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

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 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

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 website.

Finally, you can also find this commentary posted on our blog,

Quote of the week:

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