Financial Planning for Today's Woman

Double Secret Meeting

2011-12-22T08:32:00.000-08:00

Scene: December 22, 2011. Elite group of Republicans from the House of Representatives meet with the Speaker in a secure location.
Boehner: (sigh) This is like being in the 5th grade again. BO-ner. BO-ner. BO-ner. Kids can (suppressing a sob) be so cruel.
Elite male Republican One (an older, white, wealthy, slightly addled man from a Southern state): I'll tell you what is cruel, Mr. Speaker. It's cruel to prolong the suffering of the unemployed, son. Bless their hearts. Some people are meant to work, and some aren't. Why give them hope? Why prolong the agony? They'll never get a job. Most of them are too old. (Pause.) Not that there's anything wrong with that.
(Polite giggles.)
Elite male Republican Two (a young, impossibly well-groomed man from a state that reveres cowboys): Well, wisdom is what you get when you've been around as long as you have, sir. You've seen the laziness that's turned our hallowed halls into a place to argue about, what? Nutrition? Thank God we managed to define pizza as a vegetable. What are we, the nanny state? What does that make us, the nannies? Well, wipe your little noses, folks. This is the U S of A, and you eat what you kill. Take your assault rifles and shoot something for dinner. (singing) Da-vey, Da-vey Crockett, king of the wild frontier. . .
Elite female Republican One (a brunette, with captivating eyes): Congressman, ...
Elite male Republican One: Shut up, Michelle. Go run for President.
Boehner: We gotta get back to business. Who's for the two month extention?
Elite Republicans, together: Booooooo.
Elite male Republican Two: I miss Cain.
Boehner: Don't say McCain around me. Bastard. Thinks he's SO big, Mr. Senator, Presidential loser, telling us what do.
Elite Republican: Har-umph. What, what, etc.
Elite male Republican Two: I said Cain, not McCain.
Boehner: Don't argue with me. I'm the Speaker. (gulp) You're supposed to do what I say. I'm your leader. (Suppressing a sob). You're mean. I hate you guys.
Elite Republicans: (together) Aw, John. No. He didn't mean anything by that.

Two hours later.

Boehner: So what are the poll numbers?
Elite female Republican: Obama's surging. Newtie's crashing. Mitt's in a cult. Ron Paul is yammering on about something or other, and I can pray gay away. With the help of my (uh) husband.
Elite Republicans: (loud guffaws)
Boehner: Okay, than it's settled. We'll hide in here until Friday, go home for Christmas, and blame Obama.
Elite male Republican Two: That'll make him a shoe-in.
(Silence)
Elite Republicans: NEVER, NEVER say that out loud. If the anybody finds out we're double agents, they'll vote us out of office.
Elite male Republican Two: (contrite) I know. Hey, Michelle. You forgot to mention. We have a 9% approval rating, and they blame us for everything!
Elite Republicans: (together) Praise Baby Jesus!

What the Standard & Poor's Downgrade of US Debt Means to You

2011-08-07T19:21:00.000-07:00

You've probably heard that Standard & Poor's downgraded US debt. Even if you don't own a T-Bill, it's bad news for you. Even if you were a supporter of a reasonable approach to cutting US debt when your congressional representatives were not, you've been personally penalized by a company whose ability to assess risk has been shown to be sadly lacking.

The first part of your bad news is that US debt was downgraded by the same company that rated mortgage backed securities that were backed by dicey mortgages as AAA. Here's what that assessment means, in their own words.

'AAA' stress scenario.
An issuer or obligation rated 'AAA' should be able to withstand an extreme level of stress and still meet its financial
obligations. A historical example of such a scenario is the Great Depression in the U.S. . . .,(with) real GDP declined by 26.5%, . . .unemployment peaked at 24.9%, . . industrial production declined by 47% and home building dropped by 80%. . ., (t)he stock market dropped by 85% ...,(and) deflation of roughly 25%. . . .The 'AAA' stress scenario envisions a widespread collapse of consumer confidence. The financial system suffers major dislocations. Economic decline propagates around the globe.

Over a year ago, I discussed why investors' reliance on these ratings was a significant cause for the financial meltdown. Ratings agencies, unlike banks and insurance companies, however, bore little public blame for the catastrophic losses.

Now, how is a reasonable person to interpret what a downgrade on US debt from AAA to AA+ means? You saw what AAA means. Basically, Standard and Poor's assured mortgage backed securities investors that the issuers would pay interest to them even if there were a Depression. Oopsie.

That same company has now said it's possible that US Treasury bills notes and bonds may NOT be repaid even if there is a Depression. Considering the fact that Congress came within a day of default to agree on a repayment plan, the downgrade may not seem all that unreasonable.

But then, they are the company that gave a AAA to those pesky mortgage securities, aren't they?

That aside for the time being, Standard and Poor's has now rated US debt as AA+. Here is what a AA means. Remember, a AA+ is slightly better than this rating.

AA: An obligor rated 'AA' has very strong capacity to meet its financial commitments. It differs from the
highest-rated obligors only to a small degree.

'AA' stress scenario.
An issuer or obligation rated 'AA' should be able to withstand a severe level of stress and still meet its financial obligations. Such a scenario could include GDP declines of up to 15%, unemployment levels of up to 20%, and stock market declines of up to 70%.

Well, for starters, 2010 US GDP growth was 2.8%. The first six months of 2011, GDP growth has been .9%. By my calculations .9% is about 66% less than 2.8%, far worse than15%, and we're still paying. Unemployment is 9.1%. S&P thinks unemployment can double, and we'll keep paying. The stock market, as measured by the S&P 500 Index, dropped by about 50% from summer 2008 to early 2009. They think we'd keep paying if it had dropped 20% more than it did.

So, it was the THREAT of US debt default, not the inability to pay that caused this downgrade.

It's up to you whether you think it's appropriate for a ratings agency to consider political shenanigans as a reason to downgrade debt ratings.

But, back to you. Why do you care? You're not in DC.

With this downgrade, those who lend us money, like China, Japan, the UK and countries who export oil to us (in that order), can reasonably charge us more for those loans. After all, we threatened to default and one of our own ratings agencies said lending us money is riskier than it used to be.

That extra interest we pay is an added expense to our country, making the debt problem worse. And, with higher interest rates, people who buy houses, borrow money from banks, credit cards, etc., (all of us that don't live on a cash basis) will pay more, too.

All politics is local. Playing around with the debt ceiling is going to cost you.

So, if your representatives and senators voted against raising the debt ceiling, they are costing you real money. If they want to actually help you, ask them to use their influence to talk to Standard and Poor's about the wisdom of using politics to rate our debt.

The age of financial idiocy

2011-07-22T14:23:00.000-07:00

To discuss the current economic debate in this country may be seen as beyond the scope of a local financial writer. But, as Speaker Tip O'Neill wisely said, "All politics is local." That would, in my view, include all political debate about economics.
As we witness the inability of Congress to agree upon whether to raise the debt ceiling, the failure of which would, by estimates of The Economist, be approximately $86 billion, one wonders why our representatives would play Russian roulette with the financial good name of our country. In order to answer that question, we need only look in our own back yard.
I wrote recently about the fact that the Superintendent of Portland Public Schools, despite an unemployment rate of almost 9% and the worst recession since the Great Depression, said that it was her goal "to persuade voters to approve new construction until all the schools have received the overhauls the district says they need." She did not say that she would pull in her belt and approve what they truly needed, but issued a rubber stamp for everything that she thought they needed. It was as if she were living in different economic times than the rest of us.
On the day the City of Portland budget was adopted, I pointed out that 36% of our budget was spent to achieve equity for 14% of our citizens. Despite a dismal record of actually having improved the situation for the disenfranchised segment of our population, the budget allotted more money and added further layers of government to an already cumbersome and inefficient system, as its citizens struggle with a depressed housing and employment market. To justify these additional expenditures, the city relied on a study that concluded that fully 2/3 of our minority population experiences discrimination when looking for a place to rent, in spite of the fact that not one one of our city officials had read, or had access to the data, on which the decision to approve city housing appropriations was made.

When we tolerate such inept management of our local resources, why would we be surprised that national politians would behave differently? The lack of outrage expressed to those who caution against the potentially disasterous effect that failure to pay our bills would have upon our citizens, our services and those who lend us the money we spend, is consistent with the way we respond to our local politicans. Who is it among us that does not understand that, if we threaten not to repay our loan, our lenders will want to charge us more in the future?
The consequences of such unprecedented action will not be confined to Washington D.C. The cost of borrowing money, for everyone from the US Treasury to a small business that is trying to expand and hire new workers, will go up immediately. Those rising costs will damage employment, which is already tenuously improving after years of outsourcing and downsizing.
The question we should be asking ourselves is at what point did we find ourselves so entrenched in our ideologies that we cannot compromise? Does anyone except those who represent us really think that, in order to get out of debt, we must NOT cut expenses and raise taxes?
The people I know who are in debt certainly are trying to increase their income and cut their expenses. Why is this so difficult for those whom we elect to understand?
And, more importantly, why are we not telling them exactly how we feel about their reckless behavior?

The best job in Portland

2011-06-26T10:58:00.000-07:00

About a month ago, we raised the point that the $21,600 Portland Public School Superintendent Carole Smith paid to research firm Davis, Hibbits and Midghall was a waste of money. After all, that was the firm that advised the school board to inflate the recent school bond issue by $178 million, so all the schools would get something, whether they needed it or not. As the bond issue fell to defeat, I thought that perhaps the reason that the research firm made that recommendation was because they're making so much money to know that the rest of us are climbing out of the worst recession since The Great Depression.
Last week, while discussing the fact that the City of Portland spends 36% of its budget attempting to achieve equity for 14% of its citizens, I neglected to cite the findings of another study at the heart of the $88.5 million (over 90% of the money we spend to achieve equity) Portland Housing Bureau. City Commissioner Nick Fish substantiates this expenditure by citing a study revealing that 66% of our 14% minority population "face discrimination when they look for a place to rent in Portland."
That would put us on par with Mobile, Alabama in the early 1960s.
While Commissioner Fish finds this situation "appalling," I find the fact that the Commissioner refuses to make the study public more appalling. Basically, he's saying, "Believe me."
Is it because he's read the study? No. City officials paid $13,000 for the study, but have not actually read it.
Okay. He's not saying, "Believe me." He's saying, "Believe them."
"Them" is the Fair Housing Council of Oregon. Commissioner Fish has chosen not to ask for the study because that would, according to Willamette Week, "jeopardize its ability to do future audits by revealing its methods."
In summary, the city paid $13,000 for a study that is clearly statistically unsound with a conclusion that has been grossly exaggerated that has not been read by city management in order to justify spending $88.5 million of our $2.797 billion budget.
Do you want the best job in Portland?
Do research studies for the city. You don't have to be right and you don't have to show anyone your work All you have to do is conclude that the city should spend more money. And make sure and bill them for your work.

kittyok@earthlink.net

Portland budget to be adopted today

2011-06-16T07:20:00.000-07:00

The Portland City Council will adopt our new budget today on June 16. With a couple of candidates announcing their run for Mayor, this is a good time to see whether we agree with how our money is spent.

In this series, we’ll review the city budget and discuss one goal per article, whether that goal was achieved, and how much was spent on it.

The Numbers

The total budget is $2,797,348,621. It’s up $21 million, about ¾ of one percent, from last year.

Where we get the money

27% ($751 million) - money that was left after the city paid last year’s expenses (“Beginning Balance”)

20% ($574 million) - borrowed money (bonds)

19% ($520 million) - fees and service charges

16% ($452 million) - taxes

10% ($280 million) - paid to the city through government programs

6% ($154 million) - license and permits

2% ($66 million) - other sources

The amount the city is getting from other government programs is down considerably, as lower tax revenues have necessitated spending cuts during the economic slowdown.

Where we spend the money

Expenses are just over $1.7 billion

25% ($425 million) - Public Utilities (water and sewage)

24% ($423 million) - Public Safety (police, fire and emergency communications)

18% ($301 million) - Community Development (zoning, permits, erosion control)

13% ($229 million) - City Support Services (city attorney, management and finance)

12% ($217 million) - Transportation & Parking

6% ($113 million) - Parks, Recreation, & Culture

1% ($18 million) - Elected Officials

The remaining $1 billion of the budget is allocated to:

Contingency $626 million

Ending Fund Balance $ 68 million

Debt Service $416 million

Cash Transfers $592 million

Intra-city Transfers -$780 million

Economic Assumptions

Slow growth, low inflation and a stabilized housing market

This budget assumes that we will not fall back into recession, and that inflation will not grow uncontrollably. The city presumes that the economy and the revenues it produces will grow, but very slowly. Both national and local economic indicators support these assumptions, but if unforeseen circumstances cause either a recession or high inflation, money the city collects from revenues will fall short of this budget’s projections.

The budget assumes “some much needed stabilization of the local housing market by the summer of 2012.” According to the real estate Multiple Listing Service, both average and sales prices in Portland have recently improved from falling by 29% from 2007, to falling by 27%, in other words we’ve recently recouped 2% of the nearly 30% we’d fallen. To conclude that recent local data are a sign of stabilization in the coming year is premature, particularly since local property values fell in the later stages of the housing correction.

Robert Shiller, co-creator of the S&P/Case-Shiller Home Price Indices, stated on June 9, 2011, "Statisticians deal with things that repeat themselves. This housing boom and bust is so historic and unprecedented, you can't forecast the future because you have no comparison."

Therefore the risk that 2012 housing related revenues will fall short of budget projections is significant, since the basis for the anticipated housing recovery is anticipated is, at best, a “shot in the dark.”

Funding the library will be more expensive

A levy that provides some of the money used to operate the library expires next year. Portland property owners will be asked to renew the levy, which will cost more because interest rates are projected to rise. Virtually every reputable economist agrees that interest rates are likely to rise soon.

That extra interest (see Debt Service above) will probably increase city expenses by about $5 million. No library cost cutting plan to make up for this additional expense is currently in the budget.

Mayor’s Goals

In building this budget, the Mayor stated five key goals:

1. Return the City to full prosperity and invest in a stronger, more resilient City.

2. Help those hit hardest by the recession and provide support to the most vulnerable in our community.

3. Protect public safety services.

4. Increase the City's focus on equity to ensure that every Portlander has access to the most equal of opportunities.

5. Identify neighborhood nuisances and ensure more responsive City services.

Note that goals 2 and 4 are virtually identical. Since helping the vulnerable in our community is such a priority in this budget, we’ll start with examining how well we’re doing with achieving that goal, and how much we’re spending to do it.

Clearly, Portland is not a terribly diverse city. According to the US Census Bureau, as of 2000, the city of Portland is 78% white, 7% black, 7% Latino, 6% Asian and the rest American Indian and Pacific Islander. The non-white or Asian population is 16%. Achieving minority equity, the Mayor’s fourth stated goal, is laudable. Whether a new city office is the best way to achieve that goal is a debatable question.

New Program

The Office of Equity - $525 thousand

Mayor Adams intends to spend $525 thousand to create a new city agency to provide more equity for minorities.

How will this new department help?

Mayor Adams: “Well, we don’t know. So in terms of what is the Office of Equity going to do? Fundamentally, is figure out why Portlanders of color are actually seeing an increasing gap between white Portlanders, why that is and what we can do about it.”

Talk of the Office of Equity has prompted city commissioners to note that other city bureaus already address issues of fairness, equality and opportunity, and correctly so.

In addition to the $618 thousand that funds Office of Human Relations and Diversity Development and Affirmative Action Office, there is an additional $95.057 million in city funding that address minority inequity issues. They are:

1. The Portland Housing Bureau - $88.5 million. Organized on July 1 of last year, the PHB “continues efforts to synthesize programs, consolidate policy and investment approaches, and chart a new and forward-looking path.” In other words, so far, it is thinking up programs and making policy.

“As it continues to chart its path, it is emphasizing equity in its program investments. An emerging equity agenda recognizes the historic and institutional barriers to housing, homeownership, and economic stability experienced by communities of color. PHB seeks to place a greater reliance on community-validated data (such as the Coalition of Communities of Color report) to understand unmet needs, and to more intentionally hold its partners accountable for removing barriers to serving members of minority communities in greater numbers.”

In other words, when it does do something, it will try to promote economic stability and housing for minorities. Perhaps it can tell the Office of Equity how to do this. Better yet, if it does its job, there will be no need for the Office of Equity.

Here’s how the PHB spends its money. $6.8 million for the administration and support staff , $2.376 million for economic opportunity, $5.74 million for homeowner access and retention, $13.47 million for housing access and stabilization, and $60.1 million for housing production and preservation. Programs total $88.5 million.

As mentioned previously, both home median and sales prices are down 27% from 2007, and the Portland price to rent ratio is 22.41. A price-to-rent ratio over 21 indicates the cost of owning a home is far greater than renting. This fact places Portland as the fourth most expensive city in the US to buy versus rent. That is likely the greatest barrier to home ownership in the city, regardless of the minority status of the buyer.

2. The Office of Neighborhood Involvement - $3.9 million The ONI also has a goal of “expanding civic engagement – applying an equity lens. As Portland grows and becomes more diverse, ONI seeks to continue to expand involvement and bring additional people and communities into the public dialogue. The City has also recognized that historical efforts to involve under engaged groups (people of color, people with disabilities, renters, people with low income) in City initiatives have not been very effective. In exploring solutions to this problem, ONI supports the existing neighborhood system's efforts to engage all neighbors. The support is through small grants, outreach, leadership training, and technical assistance…”

The budget allocates $3.9 million to the Neighborhood Resource Center, while recognizing that its “efforts to engage under engaged groups have not been effective.” All programs by the ONI total over $7 million.

3. The Portland Development Commission - $1 million The PDC seeks to “… achieve Portland’s vision of a diverse, sustainable community with … quality jobs and housing for all.”

Under its “Partners for Economic Progress Initiative,” the budget allocates $242 thousand that will “focus primarily on 2-3 economically challenged business areas, outside of urban renewal areas used to seed small-scale neighborhood economic development projects identified and developed by the community.”

Under its “Small and Neighborhood Business Technical Assistance” program, the budget includes $600 thousand to fill gaps in business technical assistance services with a focus on stabilizing and growing small businesses with modest incomes, businesses located in economically challenged areas, and businesses whose owners may need services provided in languages other than English.” This funding will provide “tailored business technical assistance to 100 targeted businesses.”

Under its “Economic Opportunity Initiative,” the budget includes $158 thousand to fund workforce development service to 148 low-income youth.”

Total expenditures under the Neighborhood Economic Development department are $1.689 million.

4. Office of the Mayor - $685 thousand The Mayor’s budget includes $450 thousand “to support youth initiatives that drive the city towards greater equity and economic stability.”

Under its “Cradle-to-Career Implementation,” the budget includes an additional $235 thousand “to address the chronic educational challenges and prolific disparities in our schools.”

5. Office of Management & Finance - $804 thousand This budget includes $129 thousand toward its “Minority Evaluator Program Staff” to “require that all evaluation panels for Requests for Proposals include at least one minority community member.”

Its “Future Connect Scholarship” program allocates $500 thousand to “create a pathway to an Associate's Degree by helping our youth with financial burden of attending college. It also serves as an incentive for the youth who are most at-risk of not graduating college on time.”

Its “East Portland SUN School Equity” program allocates $100 thousand for “programs to improve student’s academic success.” Since “Douglas High … is the only high-poverty index school in the region without a SUN program,” these funds will provide the start-up amount for a SUN High School.

Its “CASH” Oregon program provides $75,000 for “free tax preparation service” for “low income individuals … (many of whom) are challenged by language barriers and lack basic financial literacy. In addition … CASH also assists people to get their financial houses in order by connecting them to educational resources and related community services.

6. Special Appropriations - $168 thousand

“Regional Arts and Culture Council Equity & Diversity Initiatives” provides $48 thousand to “expand its outreach to minority communities … to invest in more cultural diversity training; translate guidelines and application materials into Spanish, Russian, Chinese, Somali and Vietnamese … and increase … to one full time employee the staff … dedicated to coordinating these diversity outreach activities.”

Its “Black Parent Initiative” provides $100 thousand which “inspires and mobilizes black parent to ensure their children achieve educational excellence” through “one-on-one training … using the Effective Black Parenting model, individualized service plans, classes and support groups.”

Its “Cully-Concordia Adult ESOL Classes spends $20 thousand to “continue the English for Speakers of Other Languages Classes” tailored to the needs and desires of each student.”

Conclusion

Mayor Adams’ $525 thousand Office of Equity will be added to the $95.675 million already spent on attaining equity for the Portland population that is non white or Asian. In other words over 36% of $1.7 billion budget expense is allocated toward attaining equity for 14% of the Portland population.

Again, by no means am I suggesting that equity is not a laudable goal. I am simply pointing out that the problem does not appear to be the amount of money that is spent on achieving the goal; rather, how effectively those funds are being spent.

Generally, successful public policy to achieve financial equity involves two types of investment: Education and jobs. Government cannot create jobs in the private sector, but can make policies that are friendly toward business creation and job expansion.

The types of jobs that are likely to flourish amid our current economic climate of outsourcing and computerization are those that require physical presence (janitors, gardeners, teachers, nursing-home aides, etc.) and those that exchange information in ways that email and teleconferencing don’t accommodate (software development).

As you can see, these jobs are at the low end (janitors, etc.) and high end (software engineers) of the economic spectrum, causing some to describe both our local and national economy as a “barbell,” with jobs on either end of the spectrum, and few in the middle.

Clearly, our current policies have not achieved economic equity in the city. It requires a much more targeted approach than is being taken with our $96 million currently allocated to achieve this objective.

As to equity in home ownership, Portland home median and sales prices are down 27% from 2007, and the price to rent ratio in Portland is 22.41. As mentioned previously, a price-to-rent ratio over 21 indicates the cost of owning a home is far greater than renting. This fact places Portland as the fourth most expensive city in the US to buy versus rent.

The greatest barrier to home ownership in the city, then, is the cost of home ownership vs. renting. The $88.5 million Portland Housing Bureau, with its agenda to recognize “the historic and institutional barriers to housing, home ownership, and economic stability experienced by communities of color,” cannot further its agenda without recognition of the fact that the barrier to home ownership exists for all citizens in the community.

In our next discussion, we’ll review city policy and expenses in the area of public safety. I welcome your comments and encourage you to discuss these issues both here and with your neighbors and City Council representatives.

kittyok@earthlink.net

An open letter to PPS Superintendent Carole Smith: why we said no

2011-05-20T09:56:00.000-07:00

Dear Superintendent. Smith,
After publicly stating that it was your goal to persuade voters to approve new construction "until all the schools have received the overhauls the district says they need," it must have been quite a shock when a your well advertised campaign resulted in a resounding "no." How could that have happened?
Who does NOT heart Portland Schools?
Does that mean that you wasted the $21,600 you paid research firm Davis, Hibbits and Midghall to tell you voters would say "yes" if you added something for ALL schools (not just the ones that needed it)? What's another $178 million, when EVERYBODY gets a little something?
Also, you made the bond issue sound positively miniscule by not including that pesky $77.5 million interest and insurance costs we'd have to pay. $625.5 million does sound like a lot more than $548 million. Voters won't notice.
You even went to the trouble to underestimate the real interest cost by promising to do the very thing guaranteed it high. You would finance the long term bond by renegotiating interest rates every few years, when every economist under the sun is warning that interest rates are going up. I guess you thought that, if voters didn't notice that you didn't include the interest or insurance they'd pay, they certainly wouldn't notice that the terms of the deal were bad.
The plastic surgeons in Portland probably loved your co-chair's quote, "Anyone needs a face-lift after 65 years," but apparently some of the other voters didn't. Talking about elective plastic surgery when 9.6% of the city's workers are looking for a job may have been a bit of a misstep, but maybe you thought that if they don't work, they may not vote.
But, it turned out, even the Portland voters with jobs notice that the value of their homes was down 29% from its peak, while their property taxes were rising up at least 3% a year. Of course, you tried to soothe homeowners by saying that, the average voter would only be paying $300 more. You didn't expect them to know the difference between median and average. You couldn't have known that they'd figure out that half of them would be paying more than $300. You relied on the voters, who paid out money for salmon and elephants to pony up for the kids.
All you needed to do is show the poor little kids with ceiling tiles raining down on their heads, pointing to signs that read "asbestos," and entering through warped, unpainted doors. Surely the voters would heart schools.
On the other hand, maybe it was the older voters that killed it. They may not have liked that "everybody needs a face-lift after 65 years" comment as much as the plastic surgeons. And they may have listened to local professor Dr. Eric Fuits, with two young children in Portland schools, that recommended a "no" vote. Based on census data and Journal of Urban Economics, he estimates that "approximately 4,500 people age 50 and older may be driven out of Portland if voters approve the higher property taxes." That may have upset them more than you thought.

So, where should you go from here? Perhaps you should recognize that there is a national wave of voter disapproval of wasteful spending. Take your cue from Washington politicians, who are recognizing that unnecessary spending will cost them their jobs.

And definitely hire a new research firm. You got some bad advice.

Give your mother a gift that's worth something

2011-05-08T14:44:00.000-07:00

Maybe your mother isn't an online gamer, but in case your sweet little mom is one of the more than one hundred million people whose personal information was recently hacked, here's how to teach her to protect herself.

You've already told her not to download anything ridiculous like "never before seen pictures of bin Laden's corpse." If she's on facebook, you've told her not to click on "I won a free iPad and you can, too!" - even if it has a picture of her adorable child next to it. Now you need to teach her to monitor her credit reports and her credit score, and you love her so much, you'll show her how to do for free.

There's only one place where you can get your credit reports without charge, and it's NOT FreeCreditReports.com.

www.annualcreditreport.com is where to take your mom. Each of the three credit reporting agencies, Equifax, TransUnion and Experian, must provide her a free copy of your credit report annually, and this is where they do it. Log your mom on to the website, choose your mother's state of residence in the drop down menu, and hit "Request Report."

Have her complete her name, date of birth, social security number and address, telling her NEVER to release this information to anyone unless: 1) She goes to the website independently (they did not come to her); AND 2) She sees a https: (not http:) in the website address.

Have her check the box under her Social Security number request that all but the last four digits be encrypted, type the word at the bottom of the form in the box provided, and Send.

Select one of the three consumer reporting agency boxes, and click Next. Click Next again to continue. Review the personal information on the credit agency's page, and click Continue.

Have your mom answer the Personal Information questions listed, and hit Continue. Click Submit Order Now. On the last page, you can choose to View/Print your report or Create an Account in order to view it for 30 days. You may wish to choose the former, in order to have a printed copy of her report.

Help her to review the report very carefully, and notify the credit agency immediately if there are any errors.

Since your mom is entitled to only one free copy of your credit report each year from each agency, recommend that she stagger her request by ordering one report every four months. That way she'll help ensure that no one has stolen her identity and opened unauthorized accounts in her name.

Next, you can show her how to check her free FICO credit score by logging on to www.myfico.com This is her number, based on a statistical analysis of her credit report, that evaluates the relative credit risk she represents to a lender. The higher her FICO score, the better a credit risk she is, and the lower the interest rate she will pay. Again, she is entitled to see her FICO score annually, and recommend that she wise so, to monitor her credit and take care of any potential problems quickly.

That's all there is to it. Tell her you'll help her with the next one in four months and put it on your calendar so you won't forget.

What a great daughter you are. Your mom should be proud.

Why to say no to the Portland Public School construction bond

2011-05-02T10:16:00.000-07:00

By now, you've been inundated by television ads and direct mail pleading for your to repair our crumbling out-of-date schools that put Portland's kids at risk with leaks, antiquated boilers, overloaded electrical systems and asbestos. The Portland School Bond promises financial accountability.

Here are the reasons to say no.

The bond measure is bloated with unnecessary repairs.

Nearly 1/3 of the bond ($178 million) is NOT necessary repairs, but added construction to ensure that every school will get something. Why?

A research firm which was paid over $20,000 by the school board said that the bond would be more likely to pass if every school got something, whether it needed it or not.

The publicized costs are purposely underestimated.

From PPS, “The estimated bond rate for six years is approximately $2 per $1,000 of assessed property value. It then drops to an estimated 15 cents per $1,000 for no more than 20 additional years.” The median assessed home value in the school district is $147,480, or $300 times 6, plus $22.12 times 20 years, or almost $2,250.

PPS also neglected to include the $75.5 million cost of interest payments and the $2 million bond insurance expenses. So, it’s really costing average; property taxpayer about 2,500.

And that $75.5 million interest cost is very likely understated. Most of the financing, in their own words would be in short-term bonds that mature in one, two or three years. Interest rates are rising, so when the short term financing matures, they will be refinanced at a higher rate.

Is it really only $300 for the average taxpayer?

No. When they said “average,” they meant median home price, which means half of all Portland homeowners will be paying more. Look here to input your street address, and find your Assessed Value, directly under your Market Value. If it is more than $147,480, you’ll be paying more than $2,500 for this bond.

According to Willamette Week the best reasons to vote no are:

”It’s expensive . ., the timing sucks, the plan is to ask voters to renew the construction bond every six years for the next three decades . ., PPS wants to rebuild two schools whose populations have fallen so dramatically that they were at risk for closure last year . ., (and) PPS is not allocating our very scarce resources to protect and educate . . at a time of huge budgetary crisis.”

It will hurt older Portland citizens.

A Portland professor with two children in the Portland Public School system, Dr. Eric Fruits, recently presented findings to the PPS Board based on census data and Journal of Urban Economics.
He estimates that “approximately 4,500 people age 50 and older may be driven out of Portland if voters approve the higher property taxes”

Who is supporting this bond issue?

The vast majority of financial support for this bill is from the construction industry, not concerned parents, teachers or people who “heart” Portland schools.

This is a needlessly expensive, misrepresented, badly financed, expensive bond with terrible timing, and will be only the first of many to come over the next thirty years. It will drive older citizens out of the school district and benefit the construction industry far more than it will improve local education.

kittyok@earthlink.net

Why the Budget Fight Was Meaningless

2011-04-13T11:16:00.000-07:00

We just witnessed a potential budget fight that nearly stopped non-essential Federal government spending to a standstill. Why it was a farce, and the reason that women can picture how ridiculous the cuts are.

Our Spending Pie Chart

We've probably all baked a pie. We've certainly all served a piece of pie. We absolutely know how to cut one half. If we cut a sliver from one of those halves, the piece that is left, almost 40%, is about the amount we spend on Social Security, Medicare and Medicaid. That's a very, very big piece.

If we cut the other half of the pie in half again, we have a quarter of the pie. That's what we spend on Defense, including Homeland Security. That's a pretty big piece as well.

Did we cut anything from these two pieces that are almost 2/3 of the pie? Not a cent.

Instead, we shaved crumbs off of tiny little pieces and called it a victory. It was not, for either side.

The Sacred Cows

It is considered political suicide to discuss changes to Social Security - 40% of our spending, for 13% of our population. No matter that:

In 1950, 16 workers contributed for each retiree; now there are 3
In 1950, life expectancy was 68 (just over three years payment from age 65); now it is 81 (15 years payment from age 66), yet we moved the full retirement age up only by one year)

Each retiree is supported by only three people for an extra fifteen years. What sane person would NOT propose changes to this program under these circumstances?

The answer, of course, is any politician, whether conservative or liberal. Instead, both sides suggest ideological arguments that play to their base. Both have good ideas, but neither side acknowledges that. Instead, both point at the weaknesses in the other's plans. And neither even brings up social security.

It's not that hard. Take a listen, and see if you can live with this change to Social Security.

Changes won't affect anyone currently receiving benefits. The age for whom changes will be made can be set at 55, or even 50.
Full retirement would be raised for those at the set age and below on a step basis. For instance, if you're 50 - 55, full retirement age is 67 (one year older than it is now). For those who are 45 - 50, full retirement is 68. For people who are 40 - 45, full retirement is 69. For 35 - 40, full retirement age is 70.
Means testing will be in effect for those who's Adjusted Gross Income is $250,000 or more at full retirement age. Hopefully, we can agree that, at some level, we can afford to forgo our benefits for the long term sustainability of the program.

That seems reasonable to me. Does it seem reasonable to you?

"Obamacare"

Much has been made about the repeal of Patient Protection and Affordable Care Act. It's too expensive. Wrong and right. It should not be repealed. It should be made more cost effective. Again, read on, and see if you can live with this change to health care reform.

Everyone knows that health care costs have been rising unsustainably, and our collective medical condition does not reflect the amount we pay. To address this issue realistically, two goals must be accomplished. First, health care coverage must be universal. Romney's Massachusetts plan addressed that well. Second, after universal coverage, costs must be contained.

Those that want to repeal the bill would be far better served by amending it to assure cost containment. Otherwise, the country will continue to have rising costs, either for those who have coverage, or for those who use expensive and inefficient alternatives, such as emergency room coverage. That's clearly unacceptable. So fix the bill. Make it cost effective.

Education

Cutting educational funding is insane. In a highly competitive global environment, an educated work force will assure our economic viability. We all know where we stand in the world rankings for education, and we all know it's not good.

Much has been said about accountability in the educational system, yet the unyielding teacher's union mandates seniority over accountability, saying that a "one size fits all" measurement is impossible. I disagree.

Every person who performs a function in a capitalistic society should be paid on a merit basis. Why would it be so hard to test children at the beginning and the end of the year and measure progress over a period of time? If some teacher's students show little or no improvement, should they not be replaced?

Summary

These suggestions would save far more than have been proposed thus far. No suggestion is mean-spirited, ideological or particularly difficult. They are, however, inconsistent with either major political party. There lies the difficulty.

With politicians so unwilling to compromise, true deficit reduction is likely to be a battle of the ideologues. Most of us are not ideologues. And we are, sadly, poorly represented.

Anyone who knows how to slice a pie can see that.

Which Portland investment bankers gave the best advice in 2011?

2011-04-11T11:02:00.000-07:00

Earlier in the year, I gave you this year's forecast given by the strategists from ten investment firms, the advice from which private investors pay dearly. For the third consecutive year, we'll compare the return you'd receive from following their advice with simply buying the Standard and Poor's 500 Index.

Let's see how the quarter ended March 31 stacked up.

Oppenheimer's Brian Belski's advice would have earned you 5.26%, less commissions. You would have earned more with the S and P 500 Index, which earned 5.92% this quarter.

BofA Merrill Lynch's David Bianco's recommendations would have earned you 7.95%, more than 2% above the S and P 500.

Credit Suisse's Doug Cliggott's advice would have earned your portfolio 3.41% in the first quarter, 2.5% less than the S and P 500.

Barclay's Capital's Barry Knapp would have provided returns of 9.24% if you'd followed his advice, more than 3.3% higher than the S and P 500 Index.

Goldman Sach's David Kostin's recommendations would have returned 7.42%, 1.5% higher than the S and P 500.

JPMorgan's David Kelly's advice would have enriched your portfolio by only 3.8%, 2.13% less than the S and P 500.

Putnam's Jeff Knight's selections earned 7.67% in the first quarter, 1.75% more than the S and P.

Morgan Stanley's Henry McVey suggested investments that returned 12.25%, more than twice that of investing in the S and P 500.

Wells Capital Management's James Paulsen's advice would have returned 4.56%, about 1.3% less than the broad index.

UBS's Michael Ryan's advice was worth 7.36%, 1.4% more than the S and P.

Unlike the previous two years, a majority (six out of ten strategists) gave advice that was worth their commissions in the first three months of this year, with Morgan Stanley's advice outpacing index returns by more than 100%.

While impressive, he'd have to repeat this for two more quarters to beat a "buy and hold" strategy for the index since 2009. Nevertheless, it's an impressive feat, and we'll be watching to see if it continues into the next quarter.

kittyok@earthlink.net

What To Do With Your Money Right Now

2011-03-15T09:13:00.000-07:00

If it were easy to take a long view of investing, everybody would be rich. How to take a long view of current events, and act rationally while others are panicking.

If someone asks you your opinion of current economic conditions, you're likely to answer in terms of yourself. That's understandable, but not necessarily accurate.
If you intend to use the answer to invest your money rationally, it's better to take a look at four broad economic categories:

Where we are in the economic cycle (are we growing, peaking our growth, slowing down, hitting a trough in our slowdown)
Monetary policy (is the cost of borrowing cheap, moderate or expensive?)
Sentiment (is everybody more happy or depressed about the stock market?)
Valuation (is the stock market expensive compared to its "normal" price?)

Let's take a look.

Economic Cycle

Industry as measured by output and the amount of available space utilized for that output has been growing steadily for the last five months. There's plenty of room to grow further. Orders and consumption are both growing at about 5%.
The unemployment rate, which peaked at 10.2% in October of 2009, has fallen to 8.9%. "Normalized" unemployment is approximately 4%, so there's plenty of room for improvement there as well.
The cost to produce goods is growing at 3%, but consumer costs are increasing at only 1%. This means that producers will soon have to raise prices, or cut their profit margins.
Last year the US grew by 2.7%, higher than the rate of growth in 2006 and 2007, before the real estate bubble burst.
All in all, it looks like we're in the beginning of our growth cycle and have plenty of room to grow further. When earnings are growing, it is an optimal time to invest, compared with when the economy is slowing and earnings are likely to decrease.

Monetary Policy

The Federal Reserve Bank is spending trillions of dollars buying Treasury Notes and Bonds (US national debt), in order to keep both supply and rates low. The six month Treasury bill pays .17%. That means that, for a six month investment, you give the Treasury $9,991.50, and in six months, they'll return $10,000.
This is called "accommodative" policy (the Fed will accommodate borrowers), and it's being done to keep rates low to increase borrowing by business to stimulate the economy.
Monetary policy is currently positive for investing, as growing businesses will return a much higher long term rate than tiny returns on bonds.

Sentiment

Warren Buffett says, "Be fearful when others are greedy; be greedy when others are fearful." There is no better explanation of sentiment.
When everybody wanted to buy "dot com" stocks, if you entered the fray, you probably lost money. When everybody wanted to buy real estate and "flip" it for a fast profit, if you entered the fray, you probably are continuing to lose money.
So, the higher that positive investment sentiment is, the more nervous you should be. I follow "Consensus Index," but there are others, including American Association of Individual Investors, Market Vane, First Coverage Market Sentiment, and they all point in the same direction.
Nearly 3/4 of people think that it's a good idea to get into the stock market.
That makes me very nervous. I like numbers like 28%, which was what positive sentiment was in 2008, when it most definitely was a good time to buy.

Valuation

This is the measurement that tells you whether you're overpaying for the market as a whole. Right now, you're paying $13.56 for every dollar of earnings (sometimes called a P/E, or Price to Earnings multiple). The average market price is $15.82.
Not a bad price. If I hadn't been buying so much in 2008 and 2009, I'd be buying now, especially on days when the market dips significantly (like today).
Another way to look at valuation is to compare investing in the stock market with investing in a long term bond. I compare to the 10-year Treasury Note, because I don't think anyone belongs in the stock market that doesn't have a 10 year horizon.
Right now, the 10-year Treasury note will pay you 3.46%. Based on next year's projected S&P 500 earnings of $91.26, the earnings yield (earnings divided by price) is 7.16%. The potential return is more than twice that of long term bonds.
Another positive sign.

So, evaluating the risk level in these 21 economic indicators that lead me to these conclusions, I conclude that investing approximately 65% of long term (10 years +) investments in the stock market is the most rational asset allocation of risk versus reward in the current environment.

Women tend to live longer and earn less than men. These decisions are critical to our long term well-being. How do you make your asset allocation decisions? What is your opinion of current economic conditions?

Portland $548 million school bond: No, but . . . .Part III

2011-03-06T17:33:00.000-08:00

During the last two weeks, we've discussed the facts behind Portland Public Schools' request for you to approve a $2500 + increase in total property taxes for:

$370 million for needed building upgrades in some of its public schools
An extra $178 million (total of $548 million) for building upgrades in ALL of its public schools
$0 for teachers or improved curriculum

In spite of the facts that:

Portland's latest unemployment rate is almost 10%
Portland renters pay less than their homeowners
Since 2007, the average Portland property has declined almost 10% in value.

PPS is advertising that the average Portland homeowner's annual increase is only $300. The Public School system is, as reported last week, using the term "average" incorrectly, neglecting to add in bond costs like insurance and interest ($77.5 million), and disclosing the increase in annual terms ($300) without giving a total ($2500).

In other words, PPS appears to be banking on the fact that you aren't very good at math and won't notice that they aren't, either.

One of Portland's local professors, Dr. Eric Fruits, recently presented further findings to the PPS Board. Based on census data and Journal of Urban Economics, he estimates that "approximately 4,500 people age 50 and older may be driven out of Portland if voters approve the higher property taxes."

What does the PPS board say?

"Anyone needs a fact-lift after 65 years," says Pam Knowles, co-chair of Portland School Board.
Portland School Superintendent Carole Smith is more to the point. She said it is her goal to persuade voters to approve new construction "until all the schools have received the overhauls the district says they need."

It's interesting that Superintendent Smith does not say that she wants to persuade voters to approve construction that PPS actually needs. She says that she wants you to vote for overhauls that they SAY they need. That is relevant here, since $178 million in "added" repairs was tacked on to this bond. PPS' public relations firm said we'd be more likely to vote for it, if we all got a little something.

What do you say?

Since 2007, our economy has suffered a decline surpassed only by the Great Depression. Federal and State governments are tightening their belts, reflecting the sacrifices made by their constituents. It is in this environment that PPS asks its homeowners for far more than it needs.

Portland homeowners faced with the need for updates for their homes after a fire like the one at Marysville School would likely be limited to what was covered by insurance. Superintendent Smith, however, has a different view. "The total anticipated proceeds from the insurance claim are estimated in the range of $5 - $7 million. Part of that money has already been spent to re-establish Marysville students and teachers at the Rose City Park location, do partial demolition of fire-damaged building areas and close the damaged building to the weather. About $4.5 million will be available for reconstruction.

"The insurance does not quite cover the bare minimum to replace damaged areas of the building. This minimum option means literally touching only those parts of the building that were damaged, not bringing the entire building up to current fire/life/safety or seismic codes, let alone improving basic classroom configurations, building flow, technology, etc."

Unlike Portland homeowners, who must limit repairs to the amount of insurance coverage, Smith wants a complete upgrade for the entire school, upgrades for seven other schools, and a little something in all the schools, whether they need it or not.

It's hard to believe that PPS is so thoroughly disconnected from its community that it asks for a budget of $625.5 million (including interest and insurance) instead of $370 million during a period where the economy is just scraping back from such a brutal recession. What is possibly more disconcerting, however, is the cynicism inherent in the idea that the electorate will not vote for a school construction bond unless there's something in it for them.

So, in answer to the $548 million (which is really $625.5 million) bond, the answer is no. But, if PPS asks for only what it needs ($370 million), the answer is yes, regardless of what its public relations firm tells you.

For the $21,600 PPS paid their PR firm, they could have asked your voters. We would have happily told you that floating the largest bond in its history immediately following the greatest recession since the Depression was a bad idea.

kittyok@earthlink.net

Portland $548 million school bond: No, but . . . .Part II

2011-02-27T08:58:00.000-08:00

Last week, we talked about what the Portland Public Schools need ($370 million) and what was requested ($548 million) from Portland property taxpayers.
Here's a brief synopsis.
Portland Public Schools have an urgent need to upgrade 8 campuses for a total of about $370 million. But after paying $21,600 to research firm Davis, Hibbits and Midghall, they concluded that property owners would be more likely to vote "yes" if all 85 campuses were upgraded, and upped the ante to $548 million.
By adding $178 million to the construction bond issue, PPS and its research firm ignored Portland's:

High (9.9%) unemployment rate
Comparably low (just over $70,000) household income
Comparably high cost of home ownership (compared to renting)
Home prices that have fallen 12%+ last year.

I could bore you to tears with my version of where we are in the economic cycle, using 21 indicators reflecting one of many determinants of financial heath. But I wouldn't be telling you anything you don't already know.
We had a BIG financial scare a couple of years ago, and we're creeping with fits and starts from potential disaster. But we're nowhere near healthy.
That is an accurate description of the economic situation the people from whom PPS is asking for and extra $178 million for non-essential school construction.
So what are the "extras" we'll get for that additional $178 million?

Doors that open with key cards
Covered playgrounds
Outdoor learning environments
Upgraded science labs

Not one teacher will be added.
PPS' research firm concluded that Portlanders are concerned about education and unemployment, and therefore would happily pay an extra $178 million for non essential construction upgrades to accommodate some temporary construction jobs.
We could very well end up with covered playgrounds in schools with no physical education programs.

But it's only going to cost the average property taxpayer about $300
I used to have a financial planning business, where I did all my own macro and micro economic research.
I ignored financial pundits and analyzed the financial statements of potential investments for my clients myself. I taught financial planning students how to analyze financial statements at UCLA as well.
Here is a perfect example of why I insisted upon doing my own research.
1. It's $300 for six years, plus. . .
From PPS: "The estimated bond rate for six years is approximately $2 per $1,000 of assessed property value. It then drops to an estimated 15 cents per $1,000 for no more than 20 additional years. The median assessed home value in the school district is $147,480."
In plan English?
It's $300 times 6, plus $22.12 times 20 years, or almost $2,250.
2. The $548 million bond is really a $625.5 million bond
Oops! PPS forgot to include the $75.5 million cost of interest payments and the $2 million bond insurance expenses. So, it's really costing the "average" property taxpayer about $2,500.
And that $75.5 million interest cost is very likely understated. Most of the financing, in their own words, would be in short-term bonds that mature in one, two or three years
As anyone who has not spent the last three years in a cave knows, the Federal Reserve Bank has spent trillions of dollars to keep interest rates low to stimulate the economy. Everyone knows it won't do that forever. So, everyone knows rates are going up.
Everyone except PPS.
Instead of locking in a low long term 20 year rate now, PPS is going to finance short term loans that are ASSURED to be renewed at higher rates over the term of the bond.
So, you can be almost certain that the $2,500 will almost certainly be higher.
3. What's an average property taxpayer?
Probably not you. First of all, from a mathematics perspective, PPS is using the word "average" incorrectly.
We should expect more from those who supervise our math teachers.
What they should say is "median." The median assessed value for a PPS home is now $148,480.
That means that 1/2 of assessed values are more than $148,480.
Look here to input your street address, and find your assessed value. If it is more than $148,480, you'll be paying more than $2,500 for this bond.

More next week.

Until then, give this some thought and discuss it with your friends and colleagues, and certainly anyone representing PPS and this bond issue. Every assertion in this series of articles is based on hard facts, and I welcome discussion about any of them.

Next week, we'll review a local professor's analysis of how many residents are likely to be forced to move out of Portland because of the increase in homeowner expense if this bond issue passes.

And, how PPS "Superintendent Carole Smith says her goal is to persuade voters to approve new construction until all the the district's schools have received the overhauls the district says they need."

kittyok@earthlink.net

Portland $548 million school bond: No, but . . . .

2011-02-21T16:14:00.000-08:00

Nothing worthwhile in life is simple.
Your job isn't simple. Your love life isn't simple.
Neither is the Portland Public School (PPS) $548 million bond. It's not a choice whether you're "for kids and jobs" or not.
It's a choice of whether to cover playgrounds before you fund physical education programs.
In this "School bond: No, but . . " series, you'll see that one can be "for the kids" in a way that will actually result in improved learning, not new buildings.
You can tell PPS that the best way to spend your money is to fix what is necessary, then improve education before you improve more buildings.
First, a little background. Here's an economic "look in the mirror" for Portland.
1. Unemployment (December, 2010)- 9.9%
According to the Bureau of Labor Statistics, the Portland metropolitan area has an unemployment rate nearly 9% higher than the national average.
2. Average household income (2008) - $70,000
According to Greenlight Greater Portland, Portland's average household income is ninth lowest of ten western metropolitan areas surveyed.
3. Cost of renting versus buying a home - Cheaper to rent
According to Trulia, it is more cost effective to rent rather than buy a home in Portland. Homeowner costs are high, and, one out of every 44 of our homes got some type of foreclosure notice in 2010.
4. The bottom line
Our unemployment rate is high, our average household income is comparably low, and the cost of home ownership is comparably high. Clearly, any additional cost to Portland property owners should be limited to what is absolutely necessary, and not a cent more. That's fair to both homeowners in difficult times - and the kids.
The Portland Public School construction bond
1. What is needed - $370 million
Two-thirds ($370 million) of the PPS bond is based on legitimate need for urgent repairs. Marysville K-8 School suffered significant loss in a recent fire. Jefferson, Cleveland and Roosevelt High Schools, and Laurelhurst, Faubion and Rigler K-8, and Markam Elementary are also in desperate need of repairs.
These are necessary repairs, and they're necessary now.
I urge you to be "for the kids" and vote "yes."
2. What is proposed - $548 million
That's right. We need $370 million and we're asking for $548.   To be paid by home owners in a city with 9.9% unemployment. And comparably low household income. And an already high cost of home ownership.
So, this other $178 million is urgent, too, right?
Wrong.
The simple answer is that, in order to get everybody to vote "yes," all 85 campuses - not just the 8 that need it - will receive some kind of upgrade.   As we've seen, nothing is simple.
My personal favorite construction project in the $178 million unnecessary repair portion of the bond issue is providing covered playgrounds for schools with very uncertain physical education program funding.   Yes for protected playgrounds. Maybe not for physical education teachers.
Talk about this with your friends and colleagues.
$370 million - yes. $548 million - no.
More next week.
Until then, I sincerely invite anyone who can justify the additional $178 million to reply. I'm for the kids, too.
kittyok@earthlink.net

Do Not Start With the Redhead Having a Hot Flash

2010-08-03T10:40:00.000-07:00

The first thing that caught my eye was Senator McCain's assertion that a "$300,000 . . study whether . . yoga can be . . effective . .to reduce the severity of hot flashes in breast cancer survivors" is "waste." Then, I find that the total for the100 stimulus projects that he and Senator Coburn describe as having "questionable goals," that are "being mismanaged or were poorly planned" and are even "costing jobs and hurting small businesses," is 1/2 of one percent of the Federal Stimulus package.
Being a woman in her 50s with 20 + years of moderate to severe hot flashes has made me somewhat of an expert in what is, and is not effective in reducing them. Your opinion of my expertise aside, I can assure you with some conviction that it significantly exceeds that of both Senators McCain and Coburn. When I read that the Senators thought it wasteful to study yoga as an effective methodology to reduce the severity of hot flashes in breast cancer survivors, I thought perhaps the honorable gentlemen would have found the study less wasteful had studied reducing symptoms of discomfort for prostate cancer survivors.
No matter, Senators. You have my attention.
And I have a calculator.

FLASH - Whether you agree or not with their conclusions of wastefulness, the totality of the programs in their 55 page report is one-half of one percent of the total Federal Stimulus package.
FLASH - If I were running a business with gross revenues of $200,000, and wasted 1/2 of 1 percent of that money, that would be $1000, or $83 per month. I do not actually have gross revenues of $200,000, but I do waste $20 per day, and consider myself a very non-wasteful person.
FLASH - From another perspective, if Senators McCain and Coburn were to write a 55 page analysis for every $7 billion in the stimulus package, their report would be 9,428 pages long. 62-year-old Coburn may live to see the publishing of that report, but I don't believe it could be completed in the remaining lifetime of soon-to-be 74 year-old McCain.
FLASH - This is a mid-term election year. Voters may be polarized, angry, out of work and disappointed, but, by enlarge, can tell the difference between something of real importance and of a politically motivated attack. There are plenty of relevant political issues that differentiate the parties. This is not one of them.
FLASH - Do not tell women that a study to minimize the discomfort after breast cancer surgery is wasteful. We are more than 50% of the population and it may infuriate us. Those of us over 40, actually having these symptoms (who choose not to take hormone replacement therapy because it has a statistically significant increase in instances of breast cancer) will not only not vote for you, but may actually become quite vocal and tell others what you have done. You can't afford to lose have the voters. THAT is a significant number.
FLASH - Some of us have calculators. And we know how to use them.

Why the European Bank Stress Test is Almost Meaningless

2010-07-23T11:59:00.000-07:00

European banks just completed a "stress test" designed to indicate whether a bank could survive a further economic downturn. The primary measurement in this test is whether the bank is adequately capitalized, another way of saying whether its assets can absorb losses that may occur in such a downturn. Therefore, the definition of capital assets, in this case "Tier 1 Capital," is critical.
The Test
Assume a cumulative two-year probability of a

Default rate of 15 percent on property and corporate loans,
10 percent loss on mortgages and
Stringent "haircuts" (write-downs) on their sovereign debt

would the bank retain a 6 percent core Tier 1 ratio?

Tier 1 Ratio Defined
Included in the European bank stress test's definition of Tier One capital is

Deferred tax assets. These are primarily losses taken by a bank that are in excess of the amount that can be deducted in a particular year, and are carried forward to future years, which cannot absorb new losses
Hybrid bonds. These are loans to the bank that are convertible to common stock, which, again, cannot absorb losses.
“Silent participation” stakes, which resemble sovereign debt rather than cash, which has been injected into banks. Nevertheless, it counts this towards its core Tier 1 capital.

Which Banks Would Have Failed Without Using These Items in Tier 1?
According to Reuters, almost all big European banks would have passed. It's a different story for the
smaller state-owned banks. Germany’s landesbanks, for example, have an average core Tier 1 ratio of only 5.9 percent but a total Tier 1 average over 9 percent, according to KBW. Using a stricter definition of Tier 1 capital would probably mean taxpayers having to stump up much more in the event of an economic decline as described above.

What Was the Purpose Performing the Test Using Such Lax Standards?
Had core Tier 1 capital been applied without including deferred tax assets, hybrid bonds and sovereign debt, the number of banks that would not have passed the test would have been significant enough to cause panic and further economic downturn.

But, by concluding that only 7 of 91 banks failed the stress test, most people will be reassured that a further European economic downturn won't result in widespread bank insolvency.

Don't bank on it.

The Case Against Goldman Sachs: Epilogue

2010-07-16T09:13:00.000-07:00

Last April, I outlined the case against Goldman Sachs. In that discussion, I posed the following questions:
1. Should rating agencies rate securities on their own merit (not by considering who may or may not be investing in them)?
2. Since ACA chose the securities in this investment from a list given to them by Goldman (from a Paulson list), was it a misstatement that ACA was "Portfolio Selection Agent?"
3. Since banks and pension funds are defined as "sophisticated" investors, should they analyze the investments they are considering on their own merit (not by considering who may or may not be investing in them)?
Those questions have been answered by the Security and Exchange Commission in their settlement with Goldman.
In that settlement, the SEC found that Goldman omitted the material fact that Paulson & Co. was on the other side of the trade. That finding assumes that ACA would have selected securities differently had it known that Paulson was taking a position against, rather than investing in the securities it was analyzing. Stated slightly differently, that is analogous to saying that I would report findings on the financial health of Johnson and Johnson, the Washington Post, Moody's and Kraft Foods differently if I knew Warren Buffett was selling them than if he was buying them. That doesn't say much for me as an analyst. There's always someone selling when another is buying. When must that be disclosed? When the person is well respected? Smart? Well known?
The SEC additionally noted that material facts need by disclosed whether or not investors are "sophisticated" or not. Again, that doesn't say much for banks and pension funds, which generally have staff analysts who review the financial health of potential investments. Does the SEC feel that these analysts will conclude differently if someone they know is selling, rather than buying a security? I taught Security Analysis and Advanced Security Analysis at UCLA, and focused upon balance sheets, cash flow statements and other fundamental measurements of financial health. Not once did I recommend researching whether other people were buying or selling a stock when making a determination of its financial viability.
Put into perspective, the fine against Goldman was approximately three days' earnings, so even though it was the highest fine assessed so far by the SEC, it will not materially effect Goldman's earnings.
Further, Goldman admitted no wrongdoing in its acceptance of this agreement. Consequently, those lining up to recoup losses from their investment will have a much higher burden of proof.
My assessment of this settlement is that of a business decision by Goldman to pay a fine rather than engage in a protracted battle with the SEC. But the more meaningful message is this: The SEC has little confidence in either analysts or rating agencies.
Should you?

Financial Regulatory Reform: A Mixed Bag

2010-06-27T16:45:00.000-07:00

What's In It
Before you listen to pundits and talking heads, you may want to read a review by someone who's actually read the bill. It's a mixed bag. Some things are good. Some things are not so good.
Let's take a look.
I. What's In It
A. Creates Consumer Protection Agency under the Federal Reserve Bank
B. Increased capital requirements for financial institutions
C. Creates a council to identify and address systemic risk
D. Regulates most derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders
E. Streamlines bank supervision
F. Provides shareholders with a non-binding vote on executive compensation
G. New rules for credit rating agencies
II. What It Says
A. Consumer Protection Agency
The rationale for creating this agency was because "the economic crisis was driven by an across-the-board failure to protect consumers." With this I disagree. The economic crisis, in my judgment, was caused by

The belief that historic national upward trends in housing prices would continue, regardless of the effect of increasing demand by those whose credit would not have previously qualified them for a home;
Granting a AAA rating securitized in part by these so-called sub-prime loans; and
Allowing those who made these loans to completely offload their risk to purchasers of securitized loans.

While I agree that the buyers of mortgage backed securities whose brokers assured safety needed protection from reliance on a AAA rating by rating agencies, the problem was rooted in the fact that the rating agencies did not do their job. In other words, it was not lack of consumer protection, but a complete lack of competence by rating agencies, paid by the issuers of these securities, that resulted in brokers selling them and consumers buying them. Further, borrowers who bought $500,000 houses with a $50,000 annual income did not need protection. They needed to be honest about their ability to afford a home.
I am not saying some level of consumer protection in finance is inappropriate. I am saying, however, that to say that a lack of consumer protection caused the financial crisis is an overstatement. Had ratings agencies done their job, mortgage backed securities would have been unsaleable, and no crisis would have occurred.
B. Increased Capital Requirements
Banks now need to put aside more money as a cushion against risk. The more risk taken, the more money that must be put aside. So far, so good.
In the current economy, banks, as most businesses know all too well, are reticent to lend money. They got clobbered in the economic meltdown, and are now erring on the side of caution. It's a good thing that banks are more cautious, but a bad thing that they're too cautious because without credit, business expansion is all but impossible. So, the more money they must put aside for capital, the less they'll have to lend. And that will delay economic expansion, including new hiring. Are new capital requirement bad? No.
But there will certainly be an effect, and that effect will be that businesses will find it hard to borrow. And expand. And hire.
Also, the largest banks will be required to fund a $50 billion fund dedicated liquidating to "too big to fail" banks which are insolvent. Taxpayers will be on the hook only for working capital collateralized by bank assets, and will be first in line for repayment.
Again, on the surface, a good idea, but these funds will not be available for lending either, and will further exacerbate the difficulty in obtaining business financing.
C. Financial Stability Oversight Council
A new council will be formed that will be responsible to identify and respond to emerging risks throughout the financial system. As a last resort, they'll be able to break up any company, bank or not, that threatens US financial stability.
A good idea, but, as with anything, it will be as good as its members. Chaired by the Treasury Secretary, it will also include regulators from the Federal Reserve Board, SEC, CFTC, OCC, FDIC, FHFA, the new Consumer Financial Protection Bureau.
D. Regulates Derivatives, etc.
During the height of the mortgage boom, financial institutions collected fees for guaranteeing each others' mortgage portfolio. As long as everybody was repaying their loans, that was fine. When things went south, though, these so-called insurance promises were called in. AIG, Bear Stearns and Lehman Brothers had issued lots and lots and lots of these promises, and you know what happened when the banks started experiencing mortgage losses. Bear and Lehman went bankrupt, and taxpayers rescued AIG, which had made more promises than they could possibly repay.
Now, most derivatives will be traded on an exchange, so we'll all know about how many are issued and can theoretically stop problems based in making promises that can't be kept before they become too large.
Banks must trade most derivatives in subsidiaries (which are not insured by FDIC, and therefore not available for taxpayer bailout), except interest-rate swaps, foreign exchange swaps and instruments deemed as “hedging for the bank’s own risk.”
As always, the devil is in the details. FDIC, under this bill, will be on the hook for interest-rate swaps, foreign exchange swaps and "hedging for the bank's own risk." We'll need to make sure somebody's watching these exceptions closely, or the taxpayers will find themselves on the hook for a hedge that the bank convinced regulators was "for its own risk."
Hedge funds are now officially investment advisers (making one wonder exactly what they were before).
The big (if boring) news is that there is now an Office of National Insurance under the Treasury Department. Hopefully, this will be the first step in regulating insurance on a national, rather than State level, which will encourage more competition and - hey, that might even serendipitously bring down health insurance costs.
E. Streamlined Bank Supervision
State chartered banks and thrifts under $50 billion will be regulated by the FDIC.
All nationally chartered banks and federal thrifts, and the holding companies of national banks and federal thrifts with assets below $50 billion will be regulated by the OCC.
Banks and thrift holding companies with assets of over $50 billion will be regulated by the Federal Reserve.
While technically, this will preserve the state banking system that governs most of our nation’s community banks, the reality is that small community banks are likely to put themselves up for sale now that they have 2000 pages of regulatory compliance to deal with. I used to do that job, and speak from experience. A community bank with 75 employees would need to dedicate 10% of its staff to compliance. Not feasible.
F. Provides Shareholders Non-Binding Vote on Executive Compensation
Non-binding is the operative word here.
G. Credit Reporting Agencies
I blame the majority of the economic meltdown on credit reporting agencies. Had they done their job, mortgage backed securities would have been rated as what they were - risky. Few would have bought them. Investment bankers would not have been able to sell their risk in extending loans to people who couldn't afford them, and would have stopped making those loans.
Now, there will be an Office of Credit Ratings at the SEC. Yes, the same SEC that was responsible for overseeing Bernie Madoff. Analysts will now have to pass exams, compliance officers will be forbidden to perform sales, and the SEC can deregister an agency for providing bad ratings over time.
My reaction to this is probably about the same as yours. Too little. Too late.
III. Brace Yourself
Bank loans will be harder to get.
Bank fees will go up.
Watch for the exceptions in this legislation to be the source of the next financial meltdown.
There will be another financial meltdown.
Fear and greed cannot be legislated out of the financial system, but this legislation is better than nothing.

The Saga of Property Tax Appeal: A Mini-Series

2010-06-15T09:38:00.000-07:00

Some people want the government to run almost nothing because of its inability to do so without a mountain of red tape, layers of bureaucratic nightmares and regulations that are nearly unintelligible. Here's one woman's journey through a property tax appeal, and why, at certain times, she found herself sympathetic to anarchists' point of view toward government.
Part I - A beautiful new home
While renting a sweet little cottage long enough to make certain that we were planting our roots in a neighborhood we would love, a serendipitous real estate meltdown occurred that brought the price for the home of our dreams within reach. We found a buyer for our rental, and everybody was happy. One of the best selling points for our dreamy new home was the seemingly low property taxes. Emphasis on "seemingly."
Imagine our surprise when we received our property tax statement nine months later with a 40% tax increase.
Part II - Follow the yellow brick road
After numerous calls to the Assessor's Office, we found that the first step toward rectifying this situation was an appearance in front of BOPTA (that's Board of Property Tax Appeals, for those of you who speak non-acronym-ish). Okay, fine.
We assemble a plethora of data that includes the fact that the Assessor's Office January 1 RMV (Real Market Value) for this home was 8% higher than our independent appraiser determined 55 days later on the following February 24. The basis for thier valuation was the Assessor's Office in-person appraisal on the previous November 24. Among possible reasons for the miscalculation was the fact that the assessor determined that there was a 1120 sq. ft. fully finished basement, when the actual finished area was 336 feet. But the burden of proof was ours.
Prior to scheduling the appearance before BOPTA, we spoke to the Assessor's Office (many times) and were pressured (many times) to allow another in-person appraisal. We were reticent to do so, thinking that the inflated appraisal may get even worse, but did agree to let them see the basement, which was apparently the basis for the problem. "No can do," said the Assessor's Office. They are an "all or nothing" kind of group, and wanted to see everything or nothing at all.
With their repeated requests, were admissions that "we didn't have to" let them in. Okay. We would take our chances with BOPTA.
Part III - BOPTA
The Board of Property Tax Appeals is a group of three persons who listen to your case for about 15 minutes, and make a determination of whether your property taxes are too high. We assembled our data (appraisal, arm's length sale, pictures of the basement, etc.) and made our case to three elderly, slightly confused people who clearly never bothered to review the information. They shared the one copy we had mailed to the Board three months ago, had difficulty locating the Addenda ("Addendum III? Let's see here," flip, flip, flip. "Oh, okay, I found it," said the BOPTA triumvirate leader, with obvious pride).
Some pertinent quotes included, "This appraisal of yours isn't very long," "How do we know when these pictures of the basement were taken?", and "Property values dropped precipitously after the first of the year." No evidentiary weight was placed on the fact that the appraisal was complete, the date on which the pictures were taken was noted by the camera at the bottom of the picture and RMLS data showed that property values increased 14.8% from January 1 to February 28. "Your fifteen minutes are up," they said after ignoring our responses. "If you disagree with our findings, here's a booklet that shows you the next steps you can take."
Two weeks later, BOPTA informed us by letter that they lowered our Real Market Value by 3.7% and kept our taxes just the same.
Would we care to critique the experience?
Part IV - The Magistrate
Tearing the critique form into tiny pieces, we moved along to the next step. This required a $75 filing fee, completion of new forms enumerating (again) the reason(s) that we disagreed with the Assessor's Office, and mailing a copy to the Assessor and the Magistrate. Our booklet noted that the basis of taxation in our state is "complicated," and gave several cites proving that description to be one of the great understatements of history.
We dutifully mailed off our paperwork, and received, almost immediately, a response from the Assessor's Office. They agreed that we owned the house at the given address, and that it was indeed residential property. They disagreed that the taxes were incorrect, and the burden of proof was ours.
Part V - Measure 50
Our state, possibly in a drunken stupor, enacted a property tax measure in 1997 called Measure 50. Briefly, it goes something like this. All property will be assessed at 90% of its current value on the tax rolls as of 1997. From that point forward, property taxes can increase 3% per year UNLESS there is an exception, such as, your house burns down or you fix it up. The value of the exception is the value that the market places on improvements (or loss), and will be assessed in addition to the 3% annual increase.
You pay taxes on the MAV (Maximum Assessed Value), but that value is based on the RMV (Real Market Value) of the property.
Okay. Well, we bought a house from people who bought it in 2007, fixed it up and sold it to us in early 2009. The value of the improvements, then will be the difference between what they bought it for and what we paid, less the change in general property values in the area. Easy enough.
Ha.
Part VI - The Case Management Hearing
Before you go to court, the Magistrate mandates a Case Management Hearing. That means everybody gets on the phone and says what they think. I wrote out our case ver batim in order that it was concise, to the point, and relevant. Evidence was mailed (again) to both the Magistrate and the Assessor's Office. Six months after our BOPTA appearance, the phone rang for said management hearing.
I told His Honor that we entered into an arm's length sales transaction to buy our house, for which an independent appraisal was effected on February 24. The value of the home was clear, therefore, the value of the repairs was clear. We pointed out the errors in the Assessor's Office appraisal. We concluded by thanking all participants for their valuable time.
The Assessor's Office responded by saying that they needed to see the property. We responded that they had seen the property, that our primary point of contention was the size of the finished basement and that we had been repeatedly told we were not obligated to let them in.
The Assessor's Office said, "Our appraiser never saw the interior. He just walked around the house."
WHAT? The burden of proof to refute some guy walking around the house and guessing how much it was worth - was MINE?
The Magistrate may have interpreted my shocked silence correctly, and said, "You need to let them in."
Jesus Tapdancing Christ.
Part VII - The Appraisal
The Assessor's Office appraisers came by at 9AM the day following our return from my step-son's wedding. Groggy, but not unpleasantly, we let them in. Yup, the basement isn't completely finished, they noted, as they measured the 336 sq. ft. we'd photographed, measured and presented last November. They walked quickly through the house, measured nothing else, took a few notes, and left.
"We'll be in touch," they said.
Part VIII - The End
We had a detailed accounting of the expenditures made on the house from the previous owners, and applied the percentages of market value for each upgrade suggested by Century 21 on its website. The market value of the repairs, according to these calculations, was $45,170.
When the appraiser called with his findings, he said, "Your exception value is $50,000." "Really?" I responded. "How did you determine that value?"
"We have a complex matrix . . ." blah blah blah. "The majority of the adjustment was the basement."
I refrained from saying, "The basement you didn't want to see last November?"
I paused, and instead said "I have a less complex matrix, I applied the actual value of the repairs to the amount a national realty company suggests they are worth. My value is $45,000." Silence.
"We can't go any lower than $45,000," the appraiser snapped.
My thoughts then were inappropriate for writing here. You could, however, describe them as "Expletives deleted."
We haggled about the square footage, and the real market value of the home, which they continued to think was 2.4% higher than the purchase price, but since it had nothing to do with the amount of taxes, I relented. Close enough for government work, I guess.
"We'll send you a statement to sign, and will refund your overpayment, Thank you for your cooperation," he ended.
"You're welcome," I responded, deleting more expletives.

The Ugly Truth About US Debt

2010-06-10T07:59:00.000-07:00

Only your closest friends will stop you before you leave the house in an unflattering outfit. Maybe it takes a grown woman without an agenda to tell you to truth about US debt.
Here's an unbiased look. Please refrain from the temptation to shoot the messenger.
All links are to most current US government promulgated reports.
The Budget
We're spending $3.5 trillion dollars, and taking in $2.1 trillion in revenue. The $1.4 trillion we're spending beyond our means is our annual deficit, and is added to all prior year deficits. The total of all deficits as of last September 30 is $11.9 trillion. That amount, now just over $13 trillion, is our national debt.
Expenses
Almost 40% ($1.35 trillion of our $3.5 trillion total annual expense) is Social Security, Medicare and Medicaid.
All the money we spend on national defense is is just over 15.5%, and rises to 22%, when including all other security programs. Those two items are nearly 2/3 of what we spend.
The other third is non-security and other mandatory programs, like education, justice, commerce, state department and the like.
Income
Individual income taxes are just over 40% of all taxes. Corporate taxes are almost 7%.
Social security, medicare and unemployment taxes are the biggest chunk - just over 42%. By the way, if you think your social security taxes are put into the so-called "Social Security Trust Fund," think again. There is no trust fund. We spend that money. But we promise to pay you back. That promise is almost 40% of our annual expense.
Personalizing the Budget
I can see your eyes rolling back in your head. No one can think in trillions. So, let's put this budget in terms of your community. To keep the numbers easy, we'll say that your community spends $100,000 per year, and expenses are split up just like our Federal budget.
$38,500 is put aside for old age benefits. About 13% of your population is 65 and older.
$29,700 goes to education, agriculture, commerce, energy, justice, labor and the like..
$22,000 is for security. You live in a dangerous area, and you've been attacked within the last decade.
$5,300 is interest on loans you've taken out to finance the amount you've spent above your revenues in the past.
$4,300 was invested in your local banks, which nearly stopped making loans due to their bad condition last year. You've been repaid about half the amount you lent them so far.
Reviewing the Budget
Right off the bat, almost 40% of your budget is spent for old age benefits for 13% of your population. .
You may be able to cut a little here and there, but nothing is as anywhere near as significant as that expense. Even if you cut your security budget in half, it wouldn't be as much of a benefit as cutting the old age benefit by just one-third.
But you know that this is a "sacred cow." Just look at the civil unrest in Greece and Spain for an idea of what you can expect when you cut benefits that you've promised - even if you can't afford them.
The fact is, though, you can't continue to promise 40% of the budget to 13% of the population. Someone, at some point, is going to have to tell your community the truth.
The Truth
Old age benefits began during the Great Depression. At that time, US life expectancies were 60 years of age, and benefits were available at age 65. Now, US life expectancies are 77.2, and benefits are still payable at age 65. The age at which benefits are available has not moved, despite the increase in life expectancy of 27.2 years.
When old age benefits began, there were 42 workers per retiree. In 1950, there were 16. Now there are 3.3 workers per retiree.
Some Possible Solutions
1. Age at which benefits are available must be increased in relation to the increase in our life expectancy.
2. Those of us who have provided comfortably for our retirements must consider reduction, or even elimination of our benefits for the viability of the program.
3. The option for a portion of benefits to be available for young workers to invest in capital markets.
4. You decide. Those of us who are parents and grandparents have the responsibility to make tough decisions in order to keep this program viable for the next generations. Yes, we paid into the system. Yes, a promise was made. But we're paying out much more than we're taking in, and no expense is anywhere near that of Social Security, Medicare and Medicaid. It's our responsibility.
We need to acknowledge the problem and fix it.
As always, I welcome your comments and suggestions.

Politicians + Banking Reform = Financial Disaster

2010-05-31T09:32:00.000-07:00

Anyone who doesn't harbor some degree of animosity for the bankers who, through a combination of stupidity, short-sightedness and avarice, caused the global financial crisis is a better person than I am. That said, financial reform should not be tantamount to financial dismemberment. And there's a little known accounting rule winding its way through financial reform that may be just that.
My writer husband and I often discuss our finances. He is a brilliant man, one whose brilliance is primarily that of adept observations and the facility with which he uses language to share them. His writer friends, many of whom are dear to me, share a trait with him: they hate math.
Consequently, when the business channel drones on about FASB's consideration of mark-to-market accounting for mortgages held by banks, his eyes glaze over like a weary parent listening to his two-year-old blathering unending baby talk. I imagine many others do as well.
This bill, however, is important. And I believe that a combination of me speaking English and you being smart will result in your understanding that this is a big deal, and something you should tell your Congressional representatives to stop.
Here goes.
Let's pretend you lend money in the form of buying a bond from the ABC company. They pay you interest and agree to repay you on a certain date. Let's say your bond is worth $10,000 (the amount you lend them), your interest rate is 3% and the bond is due (repayable to you in full) on June 1, 2013. Unless ABC company files for bankruptcy protection before your loan is due, you can expect to be paid $150 twice each year (3% on $10,000), and the full amount you lent them, $10,000, in three years.
Now let's say interest rates go up this Summer. Now companies like ABC have to pay 4% for borrowed money, 1% more than the amount they're paying you. If you sell your bond to someone else after rates go up, it will now be worth less than the $10,000 you paid for it, because anyone can now get 4% for their money, and your bond only pays 3%. If you mark your bond's value to the current market price (mark-to-market), your bond will be worth less after rates go up than it was what you bought it.
But, what if you don't sell it? What if you hold your bond until June 1, 2013, collect your 3% per year, and get all your money back?
While you hold your bond from now until 2013, what is it worth?

Is it worth what you could sell it for after rates go up?
Is it worth what you know you'll receive what the bond is due?

With that in mind, let's pretend you're a bank. You are now lending money to people to buy houses. You don't sell your mortgages to investors. You keep the loans, collect the payments and keep the interest your customers pay. When rates go up, are these mortgages worth less? When rates go down, are they worth more?
Yes, according to this new rule. Why should you care?
If banks have no intention of selling their mortgages, then they probably will be very careful how they lend money. Why? If they keep the mortgages, they keep the risk that if borrowers don't pay them back, they'll take the loss. They won't make crazy loans to people and sell them to investors. That's good.
But, when rates go up (as they are sure to do), these loans will be worth less. Then, the banks have to put more money aside for them, and will have less to loan to you.
Seems crazy, doesn't it? Banks will be penalized for NOT selling their loans to investors, and you'll have a harder time getting a loan.
So, here's the English translation of what's going on. FASB (pronounced FAS-bee), is the Financial Accounting Standards Board. They're considering marking-to-market (immediate sale to investors value, not repayment value) all mortgages that banks intend to keep.
FDIC Chair Ms. Bair is against it, as is former Chair Mr. Isaac. So am I. So should you, if you intend to borrow money from a bank who makes mortgages and doesn't sell them to investors.
Contact your Congressional Representatives if you agree, and tell them that you are against FASB Topic 220, 825 and 815.

Things Are (Sort of) Looking Up

2010-05-24T11:40:00.000-07:00

In the midst of a stomach churning stock market correction, Dr. Nouriel Roubini predicts another 20% down. Why I think he's wrong (and why I think the moniker "Dr. Doom" fits him well).
April Jobs Report
After losing over 8 million jobs, an upturn of 290,000 may not sound like much. But, our April jobs report sends a strong signal that business recovery is gaining a firm foothold. As businesses continue to expand, we are seeing signs of stability in the housing market, as well as signs that the US consumer is beginning to spend again.
Type of Recovery
Generally, after a deep recession, business recovery bounces back at the GDP rate of 5% or more for several quarters, releasing pent-up demand. Not so this time, it appears. With a slower job recovery similar to that after the deep recession in the early 1980s, and significant housing inventories from buyers who should never have been owners in the first place, economic indicators point to a sustained, but muted recovery of 3%+ for the remainder of this year into 2011. More of a "U" shaped recovery than a "V" is likely under current conditions.
In addition, exports to Europe, where the declining value of the Euro to the Dollar make our goods more expensive, will dampen, but not eliminate US export growth.
Economic Indicators
This year started with a respectable 3.2% GDP growth in the first quarter. Most strength was in manufacturing and consumer spending. Business equipment spending was a moderate contributor.
Challenges to growth are in business real estate, which was very overbuilt. With the slowdown during the recession, it will be a while before businesses will grow into current vacancies.
Other challenges remain in residential real estate, which, while stabilizing, is far from growing at normal levels, and exports, which we mentioned before, will be subdued in the European region because the dollar's strength will make them more expensive.
In 2011, as the European situation stabilizes, improvements in exports will likely follow.
Inflation
Subdued, for now, as residual effects of the recession, including high unemployment, keep demand low. In the future, there are concerns that high levels of public debt will compete with private borrowing when the economy regains its footing. Look to the current European problems to see how increasing rates for borrowing fuels higher costs both in government and the private sector, resulting in higher inflation.
That's down the road, but a grave concern nonetheless.
Business Income
One of the residual benefits of a recession is the cost cutting that businesses must do to retain profitability. As consumer demand increases, these lean businesses will enjoy profits based more by sales than cost cutting.
Stock Market
The so-called easy money has been made. The brave investors who bought well run companies in March, 2009 have enjoyed a 70%+ gain. Lately, prior to the recent correction, investor sentiment was very high (a bad sign), and price earnings ratios were nearly 14 times future earnings, slightly lower than the 15.8 long term average, but nowhere near the bargain prices in early 2009. The recent correction provided a slightly better buying opportunity, but with a sub-par growth projection into 2011 and 70% gain from its lows, investors are understandably wary.
We're pointed in the right direction, to be sure. Some caution is, however, warranted.
A further 20% correction? I'd have to be nicknamed Dr. Doom to say that. And, I follow the data. Not a nickname.

What If There Were a Sale (and Nobody Bought)

2010-05-21T09:05:00.000-07:00

Do you remember looking back at the market low in March, 2009 and thinking, "I wish I had bought then"? Here's another chance.
When I was in the business of investing other people's money, I often thought it ironic that I picked the only business where nobody wanted to buy when there was a sale. Investor sentiment is a powerful thing, and, like the little girl with the little curl right in the middle of her forehead, when it's bad, it's horrid. Fear paralyzes, and when the paralysis wears off, then the fear turns to greed - "I'd better buy soon or I'll miss the rest of the upturn."
It's not often that two corrections occur when memory is fresh. But here it is.
Let's talk a little about why you may want to summon the courage to invest the money you won't be needing for the next five years.
I. Safe isn't safe
If you thought you were very smart by keeping your money in cash over the last ten years, if history repeats itself, you will find the last decade an anomaly. Generally, Certificates of Deposit, insured Money Market Accounts and the like are very good places to keep money that you need in the near future, and the very worst place to keep money you need for the long term. Why?

Inflation, the slow increase in prices over time; and
Taxes.

Let's look at an example. Right now, you can find money market accounts paying about 1% interest. Inflation over the last twelve months is running just under 1% (.95%). So, the increase in the cost of goods and services that you buy reduces your return to 1% - .95% = .05%. Then, you also have to pay taxes on your interest income.
Federal and state tax rates for most people run about 20%. 20% of 1% is .20. Subtract .20 from the .05% you had left after inflation, and you are left with negative .15%. After inflation and taxes, your real return is negative.
For money you need in the near term, that's fine. You can't risk the volatility of the stock or bond market with short term money. But, as you know, women live longer than men. And most women don't like the idea of "old and poor." So, we have to invest our money where it will earn more than inflation.
For that, you have two choices. Real estate (investments, not your home) and stock and bonds.
Real estate requires a very large initial investment, so most women choose to invest in the capital markets.
II. The two primary considerations
When you buy stocks and bonds, there are only two things you need to decide. First, you need to know what to buy. Second, you need to decide at what price to buy it.
The discussion of how to evaluate stock purchases is a primary focus in Financial Planning courses I taught at UCLA, and it required years of study. But here are a few useful shortcuts.
If you are a value investor, you can buy Berkshire Hathaway Class B shares managed by Warren Buffett. These shares trade at about $72 per share right now, down from $83.57 last March.
If you'd rather invest in the Standard and Poor 500 Index, including 500 US companies, you can buy it for about $1085 per share right now, down from about $1220 last April.
For risk purposes, many women

Subtract their age from 100
Invest that percentage of their long term money in stocks
Invest the rest in investment grade short term bonds.

So, there you are. Stocks are on sale. The sale's not as good as it was in March, 2008, but you have another chance.
Mary Buffett notes that women are good shoppers.
For the sake of our long term well-being, I hope she's right.

Vital Lessons Learned from the Market's Recent Freefall

2010-05-14T09:53:00.000-07:00

Now "fat finger" and "high frequency" trades are part of the common vernacular. Not much solace for those who lost money during the stomach churning drop. What you must know to protect yourself from losing money, while the slow process of figuring out what happened occurs.
TYPES OF ORDERS
When you buy or sell stock, there are several ways that your order can be placed. The first, and most common, is a "market" order. When you place an order "at the market," you buy at the lowest price any seller asks, or sell at the lowest price any buyer bids.
During the recent market free fall, however, prices fell precipitously. Had you sold Proctor & Gamble "at the market" late in the day on May 6, you may have thought you were selling at about $61 per share, but were executed at $40. That's because the selling was so intense and buyers were so few. People in this predicament may have thought they were selling at a profit, but actually locked in serious losses.
So, lesson one is never sell "at the market." Always enter a "limit" order" by checking the quote on the stock you want to sell, and entering it at the "bid" price. That way, you'll be assured that your sale will be at that price (or better).
Some investors like to place "sell stop" orders. These are orders that will automatically sell if the price falls to a given price. Again, using the example of Proctor & Gamble, any such sell order for under $60 may have been executed at as low as $40, because the price of the stock fell so quickly. Those who thought they were protecting their profits at $58 may have locked in losses at $40.
There are two lessons to be learned here. If the investor absolutely wanted to place a "sell stop" order, if it is placed with a "limit" price of $58, the orders would have tried to execute when the price fell to $58, but if that price were not available because the price was falling so quickly, the order would not have been executed. That investor would have likely been executed when the stock price bounced back later in the day.
Even still, after the execution when the price was on the way up, the investor would have sold at $58, and seen the price rise to $60 almost immediately.
The other alternative is not to place automatic orders at all.
This type of order was undoubtedly a part of the problem on May 6. Why? When many such orders are placed, more and more are executed as prices fall, causing more selling. When there are few buyers, these type of orders just exacerbate the problem.
So, we never place a market order when selling stock. We always place limit orders at the bid price.
We never place a "sell stop" order, without adding a "limit" price. Perhaps we just don't place "sell stop" orders at all.
That's how we protect ourselves from unintended losses. But there were some people who made money during the market drop. What did they do?
Some were value investors. These are investors who calculate the price at which they will buy a stock, and simply wait (sometimes for years) for the price they want.
Again, using the example of Proctor and Gamble, if an investor decided they wanted to buy this stock, but at a price no higher that $43 per share, she may have placed a buy order at that price that was "good until canceled." That investor may well have had that order executed on May 6.
MARKET FREE FALL SOLUTIONS
One of the problems the market experienced is lack of uniformity. Stocks that trade on the New York Stock Exchange have strict rules during market corrections. Trading is suspended for a period of time. We take a breath. We look at information. We make informed decisions that are not based in panic.
Unfortunately, there are automated exchanges that do not have such rules, and trades will sometimes be routed from the NYSE to these other exchanges during a panic sell.
There is virtually no argument against implementing uniform trading suspensions in all exchanges. The problem is executing this uniformity. The programming that is necessary to ensure that all exchanges operating under the same rules is complex, and cannot be written in a day. It will take time, but it's a good idea and will undoubtedly be a reality before the end of the year.
Until then, remember:
1) Sell only with limit orders;
2) If you place sell stop orders, add a limit price;
3) Consider not using sell stop orders at all; and
4) If you're patient, place buy orders at the value that the earnings stream is worth.
If you want to know how to calculate the value of future earnings, buy Mary Buffett's book titled "Buffettology." Or make sure your broker does.

Who's Most Guilty of Financial Malfeasance?

2010-05-04T11:28:00.000-07:00

You may have heard Warren Buffett has said that he has no problem with the Goldman Sachs deal that has resulted in charges of client misrepresentation by the Security and Exchange Commission (and is being considered for criminal charges by the Justice Department). As discussed in a previous article, I agree. If not the banks, than who is most responsible for the financial meltdown?
1. The Players
The Quants
First, there were the "Quants," the quantitative analysts, fresh from Ivy League graduate schools, who prepared studies showing the extreme unlikelihood of all regions of the US housing market dropping in value at the same time. As these were academically gifted young people with virtually no practical experience, I hesitate to lay blame here.
The Quants' Bosses
It started at JP Morgan. The bosses, seasoned professionals, read the analysis, looked at the commercial banks' and thrifts' mortgage profits, and decided to get into the business. The big question is, "Did they understand that the increase in demand that would result from broadening the real estate market would result in a crash?" While the answer to this question is unknowable, there are two issues that may point to the truth.
The first, is the recent "Internet bubble." Anyone could have seen that the amount of money that was invested in Internet stocks would have pushed their valuation to ridiculous levels. Surely, an analogous investment in the real estate market would do the same.
The second, is the fact that the risk to increasing the number of real estate owners was mitigated by selling that risk to investors, instead of holding those investments on their books.
The Banks
Once JP Morgan entered the real estate business, it had to offer terms that would be more attractive to borrowers than commercial banks and thrifts. So, underwriting standards were decreased. So what if you didn't technically qualify for a mortgage? A rising real estate market would allow you to sell your property at a profit, and a low "teaser" rate would result in low initial payments. After five years, you'd be making more money at your job, wouldn't you? Then you could afford the payments.
For banks and thrifts to compete, they, too, must lower their underwriting standards, or risk losing their loan portfolios to those banks that offered better refinancing opportunities.
So, we're off to the races.
The Borrowers
The fact that borrowers were not required to prove their income did not force them to lie on applications. Even if the borrowing terms were difficult to understand, people who earned $50,000 knew they could not afford a $500,000 house.
A lie is a lie. Lies have consequences, and I am not in the camp that says, "Poor little borrowers didn't know what they were doing."
I don't think people are that stupid.
The Rating Agencies
Rating agencies are paid by the companies that generate the securities that they rate. That is inherently insane.
If I have a security I want to sell to the general public and it's inherently risky, it is the job of the rating agencies to say "That is risky."
The problem is, if one agency declined to rate the security as "not risky," all the issuer had to do is take it to another and say, "Here's my fee. See if you can rate this as 'not risky'." And they did.
Packages of loans, geographically diversified in the US were sold to the general public as AAA - the same rating given to ultra-safe US Treasuries. "Widows and orphans" could safely buy them. Why? Because, even if the underwriting standards were lax, there was good evidence provided by the Quants, verified by the Quants' Bosses (who paid big, fat fees for safe ratings), that a majority of the loans would be good, even if there were regional difficulties at times.
2. Common Thread
If the Quants hadn't come up with the studies about the general safety of the US mortgage market, someone would have figured it out. Maybe the Quants' bosses would have done it themselves, as they saw quarter after quarter of real estate lenders' profits.
Some percentage of borrowers have always lied on mortgage applications. Underwriters catch some, but not all of them, but the number that squeak through the system were never significant.
But, this bubble could never have grown unless the issuers of laxly underwritten mortgages could have sold them to a "greater fool." If they'd kept these mortgages on their books, the banks who lent the money would have had to acknowledge the losses.
That leaves the rating agencies.
3. The Rating Agency Issue
There is no excuse for the ratings agencies giving AAA rating to risky securities. Taking money to do so is effectively the same as taking a bribe.
Ratings agencies are charged with the responsibility of analyzing underlying securities and giving the public an easily understood way to know the level of risk they have. This is the one place where, "I didn't know" isn't an excuse. Maybe the Quants didn't know. Maybe the Quants' Bosses didn't know. Maybe the banks didn't know.
But the ratings agencies can't claim stupidity. Rating securities is their reason for existing. If they can't do that, they don't deserve to exist.
4. Blame
Maybe the Quants should have known. Probably the Quants bosses should have known. Likely the banks should have know. The borrowers should not have lied. But, most definitely, the ratings agencies should have known.
So, the next time you hear that a security is rated AAA, what will you think?
It's time to hold the ratings agencies' feet to the fire. Either rate securities by using generally accepted accounting principals or rename yourselves as, "Bribe Takers."
Perhaps a little something in this regard should be passed in Financial Regulatory Reform. And, if it isn't, I wonder.
Will it be because someone has been paid to ignore it?

The Case Against Goldman Sachs

2010-04-20T10:01:00.000-07:00

There is no doubt that the sentiment toward big banks is negative. Many resent that these banks were bailed out during the financial crisis, when the individual citizen who suffered as a result of irresponsible lending practices, misrepresentation of the safety of securities backed by those loans and resulting falling home prices, paid for the bail outs with their tax dollars. When, added to that, historic profits are earned by those very banks, and enormous bonuses are paid to their employees, while ordinary citizens battle near double-digit unemployment, that anger is understandably exacerbated.
Few news reports give details of this charge, describing it as "complicated, difficult to explain, and hard to understand." I disagree. I think that, when explained properly, this is very understandable.
It's easy to vilify Goldman for bad behavior. Let's take a look at this case, and decide for ourselves.
In plain English, Goldman is accused of selling derivative securities to their clients in April, 2007. Derivative securities are securities that derive their price from another asset. The assets on which the price of these securities was derived, were residential mortgages, which were rated BBB-, the lowest "investment grade" rating available, by ACA Management, LLC, a company with experience rating securities like these.
A Goldman employee, Fabrice Tourre, allegedly led ACA to believe that a hedge fund, Paulson & Co., Inc., was investing in these securities, when in fact, Paulson was investing in the other side of the transaction, i.e., a "short" position, or an interest in the securities losing value. The securities that ACA approved as investment grade were chosen from a list that Paulson had chosen to invest against.
The approved securities were described as "Selected by ACA Management" and were marketed, not to individual investors, but to "sophisticated investors,” like banks and pension funds.
When explaining the difference between what must be disclosed to such sophisticated investors, former SEC lawyer Jacob Frenkel, explains,“Materiality is a lot like a continuum. The amount of information that needs to be disclosed to institutional investors at the highest level, where they’re doing their own research and analysis, is less. Their criteria for the investment decisions tend to be far more sophisticated than the individual investor’s.”
So, the case is this. A hedge fund wants to bet against sub-prime mortgages, and brings a list of the mortgages it feels will go down to Goldman. Goldman takes the list to a rating agency, does not tell that rating agency that it received the list from a hedge fund that thinks the securities will go down, and gets an investment grade rating for most of those securities from that rating agency. It sold those securities to banks and pension funds without telling them that a hedge fund was betting against them. The banks and pension funds lost money. So did Goldman, by the way. They received $15 million for structuring this deal, but they lost $90 million investing in it.
The SEC alleges that Goldman should have told ACA and its investors that Paulson was investing on the other side.
Here are some questions that may help you decide how you feel:
1. Should rating agencies rate securities on their own merit (not by considering who may or may not be investing in them)?
2. Since ACA chose the securities in this investment from a list given to them by Goldman (from a Paulson list), was it a misstatement that ACA was "Portfolio Selection Agent?"
3. Since banks and pension funds are defined as "sophisticated" investors, should they analyze the investments they are considering on their own merit (not by considering who may or may not be investing in them)?
I understand the anger many people feel toward investment bankers. That said, I also feel that the analysis of securities, particularly by those who buy them on behalf of institutions or pension fund participants, should be based on analytical evaluation, not by "who else is buying this?"
I believe this to be a fundamentally weak case, and cannot help but notice that it was made public during the Financial Regulatory Reform debate.
For the record, I am in favor of Financial Regulatory Reform. While this case may increase the likelihood of the passage of such reform, I find it largely without merit.
I welcome your comments.

An Issue of Trust

2010-04-17T08:12:00.000-07:00

Who can you trust with your money?
If you ask the individual investor, the answer is "no one." Not after the likes of Bernard Madoff, Allen Sanford and, now, Goldman Sachs, the crown jewel of investment banks. So, if you follow the thinking of the individual investor by measuring "Investor Sentiment," you would have drastically cut back in stock investments in December, 2008, and you would not have returned to the stock market yet.
In other words, you would have sold near the market low. No wonder Warren Buffett cautions, "Be greedy when others are fearful; be fearful when others are greedy."
I follow a proprietary investment model that measures twenty one economic indicators. I've built this model over a period of over twenty years, and use it exclusively for two purposes:

It is my model, and I use only data from apolitical, independent sources for analysis. That keeps me protected from data that may have been skewed by someone who has a vested interest in whether I choose to invest or not;
It removes all emotion from investment decisions. If it says that I should be 70% invested, I'm 70% invested. No panic. No euphoria. No need to trust anyone but me.

When I invested money for other people, it was an invaluable tool. If my clients wanted to sell low, I showed them that they were doing just that. If they wanted to buy high, again, I showed them that was a less than stellar strategy.
Discussing each indicator, and how it relates to the overall decision was the subject of a semester's work in an advanced class at UCLA for professional financial planners who chose an emphasis in investment. Mostly geeks. I will, however, discuss one part of this analysis, Investor Sentiment, and tie that discussion to the general feeling of mistrust that is currently pervasive with the individual investor.
If you had followed Investor Sentiment as discussed above, you would have sold when the S and P 500 was at 888.61. It is now at 1192.13. As reflected above, you'd have sold low and, if you buy back in, it will undoubtedly be higher.
If, on the other hand, you would have read Investor Sentiment as a negative indicator, i.e., you did the opposite of what it suggested, you would have enjoyed a 34% increase. Hmmm. I'm reminded of what my grandmother said when I based my plea to do something on, "Everybody else is doing it." Her familiar response was, "If everybody jumped off a cliff, would you do it, too?"
So, now we have both Warren Buffett and my sweet little Meema advising us to think for ourselves, and even consider doing the opposite of what others are doing. In the particular case of the last market correction, that would have been good advice. But, does it hold true most of the time?
As it turns out, yes. Investor Sentiment is the most predictive of all twenty one of my indicators, if you do the opposite of what it says to do. And, I will add, that the stock market is nowhere near the bargain it was in March, 2008, when its cost (P/E) was about its long term average of $15.82 for every dollar of S and P 500 earnings, but even though the market has come back 75% from its low (25% lower than its high), the individual investor is still not buying.
Back to trust. Yes, Bernie Madoff is a thief. Yes, Allen Sanford appears to have bilked thousands of investors out of their money, touting "safe" international CDs. Yes, it looks like Goldman Sachs took both sides of the bet that the housing bubble would burst. But does that mean you should keep your money in the bank? Let's take a look at how that will work for you in the long term.
The best rate I could find for a two and one-half year insured CD was 2.1%. To calculate your "real return," that is, your return after inflation and taxes, subtract from that 2.1% the current inflation rate, or 2.1%. Now you're at zero, but you still have to pay taxes on your interest. For most people, your marginal tax rate is about 16%. 16% tax on 3% is .48. So, tax of .48 plus inflation of 2.1 is 2.58. 2.1 - 2.58 = -.48 You're losing about 1/2% annually.
If you're a woman with $100,000 that must last you for 30 years, at that rate, this money will produce about $3100 per year. On the other hand, if you were to invest in the stock market, using its long term average return of 9%, this money will produce about $9,700 per year.
We live longer. Inflation hits us harder. We can put our money in "safe" investments that are guaranteed to lose money over the long term, or we can listen to Warren Buffett and my sweet little Meema.
The choice is yours.

The Best Investor 2010 - First Quarter Results

2010-04-07T09:43:00.000-07:00

Last January, I posed the question that buying shares in the S and P 500 may be just as effective as following professionals' stock market picks. Some women who are participating in the Self-Invested Women Pilot Program are considering whether they are passive (people who buy an index, like the S and P 500) or active (people who buy individual stocks or types of stocks, like energy and health care) investors. This may help you make that decision.
The S and P 500 Index
This index allows investors to buy 75% of the publicly traded companies in the US, many of which derive a significant part of their income outside the country. While there are many indexes (Dow Jones Industrial, the Russell 2000, the Wilshire 5000), the S and P 500 is the index against which the vast majority of money managers measure their performance.
The Challenge
Last September, ten investment strategists gave their recommendations for which sectors of the market would outperform the total market in 2010 in Barron's magazine. We chose six of these strategists, representing US Trust, Citigroup, JP Morgan, BlackRock, Deutsche Bank and Goldman Sachs. We'll compare the S and P 500 index performance against the sectors recommended by each investment professional, assuming you were to invest equally in all sectors.
Fees
It requires no management fee to invest in an index like the S and P 500. Investment advisers' fees range from 2% to 5%. We'll use the lower figure, 2%, for this comparison, and deduct 1/2% every quarter from the recommendations by the advisers.
Since there are trading costs for both individuals and money managers, we'll consider this a "wash."
Long Term Investing
We'll assume that we're in the stock market for long term investing, not short term "trading." Therefore, one quarter's data is insufficient to make this decision. We'll look at this performance all year, and discuss how relevant this little experiment is to your long term strategy.
First Quarter Performance
S and P 500
S and P 500 was up 6.04% in the first quarter this year.
US Trust
Technology + 10.45%
Materials + 6.89%
Energy + 5.04%
Industrials + 4.77%
Weighted Average performance +6.7875%, less 1/2% fee = +6.2875%
US Trust's recommendations beat the S and P 500 by about a quarter of one percent in the first quarter.
Citigroup
Materials + 6.89%
Financials - 3.68%
Software + 10.45%
Energy + 5.04%
Weighted Average performance + 4.675%, less 1/2% fee = +4.175%
Citigroup's recommendations lagged the S and P 500 by about 1.87% the first quarter.
JP Morgan
Energy + 5.04%
Industrials + 4.77%
Financials - 3.68%
Technology + 10.45%
Materials + 6.89%
Weighted Average performance + 6.166%, less 1/2% fee = +5.666%.
JP Morgan's recommendations lagged the S and P 500 by about 3/8 of one percent in the first quarter.
BlackRock
Energy + 5.04%
Health Care + 8.53%
Weighted Average performance + 6.785%, less 1/2% fee = + 6.285%.
BlackRock beat the S and P 500 by just under 1/4 of one percent in the first quarter.
Deutsche Bank
Technology + 10.45%
Health Care + 8.53%
Energy + 5.04%
Industrials + 4.77%
Weighted Average performance + 7.1975%, less 1/2% fee = +6.6975%.
Deutsche Bank beat the S and P 500 by 3/4 of one percent in the first quarter.
Goldman Sachs
Energy + 5.04%
Materials + 6.89%
Financials - 3.68%
Technology + 10.45%
Weighted Average performance + 4.675%, less 1/2% fee = 4.175%.
Goldman Sachs lagged the S and P 500 by 1.865% in the first quarter.
Summary
So far this year, three underperformed the S and P 500 and three lagged behind its performance, with Deutsche Bank doing best, and Goldman worst.
Last year, only Deutsche Bank and JP Morgan beat the averages, and four lagged behind.
Another update after the second quarter.
We'd love to hear your thoughts. Are you an active or passive investor - and why?

Taxation Without Torture

2010-03-23T12:09:00.000-07:00

Taxes. Just hearing the word makes most people cringe. How a couple of easy steps can go a long way in making the process more bearable.

The first thing you need to know is that you don’t need to know how to prepare a tax return. You just need to know a couple of things that will make the amount of tax you pay as little as possible.

The second thing is that you don’t need to become an obsessive-compulsive record keeper. You can continue being a regular person, just one with a few more envelopes. You can live with that.

This discussion is not meant to replace your tax advisor, if you have one. Rather, it’s meant to give you the tools to reduce the fee she charges by keeping track of key expenses, and make sure you can manage the process – not do it yourself.

How Federal Taxes Work

The Internal Revenue Code (“IRC”) contains the rules for paying Federal taxes. It’s long, boring and has been patched together over many years and is now nearly unreadable, because it constantly refers you to lots of other places while you’re trying to read it. What’s important to know is that it contains Congress’ encouragement for you to do certain things, by reducing the taxes you pay if you do them.

Adjustments

Some tax incentives are called “above the line” adjustments. Above-the-line adjustments are more valuable than tax deductions because they come right off the top by reducing your income. Examples of above-the-line adjustments are contributions to retirement plans or health care savings accounts. People in Congress really want you to fund your retirement plan, and have given you every financial reason in the world to do so. So, if you go no further than to learn that there is yet ANOTHER reason to invest for your future, do that. It will very likely make a difference in the amount of tax you pay, too.

If you lend money to municipalities by buying municipal bonds, you usually don’t have to pay tax on the interest you receive for that loan. If you lend money to the Federal government by buying Treasury bills, bonds or notes, you generally won’t pay state tax on the interest you receive for those loans.

Deductions

You’ve heard of tax deductions. Deductions are subtracted from your adjusted income. To see what the current standard deduction is, go to http://www.irs.gov/publications/p501/index.html Under “Publication 501 Contents,” go to “Standard Deduction,” and click “Standard Deduction Amount.” Scroll down to Table 7 to determine the amount of your standard deduction. You may have more deductions than that standard deduction amount. If you do, you will itemize their deductions, or provide a list that adds up to more than that standard deduction.

How do you know if you should itemize deductions?

Congress, through the tax code, encourages home ownership because it is seen as a stabilizing force in building communities, so both mortgage interest and property taxes are deductible. If you own a home, you will probably itemize deductions. You need to keep your property tax receipt, if these taxes aren’t part of your monthly mortgage payment . Otherwise, you’ll get a year-end statement with that amount from the bank that will also give you the total mortgage interest you paid, both of which are generally deductible.

Congress also encourages supporting charitable causes. So, if you contribute a significant amount to charity, it may make sense to itemize deductions.

And, with medical cost rising at an alarming rate, deductions are available for those, too - if they are more than a certain amount of your income .

So, if you have a lot of contributions to charities and/or medical expenses, it is a good idea to make envelopes called “Charity” and “Medical” and save all those receipts.

Like property tax, your state taxes are also deductible if you itemize your deductions.

If you work for someone else, and have lots of employee job expenses that were not reimbursed, you may be able deduct these, as well as education expenses that were directly related to your current job. Save those receipts in an envelope called “Employee Expenses.”

If you own your own or are starting your own business, you will probably file a “Schedule C.” This is the form that allows you to deduct business related expenses from your income. You are someone who definitely needs the help of a tax preparer – the sooner the better – particularly if yours is a home based business. While Schedule C itself does not appear to be a particularly complicated form, that is deceiving. Don’t do this yourself, but do save all business expenses.

Are there more? Yes, there are others. Lots of them. But, these are the big ones, and will give you a good start.

By organizing your deductions and knowing approximately how much you can deduct in each category you will have relatively organized information to give – and discuss with – your tax preparer.

Exemptions

These are also subtracted from your income. If you are single person, you are entitled to one exemption. A married couple filing a joint return receives two exemptions, and one more for each minor dependent child.

The amount of current Federal tax exemptions can be found at http://www.irs.gov/pub/irs-pdf/p501.pdf

Tax Calculation

In a nutshell, then the way taxes are figured is:

• Income minus

• Adjustments (like retirement contributions) equals

• Adjusted Gross Income minus

• Tax Deductions minus

• Total Exemptions equals

• Taxable Income which is multiplied by your tax rate.

Tax Rates

Your tax rate is determined by whether you are married. Single people pay a higher rate of taxes on their income than married people.

Your tax rate is also “graduated.” That means that your money is lumped into groups, and each group is taxed at a progressively higher rate. Then, they’re all added together, and that is the amount of tax you owe.

The lower the income, the lower your tax rate.

Tax brackets are useful for thinking about the rate you’ll pay on taxable investments, like dividends and interest.

Your average tax rate is different than your tax bracket. Here’s how to figure your average tax rate.

Amount of Tax Paid divided by Total Income

8,922.50 / 50,000 = 17.8%

Your goal in tax planning is to try to reduce your income as much as you can with above-the-line adjustments like retirement plan contributions, then reduce the tax you pay as much as you can by taking all the deductions that are available to you.

If you have a simple tax situation - a W-2 form, and interest from savings - you may prepare your own taxes. If you have a lot of any of the categories mentioned under “Deductions,” you may review whether it would benefit you to itemize.

Tax Preparers

At any point that you feel that preparing your taxes is overwhelming, get help. The kinds of people available to prepare your taxes are

Tax Preparer Attended tax preparation courses, usually sponsored by their employer firm, such as H&R Block, Jackson Hewitt, etc.

Enrolled Agents Extensive training in personal tax preparation

Accountant A person who has a Bachelors degree in Accounting

CPA Certified Public Accountant, a professional designation requiring experience, education and passing an examination.

Generally, an Enrolled Agent has more than adequate training for any tax preparation or tax planning question the majority of people will have. Some employees of national tax preparations firms are enrolled agents, but you’ll need to ask their qualifications. Questions you will want to pose to potential tax preparers are:

• What credentials do you have?

Again, an Enrolled Agent will have extensive personal tax preparation training.

• How long have you been preparing tax returns professionally?

You want at least five years of experience

• Describe your typical client.

You want a tax preparer who has experience with the tax issues that you have; e.g., similar income, profession, investments, etc.

• Does your fee include representing me if I’m audited?

You want representation if audited included, or for a small additional fee

If you keep your receipts organized and have a relatively simple tax situation, you may want to try preparing your taxes on your own. If so, software such as “TurboTax,” “TaxACT,” and others are helpful, but obviously will not include answering questions or representation in case of an audit.

Tax Planning

There are a few simple things that people who itemize deductions can do to decrease their taxes. These should be reviewed each year in mid-November.

• If you make State “estimated tax payments,” your last payment is due January 15 of the following calendar year. By making that payment before year end, it will be deductible.

• If you are considering any charitable contributions, make them prior to year end.

• If you own your home, consider making your January mortgage payment before year end, in order to deduct the interest from that payment.

• Schedule any doctor or dentist appointments before year end, especially in any year when you have high medical bills.

• If you’re planning to get married anyway, it’s better to do it in December than January to qualify for lower Married Filing Jointly tax rates.
Even if your spouse prepares your return (or oversees its preparation with a tax professiona, you are responsible for the tax return that you sign. Don’t sign it if you don’t understand it. Don’t be shy about asking questions.

In conclusion:

There is yet another reason that you should put as much money as you can into your retirement account and health care savings account.

There is yet another reason that you might consider buying a home (deductible mortgage interest and property taxes), if you don’t already have one.

If you just put all receipts for deductible expenses in separate envelopes - medical, contributions business and employee expenses every year - you’ll be way ahead of the game.

You know the basic concept for how taxes are calculated.

You know how to interview a tax preparer.

You won’t sign a tax return that you don’t understand, and won’t be shy about asking questions

Is Janet Yellen the Best Candidate for Vice Chair of the Fed?

2010-03-23T11:42:00.000-07:00

San Francisco Federal Reserve Bank President Janet Yellin is Obama's nominee for Vice Chair of the Federal Reserve Bank. Why this policy dove may be a perfect short term answer, and a long term disaster.
Mission
The primary role of the Fed is the pursuit of maximum employment and price stability. Sounds simple.
It's anything but.
I. Maximum Employment
To pursue the goal of full employment, the Fed must make business conditions favorable to hiring. That means that businesses must be able to borrow easily, expand and hire employees to facilitate such growth. As you know, banks must keep a certain amount of their deposits with their local branch of the Federal Reserve Bank in order to have sufficient liquidity to prevent panics that contributed to the Great Depression. When short term interest rates are low, banks can more freely lend to businesses because they don't have to keep as close an eye on their cash reserves. Money's cheap.
When rates rise, banks keep a tighter rein on lending by strengthening borrowing standards. It's harder to get a loan, business expansion slows and jobs are harder to get.
Why not have a continuing policy of low interest rates?
II. Price Stability
Price stability is another way of saying low inflation. Inflation is the amount prices go up every year. Anyone who lived through the 1970s remembers that prices rose much faster than wages. Every year our same dollars bought less and less.
When inflation takes hold, it's hard to stop. People want more money to afford what they could afford last year. If they get raises, however, their businesses have to raise prices to cover higher payroll costs, so costs rise. A vicious circle ensues, where labor wants raises and businesses want higher prices. What stops the circle? A recession, when businesses lay off workers and can contain prices. The higher inflation, the more prolonged the recession.
The problem is, during the recession, the Fed is pressured to lower interest rates to stimulate the economy. But, r
Once inflation takes hold, it's very hard to stop.
A Dovish Policymaker
Janet Yellin is described as an inflation "dove." That means that her decisions have been "growth and employment" oriented and less focused on containment of inflation. You may think, that with unemployment rates hovering in the double-digits, this is just what we need. Certainly, that political opinion would be currently popular. But, would it be a good long term policy?
Deficits and Inflation
No reputable economist of whom I'm aware would not have advised deficit spending to stimulate the economy during the last recession. It was a necessary evil that prevented the country from likely sinking into a Depression. But historically, the relationship between deficit spending and inflation is problematic.
Generally, when government borrowing increases, the amount of funds that remains for businesses and individuals to borrow decreases, and the competition for these fewer dollars causes rates to increase.
So-called inflation "doves," who generally advise keeping rates low, can accommodate both government and business lending only by printing more money for the government to buy its own debt, causing the money supply to expand and debt to contract.
Expanding the money supply is inflationary. Instead of raising taxes to pay its debt, printing more money makes the dollar less valuable. The cost of everything goes up when your dollar is worth less.
The Federal Reserve Board of Governors
At its last meeting, only one Fed governor, that of St. Louis, voted against keeping interest rates low. The majority (11 members) voted to keep rates low because their perception that the risk of sinking back into recession was more significant than the threat of inflation. Dr. Bernanke, current Fed chairman, is considered one of the premier scholars of the Great Depression. One significant factor in its length is thought to be insufficient economic stimulus. It is a mistake about which Bernanke argues eloquently, and apparently the majority of the board agrees.
With a propensity of more dovish members, however, it is of some concern that one who has been one of the most consistent would be considered as the Vice Chair. Generally, upon the retirement or failure to reappoint the Chair, the Vice Chair is likely to assume this influential post.
At a time when deficit spending is so high, the national debt is ballooning and the nation only recently stepped back from the brink of Depression, is it wise to choose a member who is so dovish about inflation that she stated last February, "If it were possible to take interest rates into negative territory I would be voting for that."?
Perhaps a candidate with a more balanced approach to the Fed's dual mandate would be a more reasonable decision.

Examining Tea Party Allegations of Higher Taxes and Increasing Debt

2010-03-11T08:59:00.000-08:00

The "Tea Party" movement alleges that the USA is moving toward socialism with higher taxes and increasing levels of public debt.
I discussed where the US stands with respect to public debt in an article published last December.
Let's take a look at where the country actually stands with its taxation. All data referenced in this discussion are compiled from the Organisation for Economic Co-operation and Development.
I. Taxes as a Percentage of GDP
Taxes in the US, as measured as a percentage of Gross Domestic Product, were 25th lowest out of the 30 participating countries. As of 2006, the latest year for which complete data are available, Denmark paid the highest at 49.1% of its GDP, the US paid 28%, and the lowest taxes were paid by Mexico, at 20.6% of GDP.
II. Top Marginal Taxes
As you know, the US has a "progressive tax." In this method of taxation, lower levels of income are taxed at lower levels, and higher levels of income are taxed at a progressively higher rate. Most people pay Federal income tax as follows

10% on income up to $8,350
15% on income from $8,350 to $33,950
25% on income from $33,950 to $82,250
28% on income from $82,250 to $171,550
33% on income from $171,550 to $372,950
35% on income over $372,950

The average tax paid by a person earning $373,000 is 27%, as only $50 is taxed at 35%.
The USA ranks right in the middle (15th of 30 countries) for top marginal tax rates for employees, with Denmark again at the top (59.7%) and the Czech Republic with the lowest rate (15%).
III. Corporate Tax Rates
As of 2009, the average corporate tax rate for the thirty countries in the OECD is 26.3%. Two countries, Ireland and Iceland, have rates significantly lower than the average, 12.5% and 15%, respectively. The remainder are between the Slovak Republic and Poland at 19% and Japan at 39.54%. The US is second highest at 39.10%.

We rank 20th as a debtor nation. We rank 25th in total taxes as a percentage of GDP. We rank 15th in personal income taxes. It is only in corporate taxes that the US ranks very high: We are second in the world, after Japan.
It is a laudable goal to decrease deficit spending and lower the National Debt. It is, however, important that we put the issue into perspective, and not overstate our current circumstances.

A Rose by Any Other Name

2010-03-04T16:05:00.000-08:00

As our nation grinds to a halt under the failure of statesmanship, I refuse to take a side. You may not characterize me with a word, when doing so will only give me the opportunity to give countless examples of when that word does not accurately describe my position.
Democrat, Republican, Independent, Libertarian - or Capitalist
In my study of political structures, and which function best, I've concluded that capitalism is my preference. I prefer that to Democrat, Republican, Independent, or Libertarian. In societies where capitalism flourishes, there is likely

Greater opportunity
Tolerance of diversity
Social mobility
Commitment to fairness
Dedication to democracy.

But, we must take care in how we define capitalism. Unbridled free markets recently rocked global finance to its core, and financial reform is stalled in a gridlocked Congress over a year from barely skirting a depression. Without requiring that capitalism be characterized as pursuit of a rising standard of living for the clear majority of citizens, it is reduced to a system that benefits the few.
Pursuit of a Rising Standard for All
With that definition in mind, it is interesting that the ratio of compensation of CEOs to workers was 30:1 in 1970 and 120:1 in 2000. These data were provided by the Economic Policy Institute, a think tank dedicated to including the interests of low to middle income workers in economic policy.
The growth in CEO earnings virtually mirrors in the growth in the S and P 500 Index over that same period. While workers are generally paid in the form of cash compensation, CEOs in non-financial firms earn over 70% of their compensation in the form of equity pay. Therefore, the inequity appears to be based more in the performance of the price of their company stock options than any other factor. If the CEO is ultimately responsible to her stockholders for the performance of the company, then this inequity is readily explained.
Further, during this period retirement savings changed from company-provided defined benefit pensions to retirement programs where employees make contributions that are deducted from their income. For example, a worker who contributes 15% of her $50,000 salary to a 401 (k) plan will show a taxable income of $42,500 after deducting the contribution. Because the IRS limits the dollar amount of contributions, a $250,000 executive at that same firm would be limited to a $16,500 contribution.
The worker's salary in this example would be decreased by 15%, and the executive's by less than half that (6.6%), even though the executive contributed $9,000 more. As you can see, workers contributing to these plans make their income appear proportionately less than CEOs.
Finally, because transfer (unemployment, welfare, disability and social security) payments are taxed, if at all, at a lesser percentage for lower income taxpayers, those amounts are not fully represented as income, based on tax return data.
A 2007 article by the Cato Institute demonstrates that many studies, including recent work from Paul Krugman, grossly overstate the disparity between CEO and worker income, and estimate, based on Congressional Budget Office figures, that the top 1% of earners in 2003 earn between 14:1 to 15:1 more than workers, up from about 9:1 in 1981.
So, while the current climate is not one that shows capitalism in its finest light, we do appear to be in a rising tide that lifts most boats. And, with that, I will add a codicil to my "Capitalist" title.
Barron's Byline Admission
One of my favorite economists is Gene Epstein, who is the Economics Editor of Barron's magazine. I have often referenced his work when teaching Security Analysis at UCLA because of its data-orientation and lack of agenda.
Mr. Epstein recently gave a speech to young people that he was kind enough to share with me, wherein he described himself as a "bleeding heart capitalist."  It was at that moment that I adopted a party affiliation.
I am in favor of a system that is most likely to result in greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy. I am, indeed, a capitalist.
But, I also demand that that system results in a rising standard of living for the clear majority of their citizens.  Rather than a "laissez faire" approach to free markets, I favor a properly regulated financial system that compels those who take extraordinary risk be subject to extraordinary loss - and be outside the realm of Federal insurance, either by mandate or by being "too big to fail."
I favor protection of the finest educational system in the world by protecting the free exchange of ideas in a meritocracy, encouraging participation with the world's greatest minds regardless of their country of birth, and funding their priceless contributions to our competitiveness in the global economy.
I, too, am a bleeding heart capitalist, and will support whichever political party that furthers these ideals.

The Case For (and Against) Raising Interest Rates

2010-03-02T12:34:00.000-08:00

One of the Federal Reserve Bank's most powerful tools is raising short term interest rates. Why they should (and why they shouldn't) do just that now.
Short Term Interest Rates
Didn't the Fed just raise rates? Yes, they raised the Discount Rate by 50 basis points (1/2%). The Discount Rate is the rate that the local branch of the Federal Reserve Bank charges for short term loans. There are three types of loans available from the "Discount Window."
There is also the Fed Funds Rate, which is the rate banks lend money to each other at the local branch of the Federal Reserve Bank, in order to meet the reserve requirements they must set aside for liquidity purposes. This rate, currently .25%, was set on December 16, 2008, during the recent financial crisis.
Extraordinary Measures
The Federal Reserve undertook several extraordinary measures to assist financial institutions during the recent the financial crisis. Besides providing loans to banks through the discount window lending programs referenced above, the Fed established other ways to provide liquidity to financial institutions, including:

Term Auction Facility,
Primary Dealer Credit Facility,
Term Securities Lending Facility,
Commercial Paper Funding Facility,
Money Market Investor Funding Facility,
Term Asset Backed Loan Facility, and
Section 13(3) of the Federal Reserve Act loans to support specific institutions to avert their disorderly failures.

In short, the Fed became "the lender of last resort," after effectively lowering the Fed Funds rate to zero.
Now, by most measures, the liquidity crisis has been averted, and many of the programs listed above have been suspended. Some economists feel that it is now time for the Fed to raise the Fed Funds rate and unwind other extraordinary credit facilities, and some feel that it should wait. Here are the pros and cons.
Raise Rates Now
Those in favor of raising rates now generally feel that by raising rates gradually, the economy will avoid creating future excesses like inflation caused by holding rates artificially low. This position represents the free market philosophy that the economy must move through the process of recovery without intervention by the Fed.
Such economists see the 3% - 3.5% projected US growth in Gross Domestic Production this year partially due to previously provided economic stimulus, but more importantly through sustainable growth in global demand. Acknowledging the problem of high unemployment rates, they think that potential problems created by guaranteeing low rates for the foreseeable future will create more serious economic excesses in rate sensitive sectors in the future. In effect, this policy is seen as "postponing the inevitable," and proponents of this philosophy favor no economic intervention unless absolutely necessary.
Keep Rates Low
Those in favor of keeping short term rates near zero generally agree with the 3% - 3.5% projected US growth in Gross Domestic Production this year, but feel that reliance on growth in global demand is more precarious. Citing recent concerns with the sustainability of the current recovery, including high rates of US unemployment and sovereign debt risk abroad, proponents of this philosophy feel that Fed intervention will lessen the risk of slipping back into recession, and see that risk as more probable than creating inflation by keeping rates artificially low.
Weighing the Probabilities
Those who participate in this discussion often do so by labeling their opinion as "capitalist" or "progressive." To do so is to grossly oversimplify the issue. Whether rates should be raised or not lies simply in the measurement of future global demand. Should demand be sufficient to sustain US growth, then interest rates should be raised, and the growth in production will result in new hiring that will eventually lower unemployment. The amount of projected global growth in 2010 depends upon whose data you rely.
The World Bank projects 2.7% growth this year, slightly more pessimistic than the International Monetary Fund's projection of 3%. The two organizations use different methods in calculating GDP, which partly accounts for the disparity.
For comparison purposes, global GDP growth was 5% in 2004, 4.5% in 2005, 5.1% in 2006, 5.2% in 2007, 3% in 2008, and -1.1% in 2009.
Those in favor of raising interest rates feel that relying on growth from global demand projections in an admittedly sub-par year present less risk than the potential inflationary excesses that may be caused by keeping rates low.
Those in favor of keeping rates low feel that the probability of damaging a fragile recovery by raising rates are higher than causing future inflation by not doing so.
Clearly, choosing the wrong course of action may result in significant economic problems.
What is your opinion, and why?

The Most Important Financial News You Haven't Heard

2010-02-17T09:36:00.000-08:00

Health care costs are 17% of our Gross Domestic Product, and growing at 12% per year. At this rate, in 10 years, health care will be 50% of our GDP. No health care legislation on the horizon.
The biggest contraction of GDP since the Great Depression just took place, and caused a worldwide recession. No financial reform legislation on the horizon.
This is the story that may be bigger than either of those.
I. National Debt in Perspective
You'd have to be a recluse not to have heard the Tea Party movement raving about government spending. Do they have a point?
According to the latest Congressional Budget Office report, the US will spend $1.35 trillion more than its revenues this year, slightly less than the $1.4 trillion deficit in 2009. Our accumulated deficits (plus interest), or our National Debt is $12.38 trillion.
US debt is currently 86.7% of our Gross Domestic Production, and is projected to be 94.27% by the end of this year. How does that compare to our historic levels of Debt/ GDP?
A. Post-War Years
Since 1792, our average level ratio of Debt/GDP was 28.32.
Our lowest levels were from 1835 - 1842 (less than 1%), and our highest were 1945 - 1947 (averaging 114.34%), and 1948 - 1950 (averaging just under 92%). Note that the highest years were post World War II, when fears that military spending decreases would cause another Depression subsided, as growth in housing, cold war military spending and industrial production in automobiles, aviation and electronics increased throughout the 1950s.
B. The 1960s and 1970s
In the 1960s, the Kennedy Administration increased government spending and cut taxes, but the level of Debt/GDP dropped from 67.9% in the 1950s to 45.3%.
In the 1970s, a combination of increased inflation and a stagnant economy (coined "stagflation") resulted in high unemployment, and Debt/GDP dropped to 33.7% during that decade.
C. The 1980s
Beginning the decade with a brutal recession, the Reagan Administration responded with tax cuts and spending increases, much like the 1960s. The difference was government spending for social programs was slashed, and military spending increased dramatically. During this decade, Debt/GDP rose to 42.2%.
D. The 1990s and beyond
Economic growth brought deficits down to zero in the 1990s, but a growing debt primarily due Social Security and other social programs increased Debt/GDP to 63.7%. Continued growth in social programs (including the Medicare Drug Program), the Afghanistan and Iraq wars, and the housing bubble (with its ensuing world-wide financial crisis) increased the Debt/ GDP ratio to 64.6% during the decade ended 2009.
II. US Spending by Category
National Defense 19.9%
Human Resources (Including education, training, employment, social and veteran's services) 65.2%
Physical Resources (Including energy, environment, commerce, housing, transportation and community/regional development) 8%
Net interest on National Debt 3.8%
Other Functions (Including international, science, space and technology, agriculture, justice and general government) 5.6%
Undistributed Offsetting Receipts -2.3%
Clearly, the vast majority of US spending are in Human Services (65.2%), and almost half of that spending is Medicare and Social Security. Social Security spending alone is about equal to National Defense.
Spending on Health Care, as mentioned earlier, is 17% of GDP, and is growing at 12% per year. Left unabated it will be half of our GDP in 10 years.
III. The Big Untold Story
China is no longer the largest foreign holder of US debt, having recently reduced their holdings by $34.2 billion. Japan, who now holds more of our debt than any foreign holder, also reduced their holdings by $11.5 billion. Overall, foreign holders of our debt dropped by $53 billion, the largest drop in history.
With our debt increasing, and foreign lenders less willing to buy it, the Treasury Department will now have to attract investors with higher rates of interest.
The 3.8% of our budget we use to pay interest on our debt will increase. While $136 billion may seem a paltry amount in today's vernacular, we derive absolutely no benefit from it, and it is now equal to the amount we spend on education.
With foreign governments finding our debt less attractive, the amount we spend on interest will surely increase to attract other borrowers.
We haven't had the will to fix health care costs that will be 1/2 of our total output in a short 10 years if we do nothing.
We haven't the will to enact financial reforms after the biggest recession since the Great Depression.
Will we find the will to make the sacrifices necessary to cut spending?
Warren Buffett suggested that he will pay higher taxes and forego Social Security payments, regardless of the fact that he's paid into the system all his life. Admittedly, he's a lot weathier than we are.
Nevertheless, maybe he's on to something.

The Economics of What Happened Last Year in Plain English

2010-02-08T10:19:00.000-08:00

Most economic news is reported by someone with a vested interest in what you think. I don't care what you think, but I do care that you get all the information you need to draw your own conclusions.
I. 2009 US Economy
Industrial output fell by 10%, after having fallen 3% in 2008. Less demand for goods. No surprise here.
Unemployment grew from 7.2% in 2008 to 10% in 2009. To get some historical perspective, in the last comparable recession, July, 1981 - November, 1982 (16 months), the average unemployment rate was 9.09%. When President Reagan took office in January, 1981, the unemployment rate was 7.5%. When the recession began in July of that year, it had fallen to 7.2%. At the end of the recession in November, 1982, it was at 10.8%, and stayed over 10% for the next seven months.
Consumer Confidence fell nearly 30%, after having fallen 45% in the prior year. Again, no surprise.
Inflation averaged under 1/4 of 1% last year. With less demand, both the price of commodities (like oil, lumber, etc.) and consumer goods fall. Current inflation is virtually non-existent.
Inventories fell by 6.75%. This contributed to our Gross Domestic Product, and many think this growth is artificial. I do not share this point of view because the opposite (growth in inventories) is subtracted from GDP. When you think of inventory building as wholesalers buying goods that sit on shelves (which does not contribute to growth), then depleting those inventories by selling them makes more sense as contributing to growth.
Orders for "big ticket" items fell by 20% from the previous year, but increased from $160.1 billion in January to $167.9 billion in December.
Leading economic indicators, which include measurements that generally predict either growth or contraction in the future, fell 8% from the previous year, but increased from 98.9 in January to 106.4 in December.
You can see, with the exception of employment, that these important economic indicators all fell from the previous year, but are improving. These are the data that economists generally consider when they say things like, "We're stabilizing, but are far from healthy." As you can see, history shows that unemployment lags most other economic measurements after a recession, likely due to the reticence of employers to hire until they're sure than the economy is really on solid footing.
II. Monetary Policy
You know that the Federal Reserve Bank has cut interest rates nearly to zero - .25% to be exact - in order to lower the cost of borrowing money for businesses. Any who save money know that a six month Treasury Bill returns about the same, .25%.
Many investors gauge whether the stock market is expensive by comparing the return on the 10 year Treasury Note with the expected earnings for the Standard and Poor 500 Index. Right now, the yield on the T-Note is 3.66% and expected earnings for the S&P 500 are 4.5% of its current price - about a 20% premium.
30 year Treasury bonds are paying 4.42%, good news for anyone who is buying a home because this is the rate mortgages are based upon. Now, all you have to do is find a bank that's not too scared to make a loan.
III. Sentiment
Investor sentiment is my favorite indicator because it is simple and more reliable than any other I review. As Warren Buffet often says, "Be greedy when others are fearful, and fearful when others are greedy."
That's exactly how this measurement works. When it's high, everybody wants to buy stock. Bad sign.
When it's low, everybody is scared to death to buy stock. It's cheap. Good sign.
In 2007, the reading averaged 63. In 2008, it was 28. As you know, if you bought stock in 2009, you show quite a profit. In 2009, it averaged 41, with a current reading of 58.
The market is not the bargain it was in 2008, as we'll see below.
IV. Valuation
This is a measurement of how much stocks cost. To get some historical perspective, since 1926, the stock market as measured by the S&P 500 had an average cost of $15.82 for every dollar it earned.
Right now, it's at $18.29, up from $17.97 last year.
Not cheap, but not expensive. It depends on whether you think businesses will earn more money next year. Standard & Poor's projects earnings of $58.71 for the S&P 500 in 2010, up from $50.70 (a 16% increase).
So there you are. Based on that information, your opinion is as good as anyone's.

Sending the Right Kid to Detention

2010-01-29T11:51:00.000-08:00

In the Catholic school I attended, nuns often kept an entire class after school for the behavior of a few. In the current economic climate, We the People are likely to do the same for any public official who has responsibility for anything "financial." In order to avoid throwing the baby out with the bathwater, here's a list of who is responsible for what, so we don't fire those who may not have misbehaved.
The Federal Reserve Bank
The "Fed" is responsible for two things: Price Stability and Full Employment. Easier said than done.
Price Stability means keeping inflation at bay. As anyone who lived through the 1970s can tell you, inflation is an insidious and difficult problem once it takes hold. It is the amount prices increase over the value of the currency. If prices increase 3% over a year and the value of the currency remains stable, you'll be able to buy 3% less every year. You'll need to earn 3% more to keep even. At that rate, in 25 years, you'll need to double your earnings to stay even.
When the economy slows, the Fed lowers short term interest rates to make it easier for banks to lend money and get business moving again. When the economy starts to rev up, though, the Fed must raise short term interest rates to the rate of lending, or risk inflation. It's a tricky process because the effect of raising or lowering rates isn't felt throughout the economy for about 6 months.
When the Fed raises rates, businesses slow down their borrowing, hiring and expansion. Some will lay off workers to keep costs in check, raising the unemployment level. To keep full employment and price stability, the Fed is dealing with opposing forces. Low rates = full employment, but the threat of inflation. High rates = higher unemployment, but the control of inflation.
Because of the likelihood of political pressure to keep interest rates low (and employment high), and the long term devastating economic effect that would have by causing inflation, the Fed is and must remain an independent body.
The Chairman of the Federal Reserve Bank is Dr. Ben Bernanke. He has held this position since February 1, 2006, and was on its Board of Governors from 2002 - 2005. From 2005 - 2006, he was the Chairman of the President's Council of Economic Advisors.
The Treasury Department
The mission of the Treasury Department is to manage the U.S. Government's finances effectively, promote economic growth and stability, and ensure the safety, soundness, and security of the U.S. and international financial systems. This includes:
Managing Federal finances;
Collecting taxes and paying US bills;
Currency and coinage;
Managing Government accounts and the public debt;
Supervising national banks and thrift institutions;
Advising on domestic and international financial, monetary, economic, trade and tax policy;
Enforcing Federal finance and tax laws;
Investigating and prosecuting tax evaders, counterfeiters, and forgers.
Supervision of national banks and thrift institutions is the responsibility of the FDIC (see below).
Timothy Geithner has been Treasury Secretary since 2009.
The Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and public confidence in the nation's financial system by:
•insuring deposits,
•examining and supervising financial institutions for safety and soundness and consumer protection, and
•managing receiverships.
If procedures or policies of insured financial institutions are unsafe or unsound, it is the responsibility of the Chairperson of the FDIC to protect government insured deposits by reporting such action to the Treasury Department and taking action against the institutions that engage in such practices. Note: Virtually all investment banks now operate under commercial banking charters.
The Chairperson of the FDIC Board of Directors is Sheila Bair. She's held this position since June 26, 2006.
The Security and Exchange Commission
The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
If procedures or policies by investment bankers result in a lack of protection to investors or are disruptive to markets, it is the responsibility of its five commissioners to:
It is the responsibility of the Commission to:
interpret federal securities laws;
issue new rules and amend existing rules;
oversee the inspection of securities firms, brokers, investment advisers, and ratings agencies;
oversee private regulatory organizations in the securities, accounting, and auditing fields; and
coordinate U.S. securities regulation with federal, state, and foreign authorities.
It is these commissioners who are ultimately responsible to have determined and reported the highly leveraged (borrowings of $30 per $1 of assets) positions that contributed to the financial meltdown in 2008.
The Chairman of the SEC is Mary L. Shapiro, who replaced Christopher Cox in 2009. He held this position from June 2, 2005 through Ms. Shapiro's appointment.
Glass-Steagall Act
The Glass-Steagall Act of 1933 established the FDIC under the Treasury Department, and separated the activities of commercial bankers, who accepted insured deposits from the community and made business loans, from investment bankers, who offer shares of stock ownership to investors and raise capital for businesses.
This act was repealed under the Clinton Administration.
Fannie Mae and Freddie Mac
These are government sponsored enterprises that were started for the purpose of purchasing home loans from banks. These loans were underwritten under strict parameters, and proceeds from the sale were used by banks to make more loans, and the loans which were "backed by the full faith and credit of the US government," were sold to the public as income investment. These companies became publicly owned ("for profit") companies in 1989.
In September 2003, Treasury Secretary John Snow proposed placing the Freddie Mac and Fannie Mae under Treasury oversight with strict controls over risk and capital reserves.
Representative Barney Frank, ranking Democrat on the Financial Services Committee, responded, "These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."
The seizure of Fannie Mae and Freddie Mac cost taxpayers $121 billion. The AIG bailout cost taxpayers $85 billion.
Representative Frank has served in the House of Representatives since 1980.

Taxpayers are angry, that is a certainty. Where they are aiming their anger may not, in fact, be where blame actually lies.
To support financial reform, email your Congressional representatives.

Corporate Subsidies, Anyone?

2010-01-22T11:42:00.000-08:00

Yesterday, the stock market slid precariously with dire warning about the impediments to profitability we can expect if Obama's limitations on risk-taking by "too big to fail" banks are enacted. Let's take a look.
I. The Big Conglom-ocom
Bank in the 1980's, the savings and loan industry, which specialized in mortgage lending and savings accounts, was badly damaged during a period when the rate they could pay for deposit accounts was deregulated, and mortgage rates were not. Paying extraordinarily high unregulated rates for deposits and charging low regulated mortgage rates was, as 747 failed institutions found, a flawed business plan. Through corrective regulations that addressed these problems, the difference between commercial banks and so-called thrift institutions was blurred, and banks increased their mortgage lending as thrifts began opening checking accounts.
In the late 1990's, the Clinton administration, under the advice of Robert Rubin (soon to be Citibank CEO) and others, repealed the Glass Steagall Act, which had separated investment bankers (those who invest in capital markets and raise money with investors) from commercial bankers (those who lend to businesses and raise money with insured deposits). As a result, after the turn of the century, JP Morgan was presented with an intriguing study from its newly-graduated MBA Quantitative Analysts, concluding that, at no time in recent history had the entire US mortgage market ever experienced a downward price correction.
Concluding that, based on this study, that mortgages could be packaged and sold as high grade investments, since payments on a diverse geographic basis be reliable even as there may be regional problems, investment bankers entered the mortgage business. Relying on the "general rise in housing value" premise, they relaxed their lending standards, forcing commercial bankers to either compete on those relaxed terms or lose their business.
We all know the end of this story.
II. All Banks Under One Roof
Just as the savings and loan mortgage lenders became virtually indistinguishable from commercial bankers, now investment bankers were becoming more like commercial bankers, and vice versa. As the recent crisis progressed, nearly every investment bank ducked under a commercial banking charter, received Troubled Asset Relief Program money, and again, as you know, many have repaid that money, returned to profitability and began paying bonuses equivalent to those in 2008.
III. TARP, TLGP, FDIC (and Other Four Letter Words)
What you may not know is that, as a benefit of acquiring a commercial banking charter, these investment bankers have benefited from another four lettered program - TLGP, or the FDIC Temporary Liquidity Guarantee Program.
Unlike TARP, a preferred stock investment to encourage bank lending through increasing capital, TLGP is more of an ultra-cheap bond program. Here's how it works.
If, for instance, Goldman Sachs wanted to raise money by issuing bonds (loans) to capital investors, it would have to pay a competitive market rate for those borrowings. Bond buyers, a notoriously skittish sort who prefer being repaid, demanded 7.5% for the 10-year $2 billion debt it raised in January last year. Under the TLGP program, however, Goldman raised money for just 2%, with a 1% fee.
For 4% less than market rate, Goldman borrowed from the FDIC and has acknowledged it can do more "at pretty attractive rates."
IV. Glass Steagall Anyone?
TARP and TLGP were designed to encourage banks to increase lending. Goldman's CFO has said, however, that it has "virtually no direct exposure to the consumer."
So, banks' allegations that Obama's requirement that banks who utilize FDIC insurance for their depositors in order to lend to commercial enterprises must not operate proprietary trading desks, hedge funds, etc., will derail the economic recovery is straddling the fence. Using the government to insure high risk endeavors is clearly inappropriate.
Here is the question Obama poses. Do you want to operate as a commercial bank or an investment bank?
Getting the benefit of FDIC insurance and cheap borrowings used to NOT lend to consumers is a bad deal for consumers and a good deal for banks.
He's right on this one.
I welcome discourse from anyone who disagrees.

Farewell, Banker Welfare

2010-01-18T09:52:00.000-08:00

US women seem to have an innate sense of fairness. Whether it is because of nature or nurture, even with our more liberated world position, it is women who empathize with the plight of those who have had seemingly insurmountable obstacles in their lives, and we endeavor to help them to help themselves. Our maternal instincts appear to apply to more than our offspring.
Mothers, however, are more than nurturers. They also prepare their children to be self-sufficient, self-reliant members of society, and that requires more than giving. It also requires knowing when to practice "tough love," knowing when not giving is appropriate.
During the early years of the Clinton Administration, most US women supported welfare reform, after seeing that government spending toward our poor sisters seemed to have the effect of a pattern of generational poverty from which it was nearly impossible to extricate themselves. Paying for the opportunity for self-sufficiency was a more effective solution than an endless number of monthly checks that stubbornly kept women at the poverty level.
We've spoken often about the causes of the latest recession, which could have easily been a depression, had governments not doled out dollars that paled against those paid for welfare during the 1980s and 1990s. For our investment, we avoided a certain economic meltdown, but for the 16% who are unemployed and looking for jobs, the resentment for that deal could not be higher, particularly when the bonuses paid to bankers, some of whom were the direct cause of the melt-down, have never been higher.
It is instructive to not only examine the root of this anger, but also, like the angry middle-class in the 1980s that paid the cost of welfare, look to a long term solution.
Changing welfare from an incentive NOT to work to an incentive to work reformed the system to one that both provided a safety net for those who were truly in need and an incentive for those who could better themselves to do so. What such incentive have we given for bankers who lowered lending standards, then sliced up, securitized risk and sold it throughout the world NOT to take inordinate levels of risk again?
None. Not one piece of financial reform legislation has passed. Bonuses based on short term profits, largely made by merely buying long term US debt we created to save them with the money we gave them, continue largely unabated.
Our bankers are the urban poor of twenty years past, incented to do the wrong thing by the money we pay them.
It's time to show some tough love to our bankers, and pressure our lawmakers to pass meaningful financial reform that incents long term capital growth over high risk short term behavior.
An email to your legislators is an excellent place to start.

Sizing Up the Competition

2010-01-04T14:14:00.000-08:00

We're going head to head with stock market pros this year, by comparing the results of buying the S and P 500 Index with that of professional investment strategists. In order to compare track records, let's look at how they did last year. All initial recommendations were taken from Barron's Magazine December 22, 2008 (and changes to portfolios were published as of September 7, 2009, and calculated as of September 30, 2009).

What Happened Last Year

S and P 500 Ended the Year at 1115.10
S and P Earnings were $55.91
Fed Funds Rate was .25%
10 Year Treasury was 3.85%
Best Performing Sectors were:
Technology (59.92%), Materials (45.23%), and Consumer Discretonary (38.76%)
If you'd bought the Index, you'd have been up 23.45% for the year.

What the Pros Predicted

Black Rock (Robert Doll)
S and P 500 - 1050 (5.8% low)
S and P Earnings - $57.5 (3% high)
Fed Funds Rate - 1% (300% high)
10 Year Treasury - 3.25% (16% low)
Best Performing Sectors: Technology (49.47%), Energy (11.29%), and Health Care (17.07%).
Sold Technology in the 4th quarter.
Portfolio return 25.94%

Deutche Bank Private Wealth (Larry Adam)
S and P 500 - 1025 (8% low)
S and P 500 Earnings - $71 (27% high)
Fed Funds Rate - .125% (50% low)
10 Year Treasury - 2.75% (29% low)
Best Performing Sectors: Technology (59.92%), Consumer Staples (11.2%) and Health Care (17.07%)
Sold Consumer Staples in 4th quarter, and replaced with Energy and Industrials.
Portfolio return 32.4%

JP Morgan (Thomas Lee)
S and P 500 - 1100 (1% low)
S and P 500 Earnings - $65 (16% high)
Fed Funds Rate - 0% (was .25%)
10 Year Treasury - 1.65% (57% low)
Best Performing Sectors: Financials (14.8%), Consumer Discretionary (38.76%) and Health Care (17.07%). Sold Consumer Discretionary and Health Care in 4th quarter and replaced with Energy, Technology, Industrials and Materials.
Portfolio return - 28.04%

US Trust (Christopher Hyzy)
S and P 500 - 1020 (8.5% low)
S and P Earnings - $60 (4% high)
Fed Funds Rate - .5% (50% high)
10 Year Treasury - 3% (22% low)
Best Performing Sectors: Energy (11.29%), Consumer Staples (11.2%), Utilities (6.8%), Technology (59.92%). Sold Consumer Staples, Utilities, and replaced with Industrials and Materials.
Portfolio return - 22.64%

Citigroup (Tobias Levkovich)
S and P 500 - 1000 (10% low)
S and P Earnings - $62 (10.8% high)
Fed Funds Rate - 0% (was .25%)
10 Year Treasury - 3% (22% high)
Best Performing Sectors: Technology (59.92%), Financials (14.8%), Consumer Discretionary (39.76%), Telecom Services (2.63%), Health Care (17.07%) and Industrials (17.27%). Sold Consumer Discretionary, Telecom Services, Health Care, and bought Materials and Energy.
Portfolio return - 23.26%

Goldman Sachs (David Kostin)
S and P 500 - 1100 (1% low)
S and P Earnings $53 (5% low)
Fed Funds Rate - .125% (50% low)
10 Year Treasury - 3.6% (6% low)
Best Performing Sectors: Consumer Staples (11.2%) and Health Care (17.07%). Sold both and replaced with Energy, Materials, Financials and Technology)
Portfolio return - 20.35%

Commission and Taxes

Do-it-yourself investors typically pay about .5% in annual fees, and full service brokers typically charge about 2% for their services.

Short-term capital gain tax rates are the same as ordinary income tax rates, which are 25% for most people (who earn between $33,950 and $82,250 per year). We'll ignore the tax effect on the relatively low (1.94%) dividend rate on both the index and its sectors in this comparison.
Using these assumptions to adjust the returns:

S and P 500 Index - 23.45% - .5% commission = 22.95% net return
Black Rock - 25.94% - 2% commission - 3.25% capital gain taxes = 20.69% net return
Deutche Bank Private Wealth - 32.4% - 2% commission - .58% capital gain taxes = 29.8% net return
JP Morgan - 28.04% - 2% commission - 1.42% capital gain taxes = 24.62% net return
US Trust - 22.64% - 2% commission - .5% capital gain taxes - 20.14%
Citigroup - 23.26% - 2% commission - 1.61% capital gain taxes = 19.65%
Goldman Sachs - 20.35% - 2% commission - 1.94% capital gain taxes = 16.41%

In 2009, 1/3 of the pros listed beat the S and P 500 net return with their recommendations for investing, and you can see for yourself how each predicted the other investing categories for the year.

Congratulations if you followed the advice of Deutche Bank Private Wealth or JP Morgan last year. I suspect, however, that Deutche Bank Private Wealth charges higher than 2% for its advice, but we'll keep the figures consistent for comparison purposes.

If you followed the other 2/3, you'd have been better off just buying the S and P 500 Index. It will be interesting to see if Deutche Bank and JP Morgan will continue to outperform, and whether the others will improve their performance in 2010.

Who's Smarter, the Pros or the Little Guy?

2010-01-02T15:10:00.000-08:00

Last September, I published the 2010 investment advice given by several market professionals and posed the question,
"What would earn you the most money,

Buying the entire S and P 500 Index or
Buying just the sectors of that Index that the market pros suggest?"

Buying the S and P 500 Index would initially cost you a commission, but since you would to pay for no advice, you could pay under $10 commission at a deep discount broker like ScotTrade or ETrade.

Taking the advice of the market pros would cost you a much higher fee, because

You'd need, not only to know what to buy, but also when to sell.
You pay a commission when buying and selling, and must pay capital gain taxes on any gain on your gain on sale, unless you buy in a tax-deferred retirement account.
Then, you pay an additional commission when replacing the sold securities with another investment.

So, here's our little 2010 experiment. We're going to track how much you'd make by just buying the index (consisting of Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Telecom Services and Utilities) versus buying just the sectors in that index recommended by the pros. Here's where we'll start:

Who,
What Sector, Price

Kitty,
S and P 500, 1115.10

Black Rock,
Energy, 429.95
Health Care, 362.22

Deutche Bank Private Wealth Mgmt
Technology, 370.71
Health Care, 362.22
Industrials, 242.99

Morgan Stanley
Health Care, 362.22
Technology, 370.71
Energy, 429.95

Prudential
Financials, 193.78
Technology, 370.71
Material, 199.81
Industrials, 242.99

US Trust
Technology, 370.71
Materials,199.81
,Energy, 429.95
Industrials, 242.99

Barclays Capital
Industrials, 242.99
Technology. 370.71

Citigroup
Materials, 199.81
Financials, 193.78
Technology, 370.71
Energy, 429.95

Goldman Sachs
Energy, 429.95
Materials, 199.81
Financials, 193.78
Technology, 370.71

JPMorgan/Chase
Energy, 429.95
Industrials, 242.99
Financials, 193.78
Technology, 370.71
Materials, 199.81

RBC Capital Mkts
Technology, 370.71
Consumer Discretionary, 235.07
Financials, 193.78
Industrials, 242.99

I'll give you an update at the end of every calendar quarter. What do you think? Will trading make you more money than just buying the Index?

It will be an interesting experiment, and one that just may result in you taking charge of your investments yourself.

Four Extraordinary Financial Predictions for the Coming Decade

2009-12-31T09:41:00.000-08:00

As we leave the year of the "Great Recession" behind, knowing four likely financial outcomes will show us how to position ourselves for financial prosperity in the coming decade.
FOUR FINANCIAL PREDICTIONS
1) Global growth
Emerging economies were economically superior in the last decade. Without the effect of the tech and housing bubbles in their past, their demand is not hampered by enormous public (and private) debt. The better run of these economies will prosper in the coming decade, and provide markets for economies weakened by the lingering effects of the recent recession.
2) Inflation
As we emerge from the Great Recession, the reality of the damage is becoming more clear. Without government support, we'd be in a Depression. While the steps taken by G-20 nations were inarguably necessary, it effectively covered old problems with borrowed dollars, while keeping interest rates artifically low in order to give life to a near-death economy.
As more countries take on huge amounts of debt, the numbers of lenders who have the money and motivation to lend decrease. It's a simple formula that we all know: less demand for a commodity causes the price of that commodity to fall. If nobody is buying the farmer's apples, the farmer lowers her prices.
In the case of our debt (in the form of bonds), when bond prices fall, yields go up. Here's an example
Maturity Date - One Year. Price of bond - $1000. Interest paid by borrower - 4% Yield to lender - 4%
If the price of that $1000 bond falls to $980,
Maturity Date - One Year. Price of bond - $980. Interest paid by borrower - 4% Yield to lender - 6.1%
Higher interest rates mean higher inflation. The Fed can't keep rates artificially low forever.
3) The mortgage market
We have just seen the effect of lending to less-than-qualified-borrowers in the recent mortgage meltdown. You may be able to cut mortgages into little pieces and sell them to Iceland, but in the end, the mortgages will still go bad if the borrower can't pay it back. Since the crisis, financial reform has stalled. Mega-banks are repaying taxpayers for the money we spent keeping them alive, and, while lending standards have tightened, the genie has been let out of the bottle.
Investment bankers now operate under commercial bank charters. Structure finance has diminished the barrier to entry to the mortgage market. This demand, together with stricter lending practices, will provide additional upward pressure on interest rates.
4) Wealth transfer
Over the last decade, emerging nations have produced good for the insatiable US consumer, who bought with abandon. Now debt laden, US consumer growth is diminishing. Emerging nations, however, have newfound wealth. Those nations now lend money to our government, and have a huge and growing middle class.
China is the most obvious example, but there are others. These nations, assuming that they avoid the pitfalls of asset bubbles, will provide the majority of global growth in the early part of this decade with their newly acquired wealth.
A SHIFT IN THE PORTFOLIO PARADIGM
Before the effects of globalization, all but those who ascribed to "Modern Portfolio Theory" (those who invested a set percentage of their money in various asset classes) were confident in keeping their money largely in US equities and bonds.
With future diminished US growth prospects, however, this investment strategy is unlikely to be as successful in the next decade. History has shown that this strategy has not been effective in the past, as well. Investment veteran Art Cashin, Director of Floor Operations at UBS, recently reiterated his "theory of the 17.6-year cycle." He pointed out that the periods 1966-1982 and 1929-1947 were "lean cycles," and predicts that we are entering another such cycle at this time.
Consequently, the old benchmark of "Subtract your age from 100, put that percentage of your portfolio in high quality US stocks, and the remainder in bonds" may well be over.
What now? If you agree with the four assumptions discussed above, Pimco's Emerging Market fund manager (and former Harvard Endowment fund manager) Mohamed Il-Erian proposes the following portfolio:

STOCK 15% US, 15% Non-US Advanced Economies, 12% Emerging Markets, 7% Private Equity.
BONDS 5% US, 9% International, 5% US Treasury Inflation Protection Securities.
REAL ASSETS 6% Real Estate, 11% Commodities, 5% Infrastructure.
SPECIAL OPPORTUNITIES 8%

With an increasing investment in fast-growing emerging markets, with an emphasis on TIPS and real assets, this portfolio seeks growth with protection against inflation. If you agree that inflation will cause rates to rise, you'll want to delay your US bond purchases until rates are higher, and wait until gold prices fall before investing in that commodity. Depressed real estate prices, other than commercial property, show good value now.
Of course, as we've learned through the painful correction in the last decade, this portfolio does not include cashflow you will need in the next five to ten years. That is best kept in short-term Treasury issues or insured savings. Yes, rates are low now. But, they're likely to rise, as inflation picks up, and for this money, you want return OF capital more than return ON capital.
Have a safe, happy, healthy and prosperous new decade.

Howard Dean says, "Kill Bill"

2009-12-17T16:19:00.000-08:00

You may love that health care reform in any form may be emerging from the Senate. You may want health care reform, but find so many flaws in this legislation that you hope it doesn't pass.  Why Dr. Dean wants the Bill to die.
It's a Health Insurance Bonanza
It's hard to talk about insurance. See? You're already getting bored. Stick with me.
Not knowing this could cost you.
Health insurers are state regulated. That means there are 50 hodge-podged different laws. Insurance companies want it that way. Why? Because in a majority of states, two insurers have the majority of business.

Alabama Blue Cross Blue Shield AL 83% Health Choice 5% Total by both insurers 88%
Alaska Premera Blue Cross 60% Aetna Inc. 35% Total by both insurers 95%
Arizona Blue Cross Blue Shield AZ 43% UnitedHealth Group Inc. 22% Total by both insurers 65%
Arkansas Blue Cross Blue Shield AR 75% UnitedHealth Group Inc. 6% Total by both insurers 81%
California Kaiser Permanente 24% WellPoint Inc. (Blue Cross) 20% Total by both insurers 44%
Colorado WellPoint Inc. (BCBS) 29% UnitedHealth Group Inc. 24% Total by both insurers 53%
Connecticut WellPoint Inc. (BCBS) 55% Health Net Inc. 11% Total by both insurers 66%
Delaware CareFirst Blue Cross Blue Shield 42% Coventry Health Care 23% Total by both insurers 65%
Florida Blue Cross Blue Shield FL 30% Aetna Inc. 15% Total by both insurers 45%
Georgia WellPoint Inc. (BCBS) 61% UnitedHealth Group Inc. 8% Total by both insurers 69%
Hawaii Blue Cross Blue Shield HI 78% Kaiser Permanente 20% Total by both insurers 98%
Idaho Blue Cross of ID 46% Regence BS of Idaho 29% Total by both insurers 75%
Illinois HCSC (Blue Cross Blue Shield) 47% WellPoint Inc. (BCBS) 22% Total by both insurers 69%
Indiana WellPoint Inc. (BCBS) 60% M*Plan (HealthCare Group) 15% Total by both insurers 75%
Iowa Wellmark BC and BS 71% UnitedHealth Group Inc. 9% Total by both insurers 80%
Kansas WellPoint Inc. (BCBS) 59% Health Partners 10% Total by both insurers 69%
Kentucky Data Unavailable
Louisiana Blue Cross Blue Shield LA 61% UnitedHealth Group Inc. 13% Total by both insurers 74%
Maine WellPoint Inc. (BCBS) 78% Aetna Inc. 10% Total by both insurers 88%
Maryland CareFirst Blue Cross Blue Shield 52% UnitedHealth Group Inc. 19% Total by both insurers 71%
Massachusetts Blue Cross Blue Shield MA 50% Tufts Health Plan 17% Total by both insurers 67%
Michigan Blue Cross Blue Shield MI 65% Henry Ford Health System 8% Total by both insurers 73%
Minnesota Blue Cross Blue Shield MN 50% Medica 26% Total by both insurers 76%
Mississippi Data Unavailable
Missouri WellPoint Inc. (BCBS) 68% UnitedHealth Group Inc. 11% Total by both insurers 79%
Montana Blue Cross Blue Shield MT 75% New West Health Services 10% Total by both insurers 85%
Nebraska Blue Cross Blue Shield NE 44% UnitedHealth Group Inc. 25% Total by both insurers 69%
Nevada Sierra Health 29% WellPoint Inc. (BCBS) 28% Total by both insurers 57%
New Hampshire WellPoint Inc. (BCBS) 51% CIGNA Corp. 24% Total by both insurers 75%
New Jersey Horizon Blue Cross Blue Shield 34% Aetna Inc. 25% Total by both insurers 59%
New Mexico HCSC (Blue Cross Blue Shield) 35% Presbyterian Hlth 30% Total by both insurers 65%
New York GHI 26% WellPoint Inc. (Empire BCBS) 21% Total by both insurers 47%
North Carolina Blue Cross Blue Shield NC 53% UnitedHealth Group Inc. 20% Total by both insurers 73%
North Dakota Data Unavailable
Ohio WellPoint Inc. (BCBS) 41% Medical Mutual of Ohio 17% Total by both insurers 58%
Oklahoma BCBS OK 45% CommunityCare 26% Total by both insurers 71%
Oregon Providence Health 25% Regence Blue Cross Blue Shield 23% Total by both insurers 48%
Pennsylvania Data Unavailable
Rhode Island Blue Cross Blue Shield RI 79% UnitedHealth Group Inc. 16% Total by both insurers 95%
South Carolina Blue Cross Blue Shield SC 66% CIGNA Corp. 9% Total by both insurers 75%
South Dakota Data Unavailable
Tennessee Blue Cross Blue Shield TN 50% Total Choice 12% Total by both insurers 62%
Texas HCSC (Blue Cross Blue Shield) 39% Aetna Inc. 20% Total by both insurers 59%
Utah Regence Blue Cross Blue Shield 47% Intermountain Healthcare 21% Total by both insurers 68%
Vermont Blue Cross Blue Shield VT 77% CIGNA Corp. 13% Total by both insurers 90%
Virginia WellPoint Inc. (BCBS) 50% Aetna Inc. 11% Total by both insurers 61%
Washington Premera Blue Cross 38% Regence Blue Shield 23% Total by both insurers 61%
West Virginia Data Unavailable
Wisconsin Data Unavailable
Wyoming Blue Cross Blue Shield WY 70% UnitedHealth Group Inc. 15% Total by both insurers 85%
Source: Health Care for America Now

1.  Insurance companies don't even have to compete with themselves.
Let's pretend that the majority of groceries in your state were sold by Kroger and Piggly Wiggly. There are a few other grocery stores, but they tend to niche (high end, organic, etc) markets, since the combined pricing power of their competitors doesn't allow them to compete directly with the "big two."
Now let's pretend you go visit your sister, who lives in another state. There are twice as many major grocery stores in her state, Kroger and Piggly Wiggly, PLUS Safeway and Super Valu. You notice that the prices at her Kroger are a lot less than yours. Why? More competition for your business.
Insurance companies don't even have to compete with their own company across the state line in our current system. Just by allowing intra-state competition, the cost of insurance would be drastically reduced. Who benefits from state regulation?
Insurance companies do. Not you.
2.  The more complex the regulatory process, the more they can get away with.
Every state is different. In some, you can do this, but not that. The next state over, you can do that, but not this. The state to the south allows this and that, but not the other thing. You see the problem. One set of rules gives much more protection to the consumer. We don't often take "insurance regulatory policy" into account when we move to another state.
Again, good for insurance companies. Bad for people.
3. But they can't turn you down for pre-existing conditions. . . .
Right. But they can charge you more. And, if the government is going to subsidize your extra payment, we'll all be paying in the form of higher taxes. And, if the government is not going to subsidize your extra payment, we'll all be paying in the form of higher premiums.
Good for insurance companies. Bad for people.
4. How important is this issue to insurance companies?
Some people, like me, measure how much a company wants something by how much they're willing to pay for it. Let's see where insurance companies rank in lobbying for what they want.
•$3.8 billion has been spent by the insurance and finance lobbyists and
•$3.69 billion, by health industry lobbyists,
according to Open Secrets, a non-partisan group. That's more than any other industry!
They must want things to stay the same very, very much.
Good for them. Bad for us.
5. Is this bill better than nothing?
Only you can answer this question. I will guarantee that health insurers want two things:
a) For this legislation to die; and
b) To convince us that we should keep things just as they are.
Good for them. Bankrupt nation for us.

Can the Nation Afford It? - Part II

2009-12-04T09:25:00.000-08:00

There are two sides to everything. Our previous discussion, that compared the US debtor status with other countries, showed that our GDP is nearly a quarter of the world's, and showed our status in numbers with a few less zeroes with the assumption that trillions are not numbers we throw around all that often.
Our example showed a woman earning $134,540 per year, who owes $125,000 mortgage and $1871 on her car. Doesn't sound so bad, does it?
Sadly, there is no perfect analogy. For example

The woman in our example will own her home outright 30 years from now, after paying her $125,000 mortgage, and that home will likely appreciate in value over that time. US National Debt will do no such thing. It is paying for current programs. Thirty years from now, many of us will be dead, and that debt will continue to be paid by our children. Therefore, when considering a policy that increases our debt, the first consideration should be whether it is important enough that we encumber our children with its cost. For example, health care costs are 16% of the total budget, and that cost is rising at 12% per year. At that rate, in 10 years, health care costs will be 50% of the US budget. This is an unacceptable situation that must be addressed in a way that cuts cost acceleration significantly, or it will bankrupt the next generation.
Lowering the level of national debt is a good thing, but it is the goal of no nation to completely pay off the national debt, as was the goal of the woman in our example to pay off her mortgage. According to Asia Times, even thrify China has $407.5 billion (3.26 trillion yuan) national debt as of 2005, approximately 18% of its GDP. Therefore, to quote a figure that each US citizen owes just under $40,000 per citizen is incorrect. Cutting the debt by 25% would be a more reasonable goal, which would require an average of $10,000 in tax increase per citizen - in addition to balancing the budget. Clearly, expentidures must be cut and taxes, increased.
The primary issue is not the deficit per se; rather it is the direction and trajectory of the deficit. Right now, it's going up - fast. That's very bad. Piling on debt when revenue is flat is a terrible idea. However, we are just coming out of a recession. When the unemployment situation improves, revenues will increase. No increase of revenue, however, will address the current rise in the health care portion of the budget. That must be addressed through cost containment.

Reasonable people disagree about the particulars in the health care debate. One thing, however, is certain. The beneficiaries of non-action are health insurers, who are, by the way, the largest contributors to Congress (who have an excellent lifetime health package). We must be vigilant that the effect of such lobbying not veil the critical nature of taking immediate, effective and long-term steps to stem the rise of health care costs in this country. To take no action is to assure bankruptcy for the next generation.

Can the Nation Afford It?

2009-12-02T11:08:00.000-08:00

An enormous amount of discussion about health care, additional troop deployments, extension of unemployment benefits, etc., begins with opponents saying, "We can't afford it." Let's take a look at our debt, how it compares with other countries, and weigh the pros and cons of policy decisions based on an educated look at our financial circumstances.
Where would you rank the US among all debtor nations in the world?
1. Ireland's debt is 1267% of its GDP, or $2.386 trillion as of the second quarter, 2009. It produces the 35th largest GDP @ $267.579 billion.
2. Switzerland's debt is 422.7% of its GDP, or $1.338 trillion as of the second quarter, 2009. It produces the 21st largest GDP @ $500.260 billion.
3. The UK's debt is 408.3% of its GDP, or $9.087 trillion as of the second quarter, 2009. It produces the 6th largest GDP @ $2.680 trillion.
4. The Netherlands' debt is 365% of its GDP, or $2.452 trillion as of the second quarter, 2009. It produces the 16th largest GDP @ $876.970 billion.
5. Belgium's debt is 320.2% of its GDP, or $1.246 trillion as of the first quarter, 2009. It produces the 20th largest GDP @ $506.183 billion.
6. Denmark's debt is 298.3% of GDP, or $607.38 billion as of the second quarter, 2009. It produces the 28th largest GDP @ $340.029 billion.
7. Austria's debt is 252.6% of its GDP, or $832.42 billion as of the second quarter, 2009. It produces the 14th largest GDP @ $1.013 billion.
8. France's debt is 236% of its GDP, or $5.021 trillion as of the second quarter, 2009. It produces the 5th largest GDP @ $2.867 trillion.
9. Portugal's debt is 214.4% of its GDP, or $507 billion as of the second quarter, 2009. It produces the 37th largest GDP @ $244.640 billion.
10. Hong Kong's debt is 205.8% of its GDP, or $631.13 billion as of the second quarter, 2009. While not an independent nation, it produces the 41st largest GDP @ $215.354 billion.
11. Norway's debt is 199% of its GDP, or $548.1 billion as of the second quarter, 2009. It produces the 24th largest GDP @ $451.830 billion.
12. Sweden's debt is 194.3% of its GDP, or $669.1 billion as of the second quarter, 2009. It produces the 22nd largest GDP @ $478.961 billion.
13. Finland's debt is 188.5% of its GDP, or $364.85 billion as of the second quarter, 2009. It produces the 34th largest GDP, @ $271.867 billion.
14. Germany's debt is 178.5% of its GDP, or $5.208 trillion as of the second quarter, 2009. It produces the
4th largest GDP @ $3.673 trillion.
15. Spain's debt is 171.5% of its GDP, or $2.409 trillion as of the second quarter, 2009. It produces the 9th largest GDP @ $1.602 trillion.
16. Greece's debt is 161.1% of its GDP, or $552.8 billion as of the second quarter, 2009. It produces the 27th largest GDP @ $357.548 billion.
17. Italy's debt is 126.7% of its GDP, or $2.310 trillion as of the first quarter, 2009. It produces the 7th largest GDP @ $2.314 billion.
18. Australia's debt is 111.3% of its GDP, or $891.26 billion as of the second quarter, 2009. It produces the 14th largest GDP, @ $1.013 trillion.
19. Hungary's debt is 105.7% of its GDP, or $207.92 billion as of the first quarter, 2009. It produces the 52nd largest GDP @ $156 billion.
20. USA's debt is 94.3% of GDP, or $13.454 trillion billion as of the first quarter, 2009. It produces the largest GDP @ $14.441 trillion. The next highest is Japan, at $9.5 trillion less, followed by China, at more than $10 trillion less. A discussion of the level of US national debt in historic context can be found here.
(GDP ranking source: IMF, Annual GDP source: CNBC)
Surprised?
Let's put this into context. Let's move a couple of zeroes and turn the US into a person. This person earns $134,540 per year. She owes $125 thousand on a mortgage and $1871 on her car. Would you consider this person in an unreasonably high debt level?
Next year, she will take out an equity loan on her home for $14,573. This will increase her level of debt to $141,444 (assuming she pays only the interest on this debt during the prior year). Now she owes 105% of what she makes. Do you consider this person in an unreasonably high debt level?
At this point, compared with other nations we are 20th as a debtor. Historically, in 1944, our debt to GDP was 91.45%, in 1945, 115.95% in 1946, 121.2% in 1946, 105.77% in 1947, 93.72% in 1948, and 94.56% in 1949.
In 1949, the S&P 500 Index grew 18.79%. In 1950, it grew 31.71%. In 1951, it grew 24.02%. In 1952, it grew 18.37%. In 1953, it fell by .99%, and rose 52.62% in 1954. Not only have we been at these debt levels before, but we grew handsomely after that period.
I'm not saying that I think debt is a good thing. I don't. But, I do think that the "we can't afford it" manta must be put into perspective. If the policy issue is critically important, we can afford it.
The question should be whether the policy issue is critically important.

Mid-November Economic Outlook

2009-11-16T16:27:00.000-08:00

Some very smart women I know noted recently that some women financial columnists, not unlike some of their male counterparts, sway their commentary toward a political point of view. In my opinion, that does justice to neither financial analysis, which one would hope would lead where the data follow, nor politics, which one would hope to be policy-driven. Whatever our point of view, data show both parties have contributed to the deficits we currently have.
In this column, I endeavor to give financial information as it is, and put it into some historical context, in order that we might understand our best individual financial strategies and which governmental policy decisions one would support which are consistent with a given outcome.
I. Unemployment
The unemployment rate rose to 10.2% last month. Anyone who read the July 13 column was expecting this rise, when comparing the recent recession to that in the early 1980's, wherein I noted "the average unemployment rate in the last five months of the recession ended Nov, 1982 was 10.18%, and it averaged 9.8% for the year after that recession was over."
Although this was expected, it is not good news. Coupled with the fact that consumer confidence is trending lower, it does not bode well for any sector of the ecomony reliant on discretionary spending.
II. Other Economic Indicators
Here, the outlook is inconsistent.

Housing is trending upward
Manufacturing is improving
Non-manufacturing sectors look questionable
Car sales have slowed after the "cash for clunkers" program ended
Discount and luxury retail sales are moving slightly upward
Corporate profits are improving

III. Conclusion
Economy as a Whole
Given these general economic conditions, it is unlikely that the US Gross Domestic Product will match previous 3.5% growth in the fourth quater. Given current data and trends, it appears that the year will close with a 2% - 2.5% quarter, and possible decline to 2% at the beginning of 2010. As the year progresses, if pos-recession employment trends hold true, growth will likely rise to 3% as 2011 approaches.
Investors
Investor sentiment has been very positive of late. My macroeconomic analysis includes 22 indicators, and of all of them, I think sentiment is most predictive. It is, however, a negative corollary, i.e., the higher the sentiment, the worse the outcome. It's not the bargain it was before it rose 50%, and I'll quote Warren Buffett, "Be fearful when others are greedy: be greedy when others are fearful."
I've started hearing, "Get in before you miss the boat." That always makes me want to jump ship.

Greed and Fear

2009-11-16T11:55:00.000-08:00

I was just looking over a list of the cities where the highest percentage of homes was "under water," i.e., the mortgage is higher than the house is worth.
And a light went on in my head.
I used to manage money. I heard people throw around the words "greed and fear" almost every day. When markets were expensive, EVERYBODY wanted to buy. When they crashed, you couldn't give stock away.
So, back to mortgages, more than half of the people in these cities owe more on their houses than they can get from a buyer.

Bakersfield, CA
Riverside, CA
Fort Meyers, FL
Fairfield, CA
Orlando, FL
Reno, NV
Port St. Lucie, FL
Phoenix, AZ
Stockton, CA
Modesto, CA
Merced, CA
Las Vegas, NV

That's over 1.8 million households, with houses worth about what they were sometime between 1998 and 2003. Some of these people had to buy their homes for a new job, etc. But most, I imagine, saw housing prices go straight up during that period and bought or refinanced, thinking they could make money when they sold. Now, unfortunately, the majority of people in these cities are on the "fear" side of "greed and fear."
The return on investment for investors in the stock and real estate market, over the long term, is very similar. Apparently, so is the motivation to buy. We know, as investors, we should strive to "buy low and sell high," or as Warren Buffett says, "Be greedy when others are fearful: be fearful when others are greedy." But that's not what we do.
Back to the stock market, you may have noticed it's going up. A lot. Let's take a look at that for a moment.
First of all, it's up about 50% from its low. It came down 50% from its high. So, does that mean we're back where we started? Far from it.
Since we're near Thanksgiving, let's use the example of pie. If we put a pie on the table, and the kids eat half of it, it's easy to visualize what's left: half a pie. If we increase that half a pie by 50%, we add a quarter of a pie. We've got 3/4 of a pie, or 25% less than the full pie that we put on the table.
So, if the market is down 25% from its high, does that mean that it's cheap?
If we look at history, the average price investors pay for every dollar the S&P 500 earns is $15.82. Right now, you'll pay about $21 for next year's earnings. At the market low, you'd have paid under $11. So, it's more expensive than its average price, but that's not surprising, since it's roared back over 50% from last March. Does that make you feel greedy (I've got to get in before I miss the boat) or fearful (I should have bought when it was down, and now it's probably due for a correction).
The best way to feel, in my opinion is emotionless. Being rational, rather than greedy or fearful, is the best strategy. One very good strategy is to review your spending, put some money aside every month and invest it no matter where the market is, making sure, of course that what you invest is long term money. That means you won't be using it for ten years or so.
This constant investing strategy is called "dollar cost averaging," and will result in you buying sometimes when the market is low, and sometimes when it's high. Overall, you'll average out the peaks and valleys and invest rationally - for the long term.
Then you can leave greed and fear for the drama queens.

Straight Talk About Debt

2009-11-07T12:09:00.000-08:00

No issue is more politicized than deficit spending. Blame abounds, but little insight is given into the components of our deficit, and what reasonable action must be taken.
For a history of US deficit spending, click here. For an estimate of our current national debt, click here.

Facts

The stimulus package comprises approximately 10% of our current deficit.
The majority of the deficit spending is comprised of:

Unfunded liabilities from tax cuts made by Jobs and Growth Tax Relief Reconciliation Act of 2003. When enacted, the Congressional Budget Office estimated that the tax cuts would increase budget deficits by $340 billion by 2008. That effect has been exacerbated by the just ended recession (see 3. below).
Unfunded liabilities from Medicare Drug Program. When enacted, Medicare chief Mark B. McClellan said the drug package would cost $1.2 trillion between 2006 and 2015.
The opportunity cost in GDP lost because of the recent recession which began in 2008. Generally, annualized GDP grows just under 3%. For the 18 months ended June 30, 2009, annualized GDP contracted just under 2% - or 4.6% less than average. From the last quarter in 2008 to the second quarter of 2009, our $12 trillion economy shrank an aggregate of nearly $400 billion - representing a huge loss of tax revenue, loss of employment, etc.,

No credible economist would argue that the stimulus package was unnecessary. It was begun by necessity in the previous administration and continued into the current one. It is not the source of our economic problems, and allegations to the contrary are clearly false.

Growth of health care costs is unsustainable.

Left unchecked, growth in health care costs, currently about 17% of our GDP, will bankrupt the US. That is not overstated to create alarm. It is a fact.
Those who take the position that we cannot afford to pass comprehensive health care reform are wrong.
Health care costs are increasing 6.2% per year. At that rate, in 25 years health care cost will be almost 30% of GDP. In 50 years, it will be almost 50%.
It's the biggest problem we have, and we must solve it in order to address deficit spending in any meaningful way.
To counteract any effort to address this problem which may threaten their profits,

$3.8 billion has been spent by the insurance and finance lobbyists and
$3.69 billion, by health industry lobbyists,

according to Open Secrets, a non-partisan group referenced recently in an article by the Wall St. Journal. No industries have contributed more, by the way.

Medicare first.

Only one group represents more clout than the two lobby groups discussed above. Retired persons. Grey panthers. AARP. Lots of boomers with time to spare, and raised during a time where the promise of Medicare (enacted in 1965) was sacred. Prior to the aforementioned unfunded drug program in 2006,

the number of Medicare recipients increased 2 times - from 20.4 million to 42.6 million
the economy grew 12 times - from $1 trillion to $12 trillion
Medicare spending grew 47 times - from $7 billion to $339 billion

Big problem. Anyone can see that costs are rising too fast. So where should we start?

Increasing information technology for patients
Containing drug costs via use of generics
Limiting malpractice judgements (thereby limiting doctor's insurance premiums)
Opening group insurance rates to small business
Providing equal tax benefits to private insurance as employer-provided insurance
Lowering the deductible and raising the contribution limits on Health Savings Accounts

These policies would assure that the goal of cost containment would be foremost in the minds of legislators. If we don't get this right, we go broke.
It's as simple as that.

Economic Highs and Lows

2009-11-04T09:59:00.000-08:00

After a third quarter that dazzled like a diamond in the pile of coal our economy had been for the prior year and a half, we seem to be standing at a crossroads. The stock market seems economically cheery, but most of us are not. What's the best action to take in times like these?

I. Define your goal in dollars

This sounds simple, but is not. As a matter of fact, if it's done properly, it requires soul searching. What is your economic goal? Not your neighbors', not your friends', not your colleagues'. Yours.
To know that answer is to define what makes you happy. If you're doing the things that make you happy, then all you need to do is write down how much you spend on your happy life, and ensure you have the means to live it.
If you're not doing the things that bring you joy, however, this is a big job. You need to visualize yourself in your fulfilled state, and calculate its economic cost. That may take some time.
But, it's an investment well worth your effort.

II. Identify your financial challenges

DEBT

Now, we're going to do the things that will get you to, or maintain your happy life. If you're paying off debt, especially credit cards, your first step is easy. Keep paying them down. This is the singularly most treacherous obstacle to financial health.

INVESTING

But, what if you were on the verge of retirement, and all of a sudden, BOOM! You heard the sound of your crashing 401(k). Or, what about any of us that are on the path toward financial security, but not there yet? What is the best course of action to take now?
First of all, as you have seen from the stock market's 60% rise since March, selling in a panic is a very bad idea. If you did, you learned a valuable, if expensive lesson. You sold when you should have been buying. You learned why billionaire investor Warren Buffett says, "Be greedy when others are fearful, and fearful when others are greedy."
If you didn't sell, you're down 30% from the highs, and wish you'd invested more earlier in the year. I advised moving back into the markets slowly last November in order to "buy low." The price of stocks is not as cheap as it was then. So what do you do?
First, you put nothing into the market you need within the next five years. You NEVER put money into the stock market that you need in the next five years. The last year is a perfect example of why that is true.
Next, you realize that, at the last market top the price (or P/E) was 19.7, and at the last low, it was 10.3. We're at 16.9 - not cheap. So, it's very important that you think very carefully about buying stocks that have gone up in price very quickly, like Apple, Google and AIG. A safer strategy right now is quality value stocks, like Microsoft, GE and Bank of America, whose prices have risen less quickly.
Finally, be judicious, but keep investing. You're not buying on sale, so don't buy all at once. Buy more when the market is down, and less on days when it's risen quickly, and put in a little every month rather than a lot all at once.
But, keep in mind this is where your investments return more than inflation, and don't be deterred in saving for your goals.

III. Watch your personal sentiment
The positive outlook for the US investor is very high right now. Warren Buffett's advice is worth repeating here, "Be fearful when others are greedy." Yet, the sentiment outside of Wall St. is decidedly more somber.
Here, we are discussing your personal sentiment.
No one is advocating a Pollyanna attitude. Things are tough.
But, it is under our complete control how to face our tough situation. One of my favorite stories about Thomas Edison included his reaction to a devastating fire that destroyed much of his expensive equipment and scientific notes. Surveying the damage, he noted that, with "all the mistakes destroyed," he could begin anew with a fresh perspective.
Like him many women welcome less spending over the holidays, making gifts instead of buying them, focusing on spending time, rather than money on loved ones. Some intend to keep these new rituals as part of their lives even after our financial challenges are behind us.
There is much to be gained by seeing obstacles as opportunities.

A Woman's World Economic View

2009-10-27T08:20:00.000-07:00

I. The United States
You know we've been in a recession. If you're employed, you're probably nervous about keeping your job. And if you're unemployed, you know we've been in recession better than I could ever tell you.

It's up to the National Bureau of Economic Research to provide the official beginning and ending dates for recessions, and if you're interested in how they do it, you can read about it here. For the rest of us, we saw a banking crisis start late last year, and while we may not have known the details of how it happened, we certainly knew why.

We saw every Jane, Jean and Judy buying houses they couldn't afford, getting a mortgage based on her ability to fog a mirror, and saw real estate prices zoom upward - like the Internet stock prices did in the late 1990's. A familiar pattern, with a familiar "pop" end the end of the bubble, accompanied by falling housing prices.

Then we really saw the force of this nasty recession.

Unlike the past, though, it is not the US that is leading the world out of recession. We're mired in debt and have failed to pass even one piece of financial reform legislation more than a year after causing a worldwide economic downturn. Although we appear to have stopped our economy from shrinking, we expect anemic growth at best for the next year or so.

II. Our Place in the World Economy

From the end of WWII through the remainder twentieth century, the US was the world's economic powerhouse. A significant reason for that was attributable to "good old Yankee ingenuity." During the war, we focused our best and brightest toward the war effort. Because military technology at that time had civilian application, our best minds transitioned easily from the war effort to consumer technology.

In the latter part of the 1900s, the US voted with our pocketbooks to stop looking for the union label and outsourced much of our manufacturing to countries who could produce our goods with lower employment costs. As a result, we became less a manufacturer and more a service provider to the world. Our techies were golden, and Wal-Mart, our merchant.

We imported much more than we exported, and became a debtor nation to our manufacturers, especially China. Thus, a great wealth transfer took place in the so-called "third world," where manufacturing jobs expanded feverishly. The Chinese built an enormous middle class from their export business.

Now, they finance about 25% of our national debt, which is the sum of all the deficits, or overspending we have accumulated every year - plus interest. For a look at our historic debt levels, read my July 15 article.

III. Popular Misconception

There is no doubt that our deficit is high. Without mitigating the seriousness of that situation, though, understanding China's reliance on the US as a major buyer of their manufactured goods is critically important as we evaluate our status as a debtor nation. Their population has accepted Communist rule with an unspoken financial contract that it expects to reap the benefits of newly acquired wealth. Should China stop buying our debt, which continues to be the highest quality in the world, it will also assist in further lessening the value of our dollar and likely fuel an inflationary fall into another recession.

Smart sellers don't bankrupt their main customers, and China is not stupid.

Further, while anyone can see that both China and India have been growing rapidly, we are not on the verge of losing our position as the primary financial powerhouse in the world. Much has been made of the meager savings rate in the States as compared with the thrifty Chinese. Upon closer look, however, it's apparent that the Chinese are thrifty largely because they cannot rely on their government to care for them. For example, the Chinese social security system currently has $94 per retiree, according to Steven Roach, head of Asian Operations at Morgan Stanley. Yes, our system also has problems, as the Social Security trust fund remains an IOU by Congress, but ours does have a long, unbroken history of payment. The Chinese are accustomed to caring for themselves during disasters, both natural and financial, and therefore tend to put more aside.

Last, while we attempt to once again define ourselves as the technological leader in such growth industries as "green technology," we have, without question, both the best institutions of higher learning that are necessary for cutting edge research and development, and an open door to the best minds in the world.

Having taught math-based analysis courses at UCLA, I can attest to the great difficulty I had during roll call in our first sessions. These unpronounceable names were from every corner of the world, and the university was delighted to have them.

Once again, a combination of our open door to great world minds, with Silicon Valley innovation may be our economic savior, moving from high technology to green energy, and selling it to the world.

IV. Future Course

Once we have economic stability and a health care policy that will not bankrupt our country, our next priority must be to get our financial house in order. Let's look what high debt does to the country by personalizing it a bit. Let's say you earn $60,000 per year. After taxes, you net $4,000 per month. Your mortgage payment is $1,500 per month, you have a second mortgage of $500 for major home repairs, your car payment is $600, and you have eight credit cards on which you pay an aggregate monthly payment of $850. That leaves you only $550 every month for food, clothes, medical, utilities, gasoline and car repairs, movies, and all other incidental expenses. You're in trouble. You're probably increasing your credit card debt every month, paying for necessities you couldn't afford after paying your debt. So, your credit card debt is growing, and you're barely hanging on.

Magnify that situation, and you have our Federal government. Yes, we had to pass the stimulus package to save ourselves from financial ruin. Yes, we have to address the unsustainably high cost of health care. But once that's done, we must cut expenses and pay down our debt, just like the person in our example, or risk the future of our economy.

We must also acknowledge that, within the next century, the US will be one of the world financial powerhouses, but not the only one. If China learns to cooperate with the rule of international trade, and if India streamlines its impossibly difficult tangle of red tape, than a less indebted US will share its position with them.

V. What We Do

What we do matters. We shopped at Wal-Mart. By doing so, we exported manufacturing jobs.

Now, we must demand that our deficits be reduced and focus on educating our young people to work in a much more competitive and complex world.

Education has always been a women's issue. We know that the answer to education is not primarily money. It's a contract between teachers, parents and children that excellence is expected, and failure is failure on a world order.

What we do matters.

The Female Retirement Dilemma

2009-10-23T12:02:00.000-07:00

Issues involved with planning for retirement are different for women than they are for men. And understanding them can be the difference between comfort and poverty in our old age.

I. By Saving the Same Percentage, We Retire with Less Than Half Than Men

Let's look at the result of both men and women putting aside 10% of their earnings for retirement.

First, women current earn, on average $.80 for every dollar men earn. So now, for every $.10 in men's retirement accounts, women have $.08 - 20% less.

Next, women spend an average of eleven years of their productive working lives as an unpaid caregiver for a family member. Assuming a work life from college graduation at 22 to retirement at 65, that unpaid absence lessens our earning years by another 25%. That reduction in lifetime earnings, added to the fact that we lower salaries, results in us having $.06 for every $.10 men save for retirement - or 40% less.

So, if we assume average annual earnings of $60,000 during their careers, men will save $258,000 and women, $154,800, assuming that those savings are invested in assets that keep up with inflation.

At 65, a man will need ten years of retirement income from savings of $258,000. Invested in assets that keep up with inflation and taxes, he will have $25,800 per year for ten years.

A woman, because of her additional life expectancy will have a sixteen year retirement with savings of $154,800. Invested in assets that keep up with inflation and taxes, she will have $9,675 per year.

No wonder twice as many women than men live in poverty.

II. What To Do

First, homemakers who care for children or parents should have Spousal IRA accounts funded on their behalf every year. Considering that replacing all the functions provided would total approximately $30 thousand per year (Source: http://www.womenwork.org/resources/tipsheets/valuehomemaking.htm), it is only reasonable that your retirement is funded while you provide these services at no charge.

Second, women must learn to invest their retirement assets in a way that will maximize growth without taking an inordinate amount of risk. The two long term investments that provide the highest return are stocks and real estate.

In the last few years, we have witnessed the volatility both these investments have. But, let's put this into perspective. The stock market high was in August, 2007. Just over two years later, the market is down about 30% from its high. There are two considerations we must make:

These are long term investments, intended for use in ten years or more. In the 30+ years since I've been in the business, I've witnessed a years-long 50%+ correction in the 70's, a heart-stopping drop in the '80's, a precipitous fall in the 90's, the dot com bubble bursting in the early part of this decade and the current correction. These are predictable, and those who have made wise stock investments and held them have fared far better, even at this point, from those who put their money in so-called "safe" investments, like money market accounts, Treasury Bills and insured savings accounts, which fail to stay ahead of inflation and taxes. Note that there were two times billionaire investor Warren Buffett publicly admitted to buying stock in US companies: once, during the correction in the 1970's; and the other, from March to year end, 2008.
Even at retirement, we have life expectancies that mandate we stay ahead of inflation and taxes, and therefore advise consideration of keeping at least a portion of our long term portfolios in capital markets.
Conversely, our short term (five years or less) cash flow needs must be kept in safe investments, so that our expenses are met and we are not tempted to sell our long term investments during market lows.

Third, we've seen the outcome of abdicating responsibility for our financial lives with the likes of Madoff, Stanford, Enron, WorldCom and others. There is no one who will take more of an interest in our financial health that ourselves.

It requires only that we gain the knowledge to take action and the willingness to provide for our future.

Why Inflation is Worse for Women

2009-10-18T14:42:00.000-07:00

Inflation is one of those vagaries of economics that most people hear enough to have an idea of what it means, without being able to define it precisely. Why it's important to know exactly what it is - particularly for women.

I. What It Is

Inflation is simply the measurement of how much prices rise every year. The most dramatic example of inflation is the price of houses. When I was about six years old, my parents bought a house in a suburb north of Los Angeles for $35,000. Even with the dramatic downward adjustment of house prices in that area within the last few years, that house is worth over $750,000. Over that time, the price of that home has grown at an annual rate of over 6.25%.

The way an annual growth rate works is

Price multiplied by Growth Rate equals New Price.

For example, the first year would be $35,000 X 6.25% = $2,187.50. New Price is $35,000 + $2,187.50 = $37,187.50.

The second year would be $37,187.50 X 6.25 = $2,324.22. $37,187.50 + $2,324.22 = $39,411.72. As you can see, the amount of growth in the second year is higher, because the New Price in the second year is higher.

This additional growth happens every year, and is called the effect of compounding.

II. Inflation and Women

Women live longer than men. Consequently, their investments have to last longer than men's do, in order for women to last for their longer lifespan. When you add to our longevity the fact that we earn less than men (currently about $.80 to the dollar) and average eleven years outside the workforce as non-paid caregivers for family members, it's easy to see that we start with less money, and need to make our money do more, or risk facing poverty in our old age.

III. The Risk of No Risk

The recent correction has been a stark reminder that short term volatility is a fact of life in the stock market. Many have said, "I'm never putting money into the market again. I'm sticking with safe investments." While it is certainly an understandable reaction, it is one that could risk women's long-term financial well being. Here's why.

The common economic barometer for a "no risk" investment is the one year Treasury Bill. Safety is assured, as repayment by the United States Treasury is considered certain. As of October 16, the one year Treasury Bill is paying .36%.

You must pay Federal taxes on the interest earned on your Treasury Bill. Married people earning less than $137,050 have a marginal tax rate of 25%.

Inflation over the last year has run about .31%.

So, your actual return for this "safe" investment is

.36%, Interest Rate, minus

.09% Tax Rate (25% tax on .36%), minus

.31% Inflation (the rise in costs over one year), equals

-.04%

After inflation and taxes (called "real return") you are behind where you started.

As a long term investment, this safe investment is a guaranteed loser.

IV. Some Other Types of Investments

We saw that the type of safety provided by Treasury Bills will actually lose ground over the long term. So, what's a girl to do?

A. Bonds

Bonds are loans. Treasury Bills are loans to the US government.

You can also loan money to corporations, who will pay you back, with interest. Corporate bonds are rated as to the certainty of repayment. "Investment grade" bonds are considered safe, and "junk bonds" are just what they sound like. High interest and low probability of repayment.

An investment grade bond is currently paying 5.62% for eight years.

5.62% Interest Rate, minus

1.41% Tax Rate (25% of 5.62%), minus

0.31% Inflation equals

3.90%

Your risk is that inflation will rise (as virtually every economist agrees it will) over the next eight years, and cut further into your return. But, at least you're staying ahead of inflation.

B. Stocks

Owning stock is owning a piece of a company. Owning stock in just one company is very risky, because if that company has financial problems you can lose some, or in cases like Enron and WorldCom, even all of your money.

Most people diversify their investments by owning many companies. One way of doing that is to invest in an index, like the Dow Jones Industrial Average or the Standard and Poor's 500 Average. Since the Dow has 30 stocks and the Standard and Poor's Index has 500, the latter is a more diversified investment, and is the measurement against which most fund managers base their performance.

Over very long periods of time, the stock market's return is about 9.8%, about 3.5% of which is dividend payments.

9.80% Return, minus

0.85% Tax Rate (3.5% dividend payment times 25%), minus

0.31% Inflation, equals

8.64%

There are a thousand provisos here. The growth in your investment (besides dividends) is taxable when you sell it. Current inflation rates are extraordinarily low, so your normalized return is more like 6.5% than 8.64%. But, in general, you get the point. Your money grows much faster in the market - EXCEPT there are predictable and certain big price fluctuations. You just saw one.

I've seen one in the 70's that took half the value of the market away in a long, grueling grind downward that lasted years. I saw one in 1987 that dropped far and fast. I saw one in the 90's. And there is this one.

So, short term money does not belong here. If you need it in five years, it doesn't belong here.

C. Real Estate

Real estate investments (not your home) have returns that are very similar to stocks. As you have seen, this too is a volatile enterprise. It's also highly specialized and takes a very large initial investment.

V. Risk and Return

If you know the risk, it is lessened. If you have a long term horizon, know that the stock market is VERY volatile and NEVER either sell in a panic - or invest money you need within five years - than you won't be spooked when the inevitable happens.

For those of us who are 50 and older, adding more bonds and lessening stock exposure is smart, as older women have less tolerance for price fluctuations than younger women. Some use the simple equation of subtracting their age from 100, and putting that amount in diversified stocks, and the rest in bonds.

VI. The Bottom Line

Let's say you're saving $7,500 a year for the next ten years for your retirement. Using the examples provided above:

In a Treasury Bill, you'll end up with $74,865 (less than your original investment).
With Corporate Bonds, you'll have $89,628

With Stocks, you'll have $112,008.

Yes, there will be volatility in the stock market. But, with your long term horizon, you'll know better than to panic and sell, and help yourself not be one of the 13% of women living in poverty at age 75.

Who Can You Trust?

2009-10-13T09:13:00.000-07:00

Loss of Trust

Bernard Madoff defied the odds by returning a consistent 12% annual return to his investors.
Stanford Financial assured its clients that they were investing in safe, insured certificates of deposit.
WorldCom's balance sheet was remarkable in its ability to grow profitably.

All were lies. Investors in each of these enterprises lost billions of dollars.

Market Volatility

Even those women who were fortunate enough to invest with honest advisers see their retirement savings cut by 1/3. We are understandably very hesitant to assume risk in this environment.

Disadvantages for Women Investors

Adding to those challenges, women also face the facts that we:

Earn $.80 for every dollar men earn;
On average, are out of the work force for eleven productive years as an unpaid care giver for a family member; and
Women live longer than men.

So, what do we do?

Last October, I discussed this situation using an example of a woman I called Sarah. http://beyondjane.com/lifestyle/issues/women-and-money-the-upcoming-financial-tsunami/ While she had saved almost $32 thousand, collected $2000 per month in Social Security payments and owns her $335 thousand house free and clear, she was unable to maintain even basic living expenses. Why?

Sarah invested 70% of her money in so-called "safe" investments like insured Money Market Funds and Bonds. While her investments grew slowly and predictably, after deducting the loss of spending power due to inflation, her investments barely kept up during the time she was saving. To make matters worse, she has a long life expectency after retirement that will damage her spending power with these investments even further.

That's what not to do.

While, as we've seen lately, the stock market and real estate investments can be wildly volatile in the short term, over the long term they are the investments that are most likely to grow in excess of inflation.

Stocks? Now?

Last November, I advised getting back into the stock market http://bizcovering.com/investing/its-time-to-start-buying/ If you had followed that advice and bought the S&P 500 index, that investment would have grown by 11.3%. A combination of money market funds and bonds would have grown by 2.5%. Inflation would cut your return on the S&P 500 to 11%, and 2.2% on your bonds.

That could be the difference between a comfortable retirement and one where you can barely pay your bills.

Women and Poverty

According the Center for American Progress, "elderly women are far more likely to be poor than elderly men." More than twice the number of women over 75 are poor compared to men. Those are the facts. We need to face them.

The Real Risk

The real risk we take is not taking risk. We know that, over time, the stock market and the real estate market are the two investments that grow in excess of inflation over time. We know that both can be volatile over the short term.

The Ten Commandments for Investing

1. Buy low. Sell high.
That means buy when nobody else wants to. That means buy on sale.
2. Diversify
The Standard & Poor's 500 Index can be purchased for a little over $1000 per share right now. It gives you a stake in 500 large companies, mostly based in the US.
3. The market is volatile.
Don't sell in a panic. (See #1.)
4. You have an 81 year life expectency.
Even when you're retired you need investments that will outperform inflation. One simple rule of thumb? Subtract your age from 100. Put that percentage of your investments in stock.
5. It's not too late.
Maybe you waited until now to start investing, and you think it's too late to start. It's not.
6. It's not too complicated.
You're smart. You can do this.
7. Don't be afraid of risk.
Be afraid of being old and poor instead.
8. Debt is bad.
Pay it off. That's a good initial investment, if you're just getting started.
9. Pay low commissions.
They diminish your return on investment. Use a discount broker, like ScotTrade or TD Ameritrade.
10. Keep investing.
Put money aside for yourself, and invest regularly. Putting yourself first is not selfish. It's smart.

It's Up! It's Down! It's Cheap! It's Expensive!

2009-10-09T09:48:00.000-07:00

If you listen to the business news, a myriad of market pundits are shouting,

"Beware! The market has gotten ahead of itself!"
"If you don't get in now, you'll miss this upturn!"
"The market is getting very expensive here!"
"The market is historically very cheap!"
"Buy gold!"

Who's right?

Well, as always, I think the best judge of that is you. All you need is some information, and you're likely to make a much better decision with your money than anyone who has an agenda.

I. What do we mean when we say "the market?"

Many of you have heard of the Dow Jones Industrial Average, often called the "Dow." The Dow is thirty companies (3M, AT&T, Alcoa, American Express, B of A, Boeing, Caterpillar, Chevron, Cisco, Coke, Disney, DuPont, Exxon, GE, HP, Home Depot, IBM, Johnson & Johnson, Kraft, McDonalds, Merck, Microsoft, JP Morgan, Pfizer, P&G, Travelers, United Tech, Verizon and Wal-Mart.) Since there are about 5000 publicly traded companies, so this is a rather small snapshot.

A much better measurement of the market is the Standard & Poor's 500 (S&P 500), which are 500 large publicly traded stocks, most of which are based in the US. Let's use this much broader index when we refer to the market.

II. What is a P/E?

A P/E is a fraction which consists of

The Price of the index as the numerator, and
The Earnings for that index as the denominator.

The S& P 500 index is now trading at 1067.59. That's the P. It is projected (by Standard & Poor's) to earn $69.20 next year. That's the E. 1067.59 divided by 69.20 is 15.42. The P/E of the market is 15.42. That means that for every dollar the market earns, you are paying $15.42 when you buy the index at this price.

Last year, the P/E was 28.37. The market was trading at 1099.23, and it earned $38.74 over the last twelve months. The market is cheaper than it was last year, but you knew that.

The real question is what is a "normal" P/E? The historic long term average for the S&P 500 is 15.82. So, this index is cheaper than its long term average.

III. The Market is Ahead of Itself

Let's see if people who say this are right. At its low last March, the S&P 500 traded at 666.79. It is now

Up 60% from its low of 666.79 last March, and
Down 30% from its high of 1564.74 in October, 2007

It's trading very near a "normal" P/E of 15.82. People who think the market is ahead of itself think that times are not normal. We have a huge deficit. We have high unemployment. We are coming out of the worst recession since the Great Depression.

These people may be right, except for one thing. The market is a discounting mechanism. That means it is priced for events about 6 - 9 months in the future.

Do you think things are getting better? Do you think we're on the road to economic recovery? If so, the market may be fairly priced (but not the bargain in was in March). If not, you probably think it's come too far too fast. Your opinion is as good as any.

IV. If you don't get in now, you'll miss this upturn.

If the best reason you can give for doing something now is that prices will go to the moon if you don't, then you're using the same reasoning that people used to buy Internet stocks in the late 1990's and houses in this decade. It's not a good reason to buy.

V. Buy gold

Gold is, historically, a TERRIBLE investment. What it is, however, is a hedge, and insurance policy against disaster. If currencies lose value (like our dollar has in the recent economic meltdown), people rush to gold as an internationally accepted commodity.

If you think the US economy is going to hell in a hand basket, buy gold. Otherwise, it's ridiculously expensive (an all time hight of $1050 per ounce), and is much more likely to go down over the long term than it is to go up.

So, there you have it. You have all the information you need to be a pundit. Draw your conclusions based on the facts, and act accordingly.

What If We Had A Financial Meltdown - And Did Nothing

2009-10-07T08:51:00.000-07:00

I. What Financial Reform Says

Earlier this year, we discussed the Obama Administration's financial regulation proposals in detail, breaking the discussion into a four part series. Here is the full text of the proposal http://documents.nytimes.com/draft-of-president-obama-s-financial-regulation-proposal#p=2

If you didn't have a chance to read that discussion, here it is.

Given the severity of the recent recession, not to mention its causes, the one issue I did not discuss was the possibility that Congress would take no action at all.

So, of course, that's exactly what our elected representatives did. Or, did NOT do, to be more precise.

II. What does Financial Reform have in common with Health Care Reform?
Last month, http://womensfinancialplanning.blogspot.com/2009/09/health-care-reform-meets-financial.html we saw how financial reform is inextricably entwined with health care reform. As you know, an integral part of health care reform addresses insurance reform,e.g., mandatory covering of pre-existing conditions, the much-discussed "public option" and so on.

Since we, as taxpayer/owners of insurance bohemoth American International Group ("AIG"), have paid $1400 per family to date for its bailout, after it took extraordinary unregulated risk in the housing market, you'd think this issue would demand resolution.

Think again.

Whether you support the "public option," a government-run program that will compete with insurance companies, or the insurance "co-op," designed to provide a more competitive environment for health insurance, know this. Insurance is regulated by each state - not the Federal government - and in many states, as much as 85% of health insurance is held by one insurer.

If this were true for Microsoft, the company would be sued for having a monopoly in that state. Yet, it is okay for insurance companies, because each state operates with different rules.

This is unnecessarily complicated, non-competitive and does absolutely nothing for anyone except insurance companies.

III. Dare we ask that two things be done at once?

If you think it's too much to address financial reform and health care reform in one Congressional session, then be prepared for more of the same.

If not, you may want to drop a quick note to your elected representatives, with whom, by the way, financial lobbyists have spent $3.4 billion to ensure their support.

Here's where to find them. http://www.visi.com/juan/congress/

Important Pricey Leather Handbag Information

2009-10-03T13:58:00.000-07:00

I. Gender Marketing says. . .

Men identify deeply with their jobs. They're hardwired for task orientation. When they lose their jobs, they tend to lose their identity.

"Women are . . . worried about their jobs, but not to the extent that they feel their . . .existence is being threatened, and so they are in the mood to buy despite the crisis," gender marketing expert Diana Jaffe told Reuters recently.

So, do we conclude that men face the current economic slump by questioning their identity and cutting back on spending, and women make themselves feel better by shopping for pricey leather handbags?

II. Why do we buy?

Maybe watching "Madmen" has hurled us back in time and made us behave as though we were living in far less liberated 1960's. Maybe we are taking the ostrich approach to managing our money, and, like Nero, are fiddling while Rome burns. Maybe, in this particular case, we should behave more like men - but for very different reasons.

We need not define ourselves by the way we earn a living in order to face our current economic situation. We can continue to be well-rounded human beings who know that our net worth and our self worth are very different. But in order to pursue the things that bring us happiness, we'd best ensure we have a roof over our head and food on our table in our old age before we buy "pricey leather handbags."

Yet, the fashion industry send us messages - four times a year, via preposterously thin teen-age girls - that we "need" what they offer. Do we? Does spending money on handbags and shoes really make us feel good enough to forego providing for our long term needs?

III. Put Yourself First

If you have put aside enough for yourself to live comfortably for the rest of your life and you need a handbag, by all means buy one, as long as you have the money. But if you have not provided for your long term security, exactly what do you accomplish by buying something that you truly cannot afford?

The appearance of wealth is nothing. It is for someone else. It speaks to others - not you.

IV. You Say

Times are difficult. Current times are more difficult than the grueling recession that took place in the 1970's, when I began working in finance. It was a time when wealth was lost in a grinding market correction that took place over years and cut portfolios in half. Inflation was out of control and job losses made the national mood grim. It was also the time when Warren Buffett invested heavily in the stock market and earned wealth that is measured only slightly less than that of Microsoft founder Bill Gates.

It is your right to buy whatever you want, whenever you want. You can be tempted by the fashion industry to buy gladiator shoes, designer bags or whatever it is - as long as it speaks to your authentic self.

You can also decide to put that money aside in investments that will outperform the ravages of inflation, like stocks and real estate, which will provide for you for the rest of your life.

One in four of us will live to age 95. Elderly and destitute with a pricey handbag in my closet, is not the choice I make for myself. I invite you to join me in defying gender marketing research, and investing your time and resources in investing in your future.

Happiness Is. . .

2009-09-24T09:40:00.000-07:00

"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.

Health Care Reform Meets Financial Reform

2009-09-11T12:05:00.000-07:00

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." http://www.cato-at-liberty.org/2009/09/08/mr-president-here-is-our-answer/

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, http://womensfinancialplanning.blogspot.com/2009/07/obama-administration-financial.html 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." http://www.cnbc.com/id/32799393 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 http://www.opensecrets.org/lobby/top.php?indexType=c 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 http://www.visi.com/juan/congress/

As always, your comments and suggestions are most welcome.

How Much Will YOU Earn?

2009-09-08T10:34:00.000-07:00

As I mentioned six days ago http://womensfinancialplanning.blogspot.com/2009/09/is-stock-market-cheap.html , 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.

Standard & Poor's projects S&P 500 earnings to be $72.99 in 2010.
The optimist of the Barron's group is Prudential International, which predicts $80 - 9.6% more than S&P.
Three (BlackRock, Goldman Sachs and JP Morgan Chase) predict $75 - 2.75% more than the S&P.
Two strategists (Deutsche Bank Private Wealth Management and Morgan Stanley Investment Management) predict $72 - 1.4% less than S&P.
US Trust projects $70.50, and and RBC Capital Markets, $70 (about 3.5% - 4%) less than S&P.
Citigroup predicts $68 - 6.8% less than S&P.
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.

Is the Stock Market Cheap?

2009-09-02T10:56:00.001-07:00

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.