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Archive for February 2010Investments in Education as a Stimulus for Long-Term Economic Growth and Development25 February 2010 by Richard Haskell.
February 25, 2010 Edition, Volume IV Inside Signature Update
THE MARKET – Pay Attention to Earnings For those who paid attention to Thursday’s equities market it was a wild ride and a tough day. The DOW opened sharply lower, down almost 190 points within the first hour of trading, before climbing back to close at 10,321, or down only 53 points. The combination of a weak employment report and an eleven point decline in consumer confidence was enough to send Bears to the forefront and reign in even the strongest of Bulls. Here’s the irony: with most publically held corporations having reported 4th quarter and full year 2009 earnings, some 80% of them were not only profitable, but exceeded expectations. This supports current price levels and opens the door for higher stock prices in the future as 2010 earnings estimates suggest equity values 15-20% higher. The S&P 500 aggregated forward earnings estimates of roughly $90 and a PE multiple (price/earnings) of 15 would suggest an S&P market valuation by year end 2010 of 1350 versus today’s closing value of 1,103. That represents an increase of 22.4%, in line with our 2010 expectations. THE ECONOMY - Investments in Education Stimulate Growth As many in our economy search for new standards against which we can measure future performance, we begin to look for ways to improve our current condition. Just as we discussed in the March 29, 2009 edition of Signature Update, When Markets Reset, our economy has a different look and feel today than it has in decades past, and the change will be reflected in long-term consumption and investment patterns. We also have an opportunity to impact the future of our nation as a leader in global economic and political policy and power; indeed, this is exactly why many voted for the sitting U.S. President, believing or “hoping” Mr. Obama to be a transformative leader. Whether he is or isn’t remains to be seen, but what is certain is that his political power alone can’t alter the trajectory of the nation. For that to happen, our state and national leaders will need to do what is seemingly most difficult for them; to put aside party differences, expect sacrifices to be made and to ask for more cooperation from businesses and households than at any time since WWII. Over the past forty years, our economy has shifted from one strong on engineering and manufacturing to one lead by the financial markets. Much of our manufacturing capacity, and the jobs that went along with it, has been exported to the lower cost environments of developing countries. The expectation was that we would replace these jobs with higher paying opportunities in technology, medical sciences, and finance, and indeed we have, but we’ve also experienced an unforeseen trend which has begun to shift our economy and widen the income gap separating our households. At the same time that foreign workers have benefited by fulfilling In addition to adding millions of higher paying jobs, we’ve also created a disproportionately large number of low paying jobs in food services, convenience, retail, and leisure. Some suggest these are the product of higher levels of discretionary income in households benefited by better paying employment and the increase in the incidence of two-income households. Others recognize it as being driven by a growing class of workers unprepared to make meaningful contributions to technology and industry and only able to fill less challenging positions. During the very period of time in which we might have become better able to dominate the world’s technological, scientific and social innovations we’ve become less relevant when compared to other developed nations. In the name of social progress, we’ve been disadvantaged by too many policies and influences designed for social and financial redistribution and equalization. The unfortunate byproduct of these efforts has been to decrease the average level of preparation of our workers. Though we’ve continued to innovate and drive much of the progress evidenced in the global technology, scientific and manufacturing markets, we’ve fallen behind without most of our citizens understanding why. Sadly, we’ve recently come to realize that we’ve also caused some of the difficulties in the global financial markets. We can change the negative trend, improve the lives of our citizenry, and stimulate long-term growth and economic development, but it’s going to take effort, inconvenience and enormous political and investment capital to do so. President Clinton often spoke of “investments” while working to gain public acceptance for tax increases. Similarly, the Obama administration has used some of the same language to gain popular support for stimulus proposals. In each case we can argue that high percentages of the funds disbursed following these efforts have been directed towards transfer payments and social programs. At the same time, meaningful amounts have also gone into job-creating infrastructure development and some has actually made its way into “investment”, or been used not just to create short-term jobs or support those dependant on social programs, but has been employed in such a way as to create surplus through production and innovation. Most don’t look at funds directed toward education in this light, but when applied in such a way as to foster higher levels of competency and to raise educational standards, this sort of spending is “investment” of the most important kind. In 1981 Professor Richard A. Easterlin of USC published an article titled Why Isn’t The Whole World Developed?, in which he drew on research spanning centuries and continents. The data supported Easterlin’s hypothesis that economic development follows educational improvement. Those societies that supported mass education in the early 19th centuries became economic leaders of the 20th century (Germany, France, Great Britain, United States, etc.), while those that adopted broader educational initiatives later in their histories also experienced economic growth and development later (Romania, Yugoslavia, Russia, India, Brazil, China, Mexico, Philippines, Argentina, etc.). Those that continued to resist making educational investments remain among the poorest nations on earth, with unacceptably low standards of living ( Similar comparisons and conclusions are now being drawn by economic researchers regarding state-to-state differences in educational investment and economic growth and development within the Now I’m biased in this regard. My wife and I both enjoy the benefits of having graduated from a major university and I’ve gone on to participate in graduate programs at yet others. My children have followed suit and are participants in higher education at varying levels. They haven’t been perfect students, but they’ve been active participants. They’ve worked hard, studied long, put up with a level of involvement and expectation from their parents that they certainly didn’t appreciate at the time; they’ve offered respect to their instructors, completed assignments, and prospered as a result. It wasn’t easy and it certainly hasn’t been without sacrifice or expensive, but it’s been among the most important things we ever have, or will do. Our schools should be palaces of learning, our teachers among the best paid in our society, our expectations should be high and our outcomes extraordinary. But they aren’t, and until we deal with the reasons why, we’re not likely to gain the advantages we so desperately need. Likewise, an excellent college education should be free for all those willing to take advantage of it; those willing to perform and commit to using their education to return value back to our society. This is a difficult time to discuss increasing investment in education. State budgets are under extraordinary pressure due to the recession and legislators are struggling to maintain basic services and commitments. But it’s more than that; legislators, tax payers, involved parents and many excellent educators are tired of the disappointment that often comes through compromise, through pressure to put up with unacceptable student behaviors, and requirements imposed that end up diluting the value and values of our educational system. Our schools, teachers, children and futures deserve to be subject to higher expectations and must be allowed to benefit through innovation. One such educational advancement has come through the many charter schools emerging across the country. As a whole, they educate to a higher standard and at a lower cost. They prepare students such that years are able to be shaved off the time needed to gain a similar education in more traditional settings. My youngest child has attended her junior and senior years of high school in a charter school setting. She enrolled in a school literally embedded in the local community college and completed her freshman and sophomore years of college concurrent with her last two years of high school. The requirement to participate in this charter school is committing to the curriculum and accepting that the school offers less in the way of sports, social activities and liberal arts programs; rather than being required to meet a high GPA level or bear an increased cost. After all, charter schools are public schools. The additional cost to our family over the cost of those years at the local high school was simply the added cost of transportation to a school 10 miles away; which we more than made up for in decreased costs of unnecessary programs and activities. While most states struggle to support the net cost of higher education (tuition income and grants less total expenses) our daughter’s charter school produces high school graduates at a lower cost than does the local high school and eliminates the need for two entire years of post secondary education – as well as the added cost burden of those years. Often times teacher’s unions and social advocacy groups discourage this type of innovation in an effort to protect their power and influence. In the end, it is short-sighted and has lead to higher costs and lower output. The state and local leaders willing to increase funding for education, increase expectations for teachers and students and open the way for technological and economic development will find themselves benefiting from long-term growth and development and have a decided competitive advantage over those that don’t. Likewise, the added benefit to the nation is enough to expect increased federal funding for buildings, classrooms, teachers and programs sufficient to offset that which the states can’t reasonably provide on their own. This is a time for state and national legislators to become courageous and adopt an expanded vision of what can and ought to be, but it will only work if performance standards are rigorously maintained at every level, including that of the student. THE TAKEAWAY – Obama’s Surprising Support of Annuities
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC Posted in Signature Update | Print | No Comments » Any Merit to Interest Rate and Inflation Concerns? 2-19-201019 February 2010 by Richard Haskell.
Any Merit to Interest Rate and Inflation Concerns? February 19, 2010 Edition, Volume IV Inside Signature Update
THE MARKET – Interest Rate Excitement from the Fed The DOW closed slightly higher in moderate trading on Friday following the Federal Reserve’s announcement that it would increase the Fed Discount Rate by .25%. Within minutes of the Thursday afternoon Fed statement, many Wall Street traders, analysts and media representatives began to foretell of higher interest rates and lower stock markets. And indeed, the markets opened sharply lower Friday morning as the DOW futures suggested a decline of 70 points, but by noon most market indexes were up and largely remained that way for the remainder of the trading session. Conventional wisdom suggests that rate increases spell trouble for the markets, so why not today? And how is it that early forecasts for lower equity values turned into a nine point gain on the DOW? Well, as it turns out, conventional wisdom isn’t all that conventional or wise; and most people don’t understand the relationship between the Federal Reserve and interest rates, well enough how a change in the Fed’s discount rate impacts the market. Thank goodness for level headed economists. The Fed Discount rate is not a market interest rate. Rather, it’s the rate the Fed charges banks wishing to borrow directly from the Federal Reserve; the lender of last resort. The discount rate had been set at .5% and member-bank borrowing was holding at just over $15 billion; compared to nearly $13 trillion of liquidity being held in domestic banking and capital market accounts. The .25% increase amounts to a very small drop in a very large bucket, and by the time traders and investors were able to digest the news and get past some of the initial excitement, the realization set in that the event was neither unexpected nor troublesome; quite the opposite. Fed Chairman Bernanke has stated for some time that US monetary policy will need to tighten as the economy improves. Though tightening may manifest itself in many ways, the most common result is higher interest rates; whether through the Fed’s purchase (or sale) of bonds, increased reserve requirements imposed on member banks, or federal fiat. Even though the Fed’s decision to increase the discount rate is one of the least impactful on market interest rates, it’s evidence that higher rates will be in our future; just not right now. Higher rates equate to a stronger dollar; as evidenced in declines in the price of oil and gold in early trading. But by the end of the session, both commodities had rallied along with the DOW. The bond market experienced similar activity. So if the Fed’s action doesn’t necessarily signal a near-term increase in market rates, then what does it represent? Simply that Bernanke and the Fed Board of Governors see an end to the risk trade, an improvement in liquidity of member banks, and an overall strengthening in the US and global economies. Following the PIGS ( Market interest rate increases will most likely begin to appear late in 2010 and the Federal Reserve will probably put off increases in the Fed Funds Rate until after the mid-term election; possibly as late as early 2011. The employment and real estate markets both need the added support of low rates and a not-too-strong US dollar. In the mean time, expect the Fed to continue to moderate its support of the mortgage market and member banks; fewer of which are in need of Fed capital. THE ECONOMY - Inflation’s Simply Not on the Horizon One of the most consistent concerns expressed during the last year has been over possible inflation brought on by the substantial increase in federal spending and increases in the M1 and M2 money supplies. Gold Bugs have used the concern as a means of pushing the commodity’s price higher; political conservatives have used it as a stick with which to beat the Obama administration, though with little merit; and some of those on fixed incomes have begun to scale back their lifestyles to adjust to pending price increases. But there’s simply no empirical evidence to support the current fears. Which is either a Good News/Bad News tale, or possibly Bad News/Bad News; allow me to explain. The CPI (consumer price index) data released this morning by the US Department of Labor’s Bureau of Labor Statistics reflected a .1% decrease in core price levels for the first time in twenty-seven years. When compared to similar data from the past 12 months we see that core prices have slowed their rate of increase from monthly rates of less than .3% to the recent .1% decline. The movement has not coincidentally followed the decline in US employment rates; which relationship will become important as we move on. Core price levels don’t include energy and food items and shouldn’t be viewed in isolation. But even when the CPI is expanded to include all items, the annual rate of increase is barely 2.6%; not exactly representative of hyper inflation. Persistent inflation can only occur when personal income levels increase sufficiently to put enough additional buying power into the hands of consumers and encourage them to seek after greater quantities of goods and services; pushing prices higher. Even though personal income levels increased slightly in 2009, and are likely to do so again in 2010, the increases aren’t enough to significantly raise prices. As long as we’re dealing with high levels of unemployment and a limited wage/price relation, broad-based inflation can’t reasonably gain hold of the economy. Most policy makers, notably labor economists, have come to realize that persistent inflation has become meaningfully more difficult to experience than in decades past. Many of us recall the inflation and stagflation periods on the 1970’s and 1980’s, but don’t realize how much of that was a product of the strength of labor unions and collective bargaining contracts. These cooperatives have substantially less power today than they did during the latter half of the 20th century; consequently, wage increases for the foreseeable future will remain modest. Many of the personal income increases hourly wage earners experienced up through the 1980’s were the result of labor productivity gains; as such, employers were motivated to pass some of the gains on to workers. But since the early 1990’s, most productivity increases have been brought about by technology gains requiring large capital investment by business owners and shareholders; not by improvements in labor. In many cases these gains have decreased the need for skilled workers and rather than bringing about increased incomes for wage earners, they’ve been more likely to provide returns for investors, business owners and corporate executives; otherwise these groups would have limited incentive to innovate and invest. So what’s the Good News/Bad News tale? The much feared inflation scenario simply isn’t on the horizon; due in large part to employment levels that are likely to be persistently lower and personal income increases for hourly-wage earners that are likely to be nominal. And the Bad News/Bad News possibility? Across-the-board tax increases are nearly inevitable, and are likely to put additional pressure on household discretionary income; which could serve to slow price increases even further and make it that much more difficult for a return to a robust employment market. There are solutions to all of this, of course, and they include improvements in education, technology and the capital markets. And we’ll discuss these further over the next several issues of Signature Update. Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC Posted in Signature Update | Print | No Comments » Opportunities in Markets and Inventory Levels18 February 2010 by Richard Haskell.
February 18, 2010 Edition, Volume IV Inside Signature Update
THE MARKET – Corrections and Opportunities The recent ups and downs in the The market volatility of recent weeks, though in part attributable to political events in the Why markets appear to need corrections on an interim basis before climbing to new heights is likely more of an emotional safety check for traders than the result of any pragmatic or fundamental cause. Both traders and investors take comfort, and often find confidence, in a market as they understand that a brief cooling-off period often results in short-term declines followed by longer-term extended gains. The current market climate is indicative of this behavior and rather than to be feared, ought to be seen as an opportunity to purchase attractive assets at lower levels. Finally, at the risk of sounding like a broken record, the US Treasury Yield Curve continues to be sharply positive and represents one of the strongest indicators available of future market gains. Months ago, when the market and economy were both offering encouraging signs, I suggested that this was just starting. Now, almost six months and 1,000 points of improvement on the DOW later, I’ll repeat the expectation … this is just starting.
THE ECONOMY – 2010 GDP Prospects and Manufacturing Opportunities GDP (gross domestic product) revisions for the full year and 4th quarter of 2009 will be out soon, and like those of recent quarters, are likely to be revised slightly upwards. Contrary to what many may have you believe, the The most troublesome sectors of the economy continue to be housing (real estate) and jobs (labor). Though slightly improved over prior months and quarters, they remain below important levels and continue to cause fiscal and emotional pain for far too many American households. On a decidedly brighter note, most other economic indicators have not only improved, but have done so for enough back-to-back periods to represent a firm direction and trend rather than possible anomaly. In recent economic reports, durable goods orders and shipments rose .3% and 2.9% respectively, personal and discretionary incomes each increased by .4%; retail sales increased 12.9%; employment improved by .5% (though still high at 9.7%); and inventories declined by more than $33 billion dollars. Perhaps the most important figure in that list is the inventory figure. Throughout the recession, inventory levels declined as retailers and wholesalers sought to limit their exposure to declining retail sales and reduce expenses. Virtually every calendar quarter brought lower inventory levels - hand-in-hand with the decrease in manufacturing and distribution jobs. Surprisingly, declining retail sales figures never resulted in increased inventories and consumers have continued to buy more than was being manufactured. With consumer spending on the rise, the pressure to build inventory levels is mounting – this accounts for some of the recent employment improvement. Lower unemployment, however modest, translates into higher personal incomes and increased consumer spending, which in turn puts yet more pressure on inventories. It becomes one of those positive developments we’ve needed to see for many months. Some will argue that much of Some have wrung their hands over tightening monetary policy in We now stand to gain nearly as much from foreign manufacturing of goods to be consumed in the THE TAKEAWAY – Likely to See Equity Levels Rise and Commodities Weaken
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC Posted in Signature Update | Print | No Comments » Can the US Economy Grow Without Employment Gains?5 February 2010 by Richard Haskell.
February 5, 2010 Edition, Volume IV Inside Signature Update
THE MARKET – Better Dollar, Labor & Earnings: why are stocks lower? With the strengthening US dollar, improving unemployment and stronger corporate earnings, why has the To begin with, the market has enjoyed an impressive rally from its early 2009 low of 6,500 on the DOW. Even compared with today’s close of just over 10,000 that’s a 54% rise in just over 10 months. Most market analysts would expect a market correction of up to 10% to follow this sort of increase before the market would be poised to rise to yet higher levels. For traders (short-term) this represents an opportunity to sell profitable positions and buy back into the market at lower levels; the problem is knowing when and at what levels. For investors (longer-term) there’s less cause for concern. At worst it should be an opportunity to adjust allocation parameters; again the question is when and at what levels. Most investors wisely choose to ride through this type of correction; most traders increase their intake of antacids or alcohol. The real strengthening of the US dollar has been the byproduct of improved GDP reports (5.7% for 4th Quarter 2009), increased productivity and earnings for many Historically, when the dollar has strengthened the The anti-business rhetoric coming out of In addition to Obama administration proposals to limit banks’ ability to create profits, which also limits their ability to lend, we’re now hearing about plans to tax the foreign earnings of US corporations as those earnings are realized in the US. While the prospects of new tax revenues may be appealing to legislators, we have to realize that the more likely result will be those profitable corporations keeping foreign earnings in their countries of origin; i.e. outside of the All of this has brought renewed concerns over the strength and sustainability of the ongoing economic recovery. No longer do we hear questions about whether the recovery is real, rather, we now hear comments regarding how sustainable it might be. And it’s a good question. (For a more complete discussion take a look at the following THE ECONOMY section of this article) On the positive side; GDP is rising, unemployment is moderating and may even be in the early stage of a reversal, and corporate profits are returning. Corporate revenues and profits are well ahead of 2009 levels and as of this morning, there were 39 major On the negative side; US auto sales are still lower than optimal, real estate values continue to be depressed in most markets, prolonged unemployment is ravaging otherwise fiscally healthy households, capital markets (lending) have yet to return to healthy levels, and deflation is still a real possibility at the same time that inflation concerns continue to capture media attention. Added to all of this to the fact that So why are the markets experiencing the sort of volatility reflected in today’s positive opening, sharp declines through the middle of the afternoon, and then surprising rebound for a profitable close? Maybe it’s just because it’s Friday and a major storm is bearing down on the east coast and maybe there’s a lot more to it than you’re likely to hear on the nightly news. THE ECONOMY - Can the This morning’s release of the latest employment figures showed a surprising, though small improvement: unemployment is down to 9.7% from 10% and manufacturing jobs increased by more than 11,000. That may not sound like much, but this has all taken place without the expected build up in The real question becomes, can the If shareholders and investors were evenly distributed across the spectrum of US households, then the benefit would likewise extend through all income classes, but that’s not our reality. Even though more households own stocks through 401(k)’s, IRA’s ESOP’s, and trading accounts than at any time in history, the bulk of equity ownership is still held by the highest income earners and the wealthiest of Americans. Additionally, the substantial capital investment needed to support corporate growth is largely made available through hedge funds, institutional investors, and venture capital firms – not exactly those living on Main Street, USA. What this amounts to is that while economic growth can extend through periods of higher unemployment, it may serve to exacerbate the already widening income gap and yield far more benefit to wealthier households than to those in more critical need of additional resources. Many nations across the globe have lived this way for extended periods of time, but in the end, there’s been a heavy price to pay. THE TAKEAWAY – Relax and Enjoy the Super Bowl
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC Posted in Signature Update | Print | 1 Comment »
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