Tuesday, March 30, 2010

Ty Murray on Life

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

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

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

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

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

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

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

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

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

Quotes of the week:

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

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

Thursday, March 18, 2010

Ed Justice

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

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

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

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

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

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

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

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

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

Quote of the week:

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

Wednesday, March 10, 2010

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

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

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

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

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

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

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

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

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

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

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

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

Quote of the week:

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