Federal government statistics show that January is usually the most popular month for federal employees to retire, with an annual average of around 8,300 retiring in January between 1992 and 2001. ²  January is likely to be a high volume month again in 2010, as most federal employees eligible to retire were able to maximize the lump sum payment for unused vacation time by retiring on January 1, 2, or 3. ³

Exactly how this trend impacted the data is hard to tell.  The federal government actually gained 24,000 non-census jobs in January,⁴ though few were likely backfills of workers retiring last month due to the generally slow speed of government hiring procedures.  What’s harder to research is how many other organizations, including state and local governments which continued to trend downwards, have similar quirks in their compensation systems that make January an attractive month to retire and could also have impacted the numbers.

Given the ambiguous nature of this data I would be hard pressed to say it supports any specific conclusions.  But at the very least it’s a reminder of how arbitrary short-term factors that have no relation to the overall economic health of the country can impact the job statistics.

1. See Timothy R. Homan, Bloomberg, U.S. Economy: Unemployment Unexpectedly Falls to 9.7% (Update3), http://www.bloomberg.com/apps/news?pid=20601068&sid=aMgidOoKS.dI.
2. U.S. Office of Personnel Management, Retirement Statistics, p. 4, at http://www.opm.gov/feddata/retire/rs-faqs.pdf.
3. See Edward A. Zurndorfer, Best Date to Retire – CSRS and FERS: 2009 and 2010, My Federal Retirement, http://www.myfederalretirement.com/public/315.cfm.  Most federal employees hired before 1984 are covered by the Civil Service Retirement System (CSRS).  See http://www.federaldaily.com/financial/retirementsystems.htm.
4. See “Employment Situation Summary,” February 5, 2010, Bureau of Labor Statistics, U.S. Department of Labor, at http://www.bls.gov/news.release/empsit.nr0.htm.

I believe that at current price levels Barrick shares represent a good value.  There are reasonable arguments in support of gold’s long-term prospects, particularly because of potentially increased demand from emerging nations.  However, many of the medium-term risks to gold investing I outlined in November—that the Fed will eventually raise interests and that hyperinflationary fears are exaggerated—remain.  But Barrick’s faster than initially planned closing of its hedge book—contracts to sell gold that reduce exposure to the company if gold prices tank—has at least so far positioned Barrick to profit before that turbulence hits.  Supporting that thesis is that Barrick’s CEO Aaron Regent acknowledged back in November the prospect that gold could experience a sell off, though he did not see prices falling below $900/oz.¹  If Regent is running Barrick based on the same assumptions in his public statements, the decision to close the hedge book should yield healthy profits for Barrick if gold continues to hold above $1,000/oz.

Barrick, founded in 1980, only became the world’s leading gold producer in 2006 with its acquisition of Placer Dome.  Its practice of hedging against falls in the gold price goes way back in the company’s history,² so Barrick’s full profit potential with gold at $1,000 has not yet been proven to the market.  While spot gold has declined about 5% since its November 16-20 trading range, Barrick shares have fallen 27%, to some extent pricing in market fears that gold will fall.  I believe this differential provides a good opportunity for investors who want to round their portfolio with gold-related assets to buy into an equity that has potential to appreciate even if gold itself runs in place.

Disclosure:  The author is long on Barrick Gold (ABX) as of the original publication date of this post.

1. “UPDATE 1-Barrick chief says sell off in gold possible-FT,” Reuters, November 11, 2009, http://www.reuters.com/article/basicMaterialsSector/idUSSP46116320091112.
2. See “Barrick Gold,” Fundinguniverse.com, at http://www.fundinguniverse.com/company-histories/Barrick-Gold-Corporation-Company-History.html.

Dear Senators Mikulski and Cardin:

As a Maryland resident, I write to ask that you vote to confirm the reappointment of Ben Bernanke as Chairman of the Federal Reserve.  While it may be true that the Fed did not fully recognize the magnitude of the systemic weaknesses that caused the financial crisis, neither did many of the world’s greatest investors.  Chairman Bernanke has, in my opinion, leveraged his expertise in financial history—including the history of the Great Depression—to mount a vigorous response to the crisis.  His continuance in this role will allow the Fed to continue on this constructive path and maintain the confidence of global markets in U.S. economic leadership.

Voting against Chairman Bernanke would be to vote against a proven leader because he is not perfect.  Now is not the time to let perfectionism fueled by popular frustration—however understandable—get in the way of doing what is right.

Thank you for considering my views.

Sincerely,

Thoughtsworththinking.net

To submit your opinion to Senator Mikulski, go to http://mikulski.senate.gov/Contact/contact.cfm.

To submit your opinion to Senator Cardin, go to http://cardin.senate.gov/contact/.

What does all this have to do with a uranium enrichment company headquartered in Bethesda, Maryland?

USEC (USU), the parent company of United States Enrichment Corporation, which came into being in its current form when the U.S. Government privatized its uranium enrichment operations in 1998, currently operates the only uranium enrichment plant in the United States in Paducah, Kentucky.   But it’s working on a next-generation facility in Piketon, Ohio.  In order to complete the Piketon facility, dubbed the “American Centrifuge Plant,” USEC needs money.  That’s where the politics comes in.

On July 27, 2009, the Department of Energy denied USEC’s longstanding loan application for the Ohio project.  Two days later, USEC CEO John Welsh wrote President Obama, quoting a September 2008 letter that then candidate Obama had apparently sent to Ohio Governor Ted Strickland promising support for the program:

Under my administration, energy programs that promote safe and environmentally-sound technologies and are domestically produced, such as the enrichment facility in Ohio, will have my full support. I will work with the Department of Energy to help make loan guarantees available for this and other advanced energy programs that reduce carbon dioxide emissions and break the tie to high cost, foreign energy sources.⁴

Welsh also pointed out in his letter that the American Centrifuge Plant will ultimately support about 8,000 jobs.⁵

Taking a step back to look at the big picture, nuclear energy in the United States may be on the cusp of a revival.  The need for environmentally friendly domestic energy sources, along with 1) technical advancements that make nuclear energy safer, and 2) the passage of time since the Three Mile Island (1979) and Chernobyl (1986) meltdowns, has opened the door for a wave of new nuclear power plants. ⁶  The last new plant in the U.S. began operation in 1996—it was already under construction in 1979 when the Three Mile Island incident vilified the industry—and the recent credit crunch has likely had some effect on the new projects.⁷   However, whether the current recession will dim the industry’s long-term prospects is far from certain.  There are currently a full slate of new construction applications pending before the U.S. Nuclear Regulatory Commission (NRC),⁸ and since anything in nuclear power construction seems to move at glacial speed several economic cycles may pass before most new U.S. plants go online anyway.

This new activity may also be spilling over to the enrichment side of the industry.  General Electric (GE) is operating a test facility using a laser-based technology in North Carolina that it hopes will eventually be a massive plant. ⁹  Urenco, which is jointly owned by the British and Dutch governments and German utilities, ¹⁰ is also building a centrifuge plant in New Mexico that should go into production soon. ¹¹

All this comes back to the politics surrounding USEC’s loan application.  When the application was originally denied, USEC issued a strongly worded statement saying that they would begin to demobilize the project. ¹²  An Energy Department press release followed a week later on August 4 reporting that the final decision on the application had been delayed, that “both DOE and USEC recognize that meeting these criteria will likely take six months or more,” and that $45 million in funding would be provided to USEC for eighteen months while the company worked to meet technical milestones to beef up its loan guarantee application. ¹³

There is no reason to doubt that the Department of Energy, headed by Nobel prize wining physicist Steven Chu, had legitimate cause to delay the application, and will only give it the go ahead if USEC gets its act together.  However, given the political stakes of denying the loan—which are further increased because Ohio Governor Strickland, a Democrat, faces a tough election in 2010—it’s also reasonable to expect that nothing will stop USEC from getting a fair shot to make its case.  Another aspect of the situation is that USEC’s chief competitor for the loan money is AREVA (ARVCY, AREVA IC),¹⁴, which is 93% owned by the government of France.¹⁵.  If USEC lost the loan to a foreign competitor, no less one backed by a foreign government, the political fallout could be even greater.

This is not to say that investing in USEC is a slam-dunk.  Much of what will happen is shrouded in the rarefied world of nuclear technology, and if USEC fails to meet the requirements for the loan it will be denied.  USEC’s credit rating has also taken a beating, and there are concerns that the Kentucky plant will not be profitable after its electrical contract expires in 2012. ¹⁶ But if USEC gets its act together there is every reason to believe they will get the loan guarantee, or something like it.  With the stock hovering around $4 a share ($4.07 as of market close on December 21), the risk that the company will falter has been priced in, and with 12.89% short interest (as of December 21) at the already depressed share price quite a few people have already bet on USEC’s demise.  But the political advantages on USEC’s side have not been fully appreciated by the market (see my posts on investing by arbitraging Wall Street’s misunderstanding of public policy), and if the company gets the financing its share price could jump as the shorts scramble to cover themselves.   The window formed by the timelines discussed in the Energy Department’s August 4 statement—six to eighteen months from then—opens on February 4, so those who want to ride the USEC train should board soon.

Disclosure:  The author is long on USEC (USU) and General Electric (GE) as of the original publication date of this post.  The author does not hold a securities position in AREVA.

1. See “Ohio’s Presidential Election History,” The Plain Dealer, http://www.cleveland.com/open/presidentialelections/.
2. See “Distribution of 2008 Electoral Votes, National Archives and Records Administration, http://www.archives.gov/federal-register/electoral-college/2008/allocation.html.
3. See 2008 Presidential Election:  Popular Vote Totals, National Archives and Records Administration, http://www.archives.gov/federal-register/electoral-college/2008/popular-vote.html.
4. Letter from John K. Welsh to President Barack Obama (hereinafter “Welsh Letter”, July 29, 2009, available at http://blogs.knoxnews.com/munger/obama.pdf
5. See Welsh Letter, available at http://blogs.knoxnews.com/munger/obama.pdf.
6. See Rebecca Smith, “The New Nukes,” Wall Street Journal, September 8, 2009, R1 & R3.
7. See Bernie Woodall & Scott DiSavino, “Economic Woes Delay U.S. Nuclear Power Expansion,” Reuters, March 17, 2009, http://www.reuters.com/article/idUSTRE52G4UF20090317.
8. See Combined License Applications for New Reactors, U.S. Nuclear Regulatory Commission, http://www.nrc.gov/reactors/new-reactors/col.html
9. See Jonathan Fahey, “Riches in Enrichment,” Forbes, November 16, 2009, p. 50 & 52.
10. See http://www.urenco.com/Content/3/Investors.aspx
11. See http://www.urenco.com/content/33/LES.aspx.
12. “Department of Energy Denies USEC’s Loan Guarantee Application, Company begins demobilization of American Centrifuge Plant,” USEC Press Release, July 28, 2009, http://www.usec.com/NewsRoom/NewsReleases/USECInc/2009/2009-07-28-Department-Of-Energy-Denies.htm.
13. Department of Energy and USEC Announce Decision to Delay USEC Loan Guarantee Application Final Review, Department of Energy Press Release, August 4, 2009, http://www.usec.com/NewsRoom/NewsReleases/USECInc/2009/2009-08-04-DOE-And-USEC-Announce.pdf.
14. “U.S. DOE Cancels Loan Guarantees for USEC Uranium Enrichment Plant,” OilandGasEurasia.com, July 29, 2009, http://www.oilandgaseurasia.com/news/p/0/news/5344/
15. Reuters, ANALYSIS-France faces tough choices on Areva T&D sale, Forbes, November 20, 2009, http://www.forbes.com/feeds/reuters/2009/11/20/2009-11-20T123044Z_01_LK630671_RTRIDST_0_AREVA-FRANCE-ANALYSIS.html.
16. See Associated Press, “Moody’s Downgrades USEC Ratings,” available at http://www.thestreet.com/story/10649787/1/moodys-downgrades-usec-ratings.html; Jonathan Fahey, “Riches in Enrichment,” Forbes, November 16, 2009, at p. 52.

While this experience (and my speculation that the man had just unearthed the gold from his yard) forever cemented my impression of gold as a safe-haven asset, other aspects of the situation are instructive regarding the current gold market.  The man was selling his gold at a price that was probably around $450 an ounce, and history showed that he was wise to do so.   Even with gold’s recent appreciation and the financial crisis crushing the stock market, large cap equities (going from Dow 2500 to 10,332 as of market close on November 19) have outperformed gold (about $450 to $1141 an ounce) by a large margin since 1987.  And that doesn’t even take into account that stocks can earn dividends, while holding gold can incur costs in the form of storage and/or insurance expenses.  (For that reason, other than for people who want to keep a stash of gold at home to prepare for the most extreme scenarios, I suggest that people who want to invest in gold consider equity-based investments like the dividend yielding shares of one of the established gold mining companies such as Barrick Gold (ABX), Newmont Mining (NEM) and Gold Fields Limited (GFI)).

The shorter term of the current decade paints a different picture.  Gold was in the high $200’s in 1999, and now stands over $1,100 an ounce, while the Dow crossed 10,000 for the first time in 1999, to where it has just about returned.  In this decade, with the 9/11 attacks in 2001 and the financial storm beginning last year, the United States has experienced the most significant challenges to its national and economic security in generations.  Given that gold is marketed as a hedge against events that disrupt other markets, there is a strong temptation to correlate its rise to the heightened risks of the current environment.  There may be some truth to this perceived causation, as reflected by reports of investors piling money into gold and other defensive assets as unemployment persists.  (If your family or a friend has been impacted by the unemployment situation, see my post on How to Help Your Unemployed Spouse Find a New Job After a Layoff.)  But it’s also possible that the relationship between these risk factors and the gold price is exaggerated.

This leads me to the main point of this post:  while there are long-term factors that will support gold prices regardless of where the U.S. economy goes, principally consumer demand in emerging nations, there are some significant short and medium term risks.

A combined 2.5 billion people live in China and India, over eight times the population of the United States (307 million).  But China and India are already the world’s two leading gold consumers, India being first, and both already have far more demand for gold jewelry than the United States. ¹  This means that while there is still lots room for China and India to develop more gold demand as large segments of their huge populations morph into a massive middle class, temporary reductions in their demand can move gold down.

Such downward pressure is particularly likely in the case of India, where people of modest means have traditionally preferred to put their savings in gold instead of banks, and the government has long sought to discourage gold hoarding to catalyze development of the banking system. ²  Currently in India, people who have purchased gold all along are selling it to profit from the high prices. ³  While gold buying typically picks up during the Indian wedding season that runs from October through December,⁴ once that’s over the downward pressure from Indian gold selling may resume.

Also, to the degree that the current financial turbulence is driving the gold market, there is a significant risk that the party will end.  At some point, the U.S. Federal Reserve will raise interest rates, making dollar denominated bank accounts more attractive to international investors, and creating pressure for the dollar to rise against other currencies and gold.  While deficit spending in the U.S. has created a concern for coming hyperinflation and further deterioration of the dollar, I have argued in a previous post that the current fear of hyperinflation is exaggerated because U.S. tax rates are still well below those of other nations with a triple-A credit rating.  These possibilities both provide potential catalysts for the gold price to eventually experience a correction, compounded by reduced demand when the Indian wedding season ends.

In comparison, the transformation of the Chinese and Indian populations into a broad consumer group with enough wealth to further support long-term gold appreciation is likely to take place on a longer and less predictable path than the recovery from the current recession.  What this means for investors is that now is not the time to bet big on gold or gold-related assets.  It’s good to diversify and having some gold-related holdings can be a good defensive position.  For those who don’t currently have assets tied to gold and have resources to invest, given the uncertainty of the current times it’s rational to start to gradually cultivate a gold related position in conjunction with building other investments.  But in my view those who assume that they’ll turn a big short-term profit at current gold price levels risk being disappointed.  The recent statement by Barrick Gold CEO Aaron Regent that gold could fall from current highs acknowledges that risk. ⁵  Those who are prepared to accumulate gold-related assets over time are more likely in my view to be able to capitalize on future dips and long-term appreciation.

Disclosure:  The author is long on Barrick Gold (ABX) as of the original publication date of this post.  The author does not hold a securities position in Newmont Mining (NEM) or Gold Fields Limited (GFI).

1. See “China’s Gold Demand Sparkles in Q2,” Chinamining.org, August 24, 2009, http://www.chinamining.org/News/2009-08-24/1251102403d28434.html.
2. R. Kannan & Sarat Dahl, Indian Journal of Economics and Business, India’s demand for gold: some issues for economic development and macroeconomic policy, June 2008, http://findarticles.com/p/articles/mi_m1TSD/is_1_7/ai_n28026379/?tag=content;col1, screens 1-3 & 8.
3. “India Buys Gold; Indians Don’t,” Goldnews, November 9, 2009, http://goldnews.bullionvault.com/india_gold_110920093.
4. “India gold demand abates after early week’s pick-up,” Reuters, October 30, 2009, http://in.reuters.com/article/businessNews/idINIndia-43556220091030;“Gold hits new high on weak dollar,” BBC News, November 9, 2009, http://news.bbc.co.uk/2/hi/business/8351154.stm.
5. “UPDATE 1-Barrick chief says sell off in gold possible-FT,” Reuters, November 11, 2009, http://www.reuters.com/article/basicMaterialsSector/idUSSP46116320091112.

The first flaw in these alarmist arguments is the presumption that the budget deficit the United States is now running is inherently irresponsible.  Commentators stir up fears that the ballooning deficit puts the United States triple-A credit rating at risk.  These arguments disregard that tax rates in the United States are much lower than in other Aaa rated countries.  In evaluating the resilience of triple-A countries to expand their balance sheets, Moody’s (MCO) observes that United States tax rates average 34%, as opposed to 44% in Germany and 50% in France, so that the United States’ unused revenue raising power should be considered in reviewing its credit rating. ¹  Similarly, Standard & Poor’s (owned by McGraw-Hill (MHP)) considers already-high taxes to be a constraint on fiscal flexibility negatively affecting a sovereign’s credit rating, implying that currently low taxes are a favorable indicator of fiscal flexibility. ²

Second, inherent in the hyperinflation gloom and doom is the presumption that the expansion of public debt will not be followed by growth.  It’s true that if all that happens is that the U.S. prints more money, the rest of the world will figure this out and value of each dollar will decline, fueling inflation.  But the value of a currency is based on a range of factors far beyond whether or to what extent a government is printing money, including the value to the rest of the world of what the country is producing.

In other words, if the U.S. accelerates its development of globally desirable goods and services, buyers abroad will need dollars to purchase them, creating upward pressure on the dollar to counter the dilutive effect of printing money.  Thus, running a deficit is not inherently wrong.  The real question is whether the combination of public and private sector investment is likely to lead to growth.

Another way of looking at this is as it concerns the United States’ credit rating is that it’s not the deficit itself that puts the country’s triple-A rating at risk, it’s the shock of the crisis itself.  Rather, the deficit is byproduct of the solution currently being implemented, which could either help or hurt the credit rating depending on the quality of the result.

It’s too early to tell how much the Obama stimulus package, subsequent government efforts, and private sector activity will contribute to real growth in the United States.  But that means it’s also too early to assume hyperinflation is coming.  While it’s always a good idea to diversity and I would never discourage anyone from putting some of their holdings in defensive assets, those who bet heavily on hyperinflation right now risk being disappointed.

Disclosure: The author does not hold a securities position in Moody’s or McGraw-Hill.

1. Moody’s, “How Far Can AAA Governments Stretch Their Balance Sheets?,” February 2009, pp. 11-13, http://www.docstoc.com/docs/4808646/Moodys-How-Far-Can-Aaa-Governments-Stretch-Their-Balance-Sheets-February-2009.
2. See “Standard & Poor’s, Soverign Credit Ratings:  A Primer,” March 15, 2004, pp. 7-8, http://info.worldbank.org/etools/docs/library/139503/S&P_Primer.pdf.

One of our happiest days as a couple was when my wife called me earlier this month to say she’d been offered the new job she wanted.   Now that she’s landed, I am reflecting on what worked and what didn’t on my part in helping her get there.  This is not to exaggerate my role.  My wife was the one who tolerated being alone in our suburban home for almost nine months, experienced all sorts of rejection during her search, located the ad for the job she now has, wrote and sent in the application, and was successful in two rounds of interviews with a full slate of candidates.  That being said, I learned in the process that there were things I could do as a partner that could help:

Accept that there will be a grieving period. If your spouse worked for a particular employer or in a given field for a number of years, there will be a need to grieve.  Accept that this will happen and that fighting it is counterproductive.  Different people will grieve in different ways, most of which will involve minimal or no job searching.  Having seen the process—and how it can end happily—I believe that it is entirely reasonable for someone to go for a month with minimal attention to the job search, like making an initial visit to an outplacement service, and then gradually transitioning into the search in the second month, if you can afford it.  (Outplacement services may allow the job seeker to pause their subscription so the grieving period will not count against the period of assistance the outplacement service is under contract for.)

Help your spouse identify matters that require immediate attention after the layoff. Important benefits your family needs may have been tied to your spouse’s employment, like health and life insurance.  A vital way you can help in the beginning is by figuring out what needs to be done to replace them.  There may be some silver lining here too.  When I looked at life insurance options, I found a source that could provide term life insurance at a fraction of what my wife’s former company offered.

Identify the skills you have to help in the job search and apply them. Two people skillfully working together in a job search can be more effective than one.  Whether your forte is networking, doing research, or something else, applying your skills to help your spouse is far more likely to advance the ball than just nagging.  Since I am familiar with the Internet and write a lot, it was natural for me to help my wife set up her Linkedin.com account, and help revise and edit her job search correspondence.

Put the most critical aspects of your financial situation in writing. Probably one of the most important things I did was figure out where we were financially, write it out on one and a half pages, and give the document to my wife.  I summed up how long we had before we used up her severance and then the rest of our cash in a particular savings account, and what our lives would be like at four different levels of income she might receive for a new job.  I also outlined how possible positive events could affect the long-term scenario, like me getting an expected raise at the end of the year and the prospect of eventually refinancing our mortgage when she landed.  While she was not jumping for joy with the news—who would be—writing this out was ultimately reassuring because there was some better than expected information, and my putting it together gave her confidence that I had a handle on the situation.  She did not need to get a job that paid the same as her old job for us to continue towards our major aspirations as a couple, and even if she found a job paying below what we needed to keep things on track, good things that could mitigate the shortfall were likely to happen.

Look in to the tax ramifications of the layoff and if appropriate reduce your tax withholding. A point related to getting a handle on your financial situation with the layoff is to assess the tax ramifications and how they might help you.  If you have a mortgage and file jointly, particularly if you purchased your home in recent years and have a large tax deduction for interest expenses, you may be able to reduce the tax withholding from your salary since the benefits of the deduction were previously spread between two salaries but now are not.  This complex calculation can turn on other factors too—such the tax ramifications of any severance package your spouse received, and whether tax is withheld from your spouse’s unemployment benefits.  But since checking your withholding may help address the shortfall of going from two incomes to one, it may be worth consulting a professional tax advisor if you’re not comfortable doing it yourself.

Identify options for what to do if the unemployment continues beyond a certain point. A point related to putting the financial situation in writing is to think ahead on what you can do as a couple if an offer does not materialize before a given point.  This may not be something that is productive for you to speak with your partner about regularly, but just as he/she will be occupied in thinking about to how get her or his career back on track, you can think of how to keep the ship sailing while finding the new job is in the works.  Mention this to your spouse at the right times to provide assurance that regardless of what happens, things will work out in the end and you will be together.

In our case, we had established a regular plan for investing before the layoff, including regular tax deferred contributions to our retirement accounts and monthly stock purchases.  Because the market was at historic lows and we had reserves to pick up the shortfall while my wife looked for a job, we had continued these regular investments.  Even as we did this, I began to review alternatives for what we could do to stretch our savings if the situation continued.  I determined that if we stopped the stock purchases, reduced my retirement contributions to the minimum level required to receive all the matching contributions, and changed the federal tax withholding on my paycheck to adjust for the loss in income, we could go another three months on the account we were using for the shortfall.  As things turned out she got her offer before we needed to take these steps, but knowing that the option was available made things easier as time went on.

Be supportive of purchases that will help the job search. There are many ways a couple coping with a layoff can learn to save money—ours included using entertainment coupon programs to allow occasional eating out, and changing our electricity provider to save money on our electric bill (see my post Save Money to Invest:  Shop for Electricity)—but skimping on job search resources should not be one of them if at all avoidable.  Because my wife had previously been assigned company IT equipment, she found herself without a cell phone or laptop when she was laid off.  My cell phone was on its last legs, so we spent the evening after her exit interview buying spanking new iPhones for each of us under a family plan.  I also suggested that we purchase a laptop for her so she could work on her job search out of the house.  She ended up doing most of her job search on the laptop, and the call with the job offer came to her iPhone.

Encourage your spouse to seek job search advice from a number of sources. The employment environment today has challenges that have not been seen in a generation, and in the most severely affected locations several generations.  That being the case, it’s fair to assume that any one expert is not likely to have all the answers, though many will have very helpful information.  Accordingly, job seekers should seek advice from multiple sources, and then use their best judgment on what to do.  As part of her severance package my wife received outplacement services from a major outplacement firm, which while helpful in some respects were lacking in others.  I encouraged her to contact a career coach I had used, and she did.  Since my wife was applying for jobs in industries where she had never worked, the coach suggested that she write a “functional” resume structured with headings that described her skills, as opposed to chronologically listing her jobs.  Most of her interviews, including the interview for the position she accepted, came when she had used her functional resume.

Do little things that will help make your spouse’s day easier. There are probably many things you can do that will require little or no effort on your part that will make a huge difference for your job-seeking spouse.  Something that made a big difference for my wife, particularly during periods when she was not getting any responses, was asking her if she wanted to have lunch with me during the day.  It made her feel much better to get out of the house to meet me downtown than just staying home and spinning her wheels.

Say things that will help maintain a positive mental attitude. There is a natural human tendency is believe that life will continue to be the way it is.  That’s one reason a layoff is so shocking—one minute you’re employed and financially secure, the next minute you’re not.  Once that happens, there may be a tendency to believe that the bad result—unemployment—will go on forever.  In one of my wife’s down moments, I recounted a recent experience when I was trying to fill a bare spot in our lawn.  I planted new grass seeds, but only a few came up after a week.  So I planted more, and a couple of days later some of the seeds I had given up on began to sprout, and then once the new seeds arrived the bare spot was filled.  The moral:  you never know when a seed you plant will grow, and the result may surprise you.  I reminded her of this anecdote whenever she was down about the job search—including the morning of the day when she received her offer.

Be open-minded about the kind of job your spouse will land. When the process began, both my wife and I had preconceptions about the job she would find to replace it.   The job she found was different and probably a better step in the long-term than what either of us would have seen her landing when the process began.  The position she accepted is a contractor position for a large company that will initially pay far less than her old job.  However, it will give her the experience to transition to a permanent job in a different, more recession-proof industry that pays more and has more family friendly opportunities than the industry she was in.

Focus on improving yourself, particularly in ways your spouse will appreciate. Psychologists will tell you that if you want to find out how difficult it is to change another person, try to change yourself.  During the job search, the temptation to criticize your spouse will be overwhelming.  Her or his job search will inevitably be less than perfect in some respect, and it’s appropriate to comment constructively (and particularly to offer to do something to help using your own skills).  After all, your ability to improve each other may have been one of the reasons you hit it off in the first place.  However, the truth is that you have no idea how well you would be performing if the situation was reversed and you don’t want to find out.

If you need to be a critic, you may be much more productive in turning your critical eye inward and working to improve yourself in an area that would be meaningful to your spouse.  My wife had long complained about my eating habits.  Towards the end of her search, I decided to try the popular diet, the “South Beach Diet” conceived by Dr. Arthur Agatston.  The results were outstanding.  I lost 8 pounds in a few weeks, look and feel better, and have much healthier eating habits.  Moreover, she appreciated that I was working to improve myself, so that she was not the only one of the two of us working to improve their station in life.

Of course every situation is different.  In many respects we were lucky.  I remained steadily employed, we had been living well within our means to start with, and we are located in an area that remains economically stronger than the national average.  Most importantly, my wife was responsible and structured in handing her job search.  After the grieving period she settled into a regular routine of getting right to the search after I left for work, going to the gym in the late morning, and continuing the search and doing errands outside the house in the afternoon.   So while not all of my advice will apply in every case, hopefully some of it will.  Good luck, and may you soon enjoy the happy day that we did!

Life is full of second chances, sometimes even in investing. In that connection, ING’s (ING) cumulative preferred shares plunged with the shares of the broader financial services community when the financial crisis reached its depths. ING’s 6.2 % perpetual debt securities issued in 2003 with a $25 a share denomination (ISP) reached a low of $3.20 a share this March. Since then ISP had gradually trended up again past $18, until it took a big fall back to the $11-$13 range in August. Other preferred shares originally issued with $25 denominations such as ING’s 7.05% perpetual debt securities (IND) and 8.5 % perpetual hybrid capital securities (IGK) followed the same trend at moderately higher price levels, falling respectively to $14-$15 and $16-$18. The issues yield dividends of 11.75% (ISP), 12.28% (IND), and 12.52% (IGK) at market closing for the week on September 4, 2009.

As far as I can tell, here’s what happened. On March 31, the European Commission (EC) issued a finding temporarily clearing the Dutch government to backup ING’s portfolio of Alt-A mortgages for 6 months.¹    Then, on July 22, the EC issued a paper entitled “The return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the state aid rules.”² In this paper, the Commission stated:

[Page 7] In order to limit distortions of competition and address moral hazard, aid should be limited to the minimum necessary and an appropriate own contribution to restructuring costs should be provided by the aid beneficiary. The company and its capital holders should contribute to the restructuring as much as possible with their own resources. This is necessary to ensure that rescued banks bear adequate responsibility for the consequences of their past behaviour and to create appropriate incentives for their future behavior.

[Page 8] The banks should be able to remunerate capital, also in the form of dividends and coupons on outstanding subordinated debt, out of profits generated by their activities. However, banks should not use State aid to remunerate own funds (equity and subordinated debt) when those activities do not generate sufficient profits. Therefore, in a restructuring context, the discretionary offset of losses (for example by releasing reserves or reducing equity) by beneficiary banks in order to guarantee the payment of dividends and coupons on outstanding subordinated debt, is in principle not compatible with the objective of burden sharing.[Footnote 33] This may need to be balanced with ensuring the refinancing capability of the bank and the exit initiatives.[Footnote 34] In the interests of promoting refinancing by the beneficiary bank, the Commission may favourably regard the payment of coupons on newly issued hybrid capital instruments with greater seniority over existing subordinated debt. In any case, banks’ [sic] should not normally be allowed to purchase their own shares during the restructuring phase.

[Page 8] Footnote 33 provided: [citation to unpublished decision omitted] However, this does not prevent the bank from making coupon payments when it is under a binding obligation to do so.

[Page 8] Footnote 34 provided: See Impaired Asset Communication, point 31, and the nuanced approach to dividend restrictions in the Recapitalisation Communication, points 33, 34, and 45, reflecting that although temporary dividend or coupon bans may retain capital within the bank and increase the capital cushion and hence improve the solvency of the bank, they may equally impede the bank’s access to private finance sources, or at least increase the cost of new future financing.

Nothing in the text of the Commission’s paper itself is alarming. The idea of modifying capital structure to pay dividends while sustaining huge operating losses and receiving government aid to keep a financial institution afloat is basically a sham, and it’s no surprise that governments don’t like it. But as recognized by footnote 34, this strategy may be necessary for an institution to retain access to capital markets since once dividend or coupon payments on hybrid or debt instruments are suspended, its credit ratings crash.

As demonstrated by the CIT (CIT) experience on the eastern side of the Atlantic—where the company paid its preferred dividends after receiving $2.3 billion in TARP aid from the U.S. Government despite turning only one profitable quarter in two years—this strategy can be a disaster for investors when the company appears to lack a viable strategy to recover. But there has been no such indication that ING’s condition is anything close to CIT’s “on life support” predicament. ING recently reported a small profit of $.04 a depository share for the second quarter of 2009 following three quarters of losses concentrated in the 4^th quarter crisis epicenter. Even after the release of the EC’s communication, the prices of ING’s common and preferred shares continued to rise through early August.

What turned the tide was a decision on August 20 by credit ratings agencies Moody’s and Fitch to cut the ratings of ING’s hybrid debt. The decision was connected in particular to KBC, a Belgian bank, halting its payments of preferred dividends in response to the pressure of EC regulators, raising the possibility that ING would be forced to do the same.³

A comparison of KBC to ING may not be entirely fair. Having received its third bailout in May⁴, KBC’s case—at least form a public relations perspective—may be more akin to chronic/multiple bailout brethren Citigroup (C) and AIG (AIG). Also, ING appears to have a head start at raising capital by selling assets, as reflected by recent reports that its sale of its Swiss and Asian private banking assets is on track.⁵

I’ve argued that investors can make money by identifying an instance where Wall Street’s misunderstands public policy (see my post How to Make Money in Stock by Arbitraging Wall Street’s Misunderstanding of Public Policy), and this may be an instance of such an opportunity with a European flair. The policy standard articulated by the European Commission is rational on its face, and did not by own terms turn the market against ING’s preferred shares. Moreover, with KBC’s triple bailout status and the American experience of CIT paying preferred shareholders after receiving government aid and then begging for more fresh on regulators minds, it’s not surprising that the Commission pushed KBC to stop the payments.

With a an arguably less motley bailout history (a EUR 10 billion cash injection in October 2008 and a backup facility for Alt-A mortgages announced in January 2009),⁶  and asset sales proceeding at a respectable pace, the Commission may be reluctant to upset ING’s applecart. So there’s a good argument that the credit agencies and market have overestimated the risk that ING will suspend the payments.

But it’s not inconceivable that the credit agencies will be right, and the Royal Bank Of Scotland’s decision not to call $1.6 billion of subordinated bonds because of regulators’ objections may reflect an acceleration of this trend.⁷ If they are and the dividends are suspended, the stock price will probably go down more, though it’s possible that most of the decline from halting the dividends is already priced in.

Trying to figure out what the regulators will do is guesswork. What seems far more predictable, however, is that ING will recover, so that the share prices will eventually trend back up towards their $25 par value. Either ING will pay preferred dividends without interruption, or it will halt them if the Commission presses the issue and pay up later—including the missed payments with interest for the cumulative preferreds.⁸ If these scenarios play out, patient investors who buy now will likely make money down the line, though possibly with a short-term decline if the dividends are deferred. Another strategy is to hold out to see if they defer the dividends, but if they don’t the share price may jump and the opportunity will be lost. A middle of the road option would be to decide the maximum to invest, put half in now, and put the other half in later if the stock price goes down due to dividends being suspended.

My own sentiment is that one of the two above scenarios will happen. ING is a conglomeration of traditional European and modern mass-marketed financial services that has returned to profitability and is not likely to go under. Its on-line banking platform, ING Direct, has become a mature on-line financial services operation that is effectively marketed with a contemporary orange ball alongside ING’s venerable orange lion.⁹ ING has recently deployed its captivating “find your number” campaign to draw consumers into its retirement oriented financial services.

There are arguments that ING’s earning prospects have been abridged by deleveraging. But even if true those theories are a far cry from establishing that ING will not be a stable and profitable concern. Remember, we’re talking about preferred stocks that pay a fixed dividend—and are required to do so if any dividend is paid on common shares—not common shares that will respond to the potential for higher dividends. The idea is to establish that the business is stable for the long term to get the share price back to par and keep the dividends coming.

Interested? Investing in preferred shares is a complicated business that can depend on the terms of the individual issue, so you’ll want to take a close look. Fortunately, the prospectuses for ING preferred issues are accessible on-line on ING’s web page at http://www.ing.com/group/showdoc.jsp?docid=075252_EN&menopt=ivr%7Cfis.

Disclosure: The author is long on ING ADR’s (ING), ING 6.2 % preferred perpetual securities (ISP), and CIT preferred Series A (CIT.PR.A) as of the original publication date of this post. The author does not hold a securities position in CIT common shares or in any issue of KBC Group (KBCSY).

1. “State aid: Commission temporarily authorizes illiquid asset facility for ING, March 31, 2009, at http://docs.google.com/gview?a=v&q=cache:USBKvXaGGvkJ:europa.eu/rapid/pressReleasesAction.do%3Freference%3DIP/09/514%26format%3DPDF%26aged%3D0%26language%3DEN%26guiLanguage%3Den+ing+european+commission+burden+shairing&hl=en&gl=us
2. Commission Communication: The return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules, July 22, 2009, at http://docs.google.com/gviewa=v&q=cache:pgxQ41T8Ie8J:ec.europa.eu/competition/state_aid/legislation/restructuring_paper_en.pdf+July+European+commission+bank+restrucrturing+burden+sharing&hl=en&gl=us .
3. “Fitch cuts European bank hybrid debt ratings,” Reuters UK, August 20, 2009, at http://uk.reuters.com/article/idUKN2042464020090820.
4. “Belgium Moves onto Crisis Mode on KBC Bailout,” The Wall Street Journal, May 15, 2009, http://online.wsj.com/article/SB124225248484816987.html
5. See “UPDATE: HSBC Bids for ING Private Banking Asserts-Source,” The Wall Street Journal, September 4, 2009, at http://online.wsj.com/article/BT-CO-20090904-704808.html.
6. “Transactions with Dutch State,” at http://www.ing.com/group/showdoc.jsp?docid=363620_EN&menopt=ivr|tdt&menopt=ivr|tdt
7. “RBS Told Not to Call Subordinated Bonds After Bailout,” Bloomberg.com, September 4, 2009, http://www.bloomberg.com/apps/news?pid=20601087&sid=afiEP8f7OhaA.”
8. Investors should review the prospectuses to fully understand the conditions concerning the payment of cumulative interest, including extraordinary situations where cumulative interest or payments would not be made.
9. See “The history of the ING Lion,” at http://www.ing.com/group/showdoc.jsp?docid=168408_EN&menopt=abo%7Chis%7Chil.

Do you believe that Asian economies like China and India will lead the economic recovery, and you’re looking for a way to make money from that? Take a look at Diana Shipping (DSX).

At current prices, Diana is about significant upside and limited downside. The shipping industry, which is characterized by incredible volatility, is facing two countervailing forces. On one hand, there is excess construction of new ships dating from the pre-crisis market high. During this period, the Baltic Dry Index (BDI), which measures the price of shipping dry bulk commodities (the service that Diana provides), hit a high of 11,793 points in May 2008. The BDI hit a low of 663 points in December 2008, a 94% drop,¹ and has now come to a low intermediate point of 2,468 as of August 21. Although new ship orders have nearly disappeared and there is some pressure to cancel existing projects, the shipbuilding industry has been sustained by existing orders through the financial crisis, including an effort by the Chinese to beef up the size of their own mercantile fleet.²  This suggests an oversupply of ships and lower shipping rates down the road.

The countermanding trend, however, is that aside from the lengthy process of completing these ships in the current environment, there are financial obstacles to getting them in the water to move goods, and incentives to not do so. The first is financing. Shipping was hammered by the crash in shipping prices during the crisis, and shipping banks are not well positioned to write loans.³ When the shippers do buy, the need for cash flow will press them to deploy the ships as soon as possible regardless of how low the price.

The second is that because of how the shipping sectors work, shipyards and ship owners have a mutual incentive to delay the completion of pending orders. Even though contracts may be in place, the yards are motivated to work with the owners to delay delivery because they don’t generally want to keep the ships. While shipyards do sometimes become ship owners, providing unwelcome competition to the traditional owners—and there is evidence that is presently happening in some quarters—that kind of conglomerate structure ultimately dilutes profit. Ship owners make money from effectively managing their risks as shipping fees go up and down, trying to make the best decisions on when to lock their ships into contracts and when to purchase new ships to meet future demand. Shipbuilding is more focused on steadier margins, getting the best contract price to produce a ship and then constructing it to specifications. Combining the two deprives the shipyard of its basic and arguably most predictable opportunity for profit, a good contract price for a ship, because the ship will be sailing on the yard’s own account.⁴ Diana is keenly aware of this backdrop.⁵

Sailing above all this, Diana built a fleet that is lean, new, and was largely booked when the bottom fell out of the market.⁶ Its debt/equity and debt/asset ratios, 0.23 and 0.17 respectively, are stunningly low compared to peers Genco Shipping (GNK) (1.49 and 0.59), DryShips (DRYS) (1.12 and 0.47), and Navios Maritime (NM) (1.41 and 0.49). Now with a bundle of cash from a well-timed equity offering in May that raised $218 million at $16.67 a share, Diana can afford to buy ships meeting its exacting specifications at fire sale prices, all while it continues to profitably function.⁷

Of course a big unknown is what will happen in Asia. Commentators tend to focus on certain big commodities and customers, like iron ore and coal ordered by China, as driving the train since that’s what they’re familiar with. My own sentiment is that this focus tends to overlook all the other possibilities for increased demand in this wildly developing region—whether it be aluminum for new car industries, cement for new construction, or grain for expanding economies shifting from agriculture to manufacturing—so that the potential for the market being surprised to the upside at some point is high.

Finally, as well run as the company is, I would not view Diana as the best stock to hold for the long term without watching it. The lows in shipping are low, and investors may want to trim holdings after a big rise before the next downturn. That being said, we are now far enough along to see who in the dry bulk sector is best positioned to make money when the East shifts back into high gear. The case for Diana is strong, and those who jump on board now in the $12-$13 range ($13.36 at close on August 21) will likely be able to make an attractive profit.

(Note:  The author is long on Diana Shipping as of the original publication date of this post.  The author does not hold a securities position in Genco Shipping, DryShips, or Navios Maritime.)

1. “Baltic Dry Index,” from Wikipedia, July 30, 2009 at http://en.wikipedia.org/w/index.php?title=Special:Cite&page=Baltic_Dry_Index&id=305084682
2. See public download of the China Research and Intelligence (CRI) Report, “Report of Chinese Shipbuilding Industry under the International Financial Crisis,” March 16, 2009, http://www.shcri.com/reportdetail.asp?id=252. See also OECD, “Fall in shipbuilding set to continue for some time, says OECD Council Working Party on Shipbuilding,” July 17, 2009, at http://www.oecd.org/document/16/0,3343,en_2649_34211_43319760_1_1_1_37461,00.html.
3. See Diana Shipping Q1 2009 Transcript (August 6, 2009), p. 5, May 6, 2009, http://seekingalpha.com/article/135800-diana-shipping-inc-q1-2009-earnings-call-transcript?page=5.
4. The Rise of “Shipbuilder Owner,” World Yards, June 8, 2009, at http://download.hellenicshippingnews.com/pdf/worldyards/47138-The%20Rise%20of%20Shipbuilder%20Owner.pdf.
5. See Diana Shipping Q2 2009 Transcript (August 6, 2009), p. 4, http://seekingalpha.com/article/154452-diana-shipping-inc-q2-2009-earnings-call-transcript?page=4.
6. See “Diana Shipping” at Wikinvest, June 30, 2009, at http://www.wikinvest.com/stock/Diana_Shipping_(DSX)?oldid=420589&timestamp=20090630050644.
7. See Diana Shipping Q2 2009 Transcript (August 6, 2009), at http://seekingalpha.com/article/154452-diana-shipping-inc-q2-2009-earnings-call-transcript.

Investors interested in timing the stock market’s recovery to make money are tempted to track the opinions of key commentators, whose words can affect markets. In that connection, Nouriel Roubini’s opinion can move the major market averages, possibly as much as the opinions of economist Henry Kaufman—the “Dr. Doom” of his era—who arguably ignited the 80’s bull market with his 1982 announcement that interest rates would fall.  (See my post on Dr. Doom (Nouriel Roubini) Himself May Hold Key to Market Recovery.)  Having predicted the financial meltdown, Roubini has special credibility with the markets right now, buttressed by his status as an economics professor at NYU’s Stern School of Business and head of his economic consulting firm RGE Monitor.

However, making investment choices based on reports of Roubini’s pronouncements is precarious, as demonstrated on July 16 when Roubini explained that comments he reportedly had made—precipitating a market rally—quoted him out of context.¹ This shows that if you’re going to make investment choices based on Roubini’s opinions, it’s better to do so based on developments that relate to his underlying perspectives rather than on second-hand reports of his outlook.

Hence, my point that monitoring the progress of the Obama administration’s financial regulation package with regard for Roubini’s opinions may help identifying good buying opportunities to capitalize on a sustained market recovery. Wall Street groans about regulation since it threatens profits. Paradoxically, however, passing new laws to regulate the financial sector is necessary for sustained market recovery since key figures like Roubini will likely continue to profess doom and gloom until the regulatory weaknesses that enabled the crisis are adequately addressed.

Roubini has identified what he sees as two key weaknesses in the administration’s package. First, the number of U.S. regulating authorities is still too high—he counts them as 6 federal and 50 state regulators—with only 1 eliminated (the Office of Thrift Supervision). Second, Roubini asserts that the proposal does not address more stringent liquidity, capital and leverage requirements for organizations too big to fail.²

Fully addressing the issue of the number of regulators is not likely to happen in the current financial oversight push. While some additional consolidation could occur, particularly at the federal level, the separate existence of state bank regulators is deeply entrenched in U.S. history since interstate banking was largely prohibited until 1994. Moreover, poorly conceived efforts for federal law to overtake state banking laws may have helped precipitate the crisis by making national banks and their state-chartered subsidiaries immune from state consumer protection and fair lending provisions.³ Case in point is Wachovia’s 2007 victory in the U.S. Supreme Court to free its mortgage unit from state regulation, opening the door to riskier lending and probably contributing to Wachovia’s eventual demise and takeover by Wells Fargo (WFC).⁴ For now, this would likely forestall any aggressive effort to dissolve U.S. state banking regulators. The Obama proposal does, however, advocate harmonizing regulations applicable to banks, which impliedly means harmonizing state and federal regulations.⁵

Concerning higher standards for too-big-to-fail institutions, the Obama plan contains extensive discussion on capital and liquidity requirements of large, interconnected firms; the need for special regulation of financial holding companies meeting certain benchmarks, including the degree of leverage and reliance on short-term funding; and the protection of systematically important payment, clearing, and settlement systems.⁶

So what’s going on here? Is Roubini complaining about one issue that isn’t ripe to be solved and another that already is? Not likely. Roubini knows that the Obama proposal is far from being actual legislation—what really counts is the language that becomes law.

Rather, at this point, Roubini has a strong incentive to hold out on supporting the administration’s proposal even if it is headed in the general direction he favors. From the standpoint of his economic agenda to argue for tighter financial regulation, he has little incentive to support anything other than specific proposals that address his concerns to a degree that he deems adequate within current policy constraints. In other words, he can produce pressure for government players to advance stronger regulatory proposals by criticizing general ideas that are floated as too weak. And he maximizes his visibility as an arbiter of the debate by maintaining a position independent from both the Obama administration and the financial institutions.

So for investors looking for a Roubini statement that things are on the mend, there’s still a ways to go. Even if new economic numbers are encouraging, getting the financial regulation passed is likely to take the rest of the year or longer,⁷ and it’s hard to imagine Roubini giving an overall positive assessment without the regulatory weaknesses that allowed the crisis to brew being addressed. However, in the interim, reports about the legislative process may provide good buying opportunities as the market dips in response to Wall Street’s fear of increased regulation. And the greater the fear instilled, the more likely that Roubini and commentators with similar concerns will eventually forecast a sustained recovery.

Disclosure: The author does not hold a position in Wells Fargo (WFC) as of the original date of this post.

1. “Roubini: Views on Economy Unchanged Despite Reports,” CNBC, July 16, 2009, http://www.cnbc.com/id/31947275.
2. CNBC Video, June 22, 2009, http://dailybail.com/home/yellow-weeds-roubini-sees-a-significant-market-correction-fo.html.
3. See Chicago Fed Letter, September 2006, No. 230a, pp. 1-2, http://www.chicagofed.org/publications/fedletter/cflseptember2006_230a.pdf.
4. See Watters v. Wachovia, 550 U.S. ___ (2007), http://www.supremecourtus.gov/opinions/06pdf/05-1342.pdf.
5. See U.S. Department of the Treasury, “Financial Regulatory Reform: A New Foundation,” updated July 24, 2009, p. 33, http://www.financialstability.gov/docs/regs/FinalReport_web.pdf.
6. See U.S. Department of the Treasury, “Financial Regulatory Reform: A New Foundation,” updated July 24, 2009, pp. 5, 19-27 & 54, http://www.financialstability.gov/docs/regs/FinalReport_web.pdf.
7. Paletta, Damian, “Flexibility Is Signaled on Financial Oversight,” Wall Street Journal, July 25, 2009, p. A4.