Believe It or Not, We’re All Liberals Now

9 March 2010 by Richard Haskell.

Richard E. Haskell, Sr.

 

March 8, 2010 Edition, Volume IV

 

Inside Signature Update

• The Market – Believe It or Not, We’re All Liberals Now
• The Economy – Difficult Times for the Postal Service
• The Takeaway –  Insurers in the Spotlight

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 Greece.  Oil and gold closed higher on the day ($1,138 and $81.50 respectively) based on increased US demand and a stabilizing, though weak, Euro. The DOW is now back to within 200 points of its near-term high of 10,767 and many analysts believe the index is poised to make a run at the 11,000 mark. 

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 US, most accept the label “liberal” to represent association with social liberalism and ideals representing the left end of the traditional political spectrum.  It’s what conservatives like to call Democrats when they want to contrast their points of view.  It’s also a label the Democratic Party has sought to shed as party leaders have worked to rebrand Democrats as “progressives”. 

This is quite the opposite of what the term represents in economics and how it is used in political circles outside of the US.  Since the 18^th Century, the term “liberal” has represented those supportive of free and open markets, a social structure free from government or monarchal interference, or a political structure that allowed everyone open access.  The terms “labor”, “welfare” and “socialism” have been more likely to be connected to left-of-center political groups in other polities.  The fact is the vast majority of Americans, almost regardless of political affiliation, are considered “liberals” in the larger economic, political and social sense of the term.  We’re committed to free and open economic, social and political markets, whether we all realize it or not.

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 US, even the most socially and politically “progressive” among us, including those who would shudder at being considered capitalists are in fact, capitalists.  Likewise, many conservatives around us, including those who decry liberalism via various forms of popular media and hang their reputations on their conservative views, are committed economic, political and social liberals in the truest sense of the word.

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 US culture, is once again at a cross roads, and this time the stakes are higher than ever.  In an age in which hundreds of millions of emails and text messages have replaced traditional letters, and overnight carriers UPS and FedEx continue to employ low cost and innovative solutions to deliver documents and packages in a fraction of the time and resource of only 5-10 years ago, the US Postal Service is struggling to remain relevant.

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

• President Obama unleashed a surprisingly aggressive attack against insurers this morning (Monday) as he continued his push for healthcare reform.  It showed a renewed commitment to the effort and may once again have an adverse affect on share values of insurers and healthcare related firms.

• AIG’s announced sale of its Alico unit (AIG’s international life insurer) to MetLife and AIG–Asia unit to Prudential PLC takes it closer to being able to pay its $180 billion bailout loan provided by the US taxpayer, but there are no signs that the federal government intends to sell its stake in AIG any time soon.   The move boosted both AIG and MetLife’s value to shareholders in the short run; the real question is what comes next? 

• Just as Greece seems to be making credible strides to shore up its sovereign debt crisis, Portugal fell under greater scrutiny by Moody’s Investor Services.  Moody’s warned that the debt and deposit ratings of Portuguese banks are at risk not just from a potential downgrade of the sovereign rating, but also from “an assessment of the government’s decreasing ability and, potentially, willingness to support the country’s banking system.”  As a result, the Euro’s remains weak and the US dollar stronger; if only on a relative basis. 

 

Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management  and CEO of Signature Management, LLC

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Investments in Education as a Stimulus for Long-Term Economic Growth and Development

25 February 2010 by Richard Haskell.

February 25, 2010 Edition, Volume IV

 

Inside Signature Update

 

• The Market –  Pay Attention to Earnings
• The Economy –  Investments in Education Stimulate Growth
• The Takeaway –  Obama’s Surprising Support of Annuities

 

 

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 4^th 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 US manufacturing demand by offering lower labor costs, too many US workers have chosen to limit their educational opportunities, have unrealistic lifestyle expectations, and are only prepared to work at low paying jobs.  The developing economies in which manufacturing has blossomed will one day demand labor prices at levels that will make it affordable to bring the jobs back to the US market, but we may not have a domestic labor force prepared to perform the necessary work when the time comes, and we risk the possibility that US manufacturing may never recover.

 

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 19^th centuries became economic leaders of the 20^th 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 (Nigeria, Ethiopia, Burma, North Korea, Haiti, etc.). 

 

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 US.  The research unequivocally shows that those regions that commit to higher levels of educational investment gain long-term economic advantages in engineering, technology and medical and environmental sciences over those that don’t.  If we want to improve the future of our regional and national economy it is incumbent on legislators to increase funding, policy makers to expect more from educators, teachers to require more from students, and parents and their children to discipline themselves and take advantage of their opportunities rather than squander them, as do so many.   

 

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

 

• Current market volatility may remain higher than normal as unemployment concerns persist and the national and global political climate retakes center stage over earnings reports.

 

• Bond values, little changed since last week’s announcement by the Fed, are likely to weaken through the year as we get closer to inevitable increases in interest rates.

 

• President Obama’s surprising support of annuities as value added investments in qualified retirement plans will put a spotlight on these insurance based instruments and may make those that are too complex or very costly easier to understand and more competitive.

 

 

 

Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management  and CEO of Signature Management, LLC

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Any Merit to Interest Rate and Inflation Concerns? 2-19-2010

19 February 2010 by Richard Haskell.

 

Any Merit to Interest Rate and Inflation Concerns?

 

Richard E. Haskell, Sr.

 

 

 

February 19, 2010 Edition, Volume IV

 

Inside Signature Update

 

• The Market –  Interest Rate Excitement from the Fed
• The Economy –  Inflation’s Simply Not on the Horizon

 

 

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 (Portugal, Italy, Greece and Spain) sovereign debt concerns of recent weeks, that’s excellent news.  The Fed’s monetary policy staff, which includes some of the smartest economic analysts any of us will ever encounter, doesn’t make such decisions casually; especially in an election year with unemployment near 10%.

 

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 20^th 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

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Opportunities in Markets and Inventory Levels

18 February 2010 by Richard Haskell.

February 18, 2010 Edition, Volume IV

 

Inside Signature Update

 

• The Market –  Corrections and Opportunties
• The Economy –  2010 GDP Prospects and Manufacturing Opportunities
• The Takeaway – Likely to See Equity Levels Rise & Commodities Weaken

 

 

THE MARKET – Corrections and Opportunities

 

The recent ups and downs in the US stock markets may have presented cause for concern for traders dependent on short-term technical market trends, but has spelled opportunity for investors seeking long-term gains.  The DOW, now off of its 52-week high by over 400 points (3.8%) following Wednesday’s close, is nearly 450 points above its early February low.

 

The market volatility of recent weeks, though in part attributable to political events in the US and abroad and the relative strengthening of the US dollar, has also represented what many consider to be a healthy correction.  The early-February low near 9,900 on the DOW represented a correction of 8% against the 52-week high of 10,767.  Most forecasters were looking for a correction of 7-10%; the 9,900 support level we’ve now climbed back up from appears to have calmed most concerns and opened a clear path for newer highs.  

 

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 4^th 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 US economy is in full recovery mode.  That’s not to say that everything is positive or even to suggest that all sectors of the economy are on solid footings; but it does represent that the financial, manufacturing, retail, real estate, agricultural, financial and labor markets are improving.

 

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 US retail consumption comes from foreign manufacturing, and the production increases that will rebuild inventories will have a positive impact elsewhere but not at home.  Though seemingly rational, that manner of thinking is incomplete and leads to inaccurate conclusions.  Though US consumers purchase many hundreds of billions of dollars in foreign-made goods each year, increasing retail sales and inventory builds offer sufficient US manufacturing opportunities to reverse employment trends and add the jobs needed to return the labor market to full employment.  Additionally, the US market is nearly as dependent on foreign consumption as it is domestic.  As foreign manufacturers increase output to meet domestic needs, their employees purchase US-made goods and services along side of those from other countries.  In fact, the weaker US dollar has increased the proportion of US goods purchased by foreign markets - enough so that our corporations and investment markets have benefited from improved export sales and decreased trade imbalances.

 

Some have wrung their hands over tightening monetary policy in China; again, what seems rational is incorrect.  China pegs the yuan closely to the dollar and what’s good for the Chinese currency is typically good for the dollar.  Were the US political climate strong enough to allow for tightening at the Fed, the dollar would improve; and in time, the US economy would be stronger for it. 

 

We now stand to gain nearly as much from foreign manufacturing of goods to be consumed in the US as we do manufacturing those goods domestically.  Though our economy remains subject to uncertainty in some sectors, we are stronger, leaner and more secure than we’ve been in many months.  And that’s worth a 2010 GDP forecast of 5% - 5 ½%.

 

THE TAKEAWAY –  Likely to See Equity Levels Rise and Commodities Weaken

 

• Take advantage of market weakness to strengthen equity positions.  Though we may see lower levels sometime this year, we’re more likely to see equity indexes rise and commodities weaken.

 

• The political climate of a mid-term election year isn’t likely to encourage the Federal Reserve to tighten monetary policy.  The dollar, stronger relative to many other currencies in the wake of the PIGS (Portugal, Italy, Greece and Spain) sovereign debt concerns, isn’t likely to fall prey to domestic inflation pressures.

 

• Personal and discretionary income gains of .4% may seem insignificant, but when compared to CPI (consumer price index) increases of less than .1% for the same period it equates to an increase in buying power at the household level.

 

 

 

Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management  and CEO of Signature Management, LLC

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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?
• The Economy – Can the US Economy Grow without Employment Gains?
• The Takeaway – Relax and Enjoy the Super Bowl

 

 

THE MARKET – Better Dollar, Labor & Earnings: why are stocks lower?

 

 

With the strengthening US dollar, improving unemployment and stronger corporate earnings, why has the US stock market had such a difficult time in recent weeks?  The answer is more complex than most care to consider, but can be boiled down to a few basic parts: a possibly overdue market correction, the strengthening of the US dollar against foreign currencies, anti-business rhetoric, recovery fears, and basic uncertainty.

 

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 4^th Quarter 2009), increased productivity and earnings for many US corporations; as well as stabilizing, if not outright improvement, in the US labor market.  At the same time that the dollar has enjoyed “real” improvement, it has also experienced “relative” improvement against foreign currencies.  For example: the Euro is having a difficult time in the wake of concerns over default of Greece’s and Spain’s sovereign debt obligations.  Right now it looks as though these countries will either default on their debt or be bailed out by the EU, either way the Euro will suffer and the concern has resulted in a flight to safety into the US dollar.  So much for sensationalized reports of the dollar’s demise as an international currency.

 

Historically, when the dollar has strengthened the US equities market has enjoyed extended gains.  But in more recent years the two have been counter-correlated; that is, they’ve tended to move in opposite directions.  It’s difficult to tell how long this phenomenon will last and even more so to explain why it is present at all, but for right now, a stronger dollar results in lower US stock prices.  It also yields lower commodities (oil, gold, etc) values.

 

The anti-business rhetoric coming out of Washington has many investors and decision makers concerned.  It’s not just that the President and his advisors seem determined to stall economic gains by putting pressure on profitable employers (see Not a Good Time for Anti-Business Rhetoric), but the tone breeds uncertainty; the markets disdain uncertainty.  If you’re on Wall Street, you’re likely to prefer bad news over uncertainty and confusion; at least then you know what you’re dealing with.

 

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 US. The result: new jobs created outside of the US, R&D spending outside of the US and corporate innovation outside of the US.  This isn’t exactly what the US labor market needs right now.

 

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 US corporations that had either reinstated or increased dividends to shareholders.  Retail sales have been slowly improving and the US consumer has decreased short-term debt at the highest rate in decades.   The Treasury yield curve (a relatively consistent indicator of a rising stock market) has extended its positively sloping trend and the US markets are up dramatically.

 

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 Washington insiders can’t seem to coalesce around a clear plan for growth and prosperity, and there’s little doubt as to why the markets are still more than a little jittery.

 

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 US Economy Grow without Employment Gains?

 

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 US inventories.  When manufacturers are finally able to obtain the capital needed to build inventories back to reasonable levels, manufacturing employment at home and abroad will reflect robust improvement.  But what if the confidence needed to rebuild inventories doesn’t materialize?  What if the concerns arising from the current administration’s tone and legislative landscape continue to stifle potential employment gains?  Then today’s sorry employment levels may become the new norm, even if only temporarily.

 

The real question becomes, can the US economy experience sustained growth without employment gains?  The unfortunate answer is yes, but.  Gains occur when revenues rise and/or productivity increases.  Historically, productivity gains have directly and proportionately benefited workers, but that was when the productivity gains were more a product of improving labor efficiency.  The productivity gains we’ve seen in recent years have been more a byproduct of technology improvement rather than through labor.  When improving profits come about due to investment in technology rather than increased labor productivity, then little of the benefit is passed to the worker.  The major part, if not all of it, is passed to investors (shareholders and/or capital market makers) who made available the capital needed to invest in the technology.

 

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

 

• The recent volatility in the US stock markets, though arising from a complex set of variables, is more of healthy correction that at is a long-term concern.  Investors may do well to relax and enjoy this weekend’s Super Bowl; traders may watch it as well, but are less likely to be able to remember the outcome on Monday morning.

 

• It’s time for Washington to wake up to what really makes an economy prosper: innovation, jobs and investment and step aside from growth inhibiting proposals, regardless of how well they may be received by the mass electorate.

 

• Interest rates aren’t likely to rise until unemployment shows meaningful improvement, and that’s not likely to be observable until well into 2010, perhaps as late as the 4^th quarter.

 

 

 

 

Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management  and CEO of Signature Management, LLC

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Not a Good Time for Anti-Business Rhetoric

22 January 2010 by Richard Haskell.

January 22, 2010 Edition, Volume IV

 

Inside Signature Update

 

• The Market & Economy – Not a Good Time for Anti-Business Rhetoric
• The Takeaway – There’s Opportunity in Pullbacks

 

 

THE MARKET & ECONOMY – Not a Good Time for Anti-Business Rhetoric

 

We often discuss the equities market as an indicator of economic activity six to nine months in the future; and while this is largely accurate, it doesn’t mean the markets won’t offer short-term reactions to contemporary events.  The volatility in the markets this week has been a mixture of short-term reactions and longer-term concerns.

 

Since the earliest days of the Obama administration, the President and his advisors have been unable to maintain a consistent posture regarding business.  Whether through Senior Economic Advisor Larry Summers, Treasury Secretary Timothy Geithner, Chief of Staff Rahm Emanuel, Chairperson of the White House Council of Economic Advisors Christina Romer, or the President himself, the administration has vacillated between pro and anti-business rhetoric.  The back and forth has confused the markets and now tends to yield more downside volatility than anything else.  The markets appear to have come to generally accept the administration as being anti-business, regardless of what the President or his advisors may offer in the media.  It’s unfortunate and not at all necessary; but after more than a year of observing the President and his aides, US businesses have come to realize that they may need to defend themselves against the administration rather than rely on it to help move the nation’s economy forward.  The Supreme Court’s recent allowance for business and unions to open up their wallets in support of election campaigns may become the tool used by businesses for their defense.

 

The most recent barrage from policy makers has been aimed squarely at the banking and investment industry.  Twice since the beginning of the year, the administration has either announced or backed plans to limit and tax that part of the economy which extends credit to households and firms and creates value for investors - a growing number of whom are current or near-term retirees.  Each time the administration or congress announces plans contrary to the well being of corporate America, the markets react with volatility and short-term losses.  Invariably, within a short-time period, administration officials then issue statements or leak comments to the press in support of business in an effort to undo the damage.   Each time, the weight of the damage makes it harder for the markets to bounce back.

 

When the administration announced the 2009 Economic Stimulus Package, administration officials claimed passage and implementation of the plan would keep unemployment levels from rising above 8%.  Now, with unemployment at 10% the President’s party is under pressure; and rightfully so.  Regardless of how effective the stimulus package may or may not have been, businesses have had to deal with a host of credit, employee benefits, and taxation concerns effectively limiting potential growth and putting a damper on hiring plans.

 

The President’s early January announcement of a plan to impose higher fees on banks in an effort to recapture TARP funds may ultimately be the most effective way of applying the requirement imposed by the original legislation, but the time could not have been much worse.  Likewise, his announcement on Thursday to limit banking’s ability to create profits only serves to exaggerate ongoing credit market concerns by limiting the resources available for borrowers.  The administration’s outward intent has been to bring long-term stability to an industry now proven to have the ability to bring the nation’s economy to its knees, but the shorter-term reality is more likely to be one of exaggerated deleveraging.

 

In the wake of the 2008 credit crisis, we saw US businesses and households deleverage, or reduce borrowing, so rapidly that the economy was pushed to the brink of collapse.  After deft action on the part of the Treasury and Federal Reserve, credit resources slowly began to work their way back into the markets.  Unfortunately, the impact on the labor markets became inevitable as businesses lost needed volumes and revenues to keep workers employed.  While reducing the use of credit may offer long-term benefits, both for households and businesses, it’s dangerous to attempt to engineer such a move during brittle economic times.  The Chinese announced plans this week to slow down their economy by curtailing lending in an attempt to keep their economy from overheating, but overheating isn’t exactly a problem in the US.  We’re still working to keep the fire lit rather than being concerned that it may be out of control.

 

Some of the recent plans announced have been to limit the size and impact of any particular bank so as not to allow for ‘too big to fail’ operations. These plans call for a separation of a bank’s depository and capital market operations, not unlike the intent of the now defunct Glass-Steagall Act of 1933.  While the intent may be appropriate, policy makers must understand that it has been the capital market operations of these banks that have returned them to profitability and improved banks’ capital ratios required to expand lending operations.  There are numerous ways in which the government or marketplace can safeguard the economy against failing banking operations without limiting their ability to create capital - the FDIC’s recent proposal being one of them.

 

The US markets experienced three triple digit loss/gain days on the DOW this week, largely in response to the administration’s announcements and Chinese plans.  The markets, already into a meaningful earnings reporting season, would likely have pushed forward through the week.  Now they’re simply trying to keep from dropping below January 1^st levels.  

 

The upset pulled off by Scott Brown in winning Edward Kennedy’s Senate seat is being hailed as a blow to the Democratic Party and the President’s agenda, and many suggest it’s the second round in a shift back towards conservative control of the House and Senate - the first round being the November election of Bob McDonnell (R-VA) and Chris Christie (R-NJ) to their states’ Governor’s offices.  While it remains to be seen if the Republicans can turn these events into a trend, it appears clear that the country is beginning to understand that small and large businesses, though possibly overly generous in handing out bonus compensation, are the engine of our economy and need support rather than disparagement.

 

The markets have been in recovery mode for over nine months now and have a long way to go before reaching 2007 highs.  While many expect 2010 to see the DOW break past 12,000, most recognize that it’s likely to be a few years before we see 14,000+.  The economy needs to experience multiple quarters of GDP growth in excess of 4% or 5% and unemployment below 6% before policy makers need to consider efforts to cool things down.  In the mean time, we need to make sure our elected representatives understand that the only way to return millions of the nation’s unemployed to the workforce is to keep pressure off of businesses, especially those responsible for creating the credit capital so necessary in a capitalist market system.

 

 

THE TAKEAWAY – There’s Opportunity in Pullbacks

 

• The recent pullback in the market has been led by the banking sector and may represent a buying opportunity for investors confident that banks and investment operations aren’t likely to be separated by Obama administration plans.

 

• Encouraging signs at GE, American Express, Google and other market bell weathers offer hope for employment gains, despite December and January job losses.  Top line sales growth continues to be the most sought after hope of recovery in employment.

 

• The Senate’s composition after the election of Scott Brown may be enough to keep healthcare and banking legislation from passing, but likely doesn’t represent as much cause for celebration as many conservatives might suppose.  There’s a long way to go before the mid-term elections in November and both parties are well known for their inability to ‘handle the ball’ during times of potential opportunity.

 

 

 

 

Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management  and CEO of Signature Management, LLC

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It’s All About Gold!

21 January 2010 by Richard Haskell.

A Special Edition of Signature Update

 

January 21, 2010 Edition, Volume IV

 

Gold – a Commodity to Treasure

 

The run up in the price of gold over the past several years has been nothing short of impressive - perhaps even exciting - for those already holding the precious metal.  Though a longer-term view of the commodity’s value may offer a different perspective, one thing is certain: Gold has been, and likely always will be, a commodity to treasure - if not for economic reasons, then for sentiment or perhaps even safety. 

 

In recent months, as interest in gold has reached historic levels, solicitations to buy and sell gold in varying forms have become pervasive throughout the media.  A few of these are represented by serious investors or market analysts, while most others are from speculators and opportunists.  Those who proclaim the virtue of holding gold as an asset are often referred to as Gold Bugs, and rightly so.  Like many other types of insects, they can be prolific, tend to present themselves at the height of opportunism, and scramble for safety when bright light is focused on their activities.

 

All of this begs the question: Is gold an important investment to hold, and is this the right time to buy it?  To clearly consider the answers, we need to discuss the formation of bubbles in a market, how gold is valued, and what drives people to own the commodity.

 

 

The Next Bubble … Gold?

 

First, we need to discuss the concept of a bubble in our economy.  Most recognize that a bubble forms in a particular asset class as interest in the asset heats up beyond reasonable levels, and then may often times explode with humbling consequences.  In the late 1990’s the bubble was in tech stocks; in 2006 it was real estate; and in 2008 it was oil.  Many consumers may argue that it’s difficult to tell when a bubble is forming in asset values as opposed to rational price appreciation.  However, there are a few basic observations that can be used to differentiate: 

 

• When consumers are getting into a market typically dominated by professionals because everyone in that market is making money – that likely represents the formation of a bubble in that market. 

 

• When marketers and promoters expand their advertizing campaigns for seminars, workshops and newsletter subscriptions – that probably represents a bubble in its advancing stages.

 

• When large numbers of people begin to employ an unreasonable amount of leverage (debt) in order to take advantage of an opportunity – that’s almost always a bubble preparing to burst and take out many of those who recently bought their way into the market. 

 

• When your brother-in-law who hasn’t been able to earn his way out a paper bag comes to you with a sure thing… well, that may not be a bubble, but the outcome is likely to be the same.

 

Unless you happen to be a professional in a market exhibiting the characteristics of a bubble, or have a trusted advisor with whom you or a close associate may have worked for many years to help guide you through that market, stay away from bubbles.  It is the rare individual who has the expertise to keep from being harmed when bubbles burst, and believe me… all bubbles burst!

 

 

What Drives the Price of Gold

 

Gold is priced in the open markets based on the value of the US Dollar and the influence of basic supply and demand principles.  The recent run up in gold pricing has been driven largely by the depreciation of the dollar, rather than increasing demand.  The Fall 2009 announcement that several large hedge funds had entered into the gold market was seen as a bullish (positive) sign by some; others understood it to be an affirmation that speculative forces had already been at work.  Demand decreased in 2008 and 2009 with the weakened economy, but gold’s price continued its climb.  Low interest rates extended over a long period of time reduced the dollar’s buying power in domestic and foreign markets.  Consequently, the nominal value of commodities such as gold and oil have increased.  But just as the value of oil spiked in the summer of 2008 due to speculative forces well beyond the relative strength of the dollar, gold has experienced unsustainable price increases; and interest in the commodity has only increased.  Likewise, the price of an ounce of gold, while possibly headed higher in the near-term, will more than likely tumble as a result of shifting market forces.

 

The dollar is likely to gain value as the economy continues to improve, GDP increases, and interest rates are adjusted upwards.  Gold will almost certainly move downwards in near lockstep fashion.  An argument can be made that an improved economy means a greater demand for the precious metal, and while this is certainly the case, the production of gold through mining activities remains sufficiently strong to keep increased demand pressures from supporting unreasonably high prices.  Certain manufacturing and industrial concerns use gold in their products, but the search for alternatives has yielded some cost-effective choices.  Even the consumer demand for gold being experienced in Asia isn’t enough to sustain current pricing given the world’s supply of the precious metal.

 

 

Why Gold?

 

There are few reasons individuals purchase gold.  Most people who own it do so because of its value as a sentimental product.  Many of us wear wedding rings or other jewelry fashioned from gold without really considering its intrinsic value.  Others want to hold the commodity as a tradable currency in the event our economy and society are reduced to ruin by some form of calamity.  Finally, there are those who hold gold as an investment, and look for it to provide an increasing value or hedge as part of an asset allocation methodology. 

 

A Currency for Exchange

 

Owning gold as a tradable commodity or currency is tricky.  In order to affect an efficient exchange, the holder needs to have a way to assert the purity of the metal being offered as currency and have flexible units of measure. In the mid-1800’s, assay offices offered measuring services for this very purpose.  Today, sophisticated laboratories analyze the metal and determine its characteristics in minute detail.  As it turns out, gold isn’t necessarily gold.  It may look like gold, feel like gold and even be bitten into like we’ve seen in the movies, but gold comes in a variety of purities most often measured in carats and its value can vary widely.

 

When purchasing gold coins, jewelry or even ingots and small bars, consumers need to understand that there can be a wide disparity between what a dealer may charge for the item compared to what they would be willing to pay for it.  This spread in pricing, or transaction cost, is necessary to offer the business a margin from which to profit, but too many people mistake the value of an item to be what they paid for it.  In truth, the value is what you can get for it if you’re selling the item.  What you may have paid has little relevance - just ask anyone who purchased Red Hat (NYSE RHT) at the opening in 1999 or a condo in Florida in 2005.  It’s not uncommon to find a 20-30% margin between the purchase and sale price for gold coins and small bars, and the mark-up on jewelry is higher still.

 

Though the need to store gold for the purpose of trade is unlikely, the recent events in Haiti bring this more clearly into focus than at any time in recent memory.  Gold may seem to be a broadly acceptable commodity for this purpose; but if we’re in a state of calamity, give me food, water and fuel with which to barter rather than gold.  Sometimes we forget that currency is only as useful as what it can buy; and while cash may be king, in the midst of disaster it’s water that keeps us alive.

 

An Asset Allocation Resource

 

Many investors expect gold to be a long-term part of their portfolio and may choose to alter the portion of their holdings in gold as market forces shift.  These are investors, not simply consumers, and they rarely hold the commodity itself.  Gold can be purchased through ETF’s (exchange traded funds), ownership in traditional mutual fund shares, holdings of stock in a corporation involved in the mining or processing of the metal, or through commodities contracts.  Each of these offer much greater liquidity and lower transaction costs than holding the commodity itself and as such, present entirely different levels of risk.   Gold held in these forms as an investment is still subject to the market forces presented previously, but the ease of transaction and the available data regarding the asset is far superior to what most can experience with the physical commodity itself.

 

Sometimes, speculators can impact the value of a commodity through these mechanisms, but the regulatory environment in which we now live makes that increasingly less likely.  Interestingly enough, it’s rare to see an elaborate marketing campaign for these forms of ownership in gold. 

Today’s Gold Market

 

The price of gold rose to over $1,140 in late trading Tuesday (1/19/2010) as the US dollar continued to sink amid fears over inflation.  Many now recognize a market bubble in precious metals with gold leading the way, just as oil did last year, real estate before that, and tech stocks before that.  In recent months, we’ve seen and heard more from Gold Bugs than at any time since the late 1970’s and early 1980’s.  You may recall that this was when gold topped $1,000 an ounce before falling by more than 65%.  A quick look at gold’s value shifts from the early 1970’s to today shows clear indications of a bubble in gold pricing.  Is this a good time to buy gold?  In this case, the picture speaks for itself.

 

 

 

We’re all too familiar with the enticing charts showing increases in stock and real estate prices in the 1990’s and 2000’s respectively.  We also know what followed as markets plummeted.  It only takes a glance at a similar chart of gold valuation to see what could possibly be in store.

 

Advocates for gold ownership may suggest that the recent increase in US spending, the attending trillion dollar deficits, and eventual inflation pressures will all but mandate an ongoing increase in gold’s value.  Possibly, but what is missed is the deflationary impact the recent recession has already had on the price of goods and services.  Many economists project that inflationary forces are already included in today’s price levels; some fear future deflation far more than possible inflation.

 

Will gold climb to $2,000 an ounce?  Perhaps, but it’s far more likely to tumble from current levels than it is to continue its rise.  In the meantime, most would be wise to remember the adage: bulls make money and bears make money, but hogs get slaughtered.  Oh… and bugs can get crushed.

 

 

 

 

 

 

 

(This is not a solicitation to buy or sell any investment of any kind.  Consult with your financial advisor before buying or selling any investment or financial instrument.  The purchase of commodities in any form may involve a high degree of risk.  Past performance is no indication of future gains.)

 

 

 

Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management  and CEO of Signature Management, LLC

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FDIC Cheif Sheila Bair Steps Up

12 January 2010 by Richard Haskell.

January 12, 2010 Edition, Volume IV

 

Inside Signature Update

 

• The Market –  Earnings Season Upon Us Once Again
• The Economy –  FDIC Chief Sheila Bair Steps Up
• The Takeaway –  2010 Gets Ready to Heat Up

 

 

THE MARKET – Earnings Season Upon Us Once Again

 

The US stock markets have been relatively calm this past week.  As of Monday’s close the DOW was well over 10,600 and the gold and oil markets were holding their own.  About what we expect as we enter into 4^th Quarter 2009 earnings reporting season for publically held companies.  Trading volumes have been light to moderate and there is a growing amount of investor cash on the sidelines once again.  Traders and investors are waiting to make their moves; some would ask, “what are they waiting for?”

 

On one hand, the current calm is to be expected; on the other it’s surprising.  The markets don’t appear to be bracing for negative reports; rather, a few strong earnings releases could send the market swiftly higher.  Alcoa (AA) was one of the first companies to report and their earnings were disappointing.  Adjusted for one-time-events and charge-off’s, the company reported a profit of one cent per share versus an expected 5 cents, but their sales (gross revenues) were up.  The market reacted by handing Alcoa shareholders an 11% loss on the day; while the DOW only moved downwards by only .34%; an indication that Alcoa’s poor results weren’t expected to be repeated across industry segments.

 

Supervalu Stores (SVU) shares dipped .22% along with the broader market on reports that the chain had swung to profitability and beat their full-year earnings estimates; while rival A&P (GAP) dropped by more than 20% as 4^th quarter results disappointed at both the top and bottom lines.

 

Most companies reporting early either have good news they can’t wait to share or bad news they want to get out of the way: Alcoa’s numbers were a little bit of each.  JP Morgan Chase, Cargill and Intel are all scheduled to release later this week and numerous financials, retailers and industrials are scheduled for the week following.  Until then, the markets may well hold steady as we look for confirmation that signs of growth in the 4^th quarter translated into profitability at the corporate level.

 

 

THE ECONOMY -  FDIC Chief Sheila Bair Steps Up

 

FDIC Chief Sheila Bair drew fire from bankers Tuesday morning as the agency announced plans aimed at altering compensation and risk management among the nation’s bankers.  Others cheered the announcement, and here’s why: the proposal offers compensation, without limits, to executives and managers based on long-term stock performance rather than all-cash payouts.  This is exactly what we’ve recommended since before executive compensation and bonus rewards came into focus in the wake of the financial crisis.  Bair is doing without legislative interference which is what the agency is empowered to do: regulate the risk profiles of those banks covered by the FDIC.  The proposal is focused and addresses the relevant issues without over-reaching; something very difficult for legislators and political appointees to accomplish.  Also something White House Pay Czar Kenneth Feinberg has been unable to do after more than six months on the job.

 

The FDIC plan is linked to an earlier plan to increase fees and depository insurance premiums for those banks insistent on maintaining aggressive risk structures.  Though the move may be controversial, it’s consistent with the assessment of other risk insurance premiums throughout the financial services industry.  It’s about time.

 

The December 4^th, 2009 issue of Signature Update addressed executive compensation as the Obama administration moved to limit compensation at those firms that accepted TARP resources.  The article noted that “The Administration has wisely chosen to avoid direct impact on compensation for executives at firms outside of those most dependant on TARP, but no one expects the impact of recent policy to be contained to only a few firms.”  The FDIC’s most recent proposal takes on compensation beyond the scope of TARP recipients, but does so in such a manner as to not directly impact banks’ ability to compete in the compensation market and it does so just as the debate is set to heat up once again.

 

Goldman Sachs CEO, Lloyd C. Blankfein, has become one of the most visible executives in the compensation debate.  Though the top 30 executives at Goldman (GS) will accept stock in lieu of cash for their 2009 bonuses, the firm, like many others, is battling shareholder groups over the right to set compensation policy.  Many Wall Street firms, even those that are publically held, continue to act as partnerships and distribute substantial portions of their revenues to talented managers and executives.  In good times the practice was tacitly approved by shareholders as profits masked the dynamics of the problem; that was then.  Boards of Directors are tasked with overseeing major policy initiatives for large corporations and serve in much the same capacity as do elected legislative representatives for the population at large.  Industry leaders correctly argue that shareholders have the right to influence management decisions by virtue of their votes for board members and point out that without competitive executive compensation the firms would be at a disadvantage and shareholder value may be more adversely affected than it is by disbursing billions in incentive bonuses. 

 

It’s a valid argument, and one for which Bair may have provided a meaningful influence across the spectrum of corporate America.  In the end, shareholders may well be judged deserving of the right to contravene in the decisions of the firm’s management, though they may also live to regret the possible adverse effects.  In the mean time, let’s hope executives, managers and policy makers are listening.

 

 

THE TAKEAWAY – 2010 Gets Ready to Heat Up

 

·         Just as we’re now seeing 4^th quarter earnings reports for publicly held corporations, we’re also about to see US GDP forecast revisions for the 4^th quarter and full-year 2009.  Look for better-than-expected GDP figures, possibly exceeding 5% for the 4^th quarter.

·         The market’s reaction to recent employment, revenue and earnings reports bodes well for the bulls.  The yield curve continues to be strong and steep, and suggests extended gains for US equities.

 

·         Look for legislative representatives to jump on executive compensation as the debate comes back to the forefront.  Their positions will likely have less to do with shareholder rights than social engineering, but shareholder advocacy groups will almost certainly applaud their efforts.

 

 

 

Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management  and CEO of Signature Management, LLC

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Oil’s Influence and Domestic Agriculture

5 January 2010 by Richard Haskell.

January 5, 2010 Edition, Volume IV

 

Inside Signature Update

 

• The Market – Starting the Year Off on the Right Foot
• The Economy – Oil’s Influence and Domestic Agriculture
• The Takeaway – A Time for Full Investment

 

 

THE MARKET – Starting the Year Off on the Right Foot

 

Starting the Year Off on the Right Foot

 

The US equities markets opened the New Year with the right start Monday as the DOW closed up by over 155 points representing gains across the boards.  Trading in Tuesday’s market, though choppy, largely held onto the gains as investors looked past weakness in the housing markets and shifted focus to intraday strength in the dollar and good news from higher-than-expected December retail spending estimates, a sharp rise in sales at Ford, and Google’s unveiling of a new smart phone.

 

Many believe the direction and volume of trading the market sets at the first of the year establishes a trend that the remainder of the year will follow.  While it’s a nice thought, there are simply too many influencing factors to take the notion seriously.

 

Just as 2009 was a year of calamity and recovery (partial) for the markets, 2010 is likely to be a year of sustained, though temperate, improvement.  Some of the more popular market forecasters have already weighed in and their prognostications are all over the board.  There are nearly as many calls for substantial gain as meaningful decline, and some suggest the markets will remain flat.  In truth, no one knows.  But here are a few things to be aware of:

 

• Unemployment isn’t likely to dip below 8% in 2010; if it does, the markets will reward the movement handsomely.  As long as we don’t rise above current levels we should be out of the woods relative to meaningful market declines below current levels.

 

• The Federal Reserve, already under pressure to raise key interest rates to stop the dollar’s decline is showing very few signs of meaningful change.  Increases in rates will strengthen the dollar and so far, stronger dollar momentum has offered declines in the equities markets.

 

• Rising energy costs could threaten corporate earnings by increasing manufacturing and transportation costs and putting pressure on household budgets.  Though this could be offset by employment gains, no one other than OPEC likes to see oil prices climb much beyond current levels.

 

• The current presidential administration and the US Congress aren’t likely to be any more productive in 2010 than they were in 2009 and there won’t be a recession to blame for the lack of results.  There are too many policy makers from both sides of the aisle who’ve taken positions they’re unwilling to move off of.  It’s hard to see a scenario where any joint action of the House and Senate could offer substantive impact on the markets until after the 2010 elections.

 

• Signs are already shaping up for technology, healthcare, commodities, and agriculture to be winners for 2010.  Emerging markets and financials have already rebounded with such strength that they’re likely to perform well as a global recovery continues, but ought not to offer the excitement they provided in 2009 – thank goodness!

 

• Real estate inventories aren’t likely to improve dramatically as lenders have large portfolios they’ve yet to put on the market.  They’re smart, they’ve learned to keep these assets out of the market in an effort to maintain current price levels and avoid write downs.

 

• Positive game changers could include a surprisingly accommodating congress (not at all likely), a break in the correlation of dollar and equities market moves (it could happen), and deft activity by the Fed to support the dollar while leaving rates low (possible, but tricky).

 

• Negative breaks could come at the hands of Iran or Israel as tensions mount (anyone’s guess).  Likewise, potential weakness in China could upset the current flow of export goods from the US to Asian markets (not all that likely).

 

 

THE ECONOMY – Oil’s Influence and Domestic Agriculture

 

Oil Trading over $80 per Barrel

 

With the price of oil having once again breached the $80 per barrel mark, consumers and businesses are preparing for higher energy prices that are likely to remain for an extended period of time.  The good news is that the economic recovery has clearly improved corporate production and earnings, and has begun to take the edge off of unemployment.  The bad news is that it will still be months before the labor market feels any meaningful benefit and higher manufacturing output and consumer confidence levels quickly gives rise to higher energy demand; we all know what happens when demand rises – prices rise in direct association.

 

Though we’re not suggesting we’re likely to see triple digit oil prices soon, it’s a possibility worth noting.  Any increase has an immediate impact on household budgets and corporate earnings.  With the economy still relatively brittle, increasing prices have an almost immediate impact on demand – the offsetting pressure should be enough to keep prices from rising to uncomfortable levels.  Additionally, the speculator and hedge fund activity that pushed oil towards $150 a barrel in 2008 may not be an active threat in the current market.

 

The airlines, which have enjoyed relative calm in the oil markets for over a year, are gearing up for rising costs by structuring fare increases and maintaining various surcharges once thought unsustainable; they now appear to be a long-term part of the cost of air travel.  Trucking and rail transports, many of which never abandoned fuel surcharges, continue to adjust these pricing elements in an attempt to maintain viable business models while still remaining competitive.  It’s a delicate balance at a tricky time in the economy.

 

 

Domestic Agriculture on the Rise

 

Also worth noting is a trend we’re likely to see emerge in the foods markets.  Though much of the food product we consume is produced domestically, there are still major imports from Central and South America, Europe, China and other parts of Asia.  Much of the import activity is based on business models dependant on lower costs of production and transportation of bananas, coffee, chocolate, fish, shellfish, apple juice, cashew nuts, spices, and other imported foods.  Those models have now been under pressure for over a year as a decreasing dollar has increased the real price of all import goods and due to the high cost of transporting foods around the world.

 

In decades past, rising real estate prices, low exchange rates and cheap oil allowed the US to increasingly abandon food production.  As exchange rates and transportation costs began to rise in recent years some producers began to gear up for future domestic production, but faced enormous pressure due to still rising real estate values.  Today the trend is in full reversal and hundreds of thousands of acres previously thought prime for development are being readied for production.

 

Already focusing on sustainable crop development, domestic producers and suppliers see opportunities for more local and regional production and consumption patterns.  For the first time in generations the number of small farms has shown marked increase.  In February 2009 the US Census Bureau reported an increase from 588,000 small farms in the US to over 700,000.  The increase, once thought to accommodate increased demand for organic produce, now appears to have more momentum. 

 

The 2010 Census Report shows a slowing in the decrease of US farmlands from 987 million acres in 1990, to 945 million in 2000 to 931 million in 2007.  USDA estimates reflect an increase to 933 million for 2009 – the first increase in agricultural land use in decades!

 

Coupled with the demand for organic goods and sustainable production, the affordability of domestic agricultural output due to exchange rate changes and transportation cost increases may not only offer hope to US farmers, but also represents a potentially meaningful contribution to much needed US GDP gains.

 

 

THE TAKEAWAY – A Time for Full Investment

 

• This should be a year for full investment – if you’re on the sidelines you’ve missed out on meaningful gains, but you may have also avoided an unacceptable level of risk.

 

• Those able to take advantage of improved ROTH IRA conversion benefits should consider the merits of tax-free income in the future.  The likelihood of future tax rate increases makes this even more attractive.

 

• Healthcare legislation will pass this year and reward very few of us.  Energy legislation has little chance of seeing a full vote in either house of congress.

 

• The mid-term elections this fall could offer a shift in the balance of legislative power.  In general, the country is more upset right now with the left than the right, but it’s early and that pendulum can swing back and forth with ease before Election Day.

Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management  and CEO of Signature Management, LLC

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Merry Christmas and Happy Holidays

21 December 2009 by Richard Haskell.

December 21, 2009 Edition, Volume III

 

Inside Signature Update

 

• The Takeaway – Merry Christmas and Happy Holidays!
• The Market – Thankfully Quiet this Week… so far
• The Economy – Animal Spirits and Personal Economy

 

 

 

THE TAKEAWAY – Merry Christmas and Happy Holidays

 

For most of us the shopping is winding to a close, the Christmas cards have been sent and we’re looking forward to Christmas with our families and loved ones.  In this case Christmas may be the spiritually-oriented Christian event or it may simply be a holiday season filled with tradition and gift giving. Regardless, it becomes more important than markets and economics; even if only briefly.

 

It interests me that Christmas takes on different attributes for different households.  Regardless of theology, most would agree that this time of year is one during which people are more open, a little kinder, and more likely to be considerate of others.  For families with small children it’s a time of great excitement and fervor and it’s hard not to focus on the build-up and energy of Christmas morning around the gift laden tree.  Hopefully for more mature families, couples without children in the home, and single adults the holidays take on a warmer, more comforting tone allowing us to reflect on those for whom we care and the more meaningful aspects of our lives.

 

From the staff of Signature Management and Signature Update, as well as from the Haskell family, we wish you a Merry Christmas and hope you enjoy a wonderful holiday.  May you be surrounded by those you love and find a moment to reflect on that which is important above all else.

 

 

THE MARKET – Thankfully Quiet this Week… so far

 

The markets tend to quiet down before the Christmas holiday as traders take time off and hedge funds prepare to settle positions before the end of the year.  Light volume tends to give way to a brief flurry of activity in year-end trades establishing tax losses or gains; otherwise activity is limited.  This year this all comes as welcome relief and most of us are pleased to bring 2009 to a close.  

 

When a weekend storm in the Eastern United States is the hottest news story on a Monday morning, you know things are quieting down in the market.  Early trading on Monday added to the DOW’s gains by over 100 points as some investors moved into health care related stocks; one of the strongest indicators that the White House will have a unified House and Senate bill ready for the President’s signature by Christmas Eve.  The winners in this legislative effort turn out to be insurers, drug makers and to some degree the public.  The ‘public option’ that we declared dead-in-the-water some months ago is now nowhere to be seen; thank goodness.

 

Undoubtedly, there will be various corporate developments and announcements to add a little spice to the next week’s markets.  Some of those could be meaningful, but most likely they’ll simply be adding detail to existing reports or laying the ground work for early 2010 deals yet to be announced.  

 

Thankfully, most legislators will have left Washington for their home states by Christmas Eve and won’t return until after the first of the year.  There’s little they can do other than host a few parties and offer interviews to hungry news outlets; neither of which tends to move markets and sometimes doesn’t even register with voters.

 

 

THE ECONOMY -  Animal Spirits and Personal Economy

 

What we call Economics today, was referred to as Political Economy well into the 20^th Century, with a few major universities only recently changing department names: Glasgow University in Scotland being the last of these to change its Department of Political Economy to Department of Economics in 1997-1998.  Even today, economists are closely tied to political ideologies and many have a difficult time separating the two.  Indeed, macro-economics may be inseparable from politics as it deals with economics beyond the scope of businesses and households and strives to explain regional, national or global issues.

 

The economic conditions of 2007-2009 tested and broke many widely accepted models and theories, and left many economists questioning their decision making and forecasting tools.  Some believe we’re entering into an era in which increased volatility and access to massive amounts of information may give rise to an entirely new set of models and theories.  Others suggest we’re simply going through a time period in which a given model’s degree of accuracy may falter, but the model itself will hold. 

 

My expectation is that we may not be able to rely on macro economic modeling in the future as heavily as many have come to depend upon.  As the volume of economic transactions has increased and the number of empowered decision makers has expanded (with diverse levels of education, preparation and experience) we likely need to consider behavioral economic factors far more than had previously been thought.   Keynes referred to these factors as ‘animal spirits’ in his 1936 work A General Theory of Employment, Interest and Money and untold articles and books have been written in an attempt to define them and articulate the impact of their facets and features.  In the end, these animal spirits simply refer to human nature; and attempts to confine, or define them to a predictable model may be wrought with disappointment. 

 

We’ve seen that our economies need wider margins for unpredictability and error.  In this case ‘economies’ is intended to refer to the various economies with which one interfaces: economies of household, businesses and government.  Even one’s personal economy, a term you’ll hear more often in the coming weeks and months and one that doesn’t refer to facts and figures as much as it does concepts and ideologies, may need to be  challenged and considered in a far more important light than ever before.

 

 

Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management  and CEO of Signature Management, LLC

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