the meantime, are a combination of quantitative analysis, and the subjective, or qualitative, which is heavily influenced by our worldview.

GM and Ford both posted double digit percentage gains in April. Industry wide, deliveries rose 17.9% from April 2010, with GM posting a 26% gain, overtaking Ford as the leading car seller in the U.S. Brett Arends of MarketWatch is suggesting that Apple will be the first company with a $1 trillion market cap.

Zillow, the real estate information company, shows housing prices down 8% from a year ago. It appears that housing prices are dropping about 1% per month. We have said it before, and it bears repeating. Home prices should be two to two and a half times annual household income. With annual household income in the $52,000 range, average home prices should settle at something less than $130,000. Depending on whether you are evaluating new or existing stock, average home prices are still in the $170,000 to $185,000 range. For the sake of our many friends in the residential real estate world, we hope we are wrong on this one.

Microsoft announced that it is buying Skype for $8.5 billion in cash. LinkedIn, the business networking site, saw its shares more than double on its first trading day, closing at $94.25. This from an initial offering price of $45. Liberty Media has made a $1 billion bid for Barnes and Noble.

Dominique Strauss-Kahn, head of the International Monetary Fund and one time French presidential contender, was arrested and charged with assaulting a hotel maid. His wife, Ann Sinclair, is funding his journey through the courts. Her wealth comes from the art trading of her grandfather.

The G-8 summit ended with a pledge by the member nations to cut debt. This pledge reminds me of a favorite quote, attributed to Molier. “All men are alike in what they dream, and all men are alike in what they say. It’s what they do that makes the difference.” We’ll see what these politicians actually do about the debt they have incurred.

On the economic front, signals continue mixed. Initial jobless claims have been running just over 400,000 each week. Home construction and prices remain soft. The Producer Price Index is up 6.8% over the last 12 months, while the Consumer Price Index, ex food and energy, is up 3.2%.

There is always information to review, absorb, and evaluate. Often, we can allow it to have a negative or depressing impact on our outlook. If we step back and attempt to look objectively, however, life is good. This past long weekend gave us the opportunity to reflect on that. Millions of young men and women, serving through our armed forces, have worked to keep us free. Many have paid the ultimate sacrifice, giving their lives so that we can enjoy the freedoms that we enjoy.

There will always be problems to solve, things that don’t fit with our plans, and outcomes that we don’t prefer. In spite of that, all of us reading this commentary live wonderful lives. I have found that gratefulness and depression can’t exist at the same time in the same person.

Quote of the week:

“In everything give thanks, for this is God’s will concerning you.”
St. Paul

PT Barnum

2011-05-05T11:48:00.000-04:00

THE LAST THREE WEEKS HAVE BEEN KIND TO stocks, with all three major equity indices up nicely. By the numbers, for the three weeks ended Friday, April 29, 2011, the Dow Jones Industrial Average closed at 12,810, up 430 points, or 3%. The Standard & Poor’s 500 closed at 1363, up 35 points, or 2.3%, and the NASDAQ Composite closed at 2873, up 93 points, or 3.1%.

Momentum in the equity markets has been driven in part by continuing strong performance in first quarter earnings. Ford Motor posted its best first quarter profit since 1998, and ExxonMobil profit topped $10 billion, with income up more than 50% year over year.

Ben Bernanke held his first ever press conference, his comments suggesting that he is comfortable with current policy positions. He has no plans to make changes in order to address inflation or slower growth. Meanwhile, gold and silver continued their rocket ride, with silver pushing $50, and gold well over $1500.

Research In Motion is having a tough year. Not only has its stock performance been underwhelming, but it isn’t competing well in its core business markets. J.P. Morgan’s profit was up 67%, to $5.6 billion. JPM increased its dividend to $0.25, and plans to buy back $8 billion in stock this year. Apple reported a 95% increase in profit, citing strong sales of iPhones and Macs.

Obama released his long-form birth certificate, and Mr. Trump is making noise about a presidential run. P.T. Barnum at his finest couldn’t orchestrate what is shaping up to be a most interesting election year.

Glencore, Groupon, and Dunkin Donuts are all preparing for IPOs. Glencore is a Switzerland based commodities trading house, Groupon provides online discount coupons and related services. Dunkin sells lots of caffeine and sugar, staples of the American diet.

The quality and viability of municipal and sovereign debt has been the subject of much debate over the last year. In fact, S&P is now questioning the sterling credit rating of U.S. debt. Wall Street’s line is that government debt of developed Western countries is the safest available. The challenge with that thought is that if it weren’t for Germany, then Greece, Ireland, and Portugal would most likely be in major default at this point.

Personal preference, if I’m evaluating sovereign or municipal debt, is to get input from those who stand to lose if the bonds default, rather than those who are often simply looking to move inventory. The insurance companies that offer bond default insurance seem to have lower rates for countries such as Australia, New Zealand, and the Scandinavian countries, than they do for much of the rest of the world, including the U.S.

On the tax front, the budget deal reached recently in Congress to keep the federal government open cut funding for high speed rail and the EPA, and increased the Pentagon’s budget by $5 billion.

In 2010, Congress had the gall to include legislation mandating business to business 1099s, beginning in 2012. This legislation ranked near the top of stupid laws, in terms of the cost/benefit ratio. The good news is that on April 5th, the Senate approved HR 4, which retroactively repeals the expanded 1099 reporting rules. For the moment, we can relax. As a rule though, we must remain vigilant, to protect our freedoms and liberties.

On the economic front, housing starts were up 7.2% in March, to an annualized 549,000. According to economists, a healthy economy should see 1 million new home starts annually. The Commerce Department announced that GDP grew at an annualized rate of 1.8% during the first quarter, substantially less than the 3.1% growth during Q4 2010. In addition, Commerce is officially recognizing the inflation that the rest of us have been experiencing at the gas pump and grocery store for at least the last year.

In 1862, roughly 10% of Americans, mostly affluent Northern citizens, paid income taxes. The income tax at the time was a temporary war time measure. This according to Joseph Thorndike, director of the Tax History Project at Tax Analysts, a Falls Church, VA non-profit.

During the war, citizens would pay no more than 10% of their income in tax, and this only if income was greater than $10,000. For those with incomes at or below $5000, the tax rate was closer to 5%. Income included profits from business or trade, earnings from sale of stock, gold, or real estate, and rents and interest on real estate, bonds, or securities. Income from farming operations or livestock sold was also taxable.

Deductions included a $1000 exemption, losses sustained from fire, shipwreck, or business losses not already recognized. Also deductible were wages paid to hired labor, and the cost of livestock purchased. There was a flat tax on gold watches, gold and silver, billiard tables, and carriages.

The tax law of the time was designed to be a rich man’s burden, as very few could afford a gold watch, billiard table, or carriage. The tax burden was gone in 1872, when the income tax law was repealed. It’s time to repeal it again.

To see how far we’ve come in accepting income taxes as part of the white noise of life, the IRS has announced its “Dirty Dozen” tax avoidance scams. These include hiding income offshore, identity theft, filing false or misleading forms, abuse of charitable giving, abusive retirement plans, and disguised corporate ownership, among a few others.

Quote of the week:

“Taxing oneself into prosperity is like standing in a bucket and lifting yourself up by the handle.”
-Winston Churchill

Q1 2011 Investment Commentary

2011-04-20T11:03:00.000-04:00

STOCKS CONTINUED their upward march in the first quarter, with large-caps gaining almost 6%, while mid- and small-cap stocks posted gains approaching 8% (see table on back cover for index returns). Overseas, returns were not as strong, though still good. Developed-market foreign stocks were up more than 3%, while emerging-market equities gained just under 2% for the quarter. Domestic high-quality intermediate-term bonds didn’t fare as well, barely gaining ground in the first quarter, while foreign bonds did a bit better, with developed-market government bonds gaining 0.7% and emerging-market bonds climbing by almost 3%.

We Are Not Perma-Bears, But We Are Cautious Now

For various stretches over the last 13 years we have been cautious towards the stock market based on our assessment of market valuations and expected returns. This has frustrated our clients at times, the late 1990s being the most notable example, as the S&P and Nasdaq rocketed higher during the late stages of the tech bubble. We wrote about our market concerns at that time, and our caution proved to be warranted. Despite another bear market in 2008, all of our portfolio models outperformed their benchmarks during this period, though there were a couple of performance slumps along the way—notably in 1998 and 2008.

As we reflect back and look forward, there are several points worth emphasizing.

1. Our valuation-driven, scenario-based approach is designed to help us make good decisions over the long-term. We know we can’t predict the short-term with consistent accuracy.

2. Even in the midst of long periods where returns are low there are still opportunities. In fact, these low-return periods are often characterized by higher volatility that can offer occasional fat pitches in “risky” asset classes like equities, REITs, and high-yield bonds.

3. We are not perma-bears. There have been extended periods over the past decade where our equity exposure was at a neutral level and/or our actual “equity like” exposure was at or above neutral (taking into account exposure to asset classes that have some equity-like risk such as high-yield bonds and REITs).

Currently, we are positioned somewhat conservatively with our portfolio allocations, and there are a few important points to make in this regard.

First, our longer-term analysis suggests that stock returns are likely to be mediocre over our five-year time frame–most likely somewhere in the low-single-digit range. We analyze return ranges for stocks by considering the possible economic scenarios we could see, and then considering how the “building blocks” of equity returns—dividends, earnings growth, and multiples— stack up under each. A challenge is that the range of possible outcomes is unusually wide, ranging from another re-cession to a return to the “old normal” patterns of borrowing and spending. We believe the odds skew towards the more negative outcomes, and this impacts how we want to allocate our portfolios.

Second, likely returns from bonds are even lower than stocks. With interest rates quite low, and longer-term inflationary pressure likely to result from our government’s fiscal policies and challenges, it is far more likely that we will see rising rates (which push bond prices lower) than falling rates over our investment horizon. Without the tailwind of falling rates, and with yields on bonds starting at low levels, we expect only very low single-digit returns from core high-quality bonds. Ordinarily, if we believe equity returns are likely to be higher than bonds, it would argue for being fully weighted to equities to capture that higher return.

That brings us to our third point, which is that with low expected returns for stocks and bonds, and with significant big-picture risks out there that could damage returns (especially in the shorter-term), we are underweighted to both stocks and core bonds in our balanced portfolios in favor of invest-ments that we think collectively offer better or at least competitive returns at less risk.

Examples of portfolio positions that we believe offer a better risk-reward tradeoff include: short-term high-yield bonds that offer better yields but generally low default risk thanks to their short ma-turities and careful credit research (Osterweis Strategic Income); flexible, absolute-return-oriented bond funds that have a broad toolkit with respect to the types of bonds they can own and their ability to limit the risk of rising rates (PIMCO Unconstrained); floating rate funds that generate good yields but that are not exposed to the risk of rising rates, and arbitrage strategies that are able to earn a return without the tailwind of rising stock prices.

These investments are generally a little riskier than core bonds in that they would provide less pro-tection from a severe downside scenario such as recession or deflation, but they are significantly less risky than equities. Since these positions are funded from reductions in both stocks and bonds, the net effect of these positions is to reduce overall portfolio risk while generating as good or better re-turns in most scenarios.

We have two other fixed-income investments that come with a notch-higher risk than the invest-ments described above, but that similarly offer better bang for our risk buck. The multi-sector Loomis Sayles Bond invests in (among other things) carefully selected high-yield bonds and foreign bonds, mainly of commodity producing countries, which provides some hedge against a falling dollar. The other fund—PIMCO Emerging Local Bond—invests in the bonds of emerging-markets countries and is a more direct-dollar hedge. It offers an attractive 7% yield and the chance for greater currency appreciation if our longer-term assumptions that the dollar will decline prove correct.

Our core investment-grade bond exposure is achieved mostly via PIMCO Total Return and munici-pal bond funds for taxable portfolios. Given the media focus on state and municipal finances, we want to share briefly our view on municipal bonds.

For taxable portfolios, municipal bonds are still a core position. This sector of the bond market has been in the headlines for months with some commentators making doomsday forecasts of massive defaults. This asset class is hard to evaluate on an aggregate basis because of the lack of underlying fundamental data and the fact that there are about 60,000 different bond issuers. We’ve approached our analysis by talking to and reading the analysis of experts in our network, reviewing research and data, and studying the structural factors that affect the finances of different types of muni issuers. We believe the massive default forecasts are greatly exaggerated. While defaults are almost certain to increase among smaller local issuers and will likely be higher than in past cycles, we believe there are plenty of solid muni credits available to bond managers.

Scattered high-profile defaults are entirely possible and these could spook investors and trigger more temporary nasty sell-offs for the broader municipal bond market, so we expect higher volatility than taxable investment-grade bonds. But the overall market is currently pricing in a default level that we believe is much too pessimistic—many muni bonds are offering tax-free yields that are higher than taxable U.S. Treasury yields. If municipal yields relative to taxable bond yields normalize over five years (the muni yields normally are lower since they are exempt from tax), investors may be able to capture returns that are nearly as high as the current yields, even in light of the rise we expect in the general level of interest rates. This should equate to pre-tax equivalent returns of around 5%, much better than the returns we expect from taxable investment-grade bonds. This makes municipal bond funds a decent asset class to own for the conservative portion of our portfolios for those who can ac-cept the higher shorter-term volatility.

The final point we would make about our conservative positioning is that if we continue to see strong stock returns, it is likely our portfolios will lag their benchmarks. And while we did manage to outperform in 2010 despite a sharply rising stock market, we trailed in the very strong fourth quarter and again in the first quarter of this year. It may seem odd to be cautioning clients about the “risk” of stocks continuing to march higher, but it is worth considering what that risk really is. The risk is that rising markets leave investors feeling that they missed the boat, which leads them to increase their equity exposure at a time when high stock market valuations offer less longer-term return potential and greater vulnerability to a correction.

We are often asked: “What if you are wrong and stocks just keep going up”? Stocks can keep going up in the shorter-term, and this is not something we are confident in our ability to predict. But over the longer-term, which we can analyze with more confidence, an important driver of stock returns will be earnings growth, and this is highly correlated to the overall economy. So could the economy perform well enough to continue to drive the kinds of stock returns we’ve been seeing? Consumers could ramp up spending, and take on more debt, and the jobs and housing pictures could improve more quickly than we expect. But even if that happens to some degree, the deepest underlying prob-lems aren’t going to go away as a result.

The deeper problem is that we have gone through a massive build-up of debt that occurred over many decades, and a lot of it still remains. Some of it has effectively been shifted to the government. With large deficits, a growing national debt, and entitlement spending on track to make these prob-lems significantly worse over coming years and decades, it is inevitable that at some point as a nation we will have to take our medicine. When we do, it will mean we borrow less and spend less, which will reduce economic growth, and that will be a drag on corporate earnings and therefore stock returns.

It is in considering the headwinds the economy faces in the years ahead, and factoring in other big-picture risks such as Europe’s debt problems, unrest in the Middle East, Japan’s disaster, and other possible shocks we can’t foresee, that we conclude that the returns stocks are likely to earn aren’t sufficient to compensate us for taking on the risk. We’ve often said that we view investing as a ma-rathon, not a sprint. We all are investors over a lifetime and any one year is a small slice of our in-vestment timeline. Over our investing lives there will be periods when it pays to be conservative and others when it makes sense to be aggressive. Sometimes these periods will be short, others times they will last for years. Along the way there will be ups and downs within each of these periods. Our challenge is to ignore the ups and downs and focus on the potential returns we believe we can cap-ture and weigh them against the risks.

Ultimately, what drives our risk-taking is the presence of a margin of safety, i.e., a significantly un-dervalued asset, such that even in a bad scenario it shouldn’t have much downside. Today we be-lieve there is an inadequate margin of safety in the stock market. Valuations are not attractive enough to compensate for the many serious concerns we’ve mentioned that could impact investment funda-mentals. And because we have other investments that can generate competitive returns at less overall risk, we are not concerned that over the longer-term we are giving up a lot of opportunity even if we see a scenario that is better than we expect.

Meanwhile, it is worth noting that despite our significant equity underweight, our net “risk un-derweight” is less than it seems because many of the investments described carry higher risk than bonds, from which they are partly funded.

Two final points about return expectations are that the equity managers we own can boost returns through outperformance, and many are indicating that at the stock-picking level they are finding good opportunities. Additionally, we are confident that inevitable periods of fear will drive certain asset classes lower and present us with opportunities to earn much more compelling returns in exchange for ratcheting our risk higher. This discipline and longer-term focus, along with careful underlying research, is the core of what we bring to the table as investment advisors.– Centurion Advisory Group Research Team (4/11/11)

Makers vs Takers

2011-04-14T08:47:00.000-04:00

THE WEEK WAS FLAT ON THE DOMESTIC EQUITY side. By the numbers, for the week ended Friday, April 8, 2011, the Dow Jones Industrial Average closed at 12,380, up 4 points, representing almost no change from the previous week. The Standard & Poor’s 500 closed at 1328, down 4 points, and the NASDAQ Composite closed at 2780, down 9 points.

Politicians came to an agreement late Friday evening that avoided shutting down the government. Each side trumpeted the success of favorite programs, or the saving of what’s been described as $39 billion. If these decisions didn’t weigh so heavily on the future of our country, at least the posturing and grandstanding of Congress would provide a bit of comic relief.

This continuing uncertainty, both at home and abroad, sent gold to new highs, and oil to new highs for the year. In the last couple of days, however, fear and profit taking have sent the market down 2% and change.

Kerri Shannon, writing for Seeking Alpha, has suggested a real inflation rate of 9% to 12%, compared to the 3% or less suggested by the feds. Gasoline prices are up 19% over the last year, and the producer price index was up 1.6% in February, double the January increase and more than twice the expected 0.7%.

Wholesale food prices were up 3.9% in February, the largest monthly increase since November 1974, and up 7.3% in the last twelve months. Given these increases, it will be tough for retailers not to raise prices, as they have been absorbing most price increases so far.

Stephen Moore, writing in the Wall Street Journal, offers insight into why so many states are operating at or near bankruptcy. According to Moore, there are 22.5 million government employees, and 11.5 million manufacturing employees. In 1960, manufacturing employed 15 million, and government 8.7 million.

“More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining, and utilities combined. We have moved decisively from a nation of makers to a nation of takers”, says Moore.

The future? Surveys of college graduates are finding that more and more of our top minds want to work for the government. In recent years only government agencies have been hiring, and government employment offers near lifetime security in this era of economic turbulence.

In economic news, the Institute for Supply Management’s service sector index dropped in March to 57.3 from 59.7. Any number above 50 is a positive, though this change indicates a slowdown. Initial jobless claims dropped to 382,000 last week, and consumer credit increased in February by $7.6 billion.

According to a very unofficial survey of several mortgage brokers, business is booming in terms of new loan applications. A larger number of these loans won’t be placed compared to three or four years ago, due to actual underwriting, but the activity is encouraging. Apparently, the buyers are those who are taking advantage of foreclosures and lower prices to become homeowners.

Quotes of the week:

“Unforgiveness is like drinking poison, in the hopes that someone else will die.”
-Unknown

“When the people find that they can vote themselves money, that will herald the end of the Republic.”
-Benjamin Franklin

Capital - Human, Shared, Financial

2011-04-07T08:43:00.000-04:00

IN SPITE OF UNCERTAINTY AROUND the world, the domestic equity indices have turned in a solid performance the last two weeks. By the numbers, for the two weeks ended Friday, April 1, 2011, the Dow Jones Industrial Average closed at 12,376, up 518 points, or 4.2%. The Standard & Poor’s 500 closed at 1332, up 53 points, or 4%, and the NASDAQ Composite closed at 2789, up 146 points, or 5.2%.
For the first quarter of 2011, the Dow gained 6.4%. This put the quarter’s return in the 70th percentile of returns over the last 120 years, and represents an annualized return of more than 28%.

Non-farm payrolls grew by an adjusted 216,000 in March, the best growth since May of 2010. This puts the official unemployment rate at 8.8%, though we suspect that the unofficial unemployment and underemployment rate is closer to 20%.

David Sokol has left Berkshire, presumably to run the Sokol family office. Maybe he should have had a V8, instead of buying Lubrizol for his own account first.

Home prices in 20 major U.S. markets fell 1% in January, according to Case-Schiller, the sixth consecutive monthly decline. Only Washington, D.C. saw an increase in home prices. At least someone is benefiting from our grandchildren’s tax money.

In other economic news, consumer spending was up 0.7% in February, though consumer confidence dropped. Factory orders and manufacturing growth, as well as public and private construction spending, fell in February.

As noted more than once in this space, we continue to have concerns about domestic and international equity markets. Sovereign debt, both domestically and around the world, combined with the plantation mentality that seems so prevalent, doesn’t bode well for strong growing economies, and the consumers and companies that participate in those economies.

Financial planning as a discipline has, for about twenty five years, centered on financial analysis and investment management. The missing links for many have been the coordination of these number crunching exercises with a client’s work life, which we can call human capital, as well as the client’s choice to give back, which we can call shared capital.

Would it help to engage in a way such that financial analysis and investment management was integrated with how you engaged with work and business, as well as your vision of how you wanted to make an impact? Let us know. We are exploring this question internally at the moment, and would appreciate any feedback you care to share.

Pain is a gift. It lets us know something is wrong, and that it’s time to pay attention. What if the nerve endings in your fingers were gone? You could pick up a hot skillet from the stove, but would lose your hand at some point, due to burn damage. More on this topic later.

Quote of the week:

“Being unwanted, unloved, uncared for, forgotten by everybody, I think that is a much greater hunger, a much greater poverty, than the person who has nothing to eat.”
Mother Teresa

Volatility

2011-03-23T11:30:00.000-04:00

JAPAN’S TRAGEDY, AND CONTINUING VIOLENCE IN THE Middle East combined to give the markets pause this last week. By the numbers, for the week ended Friday, March 18, 2011, the Dow Jones Industrial Average closed at 11,858, down 186 points, or 1.5%. The Standard & Poor’s 500 closed at 1279, down 25 points, or 1.9%, and the NASDAQ Composite closed at 2643, down 72 points, or 2.7%.

Japanese authorities have upgraded the severity of the nuclear crisis at the Fukushima nuclear plant. Many commentators around the world are questioning the viability of nuclear power. Areva, the 90% French government owned nuclear production entity, is working hard to maintain its profitability and viability in this environment.

According to the Federal Reserve, 19 banks have added $25 billion in earnings since 2008. This from a recent stress test, or Comprehensive Capital Analysis and Review, report. As a result, several banks, including Wells Fargo, JP Morgan Chase, BBT, and US Bancorp, have announced share buybacks, repayment of TARP funds, increased dividends, or some combination of the three. This whole marriage thing between the large banks and the federal government still leads to more questions than answers.

Berkshire Hathaway has announced plans to buy Lubrizol for $9.7 billion in cash and debt. With $38 billion in cash, Buffet & Co. are still shopping. ATT plans to drop about $39 billion in cash and stock on T-Mobile.

Federal Open Market Committee notes suggest that the Fed doesn’t believe a run-up in commodity prices will result in a sustained increase in inflation. Action by the FOMC is to leave current rates unchanged, and to continue to buy government bonds. Additional comments are that the economy is on firmer footing, the labor market is improving gradually, and underlying inflation is subdued. Guess we will see how all this works out.

Cisco Systems has announced its first ever dividend. The board of directors approved a six cents a share dividend for shareholders of record as of March 31, 2011. In-N-Out Burger has announced plans to open retail locations in Texas, primarily in the Dallas/Ft. Worth MetroPlex. To maintain the standards of fresh ground beef for which it’s famous, the company will be opening a beef processing facility in Texas.

In economic news, food and energy prices are up, though I question whether this tidbit is actually news to most of us. Housing construction permits are at their lowest levels since 1959, new jobless claims are lower, at 385,000, and leading economic indicators are up 0.8%, the eighth monthly increase in a row.

The Mid-March rate for six month CD’s was 4.39% in 2001, 1.14% in 2003, 2.05% in 2005, 3.63% in 2007, 1.14% in 2009, and 0.30% in 2011.

Historically the price ratios between gold and silver have been about twelve or fifteen to one. These ratios date back to the Greek and Roman empires, and as recently as the late 19th century, the gold/silver ratio was fifteen. This ratio peaked at 98 in 1991, and currently stands at about 40. Some speculate whether a gold/silver ratio has any meaning in the current environment. We reference it primarily to raise awareness.

Gold hasn’t served well as an investment, but has generally been held as an inflation hedge. This is especially true of the last thirty years, as in 1980 gold hit $850/oz. On an inflation adjusted basis, this is $2100/oz, compared to a current price of a bit over $1400.

Quote of the week:

"Adversity is the foundation of virtue"
Japanese Proverb

The Impact of the Japanese Tragedy on Financial Markets

2011-03-22T09:53:00.000-04:00

THE EARTHQUAKE in Japan will have a negative impact on Japan’s economic growth in the near term. It will also disrupt operations of many Japanese companies (and even some non-Japanese companies who do business in Japan). Reflecting these concerns, Japan’s stock market has declined over 11% since Friday, so much of the short-term impact may already be priced into equities.

Longer term, we believe the earthquake is unlikely to have a material impact on Japan’s economic and stock-market performance, though it is too early to say what the economic cost of this tragedy will be. Japan’s last major earthquake, Kobe in 1995, was estimated to cost more than $110 billion, which the country was able to absorb. Today, Japan is a $5 trillion economy so even if this disaster proves more costly, the country should be able to absorb the rebuilding expense. Longer term, as history has shown, countries do recover from such disasters, often with economies stimulated by rebuilding damaged infrastructure. The risk is that Japan’s already high public debt (over 2x GDP) and large fiscal deficit (of nearly 7% GDP) constrain its ability to fund necessary expenditures. Japan’s household savings rates have declined tremendously over the last two decades and, as a result, more of its borrowing will come from foreigners than in the past. With debt servicing costs as a proportion of revenues at over 40%, even at current low interest rates of around 1%, the country is highly susceptible to a fiscal crisis if foreign investors force borrowing rates up.

We do not expect the Japan tragedy on its own to have a material short- or long-term impact to global economic or earnings growth, although as we write this the nuclear reactor problem is a wild card with the potential for serious consequences at least shorter term. According to the Bank Credit Analyst, an independent global investment research firm, Japan has contributed about 2% to 3% to global economic growth over the past five years on average, so it seems unlikely that an economic slowdown in Japan could bring about a global recession. That said, the global economy is already fighting what we think are more material headwinds, such as deleveraging from developed countries, higher oil and food prices, monetary tightening from emerging markets, etc., and it is possible that Japan could tip it in the negative direction. If the Japan tragedy does tip the world into a recession, we are well positioned for that given our underweighting to equity risk in our balanced portfolios.

Impact to Our Portfolios:

Japan makes up about 15% of a typical international equity index that includes emerging markets. Factoring the different equity weightings across our model portfolios, and taking the index weighting as a starting point, Japan’s weighting in our portfolios ranges from less than 1% to 3%. Most of our international managers are underweighted to Japan, so the true impact of Japan on our portfolios is even less than what this range suggests. Moreover, our Japanese exposure is well diversified across many companies. Of course, global equity markets have also declined in the aftermath of the Japan disaster, but not anywhere near the magnitude of the drop in the Japanese stock market.

We asked several of our international managers how the Japanese companies they own will be impacted by this natural disaster. In general, the response we have gotten is that there will be no material impact to their investment thesis or their estimate of the business’ long-term intrinsic value because of the earthquake.

The indirect impact to our portfolios, however, could be more material. As noted above, it is possible that Japan’s tragedy tips the world into a slowdown or a recession when combined with many other macroeconomic headwinds we see. Our portfolios, as we’ve mentioned in our recent commentaries, remain underweighted to equities in light of these risks.

Despite the recent market decline in Japan, we do not see Japanese equities as a tactical investment opportunity at this time. Both the Japanese economy and its stock market, we believe, have to contend with significant fundamental issues in addition to the problems created by the earthquake and as such we see more downside risks there. Japan continues to fight deflationary forces because of anemic consumer demand, and the current tragedy could depress consumer sentiment further. While the corporate sector—financial and non-financial—has deleveraged to a large degree over the past decade, the public-sector debt has ballooned to dangerous levels and, as we noted above, the country is highly susceptible to a crisis stemming from rising interest rates. These worries are not new and, as a result, over time Japanese equities have declined considerably, but not to a level where we think a tactical overweighting to them is warranted. There are other factors that give us pause. We hear that many Japanese companies remain unfriendly to stockholders. Also, from a purchasing power parity perspective, the yen looks overvalued and may be a headwind to returns for a dollar-based investor.

We will continue to monitor the events in Japan closely and take appropriate portfolio actions based on the risks and opportunities we see. Because we do not believe that Japan’s tragedy on its own makes much of an impact on our assessment of global earnings power and, as a result, valuations, if global equity markets decline further, we may use that as an opportunity to add to equity risk.

"Fall seven times, stand up eight."
Japanese Proverb

2011-03-14T09:17:00.000-04:00

VOLATILITY CONTINUES, WITH THE MAJOR indices off over the last three weeks. By the numbers, for the three weeks ended Friday, March 11, 2011, the Dow Jones Industrial Average closed at 12,044, down 86 points, or 0.7%. The Standard & Poor’s 500 closed at 1304, down 15 points, or 1.2%, and the NASDAQ Composite closed at 2715, down 66 points, or 2.4%.

Japan has captured the world’s attention, with a major earthquake setting off a tsunami, and a string of other challenging events. It’s probably too early to assess the number of unknowns in this particular equation, let alone have an accurate assessment of the losses that have occurred, in lives, futures, and property damage. Let me encourage each of us to reach out, with prayer, dollars, and time, to those in Japan and around the world, who are hurting.

Actual inflation for the average American household continues to march unabated, if measured by nothing more than the price of gasoline and coffee. The official inflation rate, as measured by the federales, has been showing a fairly benign rate of growth. This type of statistical reporting calls into question all government statistics, though this isn’t new information for most of us.

Chris Liddell, who left Microsoft a year ago to become GM CFO, is stepping down. He is being replaced by Dan Ammann, a Morgan Stanley alumnus. Luxury brands, whether manufacturers or retailers, may take a hit in sales as a result of turmoil in the Middle East and North Africa. Everyone from LMVH to Mercedes generates an appreciable portion of both top and bottom lines from the money in this region.

In economic news, retail sales were up 1% in February, making for almost a 9% year over year increase. Consumer credit was up $5 billion in January, much of it for vacations and autos. Business inventories were up in January, the 13th consecutive monthly increase, and the U.S. trade deficit jumped to -$46.3 billion, meaning consumers increased their buying of foreign made goods. In general, good news.

Employment remains weak, however. Even more disconcerting, long term, is the unwillingness of politicians around the world to wean themselves from debt. Though national debt serves to keep politicians in office, and voters on the plantation either sated or numb, it is destructive to the long term health of economies.

There must come a point where all governments become willing to spend less than they make. Without this discipline, currencies eventually become worthless, terms such as “full faith and credit” become meaningless, and dictators making big promises thrive. We have read a white paper that describes several outcomes of this lack of discipline. If you’d like to read it, let us know, and we will forward it to you.

Quote of the week:

“The problem with socialism is that you eventually run out of other peoples’ money.”
Margaret Thatcher

Federales "Lost Revenue"

2011-03-01T10:45:00.000-05:00

WHILE THE LAST THREE WEEKS HAVE BEEN a bit more volatile, the major equity indices finished up. By the numbers, for the three weeks ended Friday, February 25, 2011, the Dow Jones Industrial Average closed at 12,130, up 38 points, or 0.3%. The Standard & Poor's 500 closed at 1319, up 9 points, or 0.7%, and the NASDAQ Composite closed at 2781, up 12 points, or 0.4%.

On the political front, Wisconsin governor Scott Walker indicates he's prepared for an OK Corral showdown with the unions. Union leaders are singing the blues over Walker's stance. Most employees who see their employer in financial straits begin exercising options or exploring new opportunities, such as looking for a different job or starting a business.

According to the U.S. Census Bureau, the average household income in the U.S was just over $51,000 in 2008, the latest year for which figures are available. According to the Wisconsin Department of Public Instruction, as published by the USAProductsNow blog, the average wage and benefits for teachers is $86,297 in Milwaukee, $82,956 in Sussex, and $91,065 in Elmbrook. One Germantown assistant principal makes $123,000, a bus manager in Arrowhead makes $169,000, and an elementary principal in Elmbrook makes $142,000. I'm grateful that these folks have been able to serve and educate students, and have been able to make a living doing so. I'm confused as to why they are protesting.

Turmoil continues around the world, in particular the Middle East and North Africa. Hard assets, such as oil, metals, and commodities, continue to do well, whether from inflation, because of domestic and global uncertainty, or perhaps other reasons.

Buffet is back in fine form, with Berkshire reporting a more than 40% increase in profits, though Berkshire unloaded a few positions during the fourth quarter. Borders has finally filed for bankruptcy. Content distributors, especially in the books, music and movie category, face substantial challenges keeping up with, and being profitable in the face of, changing technology. Duetsche Bank plans to pay about $9.5 billion to acquire NYSE Euronext.

In economic news, consumer credit increased by $6.1 billion in December, about three times expectations. Both imports and exports increased in December, yielding a trade deficit of $40.6 billion. Jobless claims fell in December, either due to increased employment, or the unemployed giving up, or some combination of both.

P/E ratios remain constant in the face of rising stock prices, meaning corporate earnings continue to grow. About 70% of the S&P 500 companies reporting so far have beat analysts' estimates.

Bloomberg BusinessWeek shows "revenue lost" to the federales from the following tax breaks in 2009:

Mortgage interest deduction - $77 billion
Earned income credit - $55 billion
Child tax credit - $54 billion
Charitable contributions - $35 billion
Real estate deduction - $21 billion
Medical deduction - $9 billion

The language used in this BusinessWeek article, which apparently reflects the thinking in Washington, is Exhibit One for why we must reduce or effectively eliminate the federal government. Anyone who believes that wages you earn belongs to them is mentally and spiritually ill. Those who suffer in this way need either psychiatric and pastoral care, or a swift kick in the rear, or perhaps both. Yet, the halls of Congress, and legions of paid hangers-on, subscribe to this misguided notion, which flies in the face of freedom and liberty.

2011-02-21T10:58:00.000-05:00

The new year started on a mixed note as January saw low single-digit gains across domestic large-cap and mid-cap stocks, and slightly negative returns for small-cap stocks (see benchmark returns table for full details). Looking abroad, large-cap international stocks were up 1% in January, while emerging-markets stocks dropped nearly 3% as concerns about unrest in the Middle East and high inflation in some emerging-market countries spooked investors. Turning to fixed-income, high-quality, intermediate-term bonds were flat through January, while the muni bond market dipped 0.4% on fears of muni defaults. Developed-market foreign bonds were also flat for the month, while emerging-markets bonds lost 1.6%.

Research Team Q&A

We regularly use a question-and-answer format to address questions from readers about our investment views and current strategy. The Q&A format has the advantages of letting us address questions individually without worrying about being limited by a particular theme or subject and allows readers to focus on areas that are of interest to them. This Q&A piece was worked on jointly by members of our research team and addresses questions we received during the past several weeks. The questions are grouped broadly based on subject area, beginning with our broad views on the economy.

Q: It seems like the economy is improving, why do you still seem to believe that the recovery will disappoint? And if the macroeconomic news is still bad, why is the stock market continuing to reach new post–March 2009 highs, and what do you make of this inconsistency?

We’ll begin by quickly reiterating our macro views. (Note: a more comprehensive macro discussion can be found in last month’s year-end investment commentary.) We believe we are still in the early stages of private sector deleveraging. Debt levels have come down, but we think it is premature to assume that deleveraging has run its course. To offset this private sector retrenchment, the government has undertaken unprecedented amounts of fiscal stimulus. This has prevented the economy from crashing and it has also propped up corporate profits, indirectly. This does not seem sustainable, at least at the level we have seen thus far, and that’s important in assessing what earnings growth we can expect going forward. Our fiscal deficits and debt levels are already at very high levels, and as the European debt crisis suggests, there is a limit to what level of stimulus the market will allow, even for a large country like the United States. Ultimately, we believe that it is not only where in the economy the debt resides that matters, but overall debt levels matter too, and this debt has to be whittled down, which leads us to give more weight to our subpar economic recovery scenario, in which earnings growth is sluggish over the next five years.

There are a couple of reasons why the stock market has continued to go higher despite these macroeconomic headwinds. Very low interest rates are propelling investors to chase risky assets, and that has made valuations rich. Earnings have recovered strongly as well. As we’ve written previously, we never place a lot of weighting on shorter-term earnings paths or projections. Our goal is to assess likely earnings levels and valuation multiples five years out, and we complement this analysis with other valuation metrics and analyses to assess attractiveness of equities. Still, it is important we understand why earnings have recovered faster than we expected as it may influence our longer-term earnings projections.

Much of the earnings rebound over the past year or so has been due to government stimulus and cost cutting (which has manifested in high unemployment rates and historically high corporate profit margins)—factors which can’t be sustained. We don’t think it is prudent to assume that profit margins will remain at historically high levels for an extended period when they have historically shown a strong tendency to revert to the mean and we can see many reasons why this could happen. The other important driver behind strong earnings has been emerging markets. As we wrote in our year-end commentary, we believe this will continue to be a positive factor for many U.S. companies who are gaining an increasing share of their profits from sales to emerging markets, which are growing rapidly, offsetting at least some of the headwinds in the United States and other developed countries we have talked about. Given the many unknowns it is impossible to be certain about the magnitude of this emerging market “X” factor, so we will be assessing this on an ongoing basis. At this point, the positive impact of emerging markets on our more-likely scenario is only marginal, while in our optimistic scenario it is more significant.

So there are many factors, most of them unsustainable, that in the short term can cause earnings and the stock market to deviate from our economic scenario, but longer term we continue to think a subpar economic recovery will be a major headwind for corporate profits and the stock market.

Q: Your five-year return estimates look subpar across all the major asset classes. Is it possible one- to two-year returns could be considerably higher, and if so, are there any circumstances in which we’d take a larger weighting based on shorter-term expectations?

Of course it is possible that shorter-term returns for equities could be much higher than the annualized return expectations in our five-year base case scenario, and we have seen throughout history that markets can go far beyond (both on the upside and downside) what an asset class’s underlying longer-term fundamentals can justify. This is particularly true for a volatile asset class such as equities, where the potential range of returns in any given year is extremely wide. There are so many variables and factors that can influence stock prices in the shorter term (and we would consider one or two years to be shorter term) that we don’t have confidence basing our investment decisions on that type of time horizon. As we extend the time horizon for equities, we have more confidence that the underlying economic and business fundamentals will be reflected in stock prices (at least at some point within that time frame).

Our risk management process does involve a shorter-term time frame for analysis, typically 12 months. So in that sense we might make a tactical move for risk management purposes in response to a shorter-term expectation or perceived risk (e.g., we did this in the fall of 2008 when we sharply reduced our equity exposure as the potential magnitude and damage from the credit crisis became apparent to us).

But getting back to the question, we actually are actively debating and discussing some possible tactical moves on the fixed-income side based in part on our assessment of expected returns over the next year or two, rather than our typical five-year horizon that we use for equities. We will provide some more details on this below, but the bottom line is that we may conclude we have a high enough degree of confidence that the range of potential return outcomes is both attractive enough and narrow enough for certain fixed-income sectors over the next 12–24 months to warrant a tactical weighting. And the shorter-term outlook might be compelling from a risk/return standpoint relative to other asset classes currently in the portfolio, at least in certain scenarios. If that is the case, we would certainly consider a tactical move based on that shorter-term one- to two-year outlook.

But the key elements of this shorter-term analysis here, as with our normal five-year expected returns analysis, are that our decision will be driven by our assessment of the underlying asset class and economic fundamentals, we will be looking at multiple scenarios that we think are likely to or could possibly play out, and we will stress-test the downside risk of any tactical moves at the overall portfolio level in order to manage the risk of violating a given portfolio’s 12-month downside loss threshold. We focus on both the potential risks and returns in various scenarios.

High-yield bonds are an example of where our shorter-term returns are higher than our five-year forecasts. Looking at our base case scenario, our return estimate over our five-year investment horizon is in the 4% range, but over the next year, we think a return in the 7% range is more likely. There are two key reasons for our higher short-term return estimate.

First, we’re assuming interest rates rise over our five-year forecast period. As interest rates rise, this will put upward pressure on yields. As yields increase, prices of high-yield bonds fall. We think the timing of a rate rise is less likely in the near term but more likely over the full five-year window.

The second reason for the higher shorter-term return estimate is that we are assuming default rates increase further out into our five-year investment horizon. Defaults ended 2010 in the 3% range, below the historical average of 4%. Next year, the base-case assumption is for defaults to move even lower. But looking out over the next three to five years we expect a pick-up in defaults, given the maturity calendar. Defaults are a very influential input to high-yield bond valuations as they drive the loss of income/capital and influence spreads.

So it’s the combination of our expectations for higher interest rates, which put upward pressure on yields, and our expectation for higher defaults, and the fact that we expect these to happen later rather than earlier in our five-year window, that is driving the difference in short- and longer-term returns.

As we mentioned earlier, we don’t ignore the short-term projections, but we have to be intellectually honest with ourselves about our ability to accurately project what’s going to happen over any 12-month period for any asset class. For instance, looking at a range of economic scenarios, our range of outcomes for high-yield bonds returns over the next 12 months is as high as 10% and as low as a loss of 13%. Needless to say, that’s a wide range of outcomes.

U.S. Equities

Q: Given your view that stocks are expensive, at what point would you reduce your stock exposure further? Conversely, at what point would you add to stocks?

We are already quite underweighted to equities, so the hurdle to further underweight equities is higher. While we think it is not likely, we have to factor in the possibility that our optimistic earnings scenario might play out even if the U.S. economic recovery is subpar. One reason we mentioned earlier is emerging markets, which could be a major positive X factor for S&P 500 earnings over our five-year horizon. There are a lot of variables involved and it is a bit of a moving target, so it is difficult to precisely say at what level we will underweight equities more, but it is likely we will reduce equity exposure further when returns from our current optimistic scenario do not look appealing to us—in other words, when likely returns are mediocre to poor across all our scenarios.

As for when we would add to stocks, our estimated fair-value range is 800–1,100, with a fair value point around 950. Given the current level of our underweighting, it is likely we will add to equities as we approach the upper end of this range. Of course, markets could go sideways for a while, and during that time our fair-value range will shift up as we roll forward earnings in our five-year investment horizon, so we may end up adding to equities at a higher level. In addition, our fair value analysis is not static. We are continually assessing new information that might impact our scenarios and assumptions; any change in either may impact our fair-value estimate.

Q: Some investors view stocks as cheap because the earnings and cash flow yields compare so well to cash and bond yields. Is this comparison valid?

We think this is an unfair comparison for a few reasons. First, it does not factor in the fact that equities typically have significantly more downside risk than bonds. In addition to looking at relative returns across asset classes, we also look at whether or not absolute returns justify the downside risk we are taking in our portfolios. For us a potential return of around 9% in our more-likely scenario gives us enough compensation to consider a neutral position to equities, assuming there aren’t other asset classes that offer better risk-adjusted returns. But, why should we accept a lower absolute return on equities if we can get at least mid-single-digit returns that come with much lower downside risk? That is one of the key reasons why we have been as underweighted to equities as we have been. For example in 2008 and 2009 it was high-yield bonds and in 2010 it was emerging-markets local-currency bonds that, as expected, gave us equity-like returns but with much lower risk. This helped reduce the opportunity cost of underweighting equities and allowed us to outperform our benchmarks despite a strong stock market and with a lower overall portfolio risk exposure than the benchmarks.

Second, many investors tend to use forward estimates of operating earnings which makes earnings yields more attractive than they actually are. Operating earnings in our view tend to be overly optimistic and not reflective of true economic earnings longer term.

Lastly, comparing current low bond yields to earnings yields may prove to be a mistake if rates normalize in response to the economy normalizing, as it seems the market is discounting in equity prices. However, if rates remain abnormally low for an extended period, then they are likely low because we are still facing deflationary pressures, which is normally not good for equities. Neither rate scenario seems appealing for equities.

Municipal Bonds

Q: Could Meredith Whitney, who is predicting massive municipal defaults, be right?

The answer is we can’t say for sure that Whitney is wrong, but we are intensifying our research to make sure that we consider her points and account for them in our analysis.

As a quick background, Whitney is a banking analyst who has most recently gained notoriety for her assertions that massive levels of municipal defaults will be the next chapter in the credit crisis.

We are relying on muni bond managers for a lot of our market intelligence, but with that, there is a risk that their own biases may be coloring their comments or even their own beliefs. Understanding that, we’re continuing to look for unbiased contacts as well as views that are in line with Whitney’s in order to better inform our opinion.

The individuals we have spoken with think Whitney’s view is too extreme. Some are calling her “campaign of fear” irresponsible, which they say is driving lots of retail investors to make the decision to exit investments that are predominantly investment grade, and ultimately have little chance of default. But assuming she is wrong and the consensus is right (or at least closer to right), there remains the potential for the headline risk issue to play out. If there is a high-profile muni default, the headline risk could trigger a lot of selling (in light of what we’ve already seen). Meanwhile, there are others who don’t agree with Whitney’s default forecast, but think the headline risk will be huge.

It is possible that there will be enough contrary reaction to Whitney’s statements that will make it into the financial media to keep people calm, and we are increasingly seeing this. For example, we’re seeing more commentary refuting Whitney’s forecast, and we’ve heard that analysts are now calling for public disclosure of the details behind Whitney’s report given the additional costs her report has put on state borrowing and the investor losses prompted by her commentary and subsequent media coverage.

While it seems probable that we will see an increase in local government debt defaults, it does not appear likely that these will be widespread. They will generate headlines though, and that may trigger temporary sell-offs in the municipal bond market. Continuing to monitor the muni market remains a high priority for us.

Q: Are you worried about a run on the funds you use?

We are reading reports of mutual funds selling holdings to raise cash in anticipation of redemptions. DWS has been experiencing outflows in its Managed Muni fund over the past two months, consistent with industry flows, but inflows are also still coming in. Therefore, DWS has not felt it is necessary to build up their cash position. This is something we will continue to monitor.

Q: Given the recent sell-off, does the municipal bond market represent a tactical opportunity, or are current valuations justified based on the risk and uncertainty in the market?

The yield of the muni index is 4.27%. Adjusting for a 35% federal tax bracket that’s a tax-equivalent yield of roughly 6.5%. Historically, these levels have proven enticing to individual investors. Obviously, at these levels, the risk/return trade-off in the muni market is getting more favorable. Yet, it’s likely that this debate about state and local budgets still has a long way to go and will likely generate a lot of headlines. For now, we continue to rely on and believe in our active muni managers’ ability to navigate the credit risks in the muni market.

Emerging Markets

Q: How might emerging-markets inflation affect PIMCO Emerging Local Bond’s performance and do these inflation trends affect your views on the asset class?

The quick answer is that it depends upon the type of inflationary scenario we are getting. Before investing in PIMCO ELB back in August 2009, we factored in two inflation scenarios. In one scenario, we assumed food and commodity price inflation, which is what we are getting right now in many emerging markets. In that scenario, over our five-year investment horizon we estimate returns slightly above mid single digits, which is lower than in our base case scenario but still decent. In a more extreme inflation scenario, which we think is unlikely, we assume some emerging-market countries make policy mistakes and let inflation get out of hand. In this scenario returns would be even lower, probably in the low single digits, but it would be far from a disaster. In both scenarios it is likely returns in the short term would be poorer, but longer term the higher yields will help cushion the capital loss. Also, in both scenarios we are not baking in significant currency appreciation, and there is a possibility we are surprised on the upside on the currency front. This is possible because other than raising interest rates, currency is one of the policy levers emerging-market countries can use to tackle inflation.

Fixed Income

Q: Many of your fixed-income funds, like Loomis Sayles Bond and Osterweis Strategic Income, have performed well in spite of pessimism about future bond returns. Do you think they can continue to perform as well?

Loomis Bond: We continue to like Loomis on a long-term basis, while being aware it is riskier than our other fixed-income holdings and than a typical investment-grade bond fund. We think we will continue to be paid for accepting the shorter-term volatility though. We like the bond-picking expertise of Loomis, and currently the fund has about one-third of its assets in high-yield bonds, mostly at the upper end of the junk quality spectrum. That’s close to the fund’s maximum allowed in high-yield of 35%. We also like the non-dollar exposure we are getting in the fund—roughly 32% of the fund, with about 22% in so-called commodity currencies, such as Canada, New Zealand, Norway, and Australia, with most of the rest in emerging-markets currencies. The fund has almost no exposure to Treasuries or Agencies, so although its stated duration is 6.2 years, its actual downside exposure to rising interest rates is probably lower than that; rising rates might be a reflection of stronger economic fundamentals, which should be good for the fund’s credit/high-yield exposure. The fund’s average current yield is around 5.5%.

Osterweis Strategic Income: Osterweis was up just over 10% last year. We, like everyone else, are thinking about our fixed-income exposure in what we expect to be a rising interest-rate environment.

Specific to Osterweis Strategic Income, Kaufman continues to focus on balancing risk aversion with opportunistically seeking returns. Although there are no longer opportunities as compelling as there were in late 2008 and early 2009, he is still finding enough bond issues from well-run companies that offer reasonable returns without going too far out on the risk or duration curves. True to his process, he remains unwilling to lower his quality standards or to take excessive interest rate risk at this time in order to increase returns.

As for portfolio activity, over the past six to nine months, Kaufman has been opportunistically shortening the fund’s duration. This is not a wholesale move, but rather an incremental shift. For example, not long ago, Kaufman was selling longer-dated, equity-sensitive convertible bonds that appreciated during the market’s run-up, and using the proceeds to opportunistically buy high-coupon, non-investment-grade intermediate-term bonds. Kaufman is continuing to identify so-called cushion bonds, which are very high-coupon bonds. The fund’s yield to maturity is currently about 6%, and duration currently in the 2–2.5 year range.

Kaufman is also holding 10% cash, and is putting that cash to work as he identifies attractive investments. If the bond market corrects, and yields increase, he plans to more aggressively put that money to work, opportunistically, at higher yields.

While we continue to think Osterweis Strategic Income can perform well in 2011, we don’t expect returns to be as high as last year.

PIMCO Unconstrained: PIMCO Unconstrained is another flexible fixed-income portfolio holding that has the potential to perform relatively well in 2011. We just completed a fund update call with portfolio manager Chris Dialynas, and are publishing the write-up this month. The portfolio is getting very interesting in a couple of dimensions. Most significantly, the fund’s duration is now under one year. Dialynas brought the duration sharply lower in December (from three years to a little over one year) after the federal tax deal was announced. The tax deal basically made PIMCO more bearish on interest rates, both because of the higher cyclical growth prospects from the new stimulus and the fact that it worsens the federal deficit and will require the government to issue even more debt to finance the tax cuts and stimulus. Dialynas told us he has continued to bring down the fund’s duration so far in January. He also said he’s getting to the point where he’ll be considering a negative duration for the fund, possibly in the next few months. So the Unconstrained fund should be well positioned to weather an interest rate rise. The other key element of the fund is its significant and increased weighting to emerging-market currencies (primarily China and other Asian countries), which reflects PIMCO’s long-term view that the dollar has to depreciate relative to these currencies based on their relative fundamentals. Emerging-markets currencies are now about an 18% weighting in the Unconstrained fund. The fund also has an increased weighting to dollar-denominated emerging-market sovereign and corporate bonds. Dialynas says he is continually adding to the emerging-markets corporate bond position as attractive new issues come to market. Finally, he thinks Build America Bonds are very attractive at their current yield spreads relative to Treasuries and high-quality corporate bonds.

We think that this strategy, with its very flexible mandate backed by PIMCO’s deep team and expertise, can continue to perform well and navigate the bumpy road for fixed-income markets that is likely ahead.

Commodity Futures

Q: Commodities are heating up again—what would lead you to reintroduce an allocation to commodity futures in your portfolios?

We continue to evaluate commodity strategies, both the traditional long-only index strategies as well as some of the newer “rules-based” index strategies, such as the United States Commodity Index Fund (USCI) based on the SummerHaven Dynamic Commodity Index.

When we did our original research on commodity futures as an asset class back in 2003 and 2004 we concluded that a diversified long-only commodity futures index, such as the Dow Jones-AIG Commodity Index (now Dow Jones-UBS Commodity Index) could add long-term value to a traditional balanced stock/bond portfolio both from an expected return and risk reduction/diversification standpoint. We bought a position in PIMCO’s Commodity Real Return fund (which tracks that index) in January 2005 and held it until March 2008, and we earned a nice excess return on that position relative to stocks and bonds. We sold the position in 2008 because we saw a more attractive investment in emerging-market local-currency bonds and because we had become increasingly concerned about the risk of an economic slowdown coupled with the sharp upward (and possibly speculative) spike in commodity prices.

At the time, we wrote that we expected to invest in commodity futures again in our portfolios, once our concerns about the shorter-term environment were alleviated, based on our analysis that commodity futures would likely add longer-term value. However, over the past year or so we have been rethinking the potential longer-term value of owning a long-only commodity futures index fund. (We are still in process of this reassessment and have not reached any firm conclusions yet.) As the asset class has gained in acceptance among investors and the number of investable funds/ETFs has proliferated, it raises questions as to whether and to what extent the historical risk/return and correlation characteristics that we based our original analysis on will hold going forward.

For example, much of the commodity futures index has now been in contango for quite a while. This presents a headwind to potential returns—due to a negative roll return (or negative “yield”) from rolling over the index’s commodity futures contracts each month—although it does not mean the total return can’t still be positive if commodity spot prices move higher enough to offset the negative roll return. Some newer commodity index strategies attempt to minimize the contango headwind, and as mentioned, we are looking at those.

It also seems very plausible to us that the increased money flows into commodity futures as it has become a more mainstream asset class has reduced the historically observed risk premium that long-only commodity futures investors should in theory earn in exchange for absorbing short-term price volatility from commodity producers who want to hedge their price risk.

In addition, as commodities have become more of a mainstream asset class in investment portfolios their performance may have become more correlated to other traditional risk asset classes, such as equities. This was certainly the case during the financial crisis of 2008–2009, when both stocks and commodity funds plunged sharply, and also during the market recovery in 2009 and 2010. Given the fears of a global depression and deflation in late 2008–early 2009, we aren’t surprised commodities performed poorly because they tend to perform in sync with economic cycles. But we are not sure the diversification argument for commodity futures is as strong as we originally thought, at least in the kinds of environments in which a diversification benefit would be most material. This is a question we will be assessing more deeply.

—Centurion Advisory Group Research Team (2/1/11)

A New Pharaoh?

2011-02-08T08:57:00.000-05:00

IN SPITE OF ECONOMIC CONCERNS, THE PUBLIC MARKETS continue to do well. By the numbers, for the two weeks ended Friday, February 4, 2011, the Dow Jones Industrial Average closed at 12,092, up 221 points, or 1.8%. The Standard & Poor’s 500 closed at 1310, up 27 points, or 2.1%, and the NASDAQ Composite closed at 2769, up 80 points, or 2.9%.

As noted, the DJIA has closed above 12,000 for the first time since June 2008, and the S&P 500 above 1300 for the first time since August 2008. Many are suggesting the market is overpriced. At the same time, Jeremy Siegel recently told an audience that the equity markets are still 20% below their long term trend lines. Professor Siegel tracks the domestic equity markets to the beginning of the 19th century. Our observation is that there is still much fear and concern regarding the stock market. This fear and concern is usually a good omen for the markets.

Intel disclosed a design error in a chip component that will cost the company about $300 million in lost sales, according to an Intel spokesman. ExxonMobil reported a 53% increase in quarterly profits, to $9 billion, its best numbers since Q3 2008.

Egypt is in the middle of determining a new direction. How the U.S. responds, and which leaders the U.S. supports, can have an impact on the outcome of these decisions. It can also impact the stability of the Middle East, and the safety of millions. President Carter chose not to throw the full weight of American opinion behind the Shah of Iran. The results over the last thirty years haven’t been pleasant. Are we taking the same approach now, with Mubarak?

The official unemployment rate fell to 9% in January, a 21 month low, though just 36,000 non-farm jobs were added. Consumer spending increased in December by 0.7%, and factory orders were up 0.2%. According to the ISM, the manufacturing reading stood at 60.4, and the service sector figure stood at 59.4, both at their highest in more than six years.

According to a recent AARP article, the five states with the biggest budget shortfalls for FY2011 were Nevada, Illinois, New Jersey, Arizona, and Maine. Alaska, Arkansas, Montana, and North Dakota were in the black.

Quote of the week:

“Character is the ability to carry out a good resolution long after the mood in which it was made has left you.”
Cavett Robert

Facebook Public?

2011-01-25T10:04:00.000-05:00

JANUARY HAS STARTED WELL, THOUGH with a bit of volatility. By the numbers, for the three weeks ended Friday, January 21, 2011, the Dow Jones Industrial Average closed at 11,871, up 294 points, or 2.5%. The Standard & Poor’s 500 closed at 1283, up 26 points, or 2%, and the NASDAQ Composite closed at 2689, up 37 points, or 1.4%.
Apple is out of Jobs. At least they need to prepare for a future without him. Whatever his medical conditions, those conditions appear to be absorbing his attention, which will continue to make it challenging for him create popular new bites.

Goldman Sachs reported quarterly profits of $2.39 billion, off 53% from the fourth quarter of 2009. Apparently, this is the third consecutive quarterly decline in revenue and profits for the firm. You can find the company’s address on their website, if you want to send CEO Lloyd Blankfein a sympathy card.

Speaking of Goldman, Facebook just picked up $1.5 billion from them. It appears that Facebook has operating margins of almost 50%, and year over year revenue growth of more than 100%. According to those who say they know, these are better numbers than Google posted at the same point in its business cycle.

Wal-Mart and Michelle Obama have announced plans to re-arrange the ingredients in a variety of foods sold at Wal-Mart, in order to offer more healthy fare. We wish them well, and encourage everyone to be aware of what it takes to be healthy. My parents always kept a garden, which also seemed a good way to keep healthy foods available.

GE profits were up 51% for the fourth quarter, with robust growth coming from its technology and infrastructure businesses. GE stock, at $20, is right at its 12 month high.

On the economic front, the Conference Board’s leading indicator index was up 1% in December, the sixth consecutive monthly increase. New home construction dropped 4%, to an annualized 529,000 units. Existing home sales were up 12% in December, which is 3% below the year ago level. Initial jobless claims dropped to 404,000, with the official unemployment rate still north of 9%, and the real unemployment rate a guess, but probably in the high teens.

With ongoing concern over the economy, employment, housing and mortgages, and the state of our republic, the stock market should be in the black this year. You may want to save this commentary until year end to see if I have a clue what I’m talking about. One interesting tidbit – Travelers, Quest Diagnostics, and Coach, among others, have increased their share repurchase programs.

According to a recent report, U.S. job growth has been stagnant over the last ten years. Nonfarm payrolls, which include both government and private sector positions, were 132 million at the beginning of 2001. Nonfarm payroll grew to 138 million in 2007, and finished 2010 at 131 million.

We live in a global economy. Capital of all kinds, including financial and human capital, finds its way to environments where it is rewarded and appreciated. The U.S. doesn’t compete well in some of these areas. On the financial side, we may want to focus on rewarding capital by reducing the tax and regulatory burdens of putting capital to work. On the human side, we may want to focus a tad more on results and persistence, and a bit less on self esteem. The latter is a by-product of the former.

Quote of the week:

“A man does what he must – in spite of personal consequences, in spite of obstacles and dangers and pressures – and that is the basis of all human morality.”
Winston Churchill

Intermarine 55

2011-01-04T11:05:00.000-05:00

DOMESTIC EQUITIES FINISHED 2010 strong, with solid holiday shopping reports, and at least some tax resolution in Congress. By the numbers, for the two weeks ended Friday, December 31, 2010, the Dow Jones Industrial Average closed at 11,577, up 86 points, or 0.8%. The Standard & Poor’s 500 closed at 1257, up 14 points, or 1.1%, and the NASDAQ Composite closed at 2652, up 9 points, or 0.3%.
Health care legislation, interesting election results, wars, floods, blizzards, Russian spies posing as financial advisors – all this and more made the headlines in 2010. Around the world, sovereign bankruptcies in Greece and Ireland were averted, whiners in France and other plantation states rioted because they are actually expected to work to get paid, and the European Union began to show its cracks.

A variety of asset classes responded to this worry and concern by having a very solid year. In 2010, the Dow was up 11%, the S&P 500 was up 13%, the NASDAQ was up 17%, European stocks were up 9%, Netflix was up 228%, and H-P was off 18%. Responding to either demand from growing economies, or the suffocating sovereign debt levels around the world, hard assets had a good year. Gold was up 29%, silver was up 82%, copper was up 32%, oil was up 15%, and palladium was up 94%. Bombay’s Sensex finished the year up 15.4%, closing at 20,509. Hong Kong, Shang Hai, and other Asian markets also finished well.

The president has signed into law a repeal of “Don’t Ask, Don’t Tell”, allowing gays to serve openly in the military. It will be interesting to see what impact this has on our military and even more, to track unintended consequences.

According to a recent survey, Washington D.C garnered the spot as the best city for business, beating Omaha, Boston, and Des Moines, among others. Never hurts to have a seemingly endless supply of other people’s money to help fund your growth. This strategy consistently falls into the best practices category of the finest Ponzi con artists.

Toronto-Dominion Bank, owner of TD Ameritrade and other financial enterprises, has announced the purchase of Chrysler Financial from Cerberus. This is a plus for Chrysler Financial, in our opinion, as Canadian bankers don’t seem to be nearly as afflicted with the virus that seems to live and feed on Wall Street.

On the economic front, jobless claims dropped to 388,000 last week. Consumer confidence declined in December, according to the Conference Board, from 54.3 to 52.5. Oil prices are likely to continue to head north. Saudia Arabia has said it is prepared to support $100 per barrel oil, as they find greater demand in emerging markets. Prepared to support? No kidding.

So, what happens next in the world economy? Are we in for Happy Days again, or is this simply the euphoria before some type of worldwide meltdown? Well, my crystal ball is in for repairs, and the shop won’t return my calls.

There is always opportunity, and sovereign debt and its causes must be addressed. How will that shake out? There are too many scenarios to comment on, and everyone has an opinion. Those companies that appear to be best positioned for the future, regardless of economic circumstances, seem to be those that are multi-national, meaning they have revenue and operations around the world, have a low debt load, and offer products deemed to meet basic needs. Often, these companies are mature in the developed markets, and are growing rapidly in the developing economies of the world. They also have paid a consistent dividend.

Intermarine of Brazil, and BMW Group’s DesignworksUSA have teamed up to create Intermarine 55, a 57 foot yacht that will go on sale in July. It will sleep six comfortably, features windows all around, a sink, barbeque area, and cooler on the stern, another sink, barbeque area, and refrigerator on the flybridge, and plenty of meal prep space in the galley. Fridge, stove, and microwave come standard. You can customize fabrics and woods. Base price is $2.2 million.

Quote of the week:

“Don’t ask what the world needs. Ask what makes you come alive, and go do that, because what the world needs is people who have come alive.”
Howard Thurman

Merry Christmas!

2010-12-17T12:16:00.000-05:00

MIXED ECONOMIC NEWS GAVE MARKETS little direction last week, with most domestic equity indices up slightly. By the numbers, for the week ended Friday December 10, 2011, the Dow Jones Industrial Average closed at 11,410, up 28 points, or 0.25%. The Standard & Poor’s 500 closed at 1240, up 16 points, or 1.2%, and the NASDAQ Composite closed at 2637, up 46 points, or 1.8%.
On the economic front, data indicates a slow recovery. The U.S. trade deficit fell in October to $38.7 billion, due primarily to increased exports and reduced gasoline consumption. Consumer borrowing increased by $3.4 billion in October, most of which was student loans. Credit card use fell for the 26th consecutive month, and jobless claims were down to 421,000.

While there are encouraging short term signs of economic recovery, long term challenges are real, and must be addressed. The Congressional Budget Office, www.cbo.gov, estimates that the U.S. will add another $7 trillion in debt by 2020, bringing our total indebtedness to $20 trillion, whatever that is. Either we print this money and devalue the dollar, which is the current approach, or we find other countries willing to purchase our debt. Either path brings lousy results.

Steve Jobs has been named CEO of the Decade by MarketWatch, a Dow Jones service. Tim Solso of Cummins Engine, among others, was a finalist.

The last building of Chicago’s Cabrini-Green housing project is being torn down. CG is one more case study in the string of failed attempts by government to do good. Any assistance requires buy-in by those being helped. Without this participation, a sense of futility and ultimately entitlement prevails.

Physical and fiscal health top the list of New Year’s resolutions. A few thoughts regarding fiscal health. Affluence, or discretionary cash flow, has very little correlation to wealth. Economic wealth can be described as control of assets. Affluence indicates that you have learned how to make money, or have available credit. Wealth indicates you have learned how to properly deploy the money you make. These are two entirely separate skills.

The wealthy among us have lived in the same town most of their lives, own a business, have been married once and remain that way, and live next to people with a fraction of their wealth. Here are seven common denominators we have discovered among the wealthy.

1. They live well below their means.
2. They allocate time, energy, and money efficiently.
3. They prefer financial independence to social status.
4. Their parents did not provide economic outpatient care.
5. Their adult children are economically self-sufficient.
6. They are proficient in targeting market opportunities.
7. They chose the right occupation.

What have we learned? Building wealth takes discipline, sacrifice, and hard work.

Christopher Buckley offers a Santa’s Wish List for World Leaders. Hugo Chavez - a karaoke machine with 100 anti-U.S. rants. Olafur Grimsson – 10 trillion kronur debt relief, Mahmoud Ahmadinejad – leather-bound copy of Protocols of the Elders of Zion, Nicolas Sarkozy – custom shoe lifts, Kim Jong Il – economy size tube of styling gel.

The last few weeks of each year are times of reflection and celebration. In the U.S., we start the fall holiday season with Thanksgiving, to remember God’s grace and provision to some of the early settlers of our great country. Moving into December, many celebrate Hanukkah, or the Festival of Lights, a memorial to the Jews’ victory over very oppressive rulers in the 2nd century, B.C.

In our home, we celebrate Christmas, when we pause to give thanks for the freedom, salvation, and restoration found in Christ, our Saviour. However you celebrate, make time before the new year starts to reflect on the goodness of life, the gifts of friends and family, and whatever other blessings are around you.

Apple at $1000?

2010-12-10T13:59:00.000-05:00

DOMESTIC EQUITY INDICES WERE up for the week, following a batch of positive economic reports, and in spite of hiring softness. By the numbers, for the week ended Friday, December 3, 2010, the Dow Jones Industrial Average closed at 11,382, up 290 points, or 2.6%. The S&P 500 closed at 1224, up 35 points, or 2.9%, and the NASDAQ Composite closed at 2591, up 57 points, or 2.2%.

On the economic front, nonfarm payrolls grew by 39,000 jobs in November, substantially less than the 155,000 forecast, sending the official unemployment rate from 9.6% in October to 9.8% in November. Construction spending gained 0.7% in October, fueled primarily by stimulus financed projects, and reminiscent of the WPA days. Manufacturing activity expanded for the 16th straight month, with auto sales leading the charge. Consumer confidence is at its highest level since June, and productivity growth was revised upward for the third quarter from 1.9% to 2.3%.

The U.S. continues to lose manufacturing jobs, as skilled labor and government services have both priced themselves out of the global market. In some of the best economic news in a long time, local governments reduced unemployment during October by 14,000 jobs. While this is a small start, it is a large step in the right direction.

On the tax front, Congress and the White House are attempting to come to terms on a tax bill before year end. Look for a special year-end tax update from us, delivered to your inbox by the 15th of December.

The European Union agreed to a $112 billion bailout of Ireland over the weekend. We will be surprised if the EU survives in its current form for another five years. Germany and its work ethic will agree to carry the rest of Europe only so long, and I suspect Germany is nearing the end of the line with its neighbors.

China is attempting to figure out what to do with its new found power. The current announcements are a tightening of the money supply and the importation of gold. It will be interesting to see if the old Communist lions can transition to their version of a capitalist economy or free market in a manner that allows them to sustain their current growth rates.

In China’s favor is a large and growing underground church, whose presence and impact is missed completely by almost all political and economic analysts and commentators. It is my understanding that China now leads the world in the number of Christian missionaries sent to other countries, surpassing both the U.S., and South Korea.

Cody Willard is suggesting that Apple stock will trade at $1000 a share by 2015. Pepsi has announced plans to purchase 66% of Russia’s Wimm-Bill-Dann foods, in a continuing effort to expand its global footprint.

Uncertainty is always with us. Often, it is masked behind what we see as good times. One approach to life is to separate our view of good and bad times from macro or micro economic circumstances. This is easier said than done, but it can be a useful exercise.

Quotes of the week:

“Alexander Hamilton started the U.S. Treasury with nothing, and that was the closest our country has been to being even.”

“I don’t make jokes. I just watch the government and report the facts.”
-Both quotes courtesy of Will Rogers

At Last!

2010-11-30T11:51:00.000-05:00

After a several month absence, we are pleased to be back to you with a roundup of the markets, and observations about business, the economy, and whatever else may be top of mind in a given week.

The domestic equity indices, as measured by the Dow Jones Industrial Average, the Standard and Poor’s 500, and the NASDAQ, were off for the year, through the end of August, by 5.4%, 8.5%, and 7.5% respectively. September and October were very solid months for the domestic equity markets, and as of last Friday, November 26, 2010, these indices were up 4.6%, 4.8%, and 9% respectively, year to date.

Consumer sentiment, housing starts, and sovereign debt both at home and around the globe continue to be topics of conversation, and causes for uncertainty. The Republican recapture of the House in the November elections hasn’t quieted the general uneasiness on the part of many.

All this together has caused a flight to assets perceived as safe, such that gold and silver are up about 30% and 40% year to date. Silver has doubled in price over the last year, and gold has done the same over the last two plus years.

Some of the largest public companies in the world are deploying some of their cash on hand, buying up either content or distribution. They are also taking advantage of historically low interest rates by arranging lines of credit, with an eye toward making strategic use of this relatively inexpensive money.

On the economic front, GDP for the third quarter was revised up to an annualized 2.5%, personal income gains were 0.5% in October, and initial unemployment claims fell to 407,000, the lowest level since July 2008. Existing home sales dropped another 2.2% in October, to an annualized rate of 4.4 million units, and the median home price fell to $170,000, a 1% decline in the last year. New home sales fell by 8.1%, and prices of these homes were $194,000, down from $215,000 a year ago.

Homeownership has long been the Holy Grail for many Americans, though technically the mortgage company actually owns the home. Many have questioned when the residential market will stabilize. Median household income in America in 2008, according to the US Census Bureau, was $52,000. A household can realistically support a mortgage of two to two and a half times household income. Therefore, I suspect that residential real estate prices will drop until the median home price is in the range of $120,000 to $130,000.

If you plan to buy, buy at two times household income, and no more. If you can’t find something that fits that price range that you want to buy, continue to rent, wait, and continue to look.

In terms of economic outlook, the strong growth around the world will continue to come from developing countries that aren’t saddled with debt, entitlement programs, and entitlement mentality. This excludes the US, and Eastern and Western Europe, and includes parts of South America, Africa, and Asia. America has the opportunity to retain its leadership, once it refuses to fawn over terrorists, and chooses to get its own financial house in order.

Long term care insurance is in the news, as John Hancock has announced a 40% increase in individual LTCi premiums, and has suspended the sale of group LTCi. MetLife has also announced that it is exiting the LTCi business. We expect substantial premium increases on LTCi policies from Genworth, Conseco, Allianz, and others. New York Life, Northwestern Mutual, and State Farm, all mutual companies, appear to have priced their LTCi plans and managed their distribution such that their premiums will remain fairly stable.

According to Rich Kaarlgard, writing in Forbes, a 3.3% economic growth rate is required to maintain growth momentum. He quotes Carl Schramm, who heads the Kauffman Foundation. Schramm suggests that this growth rate is sustained when America has 75 to 125 new companies each year that have moved from start up to the $1 billion revenue mark within twenty years. Schramm further suggests that all of us dream big, and that we as a society adopt policies and guidelines friendly to this growth. Finally, Schramm’s research indicates that an outsized number of these companies are founded by those born in other countries. Suggestion from me is that we throw open the borders to legal (not illegal) immigration to those who want to come to America, assimilate into the dominant culture, learn English, and pursue their dreams.

We will be sending out a separate communication regarding Tax Tips for 2010. However, there is one tax detail you need to be aware of today. On September 27, 2010, the President signed into law the Small Business Jobs and Credit Act of 2010. One provision of the Act affected Qualified Small Business Stock (QSBS) pursuant to Section 1202 of the IRC of 1986. Provided such stock qualifies, all gain on sale is exempt from income taxation, and the gain also escapes inclusion as an AMT preference item. Call or email if you would like additional information, and look for additional details in our tax letter.

Quote of the week:

“All that’s required for evil to triumph is for good men to do nothing.”
-Edmund Burke

2010-06-03T09:26:00.000-04:00

MAY DOLDRUMS CONTINUED FOR THE public equity markets. By the numbers, for the three weeks ended Friday, May 28, 2010, the Dow Jones Industrial Average closed at 10,136, down 244 points, or 2.4%. The Standard & Poor’s 500 closed at 1089, down 21 points, or 2%, and the NASDAQ Composite closed at 2257, down 8 points, or 0.3%.

BP continues its attempts to both cap the Deepwater Horizon well, and come to grips with its responsibilities regarding the spill. To date, both efforts have met with very limited success. The $900 million that BP is said to have spent to date represents about nine days of BP’s free cash flow from operations.

The U.S. Treasury Department announced the sale of about one-fifth of its Citigroup stake for $6.2 billion. The government’s continuing move to sell its positions in publicly traded companies should not be confused with a return to free markets.

Spain joins Greece in the ranks of countries whose debt has been downgraded by ratings agencies. Wal-Mart has cut prices by half on the iPhone 3GS, in preparation for new product from Apple. Marc Zuckerberg, interviewed at the “All Things Digital” conference, had challenges being forthcoming about his plans for Facebook. All in all, an interesting interview, given his interest in information from and about FB users.

For those of you who own Sub-S corporations, pending legislation would subject distributions to Self-Employment tax, beginning in 2011. This effectively gives you the opportunity to pay both sides of FICA on these distributions. My guess is that there will be fewer Sub-S entities in 2011 than there are today.

The Freedom From Religion Foundation is attempting to have the tax exemption for parsonage allowances declared unconstitutional. Look for continuing attempts to fracture America’s tradition of supporting faith based initiatives. Note that substantial gain from the sale of a primary residence, beginning in 2012, can trigger a special 3.8% Medicare surtax. This tax kicks in at AGI’s of $200/$250K for single/MFJ. Given the IRS’ aggressive approach to tax collection, they may want to change the IRS uniform to brown shirts.

Viable solutions for our country include limiting the federal government to powers specifically granted in the Constitution, while returning all other powers to the states. This would do away with many federal agencies, which is a plus. Other positive steps include doing away with all tax on income and assets, and adopting a 10% national sales tax. Congress also must do away with its pension and health plans, and participate in its legislation for the rest of America. We must return to a Constitutional Republic, if we have any hope of a future as a country. Let me urge you to be involved with your time and money in the upcoming November elections.

Speaking of elections, incumbents aren’t faring well. Utah’s Bob Bennett didn’t make it out of caucus. Rand Paul, who holds himself out as a constitutional conservative, is in the Senate race in Kentucky. Senator Blanche Lincoln of Arkansas is in a June 8th runoff. Incumbents are at risk around the country. It remains to be seen whether the anti-incumbent mood carries through to the general election.

On the economic front, GDP is running an annualized 3%. Durable goods orders are up for the first quarter, due primarily to aircraft orders. Sales of new and existing homes rose, perhaps in large part to the tax credit benefits.

There is always news on the economy, the financial markets, and the continuing efforts of our comrades at the IRS working to separate us from our dollars. In spite of all this, life is good, and most days, life is excellent. There will always be circumstances. How we choose to engage with life, regardless of our circumstances, will determine its quality. It will also determine the impact we make during the time we have been given.

Quote of the week:

“…You are not your own; you were bought at a price…”
St. Paul

Eagles

2010-05-13T15:56:00.000-04:00

THE MONTH OF MAY has certainly added an interesting perspective to the financial markets. Since our last report, almost two months ago now, we have witnessed all manners of news. By the numbers, for the six weeks ended Friday, May 7, 2010, the Dow Jones Industrial Average closed at 10,380, down 470 points, or 4.3%. The Standard & Poor’s 500 closed at 1110, down 56 points, or 4.8%, and the NASDAQ Composite closed at 2265, down 130 points, or 5.4%.

Some of the best minds and petroleum engineers in the country are attempting to figure out how to sop up the oil in the Gulf of Mexico. Seeing a recent video demonstration brought back memories. Farm equipment leaks oil. The easiest way to soak up the oil was just to throw some loose hay on it. The oil would stick to the hay, and we would then just burn the hay.

Seems to me that it may be time to order several ships full of hay bales to spread around the gulf. Bermuda or prairie grass would work best. Hay doesn’t sink, and is fully biodegradable. Just a thought.

Based on last Thursday’s market gyrations, it appears that some of our country’s largest financial institutions don’t quite have a handle on the operations side of their trading systems. This will simply further endear these paragons of virtue to those millions of Americans who entrust their retirement savings to these firms.

As of last week, 437 of the S&P 500 had reported first quarter earnings. 77% of those reporting beat analyst’s earnings estimates, reflecting earnings 56% ahead of the first quarter in 2009. Not only are staff cuts having the desired effect, but top lines are growing as well.

On Main Street, my friend Steve, who owns a local pizza shop, tells me that April was the first month in fifteen months that sales didn’t decline. I’ll let you know what his May looked like in a couple of weeks. Other privately held businesses are reporting solid sales gains for March and April.

It looks as if Merkel and Sarkozy were able to get their friends to agree to bail out Greece. They must, if they intend to maintain the EU. Not that a bailout addresses the issue. What must be done, around the world, and including the USofA, is for nations to spend less than they take in, and for governments to wean their constituents from the government teat. I haven’t met or heard a politician with the will to do such.

Cameron and Clegg have agreed to lead Britain, replacing Brown. What remains to be seen is whether these two will step in to articulate a meaningful future, and help make the tough decisions to move Britain toward that future, or whether Britain has chosen to saddle itself with elected officials who can see no further than the next election or board position. All countries face the same questions, and too many are answering poorly.

On the economic front, the US added 290,000 non-farm jobs in April, the biggest increase since March 2006. Hiring has risen for four straight months, reversing nearly two straight years of job losses. Unemployment remained at 9.9%, meaning more people have begun looking for work again. Construction spending rose 0.2% in April, primarily from highway and public sector spending. Productivity jumped 3.6%, while unit labor costs were down 1.6%.

We have a choice. We can engage, or we can withdraw. Whether in war, in business, or in personal relationships, we can choose to engage, often at risk of physical or emotional harm, or we can withdraw. Withdrawing may allow us to escape momentary pain, and may be our reaction in an attempt at self-preservation. What we often miss is adventure, love, victory, freedom, and the richness of life that comes with the willingness to risk. A wise man once said that in order to gain life, we must be willing to lose ourselves. Charge the hill. It is much better to risk defeat than never to have attempted victory.

Quote of the week:

“…every form of refuge has its price…”
-The Eagles, “Lyin' Eyes”

Ty Murray on Life

2010-03-30T11:07:00.000-04:00

EQUITY MARKETS CONTINUED THEIR march north, apparently on the back of hopes for continuing low interest rates, and drops in unemployment claims. By the numbers, for the two weeks ended Friday, March 26, 2010, the Dow Jones Industrial Average closed at 10,850, up 226 points, or 2.1%. The Standard & Poor’s 500 closed at 1166, up 16 points, or 1.4%, and the NASDAQ Composite closed at 2395, up 28 points, or 1.2%.

Germany, France, and the rest of the European Union have chosen to bail out Greece. Isn’t this like buying your son a new car after he wrecked the one you bought him last year by drinking and driving? Apple continues to wow the consuming public, and has built substantial anticipation into the iPad release.

Treasury is selling its 27% stake in Citigroup. Caterpillar, Deere, and ATT have announced non-cash charges related to the passing of the most recent version of the Patient Protection and Affordable Care Act, otherwise known as national healthcare. More on this topic later.

In 1775, the Continental Congress asked the colonies to pray for wisdom as the representatives worked to form the new government. President Truman signed a joint resolution by Congress in 1952, recognizing a National Day of Prayer. President Reagan signed a proclamation setting aside the first Thursday of May as the time for a National Day of Prayer. Every president since 1952 has signed a National Day of Prayer proclamation, and most presidents over the last twenty years have hosted services in the White House. This year, the National Day of Prayer is May 6.

On Tuesday, President Obama signed into law the referenced healthcare reform. A few of the changes are as follows. For a complete summary, prepared by the National Association of Health Underwriters, send us an email, and we will forward it to you.

1. Existing plans are grandfathered as long as the only changes are additions and deletions of employees and dependents.
2. Eligible small businesses can receive phase one of the small business premium tax credit.
3. Employers will lose the deductibility of Medicare D subsidies paid on behalf of retired employees.
4. Plans may not cap lifetime benefit limits.
5. All plans will be required to cover dependents up to age 26.
6. All plans will be required to cover pre-existing conditions.
7. All employers will be required to enroll employees in a new national public long-term care program, unless the employee opted out.
8. All business owners will be subject to new expanded federal income tax requirements on payments of fixed or determinable income or compensation.

Israeli Prime Minister Benjamin Netanyahu was essentially stiffed by the Obama administration on a recent visit to the White House. For 60 years, Israel has been our one consistent friend in the Middle East. In the meantime, the President appears to have made it a priority to befriend the Muslim world, visiting Egypt, Saudi Arabia, Turkey, and Afghanistan, among other countries.

In economic news, GDP was revised to 5.6% for the fourth quarter, down from the previous 5.9%, but still quite strong. Durable goods orders were up 0.5% in February, the third consecutive monthly increase, though existing home sales fell 0.6%, and new home sales fell 2.2% in February. Last week, the Congressional Budget Office announced that Social Security will pay out more than it receives in payroll taxes this year.

Ty Murray, at the age of 19 in 1989, became the youngest cowboy ever to win the All-Around Rodeo World Championship. Ty credits a conversation with his mom as the catalyst for this achievement. Through high school, according to Ty, he would perform well until the championships, where he would choke. His mother taught him to treat the championship rides as just another day at the rodeo. Ty says that in bull riding, you take something that big, that scary, and that dangerous, and you learn to gain control over your mind and your emotions, and move fluidly through the situation. Good words.

Quotes of the week:

“Home life ceases to be free and beautiful as soon as it is founded on borrowing and debt.”
Henrik Ibsen

“All men are alike in what they say; all men are alike in what they dream; it’s what they do that makes the difference.”
Anonymous

Ed Justice

2010-03-18T10:00:00.000-04:00

EQUITY MARKETS CONTINUE TO edge up, probably from lack of any other opportunity to find a meaningful return. By the numbers, for the week ended Friday, March 12, 2010, the Dow Jones Industrial Average closed at 10,624, up 58 points, or 0.5%. The Standard & Poor’s 500 closed at 1150, up 14 points, or 1.2%, and the NASDAQ Composite closed at 2367, up 41 points, or 1.7%.

The flight to bonds continues, as investment grade corporates continue the upward journey in price they have experienced the last four or five years. It wouldn’t surprise us if the winning streak in bonds is nearing its end, and it will be interesting to see how bond prices respond to a quarter point increase in interest rates, once that happens.

China and Google are fighting for control, Congress is fighting for its life, the Administration is fighting for power, and Toyota is fighting for market share. I’m not convinced that most of these are worth fighting for. Fighting for justice, truth, those who can’t speak for themselves, yes – but fighting for power and control is an empty victory, if it comes.

U.S. debt grew at its slowest pace on record, with consumer debt actually falling in 2009 for the first time since records have been kept. Is there anyone willing to serve at the federal level that will bring discipline to their financial decisions the way households are required to? By the way, what’s a dangling participle?

In general economic news, retail sales were up 0.3% in February, a respectable showing given the nasty weather. Business inventories were unchanged in February, and the U.S. trade deficit fell to $37.3 billion, as both imports and exports declined.

States around the nation are facing large and growing deficits, with the typical suspects, those bastions of socialism such as California, New York, and New Jersey, having especially difficult challenges. California has already issued scrip instead of cash for some of its noteholders. Look for other states to follow, either with scrip, or trips to Washington, with sob stories in tow.

Revenue bonds can be attractive for the yield. Like corporate bonds, they depend on the revenue of an underlying entity, such as a road, museum, hospital or housing project for their value and income stream. In many cases, these entities are governed and run by those from the public or non-profit sector. Given my experience with non-profits, this isn’t especially comforting.

If we were buying individual bonds, I’d be tempted to stick with the General Obligation bonds of states such as Tennessee, Oklahoma, North Dakota, or Idaho. You may have to look hard for GO bonds from some of the less populated states, as they don’t carry much debt. There’s probably a tip in there somewhere.

Ed Justice, the youngest of six, was born in Paola Kansas. He died a couple of years ago at the age of 87. In the late 30’s, Justice drove Route 66 west to California and took a job with Douglas Aircraft. After his brother Zeke joined him, they worked at Kurtis-Kraft building race cars. Soon, they launched Justice Brothers Racecar Repair and Fabrication. This led to a distributorship for motor oil additives, sold to service stations, and a move to Florida. Bill France, owner of an Amoco Station and founder of NASCAR, was one of their customers. Justice became an early NASCAR sponsor. After his retirement in 1989, Ed devoted his time to the Justice Brothers Museum of Early American Racing. You can visit the website at www.justicebrothers.com. Click on the racing button.

Quote of the week:

“Americans have always been able to handle austerity and even adversity. Prosperity is what is doing us in.”
James Reston

2010-03-10T08:46:00.000-05:00

SEVEN WEEKS HAVE PASSED since our last commentary, though it was designed to go out weekly. Over that time, the major indices have moved very little. By the numbers, for the seven weeks ended Friday, March 5, 2010, the Dow Jones Industrial Average closed at 10,566, down 43 points, or 0.4%. The Standard & Poor’s 500 closed at 1138, nearly unchanged from 1136, and the NASDAQ Composite closed at 2326, up 38 points, or 1.6%.

The equity markets have trended up so far this year. We suspect this is driven more by investors looking for yield, than any real confidence in economic fundamentals. Washington continues to exude confusion and uncertainty, and Wall Street has been written off as a meaningful source for solid investment ideas – at least for anyone other than their promoters.

History tells us that the long term trend for stocks should be up. We concur, though this trend will most likely bring short term volatility. As has been noted elsewhere, the S&P 500 returned -0.5% annually over the last ten years. This was nothing but a reversion to the long term average of 10% annual gains, as the nineteen years ending in 2000 saw an 18% annualized return. The only other decade that saw negative annual returns was the 30’s, with an average annual return of -0.2%.

At the moment, the overvalued asset class appears to be bonds. Bonds have had annualized returns of 5% or more over the last several years, depending on which bond type is in question. In 2009, more than ten times more dollars went to bond funds than to stock funds.

In business news, Coke has purchased its largest bottler, Coca-Cola Enterprises. It will be interesting to see how this integration works. Chile and Turkey, like Haiti and AIG, have been hit by earthquakes. The countries are rebuilding. AIG appears to be rebuilding as well, starting with selling off units to raise cash and pare debt.

Greece is only the most obvious example of being satiated with debt. Sovereign debt loads around the world are staggering, in the size of their raw numbers. Some have suggested the end of the world as we know it, as a result. Productivity is the solution. One of the sure courses to productivity is to remove the tax incentives to carry debt, and to remove the tax penalties for putting equity to work. FairTax is still a superb solution.

The official unemployment rate is holding steady, at just under 10%. This doesn’t include the underemployed, or those who have simply given up. Employment is generally a lagging indicator of economic health, as companies find ways to create profitability with fewer employees during economic down cycles. The third and fourth quarter 09 nonfarm productivity numbers were up, confirming this corporate strategy.

The Congressional Budget Office recently offered an analysis of the administration’s budget estimates. CBO’s findings were that the federal government would record deficits of $1.5 trillion in 2010, and $1.3 trillion in 2011. The cumulative deficit to 2020 would be $9.8 trillion, and public debt by 2020 would be $20.3 trillion. Finally, net interest on debt would grow from the current 1.4% of GDP, to 4.1% in 2020.

The IRS released IR-2010-1, on January 4, 2010, which proposes standards for paid tax preparers, including CPA’s, attorneys, and enrolled agents. The proposed standards include a registration requirement, a competency testing requirement, and a continuing education requirement. It appears that companies specializing in registrations, testing, and education stand to benefit. Under the proposed guidelines, the IRS will conduct preparer visits and sporadic compliance checks.

On the tax front, Congress continues to be desperate for new revenue. In the crosshairs are profit distributions from Sub-S corporations. Look for new taxes on these funds. A district court in Michigan has ruled that severance pay for downsized employees isn’t subject to Social Security taxes, specifically repudiating an Appeals Court analysis. The IRS is irritated. Look for an IRS appeal.

More than 90% of most personal financial statements are comprised of business interests, real estate, or other long term investments. Most charitable giving is done from the cash and equivalents portion, which represents less than 10% of assets for most households.

There are wonderful planning tools and strategies that allow the charitable gifting of assets, in a way that cares for the household, and has a major positive impact on charitable organizations. It’s immaterial whether the asset is real estate, privately held or publicly traded stock, or financial assets such as life insurance or IRAs. If you would like to receive a short PowerPoint that reviews a few of these ideas, respond to this commentary, and we will get it to you.

Quote of the week:

“A taxpayer is someone who works for the government without taking the civil service exam.”
Ronald Reagan

Senate Race

2010-01-22T09:50:00.000-05:00

2010 IS OFF TO A SOLID start, as the major equity indices are up. By the numbers, for the two weeks ended Friday, January 15, 2010, the Dow Jones Industrial Average closed at 10,609, up 181 points, or 1.7%. The Standard & Poor’s 500 closed at 1136, up 21 points, or 1.85%, and the NASDAQ closed at 2288, up 19 points, or 0.8%.

Earnings season has started. Analysts expect earnings of the S&P 500, ex-financial stocks, to increase 8% during this reporting season, up for the first time in nine quarters. December unemployment held steady at 10%. Ford auto sales were up 33% in December, while both government run operations continue to bleed.

Retailers reported their best December in two years, though Marks & Spencer of England suggested that the heavy winter weather took a toll on sales. Novartis has decided to drop $39.3 billion for the 75% of Alcon it doesn’t already own. Cadbury appears ready to acquiesce to Kraft’s increased offer of $19.5 billion.

The Coakley-Brown showdown in Taxachussetss appears to be a referendum on fifteen months of federal foolishness, starting with the $800 billion feeding frenzy in the fall of 2008. A Brown win would end an eighty year Kennedy monarchy.

The World Cup of Texting took place in New York City this last weekend. Yours truly didn’t qualify. The Administration is proposing a ten year fee on financial institutions that is projected to raise $90 billion during that time frame. Bankers are in a quandary. On the one hand, they are hammered for not lending by Washington. On the other, they are getting no clear direction from OCC and FDIC auditors, who are in serious defensive mode.

Google is considering leaving China, after what appear to be attempts to censor the flow of information through the Google network. On the economic front, the Fed’s Beige Book reported improved economic performance in ten of the twelve Fed regions in December, and business inventories grew for the second straight month after no gains since August 2008. Consumers continued to cut spending, trimming consumer credit by $17.5 billion in November, the largest decrease since 1980.

On the tax front, Congress is in complete disarray, with no consensus on either cap-and-trade or nationalized health care. Our distinguished and seasoned leaders have been so caught up with political shenanigans that they have allowed a variety of tax laws to expire, leaving a vacuum, instead of allowing for sound planning. Regarding estate taxes, a group of Congressmen is pushing for a $5 million exemption and a 35% maximum rate.

Expect the mileage deduction to remain at 50 cents for 2010, and for the domestic production deduction to increase to 9%. Still to be addressed are AMT provisions, charitable gifting from IRA’s, R&D credits, and credits for college tuition and teachers’ supplies, to name a few. The limits on HSA deductible payins increases to $6150 and $3050 for married and single taxpayers in 2010. The adoption credit goes to $12,170 in 2010, and 401k contribution limits remain at $16,500.

The Iditarod starts this year on March 7 in Willow, Alaska. The race covers 1150 miles of some of the most beautiful terrain on earth, and can last from ten to seventeen days. 2010 should see 75 teams attempt to be the first to Nome, on the Bering Sea. You can learn more at www.iditarod.com. To plan your outing to watch the Iditarod, check out www.iditarodtours.com, and www.discoverak.com, among others.

Quotes of the week:

“Of the four wars in my lifetime, none came about because the U.S. was too strong.”

“I have wondered at times what the Ten Commandments would have looked like if Moses had run them through Congress.”
Ronald Reagan

Hellenization

2009-12-15T13:13:00.000-05:00

THE WALL OF WORRY APPEARS to be flattening? By the numbers, for the week ended Friday, December 11, 2009, the Dow Jones Industrial Average closed at 10,471, up 83 points, or 0.8%. The Standard & Poor’s 500 closed at 1106, essentially flat, and the NASDAQ Composite closed at 2190, down 4 points, or 0.2%.

AOL now stands independent of Time Warner. Should be interesting to see how it fares. Retail sales were up 1.3% in November, the third increase in four months, according to the Commerce Department. Goldman Sachs and other large commercial and investment banks are restructuring compensation and bonus structures. Oh well. This is too little, too late, and is most likely nothing more than posturing.

Apple plans to launch a tablet size computing device in early 2010. While Apple products aren’t taken seriously by many in the business community, their cute, easy to use, consumer driven products have certainly helped their bottom line. United Airlines has ordered 50 new wide-body, long haul jets from Boeing and Airbus.

Consumer credit outstanding fell by $3.5 billion in October, the ninth consecutive monthly decline. According to Vanguard economist Roger Aliago-Diaz, household debt in the U.S. jumped from 80% of personal income in 2000, to 110%, just before the 2008 financial crisis.

According to a recent report from the College Board, tuition increases for 2009-10 averaged 6.5% for public schools and 4.4% for private colleges. Are some colleges pricing themselves out of the market? In the category of random thoughts, I’ve wondered over the last few weeks how I would behave if I were 30 years old, and had personal annual cash flow of $50 million?

On a recent Sunday, 57.5% of the Swiss voted for a constitutional ban on the building of minarets attached to the country’s mosques. This vote appears to be notice to the Muslim community that the Swiss will not allow their culture to be overrun by Muslim philosophy and sharia law, as is happening across much of Europe. According to Tariq Ramadan of Oxford University, as reported by David Aikman, “Over the last two decades, Islam has been connected to so many controversial debates, violence, extremism, freedom of speech, gender discrimination, and forced marriage, to name a few, it is difficult for ordinary citizens to embrace this Muslim presence as a positive factor”.

On the death of Alexander the Great, his kingdom was ruled by the Ptolemy’s and the Seleucid’s, who continued the Hellenization of Alexander’s holdings, including the Near East. In 165 B.C., Judas Maccabeus led a rebel army to victory over the Seleucids, freeing the Jews and establishing the Hasmonean Dynasty. This victory, and the subsequent rededication of the Holy Temple in Jerusalem, is celebrated each year as Hanukkah. In 2009, the eight day celebration began at sundown on Friday, December 11.

Quote of the week:

“A prisoner of war is a man who tries to kill you and fails, then asks you not to kill him.”

Winston Churchill

Proclamation

2009-12-09T09:54:00.000-05:00

INCREMENTAL INCREASES have continued to move the equity indices over the last two weeks. By the numbers, for the two weeks ended Friday, December 4, 2009, the Dow Jones Industrial Average closed at 10,388, up 70 points, or 0.7%. The Standard & Poor’s 500 closed at 1106, up 15 points, or 1.4%, and the NASDAQ Composite closed at 2194, up 48 points, or 2.2%.

According to the BLS, just 11,000 jobs were lost in November, bringing unemployment to 10%. Analysts are suggesting that hiring may start sooner than expected. GM’s Fritz Henderson has resigned and Ed Whitacre is standing in for him, for the moment. I guess Fritz wasn’t ready to work for the government, other than paying his taxes. Ford announced it sold about as many vehicles in November 09 as in November 08.

Dubai World has asked for a little help from friends on the $60 billion of debt on its books. Worldwide sovereign debt, according to Moody’s as reported in Forbes, is expected to hit $49.5 trillion by the end of 2009, a 45% increase since 2007. The G7 account for 78% of this debt, which is expected to be 80% of GDP by year-end 2010.

Countries can raise taxes or print money. Voters around the world may reach their limits on taxation. What then, Weimar or Zimbabwe style inflation? If so, how do we maintain purchasing power when we can no longer turn dollars into bread and milk?

Bank of America is prepared to pay back $45 billion in TARP funds. In support of my theory that the government hacks in DC are watching out for their own, first, last, and always, I offer the following, courtesy of David Weidner of Marketwatch. The 2009 Wall Street bonus pool is expected to be $140 billion, compared to the estimated budget deficit of all 50 states for 2010 of $142 billion. The average bonus at Goldman is $550,000, and the median annual US income is $50,740.

Total bailout funds committed to Wall Street and Detroit is $1.1 trillion, whatever that is. Ratio of bailout funds to small business loans provided through the stimulus package is 2933:1. Small businesses are responsible for 64% of the jobs created in the last fifteen years, and the majority of the patents, by a multiple of 13.

In economic news, non-farm productivity was up 8.1% during the third quarter, and labor costs fell 2.5%, both of which are to be expected with fewer employees. Mortgage rates continue their downward drift.

At the recent Policy Forum sponsored by the Federal Reserve Bank of Philadelphia, a paper on “Eight Centuries of Financial Folly” offered the following. Financial crises are protracted affairs – they last longer and recovery is slower than expected. Government efforts to stimulate the economy are not always successful, but always result in increased government debt. Periods of significantly increasing government debt are usually followed by periods of slow economic growth.

What fascinates me is that academics writing white papers actually think this is news. Anyone that pays attention has had the referenced details figured out for years.

If the proposed health care reform becomes law, the IRS will be charged with confirming that individuals have health care coverage, or enforcing the payment of penalties when returns are filed. After listening to stories of those who were persecuted by Eastern Bloc communists, I have visions of brown shirts and black vans. The IRS will also be tasked with collecting fees from large and midsize employers who don’t provide health coverage.

In the meantime, some fifteen thousand delegates, five thousand journalists, and assorted other carpetbaggers are descending on Copenhagen for the Climate Change Summit. According to the UK Telegraph, more than 1200 limousines from around Europe have been pressed into service, five of which are hybrids or electric cars. 140 private jets are expected to drop off their passengers, and park around Europe, due to space limitations at the local airport.

The scarlet ladies union has announced that all 1400 members will be offering their services for free to delegates, giving new meaning to the term “carbon dating”. There is more foolishness in Copenhagen, but that’s enough for one day. It seems that attendees are determined to take farce to an entirely new level.

FINRA, the Financial Industry Regulatory Authority, charged by the SEC with overseeing the activities of the nation’s stockbrokers and their employers, had an operating loss of $696 million in 2008. FINRA was still able to pay thirteen employees $1 million or more in compensation during that time.

Quote of the week:

“Whereas it is the duty of all Nations to acknowledge the providence of Almighty God, to obey His will, to be grateful for His benefits, and humbly to implore His protection and favor; and whereas both Houses of Congress have by their joint Committee requested me to recommend to the people of the United States a day of public thanksgiving and prayer to be observed by acknowledging with grateful hearts the many signal favors of Almighty God, especially by affording them an opportunity peaceably to establish a form of government for their safety and happiness.

Now therefore I do recommend and assign Thursday the 26th day of November next to be devoted by the people of these States to the service of that great and glorious Being, who is the beneficent Author of all the good that was, that is, or that will be – That we may then all unite in rendering unto Him our sincere and humble thanks, for His kind care and protection of the people of this Country previous to their becoming a Nation – for the signal and manifold mercies, and the favorable interpositions of His Providence which we experienced…for the great degree of tranquility, union, and plenty, which we have since enjoyed, for the peaceable and rational manner in which we have been enabled to establish constitutions of government for our safety and happiness…for the civil and religious liberty with which we are blessed…and in general for all the great and various favors which He hath been pleased to confer upon us.

And also that we may then unite in most humbly offering our prayers and supplications to the great Lord and Ruler of Nations and beseech Him to pardon our national and other transgressions, to enable us all, whether in public or private stations, to perform our duties properly and punctually, to render our national government a blessing to all the people, by constantly being a Government of wise, just and constitutional laws, discreetly and faithfully executed and obeyed, to protect and guide all Sovereigns and Nations, and to bless them with good government, peace, and concord, to promote the knowledge and practice of true religion and virtue…and generally to grant unto all Mankind such a degree of temporal prosperity as He alone knows to be best.

Given under my hand at the City of New York the third day of October in the year of our Lord 1789. "

George Washington

Illness or Internal Terrorism?

2009-11-17T10:46:00.000-05:00

MOMENTUM CONTINUES IN the equity markets. For the five weeks ended Friday, November 13, 2009, the Dow Jones Industrial Average closed at 10,270, up 405 points, or 4.1%. The Standard & Poor’s 500 closed at 1093, up 22 points, or 2.1%, and the NASDAQ Composite closed at 2167, up 28 points, or 1.3%.

Intel will pay AMD $1.25 billion, and in return AMD will call off the dogs. HP is buying 3Com for $2.7 billion in cash. Wal-Mart reported a better than expected increase in third quarter earnings of 3.2%, fueled primarily by inventory control and international operations.

Kraft’s $16 billion bid for Cadbury has become a hostile takeover attempt. 20 years ago, Reagan helped bring down the Berlin Wall with a little focused oratory. Wish to God we had leadership anywhere in the world today, similar to that, which would challenge evil and promote good.

The U.S. House has opted for its version of universal health care. Either our elected officials aren’t listening, or far too many of our fellow Americans find it easier to be slaves on someone else’s ship, rather than captain of their own.

Terrorism has found its way into our military, and too few seem to realize the implications, or have the nerve or other body parts to call terrorism what it is. If you have seen a strong denunciation of the Ft. Hood shootings by peaceful Muslims, please forward whatever you have read, as I’d like to read it.

On the tax front, the home buyers’ credit has been extended through April 30, 2010, as part of a law extending unemployment benefits. The full $8000 credit is available for joint filers whose AGI is $225,000 or less, and includes benefits for existing homeowners. This new legislation also allows businesses with losses to carry back 2008 and 2009 losses for five years instead of just two years.

Sales tax for new vehicle purchases is deductible for AMT purposes, for non-itemizers. Pension plan sponsors with internal websites must now post basic plan information there, according to new IRS guidance. Incentive stock options exercised by employees aren’t deductible R&D costs, according to an IRS Private Letter Ruling. The result can be different if there is a disqualifying disposition by R&D employees.

If you lease a plane to a company you control, slower depreciation is required if personal use exceeds 50%. This according to an IRS PLR as a result of an audit. In other IRS news, a defective merchandise allowance from a vendor is not taxed as income. Finally, energy saving improvements to your home, completed before year end, could result in tax credits of up to 30% of the cost of such improvements, within established limits.

A well developed sense of stewardship challenges us to care for and make good use of the earth and all its resources. The dark side of the green movement suggests that man is the problem, and should leave a nominal footprint, if man exists at all. This death wish is common in our world. It is expressed in issues as diverse as the green movement, assisted suicide, abortion, drug use, various forms of self-mutilation, genocide, slavery, and the list goes on.

At its core, this is the natural state of man, when he sees himself as simply one more animal, with no real reason for existence. When there is no understanding of why man was created, or what his purpose is, chaos reigns. Chaos has been the order of the day for most of recorded history, for most individuals.

America, for much of its existence, has been a shining light, a city on a hill, which offered hope, and an escape from chaos, for many. This was the intent of America’s founders, who had a strong belief in what Washington called Divine Providence. While interpretations varied, most of the founding fathers had a strong belief in a Creator who ordered the affairs of men. As we move from this core belief, we see chaos rear its head.

Restoration is possible, though it will need to come from a leader who is prepared to articulate America as a place and source of hope, freedom, stability, and order – a light in a dark world. As Maxwell says, one of a leader’s primary roles is to define reality, and to help envision an excellent future. If these leaders don’t appear, what are we prepared to do individually to reflect supernatural light into a dark world?

Quotes of the week:

“Where there is no vision, the people perish.”
Solomon

“Life is hard. It’s harder when you are stupid.”
John Wayne

Who are you?

2009-10-15T14:00:00.000-04:00

POSITIVE EARNINGS SURPRISES lifted the equity markets last week. By the numbers, for the week ended Friday, October 9, 2009, the Dow Jones Industrial Average closed at 9865, up 377 points, or 4%. The Standard & Poor’s 500 closed at 1071, up 46 points, or 4.5%, and the NASDAQ Composite closed at 2139, up 91 points, or 4.5%.

U.S. President Barack Obama won the Nobel Peace Prize for his extraordinary efforts to strengthen global diplomacy, according to the announcement from the Norwegian Nobel Committee.

Alcoa kicked off earnings season by reporting a surprise third quarter profit of $77 million, on revenue of $4.6 billion. Gold, which has run to about $1050 an ounce, will be at $2000 an ounce within a decade, according to commodities bull Jim Rogers. Grupo Santander raised $8 billion by selling a 16% stake in Banco Santander Brasil.

Analysts expected retailers to report September sales declines of 2%, instead of the 0.1% increase actually reported. 24 France Telecom staffers have put their own lights out in the last eighteen months. The head of the company’s French operations, Louis-Pierre Wenes, has resigned.

Looking at the overall economy, the U.S. trade deficit fell in August to $30.7 billion from July’s $32 billion. The Institute of Supply Management reported that its index of nonmanufacturing activity rose to 50.9 in September. Readings above 50 are considered a sign of economic expansion. September was the first reading above 50 in more than a year.

According to a recent study from PriceWaterhouse Coopers, within 15 years public pension and healthcare systems will have less than half the money they need to pay mandated benefits. Makes me look with a bit more discernment at muni-bonds.

We are born alone, not known to ourselves or others, and often spend many years looking for our identity. There is only One who can reveal to us our true identity, and that is our Creator. If we reject this identity, we invest enormous sums of time, energy, and money attempting to identify, or find, ourselves. Unfortunately, too many of us, to paraphrase Mickey Gilley, look for our identity in all the wrong places.

Quotes of the week:

“If I think of human beings I’ve known and of my own life, such as it is, I can’t recall any case of pain which didn’t, on the whole, enrich life.”
Malcom Muggeridge

“My mother had morning sickness after I was born.”
Rodney Dangerfield

How Much is $1.6 Trillion?

2009-10-07T10:58:00.000-04:00

ONCE AGAIN, EQUITY INDICES took the week off. By the numbers, for the week ended Friday, October 2, 2009, the Dow Jones Industrial Average closed at 9487, down 178, or 1.8%. The Standard & Poor’s 500 closed at 1025, down 19 points, or 1.8%, and the NASDAQ Composite closed at 2048, down 42 points, or 2.1%.

Opinions abound as to whether the stock market will continue its upward trek, whether there will be a small drop in prices, or whether we will have a sharp decline that will test March lows. We will know in hindsight.

Rich Karlgaard, writing recently in Forbes, had what I thought was an interesting observation. Rich suggested an S&P 500 of 1200, then ongoing volatility and market muddling for several years. He further suggested that in times of economic uncertainty, those companies with focus and adaptability will do quite well, and others will no longer be in business.

Ken Lewis will be stepping down from Bank of America by the end of the year. My guess is he is simply a fall guy for government shenanigans. Rio de Janeiro will host the 2016 Olympics, trumping Chicago and several other contenders. Job losses in September took the unemployment rate to 9.8%, a 26 year high. Angela Merkel was returned to office in Germany.

Starbucks has introduced Via, an instant coffee. We’ll see. Gannett said it expects to post earnings that are higher than analyst’s expectations, on an increase in ad revenue. I’m not sure this is an indication of recovery in the newsprint business. Xerox announced plans to buy Affiliated Computer Services for $6.4 billion in cash and stock.

More economic stats – Personal income rose 0.2% in August, and personal spending increased 1.3%. Construction spending rose 0.8%, which is annualized rate of about 10%. The federal government’s fiscal year ended last Wednesday, with what is expected to be a $1.6 trillion deficit. What happens when decent people go to Washington? Does power vaporize all intent, and life-long values? Does the need to be a part of whatever Washington represents cause them to sell out? All of us know we can’t run our homes and businesses in such a fashion.

Www.annualreports.com allows you free access to the annual reports of thousands of companies. The U.S. Census Bureau indicates that median family income fell in 2008 from $52,163 to $50,303. The 10% of Americans with the highest incomes earn more than $138,000 annually.

Perhaps you have heard that America spends much more on health care, as a percentage of GDP, than other developed countries. In the same breath, you may also hear that life expectancy in the U.S. lags that of most of these countries, as if we don’t get as much bang for our healthcare buck as other countries. Both pieces of information are correct, but the correlation that some attempt to make doesn’t necessarily exist. Marie-Josee Kravis of the Hudson Institute, in a recent column, offered some interesting observations.
Life expectancy calculations are influenced by many factors, including diet and lifestyle. For example, the U.S. has the highest incidence of road fatalities in the world, which impacts life expectancy calculations, but is unrelated to healthcare spending. A one-payer health system won’t stop speeding. The homicide rate is ten times in the U.S. what it is in the U.K. Universal access cards won’t replace guns. 32.2% of Americans are obese, compared to 21.7% of Aussies, 18% of Canadians, and 13.6% of Germans. One stop healthcare won’t automatically drop those pounds. Obese Americans spend 36% more for health services, and 77% more for medications, than those of normal weight.

Last year, the journal Lancet Oncology found that Americans have a higher survival rate for 13 of the 16 most common forms of cancer than other developed countries. Similar studies for other illnesses have documented the same trend. Americans who use our current health system live longer, and more of them survive, than in those developed countries that have a one-payer system.

Quote of the week:

“We have not been given a spirit of fear, but of love, and power, and a sound and disciplined mind.
St. Paul

Nuclear Toys

2009-09-30T13:57:00.000-04:00

EQUITY MARKETS TOOK a break this last week. By the numbers, for the week ended Friday, September 25, 2009, the Dow Jones Industrial Average closed at 9665, off 155 points, or 1.6%. The Standard & Poor’s 500 closed at 1044, off 24 points, or 2.2%, and the NASDAQ Composite closed at 2090, off 42 points, or 2%.

The Fed’s Open Market Committee held interest rates steady, and suggested that the economy is slowly improving. Sales of existing homes dropped 2.7% in August, while new home sales increased 0.7%. New home inventory stands at 7.3 months, down from a high of 12.4 months in January. Realtors continue to work for renewal of the home purchase credit, which applies to homes purchased by November 30, 2009.

Dell has announced plans to buy Perot Systems for $3.9 billion, in a move to compete with HP. A123 Systems, the government subsidized maker of lithium-ion batteries, went public last week, with its shares jumping 40% on its first trading day. This is good news for investment bankers and those with founders stock, a little less so for those who purchased at opening.

In other economic news, the index of leading indicators rose 0.6% in August, the fifth consecutive monthly gain. Durable goods orders fell 2.4% in August.

In 2010, the income limitations for Roth conversions go away. Many professionals will suggest converting your IRA balances to a Roth beginning in 2010, and paying income taxes. Our advice to clients will be to wait for a couple of years, to determine if Congress is going to do away with the tax deferral features of many types of plans, including IRAs. No reason to pay the tax now, if in fact Congress does away with the tax free benefits of Roth IRA distributions.

Kao-ling, or China Clay, known in the U.S. as kaolin, a clay mineral, is found in great quantities in four places around the world – China, Brazil, Australia, and Middle Georgia. It is found to a lesser degree in the UK, France, Germany, India, and several other places. It has many uses, and is one of the key components of porcelain.

Several counties in east central Georgia had a strong grip on kaolin mining and processing beginning in the first half of the 20th century, as kaolin’s industrial uses were developed. During the 80’s, commercially viable deposits were found in the mountains of Brazil, providing competition for the Georgians. While kaolin has long been used in China to make China and porcelain products, it has remained commercially unviable in China due to political considerations.

Mahmoud Ahmadinejad, president of Iran, is on a mission from Allah to destroy the infidels, starting with Israel and the U.S., expecting this to usher in the coming of the 12th Imam. Acquisition of nuclear capabilities will speed up this process, as far as he is concerned.

We expect Iran to announce viable nuclear toys by the end of 2010. It wouldn’t surprise us to see Israel attack Iran when this happens, as like all of us, they have a distinct interest in self-preservation. The price of oil, and most likely other natural resources, should jump when this happens, as large deposits of the world’s oil reserves become unavailable due to political turmoil.

The European Union, United Nations, and many in our own State Department dismiss these scenarios, confident that we can have conversation with Ahmadinejad that will cause him to stand down. Many thought the same thing of Hitler 70 years ago. Either there is a distinct lack of understanding of history, or those with decision making authority don’t understand that ultimately, the terrorist’s issues with Israel go back to Isaac and Ishmael. I suspect it’s the latter, as stories of Isaac and Ishmael don’t fit neatly with the worldview of many.

Quote of the week:

“If you want to feel rich, just count the things you have that money can’t buy.”
Anonymous

One Man With Courage

2009-09-30T09:01:00.001-04:00

ONCE AGAIN, EQUITY INDICES continued their journey up the wall of worry. By the numbers, for the week ended Friday, September 18, 2009, the Dow Jones Industrial Average closed at 9820, up 215 points, or 2.2%. The Standard & Poor’s 500 closed at 1068, up 26 points, or 2.5%, and the NASDAQ Composite closed at 2132, up 52 points, or 2.5%.

Worry over the relationship between stock prices and underlying business fundamentals continues. With so much variability in how numbers can be reported, it’s often difficult to come to meaningful conclusions. Adherence to a discipline, while continuing to study, back test, try, fail, and adjust, seems to be the best approach to doing well. This applies to arenas outside the financial markets as well.

Mark Hulbert, in a recent column, looked at bond funds versus stock funds during 2009. Mark said that bond newsletters are more bullish now than they have been since early 2001. Over the last six months, bond funds have had net inflows of $214 billion, and equity funds have had net inflows of $10.5 billion, according to TrimTabs Investment Research. This bond inflow is twice as much new money as went into bond funds over the previous four years combined.

This is interesting insight into investor behaviour, as the major equity indices are up about 50% from their March 2009 lows. Keep in mind though, that this 50% increase is roughly 20% of the market highs in October 2007.

Fed Chair Bernanke said his numbers say the recession has ended. It is true that employment is a lagging indicator. Retail sales were up 2.7% in August, the biggest monthly increase in three years. Auto incentives, gas prices, and school shopping are credited with helping to spur sales.

Since the U.S. has put tariffs on Chinese tires, China is preparing to levy tariffs on U.S. chickens. There must be some good one-liners in this story somewhere.

In economic news, the Producer Price Index was up 1.7% in August, and CPI was up 0.4%, both larger than expected. Business inventories were down 0.1% in July, the eleventh consecutive monthly decrease, which means someone will need to start making something soon. Industrial production was up 0.8% in August, the first increase since December 2007. New home construction was up 1.5% in August, which is a move in the right direction.

Boston Consulting Group recently predicted that worldwide wealth wouldn’t return to 2007 levels until 2013. They also found the number of millionaires down 18%. According to David Kelly, chief economist at JP Morgan, the stock market, on average, moves 0.81% daily. During the fourth quarter of 2008, average daily volatility was 3.7%.

Many investors over the last two years have been reassessing how and whether they work with financial advisors. What is unclear to many investors is the business relationship between themselves, the advisor, and the advisor’s employer.
Many financial advisors today work for large brokerage or insurance firms. As an agent for and representative of these firms, their first responsibility is to move the products of the firm for whom they work.

The determining criteria for whether consumers should buy a particular product from an agent or rep is called “suitability”. If, based on the information the rep collects from the consumer, the product is suitable, then the consumer can buy, and the rep can sell, the investment or insurance product. The relationship remains, for the most part, a customer/sales person relationship, and in every case of which I’m aware, these reps cannot serve as fiduciaries.

Consumers’ ability to receive from this rep or agent unbiased financial counsel is completely dependent on the rep. For many reps and agents, the lure of substantial commissions makes it easy to rationalize recommendations that serve them first and consumers second. The good news is that there are solid, independent reps in the marketplace that do serve their clients well.

A much smaller group of advisors serve as fiduciaries. These advisors, and their firms, are regulated by the SEC and individual states, though under a different Act of Congress than registered reps. Those firms and individuals who serve as fiduciaries have sworn to always place the client’s interest ahead of their own, and they accept no commissions on the sale of products. All revenue at these firms comes from clients.

Culturally and structurally, fee-only fiduciary firms look more like other professional service firms, such as law, accounting, and engineering, than they do product sales organizations. We have found that the only way to provide completely unbiased, objective, independent advice and counsel is to be a fee-only firm that serves our clients as fiduciaries.

Quote of the week:

“One man with courage makes a majority.”
President Andrew Jackson

Corp vs Personal Tax Rates

2009-09-16T12:47:00.000-04:00

EQUITY INDICES CONTINUED their advance, as all three major indices were up. By the numbers, for the week ended Friday, September 11, 2009, the Dow Jones Industrial Average closed at 9605, up 164 points, or 1.7%. The Standard & Poor’s 500 closed at 1042, up 26 points, or 2.6%, and the NASDAQ closed at 2080, up 62 points, or 3.1%.

Commentators of every stripe have offered opinions about the direction of, and long and short term outlook for, the stock market. Gary Shilling is still calling for an S&P 500 of 600 by year-end. Others are suggesting the S&P 500 will end the year north of 1200.

Mark Sunshine recently suggested that the five major Wall Street firms needed to have the S&P 500 close up 10% for the year. Mark said solid returns for 09 were one way these firms could encourage trillions of dollars from the sidelines to return to the market. Much of their profitability depends on trading commissions from these currently dormant dollars, so they have a vested interest in stock prices going up.

Sir John Templeton, when asked by a reporter for his observations about the market, simply said “The market goes up, and the market goes down”.

In a recent speech before a joint session of Congress, President Obama endorsed a government run insurance plan. Steve Jobs has returned to Apple, starting with an appearance at a product event. GM is selling a majority interest in its European Opel and Vauxhall operations. Cadbury is in play, with Kraft in the hunt to make the purchase.

FedEx said first quarter profit will exceed guidance, thanks to better than anticipated international volume, lower fuel bills, and cost containment. FedEx CFO Alan Graf said demand deterioration has slowed, and that earnings for the quarter should be $0.58, compared to expectations of $0.43.

According to the Bureau of Labor Statistics (BLS), about 15 million people are out of work, with 5 million having been unemployed for six months or more. Employment opportunities abound in government services, education, and energy, though location matters. The current geographic hotspot is Washington DC, not that this is news. The federales expect to add 273,000 jobs in the next three years. Other cities that have a good openings-to-seekers ratio include Jacksonville, Salt Lake and New York City, Boston, Austin, and Oklahoma City. This according to Bao Ong, writing for Marketwatch.

Congress is hard at work, looking for new and creative ways to pick your pocket. One tax detail expected to pass – we will no longer be able to use flex spending and other such accounts to pay for over the counter medicines. Thankfully, the IRS has lost a Tax Court battle that attacked transfers of interests in one-person LLC’s. The IRS has chosen to delay imposing a seven-year recovery period for investment in ethanol plants, allowing investors to use a five-year recovery for any property placed in service before the ruling.

If you are a business owner, you would do well to watch the maximum income tax rates. It is very likely that the personal federal income tax rate will soon be close to 40%, plus a variety of surtaxes for high income earners. With the current corporate tax rate at 35%, it may make sense to use a regular corporation for business purposes. This is especially true if tax considerations play a major role in determining corporate structure.

The IRS is looking for informants to help identify those who are getting the health insurance subsidy and shouldn’t be. The IRS is also tapping state and local real estate transfer records to identify those who don’t pay gift taxes, but should be. This brings to mind images of brown shirts and black vans. Wouldn’t a national sales tax be simpler? Good grief.

States are using Facebook and MySpace to identify tax evaders. The IRS will most likely join in if the states are successful. If you are bored with downloading music onto your iPod, you can switch to tax updates, offered by the IRS.

It seems to me that at the end of the day, perhaps the biggest need is for each of us to maintain consistency and faithfulness. We can apply this to our thinking, our business and personal activities, and our relationships. Uncertainty is all around us, though often hidden when times appear to be especially good. Commitment to a cause, a person, a reason for being, that supersedes the circumstances of life, and our own needs, may allow us to have an impact, and make a difference, far beyond the span of our lives.

Quote of the week:

“When you were born, you cried, and the word rejoiced. Live your life in such a way that when you die, the world cries, and you rejoice.”
Anonymous

Thomas Jefferson

2009-09-08T16:38:00.000-04:00

OVER THE LAST THREE weeks, since our last commentary, the major equity indices have moved up slightly. By the numbers, for the week ended Friday, September 4, 2009, the Dow Jones Industrial Average closed at 9441, up 120 points, or 1.3%. The Standard & Poor’s 500 closed at 1016, up 12 points, or 1.2%, and the NASDAQ closed at 2018, up 33 points, or 1.7%.

The Shanghai stock market continued its volatility, with daily swings of 5% to 7%. Non-farm payrolls fell by 216,000, bringing the official unemployment rate to 9.7%, a 26 year high. The Federal Reserve is confident that the steep economic downturn is over, but they have no idea what the future looks like. At least they admit it.

The European Central Bank kept interest rates at 1%. ECB president Jean-Claude Trichet says the worst is over, but sees only a “very gradual recovery”. Retail sales were off 2% in August. Discounters Costco and BJ’s posted sales increases, Gap and Banana Republic fared worse than expected, while Old Navy posted a sales increase. Aeropostale recorded a 9% sales increase, and Abercrombie saw a 29% sales decline, according to recent reports at Marketwatch.

Walt Disney is buying Marvel Entertainment, and EBay is selling Skype. According to reports, the Pension Benefit Guaranty Corporation, or PBGC, is running a $33.5 billion deficit. This should worry taxpayers more than retirees.

Digging into the employment report, there were 63,000 jobs lost in the manufacturing sector. April 2006 was the last month that there was a job increase in manufacturing. Education and healthcare added 52,000 jobs in August, which is no surprise, given that these two industries are funded primarily through taxes. Non-farm productivity jumped 6.6%, while unit labor costs dropped by 5.9%.

In his Saturday radio address, President Obama suggested four new initiatives that he hoped would improve savings. First was automatic enrollment in employer sponsored retirement plans. This means it would take action on the part of the employee not to participate. Second was the ability to receive tax refunds in the form of savings bonds, sort of like the scrip issued by mining companies in years past. Third was the ability for employers, with employee consent, to contribute unused vacation and overtime pay to retirement accounts. The fourth was the government’s printing of a guide to job changes and retirement plans. Steps one through three may be good ideas, unless Washington nationalizes the country’s retirement plan system.

According to the FDIC, as of the second quarter of 2009, the number of banks on the “problem list” stood at 400, compared to less than 100 during the first quarter of 2008, according to Bob LeClair’s newsletter. Boeing is now promising to fly the 787 before the end of 2009, with initial deliveries by the end of 2010.

On the tax front, 401(k) plan fiduciaries aren’t liable for losses on employer’s stock. This ruling came in district court, in the Lingis vs Motorola case, according to Kiplinger’s Tax Letter. Michigan employers can expect a 2009 FUTA rate of 1.1%, compared to 0.8% in most other states. Indiana and South Carolina will most likely see FUTA rate increases in 2010. According to a New Jersey District Court, settlements of job bias cases are taxable, even to the extent of being hit with payroll taxes.

Firms have until October 15 to elect to carry back a 2008 net operating loss for five years instead of two. This break applies only to those companies with $15 million or less in revenue.

If you tapped a home equity line for business use, then borrowed against it again for personal use, such that the total exceeded $100,000, your interest deduction would generally be capped. According to a Private Letter Ruling by the IRS, you can claim the business portion as a business loan instead of mortgage debt, and deduct the interest as business interest. This could allow the personal debt interest to be fully deductible. You make this election by attaching a statement to your tax return.

If you’ve read this far, I’d be interested in your input. From either personal experience, or from watching others, share with me what it takes to bounce back from defeat. What did you do? What was your mindset? Did you do certain things, read certain books, change the scenery, take a sabbatical, change careers or businesses? These stories are fascinating in a good way, as they display the strength and resiliency of the human spirit. I’ll not reference these stories without your express permission. Thanks for sharing.

Quotes of the week:

“The natural progression of things is for liberty to yield, and government to gain ground.”

“To compel a man to furnish funds for the propagation of ideas he disbelieves and abhors is sinful and tyrannical.”

“What country can preserve its liberties if its rulers are not warned from time to time that their people preserve the spirit of resistance?”
Thomas Jefferson

Healthcare & Taxes

2009-08-19T10:35:00.000-04:00

FOR THE FIRST TIME IN five weeks, the major indices took a break. By the numbers, for the week ended Friday, August 14, 2009, the Dow Jones Industrial Average closed at 9321, down 49 points, or 0.5%. The Standard & Poor’s 500 closed at 1004, down 6 points, or 0.6%, and the NASDAQ Composite closed at 1985, down 15 points, or 0.7%.

The Open Market Committee of the Federal Reserve decided to make no changes to interest rates this last week. The Fed did say it would slow its purchases of long term treasuries, and allow the purchase program to expire in October. The Chinese markets have backed off some over concern about tightening credit.

Both Germany and France reported GDP growth in the second quarter. Overall, Eurozone GDP contraction was 0.1% during the second quarter, compared to an expected contraction of 0.4%.

Nestle reported a 3% drop in first half profit, missed its sales forecast, and withdrew its annual revenue target. Kraft forecast a 4% growth in revenue for the year and raised its profit target, while Unilever reported a 4.1% growth in second quarter sales.

CIT is now effectively under government control, apparently needing permission for something as basic as going to lunch. The International Energy Agency hiked its 2009 and 2010 consumption forecast, citing growing demand in Asia, and in particular China. In spite of this, demand is expected to be about 3% lower in 2009 than in 2008.

GM said its new Chevy Volt should get 230 MPG in the city. Sounds like one of those cars you put on instead of get in. The solar energy industry is now awash in modules and cells, bringing the price of products and installation services down. This shift in supply and demand has happened in part because Spain, which accounted for 50% of all solar installations worldwide last year, cut its solar subsidy.

If you are a commercial or residential tenant, this may be a good time to negotiate a new lease. Landlords seem to be amenable to working with you, as they prefer some cash flow to no cash flow. Speaking of which, cash flow beats assets every day of the week. Have you ever tried to pay for groceries with the title to your home, or pay your electric bill with the title to your car?

The administration may be getting the message – Americans don’t want federales controlling delivery of healthcare. Stay tuned for more on this very emotional issue.

On the tax front, according to Kiplinger’s Tax Letter, the IRS has ruled, in a PLR, that all gain realized on metals ETFs is taxed as ordinary income. For IRAs, a different interpretation, as long as the IRA is held by an independent trustee. This means you can own metals ETFs in your IRA without running afoul of the collectibles rules. As a refresher, IRAs can own just about anything except life insurance, shares of Sub-S corporation stock, and collectibles. If you are a client of CAG, your IRA is held by an independent trustee.

In other tax news, open-air parking structures must be depreciated over 39 years. An Appeals Court has upheld the three year statue of limitations on the IRS’ ability to go after misstated returns. Timber owners who enroll in the federal Forest Health Protection Program can get cost sharing payments that cover up to 75% of the cost of implementing a pest control plan.

In a PLR, the IRS let a couple with several rental properties have time to elect to treat them as a single entity, helping them avoid passive loss rules. This in the case of real estate professionals, who are those who work at least 750 hours a year in the real estate business, and are materially involved as landlord, broker, or developer.

UBS values its business in the US to the extent that it is rolling over for the IRS. As many as 150 families may face charges.

The top 1% of all tax filers paid 40.4% of all federal income taxes in 2007, up from about 29% 20 years ago. These taxpayers reported just 22.8% of all income. The highest 5% paid 60.6% of all federal income taxes, while reporting 37.4% of all AGI. The bottom 50% of all filers paid just 2.9% of the total income tax bill. Just more evidence that the wealthy don’t pay enough in taxes. www.fairtax.org.

According to Russ Alan Prince, in his book “The Influence of Affluence”, Steve Bell of Seattle had a solid business as a subcontractor, building out dentist’s offices. That is, until the general contractor was arrested for cocaine distribution. Steve was left with more than $100,000 in debt to a vendors and subcontractors. His attorney recommended bankruptcy. Instead, Steve went to his creditors, promised to pay them all, and went to work. Six years later, all debts are paid, and Steve has a thriving kitchen and bath remodeling business, complete with showroom.

Quote of the week:

“Every adversity, every failure, every heartache, carries with it the seed of an equal or greater benefit.”
Napoleon Hill

Ogilvy's Creativity

2009-08-12T12:45:00.001-04:00

ONCE AGAIN, THE MAJOR EQUITY indices closed up. By the numbers, for the week ended Friday, August 7, 2009, the Dow Jones Industrial Average closed at 9370, up 199 points, or 2.2%. The Standard & Poor’s 500 closed at 1010, up 23 points, or 2.3%, and the NASDAQ Composite closed at 2000, up 22 points, or 1.4%.

Both the NASDAQ Composite and the S&P 500 broke new technical barriers, closing above 2000 and 1000 respectively. You can find a variety of opinions as to what that means. On the employment front, July job losses retreated, reaching their lowest level since August 2008, bringing the official unemployment rate to 9.4%.

Retailers had a tough July, with sales down pretty much across the board. Auto dealers enjoyed a robust month, thanks to the CARS program, with Ford reporting its first sales increase in two years. Mark Muller, of Max Motors in Butler, Missouri had to withdraw his offer of a free AK47 with each new car purchase. He ran out of cars.

Google CEO Eric Schmidt is leaving Apple’s board. The Institute for Supply Management indices for July for manufacturing and service sectors were still below fifty, though they have been increasing.

It’s been ten years since the passing of David Ogilvy, recognized as one of the premier creative minds of the 20th century. His thinking was behind such notable campaigns as Dove soap being marketed as 25% cleansing cream. His advice for building and running a business included:

§ Remember the old Scottish motto: “Be happy while you’re living, for you are a long time dead”.
§ If you have to reduce company payroll, do so only after you have cut your own compensation, and that of your other officers.
§ Define your corporate culture and principles in writing. Don’t delegate this to a committee. There are no statues to committees.
§ Stop cutting the quality of your products in search of bigger margins. The consumer always notices – and punishes you.
§ Never spend money on advertising which does not sell.
§ Bear in mind that the consumer is not a moron. She is your wife. Do not insult her intelligence.

Ken Cage of Philadelphia is having a banner year. His firm, International Recovery and Remarketing, repossesses planes, boats, and RV’s. According to Ken, the company’s 500 repos in 2008 were triple the previous two years combined. His company is set to double the 2008 number this year. Most owners don’t contest his presence, as they are aware of the situation. Of course, Ken and his team must find the asset without tipping off the owner, as many owners would hide the plane or boat.

Quote of the week:

“Some see private enterprise as a predatory target to be shot, others as a cow to be milked, but few are those who see it as a sturdy horse pulling the wagon.”
Winston Churchill

QALY

2009-08-06T11:31:00.001-04:00

ONCE AGAIN, THE EQUITY MARKETS added gains. By the numbers, for the week ended Friday, July 31, 2009, the Dow Jones Industrial Average closed at 9171, up 78 points, or 0.9%. The Standard & Poor’s 500 closed at 987, up 18 points, or 0.8%, and the NASDAQ Composite closed at 1978, up 13 points, or 0.6%.

Microsoft and Yahoo have agreed to join forces to take on Google, which should make for an interesting fight over market share. The major oil companies reported lower earnings, with year over year demand down, and supplies at nineteen year highs. U.S. home prices rose in May for the first time in three years. Alcatel-Lucent reported a second quarter profit, it’s first since the companies joined forces in 2006.

On the tax front, its more of the same, with Congress toying with surtaxes. Several proposals are being offered, with a three tiered approach being favored by the House. Under this Robin Hood scheme, singles and joint filers with AGI’s above the $280K/$350K mark would pay an extra 1%, filers with AGI’s above $400K/$500K would pay an extra 1.5%, and filers with AGI’s above $800K/$1 million would pay an extra 5.4%. By the way, Robin Hood was a common criminal. www.fairtax.org.

For those of you in California who have been issued IOU’s instead of tax refunds or payment for services – good news. Interest on the IOU’s is tax free, according to the IRS. These IOU’s are treated as muni’s for tax purposes.

According to Kiplinger’s Tax Letter, random audits of S corporations have been profitable for the IRS. Areas of noncompliance targeted for future scrutiny include travel costs, meals and entertainment, car and truck expenses, and taking profits as dividends instead of salary, among others. The war on capitalism continues. Once again, www.fairtax.org.

The IRS can seize health savings accounts for back taxes. In a private letter ruling, the agency says the IRS has power to attach these assets. Even worse, these distributions will be subject to income tax, and a tax penalty. Next up, the little black van.

Millions of words have been spoken and written about the administration’s proposed national health care plan. In lieu of opinion, let’s look at what is actually proposed under the plan. Based on several analyses of the plan which we have read, here are some highlights.

According to Dr. David Janda, the healthcare plan is based on rationing and denying care. A National Health Care Board will oversee the plan. The plan mandates the creation of Federal Coordinating Council For Comparative Effectiveness Research. One of this Council’s goals will be to “slow the development of new medications and technologies in order to reduce costs”.

Doctors and hospitals will be overseen by The National Coordinator For Health Information and Technology. This coordinator, or its employees, will “monitor treatments being delivered to make sure doctors and hospitals are strictly following government guidelines that are deemed appropriate”. “Doctors and hospitals not adhering to guidelines will face penalties.” According to those in Congress, penalties could include large six figure fines and imprisonment.

According to Section 102 of the plan, “Protecting the Choice to Keep Current Coverage”, it will be illegal to maintain private insurance when someone changes jobs, retires, or at similar life events. According to Section 1233, “Advanced Care Planning”, Americans over age 65 will be required to go to mandated counseling, the goal of which is to help end life sooner.

QALYs, or Quality Adjusted Life Years, have been discussed in medical journals and circles for decades. America’s Affordable Health Choices Act of 2009, the national healthcare plan, would adopt QALYs as a standard by which to gauge whether someone is deserving of treatment. In effect, reducing life to a quantitative analysis. If you can make an economic contribution, and your treatment won’t unduly burden the system, you get treatment. If you no longer make an economic contribution, or the cost of your treatment outweighs your potential economic benefit, your needs and treatment are ignored or denied – put on the back burner. To make a very gruesome comparison, isn’t that what Hitler did, with a very sadistic racist twist?

If you would like supporting documentation for these comments, or a link to the entire 1018 page document, you are welcome to email us, and we will forward it to you.

It was a pleasure to watch 59 year old Tom Watson make a run for the British Open title. When 30 year olds win, we stand in awe. Tom inspires us, gives us confidence that we too, though our body creaks from time to time, can still charge the hill.

Quote of the week:

“All that is necessary for evil to triumph is for good men to do nothing.”
Edmund Burke

Health Options

2009-07-30T14:07:00.000-04:00

THE WALL OF WORRY HAS continued to provide comfortable climbing for the major equity indices. By the numbers, for the week ended Friday, July 24, 2009, the Dow Jones Industrial Average closed at 9093, up 350 points, or 4%. The Standard & Poor’s 500 closed at 979, up 39 points, or 4.1%, and the NASDAQ Composite closed at 1965, up 79 points, or 4.2%.

The administration is in full court press mode on national health insurance. An interesting group of folks, including Blue Dog democrats, and some Republicans, are offering alternatives. One of the more divisive proposals in the national health plan is a public plan option, which would put the government in competition with private insurers.

Starbucks and home builders shares are up, Microsoft shares are down, as companies continue to report earnings. According to a report released by Ryanair, two-thirds of airline passengers would stand on short flights, if they could fly free. 42% would stand if they could fly for half price.

The price/earnings ratio of the S&P 500 is about 14.3, near long term averages. If we take into account some of the large write-offs in the financial sector over the last year, it’s possible to suggest a P/E of closer to 50. Many who study the economy and financial markets suggest that a P/E in line with historical norms is reflective of a generally healthy economy, and growing corporate earnings. At the moment, both of these are in serious question.

As of last Friday, 189 of the S&P 500 have reported earnings. Of those, 77% have exceeded analyst’s estimates. Some estimates were for profits, others were for losses. This according to Bob LeClair, writing for Leimberg Information Services.

Our friends in Washington are looking at using the tax code as an enforcement tool, not just a fundraising tool. The plan is to make folks buy basic coverage, and have employers offer insurance, or face a big penalty. Key lawmakers in both House and Senate agree that this is the way to go, according to the Kiplinger Tax Letter.

House Democrats prefer an 8% excise tax on payroll of companies that fail to fund at least 65% of the insurance premium for an employee’s family coverage, with corporate payrolls of less than $250,000 exempt. The Senate prefers a flat fee tax of $750 for full time and $375 for part time employees for firms that don’t pay at least 60% of employee premiums for basic coverage, with exemptions for firms with fewer than 25 employees.

With this headlong rush toward socialized medicine, and exemptions for small employers, look for creativity. We see free market business owners looking for ways to maintain control over multiple entities. The goal will be to employ few enough people in each entity to stay under the qualifying limit, maintain enough control to run the businesses effectively, and give up enough ownership to avoid common control issues.

Our family is exploring health care options. For the last few years, we have been covered under my wife’s employer plan. As of August 1st, our costs are tripling, to more than $600 monthly. One option I’m exploring is MediShare. MediShare is a membership organization that gives members the opportunity to share medical expenses. It does not offer insurance. As I’ve studied the way it works, it reminds me to some degree of the fraternal organizations so common in the 19th and early 20th centuries. If you are interested, you can find out more at www.medi-share.org.

In a big win for taxpayers owning interests in LLCs and LLPs, the Tax Court has ruled that losses from these entities aren’t necessarily presumed to be passive, as the IRS has argued. In Garnett, 132 TC No. 19, the Tax Court rejected the theory that taxpayers must classify all LLC and LLP losses as passive, allowing taxpayers to show that they materially participated in the business of the entity. At stake is the difference between losses taken against all income, versus losses taken against only passive income.

Charitable trusts that purchase securities on margin may be subject to UBTI. Any income from securities purchased on margin will be subject to Unrelated Business Taxable Income Tax, according to Tax Court Memo 2009-145, and reported in Kiplinger’s.

Quote of the week:

“Hard work spotlights the character of people: some turn up their sleeves, some turn up their noses, and some don’t turn up at all.”
As submitted by my good friend and Marine, Bill Broughman

New Paternalists

2009-07-28T09:03:00.001-04:00

POSITIVE EARNINGS REPORTS lifted the major equity indices to a very solid week. By the numbers, for the week ended Friday, July 17, 2009, the Dow Jones Industrial Average closed at 8743, up 597 points, or 7.3%. The Standard & Poor’s 500 closed at 940, up 61 points, or 7%, and the NASDAQ Composite closed at 1886, up 130 points, or 7.4%.

Earnings season is in full swing. Goldman reported earnings of $3.44 billion on revenue of $13.8 billion. The supporting cast includes a $10 billion federal aid package, which has been repaid, and friends in high places. Goldman has set aside 48% of this revenue, or $6.6 billion, as a bonus pool for employees for 2009.

Except for the $1.45 billion fine that European federales extracted from Intel, the chip company would have earned $1 billion on revenue of $8 billion in the first quarter. Google reported earnings of $1.87 billion on revenue of $5.52 billion. Bank of America earned $3.2 billion on revenue of $16 billion, though there were write downs due to derivatives liabilities and other challenges.

Dell, Nokia, and Ericsson all reported difficult quarters in what has become a commodity business for each of these companies. CenturyTel has become the country’s fourth largest telecomm company. It started life in 1930 as a small local carrier in Louisiana.

Everyone has an opinion as to the direction of the market and the economy. Ron Muhlenkamp, of the fund with the same name, has suggested that the worst is behind us, although the definition of future growth will be entirely different than it has been in the past. Ron’s thought is that the wild card is tax rates, and their effect on the incentive to work and to hire employees. Regarding taxes and work incentives, I have to agree with Ron.

Others would suggest that the current momentum is running on fumes, and a major adjustment is on its way. Economist Gary Shilling is suggesting an S&P 500 of 600 by year end. What to believe? There is merit to the thought that we should be wise as serpents and harmless as doves.

At the moment, insider selling is substantially higher than insider buying, with selling exceeding buying in May by a multiple of 22. I question the quality of earnings posted by all the large financial institutions. At some point, the debt load of governments around the world will have to be accounted for, with higher taxes, service reductions, or inflation that makes the 70’s seem tame.

Mario Rizzo, an associate economics professor at NYU, in a June 2007 Forbes article, suggested that some economists have become New Paternalists. According to Rizzo, these economists support ideas such as automatic enrollment in your company’s 401k plan, or a fat tax on junk foods to help us avoid junk food. The New Paternalist thinking is that these ideas are good for you, and actions you would take anyway, if you were thinking clearly and logically. The underlying assumption in the proposals of New Paternalists is the claim that they know what people really want. Do they?
Dallas Willard said that the history of God and man is God’s consistent desire to give man power and authority, and man consistently unable to live up to the task.

Hiking Boots

2009-07-15T08:33:00.003-04:00

SUMMER VACATION APPEARS to have set in on Wall Street, as the major indices backed off for a second week. By the numbers, for the week ended Friday, July 10, 2009, the Dow Jones Industrial Average closed at 8146, down 134 points, or 1.6%. The Standard & Poor’s 500 closed at 879, down 17 points, or 1.9%, and the NASDAQ Composite closed at 1756, down 40 points, or 2.2%.

U.S. market regulators are moving toward regulating the trading of oil and commodities, primarily to control price volatility. Stay tuned for more on this effort. Oil dropped below $60 per barrel this week. The price of a barrel of oil jumped from $3 to $12 during the 1973 Arab oil embargo, giving OPEC for the first time a taste of its control over oil prices. The price of a barrel of oil peaked at about $37 in 1981, dropping to about $12 in 1998, before starting its journey north again. In 2008, oil peaked at about $150 before settling back to its current $60 range. Our thanks to the WTRG Energy Economist Newsletter for this update.

The administration has reiterated its support of national health care, following comments by an administration staffer. The SEC has ruled that the paper sold recently by California is securities, and not obligations of the state of California. This gives the federales an out when California comes to Washington for a handout.

The Institute for Supply Management reported that its service index for June was 47. Any index below 50 represents a business contraction. GM is emerging from bankruptcy, with questions still surrounding the status of GM stock and bond holders. It will be interesting to see how Government Motors fares as an enterprise.

According to Bob LeClair, last week’s oil distillates report showed inventory levels at their highest in almost 25 years. US demand for gasoline, diesel, and heating oil is off 12% from the same period last year. Will the price of oil go to $30 or $300 in the next twelve months?

California leads the country for states in financial crisis, and is expecting a $53 billion budget deficit, representing more than 50% of its budget, for FY 2010, according to the Financial Times. To see how other states are faring, go to www.ft.com/usstatedeficit. According to this report, only Montana, Oregon, and North Dakota have no deficit.

US representatives Henry Waxman and Ed Markey have sponsored the American Clean Energy and Security Act of 2009, the cap-and-trade bill. This bill, already passed by the House, would cap carbon emissions, and set goals for percentage utilization of renewable energy.

According to Randall Pugh, president of Jackson EMC in Northeast Georgia, the provisions of this cap-and-trade bill will raise the cost of living of an average household by $1600. The renewable energy provision requires power companies to produce at least 6% of their power from renewable resources by 2012, and 20% by 2025. Power companies that fail this test will be taxed at the rate of $.025 per kWh above 4 billion kWh used annually. For Jackson EMC, this would have been a tax penalty of $25 million in 2008, all of which would be passed on to EMC members.

According to testimony by EPA administrator Lisa Jackson, given in congressional hearings, the cap-and-trade bill will have no material impact on CO2 concentrations unless all regions and countries of the world participate. A recent study by MIT came to the same conclusion. China and India have both made it clear that they will not participate in emission-reduction targets or schemes. In fact, China went so far as to suggest that they view carbon tariffs as a violation of WTO rules.

Peter Limmer has been making boots in an 18th Century barn in Intervale, NH, for many of his 53 years, a fourth generation bootmaker. 200 pairs a year, by hand, with one assistant in the shop. The waiting list for a pair of Limmer boots is two years, with a $50 reservation fee to join the list. Peter prefers that you come in for a fitting. You can find out more at http://www.limmercustomboot.com/.

US authorities are eyeing North Korea as the source of the cyber attack that overwhelmed government websites in the US and South Korea. San Francisco Mayor Gavin Newsom has banned spending city money on bottled water, has mandated composting citywide, and has proposed mandates on healthier food. The administration is spending $18 million to redesign the http://www.recovery.gov/ website.

Finally, you can also find this commentary posted on our blog, www.centurionag.blogspot.com.

Quote of the week:

“I cannot always control what goes on outside. But I can always control what goes on inside.”
Wayne Dyer

Time for Action

2009-03-01T20:58:00.004-05:00

The last six months have been some of the most challenging in my career. The business hasn't suffered greatly, although it has changed how people are making decisions at the moment.

What's been tough is attempting to ascertain what's going on, what will happen in the next six to twenty four months, allay clients' concerns, and offer considered counsel. That process has taken every bit of energy, gifts, talent, experience, and education I have had.

Along the way, we watched the decision makers at the top levels of government, including executive, legislative, and regulatory, as well as the C-Suite across the largest financial institutions, absolutely rape and pillage the American consumer.

The credit lockup, the markets meltdown, and the shrinking economy created fear that I have not seen in my life time. Looking back on it, I was apparently attempting to assuage this fear on the part of others, with no real insight to offer. This led to all kinds of stress, as well as substantial anger at the perps.

Along the way, we watched the American voter elect a president with no governing experience, who apparently cannot speak without a teleprompter, and who is by far the most liberal president ever put in office. His record would fit better in mid-20th century Russia than in America.

He is suggesting that we tax and spend ourselves into prosperity, a business plan that hasn't worked in the first six thousand years of human history. He has total disregard for lives unborn, complete lack of understanding, or disregard for, our American heritage, and ties to Arabs that frankly, confirm the fact that he is Arab first, and American second.

How on the face of God's green earth do we address this myriad of issues? First, we can be at peace, with the peace from God that passes all understanding, since God is the one in charge. For guidance on what to do next, it is instructive to look back to the story of Gideon.

I'll not repeat the story here. You can find it for yourself starting in Judges 6. In short, when Israel was being repeatedly brutalized by the Midianites, and they called to God for relief, God sent an angel to visit Gideon, a young farmer working for his father.

This angel addressed the young man with "Hail, you mighty man of valor". When Gideon expressed fear about his country's situation, what did God tell him to do? "Go, in your power, and save your country." Look it up, its in there.

Friends, there are certain attributes that have made America great. These include faith, family, freedom, duty, honor, loyalty, commitment, entreprenuership, rule of law, personal responsibility, and charity. Our greatness comes from our willingness to live by law, recognizing that all law comes from the ultimate law giver. That is what has made our constitutional republic work. These can be summed up as those three pillars of economic opportunity, religious liberty, and political freedom.

Historically, we have been able to keep much of the fruit of our labor. We have also been generous, as individuals and organizations, seeing as part of our responsibility the caring for those who are less fortunate, or who suffer.

We have allowed any who choose to come, and who want to be productive, to migrate to America, and to enjoy this wonderful way of life. Historically, these immigrants wanted to be Americans. They wanted to assimilate into the dominant culture. Across all cultures beats a heart for freedom, the desire for a better way of life, the casting off of a caste system, the privilege of worshipping God as each saw fit. America has been that city setting on a hill, casting its golden glow around the world.

That country, dear ones, is under attack. No longer do those who migrate here necessarily want to be Americans, or assimilate into the dominant culture. Yes, this culture had a Judeo-Christian heritage, and the holding of those teachings as the highest and best to strive for is what made America great.

There are those in our country who detest America's leadership, who believe we should look more like Europe, or who simply want to live with no personal restraint.

We have a choice, and I pray we are not too late. We must do more than simply vote every time we have the opportunity. We must make our voices heard, through the editorial page, by running for elective office, by being involved with time and money with those who are running for office, and any other way we can find to restore America to its greatness.

This is a great task, a life's work, an honorable calling. It is a fight worth fighting for. Along the way, we will have much opportunity to answer the question of why we are fighting. We can share the good news that we are on a mission to not only to save our country, but to create a platform that will allow us to ultimately share the best news of all - Unto you a King is born, a Saviour is given.

Now is the time, this is the place. Like the angel told Gideon, "Go, and save your country".

Until next time...

March Lion

2009-03-01T20:01:00.004-05:00

March has arrived in Georgia like a lion, so according to Poor Richard's Almanac, it should go out like a lamb. Last week, we were enjoying sunshine, blue skies, and temps near 70 - you know, the reason you live in North Georgia.

The weather cats were telling us that the rain which started Friday would continue through the weekend, and that the temperature would drop. In addition, they suggested that we could expect one to two inches of snow.

Having lived here for 23 years, we took the weather dude's predictions about snow with a grain or three of salt. Well, about noon, the rain turned to snow. Sounds like that New Year's Eve song, but it's true.

Our son Justin will be 28 Tuesday, which apparently puts me firmly in middle age. Since between Justin and Courtney, and Teresa and myself, we have four full-time jobs, we decided to celebrate today. This celebration took us to brunch at Wahoo, a restaurant in Decatur. You can check it out at www.wahoogrilldecatur.com. It's a nifty little place, with serious shrimp and grits.

The restaurant is in an older brick building that has been restored, and backs up to a courtyard that is shared by the other buildings on the block. For the hour or so we were there, we enjoyed looking out the window at a beautiful snowfall. Since the temp was about 35 degrees, the snow was wet, and the flakes were big, making for a very scenic courtyard.

Later this evening, we talked with our daughter, who lives with her family less than ten minutes from Justin's home. She said they had about four inches of snow, and that she and our granddaughter Scarlett had a great time this afternoon playing in the snow and building a snowman.

The weather dude's are telling us that overnite lows will be 20 degrees, so we look forward to watching the crazies run off in the ditch on their way to work tomorrow. Maybe we should send a blast email, suggesting they google Black Ice.

Ok, enough of this rambling. Until next time...

Octuplets

2009-02-07T09:17:00.003-05:00

Miss Nadya Suleman has apparently given birth to eight, or octuplets. According to news reports, she is single and has six children. Reactions to the news have been all over the place.

Here's a thought. The last time I checked, America was still a free country. Of course, this may well change once Comrades Pelosi, Reid, Obama, and Soros finish their handiwork.

If Miss Nadya wants to have 14 children, or 24 children, or whatever, let her go for it. However, if Miss Nadya expects the city, state, or federal government to step in with benefits, whether food stamps, or free housing or education, or whatever kind of foolishness these mushy brained liberals can come up with, then the old girl needs to learn to keep a dime between her knees.

In fact, in the 21st century, there are fairly simple surgical procedures that can allow her to avoid getting pregnant, while still enjoying the God-designed process.

Some of these whiners, who have taken their outrage to an art form, have bought into the lie that one of our major problems in this world is overpopulation. This is absolutely not true. One of the major problems we do have is the amount of so-called free money misguided government types are prepared to throw at people who they deem to be disadvantaged, because so some sense of misplaced guilt, or because throwing other people's money is easier than actually caring.

What the whiners and those with fake outrage need to do is chill the hey out. What Miss Nadya needs to do is be sure she doesn't plan to lie sideways in the government trough, like so many inside the beltway enjoy doing. If diaper companies, or book and movie types want to support her or send her large checks, let them do it. That's the way a free market or capitalist economy works.

Whether Miss N ends up with nothing or large sums of money, she still has 14 children to get to adulthood. Her willingness and ability to do that will tell the tale of what the last 20 or 30 years of her life will look like.

Until next time...

Randy

Social Media Question

2009-02-07T09:03:00.003-05:00

My standard line, which frankly has mold on it at this point, is that I graduated from high school with a slide rule. Being somewhat geeky, I thought I was a state of the art tech head.

As we wrap up the first decade of the new century, I find that most folks under the age of 35 have not only not seen a slide rule, many have never heard the phrase.

So what? Well, it seems I've spent the last 35 years running fast to keep up with technology, and it keeps running faster. 2009 is the year I've decided to learn the language and protocols of social media, as I believe it can be a most excellent tool and communication method.

This morning, I've been doing some reading and research, and have questions. How do I arrange my settings on my blog so I can show other blogs or websites that I like? How can I arrange the settings to allow others to show my blog, or forward its content to others? How does Google reader work? How do I arrange the settings so that when I send an email to my distribution list, and ask those folks to become fans and readers of the blog, they can actually do that?

Is there a tutorial for all this? Are there folks I can hire to help? Surely its not too complicated.

Thanks for your input.

Until next time...

Randy

Comp Caps

2009-02-04T19:05:00.000-05:00

It's a sad day in America, and speaks poorly of how far we have fallen, when the president of our great country must impose pay caps on corporate leaders. Since they have chosen not to be self-governing, either before or after the bailout, this most likely was a necessary step to protect America's interest in these companies.

How do we teach our children well, in the words of that old ballad? How do we engage with life, work, and the world around us so that the generations coming behind us will appreciate life, be encouraged to build wealth, yet understand the responsibility that both wealth and power bring?

To be sure, these creative folks at the companies that are experiencing the caps will find ways to take care of the executive suite that doesn't violate the letter of the law. At the same time, what they create in the form of benefits for these decision makers will surely blow the intent of this presidential action to kingdom come.

Until next time...

Randy

What Taxes?

2009-02-03T21:47:00.000-05:00

It appears that Obama has the same gene pool to draw from as the rest of the world. That is, those fallen beings known as humans. Tim Geithner, who will be overseeing quite a few dollars in his new role, is unclear how the tax system works. Tom Daschle, a former Senator, decided on January 2, 2009 it was time to pay a buck or $140,000 in back taxes.

Reality makes for a tough meal, especially for those who saw a coronation or the Second Coming on January 20th. There will be more. It's just part of the system for those who choose to spend their lives laying sideways in the government trough.

As we have said before, and will say consistently, let's throw out the current tax system completely, terminate the IRS, and adopt the FairTax. When you tax a man's wages, he becomes your slave. For far too long, Americans have been slaves to the federales, at the mercy of our elected slavemasters.

Until next time...

Randy

Variable Annuity Wasteland

2009-02-01T17:07:00.000-05:00

One of the favorite products of many in the financial services community is the variable annuity. It is called an annuity because it offers annuitization, or income stream options, at some point in the future. The product is used as an accumulation vehicle during the annuity owner's earning years. One of the chief benefits of annuities in general is their ability to defer tax on gain until distribution. Finally, the variable annuity, or VA, allows the owner/investor to invest in the financial markets using mutual fund-like subaccounts.

At first glance, this is a nice starter package of benefits. Income options in the future, guaranteed by an insurance company, deferral of gain while the asset is growing, and the opportunity to participate in the financial markets makes for a wonderful story. In addition, the issuing carriers have upped the ante, primarily due to competition.

Many VA issuers provide guaranteed benefits in a couple of ways. One guarantee is an income guarantee. For example, if you deposit $100,000 in a VA contract, the issuing company might guarantee that regardless of whatever else happens, they will guarantee 5%, or $5000 per year, for your life. In some cases, they will extend this guarantee to your spouse as well. When this income starts, and whether and under what conditions it extends to a spouse, are contract specific benefits.

Another guarantee is a benefit step-up. With this benefit, the insurance company guarantees that the underlying value of your annuity will increase by a pre-determined percentage every few years. What the percentage is, and how many years between the step-up is again contract specific language.

These two benefits taken together, along with the standard VA benefits, make for a tantalizing package of benefits for many consumers. Whether the consumer has lost money in the market, doesn't have the temperament for investing in stocks, or simply has a long standing distrust of Wall Street doesn't matter. This combination of benefits, along with fear of the markets embraced by many consumers, has made for a target-rich environment for annuity sales reps, especially those selling VA's.

As a side note, those licensed to sell VA's, and in most states it takes both a securities and an insurance license to do so, are well compensated for their time. The gross commission, or in the broker-dealer world, the gross concession, can range from 3% to 5% at the low end, to 12% or 15% at the higher end. It is very common for the street level commission, or what's paid to the person sitting in front of you, to be 5% to 7% of the deposit. For a $100,000 deposit, that's a commission of $5000 to $7000.

Also, in case you are wondering, there is roughly a 1 to 1 relationship between street level commission and the number of years in the surrender charge. For example, if you are looking at a VA contract with a 7 year surrender charge, the street level commission is most likely about 7%.

Now, back to the company challenges. Insurance companies, in an effort to bring dollars in the door and to stay competitive, have continued to sweeten the benefit pie to both VA owners and VA sellers. So much so that in 2006, more than $184 billion was invested in VA's. In 2007, that number dropped to $160 billion, while sales of fixed annuities increased. At the end of 2007, there was more than $1.485 trillion invested in VA's.

Unless you have been on vacation in Siberia for the last eighteen months, you know that the stock market dropped in value by 35% to 45% in 2008, depending on which index you follow. Since most VA assets were invested in the stock market, the underlying values on the statements received by VA owners at the end of 2008 were substantially lower than they were at the end of 2007. Yet, because of the guarantees offered by insurance companies, the value available to contract owners hasn't necessarily dropped significantly.

The guaranteed values, and how they work, is specific to the contract and the company. However, it is safe to say that the issuing companies have more in liabilities than the contracts have in assets to support those liabilities. What I expect to see, over the next two to five years, are some of the largest insurance companies in the world going to their respective governments for handouts, because they have made promises they can't keep.

The top ten writers of VA business in 2007 were TIAA-CREF, RiverSource (Ameriprise), Jackson National, John Hancock, VALIC, Pacific Life, Skandia, MetLife, and Hartford. These companies, along with AXA Equitable and Allianz, have traditionally led the market in VA sales.

If you have questions, our recommendation would be to contact the company directly, talk to your selling agent, or better yet, find someone who can give you unbiased counsel about your situation.

Until next time....

Randy

Joseph Everitt Gates

2009-01-29T23:02:00.001-05:00

This evening we take a break from the usual outing of mushy brained thinkers for a little personal news.

Just before 11pm on Wednesday, January 28th, our second grandchild, and first grandson, was born. He showed up in most excellent health, wasting no time discovering America once he clued his mother in that he was ready.

At 20 inches, he was about the length of his older sister when she was born, but outweighed her by over a pound, tipping the scales at 7 lbs 13 oz. He arrived with the full complement of parts, and all systems appear to be working as designed.

Speaking of which, what is this totally lunatic idea that humans morphed from amoebas? Where did that mushy brained idea come from?

Back to the grandson. I am grateful that we have been given this most excellent gift, for the blessing he will be to the world, and to parents who are committed to rearing a son after God's own heart.

Until next time...

Randy

Zero Population Growth?

2009-01-28T20:56:00.001-05:00

Some in our culture are suggesting that too many children are being born, as new children create a drain on society's resources. The proposed solution is fewer children. Whether this encouragement would come by way of the bully pulpit, or fines via legislation as in China, or even death as per partial-birth abortion is yet unknown.

The challenge is that the entire premise is hogwash and foolishness. The first part of the foolishness is the assumption that new mouths to feed are an expense to the government. They should not be, and if they are, it is purely a result of misguided charity. This misguided charity comes in the form of government programs that may mean well, but missunderstand completely human behaviour.

Moving on, a call for fewer children flies in the face of the way healthy, growing economies operate. The cultures that are dying in this world, including Japan, Western Europe, and to some degree Scandinavia, are those cultures where the birth rate hovers just over 1. The average age of the population is moving through the 30's, and toward the 40's. The natives, who have become relatively affluent, aren't reproducing, but are slowly dying off.

These cultures are being overrun by immigrants, many of them Muslim, who have large families and are changing the nature and culture of these societies. Even Japan, which for centuries has been extremely Japan-centric and abhorred immigrants, is importing Latinos from South and Central America to work in its factories.

An older population absorbs substantial government services, with very little relative production. Large families, on the other hand, provide an impetus for guys to focus on someone besides themselves. Government policy, properly structured, would encourage the formation and longevity of large nuclear families. These children are wonderful consumers, and provide encouragement for the parents to be tax paying producers.

These children are also those who will solve many of the problems we continue to face as a world. They will be consumers of diapers, baby food, pre-schools, hulahoops, iPods, tennis shoes, college educations, new homes, and the list goes on and on. Without a healthy, young, and growing population, a nation and culture begin to die.

The one saving grace of America is the number of immigrants, primarily Latino, who inhabit our country, legally and otherwise. On the immigration issue, we need to allow only legal immigrants, who come to the US to pay taxes, produce, start businesses, have families, and learn English. If they don't want to do these things, they can stay home. However, many immigrants from Latin countries and around the world want to do these things. For those that do, let's open the doors, encourage them to come, and bring their children with them.

It is only with the repopulation of our country with the young that we will stay young, vibrant, and financially healthy as a country.

Until next time...

Randy

What Does It Look Like?

2009-01-27T16:38:00.000-05:00

The strength of America lies in four principles, namely:

1. A small federal government

2. Personal responsibility

3. A culture of life

4. Fiscal responsibility

These four principles, built around the pillars of economic opportunity, religious liberty, and political freedom, have made America the leader of the world, and the envy of most of the world.

Where are we today? In the last twelve to eighteen months, we have watched as those who were given the option of self government threw off the restraints that came with this responsibility, destroyed trillions of dollars of customer and shareholder wealth, gave themselves bonuses to secure their future, and then had the absolute gall to show up in our nation's capitol asking for a handout. With no shame, no integrity, no regret. What happened to personal honor, courage, commitment, duty, perseverance, others above self?

Our congressional leaders, if they can be called that, willingly sold our grandchildren under the guise of saving large employers, when in reality they were attempting to lock in the votes of the employees, and secure future campaign funding. Their behaviour is no surprise. We have long had the best politicians money can buy.

The Detroit auto show was just that. All the posturing, the penitence on the part of the CEO's, was merely grandstanding for the benefit of the electorate.

We now have a $10 trillion national debt and growing, what appears to be a $1 to $2 trillion deficit for each of the next couple of years, elected officials across the political sprectrum with jelly for backbones, and a voting populace who has willingly traded freedom for the vague promises of change and security. Churchill was right. He who would trade freedom for security will have neither.

What does the future look like?

1. National health care within the next five years. This means that if you want meaningful, top quality health care, get out your checkbook. If the system our federales put in place doesn't allow a private pay system, be ready to explore medical tourism, and see Asia in the process.

1. National auto industry. This will be reminiscent of Ladas and Volgas, until the entire industry is shut down. This only after Washington invests $100 billion or more.

2. National banking system. The downside is that the federales could nationalize your money. The question then becomes where do you hold financial assets in a way that provides some personal security?

4. Higher personal income taxes. The tax rate will drop to zero for those with less than $50,000 of income. It will increase steadily and quickly, reaching top rates of 90%, with most households above the $50,000 threshold paying 60% or more of their income in taxes to support the system. There will tax credits for those earning $30,000 or less, giving them a standard of living equal to those earning $100,000 annually.

5. Devaluation of the dollar due to inflation caused by the uncontrolled printing of money.

Is there hope in any of this? Yes, there is. It will take real leaders, who are willing to sacrifice themselves for the sake of the idea that is America. Can this happen? Absolutely. Who will answer the call?

Until next time...

Randy

Born Free - Taxed to Death

2009-01-25T15:58:00.000-05:00

We have this federal tax system that punishes productivity and capitalism, and rewards sloth and debt. No wonder the world is upside down.

If you have two jobs to help put one of the children, or a part of the extended family, through college or graduate school, you risk throwing yourself into a higher tax bracket.

Bust a gut building a business, foregoing a really cool life for years or decades, and once you reach a meaningful level of profitability, you have the opportunity to hand large parts of your productivity to the federales in the form of income taxes. States and local municipalities get in on the action as well.

Stay at it long enough, and you can learn how to convert income into a meaningful asset base. If you learn enough, get good at making decisions and getting good counsel, and live long enough, you will have something to pass along to the next generation. Except the tax man shows up with his hand out, wanting a part of your estate when you die. The federales really don't want stock in your business, or acres of your farmland. They want cash. So...you gotta figure out how to convert those assets to cash.

Now, the insurance industry has figured out how to help with this, which is all well and good. However, Judge Learned Hand, in the late 19th century, suggested that when you tax a man's income, he becomes your slave.

In America, we have become a nation of slaves and serfs, as we have quietly allowed the politicians and bureaucrats to extract through payroll deduction large portions of our income. It is crucial that we remove ourselves from this slavery, and in fact abolish the IRS.

It is time in America for the FairTax. The idea is one of a consumption tax. We must do away with taxes on earned income, taxes on unearned income of all sorts, and taxes on assets, both individual and corporate. One proposal for a consumption tax would have that tax set at somewhat north of 20% of the price of the item sold. My suggestion is that we set the national tax at 8%.

Two reasons for the 8%. First, an 8% national sales tax keeps the number in single digits. Second, there is absolutely no reason to give Congress an equal amount of revenue as they now have to squander. They must be put on a fiscal diet, and learn to allocate within the dollars we as taxpayers are willing to give them.

Check out www.fairtax.org, and choose to be involved.

Until next time...

Randy

That Planning Thing

2009-01-23T17:36:00.000-05:00

Planning, whether you are discussing life, business, relationships, your future, a vacation, the purchase of a home, can be straightforward. In its most basic form, it is determining what you want, why you want it, and then determining how you will go about getting it.

Speaking of the markets, and how they relate to the financial side of life, any number of prognosticators have offered their observations about the market's 2008 performance, or lack thereof. The question is whether and how the market's performance had an impact, good or bad, on your ability to live out the future you have chosen for yourself.

The presuppositions here are that you have invested time in determining what your future looks like, and that you believe you have a choice. If you believe you have no choice regarding your future, then there is no reason to make plans to create that picture in your mind.

If you believe you have a choice, and have made no plans, perhaps making those plans isn't important to you. While not an option I'd choose, it is certainly an option that is open to you.

If you believe you have a choice, and have made plans for the future, my guess is that the important questions don't really concern market performance, or event how your financial statement or investments fared. The real question is whether, as a result of what has happened, you will need to change your plans.

If you have achieved financial independence, will you need to alter your lifestyle? If you are working your way toward financial independence, will you need to change the target date, or the amount of money you are setting aside, or both? These are the material questions, and ones you probably want to answer.

Market performance only matters in the context of how it helps you, or keeps from helping you, reach your goals, and live out the future you have pictured in your mind.

Until next week...

Randy

Where To From Here?

2009-01-22T21:01:00.000-05:00

This blog has been sporadic at best, over the last nine months. From this point, we intend to be diligent in posting daily. This forum will be used to discuss financial, economic, and political news in a way that offers insight and suggests meaningful questions.

On a regular basis, there will also be technical details we cover. You are welcome to respond and post comments. You are more than welcome to promote this blog to your circle of acquaintances if you find it of value.

Here are three things we can expect in 2009. First, a $2 trillion plus federal deficit for FY09. Second, the nationalization of whatever banks may be left standing. Third, the implosion of commercial real estate.

Am I right, wrong, or out to lunch?

Until next time...

Randy

2009-01-20T22:12:00.000-05:00

Inaguration Day has come, and is for the most part complete. While neither a coronation nor the Second Coming, it was certainly a historic event. Regardless of our political persuasion, President Obama is our president. As such, he is deserving of our prayers.

In the tradition of Reagan and JFK, he is an orator who inspires hope. Many Americans need hope just now, as their personal situations are tenuous at best. Unfortunately, many have no hope outside this short span of life we have been given.

Given the recent turmoil in the economy and the financial markets, both domestically and worldwide, President Obama has plenty to occupy his time. He has four years, and perhaps eight, during which to have an impact. I trust that he chooses to uplift the good and combat evil, both here and abroad, in a way that inspires people to both pursue the good, and to be self-governing.

The markets gave him a raw introduction today, with the Dow off more than 300 points. Asian markets were in free fall Wednesday, and the next eighteen hours will tell us what the markets will deliver as a followup to Tuesday.

Until next time...

Randy

Welcome to 2009

2009-01-19T16:25:00.000-05:00

Welcome to 2009! We trust you are prepared for a year of abundance and prosperity.

Washington is working furiously to shore up our financial system, although we expect the worst is yet to come. Commercial real estate is next. That will be followed by those insurance companies who are heavy in variable annuity assets. These companies have made promises and guarantees that will difficult to support in the current environment.

The incoming administration has its hands full. There is of course, the question of whether any administration or sitting Congress can actually solve the fundamental problems in our system. I suspect those issues will need to be addressed one household at a time.

In spite of that, each of us can take action concerning our personal economy, and make 2009 our personal best year ever.

Until next time...

Randy

National Finance

2008-09-21T18:42:00.000-04:00

The federales have stepped in to save the lifestyles of their buds that run the large investment houses. In the process, they have nationalized the financial services entity. That's the first obvious one, with the rest of the country to follow.

There has been more than a close working relationship between the military and the industries that provide the parts and equipment to them for decades. While there needs to be some knowledge of the military system by the suppliers to that system, there is no doubt every opportunity to abuse the system for personal benefit. This raises the bar very high, if in fact the goal is to watch out for the government's interest first.

The same could most likely be said about the financial services industry. Many who serve in the highest ranks of government oversight of the financial services industry are floaters. They float between government service, the executive suite of the largest investment and financial firms, and the top spots in academia. This rotation develops friendships and business relationships that last decades.

One of the challenges is simply that its tough to hold your friends and professional acquaintances to account. This type of arrangement isn't new, nor is it unique to the financial industry.

There is more than enough blame to go around in terms of who is responsible for the meltdown. Loose money from the Greenspan era, mortgage and real estate brokers who are incented to maximize the size of the deal, federal encouragement to make bad loans, the aforementioned financial entities making billions by packaging junk, and selling it in the market, potential homeowners desparate to own a home, and the list goes on.

Yes, there are all sorts of parties and reasons to blame in this. However, nationalization of the industry is not the solution, nor is it the answer. Yes, it will allow those at the top of the food chain to retain their lifestyle, and their home in the Hamptons. And, with a federal bailout, it will defer the costs of fixing the problem for a decade or two. It may well allow quite a few people to keep their jobs, and provide for some stability in their 401k's.

But is that the goal? It appears we have made an incredibly costly trade. We have chosen to sacrifice the connection between decision and consequence on the altar of perceived safety and security. Those who made the decisions that led to the meltdown, as well as those watching, have learned one thing. That is, they can make poor decisions, and if those decisions have a negative affect on enough people, the taxpayers will bail them out.

Now we are faced with two challenges. One is the overt nationalization of our country, and the other is a long term reduction in the value of our enterprises. If companies are not allowed to fail, then poor to average decisionmakers will never have the opportunity to learn to make good decisions, and will move up through the ranks. These average decisions, allowed to happen because the government will step in and save the day, reduce the earning potential of the company, and ultimately reduce the value of the stock.

The challenge with nationalization is simply that a profit motive doesn't exist in a government environment. Governments are not producers, they are consumers. To this day, I have met no career government employees who have made a successful transition to a leadership position in the private sector.

Well, I could go on, but have probably said enough on this topic.

Until next time...

Randy

Domestic Tranquility

2008-09-13T05:42:00.000-04:00

In many parts of our great country, domestic tranquility is hard to come by. I'm not speaking of conversations between the adults in the house, but the uneasiness many feel concerning the economy.

It appears that we could be facing a form of perfect storm. The price of gasoline has risen dramatically in the last two years, settling in at just under $4 a gallon. Housing inventory exceeds demand, interesting lending practices over the last few years have dried up liquidity for borrowers, and the adjustable rates used so frequently just two or three years ago are adjusting. In addition, the affected industries, construction and autos, and their supporting industries, continue to shed jobs.

Those so-called homeowners with adjustable rates have been putting discretionary dollars in the gas tank, hitting two sectors fairly hard - department stores and non-profits. Consumers are flocking to Wal-Mart and Costco instead of Penneys and Sears. Some of the adjustable rates have begun adjusting, with the majority of them set to adjust beginning in January of 09. We expect the foreclosures to continue to rise.

Given all this, we don't expect 2009 to be much prettier than 2008, and the economic conditions could worsen before they improve. Is there any good news in this?

Well, some of the larger companies on the planet are setting up shop in America. In spite of our current challenges, America is still the world's largest consumer economy, with the best trained workers, and the best legal and physical infrastructure of any country in the world. Every day, it seems, we are reading of a new company that has selected a town or city in America as the place for its next manufacturing facility. I expect this trend to continue, and not just because of the relative weakness of the dollar.

For those who depend on jobs for their livelihood, which is most of America, this would be an ideal time to learn people, leadership, and management skills, so they are prepared for promotions. For those who depend on technical skills, retraining is the word for the day.

For those who have other forms of income, such as business ownership, cash, as always, is precious, and is king. Those who have depended on debt to support their lifestyle are already in trouble.

What are the opportunities? For those with cash, the challenge will be separating the good opportunities from the great opportunities. Also, many of us will have the opportunity to give of our time, money, and energy to those who have been hit hard by this perfect storm.

Until next time...

Randy

Palin & Company

2008-09-11T08:29:00.000-04:00

Well, McCain certainly hit a hot button with Sarah Palin. She has moved, in the space of a few weeks, from a relative unknown to political center stage. We will know within 60 days whether McCain's decision paid off.

The Democrats still have no real idea what to do in response to Palin's presence. Just about anything they say that's negative or derogatory has a backlash that just harms them. The traditional print and broadcast media are lost when it comes to explaining Palin and her family. They are certainly trying, but her American experience and their American experience might as well be from two different planets.

Palin has appeal to some part of the female vote that McCain didn't have. She and Todd are working together to parent five children, and soon a grandchild, and at the same time have an impact beyond their family. Palin is certainly no wallflower, as evidenced by her pasttimes and her comments at the convention.

She also appeals to the evangelical portion of the Republican party in a way that no one since Reagan has done. While it's mostly unspoken, there is an absolute determination among this base that Obama not be elected, and Palin has become the galvinizing force.

Finally, the Palin's appeal to the Reagan democrats, which in large part were the union members across the rust belt. Don't most guys relish winning some event like Todd Palin has done? They may not say it, but yes, they do.

So, let me make one prediction. The McCain/Palin ticket will win the popular vote by five to ten points, and will take about 350 electoral college votes. You may want to earmark this blog so you can come back and see if I am correct in my predictions.

Until next time...

Randy

Rambling

2008-08-19T19:44:00.000-04:00

According to folks that know, a blog needs to be updated about everyday in order to be read consistently. I'm sure I'll learn that lesson well as I continue to blog. According to my notes here, my last entry was on the 13th, when I was in Orlando.

On Thursday, Teresa and I headed to coastal North Carolina, for a long weekend at the beach. Part of the draw was the opportunity to interview a potential new client that wanted to sell his business, as well as some real estate he had accumulated.

At the moment, I haven't decided that we will add this gentleman as a client. However, Teresa and I had a good time. The weather was perfect. Some sun, some overcast skies, and plenty of time to sit in a chair at the beach and read. Everyone enjoys different things. We enjoy hours of quietness, given to reading.

We missed the little one, but did get to see her once we got home Sunday evening. Monday it was back in the saddle, riding off to rescue the world from all the vultures that would separate well meaning folks from their money.

So, how was your week?

Until next time,

Randy

Random Business

2008-08-13T07:01:00.000-04:00

It's common for business advisors and coaches to suggest that each year, business owners or CEO's should build a business plan. Often this is an activity that takes place in the September time frame, perhaps earlier or later depending on the size of the organization.

As a matter of business practice, we have done that for years. Included in the plan is a revenue target for the coming year. There is also a discourse on what activities we will engage in to develop new clients, as well as our estimates as to the source of the new clients.

What I find interesting is that we hit our revenue targets. However, when I review the source of the new business, it seldom comes from the sources we identified in the planning process. In many cases, the source of new business appears to be totally random.

That has happened again in 08. What we expect to be one of our larger clients came through a referral to someone I'd met six months earlier, and had a very pleasant conversation with. Over the course of almost 30 years in business, that type of conversation has occurred thousands of times. Why would this time be different?

Perhaps it would be nice to have some answer, or to identify some logic behind this randomness. On the other hand, does it matter? Maybe the best approach is simply gratefulness.

What is your experience?

Until next time,

Randy

Imagination and Work

2008-08-09T12:46:00.001-04:00

Earlier today, I was listening to an interview about how children play. The conversation got me to thinking about a couple of things.

Many of us may remember playing as children with a refrigerator box, or washer/dryer box. We could have fun all day, while the box served all kinds of purposes for us and our friends or siblings. The same thing could be said about branches, boards, bricks, blankets, and chairs. Take a few basic items you find inside or outside of the house, add a child's imagination, and you can create a terrific world.

My granddaughter has lots of toys, thanks to the pocketbook and determination of her granna. These include plastic stuff, as well as a good selection of books and CD's that help her learn. Overall, a decent selection.

The thought that crossed my mind is whether the toys that come designed for pre-determined use somehow inadvertantly limit creativity and imagination by prescribing uses for the toys based on their design. Could there be some benefit, or could we enhance the development of the imagination or creative side of the little ones, if we simply let them play with whatever was at hand, rather than the vast selection of toys at Wally World or ToysRUs? Of course, this strategy adopted enmasse wouldn't do much for the fortunes of Fisher-Price.

What about books and movies, in the same vein? Any number of books have been made into excellent movies. I've found one of the beauties of books is that as I read, I can develop the pictures of the scenes in my mind. Probably someone else reading the same book, would have somewhat different scenes in their mind.

When we see a movie, the producer has put their interpretation of the scene on the screen for us to see. Does this arbitrarily limit the use of the imagination by the viewer? Of course, Hollywood and authors won't stop creating movies from books simply because I believe movies dampen the imagination. The whole thing is food for thought, though.

In fact, I heard someone say one time that the mark of a good author was his or her ability to direct the imagination of the reader. That's well put.

Until next time...

Randy

Mass Transit

2008-08-04T20:54:00.000-04:00

Today I had the opportunity to travel to downtown Atlanta. Since I had an appointment in Buckhead, I decided to ride the local train, MARTA. MARTA offered a stop in downtown Atlanta, just a block from my meeting place.

After that meeting, I headed back to Buckhead, where I was able to exit the train just two blocks from a lunch meeting, and about the same distance from a 2pm meeting. After wrapping up a day of meetings, I was able to take the train back to my car, which had been parked most of the day, in the shade.

The total cost of transportation and parking for moving around different parts of the city was about $6. While there may have been some additional minutes used that wouldn't have been used otherwise, I wasn't impaired from using my phone. In fact, the train time gave opportunity to catch up on work that seems to sleep in my briefcase.

Compared to gas at $4 a gallon, and parking at $2 per hour, it wasn't a bad deal, overall. Interesting experiment that we may try again.

Until next time...

Randy

Quietness

2008-08-03T17:31:00.001-04:00

There is something special about a Sunday afternoon. Especially one of those days when the house is quiet.

Often, when the children were growing up, we would make a homemade meal for early afternoon, and invite a number of their friends over after church. This was always a big hit, as so few of their peers enjoyed home cooked food on a regular basis.

It was a treat for me as well, since Teresa is a master of the kitchen arts. Our son left for Tech, and our daughter for boarding school, in the fall of 99, and the house became fairly quiet. Sunday afternoons were sometimes used to run errands that didn't get taken care of during the rest of the week.

My favorite way to spend a Sunday afternoon is to simply read, maintain an unschedule, and take a nap. Some of those naps are 30 minutes, some have been two hours. Whatever their length, they speak to the fact that for this day, there are no appointments to get ready for, no deadlines to meet, and nothing pressing that can't be postponed.

Yes, there are occassional family get togethers, or other activities. However, both of us have found real value in simply a quiet, unscheduled day. The absolute best type of Sunday involves going absolutely nowhere, once we get home from church. We have recognized the wisdom of the six and one design that has been in place for centuries.

All of us need time and space away from things that occupy our mind and time the other six days a week. I have found myself more ready to engage, mentally more prepared, and looking forward to time with all my responsibilities, when I clear my calendar for rest and refreshment.

What about you?

Until next time...

Randy

Domestic Oil

2008-08-01T21:39:00.000-04:00

My good friend Michael Cross, an Alpharetta attorney, was kind enough to offer his thoughts about drilling for oil in the U.S. In his opinion, the USofA has a moral responsibility to drill for oil, on our territory. After reviewing his thoughts, I must say that I agree. Here are his thoughts about the issue, offered here with his permission.

The underlying assumptions are:

1. The actions undertaken by any society on our planet impacts our environment,

2. Large scale impacts to the environment in one area of the planet effect the environment in other areas,

3. Oil is a necessary ingredient for our present global society to function, and, regardless of the innovation that arises, will continue to be a necessary ingredient for the foreseeable future,

4. Those who drill for oil haphazardly and without exercising good stewardship foul the earth and impact the world,

5. Americans have the ability to drill more cleanly and efficiently than any other country in the world,

6. Americans care as much for the environment as the citizens of any other country in the world,

7. Those who urge America not to seek oil within her boundaries cause harm to those in other areas of the world that lack the ability or sensitivity to concerns of conservation thereby causing harm to the inhabitants of other areas,

8. Those most harmed by reckless oil exploration and extraction are those with limited means, who may have little means of protection,

9. If America engages in further oil exploration and extraction within her boundaries, fewer people in the world will be harmed by those who cannot, do not, and/or will not act as well as Americans do in the pursuit of oil extraction.

Given these assumptions, which I am inclined to do, then if Americans care about others in the world, it is our moral duty to engage in oil exploration and extraction so as not to cause undue harm to the oppressed.

Until next time...

Randy

Generations

2008-07-31T13:07:00.000-04:00

Until 1984, I had all four grandparents living, so I was well into my 20's when the first one passed. At that point, I was young, and totally focused on myself and my life. It never occurred to me that at some point, I would be the last generation standing.

Today, all four grandparents are gone. My parents are with us, but I see them aging. While my parents are in good health for being in their 70's, I watch as they slow down, and especially as their brothers and sisters age and pass.

It has occurred to me in the last couple of years that the time is not far away that I will be the oldest living generation. It's a different thought, as there has always been the sense of stability that comes from knowing that there is a generation ahead of you.

For many of us, the generations ahead of us provided an example to look to, in order to see how to live life, or how a marriage should work so it would last 60 or more years. By example, we were taught lessons about investing time in the succeeding generations, and how to give to others, regardless of the benefit to us.

Am I ready to step into that role?

Until next time...

Randy

What Would It Be Like?

2008-07-28T21:28:00.000-04:00

Over the weekend, I got $20 cash back from a purchase at the grocery store. I still marvel at the convenience. It was 1977 when I saw my first ATM, and it's only been the last ten years that the cardswiper at every retailer has become common.

Would our world work, and if so how, if we used only technology that was available in the 50's, or the 60's, or the 70's? What habits would we need to change? How would our work be different? What about communication?

It was definitely a different world. But the good old days? Well, perhaps for those unprepared for change. Most technology changes over the last thirty years have been improvements. LP's gave way to eight tracks, then cassettes, then CD's, then downloads. How sweet is that?

Communication went from letters to party lines to private lines to mobile phones to cells. In the not too distant future, we will be able to, if we choose, have a very small receiver implanted underneath our skin, and be able to communicate at will, on a handsfree basis.

What would be different in our world without our current technology? What will our world look like in the next ten years with developing technology?

You are welcome to share a thought.

Until next time...

Randy