Thursday, September 24, 2009

Happiness Is. . .

"Happiness is," said a song that was popular when I was a girl, "different things to different people."

A few days ago, New York Times columnist Maurine Dowd noted that the General Social Survey, "which has tracked America's mood since 1972," found that men are getting happier and women are "getting gloomier." Ms. Dowd quotes Marcus Buckingham, a former Gallup researcher and current Huffington Post blogger, as noting that "women begin their lives more fulfilled than men, as they age, they gradually become less happy."

From the women of The View to moms on the playground, opinions about why this state of mid-life malaise abound.
  • Our lives are more crowded with our increased options of family, work, friends
  • Our biology makes us more sensitive, and therefore vulnerable
  • Our culture is youth obsessed, especially as it relates to women

Stretched too thin, feeling responsible for far too many things for time to allow, becoming less and less culturally attractive, who would NOT feel unhappy? In every discussion I've heard, reasons are many, but, as Ms. Dowd concludes, the answer is a paradox.

Perhaps. But, maybe our answer is the fact that we simply do not take time, individually and as a group, to address our unhappiness. Perhaps we have invested our time, energy and resources in others and have left ourselves feeling impoverished. As a person who has earned her living in advising others how to invest their wealth, I now wonder whether the same structure that one uses to develop a portfolio can address this problem. Here is a general example of how this process works.

  • What is your goal? In investment terms, the answer is a number. In life terms, the answer is your response to "What makes you happy?" Answering that question requires enough time to consider what it is that brings you true joy. It's much easier to say, "I don't have time to think about that," than "I don't know what makes me happy." The latter statement is a symptom of not having nurtured oneself. And, over time, that lack of nurturing will likely result in deep unhappiness.
  • What must you do to achieve your goal? In investment terms, this answer requires both sacrifice and risk. Sacrifice involves putting money aside for the future, and risk involves investing in assets which can, as we have all seen lately, fluctuate wildly in short term price, but, over the long term, earn more than inflation. In life terms, we must also be willing to make sacrifices and take risk to get what we want. We must develop a strategy to acquire those things that bring us great joy, whether they be experiences or self expression. We must surround ourselves with those who will help us, and rid ourselves of those who will not. We must cease to think of providing for ourselves as "selfish," and begin to treat ourselves as the valuable beings that we are.
  • What must you do to stay on course? In investment terms, this requires a minimum of an annual check-up to measure progress. In life terms, we must also constantly monitor our progress, and ensure that we do not allow ourselves to feel guilty, unappreciated, dismissed, or any other negative emotion about achieving what it is that we want.

By following this investment structure, we will find that our lives cannot become too crowded for ourselves, because we will filter out that which is not fulfilling our life goal. We will expand our sensitivity to ourselves by putting ourselves first, without a moment's thought that we are being selfish. We are merely nurturing ourselves in order that we can be more nurturing to others. Finally, we will dismiss any assertion that we are not attractive people. We will value ourselves much too highly to think we must look any certain way in order to be attractive. We will define ourselves by our own standards.

Then, we may give our daughters, nieces and young women friends the priceless gift of valuing themselves on their own terms. And, perhaps, like us, they will use their options to achieve happiness as they define it.

Friday, September 11, 2009

Health Care Reform Meets Financial Reform

I. Health Care Reform - and Insurance

In response to President Obama's Health Care Reform address this week to a joint session of Congress, the Cato Institute recommended that, in order to help achieve the goal of cost control in comprehensive health care, "(p)eople should be allowed to purchase health insurance across state lines," noting that "(o)ne study estimated that that adjustment alone could cover 17 million uninsured Americans without costing taxpayers a dime."

Unfortunately, the insurance industry is regulated on a State level, so such across-state-lines purchase of health insurance is currently not possible.

II. Financial Reform - and Insurance

As I mentioned recently in the first of a four part Financial Reform legislative review series, State regulation of insurance companies makes regulatory oversight very difficult. That difficulty in regulating this industry contributed in large part to the financial meltdown that began last year, and continues today.

III. Health Care Reform Meets Financial Reform - with Insurance

Insurance regulation is again brought to the forefront as we discuss means to achieving bi-partisan support for the adoption of comprehensive health care reform in the United States, just as it was when financial regulation was being discussed. And, as this reemerges, we find Morgan Stanley CEO John Mack, who guided that institution through the recent financial meltdown, saying:

"I'm somewhat disappointed that we've lost a little of the steam about getting financial reform. We do need system-risk management." Risk management, by the way, is just another way of saying 'insurance.'

These are complex times. There are complex domestic issues that require consideration on many fronts.

IV. Can We Do More Than One Thing At a Time?

It is not appropriate to say, "Since we've avoided the seizing up of the financial markets, now we can concentrate on health care." We cannot discuss the health care without discussing the insurance industry - and a large part of financial meltdown involved abuses from industry.

To date, no financial regulation reform has passed. Every US woman and man has a stake in this. It was with $180 billion of your money that insurance giant American International Group ("AIG") was bailed out, after having issued innumerable credit default swaps. What were those? They were unregulated promises by AIG to guarantee mortgage payments - for which they had no way of paying when the mortgages defaulted. In other words, AIG (and many others) collected fees for promises they made, but could not keep.

Thus, the insurance industry is at the heart of both the financial crisis and the health care debate. We must accept that both are critical components of our economic survival.

I have heard no compelling argument for keeping the insurance industry regulated at the State level. That is too complex from a regulatory perspective, and non-competitive from a health insurance perspective. Both sides of the political aisle seem to agree on that.

V. What Action Can You Take?

First, become acquainted with the issues. The administration's financial reform proposal is referenced and discussed at the link provided above in Section II. Whatever your opinion with respect to the version of health care legislation you support, it is likely, unless you own or lobby for an insurance company, that you support the free market competition that will result from the ability to purchase health insurance across state lines.

If you refer to Open Secrets, a non-partisan group referenced recently in an article by the Wall St. Journal you will see that the two top industries spending the highest number of lobbying dollars to influence legislation are:

  • Finance, Insurance & Real Estate $3.7 billion
  • Health $3.55 billion

Remember that your Congressional representatives work for you, not lobbyists, and that it is you who pays for their health insurance, which is likely far superior to yours. To voice your opinion on Federal regulation of the insurance industry, here is a list of your representatives, with their email addresses

As always, your comments and suggestions are most welcome.

Tuesday, September 8, 2009

How Much Will YOU Earn?

As I mentioned six days ago , I look to Standard & Poor's for earnings projections. I had mentioned that, in the next twelve months, projections for S&P 500 earnings are $48.67. Note that the next twelve months are September, 2009 - August, 2010.

Last Saturday, Barron's magazine published projections for 2010 by ten strategists, who charge dearly for their advice. These projections are for January, 2010 - December, 2010. Let's take a look.

I. Next Year's Earnings for the S&P 500

Since I'm writing this column, I'll go first.
  1. Standard & Poor's projects S&P 500 earnings to be $72.99 in 2010.
  2. The optimist of the Barron's group is Prudential International, which predicts $80 - 9.6% more than S&P.
  3. Three (BlackRock, Goldman Sachs and JP Morgan Chase) predict $75 - 2.75% more than the S&P.
  4. Two strategists (Deutsche Bank Private Wealth Management and Morgan Stanley Investment Management) predict $72 - 1.4% less than S&P.
  5. US Trust projects $70.50, and and RBC Capital Markets, $70 (about 3.5% - 4%) less than S&P.
  6. Citigroup predicts $68 - 6.8% less than S&P.
  7. Gloomy Barclay's Capital? $60 - almost 18% less than S&P.

So, one of the statistical methods you may have slept through in Stats Class, was to throw out the highest and lowest numbers and average the rest. Doing so gives us $72.19 - 1% difference between S&P's projection and that of esteemed (and expensive) strategists. That's not much.

II. The S&P 500 Index - Left Alone vs. Sliced Up

If you buy the S&P 500 Index, it looks like this:

  • Technology - 18.6%
  • Financials - 15%
  • Health Care - 13.5%
  • Energy - 11.7%
  • Consumer Staples - 11.6%
  • Industrial - 10%
  • Consumer Discretionary - 9.1%
  • Utilities - 3.8%
  • Materials - 3.4%
  • Telecommunications - 3.2%

Our esteemed strategists, on the other hand, want you to buy individual sectors of the index that look like this

  • Technology - 22.2% (3.6% more than the index)
  • Energy - 19.4% (7.7% more than the index)
  • Materials - 19.4% (7.7% more than the index)
  • Industrial - 16.7% (6.7% more than the index)
  • Financials - 13.9% (1.1% less than the index)
  • Health Care - 5.5% (8% less than the index)
  • Consumer Discretionary 2.8% (6.3% less than the index).

They don't want you to buy any

  • Consumer Staples (11.6% of the index)
  • Utilities (3.8% of the index), or
  • Telecommunications (3.2% of the index)

III. The Cost of Buying the S&P 500 Index vs A La Carte

So, basically, this is the deal. You'll be paying a big fat fee to strategists in order to slice up the sectors of the S&P 500, ignoring about 20% of it, and whittling the remaining 80% + up or down by an average of about 5%. They're suggesting that, by doing this, you will see earnings increases on your investments of an average of about 24.5% - less their big fat fee.

You'll pay nothing to me to recommend the S&P, which is predicting earnings increases of 34.5%. And neither S&P nor I care whether you buy or not.

Strategists, on the other hand, stake their livelihood on whether you pay them for their opinion.

Which do YOU think is the better deal? Just for fun, let's keep track of the difference between buying the S&P 500 index in 2010, and doing what strategists suggests throughout 2010. Then, we'll subtract their average big fat fee from their returns and nothing from mine, and see who wins.

It's one woman versus ten men. I'm comfortable with those odds.

Wednesday, September 2, 2009

Is the Stock Market Cheap?

If the answer were "yes" or "no", this would be a short column.
I don't write short columns.
First of all, we have to decide what we mean by "cheap".
I. Ancient History
Going back to the last quarter of 1936, you would have paid an average of $15.82 for every dollar of earnings for the Standard and Poor's 500 Index (more diverse than the better known Dow Jones Industrial Average, which consists of 30, as compared with 500 companies). That average price is the numerator (top number in the fraction) of the Price/Earnings, or P/E ratio. The denominator (bottom number in the fraction) is the amount the S&P 500 earns. So, the average P/E (or amount you pay for every dollar of earnings you're buying) has been 15.82
Last Friday, the S&P 500 average was $1028.93. That's the price. S&P projects the next twelve months' earnings to be $48.67.
1028.93/48.67 = 21.14 Right now, you're paying $21.14 for every dollar the S&P 500 is projected to earn for the next year. That's 25% more than the average price has been since 1936. So, using that measurement, no, the market is not cheap.
II. Last Year
A year ago last Friday, the S&P 500 average was 1282.83. Earnings over the last year were $33.60.
1282.83/33.60 = 38.18. $33.18 is 80% more than $21.14, so the market is a lot cheaper than it was last year. You may have heard something about this. The market is down a lot.
III. Forward vs. Trailing Earnings
Many of you are racing to your Wall St. Journals and saying, "Hey, Kitty, what gives? Their P/E ratio is different from yours!"
You're right.
Some financial publications do the math this way:
Right Now Price divided by Last Year's Earnings
I do my math like this:
Right Now Price divided by NEXT YEAR'S EARNINGS
Why do I do that? Last year's earning were earned by people who bought the market last year. When I talk about earnings, I am talking about now - not last year. I get my earnings projections from Standard & Poor's - not some Wall St. schlub who's trying to talk me into buying or selling. Standard & Poor's doesn't care if I buy or not, so I trust their projections more than I trust those who have a stake in how the answer looks.
My preference.
IV. Comparable Yields
The Federal Reserve, and a lot of other really smart people determine the value of the market by comparing it with what you'd get if you invested someplace else.
Since you're much too smart an investor to jump in and out of the market, paying short term capital gains taxes on all your sales, you are a long term investor. Short term investors don't belong in the stock market. Stock markets can correct, as you've seen recently, and short term investors can get their heads handed to them in corrections.
So, the long term investor compares the price they pay for the market to another long term investment - the 10 year Treasury Note. That's a loan to the US Treasury for that collection of deficits we've been running up lately.
The ten year Treasury Note is paying 3.48%. So, what is the market paying?
It's the reverse of the P/E, it's E/P. Again, the projected earnings are $48.67 and the market is trading at 1028.93.
48.67/1028.93 = 4.73%
4.73% is 26% more than the 3.48% Treasury Note yield, so your return on the stock market looks a lot better than your return on a 10 year bond. And it should.
Those stock market earnings aren't guaranteed. Something bad could happen. There's risk in the market. That's why you should get paid more.
But 26% more is pretty good under anybody's measurement.
V. So, is the market cheap?
Historically cheap? No
Cheap compared to last year? Yes
Cheap compared to comparable yields? Yes
More yes than no.
If this stuff were easy, everybody would be rich.

Tuesday, September 1, 2009

A September Snapshot

September 2009 looks much better than September 2008.
We've certainly heard everyone and her mother say we're climbing out of recession. Shall we take a look and see whether everyone is actually right?
For the purposes of comparison, we'll compare the data available thus far in 2009 with the full year of 2008.
I. Manufacturing
Industrial output has averaged 97.4 over the first seven months of this year, with July actually showing upward movement for the first time this year, probably due in large part to the "cash for clunkers" program. 2008 industrial output averaged 109.6, however, so we're still down over 11% year-over-year.
The percentage of manufacturing capacity we are using has averaged 69.4% this year through July. (Full capacity is generally thought to be 84%.) Last year's was 78.3%, so here again we're down over 11%. The good news, however, is that capacity utilization has been climbing upward for five straight months.
II. Gross Domestic Product
It is generally thought that an economy our size can grow at 2.8% per year at full employment without causing inflation. In 2007, the US economy grew at 2.5%. In 2008, our economy contracted by 1.8%. In the first two quarters of 2009, GDP was -6.4% and -1%, respectively. Most economists predict flat to 2% growth in the third quarter of this year.
III. Unemployment
Last July, we looked at historic unemployment data and saw that unemployment generally begins to improve about one year after a recession ends. 2008 unemployment levels averaged 5.76% and this year, 8.77%. We can conclude, based on these data, that unemployment will begin to improve in the third quarter of 2010.
2010, however, is a mid-term election year, and this issue has already begun to be politicized. For that reason, the current Congress may approve an additional stimulus package aimed at improving the unemployment outlook, and, in doing so, their re-election prospects. From a strictly economic perspective, this seemingly unnecessary expenditure, and additional deficit to be added to the burgeoning national debt, would seem to be a mistake.
But, I never underestimate the lengths to which our esteemed members of Congress will go to be re-elected, so I consider an additional stimulus to be a needless, but likely event.
IV. Consumer Confidence
As you have undoubtedly heard, 2/3 of US GDP is consumer spending. As you have undoubtedly experienced, consumers are somewhat less confident than they were before this recession. To validate your feelings, consumer confidence was 103.49 in 2007, 56.76 in 2008 and, thus far in 2009, is 39.89.
Before we assume that all is lost for any potential growth in GDP owing to our cautious consumers, please take a look at the often ignored export situation, discussed recently
Should the hypothesis that newly enriched emerging markets will spend their dough on our exports, we may have a growth engine that could replace our previous non-stop, debt-riddled spending spree with something more sustainable.
V. Inflation
From 1973 to 1995, inflation averaged 2.8%. Most economists believe that 2.5% inflation allows sustainable economic growth and full employment. In 2007, inflation averaged 2.87%. In 2007, inflation rose to 3.85%. This year, with falling energy prices due to lessening demand, as well as consumer entrenchment in nearly all categories, inflation is .33%.
This is undeniably good news, which, of course, I will turn into something scary. At no time in history has the government printed money to the extent it has now and NOT caused inflation. History tells us it is coming, but it's not here yet.
VI. Business Inventories
When businesses are humming along, inventories used to build up in anticipation of happy consumers. Those days are over, for two reasons. The first, and most obvious, is that consumers are scared. So scared, in fact, that they're SAVING money. Weird.
Second, businesses have gotten smart. They operate as close to a build on demand model as possible, i.e., they don't build your thingamabob until you order it.
That said, however, inventories have fallen by over 6% - after building up for six straight years. They are low, and falling. When demand does return, which I believe it will through exports, then inventory buildup will help boost economic growth.
VII. Conclusion
All these indicators are pointing positive. It's been so long since we've had good economic news, we hardly recognize it when it shows up, but there it is.
The worst is over. Let's hope we keep our heads on straight and stay the course without succumbing to political pressure that will cause us to make poor economic decisions.