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Earnings stability rating

2012-05-06T23:30:00.001-07:00

Among apparel stocks, most don't pay a dividend.
Of those that do, the top-rated stock is VF Corp. (VFC)
The North Carolina-based company, which is No. 18 in the Big Cap 20, holds a slew of well-known brand names, including Wrangler, Lee, JanSport, The North Face and Timberland.
Over the years, VF has grown through acquisitions. For example, Lee was acquired in 1969, JanSport and Wrangler in 1986, The North Face in 2000 and Timberland in 2011.
Last year's $2.3 billion buyout of Timberland was VF's largest ever, and expanded VF's footprint in the outdoor clothing space.
In a New America article in March, Cowen & Co. analyst John Kernan told IBD that VF "could be poised to make another acquisition in the back half of this year."
The analyst believes the acquisition "will be focused in outdoor active sports, and we think it will be a major international brand, probably in Europe."
VF derives about two-thirds of its revenue from the U.S. The balance is from Europe, Canada, Asia, Mexico and Latin America.

The company said in its latest 10-K report that it is focusing more on outdoor attire, because profit margins and growth rates are higher in that space than in VF's other businesses.
In 2011, VF's pretax margin was 12.7%, the best in the past five years.
Annual earnings dropped 8% on a revenue decline of 6% in recessionary 2009. Since then, EPS rebounded 25% each in 2010-11 as revenue rose 7% and 23%.
The Street expects earnings to rise 17% this year on 17% sales growth.
The three-year earnings stability rating is 4, and the five-year rating is 9. The gauge runs from 0 (calm) to 99 (wild). The current annual yield is 1.9%.
One angle to consider is VF's No. 2 status in its industry group in Stock Checkup at Investors.com. The No. 1 stock is Michael Kors (KORS), an upscale apparel marketer with much stronger fundamentals, though it pays no dividend. Buying the best on a breakout and taking income out of capital appreciation might be the best strategy.

High dividend yield stocks

2012-05-04T02:28:00.000-07:00

To cope with current sluggish GDP growth, some managers focus on high dividend yield stocks. Not Fidelity's Jason Weiner.
"I'm way more focused on the growth side of things," said the helmsman of $1.1 billion Growth Discovery Fund .
Sixteen of his 157 holdings were in the IBD 50 going into Tuesday. Six were on IBD's Leaderboard.
Even his stake in Apple (AAPL), which made a high-profile announcement in March about a share buyback program and resuming its dividend, is mainly for the sake of growth.
"Its yield is nothing to write home about," Weiner said. "But you're getting good growth at a modest P-E."
Its 1.8% yield is shy of the S&P 500 tech sector's 1.84% average. The entire S&P 500's dividend payers average 2.45%.
One key Apple driver is the iPhone 4S, which is on sale in more than 100 nations, including China.
Also unlike many competitors, Weiner didn't use the Q1 market sell-off to add to names he likes. Rather, he traded less.

"My playbook is the opposite," he said. "I'm trading less."
Even his interest in energy transportation master limited partnerships — Oneok Partners (OKS), Markwest Energy (MWE) and Atlas Pipeline (APL) as of his latest disclosure — is due to growth as well as income.
"It's a small corner of the fund, where dividend yields are growing fast," he said.
Weiner's tack had the fund up 16.40% this year going into Tuesday. The fund's large-cap growth rivals tracked by Morningstar Inc. averaged 14.91%. The S&P 500 gained 11.88%.
Over the past three years the fund's average annual gain was 22.55% vs. 18.81% for its peers and 19.46% for the big-cap bogey.
Racy Advertising
Monster Beverage (MNST) soared Monday before closing slightly down amid rumors of a Coke (KO) takeover.
Weiner said, "Monster uses racy advertising to sell to teenage boys and younger men. Their energy beverage is in a growing category."
Herbalife (HLF), a holding as of the fund's latest disclosure, plunged Tuesday on monster volume as its first-quarter profit topped estimates, but it forecast Q2 earnings below estimates.
Also, a short-seller from Greenlight Capital questioned the company about its 10-K SEC filing.
Last week Cirrus Logic (CRUS) reported Q1 EPS of 36 cents. That was up 64% over Q1 last year, and it beat estimates by 2 cents.
Despite issuing cautious guidance, the stock rose 30% last week. That put it 12% over its buy point in a cup-with-handle base. It's up 73% this year.
The firm is a major supplier to Apple.
Dollar General (DG) is up 15% this year. EPS growth has accelerated for three quarters. Return on equity has accelerated three years in a row.
Investors' concerns about economic weakness tend to help dollar chains.
On Tuesday, the Institute for Supply Management said U.S. manufacturing expanded at the fastest pace in 10 months in April.
But no worries. Dollar General is a proven model, Weiner says. "They can tweak their model, squeezing more profit from their stores," he said. "That's not an original idea. But it does not have to be original to be right."

Funds that invest primarily in the U.S

2012-05-02T05:53:00.001-07:00

Investors pulled $9.62 billion from stock funds in March, even as the market rose.
It was well off February's inflow of $1.38 billion, which was revised from an outflow of $1.19 billion, according to the Investment Company Institute. February's inflow had ended a nine-month outflow streak.
Signs pointed to smaller net redemptions this month.
Funds that invest primarily in the U.S. disgorged $11.63 billion last month. They took out $1.66 billion in February. In March the S&P 500 rose 3.13%, continuing a run-up begun in late November.
Stock funds that invest primarily overseas took in $2.02 billion from investors vs. $3.03 the month before. During the month, the MSCI EAFE index fell 0.91%, while the dollar rose 0.44%.
Year to date, stock funds gave back $8.64 billion vs. inflow of $32.01 billion in the year-earlier period.
Hybrid funds, which invest in both stocks and bonds, had inflow of $6.37 billion vs. $8.42 billion the previous month. For the year to date, hybrid funds took in $23.19 billion vs. $18.86 billion a year earlier.

In a seventh straight month of inflow, bond funds took in $31.84 billion vs. $34.71 billion the prior month. The yield curve steepened in March.
Taxable bond funds took in $28.33 billion vs. $28.40 billion the month before. Investors put $3.51 billion into muni bond funds vs. $6.31 billion the prior month.
For the year to date, bond funds had inflow of $94.55 billion vs. $21.92 billion a year earlier.
Money-market funds, which often have wide swings in flows, saw outflow surge to $70.63 billion in March from $3.01 billion the month before.
Fund assets rose by $61.6 billion, or 0.5%, to $12.458 trillion from $12.397 trillion the month before. They stood at $12.189 trillion a year earlier. Stock fund assets, with appreciating holdings offsetting outflow, rose $95.7 billion, or 1.7%, to $5.888 trillion from $5.792 trillion the prior month. They were $5.915 trillion a year earlier.
Bond fund assets rose $22.7 billion, or 0.7%, to $3.071 trillion from $3.048 trillion the month before. They were $2.688 trillion a year ago.
Early indications were that stock fund outflow decreased in April. TrimTabs estimated outflow was $4.2 billion through April 25.
For U.S. equity, mutual funds saw estimated outflow of $15.6 billion. ETF outflow was $4.9 billion. For world equity, funds saw $11.4 billion inflow. ETF had $400 million outflow.
Bond fund inflow was an estimated $21.3 billion. Bond ETF inflow was $3.5 billion.
As of April 25, the S&P 500 was down 1.26%, the MSCI EAFE was off 3.77% and the 10-year Treasury yield was off 22 basis points at 2.01%.

The stock has rebounded

2012-05-01T03:51:00.001-07:00

Stocks got a leg up Thursday as investors, faced with mixed economic data, focused more on the good news — strong home sales — and shrugged off the bad — higher-than-expected initial jobless claims.
Pending home sales jumped by a much-better-than-expected 4% in March. Economists had expected a 0.5% gain. New jobless claims fell 1,000 to a seasonally adjusted 388,000 last week, worse than forecasts for 375,000.
The Dow Jones industrial average added 0.9%, while the Nasdaq and the S&P 500 each gained 0.7%.
Volume climbed 5% on the Nasdaq but fell 4% on the NYSE, according to preliminary data.
Equinix (EQIX) surged 13% in fast turnover. Late Wednesday, the provider of high-performance data centers said first-quarter EPS increased 34% to 71 cents, crushing forecasts for 49 cents. Revenue grew 25% to $452 million. The stock has rebounded off its 10-week moving average to a new high after making its first pullback to that level since a breakout in January.

Texas Capital Bancshares (TCBI) jumped 7% in fast trade, clearing a 36.71 buy point from a square-box base. The regional bank said quarterly EPS climbed 126% to 70 cents, beating views, as sales rose 32% to $102 million. It also scored an upgrade to buy from Sterne Agee.
SolarWinds (SWI) shot up 20% in huge turnover after gapping above its 50-day line to an all-time high. The software maker said quarterly EPS grew 43% to 30 cents, topping forecasts and accelerating from a 21% jump in the fourth quarter of 2011. Revenue, including acquisitions, jumped 39% to $59.7 million. SolarWinds has lifted off support at its 10-week moving average.
O'Reilly Automotive (ORLY) leapt 6% in strong volume and notched a new high before giving up some gains. The car parts retailer said quarterly EPS gained 37% to $1.14, ahead of estimates, as revenue jumped 11% to $1.5 billion. Its guidance was roughly in line. The stock hit a new high early Thursday, but has given up gains. It's well-extended past its last buying range.
But Nu Skin Enterprises (NUS) fell 7% despite topping views. Before the open, the maker of skin care products reported that its Q1 profit climbed 32% to 74 cents a share vs. expectations of 70 cents. Revenue grew 17% to $462 million, also above estimates. But Nu Skin sees Q2 earnings coming in at 79 cents to 83 cents a share, below expectations of 85 cents.
Celgene (CELG) gapped below its 50-day moving average and dropped 5% after reporting disappointing Q1 results. The biotech earned $1.08 a share, up 30% from a year ago. But it missed views by a nickel. Sales rose 13% to $1.27 billion, below expectations and the smallest increase in 11 quarters. It was also the fourth straight quarter of sales growth deceleration.

Growth deceleration

2012-04-30T10:10:00.000-07:00

Stocks traded near their session highs in late-afternoon action Thursday, scoring solid gains after being up just modestly earlier.
The Dow Jones industrial average added 1%, the Nasdaq rose 0.8% and the S&P 500 gained 0.7%. Turnover continued to track down from Wednesday's level for the NYSE, but turned higher for the Nasdaq.
Leading stocks generally were faring well. Within the IBD 50, more than 40 stocks were up. As earnings season keeps rolling, a number of leading stocks were making big moves on their quarterly reports.
Equinix (EQIX) surged 12% in fast turnover. Late Wednesday, the provider of high-performance data centers said first-quarter EPS increased 34% to 71 cents, crushing forecasts for 49 cents. Revenue grew 25% to $452 million. The stock has rebounded off its 10-week moving average to a new high after making its first pullback to that level since a breakout in January.

Texas Capital Bancshares (TCBI) jumped 7% in fast trade, clearing a 36.71 buy point from a square-box base. The regional bank said quarterly EPS climbed 126% to 70 cents, beating views, as sales rose 32% to $102 million. It also scored an upgrade to buy from Sterne Agee.
SolarWinds (SWI) was up 21% in huge turnover after gapping above its 50-day line to an all-time high. The software maker said quarterly EPS grew 43% to 30 cents, topping forecasts and accelerating from a 21% jump in the fourth quarter of 2011. Revenue, including acquisitions, jumped 39% to $59.7 million. SolarWinds has lifted off support at its 10-week moving average.
O'Reilly Automotive (ORLY) was up 5% in strong volume and carved a new high before giving up some gains. The car parts retailer said quarterly EPS gained 37% to $1.14, ahead of estimates, as revenue jumped 11% to $1.5 billion. Its guidance was roughly in line. The stock hit a new high early Thursday, but has given up gains. It's well-extended past its last buying range.
On the downside, Nu Skin Enterprises (NUS) shed 8% despite topping views. Before the open, the skin care products firm reported that its Q1 profit climbed 32% to 74 cents a share vs. expectations of 70 cents. Revenue grew 17% to $462 million, also above estimates. But Nu Skin sees Q2 earnings coming in at 79 cents to 83 cents a share, below expectations of 85 cents.
Celgene (CELG) gapped below its 50-day moving average, losing 6% after reporting disappointing Q1 results. The biotech earned $1.08 a share, up 30% from a year ago. But it missed views by a nickel. Sales rose 13% to $1.27 billion, below expectations and the smallest increase in 11 quarters. It was also the fourth straight quarter of sales growth deceleration.
In economic news, pending home sales jumped by a much-better-than-expected 4% in March. Economists had expected a 0.5% gain. New jobless claims declined by 1,000 to a seasonally adjusted 388,000 last week, worse than forecasts for 375,000.

Economic growth slows

2012-04-27T05:46:00.000-07:00

U.S. Treasury debt prices rose Thursday after disappointing data on jobless claims fueled worries about slowing U.S. economic growth, which would hold down inflation and keep alive the chances of more bond purchases from the Federal Reserve.
Weaker-than-expected European economic figures stoked fears that the region is entering a recession and compounded safe-haven bids for U.S. government debt, analysts and traders said.
"We've seen a deterioration in data in the U.S. and Europe. That's keeping a bid for Treasuries," said Jason Brady, portfolio manager at Santa Fe, N.M.-based Thornburg Investment Management, which oversees $82 billion in assets.
Benchmark 10-year notes last traded up 11/32 in price for a yield of 1.95%, down 4 basis points on the day. They were up as much as 16/32 with a 1.93% yield, helped partly on safety bidding on persistent worries about contagion risk from the euro zone debt crisis.

The U.S. government said initial claims for jobless benefits dropped by only 1,000 in the latest week to 388,000, which was far fewer than forecast. On the other hand, the National Association of Realtors said pending home sales rose 4.1% to nearly a two-year high.
In Europe, Italian business sentiment fell to its lowest level in 2-1/2 years, while an index on broader euro zone economic sentiment fell more than expected in April.
This risk-averse climate helped spur bidding for $29 billion in new seven-year notes, the last leg of this week's $99 billion in coupon-bearing supply.
The U.S. Treasury Department on Thursday sold new debt securities due in April 2019 at 1.347%, the lowest yield at a seven-year auction.
There was no clear consensus on the future path of U.S. monetary policy, a day after the Federal Reserve affirmed its commitment to near-zero interest rates and hinted at no imminent move to embark on a third bout of large-scale bond purchasing, dubbed QE3, to stimulate U.S. economic growth with unemployment stuck at a historic high.
The Federal Open Market Committee, the Fed's policy-setting group, moderately upgraded its outlook on the U.S. economy for a second straight meeting. That was offset by Chairman Ben Bernanke's press conference on Wednesday, where he signaled the Fed is prepared to inject more stimulus if U.S. economic growth slows much further.
On Friday, the government will release its first reading on U.S. gross domestic product, which analysts predicted likely grew at an annualized rate of 2.5%, slower than the 3% annualized rate in the last quarter of 2011.

If your company has pay ranges

2012-04-24T00:53:00.000-07:00

The U.S. continues to add jobs, even if at a snail's pace, and pay raises are slowly becoming more common.
Saving more is a regular strategy for pumping up retirement accounts. As the economy improves, you should also look for ways to boost your pay.
Aon Hewitt, human resource consultant and outsourcer, projects U.S. pay hikes will average 2.9% this year.
In 2009, 48% of firms froze workers' pay. By last year that was down to 5%. Aon Hewitt expects that to drop again this year.
"Pay raises are no longer extremely rare," said John Challenger, CEO of outplacement consulting firm Challenger Gray. "But the old, routine 4% annual increase is not back yet either. If you want a pay raise, you've got to go after it."

Your odds of success increase if you follow some moves.
• Do your homework. You greatly boost the odds of landing a raise by backing your request with facts and figures.
Find out how much you're worth to your company.
For information about national average pay grades, check out the Bureau of Labor Statistics' data at bls.gov. Go to its occupational employment statistics page.
You'll find links to tables that group data by regions and metro areas. You can also do searches at sites such as salary.com, erieri.com and payscale.com.
• Be precise. That means assessing how much someone with your years of experience as well as your skills and credentials is worth to your employer and in your specific location.
"Salaries for the same job vary from state to state, city to city," said Stacey Carroll, director of professional services for payscale.com. "If you're not specific, you can lose the debate before you even start."
• Put things into context. If your company has pay ranges, include those in your presentation.
If you want to be paid more than your company's norm, explain why that would be justified.
• Forget the sob story. "Never base your request on how you need the money and can't afford not to have it," Challenger said. "Always put your request in terms of how you have earned a raise."
This makes the discussion a business decision — which is what it boils down to for your employer.
Explaining how you've earned a raise is also a way of pointing out what you can do for the business.
"Focus on the metrics that are important to your business," Carroll said.

Drove the prices of stocks

2012-04-22T07:39:00.000-07:00

[The last fifty years] produced a persistent increase in asset prices vs. nominal GDP that led to an average overall 50-year appreciation advantage of 1.3% annually. That’s another way of saying you would have been far better off investing in paper than factories or machinery or the requisite components of an educated workforce. We, in effect, were hollowing out our productive future at the expense of worthless paper such as subprimes, dotcoms, or in part, blue chip stocks and investment grade/government bonds. Putting a compounding computer to this 1.3% annual outperformance for 50 years, produces a double, and leads to the conclusion that the return from all assets was 100% (or 15 trillion – one year’s GDP) higher than what it theoretically should have been. Financial leverage, in other words, drove the prices of stocks, bonds, homes, and shopping malls to extraordinary valuation levels – at least compared to 1956 – and there could be payback ahead as the leveraging turns into delevering and nominal GDP growth regains the winner’s platform. …Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets – while still continuously supported by Fed and Treasury policymakers – is likely at its pinnacle. Out, out, brief candle.

The economic future

2012-04-19T04:42:00.000-07:00

The piece below by Peter Boettke summarizes what I think about current economics. The Keynesian model or paradigm is wrong and always has been. Two primary reasons it was adopted were 1) the crisis of the 1930s was misunderstood but demanded “action” of some kind and 2) it gave the politicians a license to steal power and money from the citizens. If economics were a physical science where data could refute false hypotheses, it is doubtful that the paradigm would still exist today. Because it isn’t, reason number two became paramount. Most economists initially objected to the theory, gradually agreeing with it over time. After all, it also provided lucrative rewards for them in terms of higher paying jobs in government and eventually a route to tenure after it dominated university economics departments.
The books referenced below in the fifth paragraph are excellent reads for anyone interested in the flaws and inconsistencies in the so-called General Theory. “The Critics of Keynesian Economics”
book is especially insightful because it is a collection of great economists (authors include Jacob Viner, Frank Knight, Garet Garrett, Jacques Rueff, Benjamin Anderson, Frederick Hayek, Ludwig von Mises, and others) contemporaneously passing judgment on the then “New Economics.” Most of the essays were written in the 1930s or early 1940s and accurately saw the inconsistencies in Keynesian theory and its ultimate unworkablility. The passage of time has only proved their critiques correct.
As the world suffers through another desperate period, unnecessarily imposed by crank economics, one wonders if the dullard economists of today will finally recognize where the blame lies. If this recognition were finally to come, there is no guarantee that normalcy would return. The political establishment is so entrenched and dependent upon these false ideas that it is difficult to see how the situation will change. Indeed, it is this fact that has probably enabled it to last so long in the first place.

The Legacy of Lord Keynes

Greg Mankiw argues in the NYT that John Maynard Keynes is the most important “defunct economist” to learn from for 2008. Tyler Cowen proposes to do a book club reading on his blog for Keynes’s General Theory. In the comments section Barkley Rosser predictably (irony intended) suggests that chapter 12 is the key to unlocking the mystery of our current mess. On could just as easily point to Keynes’s 1937 article summarizing his core ideas on our being “engulfed in the dark forces of time and ignorance.”

Now I am all for reading and debating economics, and so I don’t have an objection to another public forum discussing Keynes’s contribution. But I also think that the emphasis on Keynes demonstrates a collective delusion among economists. Even Milton Friedman can be quoted as emphasizing Keynes’s brilliance.

But what of Knight’s judgment that “what is new isn’t true, and what is true isn’t new”, or of Hayek’s judgment that Keynes’s idle resources argument assumes a post-scarcity world, or of Mises’s judgment that Keynesian economic policy assumes the miracle that stones can be turned into bread?

The problem with economics since 1940 has been the thorough victory of Keynes throughout the democratic western nations. We have Keynesian theory, the development of Keynesian inspired data collection, the “testing” of Keynesian theory via Keynesian data with the purpose of providing tools for Keynesian policy. This exercise survived the Monetarist and New Classical intellectual challenge, and it survived the Supply Side revolution in policy. All that remained was an oscillation between liberal and conservative Keynesianism, never a serious challenge to the paradigm of Keynesian policy manipulation of the economy.

Instead of reading Keynes one more time with feeling, I would suggest an alternative reading experience. (Or at least an additional one) Start with Henry Hazlitt, ed., The Critics of Keynesian Economics, move on to Hazlitt’s The Failure of the “New Economics”, graduate to W. H. Hutt’s The Keynesian Episode, and then read closely Buchanan and Wagner’s Democracy in Deficit and then Higgs’s Crisis and Leviathan and War, Depression, and Cold War.

Sincerely, you want to know what is going on in 2008 — it is the consequence of the bad economic ideas of Lord Keynes that have led to the victory of Keynesian policy (of either the liberal or conservative variety) since 1940. We are living through the consequences of Keynes’s ideas. The Soviet Union had to confront the legacy of Marxist-Keynesianism in the 1980s, and we are dealing with the consequences of Social Democratic-Keynesianism in the 2000s.

Hayek warned us about the “tiger by the tail” problem of inflation and Buchanan warned us about the destruction of the “old-time fiscal religion” due to Keynesianism. Yes, Marxism and Social Democracy caused serious problems as they reflected a breakdown in restraints on the power of government, but we have to also recognize the fundamental role that Keynesian ideas on economics and economic policy fed into this shift from constitutional democracy to social democracy throughout the 20th century in the West and the policy reality of conspicuous production for “growth accounting” in the Soviet Bloc nations after the Industrialization Debate in the 1920s, the Collectivization of the 1930s, and Five-Year Planning system from Stalin to Brezhnev. Keynesianism represented the pushing open of an already opened door to fiscal and monetary irresponsibility and opportunistic politicians left and right walked right through. I am sure stating this sentiment this way will qualify me as a “wing-nut” in Brad De Long’s classifications, but instead of admitting my “wing-nutness” I would rather we have a serious discussion of the consequences of Lord Keynes with respect to world-wide fiscal imbalance associated with intergenerational accounting and world-wide inflation as governments attempt to meet those obligations through monetization of debt. Somehow I doubt that will take place in our current intellectual and policy context.

So by all means join Tyler in his book club and re-read The General Theory, it is a very important book to read thoroughly and critically understand. But I would suggest that you read Keynes alongside the books I suggested above and with the Hayekian and Buchananite perspective on the legacy of Lord Keynes with respect to monetary and fiscal policy.

Keynes isn’t the intellectual solution to our current woes, his ideas are one of the primary reason we are in this mess in the first place. He was wrong in 1936, he was wrong in 1956 and 1976, and he is certainly wrong in 2008 and will be wrong in 2036. Bad economic ideas result in bad economic policy which in turn result in bad economic consequences, and that simple linear relationship is true across time and place. Until we come to grips with the implications of this, we will not understand the consequences of Lord Keynes for our economic future let alone the economic future of our grandchildren.

Look at our portfolio on the refining side

2012-04-16T23:30:00.001-07:00

Global aluminum giant Alcoa may further cut capacity this year as it reevaluates demand, the company's Chief Executive Klaus Kleinfeld told analysts on its first quarter conference call.
Already, the conglomerate has announced it would cut smelting capacity by 12 percent, closing facilities in Tennessee and Texas in the U.S., as well as operations in Portovesme, Italy and La Coruña and Avilés, Spain.
"We continue to look at our portfolio, and we continue to monitor the outside world. And by the way, I mean, the 530,000 tons that we've taken off-line may not be the end," Kleinfeld said.

Kleinfeld's comments came after Alcoa reported a sharply stronger first quarter than the Street had anticipated. The company reported net income of $105 million when excluding one time items, or $0.10 per share, above expectations for a $0.04 loss. Revenue also surged, topping $6.0 billion.
Alcoa's European lines are some of the highest-cost smelters in the company's system, however systems in both Brazil and Australia also lie at the high point of its cost curve.
"There's a discussion in Brazil, we just extended the time line which originally we had a deadline that finished by the 31st of March, we just extended it for 60 days," Kleinfeld said. "With the government, there's a discussion on the electric northern [ph] power, power cost supply. So we will continue to do that and we expect if we look at our portfolio on the refining side, that is a very strong commitment."
The company has operations in São Luís and Poços de Caldas in Brazil, among others, which represent some of Alcoa's oldest lines.
Alcoa did not specify how many jobs would be impacted if it did go ahead with further cuts.

The amount of risky loans

2012-04-13T03:30:00.000-07:00

Bank credit cards had a 41% increase in sub-prime consumers from 2010-2011, pushing sub-prime borrowing to a four-year high in December, according to a report from Equifax.
Sub-prime borrowers also make up over 46% of the auto-financing market.

"The evidence of increased lending to sub-prime consumers demonstrates banks' ongoing efforts to grow lending by providing credit opportunities to more consumers," said Equifax Chief Economist Amy Crews Cutts. "Year-over-year results show borrowers are taking advantage of the new opportunities and seeking to diversify their financial activity, which is building momentum toward economic improvement."

Many blamed the housing crisis on the sub-prime lending market. As such, loans trending in that direction is at least a bit worrisome. Loans of all sorts are being given at a higher rate to risky borrowers.
As of December, 66% of new student loans were held by what are deemed as "higher-risk" borrowers.
While this is not to say another crash is inevitable, it is worthwhile to keep an eye on the amount of risky loans being offered across all lending platforms.

Primarily invest in dividend stocks

2012-04-13T02:56:00.000-07:00

BOSTON (AP) — Investing is about give and take.
Consider growth-oriented companies, which are focused on building business and expanding market share. When the economy improves, their stocks are likely to rise more sharply than those of well-established companies, such as General Electric and Johnson & Johnson. In exchange, growth stock investors pass up the potential for regular dividend income.
Most technology companies fall into this category. They spend heavily on new products and research to stay competitive. But many have built up so much cash that they're rewarding investors by starting to pay dividends, or by increasing them. It's an emerging trend that's giving tech investors solid dividend yields, along with strong potential returns from stock price appreciation.
Look no further than the biggest tech name, Apple. Its shares are up more than 50 percent this year, and its cash stockpile grew so large that it recently announced plans to begin paying a dividend. Starting this summer, Apple investors will get $10 billion in annual payments.

That move has made tech the second most-generous industry group in the Standard & Poor's 500 index. Other big tech companies such as Cisco Systems and Oracle have initiated dividends in recent years, and longtime dividend-payers such as Intel, IBM and Microsoft have increased their payouts.
It's drawing the attention of mutual fund managers who see growing opportunities for investment income from a market segment that's historically been stingy. These managers don't think the payouts will hamper the ability of tech companies to grow, or slow stock price appreciation.
Tech is one of the key areas that will drive the dividend market for the next five years, says Laton Spahr, co-manager of the Columbia Dividend Opportunity fund (INUTX), which counts dividend-payers Microsoft, Intel and Microchip Technology among its recent top 20 holdings.
That's quite a change from the late 1990s, when Spahr was a financial analyst covering the semiconductor industry.
"Back then, none of my companies would entertain the idea of paying a dividend," he says. "There was a perception that once you started paying dividends, the market would penalize you because you were admitting that you no longer had growth in front of you."
There are plenty of reasons to believe that tech companies can distribute sizable dividends without cutting into earnings and stock price growth. But it's not a simple equation. Here are 6 things that mutual fund investors should know about tech stocks and dividends:
1. DON'T EXPECT REGULAR INCOME FROM TECH MUTUAL FUNDS:
It would seem logical for an investor seeking regular income from tech stocks to consider a fund specializing in tech stocks. But among 52 tech sector funds, just a handful make regular dividend distributions. Instead, managers reinvest the dividends their stocks generate. Rather than tech-specialty funds, consider those that primarily invest in dividend stocks, commonly labeled "equity income" funds. Many, like Spahr's fund, invest in plenty of dividend-paying tech names, and make quarterly distributions.
2. TECH DIVIDEND BOOM IN EARLY STAGES:
Tech companies are increasing or initiating dividends faster than other segments of the market. But it's important to remember that most tech companies still don't pay dividends. Among large-cap companies — those generally valued at more than $2 billion — fewer than one-third of tech stocks pay dividends. Notable non-payers include data storage company EMC Corp. and computer maker Dell Inc. Google on Thursday announced plans to distribute a stock dividend to existing shareholders as part of a 2-for-1 split of its shares, but it hasn't joined the ranks of tech companies making regular cash payouts.
3. TECH ISN'T A BIG SOURCE OF DIVIDEND INCOME:
The average dividend yield of tech stocks tends to be below that of other industries. A stock's dividend yield is the amount of the annual dividend, divided by the share price. Among 10 sectors in the S&P 500, dividend-paying tech companies have the lowest average yield, 1.83 percent, even after Apple's dividend is factored in. Tech trails only consumer staples in terms of the dollar amount of dividends paid. But tech yields are lower because many top tech stocks have high share prices relative to their dividend payouts. For example, Apple shares are trading at about $622 apiece, so its $10.60 annual dividend will yield just 1.7 percent.
4. DON'T GET TOO ENAMORED WITH TECH:
Be careful not to load too much of your portfolio with tech stocks. The sector makes up 21 percent of the value of the S&P 500. If you invest in a fund that tracks that index, you already own roughly that same tech weighting in that fund. And many investors' tech exposure has grown because Apple's stock has surged, making it the world's most valuable stock, and the most commonly owned in fund portfolios.
5. MINIMIZE EXPOSURE IF YOU'RE WORRIED ABOUT VOLATILITY:
Tech stocks are more volatile than the broader market, so expect choppy returns. For example, tech funds were among the worst-performing stock fund categories last year, losing an average 8 percent. This year, they're the top performers, averaging returns of 17 percent. Credit a strengthening economy, and Europe's recent progress in controlling its debt crisis. Europe is a huge market for U.S. tech companies, so its economy is a big factor in the recently improved tech outlook. "Last year, there was a crisis of confidence," says Matt Sabel, manager of the MFS Technology Fund (MTCAX). "But this year, it became clear that the world wasn't entering a double-dip recession." However, expect tech to get hit hard again if the economic outlook deteriorates.
6. DIVIDENDS CAN INSTILL FINANCIAL DISCIPLINE:
Dividends force corporate managers to be cautious spenders. Sabel reasons that dividend-paying tech companies are less likely to dip into their cash stockpiles to make a risky acquisition, or launch an ill-conceived research project. Relative to non-dividend-paying tech stocks, dividend-payers are likely to deliver steadier returns.
"When that dividend check has to be cut every quarter," Sabel says, "it does focus management on cash flow, and sometimes that's a good thing."

Banking and industry

2012-04-10T05:33:00.001-07:00

Investors Business Daily opines that “Big government threatens our well-being with irresponsible health care “reform,” higher taxes on entrepreneurs, a tax-filled cap-and-trade energy bill, a host of new business-strangling regulations and trillion-dollar deficits as far as the eye can see.” Then they go on to say: “In late July, economist J.D. Foster of the Heritage Foundation put it succinctly: ‘This is no longer an experiment in economic policy. The results are in: Keynesian stimulus does not work.’ This GDP report doesn’t change that conclusion a bit”.
It is difficult to be more pessimistic than that. However, they do state that we have “stepped back from the abyss.” and that “our only hope going forward is the private economy. Though hindered by massive government intervention in housing, banking and industry, it’s still the most resilient in the world. Given the list of problems they cite, it is difficult to reconcile the optimism and pessimism contained in the piece. I suspect that we will slip back into recession in another quarter or so. I found little reason or justification for their, admittedly muted, optimism.

Accumulations of government debt

2012-04-06T02:14:00.001-07:00

A nice article detailing the recent history of the dollar. The fact that the dollar has declined 79% in the last 9 years versus the Euro is shocking. What is even more astounding is that it has declined so much against a currency not backed by a country and a region that has underperformed for decades. The socialistic economies of “Old Europe” have been stagnant for many years, especially regarding job creation. What does this say about the US for the past 9 years? Obviously it has implications for our economy, regardless of what government-reported GDP statistics say. It says even more about our loose monetary policy which would reflect even more directly into exchange rates.

The image to the right depicts a unit of currency issued by the United States of America. On the back is the phrase: “In God We Trust.” To the extent that the dollar has much value left, it may be as a

result of this phrase. I assume that means it is less valuable to atheists than believers, but that is purely speculation.

Euro Bests Dollar by 79% in This Millennium

The dollar’s value against major currencies has fallen in recent months as the U.S. fiscal outlook worsened and amid expectations that interest rates will remain close to zero for some time to fight the economic downturn.
This week, the euro broke above the psychologically important level of $1.50 driving gold prices to record levels, prompting many global central banks intervening on currency markets to slow the dollars fall.

How Did We Get Here?
Since the financial crisis last fall, currency markets have taken their cues mostly from stock markets. When stocks plunged in March of this year, investors rushed to the safety of U.S. government bonds, pushing the dollar index up to 89.62, the highest point this year.
Since then, however, it has been a steady downward drift for the greenback. As markets steadied into a rally, traders sold Treasuries and Dollars for riskier assets and higher returns, pushing the dollar lower against other major currencies.

The value of the euro has risen by 79% in nine years since euro hit 0.84 in Oct. 2000, and the White House has done little to curb the dollar’s slide during this period. Loose monetary policy and a weak U.S. dollar are part of the consequences resulting from the U.S. recent trends of unprecedented spending, fiscal deficits, and accumulations of government debt.
“Strong Dollar Policy”…Not

Although the current Administration officially supports a strong dollar, the latest indications came from Federal Reserve Chairman Ben Bernanke and Larry Summers, President Obama’s chief economic advisor.
Mr. Bernanke said this week that the U.S. should cut down on its budget deficit and increase the savings rate in order to reduce global imbalances. Bernanke’s statement chimed with that by Summers earlier this year, when Summers said that

“the rebuilt American economy must be more export-oriented and less consumption-oriented… and less oriented to income growth that disproportionately favors a very small share of the population.”
World War III – Currency
There are only so many paths you can take to be “more export-oriented”, and at the same time save more/spend less. We could increase our savings rate; however, with the unemployment rate around 10%, it is certainly a challenge, to say the least, for middle class Americans. Therefore, the most likely options are

Devaluation of the dollar to help exports

Slapping taxes on imports; or

A national sales tax or a value-added tax (VAT), which seems to have gained traction in Washington, to discourage spending and fund federal deficits.

The problem is that much of the world is also working on increasing its exports to help recover from the global financial crisis. Many countries fear that strong domestic currencies (against the dollar) could harm their still fragile recoveries. A steep drop in the dollar has already enraged our chief creditors and trade partners resulting in Gulf States, Russia, and China reportedly ready to stop pricing oil and gas in dollars, and U.S. clashes with EU and China on trade.
Tails, Dollar Loses
There have been increased signs recently that central banks and governments in many parts of the world may gradually end the massive quantitative easing programs. Australia, for instance, hiked rates to 3.25% and highlighting inflation concerns. The U.S. Federal Reserve, on the other hand, has shown little indication that it is anywhere close to removing the massive liquidity injected into the system.
In fact, last Tuesday, San Francisco Federal Reserve President Janet Yellen said she doesn’t expect the central bank to tighten monetary policy “in the next few months.” This suggests the U.S. will stay on its current course of stratospheric fiscal deficits, zero interest rates, easy money, and… a weak dollar in the near term. Worse yet, in a recovering world, any good news about growth could provoke dollar selling.
Double Dip, Hyperinflation or Both?
A weaker dollar would be beneficial to exporters and to the balance of payments with a narrowing trade deficit as imports would fall faster than exports. So, with domestic demand depressed from the recession, a short to medium term boost to exports could be good for the US.

However, the flip side is that the diminishing purchasing power of the dollar will inevitably drive up prices for goods and services, among other long term effects. This could only result in three likely scenarios manifesting by the end of next year:

W-shaped double dip recession as higher prices crimp recovery

Hyperinflation, if we have a stronger than expected economic growth

Another plausible scenario is that the U.S. could lapse into a double-dip recession with high inflation in commodities, i.e., a stagflation scenario.

Based on the latest economic data and the near 50% one-year gain of the Goldman Sacks Commodity Index, my money is on stagflation.
Dollar Status Intact, For Now
The U.S. remains the largest economy in the world. The absence of a credible alternative to the dollar, means that, despite its declining value, its status as the world’s reserve currency is not seriously under threat. In addition, the complexity, geopolitical realities would arguably rule out the re-pricing of oil in non-dollar currencies at this time. All that might change in the future, but it will be a very long, long (think decades) debate.
Strategy: Anti-Dollar & Anti-Inflation
Meanwhile, the dollar will continue to weaken as interest rates in many countries and the eurozone are higher than the current rock-bottom U.S. rates, providing currency traders carry-trade opportunities. This will encourage more selling of the dollar and buying up stocks, commodities and other currencies, which has been the general trend since spring.
So, based on the discussion so far, prudent investors should allocate a portion of their portfolios to hard assets like silver, agri products, and non-dollar currencies such as Brazil’s Real (BRL) or the Australian Dollar (AUD) to hedge against inflation risk and the US Dollar`s devaluation.

Spending more money

2012-04-03T01:33:00.003-07:00

Apparently things are so good that we are going to make them even better. Are we back in Alice in Wonderland? If this were not so serious, it would be comical. Another stimulus is being discussed. Who possibly could have seen this coming? Probably only all those that said the first one would not work. Of course, they and probably many more will now opine that a subsequent one will not either. But what do they know, they got lucky on their first call. Our “leaders” will ignore them once again.
The country and the Keystone Cops running it are bankrupt. Spending more money when you have none appears to them a winning strategy. Perhaps it is, if your goal is to worsen things. Maybe it will enable the citizens to realize how lost our country is.

Uncontrollable obligations

2012-03-31T06:19:00.000-07:00

As various people bask in the economic “recovery” based on the third quarter GDP report, there is little reason for optimism. Banks are filled with toxic assets that are being covered up temporarily but will not go away quietly. Derivatives, estimated at over $600 Trillion hang over the economic world by a frayed thread. Infrastructure requires enormous expenditures to just bring it up to standard after decades of neglect.
And then there is the pension problem which few people talk about. No, not the social security pension problem. All other pensions. Many private pensions are underfunded, virtually all public pensions are. Both are trains coming down the tracks to which taxpayers are tied. Public pensions are the bigger problem, by far. Part of the public pension problem comes from what is known as “gaming the system.” Unlike the private sector, the public sector has every incentive to “kick the can down the
road” and allow someone else to worry about the problem. Unlike the Federal Government, State and Local governments do not have a printing press to run.
Read and weep, or throw something through your computer screen.
The Real Pending Crisis: Public Pensions

President Obama often states that the federal budget cannot be balanced without health insurance reform. Even if that were true, the real crisis that exists already and will only worsen over time comes from the horrendous obligations taken on by state and local governments for public employee pension plans.
Keith Richman caught on to this problem while a California Assemblyman. He has formed the non-profit California Foundation for Fiscal Responsibility to educate elected officials and the public on the looming budget disaster. Fortunately, he is not the only one touting this pending mess. Ron Seeling, the Chief Actuary for CalPERS (the California public employees’ retirement program), has stated the plan is unsustainable. CalPERS represents state employees and 1,500 local governmental entities.
Some would say the pension problem starts with the unionization of public employees. In California, the major catalyst was SB400, signed by Gray Davis in his first year in office, 1999. The bill lowered retirement age for public safety employees to 50 years old and to non-public safety employees to 55 years old. We are in an era when people are living on average until around 80 years old.
The law gives the employee pension benefits of 3.0% of their final income for each year of service. It also made the 3.0% amount retroactive to the beginning of their employment period. That means if you work 20 years you receive a pension benefit equal to 60% of your final income. The problem was compounded by how they calculated the income on which to base the pension.
Everything including the kitchen sink adds to the final income level. Things such as auto allowance and bonuses boost the final number. If the employee did not use vacation pay or holiday pay for the prior 10 years that adds to the base salary to determine the income. Understanding that in most private sector jobs when you do not use your vacation, you lose your vacation, the ability to accumulate vacation time opens up the system for vast manipulation. Peter Nowicki, the Moraga Orinda fire chief, retired at age 50. His final salary was a whopping $185,000, but small compared to his annual pension benefit of $241,000. Making that matter worse, Nowicki was hired as a consultant to the fire department for an additional $176,000 per year — on top of his retirement benefit.
This is not an isolated case. In Los Angeles County there are over 3,000 people receiving greater than $100,000 per year in pension benefits. In San Francisco, it was found that 25% of employees’ income spiked up over 10% in the final year of their work. The San Francisco grand jury found that amount cost the city $132 million.
Some would argue why not game the system? Let’s say you start working for the government when you are 30 years old and work for 25 years. Your final income with all the fancy calculations ends up at $120,000. That means you would receive $90,000 plus full health care benefits. You can either live on that very nice retirement or you are free to get another position. After all, being 55 years old, you are still in your prime earnings years. Where in the private sector are there comparative opportunities?
These kinds of retirement ages and benefits are why the estimated unfunded liability is soaring. California has estimated unfunded pension and health care liabilities ranging from $100 to $300 billion. The school systems operate under their separate pension program – CalSTRS. The Los Angeles Unified School System estimate for unfunded retiree benefits comes in at about $10 billion. That is one school system, be it the largest, in one state. Estimates show that the LAUSD will soon carve out 30% of its budget for combined retiree health and pension benefits.
California may be the worst example, but not the only example of deplorable financial planning by governmental entities. The original justification for rich benefits for public employees centered on lower salaries, but that no longer rings true. A recent analysis by the U.S. Bureau of Economics shows that federal employees receive compensation that is double the average of the private sector. Other studies have shown state and government employees to be receiving like levels of compensation.
The genesis of this pending disaster comes from the right of public employees to unionize. This was not always so. The first opportunity occurred in 1958 in New York City under Mayor Robert Wagner. President Kennedy instituted the right for federal employees to unionize in 1962. Since then the right for public employees to unionize has spread, but is not universal. States that have more restrictive laws have blocked public employee unions and thus have not suffered the consequences.
In states like California, the public employee unions fund huge political campaigns. To most observers, the unions have a stranglehold on the state legislature, Los Angeles and San Francisco city governments, and most if not all of the school districts in the state. When the employees control the employers, the results are uncontrollable obligations.
A recent report stated that children born today will live an average life span of 100 years. With public employees retiring at 50 or 55 years of age, it doesn’t take a deep thinker to extrapolate that these retirement benefit programs are unsustainable.
Private sector employees now receive less annual income than their public counterparts. Private sector employees will have to work well into their seventies to pay for these public sector employees’ retirement benefits which far exceed what the private sector offers. The public will, little by little, become aware of this upside-down arrangement. Heroes like Keith Richman are sacrificing to make the public aware of this coming debacle. Our elected officials need to heed his warnings.

The balance of power

2012-03-23T03:19:00.001-07:00

For the first time in recent years, voters trust Republicans more than Democrats on all 10 key electoral issues regularly tracked by Rasmussen Reports. The GOP holds double-digit advantages on five of them.

As a libertarian I have equal distrust for all political parties, but this report is quite telling in what it could mean for the balance of power in Congress come the next general election.

Here’s some more from the report:

Republicans have nearly doubled their lead over Democrats on economic issues to 49% to 35%, after leading by eight points in September.
On the highly contentious issue of health care, voters now give the edge to Republicans 46% to 40%. The parties tied on the issue last month, after Republicans took the lead on it for the first time in August.
Most voters (54%) oppose the health care reform plan proposed by the president and congressional Democrats, but 42% are in favor of it.
On taxes, Republicans are now ahead of Democrats 50% to 35%, nearly doubling their September lead on the issue. Prior to July, the percentage of voters who trusted the GOP more on taxes never reached 50%. It has done so three times since then.

Dollar decline draws international protest

2012-03-19T05:03:00.007-07:00

“Some sort of crisis is looking inevitable,” said Neil Mellor, a currencies analyst at the Bank of New York Mellon in London. “You can’t continue down this road without something giving way, and it’s clear that the U.S. is not going to do anything to put meat on the bones of its strong-dollar policy.”

LONDON — This could end up being viewed as the week when dollar weakness became too much for the rest of the world to bear, setting the scene for tense encounters at the upcoming meeting of finance ministers from the world’s 20 largest economies.
Brazil has now imposed a tax on some foreign-exchange inflows. The Bank of Canada has cranked up its negative tone on the strength of the Canadian dollar. And a whole slew of European officials have practically begged the U.S. to step in and boost the buck.
This chorus of pain marks a rise in international pressure on the U.S. to live up to its oft-quoted “strong-dollar policy,” after central banks in South Korea, Taiwan, the Philippines, Thailand, Indonesia and Hong Kong all stepped in to weaken their currencies against the greenback earlier this month.
Now, the G20 meeting scheduled for Nov. 6-7 in Scotland will offer a perfect forum for such concerns over dollar weakness to be aired.
“I think there will be fireworks at the G20,” said Stephen Jen, a well-respected currencies investor at hedge fund BlueGold Capital Management in London. “The G20 has such diverse membership” that disagreement over how to handle the dollar’s decline is very likely, he added.
When measured against a basket of currencies from the U.S.’s trading partners, the dollar is now only around 7% above its lowest point since 1971. The greenback has recently hit some notable lows against a range of currencies, with the euro briefly nudging $1.50 Wednesday.
“Some sort of crisis is looking inevitable,” said Neil Mellor, a currencies analyst at the Bank of New York Mellon in London. “You can’t continue down this road without something giving way, and it’s clear that the U.S. is not going to do anything to put meat on the bones of its strong-dollar policy.”
The strain is certainly starting to show. Most countries would greatly prefer to see their currencies weaken, because it makes their exports appear cheaper — a boost when economies are edging out of the global downturn. Instead, many currencies are climbing, not necessarily because of domestic factors, but because the dollar is sliding as newly optimistic investors pull funds out of the greenback, to which they had turned as a safe haven in deeply troubled times.
Brazil’s government took action Tuesday, slapping a 2% tax on foreign purchases of bonds and shares in a direct effort to rein in the Brazilian real, which has risen by nearly 31% against the dollar since March.
The new tax rule sent some investors scurrying for the exits and immediately shoved the dollar 3.75% higher against the real in just one day — a very substantial single-day move in the currency markets.
Currencies watchers are divided about the likely long-term impact of Brazil’s move. Some think that with bumper returns still lying ahead in Brazilian assets, many investors will stick with the country, pushing the currency still higher. The Institute of International Finance has estimated that capital flows into emerging markets will almost double from 2009 to 2010.
David Lubin, an emerging-markets economist at Citigroup in London, said Wednesday that he sees little chance of countries in Central and Eastern Europe adopting similar measures, although he cautioned that investors should “never say never.”
But skeptics, fearing a potential dollar rout, aren’t so sure. “I take the move as a real statement of intent. This could be the thin end of the wedge. There’s a crunch coming, and the only route is the Brazilian route — I think we will see more moves like this,” said Mr. Mellor at The Bank of New York Mellon.
Some authorities around the world are more sanguine about dollar weakness, with the Reserve Bank of New Zealand Governor Alan Bollard stating this week that the strength of the New Zealand dollar was no impediment to raising interest rates.
However, Brazil is not alone. Canada’s central bank warned Tuesday that persistent strength and volatility in the Canadian dollar could “more than fully offset” other encouraging developments seen in the Canadian economy since July.
The market read this as an indication that intervention to weaken the Canadian dollar could be close to hand, prompting traders to push the U.S. dollar nearly 2% higher against its neighboring currency.
Finally, European officials were particularly forthright this week. French Finance Minister Christine Lagarde said Tuesday that “we want a strong dollar; we need a strong dollar.” A senior advisor to French President Nicolas Sarkozy also said that “the euro at $1.50 is a disaster for the European economy and industry.” Currency traders, however, decided to ignore these words.
That’s because few see a real prospect for a successful unilateral program of intervention in the euro zone. Particularly in the case of this heavily traded currency pair, U.S. involvement in a joint effort to sell euros is seen as crucial, because such large sums would be needed to push the rate around. Intervention programs involving just one country are rarely successful.
For its part, the U.S., publicly favors a strong-dollar policy, mindful that the world’s largest economy relies heavily on the goodwill of foreign investors buying its dollar-denominated bonds. However, U.S. Treasury Secretary Timothy Geithner appeared to soften this stance last month, when he indicated that a U.S. transition towards a heavier reliance on exports would be “healthy” and “necessary.” Naturally, a weaker dollar would help in that process.
In the end, most experts agree that unless the dollar’s decline becomes much more rapid, or unless it provokes a rush away from U.S. government bonds — both unlikely prospects at this point — then the U.S. authorities will continue to stand by and let the buck fall.

Inflation was supposed to lower unemployment

2012-03-19T04:50:00.001-07:00

Allan Meltzer is a renowned Monetarist and academic economist. His discussion below of current economic policy and interest rates is important reading. He succinctly captures the issues, discusses the dangers of continuation of current policies and probable outcomes. Emphasis has been added by me.

The United States is headed toward a new financial crisis. History gives many examples of countries with high actual and expected money growth, unsustainable budget deficits, and a currency expected to depreciate. Unless these countries made massive policy changes, they ended in crisis. We will escape only if we act forcefully and soon.
As long ago as the 1960s, then French President Charles de Gaulle complained that the U.S. had the “exorbitant privilege” of financing its budget deficit by issuing more dollars. Massive purchases of dollar debt by foreigners can of course delay the crisis, but today most countries have their own deficits to finance. It is unwise to expect them, mainly China, to continue financing up to half of ours for the next 10 or more years. Our current and projected deficits are too large relative to current and prospective world saving to rely on that outcome.
Worse, banks’ idle reserves that are available for lending reached $1 trillion last week. Federal Reserve Chairman Ben Bernanke said repeatedly in the past that excess reserves would run down when banks and other financial companies repaid their heavy short-term borrowing to the Fed. The borrowing has been repaid but idle reserves have increased. Once banks begin to expand loans or finance even more of the massive deficits, money growth will rise rapidly and the dollar will sink to new lows. Do we have to wait for a crisis before we replace promises with effective restraint?
Many market participants reassure themselves that inflation won’t come by noting the decline in yields on longer-term Treasury bonds and the spread between nominal Treasury yields and index-linked TIPS that protect against inflation. They measure expectations of higher inflation by the difference between these two rates, and imply long-term investors aren’t demanding higher interest rates to protect themselves against it. But those traditional inflation-warning indicators are distorted because the Fed lends money at about a zero rate and the banks buy Treasury securities, reducing their yield and thus the size of the inflation premium.
Further, the Fed is buying massive amounts of mortgages to depress and distort the mortgage rate. This way of subsidizing bank profits and increasing their capital bails out these institutions but avoids going to Congress for more money to do so. It follows the Fed’s usual practice of protecting big banks instead of the public.
The administration admits to about $1 trillion budget deficits per year, on average, for the next 10 years. That’s clearly an underestimate, because it counts on the projected $200 billion to $300 billion of projected reductions in Medicare spending that will not be realized. And who can believe that the projected increase in state spending for Medicaid can be paid by the states, or that payments to doctors will be reduced by about 25%?
While Chinese government purchases of our debt may delay a dollar and debt crisis, they also delay any effective program to reduce the size of that crisis. It is far better to begin containing the problem before we blow a hole in the dollar and start another downturn.
A weak economy is a poor time to reduce current government spending or raise tax rates, but we don’t require draconian immediate changes. We do need a fully specified, multi-year program to restore fiscal probity by reducing spending, and a budget rule that limits the size and frequency of deficits. The plan should be announced in a rousing speech by the president. The emphasis should be on reducing government spending.
The Obama administration chooses to blame outsize deficits on its predecessor. That’s a mistake, because it hides a structural flaw: We no longer have any way of imposing fiscal restraint and financial prudence. Federal, state and local governments understate future spending and run budget deficits in good times and bad. Budgets do not report these future obligations.
Except for a few years in the 1990s, both parties have been at fault for decades, and the Obama administration is one of the worst offenders. Its $780 billion stimulus bill, enacted earlier this year, has been wasteful and ineffective. The Council of Economic Advisers was so pressed to justify the spending spree that it shamefully invented a number called “jobs saved” that has never been seen before, has no agreed meaning, and no academic standing.
One reason for the great inflation of the 1970s was that the Federal Reserve gave primacy to reducing unemployment. But attempts to tame inflation later didn’t last, and the result was a decade of high and rising unemployment and prices. It did not end until the public accepted temporarily higher unemployment—more than 10.5% in the fall of 1982—to reduce inflation.
Another error of the 1970s was the assumption there was a necessary trade-off along a stable Phillips Curve between unemployment and inflation—in other words, that more inflation was supposed to lower unemployment. Instead, both rose. The Fed under Paul Volcker stopped making those errors, and inflation fell permanently for the first time since the 1950s.
Both errors are back. The Fed and most others do not see inflation in the near term. Neither do I. High inflation is unlikely in 2010. That’s why a program beginning now should start to lower excess reserves gradually so that the Fed will not have to make its usual big shift from excessive ease to severe contraction that causes a major downturn in the economy.
A steady, committed policy to reduce future inflation and lower future budget deficits will avoid the crisis that current policies will surely bring. Low inflation and fiscal prudence is the right way to strengthen the dollar and increase economic well being.
Mr. Meltzer is professor of political economy at Carnegie Mellon University and the author of the multi-volume “A History of the Federal Reserve” (University of Chicago, 2004 and 2010).

Valuation multiples against earnings

2012-03-17T00:58:00.001-07:00

John Hussman is an astute observer of markets. Currently, he is very concerned about overbought conditions.

That said, investors clearly are approaching the current market with every belief that the extreme valuations of 2007 represent the sustainable norm to which stocks should return. This despite the fact that the 2007 peak reflected rich valuation multiples against earnings that were themselves inflated by abnormally elevated profit margins. Last week, Bill Hester reviewed the evidence that forward earnings estimates presently assume a return to record profit margins observed just before the market turned down. If the expectations of investors and analysts are heavily anchored to those 2007 levels, as seems to be the case at present, then the fact that stocks are richly valued on the basis of sustainable, normalized earnings and cash flows may not be sufficient to give investors pause.

Some of the solutions facing the economy

2012-03-17T00:49:00.000-07:00

oreover, businesses have little reason to hire already because of massive overcapacity. Add increasing health care costs to the list of reasons for businesses not to hire.
Given that government spending crowds out private investment, these policies all but assures that unemployment is going to remain high for a long time as noted in Structurally High Unemployment For A Decade.
Killing The Goose
Last week in Thoughts on the Economy: Problems and Solutions I listed the problems and some of the solutions facing the economy. It was a discussion between John Mauldin and I about his weekly E-Letter Killing The Goose.
John and I agreed on many, but not all solutions. I would also like to add something I have proposed before, killing the Davis-Bacon prevailing wage act.
Muddle Through Where Art Thou?
Back in 2002, the usually optimistic Mauldin proposed the economy would somehow manage to “Muddle Through”.
However, because of the unsustainable path we are on. John has changed his mind. Please consider these excerpts from Muddle Through, R.I.P?
I defined a Muddle Through Economy in the past as one of slow growth (in the area of 1-2%) and a slack employment environment, such as we had in 2002 and the early part of 2003. In early 2007, I suggested we would return at some point to such an environment at the end of the recession I was predicting.
However, gentle reader, never in my wildest dreams did I think we could be
looking at government deficits of $1.5 trillion dollars and actually budgeting future
deficits of over $1 trillion as far as the eye can see. And there is real reason to think that under current plans, $1 trillion deficits are optimistic.

Look at the graph above from the Heritage Foundation. They suggest that current policy would bring us closer to a $2 trillion deficit by 2019. And that assumes nominal growth that is north of 3% and unemployment dropping back below 5% in reasonably short order.
Japanese Disease
Some readers wrote this week telling me I am far too worried about a rising government deficit. Right now we are at roughly 42% of debt to GDP. In 1989, at the
start of the lost decades, Japan had a debt-to-GDP ratio of 51%. Now it is at 178%, and the world has not come to an end for them. In fact, they are running massive government deficits today and plan to do so for a long time. Why, I am asked, can’t we be like Japan?
In 1989, private Japanese debt (businesses and consumers) was at a debt-to-GDP
ratio of 212%. Now it is at 110%. And the total of both government and private debt is roughly the same (within 5%) of where it was 20 years ago. Along with running large trade surpluses, private debt has been exchanged for government debt. Savings have fallen from the mid-teens to about 2% today, as the country is rapidly aging and now using its savings to live on. And how much has all that government spending helped the country?
Before I answer that, read these paragraphs from Hoisington Asset
Management’s latest letter (last week’s Outside the Box):
“The federal government’s promise to extricate the U.S. economy from this
recession involves more spending (increasing public debt) and more subsidies for
consumers, such as car rebates and home buying incentives (more private debt). In other words, more debt is supposed to solve the problem of over-indebtedness. The truth is that this policy merely indentures its citizens further without providing any income for repayment of debt.
“This means there is no long term income benefit from stimulus programs.
According to the latest academic research, the most recent $800 billion stimulus plan will boost economic activity in the short run, but will surely depress economic activity over time. The government problem is complicated by the fact that the tax multiplier is 3, meaning that a 1% change in taxes will change GDP by about 3% over time. More recent research (Barro & Redlick, September 2009, “NBER Working Paper 15369″) suggests that a 1% cut in the marginal tax rate would raise GDP in the ensuing year by 0.6%. With the deficit rising due to a zero spending multiplier, the tendency will be to try to raise taxes to pay for this higher level of expenditures, which will further depress aggregate spending and output.”
For all intents and purposes, Japan has had no growth for almost two decades.
Their nominal GDP is where it was 17 years ago, and the number of employed people is at 20-years-ago levels. An aging population has masked their unemployment problems, as older citizens retire. Their savings went to government debt. Taxes were raised numerous times. Since government deficit spending has no long-term multiplier effect, growth has been nonexistent. (By the way, that research about multiplier effects has also been done by Christina Romer, the chairman of the current President’s Council of Economic Advisors, and further explored by European economists. There is general agreement on these facts.)
Large government deficits choke off the very investment that we need to create
jobs. In the name of doing good, the unintended consequence is to make it more difficult for small businesses to start up and create jobs. And we all know that small business is the engine for job creation.
The New Muddle Through Economy
This is not a prescription for a return to normal growth. We are headed for a New
Normal that is less than what the market currently believes. Unless the deficit comes
under control at some point, we face the real prospect of catching Japanese Disease and suffering yet another lost decade. Can we Muddle Through? We have no choice but to do so. But it will not be fun. It will not be long-term 2% growth and employment going back to 6% any time soon. Can we reverse the course? With a different attitude and leadership in Congress, maybe we can. But it won’t happen next year, and it’s unlikely in 2011.
I am afraid we will have to put my old friend Muddle Through, as I previously
defined him, back in his box for a while.

Reserve currency is teetering on a precipice

2012-03-16T01:36:00.001-07:00

Not much to disagree with here, at least in the intermediate to long-term. If we have a market correction in the US, which seems almost inevitable, then the whole world will be affected including, if not especially China. There is much not to like short-term in China — the banking systems, centrally-directed economy (when they make mistakes they tend to be doozies), dependence on US for exports, coming currency adjustments, etc. Despite these near-term concerns, I am in agreement with the article. Just don’t “double-down” right now.

Jim Rogers on the Next 10 Years

By Heather Bell
I’m moving to China … possibly to live in a bunker. At least that was my inclination after listening to a presentation by Jim Rogers Thursday.
Now don’t get me wrong―Mr. Commodities wasn’t all doom and gloom. In fact, his talk was both informative and highly entertaining. But Rogers doesn’t sugarcoat things―he’s very matter-of-fact about his concerns and projections for the future. And most of them don’t bode well for the U.S.
I’ll be posting an interview with Jim Rogers on the site in the coming week, but for now, I just wanted to offer some highlights from his speech at ETF Securities’ mini-conference and the Q&A that followed.
1. The 21^st century belongs to China
According to Rogers, the 19^th century was the era of the British Empire and the 20^th century was the U.S.’ heyday. But the 21^st century is China’s (though the rest of Asia is definitely going to get a boost too).
The reasons for this are many, but some points brought up by Rogers include the following:

The Chinese want to live like we do;

They are more eager to work;

They are better at saving;

There are 1.5 billion Chinese citizens (and 3 billion people in all of Asia), and we owe them money. They are, according to Rogers, “among the best capitalists in the world.”

There will be some setbacks, of course, Rogers says, but these are opportunities. “If you see setbacks in China, you should pick up the phone and get more involved,” he advised, before adding his favorite refrain, “The best advice of any kind that I can give you is to teach your children and grandchildren Chinese.”
China’s path to world domination started with Deng Xiaoping’s capitalist programs in 1978, and there hasn’t been any looking back since. Rogers views China’s dominance as nigh-on unstoppable except for one little thing: its water problem. There are parts of the country that are running out of water, and when the water disappears, Rogers points out, so does civilization. However, the country is acting aggressively to combat the problem, and he doesn’t view it as that much of a threat.
2a. Jim Rogers is not a Ben Bernanke fan
Yep, it’s a fact. No “Team Bernanke” shirts for Jim Rogers (who said to scattered applause during the Q&A session that if he was in charge of the U.S. economy he would “abolish the Fed and resign.”).
Rogers is appalled by the government’s actions—Bernanke’s in particular. The U.S. government’s strategy calls for the debasement of the dollar, he says, calling it a “horrible policy.” While he concedes it can work in the short term, it NEVER works in the mid- or long term.
“He’s going to run those printing presses until we run out of trees, because that’s the only thing he knows,” Rogers said of Bernanke.
Add that on top of the country’s rapidly growing astronomical debt, and Rogers believes you’ve got a recipe for disaster.
2b. The U.S. dollar is screwed
Consider this a corollary to point 2a. Its status as a reserve currency is teetering on a precipice, in Rogers’ opinion, and he’s not alone. In fact, so many people are selling dollars right now that he’s sitting tight, waiting for a possible—and ultimately unsustainable—rally in order to exit the market. Of course, if it fails to rally and just drops again …

“I’ll just have to panic and sell like everyone else,” Rogers said.
3. Commodities, commodities, commodities
OK, as mentioned before, there are 3 billion people in Asia, most of whom are aspiring to play the home version of the American Dream game show. And let’s face it: American society is largely about consumption. We like stuff―we buy it, we wear it, we eat it, we flaunt it, we sometimes even bedazzle it (yeah, Google that). So that’s a lot more consumption on the global level. Rogers notes that while consumption is expected to increase exponentially, not a lot of capacity has been added in the last few decades for a lot of commodities. Meaning, not a lot of new refineries have been built, and not a lot of new resources have been discovered or excavated for a variety of commodities.
In terms of oil, Rogers cites the fact that Saudi Arabia has not seen any new oil discoveries but has consistently said for the past two decades that its reserves are at 260 billion barrels (in which time it has sold 60 billion barrels). He also points out that farmers are a rapidly disappearing species. So to sum up―that’s a lot more people competing for diminishing resources (including the all-important energy and food). Basic supply and demand theory pretty much takes it from there.
“Commodities are the second-largest asset class in the world,” Rogers noted. And they are “the best anchor” for your portfolio, he adds.
Rogers says the typical life span of a commodities bull market is 18-20 years. We’re currently in year 11 right now. Yeah, it could end tomorrow, but that whole supply and demand imperative could also extend this bull beyond its typical time frame.
During the Q&A session, though, the conversation took a darker turn. One questioner asked if the increased competition for resources might lead to war, and Rogers allowed it was a possibility, though he hoped it would not come to that. He pointed out that when a rising power clashes with an established power, the result is usually war, and said that research consistently shows that resource shortages lead to war.
So, sure, commodities shortages might start World War III, but if you invest in the commodities themselves, you might at least be in decent financial shape when the shelling stops—and I’m not being flippant at all. War drives up the costs of commodities.
4. U.S. government bonds are the next big bubble
Well, would you lend money to us? Rogers says short-term bonds are probably OK, but he advises getting out of anything with a longer maturity. He calls it “inconceivable” that anyone would lend money to the U.S. for 30 years at the going rate, and notes that the U.S. was a creditor nation as recently as 1987.
“Now the U.S. is the largest debtor nation in the history of the world,” he said.
And for bond portfolio managers, he had some very pointed advice: “Get a new job.”
5. Protect yourself
The underlying theme of Rogers’ entire speech was that the world is changing, and here are some things you should know if you want to come out the better for it (and for your family members, clients, etc., to also come out the better for it) financially. Based on Rogers’ observations, it seems recognizing that change is a key step, but so is adapting to it (see advice regarding learning Mandarin, for example).
And in Rogers’ eyes, commodities are a good way to achieve this protection. No investment is certain of course, but right now, he thinks commodities look pretty darn good.
Best Comment Of The Night
Addressing one audience member’s question, Rogers asked if the young man were an MBA. The questioner admitted to holding an MBA and was promptly told he should swap his MBA for an agriculture degree from Texas A&M.
“You should become a farmer,” Rogers said.
That’s an old line for Rogers, but he added a new wrinkle. If you’re not going to become a farmer, you should open the first Lamborghini dealership in Iowa. Because with farmers closing in on extinction just as the world needs more food, that’s probably what they’ll be driving in a few years.

The largest borrower in the municipal market

2012-03-16T01:18:00.001-07:00

Just ten weeks after the new budget, California is going deeper into the red. For years states have been using various accounting gimmickry to meet legal budget limits. All of this profligacy and coverup is now being revealed in this downturn.
Several points might be relevant here. California is probably not salvageable because the Feds cannot afford to bail them out along with the other states in similar condition. Even now, states and the Federal government seem unable or unwilling (probably the latter) to recognize the magnitude of the economic crisis. The strategy of wallpapering over the cracks caused by the sinking foundation still appears to be their only solution. Why not? It always worked in the past. But the past is no longer. We are in the “new abnormal,” a condition unlike the past 30 years. Arguably that period might be labelled the “old abnormal” because of the credit explosion that created an unsustainable boom. The “new abnormal” will see the reversal of this process with a de-leveraging period that could last for a decade or more. As this occurs, spending will drop well below norms as savings is increased. Unemployment will continue at high rates. This process will be painful and long. The “new abnormal” will be characterized by a lower standard of living than people expect or want. It will produce lower tax revenues, too low to sustain overbloated governments structured for the continuation of the previous Alice-in-Wonderland economy. Governments will fight adjusting to this situation, playing for time and tweaking here and there to get through. But this period will not end shortly and some governments might.
For years California has been considered the bellweather of change in the United States. Unfortunately, in their spending and budget crisis, they are probably still the lead cow. Look for similar “bankruptcies” to follow in other states shortly and perhaps the Federal government as well.
This article from Bloomberg provides details.

California Budget Is Already in the Red 10 Weeks After Passage

Schwarzenegger will know within a month whether a $1.1 billion drop in revenue collections is part of a growing budget shortfall or an isolated event, his budget spokesman said. Revenue in the three months ended Sept. 30 was 5.3 percent less than assumed in the $85 billion annual budget, state controller John Chiang reported yesterday. Income tax receipts led the gap, as unemployment reached 12.2 percent in August.
“The culprit here appears to be estimated quarterly personal income tax statements,” H.D. Palmer, the governor’s budget spokesman, said yesterday. “The numbers are cause for concern, but the issue now for us is to determine if this is a one-time event or whether it has more long-term implications.”
The latest figures show that California is facing resurgent fiscal strains brought on by the U.S. recession. Since February, Schwarzenegger and lawmakers have cut $32 billion from spending, raised taxes by $12.5 billion and covered $6 billion more with accounting gimmicks and borrowing. Even with those actions, state budget officials predict an additional $38 billion in deficits in the next three fiscal years combined, including $7.4 billion in the year starting July 1.
Schwarzenegger must present a budget for the coming fiscal year in January. The state’s Franchise Tax Board will deliver new data to the governor in November.
Debt Sales
The budget news comes as the most populous U.S. state prepares to sell as much as $15 billion of bonds in the next nine months to refinance debt and fund public-works projects, and as a surge in fixed-rate municipal issuance sent benchmark rates up by the most in almost four months.
California, already the largest borrower in the municipal market, may offer $4 billion of debt during the week of Oct. 26 to refinance the bonds used by Schwarzenegger to cover previous budget deficits. The budget enacted in July would allow the sale of as much as $11 billion more of general obligation bonds through the June 30 end of the fiscal year if financial markets allow, state Treasurer Bill Lockyer said. The exact sale amount hasn’t been decided.
“If the market is inhospitable, we won’t go,” Lockyer said in an interview yesterday. “We’ll just have to wait and see how the feelings are when we get ready to think about it again.”
Additional bond sales by California would follow an offering of $4.1 billion of general obligation bonds this week.
Scaled-Back Offering
The state was forced to scale back the size of the deal by almost $400 million as benchmark yields surged. The yields climbed after gains in the tax-exempt market last week pushed them to a 42-year low.
California’s sale follows a two-month rally in municipal bond prices, fueled by a record flow of money into mutual funds that outweighed lingering fiscal strains on localities, said Craig Elder at Milwaukee-based Robert W. Baird & Co.
U.S. Treasuries also fell, sending two-year notes toward their first weekly loss since the period ended Sept. 18. Federal Reserve Chairman Ben S. Bernanke said the central bank is ready to tighten monetary policy once the outlook for the economy improves.
California, a state that’s been among the hardest hit by the recession, had already issued $22 billion of debt since March, including $8.8 billion of notes that provided the state with an advance on taxes collected next year.
Even after increasing what it would pay, California still borrowed more cheaply than during previous offerings. A taxable California bond maturing in 2039 yielded 7.23 percent this week, down from a yield of 7.43 percent during a sale in April.
“Everybody thinks there’s still an appetite for California bonds,” Lockyer said. “There’s certainly a continuing need for long-term investments in schools, high-speed rail, stem-cell research centers and so on.”

Businesses unable to borrow money

2012-03-16T00:52:00.003-07:00

The private sector must lead a recovery because it alone produces goods and services. Without this sector, there can be no reversal in job losses and no recovery. Here is more evidence that the private sector is not expanding. It is still shrinking.

Banks cutting back on loans to businesses

Credit squeeze on entrepreneurs threatens to derail recovery
WASHINGTON (MarketWatch) — U.S. banks are reducing their lending at the fastest rate on record, tightening the credit squeeze and threatening to leave many otherwise viable businesses unable to borrow money to expand their businesses, meet their payroll or refinance their maturing debts.
According to weekly figures provided by the Federal Reserve, total loans at commercial banks have fallen at a 19% annual rate over the past three months, while loans to businesses have dropped at a 28% annualized pace.

While such a step is not inevitable

2012-03-15T03:19:00.000-07:00

History is replete with situations where the middle class of a country has been wiped out as a result of the profligacy of its government. If one believes the risks of such an outcome are high, steps should be explored that will protect one’s savings and wealth. If you believe the dollar is going to collapse, you move investments out of the dollar. One way for US investors is to invest in non dollar-denominated instruments like foreign stocks, foreign bonds, foreign currencies and CDs in foreign banks. Unfortunately, history is also replete with government reactions in such situations. In virtually all, the government prevents its citizens from protecting themselves by imposing capital controls. Rather than government enabling or encouraging its citizens to protect their savings and wealth, they preclude them from doing so via “emergency” legislation. While such a step is not inevitable, it becomes highly probable as less capital enters this country and more leaves. Capital controls are never discussed in advance; they appear as a “surprise,” effectively precluding any protective actions.