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Archive for March 2010The Next 1,000 Points on the DOW22 March 2010 by Richard Haskell.
March 22, 2010 Edition, Volume IV Inside Signature Update
THE MARKET – The Next 1,000 Points on the DOW The DOW closed higher for the 8th day in a row Thursday, extending the index’s 52 week high to 10,821 points; though still far from the October 2007 high of 14,400, the rebound over the last twelve months represents a 66% gain over the DOW’s March 2009 low of 6,500. Friday’s close at 10,737, down 39 points on the day, presented an expected breather for the markets after such an extended run to the positive. And then came Sunday’s passage in the US House of Representatives of the Senate’s Healthcare bill and Monday’s double digit stock market gains. With a major piece of uncertainty now out of the way, the next 1,000 points for the DOW could come quickly. You’ll recall that the markets disdain uncertainty above almost all else, and the recent political maneuvering towards a House of Representatives vote on the healthcare legislation presented just that. As late as Friday of last week, House Speaker Nancy Pelosi maintained that a passing vote would occur on Sunday; but with only 200 votes secured of the 216 votes needed, her assertion was viewed as more than optimistic by many. At the same time, President Obama suggested a passing vote may not take place until later the following week, and InTrade, an online market predictor, put the likelihood of passing healthcare legislation by June, 30, 2010 of approximately 80%. That’s all history now, and even though there’s still much work to be done to bring the House and Senate bills into law, there appears to be little in the way of halting the legislation’s progress. The biggest winners in this effort have been the Obama administration and the Democratic Party; to whom congratulations are due, regardless of how you feel about the legislation. They’ve pulled off an effort at which others have tried and failed; one that I honestly didn’t think would succeed until after I spoke with a trusted business associate a little over a week ago. This conservatively minded, small-business owner friend explained that the only way he saw himself being able to provide reasonably priced health insurance for his family was through the passage of the President’s health care bill. Though he may not have fully appreciated the pending legislation’s nuances, it was clear that he had tied his family’s well being to the bill, and I immediately realized that if he had reached this conclusion, millions of others just like him had likely gotten to the same point. At that moment, my expectation of the bill’s passage became certain; the only question was when it might take place. Other winners include hospitals, which now see a clear path to a funding source for the cost of care for previously uninsured patients; pharmaceutical manufacturers, that just had almost 30% of the market open up to them (the previously uninsured), and insurers which are likely to see the largest proportional shift in the size of their risk pool and customer base since the 1940’s. The certain losers are those highest income earners, who will see their federal income tax obligations increase. The An unfortunate aspect of the legislation’s passage is that it will likely move more important issues even further to the sidelines. The current legislation is more of a health insurance reform bill than healthcare reform. Its single largest benefit is to improve the risk pool for insurance companies by mandating the inclusion of healthier citizens who may not feel the need for coverage under the current system; and receiving premiums from them, of course. Demographers suggest that this portion of the newly covered won’t exceed those less-healthy individuals without coverage, but argue that the less-healthy, previously uninsured have been receiving de facto coverage through emergency rooms and free clinics funded by tax payer dollars and higher prices charged to those with insurance coverage. This may fall under the heading of “good is the enemy of great”. While there are certainly good provisions in the bill, it falls well short of great, but may be enough to keep the focus off of enacting a solution to the nation’s larger problem of healthcare reform. In the August 11th (Just What Are We Reforming – part one) and September 3rd (Just What Are We Reforming – part two), 2009 issues of Signature Update we discussed some root causes of our nation’s healthcare problems. Sadly, the bill just passed doesn’t address them; consumers will continue to expect more from the healthcare system than can reasonably be expected; insurance fraud and abuse will continue; and medical malpractice and tort reform are as far away as ever. Regardless, what has taken place is historic and may open the way for the next 1,000 points of gains on the DOW. That could also make winners out of anyone holding stocks, mutual funds, or other market based investment and insurance products. THE ECONOMY - Extremely Costly Lessons In the last few months I’ve had numerous thoughtful and intelligent people ask if the widely heralded economic recovery is real. With unemployment rates close to 10%, market values well below their highs, many businesses still reporting revenues well below those seen in the mid-2000’s, uncomfortable real estate values and relatively low consumer confidence levels, could we honestly be seeing a broad-based recovery? The answer is yes, but we need to differentiate between an economic recovery and a return to economic prosperity. Economic recovery doesn’t mean that all is well and that good times have returned for every sector of the economy. It simply means that the economy is improving rather than declining. It suggests that today’s economic results are better than yesterday’s, with the recognition that yesterday’s were worse than those of the day before. Unlike a return to economic prosperity, an economic recovery is simply the beginning, and in this case the road to prosperity is likely to be measured in years rather than months, as is a return to full employment. Though our economy will almost certainly see a return to prosperous levels of output and employment, we still need to deal with the affect of the recession and the remedies employed to bring us out of it. Unacceptably high levels of federal debt will need to be overcome, precautionary regulations will be enacted, and trust will have to be restored to the capital market system before we can declare prosperity across the board. In the mean time, appreciate that the economy is improving; enjoy any benefits this may bring to your business or household; and learn from what have been extremely costly lessons. THE TAKEAWAY – Consumer Demand and Stronger Dollar Effects
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC Posted in Signature Update | Print | 2 Comments » Luxury Retailing Gains Not Surprising… if you know Thorstein Veblen15 March 2010 by Richard Haskell.
March 15, 2010 Edition, Volume IV Inside Signature Update
THE MARKET – The Rising Price of Oil May Quickly Become Self Correcting Three years ago, at roughly this same time of year, we saw oil prices begin to climb to uncomfortable levels. Oil prices rose from the $60-$70 per barrel range in early 2007 to almost $150 in the summer of 2008, before crashing to $33 less than six months later. The rise was due to a combination of increasing demand and outright speculation and market manipulation; the crash came as demand collapsed and the economy presented one of the most difficult recessions in recent memory. It’s difficult to tell how much oil’s bloated pricing weighed on the economy. Though it isn’t likely that it was a major contributor to the recession, it certainly hastened the event’s economic and market impact. Household budgets were stressed and producers struggled to maintain acceptable operating margins in the face of increased energy costs. That the scenario played itself out along side of a real estate boom and bust and the attending credit crisis is likely coincidental; regardless, it made a bad situation worse. Today, we’re seeing oil trending higher once again. Global demand is expanding as the recession is subsiding and economies are once again increasing output. Unlike the demand and speculation driven increase in the price of oil during 2006-2008, today’s price levels appear to be supported by international exchange rate changes as the dollar has lost ground. Fully $30 of oil’s rising price tag may be related to the dollar’s value relative to that of other currencies. But that leaves room for another $20 of price increase due to expanded demand.
Though I don’t want to get caught in the trap of suggesting that “things are different this time”, it is important to point out that the fundamental causes for oil’s rise from $100 per barrel to near $150 in 2008 were heavily laden with market speculation and outright manipulation. These detrimental market forces are in no position to make a run at oil following the recent recession; their coffers aren’t filled with profits from real estate and stock market gains, and there simply isn’t the availability of credit capital to employ substantial leverage.
When consumers finally shifted consumption patterns in 2008, oil’s price collapsed, leaving speculators and market manipulators with dire consequences, but it did so after substantial damage was inflicted on the economy. Not only have consumers begun to shift demand for fuel much earlier than several years ago, but the US dollar has stabilized and appears to be poised to make meaningful gains as interest rates return to more appropriate levels later this year and in 2011. A stronger dollar shifts the price of oil downward, and when combined with demand decreases by consumers, should moderate oil’s rise in price and avoid exaggerating oil’s impact on our recovering economy. THE ECONOMY - Luxury Retailing Gains Not Surprising… if you know Thorstein Veblen Higher-than-expected retail sales and unchanged inventory levels were reported early Friday morning; providing a boost to equity markets and showing greater strength than most had expected. February retail sales figures increased by 0.3% in spite of the winter storms expected to have kept many consumers in their homes and away from retail outlets. Analysts had anticipated a 2.1% decline in reaction to the worse-than-expected February weather trends and high unemployment levels, but once again, the Throughout the recent recession, economists and others debated whether or not the Manufacturers, both at home and abroad, have increased production to replenish depleted inventories, and the resultant improvement in GDP helped buoy the markets and calm fears. Despite pessimist’s concerns that increased production would equate to increased inventories, we’ve now observed that inventory levels remain low and expect production levels will need to expand yet further. That’s good news for the economy and even better news for the nation’s unemployed. Though most manufacturing jobs have been exported to other countries, a sufficient number remain to make a meaningful difference. In addition, the domestic labor force required to support distribution represents a substantial number of job opportunities in transportation, administration, retailing, finance and advertizing. While it may not be sufficient to return our economy to full employment, it is certainly enough to improve employment figures by 1-2%. High-end retailers across the country are seeing improvements in almost every measurable category. Sales volumes, transactions, in-store traffic, and margins have improved across the board, but more so for retailers such as Nordstrom’s and Neiman Marcus than discounters WalMart and Costco. Improved sales of luxury goods appears counter-intuitive when viewed in relation to the nation’s ongoing employment problems, increased savings rate, and limited gains in personal income, but sales at luxury retailers have made meaningful gains, many now with three and four month improvement patterns, while sales at discounters remain flat. The rise in high-end retailing certainly isn’t due to improved employment or increasing real estate values, but may be indicative of an affect described by the 19th century economist Thorstein Veblen in his 1899 publication, The Theory of the Leisure Class. Veblen proffered that consumers at all levels will choose to purchase goods above that which may be prudent in an effort to increase utility and maximize satisfaction. Some do so to connect themselves to a higher level of society; others simply find greater enjoyment and sense of self-worth through the consumption of luxury goods. These goods, referred to as “Veblen goods” have been at the heart of virtually every economic recovery of the 20th, and now 21st, centuries; prior to which time wide spread availability of higher end consumer goods was limited. Even though luxury goods are among the first to suffer sales declines when the economy tightens, they’re also among the first to rebound. Consumers simply demand them; regardless of how prudent such purchases may be. Retail sales increases, particularly in respect to luxury goods has become one of the most certain signs that economic recovery is progressing. It has become an even more accurate barometer than consumer confidence indicators. Many suggested that this recovery would be different than those of the past, that things were “different this time”, and have offered explanations for why the consumer couldn’t be expected to make any significant contribution to a rebound. We appear to be seeing, once again, that things are rarely different than at times in the past, and that supposing they will be may only lead to greater levels of difficulty for those unprepared to accept the path dependant nature of economic events. THE TAKEAWAY –Gold Bugs Looking for Profits as Prices Decline
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 » Believe It or Not, We’re All Liberals Now9 March 2010 by Richard Haskell.
Inside Signature Update
THE MARKET – Believe It or Not, We’re All Liberals Now
The DOW closed up sharply Friday afternoon after posting gains of almost 250 points for the week. Better housing, employment and retail sales figures added to an active M&A (mergers and acquisitions) market, as well as more solid plans for a return to solvency for
It’s a relief to enjoy a relatively calm and upward trending market at the moment. The VIX (volatility index) is at a near-term low reflective of the current calm, but it won’t likely stay this way for too long. So while we’re here, rather than delve into the market’s technical details or proclaim its fundamental virtues, I thought this might be a good opportunity to discuss the terms market liberalism and free market capitalism; terms that are not all that much different from each other and not at all what most believe.
In the
This is quite the opposite of what the term represents in economics and how it is used in political circles outside of the
In this context, a free market is a liberal market, and represents an economy in which open markets are encouraged and where most public services are the purview of the federal, state or local governments. Sound familiar? It should, we live in an economy and polity governed by such a structure. We also live in a market based on capitalism, and while most suppose the terms capitalist and liberal are contradictory terms, they are not. Moreover, they’re complimentary at the core and, right or wrong, both have come to be associated with democracy the world over.
Capitalism is the economic state in which those with property rights have the opportunity to invest resources in pursuit of productivity gains and returns on their investments, without the expectation of undue government competition or intrusion. Anyone who ever expects to earn interest on savings, invest in a retirement plan, thinks of having their own business and work for themselves, or even expects to receive the benefit of their own labor is, dare I say it, a capitalist; and a liberal. Capitalists recognize that economic growth and development are best cultivated in an open market structure where opportunity exists for each economic actor.
In this regard, property rights includes real property, but also extend to anything able to be used for the sake of production; including various types of intellectual, intangible and physical property, as well as the value of one’s own labor.
Many economists have come to believe that progression towards a liberal, or open, democracy is inevitable for virtually all developing economies and expect that some form of capitalism likely accompanies the trend. While we’ve seen some evidence that this form of political and economic development does occur, we’ve also seen numerous examples of meaningful economic development where capitalism has not been accompanied by democracy. It may be that regardless of how attractive capitalism or democracy are to a developing nation’s transformative leaders, other long-standing economic, political and social institutions are all but impossible to counteract.
In the
So here we are a nation in which the most conservative among us are liberals and the most socially liberal are capitalists. All of a sudden the unpredictability of the stock markets, the vagaries of corporate and municipal finance and volatility of the commodity markets seem a lot less daunting and complex, don’t they?
THE ECONOMY - Difficult Times for the Postal Service
The US Postal Service, long a symbol of consistency and commitment in
The postal service, now a business-like, quasi-government agency is projected to lose $7 billion this year on its way to a cumulative loss of $238 billion over ten years. Recent rate hikes have only served to decrease operating income as higher postal costs and an ailing economy have repressed postal transactions so deeply that the service is finally looking at cutting delivery costs by excluding Saturday deliveries. This is certainly too little and may quite possibly be too late.
Daily mail delivery became the norm as transaction costs were lower (labor, benefits, fuel) and competition was virtually non-existent. Rather than being a necessity for households, it’s a luxury to which we’ve became accustomed; even if only for a sense of daily rhythm. With so many of the functions formerly assigned to the postal system now being handled electronically (paying bills, writing letters, delivering advertizing), few are able to make the argument that daily mail delivery is a luxury we can’t afford to do without. But there’s a problem with scaling back delivery at this particular time; and that is the job market.
It’s likely that the average American household would do just as well with three postal delivery days a week as it now does with six; as households now collect their mail less frequently than in years past and many allow mail to pile up until the weekend before being opened. Business and government offices may be a different story, but many of these now operate on a four-day work week, with Saturday business delivery already unavailable in most areas. Though reducing household delivery by half (three days versus six) would cut postal service operating expenses by over $10 billion a year and return the service to profitability, it would also cut some 90,000 direct employees and as many as another 120,000 indirect jobs, as the ripple spreads through sub-contractors and service providers. Our highly political and still-brittle economy isn’t in a position to deal with the issue right now.
However, if we chose to repurpose the newly available workforce into jobs in education, technology, energy and infrastructure development, the costs to the economy would remain constant, but the potential additional economic output could be enormous. Such an effort could not be affected overnight; the phasing out certain postal services and the efficient and effective ramping up of other educational and industrial structure takes several years; and that presumes complete cooperation from some of the most powerful labor unions in the country. Sadly, it’s not at all likely.
The only benefit of supporting jobs related to a bloated postal industry is the income of the employees and tangential service providers, but what if the resources were able to be re-tasked to those parts of our economy offering long-term growth and development? We can only imagine the benefits; unfortunately we can also imagine the near-term difficulties the transformation would create; the political maneuvering, the fiscal damage to thousands of households in transition and the prolonged weakness it would add to the nation’s real estate market.
In the February 19, 2010 issue of Signature Update we committed to discussing potential solutions to some of the difficulties facing our economy, and stated that they would not be easy, would require sacrifice, and could only be carried out by courageous and innovative leadership. This is one of those solutions.
Necessary though they may sometimes be, labor transformations are not short-term events. Most take at least several years before economic advantages can be realized. Perhaps the opportunity created by the postal service’s difficulties can be capitalized for the good of the country; the taxpayer is already set to bear the cost, we may as well direct it to a more productive purpose.
THE TAKEAWAY – Insurers in the Spotlight
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 »
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