Tuesday, December 15, 2009


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

Wednesday, December 9, 2009


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

Tuesday, November 17, 2009

Illness or Internal Terrorism?

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.”

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

Thursday, October 15, 2009

Who are you?

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

Wednesday, October 7, 2009

How Much is $1.6 Trillion?

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

Wednesday, September 30, 2009

Nuclear Toys

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.”

One Man With Courage

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

Wednesday, September 16, 2009

Corp vs Personal Tax Rates

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.”

Tuesday, September 8, 2009

Thomas Jefferson

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

Wednesday, August 19, 2009

Healthcare & Taxes

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

Wednesday, August 12, 2009

Ogilvy's Creativity

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

Thursday, August 6, 2009


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

Thursday, July 30, 2009

Health Options

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

Tuesday, July 28, 2009

New Paternalists

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.

Wednesday, July 15, 2009

Hiking Boots

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

Sunday, March 1, 2009

Time for Action

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

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...

Saturday, February 7, 2009


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...


Social Media Question

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...


Wednesday, February 4, 2009

Comp Caps

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...


Tuesday, February 3, 2009

What Taxes?

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...


Sunday, February 1, 2009

Variable Annuity Wasteland

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....


Thursday, January 29, 2009

Joseph Everitt Gates

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...


Wednesday, January 28, 2009

Zero Population Growth?

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...