Wednesday, July 27, 2011

Snail Mail or E-File?

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

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

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

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

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

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

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

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

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

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

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

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

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

Quote of the week:

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

Wednesday, July 6, 2011

Debt to GDP

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Quote of the week:

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