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.
Friday, May 20, 2011
Sunday, May 8, 2011
Give your mother a gift that's worth something
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.
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.
Monday, May 2, 2011
Why to say no to the Portland Public School construction bond
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
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
Wednesday, April 13, 2011
Why the Budget Fight Was Meaningless
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:
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.
"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.
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)
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.
"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.
Monday, April 11, 2011
Which Portland investment bankers gave the best advice in 2011?
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
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
Tuesday, March 15, 2011
What To Do With Your Money Right Now
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:
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?
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?)
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?
Sunday, March 6, 2011
Portland $548 million school bond: No, but . . . .Part III
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:
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?
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
- $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
- 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.
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."
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.
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
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