Tuesday, November 30, 2010

At Last!

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

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

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

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

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

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

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

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

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

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

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

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

Quote of the week:

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