Weekly "Mark-Enomic" Commentary

3/8/10

It appears as if bad some bad Feb snow storms were not enough to impede the ongoing repair of the job market, according to data released last Friday. Prior to the release of the data the White House was very adept in setting up the expectation for a bad report hinting the losses could be much worse than the market was expecting. But low and behold, the Labor Department reported that the nation shed “only” 36,000 jobs and the unemployment rate held steady at 9.7 percent, figures that surpassed many forecasters' expectations. Total job losses were “just” 36K versus consensus expectations of 50K. As if right on cue, the market rallied on the data.

The conventional wisdom held that the 36,000 payroll jobs lost could be cheerfully blamed on that always handy villain, the weather. And no argument, we did have more than a sprinkling of snow. But as the Bureau of Labor Statistics forthrightly explained, "in order for severe weather conditions to reduce the estimate of payroll employment, employees have to be off work for an entire pay period" and not be paid. Workers who drew pay for even one hour during their pay period (typically, two weeks to a month) were counted as employed in February. Too, the BLS points out, some unknown number of workers could well have been added for clean-up and repairs after the storm.

What's more, as Bill King of the King Report spotted, there were 97,000 additions to the job total courtesy of the problematic birth/death model. Worth noting, too, is that the census added 15,000 hires. While the unemployment rate held at 9.7%, our preferred measure, which includes the underemployed, edged back up to 16.8%, from the previous month's 16.5%. - Barrons

Of course, the more important aspect of this jobs “recovery” is to keep it in perspective. We lost almost 8MM+ jobs during the course of this recession. Using the prior recovery as framework, it will take 86 months (2016) to get back to where we were before the recession began. If we assume the data being reported is accurate, Friday’s job report was no question a step in the right direction but what it clearly points out is this is going to be a long, long recovery.

The jobs data has additional implications as reported by The Pragmatic Capitalist

•“We’re now seeing a bottoming in unit labor costs. This has been the largest cost cutting operation in corporate America since 1948. It’s been truly remarkable, and corporations should be commended for staying lean and prudent. It’s coming to an end, though.

•Unfortunately, this means corporations are no longer cutting costs via employment cuts at the rate they have been. While the cost cutting has been a good sign, this turn in labor costs will hurt profit growth going forward barring a sizable return in revenue growth (revenues grew 1.1% ex-financials last quarter). As we’ve mentioned previously, this is shaping up to be a year that is characterized by H2 earnings disappointments. This jobs data (as it turns positive) supports this thinking. Interestingly, analysts are boosting their estimates at just the wrong time (as the rebound in corporate profits begins to slow its pace).”

The jobs data also has important implications for the Fed. It’s quite clear the Fed will be pressured to raise rates and end their liquidity programs sooner rather than later. While global rate increases have already started (Australia raised its rate .5% last week to 4%), it's likely the Fed Chairman will begin to feel the pressure to follow suit due to the “improving” employment situation and positive economic undertones. Unfortunately, rising corporate costs (labor and borrowing) put downward pressure on corporate earnings. As such, as soon as the Fed begins its tightening, I expect a much weaker investing environment (as soon as the second half 2010) as cost inflation creeps into the picture and slow economic growth (the definition of stagflation) is rarely good for stocks.

3/1/10

Last week, the Credit Card Responsibility and Disclosure Act (CARD Act) went into effect. The act resulted from the fallout of the recent debt crisis, in which unsecured consumer debt along with home mortgages left citizens swimming in a sea of red. The act imposed new rules on credit card issuers aimed at protecting consumers from potentially harmful practices. You may have received new disclosures outlining any changes of terms from your credit cards in the recent days because of this act. Then again, credit-card rules are hardly ever simple – and the CARD Act is no exception. Below are the key changes that the new law puts forth.

Finance charges, interest-rate hikes and notifications

• No rate increases for the first 12 months after opening an account.
• Rate increases can only be applied to new charges.
• Annual and application fees cannot exceed 25% of your initial credit line.
• No more double-cycle billing.
• A six-month minimum promotional-rate period.
• No more over-limit fees, unless the card holder opts in.
• No fees to make credit-card payments online or over the phone, unless you make a payment on your due date.
• Must give 45-day notice of pending rate or fee hikes or any other significant changes to credit-card terms.

Billing statements, payments and disclosures

• Billing statements must be sent 21 days before the due date.
• Your due date should be the same date each month.
• Payments are considered on time when received by 5 p.m. on the due date or the next business day after a holiday or weekend.
• Payments above the minimum must be applied to the highest-rate balance first.
• Each monthly statement must include information on how long it would take you to pay off your balance if you make minimum payments only and the total you’ll pay, including interest and principal; and how much you need to pay each month in order to pay off your balance in 36 months and the total you’ll pay, including interest and principal.
• Statements must also include a warning that by making only minimum payments you will pay more interest and it will take you longer to pay off your debt, as well as a toll-free number to call if you want to be referred to a credit-counseling service.

And of particular interest to parents of college-bound children:

College students and young adults

• No credit cards for college students unless co-signed by a parent or they can demonstrate “ability to pay.”
• No credit-limit increases if you are under 21 and have a co-signer without that co-signer’s permission.
• No credit-card marketing and freebies on college campuses.

While the new rules are very helpful especially for those who currently carry balances on their card and in protecting younger adults from getting in over their head, it did have the unintended consequence of hurting responsible credit users in the process. People who paid off their monthly balance and were never late still saw astronomical interest rate increases from their credit card companies in advance of the CARD Act. Additionally those that seldom use credit cards but keep one open for emergency purposes may now get assessed an inactivity fee or see the line of credit closed if enough time passes between transactions. It can be argued that this particular consumer was not in as much need of protecting. If that was the thought hopefully the new rules and fuller disclosures will result in creating more responsible users of credit going forward.

2/22/10

A few weeks ago I raised the flag about the SEC giving themselves the ability to close down access to your money market funds by withholding redemptions if they so elect. Now it appears as if something else with regards to the banks is raising its ugly head as the noose gets ever tighter around controlling YOUR money. We know the banks have always had the ability to close their doors based upon the Government calling for a bank “holiday” (which has happened a few times in our past) but that has always been at the Federal level. Now it appears that Citibank (remember they are still only in business because you, the taxpayer, provided them bailout money) may now be putting their own set of restrictions on access to the money in your checking account.

As reported on SeekingAlpha.com

Seen on a recent Citibank (C) statement:

"Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change."

Now I am not a Citi customer so I have no proof what was reported is, in fact, true. But if it is, it is extremely alarming and provides further reason to avoid them. It appears as if the SA reporter did actually call Citi and was provided the following tidbit:

The warning applies only to customers in Texas and that the notification had been mistakenly included on statements nationwide.

If it is true and whether it just in Texas or across the US,it doesn't exactly inspire confidence in Citi. Regardless, I continue to recommend clients consider moving all existing money that remains within the US banking system out of the “big” institutional banks (Wells, B of A, Citi, etc) and put it in a good, safe, local community bank or credit union. This way access to your money is not dictated by the institution holding it but rather by you.

2/8/10

Recognizing that retirement security is increasingly being placed in the hands of the individual the Obama administration has proposed as part of its 2011 budget a program which will automatically save for employees’ retirement unless they opt out of participation. Mentioned in his State of the Union address last month, the Auto IRA plan would automatically deduct up to 3% of an employee’s salary straight from their paycheck and invest it in Roth IRAs, unless the employee chose to opt out, or chose to invest in a traditional IRA. This plan would be for employees who don’t have other types of pensions or retirement savings plans, about 80 million workers in all. A boon of auto-enrollment is that it tends to increase the retirement savings rate of employees (one survey cites the jump from 20% to 80% with such a feature), which with the rise of unemployment and tough economic conditions understandably saw a decrease over the past year.

The challenge since the rise of the 401(k) as the preferred employer-sponsored retirement plan has always been to get people to start saving and to save enough. Consider one rule of thumb: to get a 70% income replacement ratio (to be able to spend 70% of pre-retirement income in your non-working years) you need to save 10% to 14% of your income each year. That is an eye-opening number for the vast majority of people. Moreover, given that the average 401(k) balance before the Great Recession was ~$65,000, we could very well have millions of Americans being poverty-stricken in retirement at that rate of savings.

With the demise of traditional pension systems and the inability of Social Security to provide adequate income in retirement (though it was never intended as a complete replacement for wages during retirement anyway) a government-enforced savings program would at least oblige workers to start saving for retirement as soon as they enter the workforce all the way until they leave it. If this proposal turns into reality, it may well be a case of “something is better than nothing.”

2/1/10

Top 3 weekly economic headlines you may, but shouldn’t have missed

Debt ceiling raised to $14.3T

A mere three hours before the Bernanke reappointment vote, America approved an increase in their debt levels to an unprecedented 100% Debt/GDP. The 60/40 vote was across party lines and hurried through before the swearing in of newly elected Massachusetts republican, Scott Brown.

US Government Finances -

The one month t-bill once again has a negative yield

Yes it is true. This means you are actually paying the Govt money for the honor of letting them borrow money from you instead of the other way around. The last time this happened the U.S. was in the middle of the Lehman Bro’s collapse. The bond market may know something we don’t and we should not ignore this potentially ominous sign.

And the biggie for the week…

The SEC approved, by a 4-1 vote, to allow the suspension of redemptions from Money Market funds.

Once again the mainstream media glossed right by the story and its importance. In case it’s not apparent this means that money market investors (and this means anyone who has a brokerage account) may NOT be able to withdraw their money when the desire.

"We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares." - SEC chief Mary Shapiro

The new rule is, of course, is being promoted as a way to “help” protect investors. If you call denying access to your money help, then I agree but otherwise, are you kidding me?

This is extremely worrisome because when the next rush to capital occurs, the Government controls every exit door. If you need unabated access to your money what are you going to do? You don’t have easy access to your retirement funds. The banks limit the amount of money you can withdraw (assuming their doors will even be open in the event of a crisis – think 1930, the 1980 S&L bank “holidays” and most recently last year where bank doors were in lockdown). And now, the last bastion of liquidity and access, your money market funds, are allowed to deny you access to your money by refusing to redeem shares all in name of helping to protect you.

As a planner I like to look at worst case scenarios and insure a contingency plan is in place. With this most recent move I would recommend everyone seriously consider having money located outside the US banking system and some hidden safely in your home seems like a very prudent move.

1/25/10

This week’s commentary comes to you courtesy of Mike Shedlock over at MISH'S Global Economic Trend Analysis website. Since most everyone who gets my weekly commentary is sitting smack dab in the middle of the madness you might find it as interesting as I did to get some perspective of why California is in the trouble it is in.

For the oustanding article in its entirety and the support for the presented facts please visit http://globaleconomicanalysis.blogspot.com/2010/01/why-is-california-broke.html

Why California is Broke

• California has the 3rd highest state income tax in the nation: 9.55% tax bracket at $47,055 and 10.55% at $1,000,000

• California has the highest state sales tax rate in the nation by far at 8.25%. Indiana is next highest at 7%.

• California corporate income tax rate is 17th worst in the nation with a rate of 8.84%. - However, of the non graduated states, only Pennsylvania at 9.99%, Rhode Island at 9.0%, and the District of Columbia at 9.98% are higher. One size fits all (and a very high one at that) is exceptionally hard on small businesses.

• California ranks 13th best in property taxes. However proposition 13 causes massive distortions for new buyers.

• California has the fourth highest capital gains tax 9.55%.

• California has the highest gasoline tax as of January 2010, averaging 65 cents/gallon. The national average is 47.4%

• California has one of the highest state vehicle license car taxes, 1.15% per year on value of vehicle, up from 0.65% in 2008.

So where's the money going?

• 1 in 5 in LA County receiving public aid, nearly 2.2 million people as of February 2009. 20% in Los Angeles County receive public aid

• California has 12% of the nation’s population, but 36% of the country’s TANF (“Temporary” Assistance for Needy Families) welfare recipients – more than the next 8 states combined. Unlike other states, this “temporary” assistance becomes much more permanent in CA. July, 2009 California has more recipients in key welfare category than next eight states combined.

• California prison guards highest paid in the nation. The maximum pay of California's prison guards is nearly 40 percent higher than that of the highest-paid guards in 10 other states and the federal government, according to a study by the California Department of Personnel Administration.

• California teachers easily the highest paid in the nation.

• California now has the lowest bond ratings of any state, two steps above junk. The new rating affects about $72 billion of general obligation and lease-supported bonds. July 15 California bond rating cut again

• California ranks 44th worst in “2008 lawsuit climate.” Institute For Legal Reform

• California, a destitute state, still gives away college education at fire sale prices. California community college tuition is by far the lowest in the nation. Nationwide, the average community college tuition is 4.5 times higher than California CC’s. This ridiculously low tuition devalues education to students – resulting in a 30+% drop rate for class completion. Moreover, 2/3 of California CC students pay no tuition at all – filling out a simple unverified “hardship” form that exempts them from any tuition payment, or receiving grants and tax credits for their full tuition.

• California offers thousands of absolutely free adult continuing education classes. In San Diego, over 1,400 classes for everything from baking pastries to ballroom dancing are offered totally at taxpayer expense.

• California residential electricity costs 13.81 cents per kilowatt-hour. The national average is 6.99-8.49.

• It costs 38% more to build solar panels in California than in Tennessee – which is why European corporations have invested $2.3 billion in two Tennessee manufacturing plants to build solar panels for our state.

The answer to the question Why Is California Broke? should now be quite apparent.

• California has a horrible business climate that drives business elsewhere.

• California has an array of some of the highest tax rates in the nation.

• California is beholden to the unions, especially the teachers union and prison system, and at the municipal level to the police and fire unions.

• California hands out money with free services encouraging an influx of illegal aliens and an exodus of those wealthy enough and mobile enough to move

And if anyone wonders why I continue to recommend NOT owning long-term CA issued debt, the above should make it pristinely clear. It is long overdue we put in place the leadership to correct this ongoing lunacy before it’s gets past the point of no return. As elections are upon us this year it is critical we keep this data in mind.

1/18/10

"Buy when everyone else is selling and hold until everyone else is buying. This is not merely a catchy slogan. It is the very essence of successful investing." - J. Paul Getty

As an advisor I learned early on there are a few sacrosanct adages one must follow if you are to guide clients through the ever-volatile investment waters. The second most important axiom is “the trend is your friend” so don’t fight it. There is no question that the trend since March 09 has been straight up with nothing but one small bump along the way disturbing the ride. So, does that mean that since the trend is up the markets will continue increasing ad infinitim? To answer this one needs to consider THE most important investment truism which overrides all others … “Prices always revert back to the mean, always”. As such, it is critical to keep an ever watchful eye on valuations in order to capitalize on investment opportunities given (prices lower than their long term average) and more importantly, avoid any hazards in the making (prices higher than their long term average). So where are we today? Taking a look at today’s market using the widely accepted smoothed P/E10 methodology created by Yale professor Robert Shiller, we see in the Doug Short (dshort.com) created chart below that equity valuations are substantially overvalued.

For a more precise view of how today's P/E10 relates to the past, the above chart includes horizontal bands to divide the monthly valuations into quintiles — five groups, each with 20% of the total. Ratios in the top 20% suggest a highly overvalued market, the bottom 20% a highly undervalued market and everything else falls in between. We can see that over the past several months, the decline from the all-time P/E10 high, 44.2, dramatically accelerated toward value territory, with the ratio dropping from the 1st to the upper 4th quintile in March at 13.4. The price rebound since March has now put the ratio at the top of the 2nd quintile, 20.5.

A very interesting and cautionary observation from the chart is that every time the P/E10 has fallen from the first to the fourth quintile, it has ultimately declined to the fifth quintile and bottomed in single digits. If this same historical precedence holds, based on the latest 10-year earnings average, to reach a P/E10 in the high single digits would require an S&P 500 price decline below 750, more than 450 points lower than where it sits today. Of course there is a chance of this never happening if corporate earnings make a stronger than forecasted and prolonged surge this year. If not, when might we see a P/E10 bottom? These secular declines have ranged in length from over 19 years to as few as three. The current decline is now nearing its tenth year so it could be that it has some time to work itself out before we can conclude we are out of harms way.

It’s important to note that the equity market's historical low-valuation extremes were hit during what would be described as extremely turbulent and economically tough times, including World War I, the Great Depression, World War II, and the stagflation of the late-1970s. I would suggest that our current climate fits that bill to a tee while you will hear others argue this is just another recession.

Armed with the above info one should be able to conclude that historical precedence shows that now is not a good time to have an (over) exposure to the equity markets considering prices are well beyond their long term average. Decisions to invest or not are made by weighing the upside potential against the downside risk. Doing that I see today’s market potential does not provide proper upside to offset the much greater downside risk from the potential for reversion to the mean in prices. Does that mean we should sell and get out of stocks all together? No, not necessarily because it’s important to understand that the markets could continue upward for many more months while the zero rate FED stimulus continues its euphoric effect on stocks. But when it runs out (it’s not a matter of if but when), I would not want to be a looking for a chair when the music stops. So I am not saying to avoid the markets but rather if you elect to stay fully invested make insure you have proper defense in place to protect against a trend reversal which could be months away or just around the corner.

I’d like to offer some additional and more insightful words from a couple of market pundits who deserve our attention, Rosie (David Rosenberg) and John Hussman …

“The vagaries of an overvalued market are that good news may no longer be good enough — and viewed as an opportunity to take profits. When this strategy occurs en masse — well, look out. And in extremely overvalued markets, it doesn’t take much. Food for thought — think of the risk involved before chasing the performance of the past year.

Of course, when there is fiscal stimulus of 10% relative to GDP in the U.S., and 3.5% of stimulus globally, together with bank bailouts and government support for housing and autos, then it’s a no-brainer that for a while it is going to feel as if the worst is over and that we are entering a new world of prosperity and tranquility, which is what a 17 reading on the VIX index symbolizes (the same level it was at when the market peaked in October 2007, come to think of it).

Nothing could be further from the truth. We have a situation where banks that are allegedly to-big-to fail have been protected, accounting rules changed in mid-stream, the government buying stock in auto companies and financial service firms, buying automobiles, declaring foreclosure moratoria and loan modifications, which ensure that the real estate market will not clear and thereby forestall price discovery.

The problem is that all this fiscal largesse, intervention and incursion cannot go on indefinitely because there are limits to what the taxpaying public will support in terms of policy. Trying to get people to buy a home when the homeownership rate is still well above the long run average; trying to spur auto consumption when 20% of the households in the U.S.A. are already a three-car family — these policies aimed at reviving a defunct cycle of over consumption is starting to be viewed as a colossal waste of taxpayer money.

No doubt efforts to support the swelling ranks of the unemployed are going to remain critical, not just as income support but to ensure that they can be retrained too. We are already at the point where a record of nearly 20% of personal income is coming from government transfers — the government will have to make some serious choices about how it is going to allocate its fiscal resources going forward because the appetite for more public debt is beginning to wane. The government cannot fight human nature forever. In fact, all the Obama team has managed to really buy is time.

But it does look like the fiscal tightening morphs into tightening sometime around mid-year because the mathematics with deficits is that if you go from $1 trillion to $1.4 trillion in a year, you just added some stimulus; just to prevent fiscal withdrawal from economy, the deficit for the next year has to stay at $1.4 trillion just as an example. The problem of course is that even if the deficit were to stay at $1.4 trillion that adds 10 percentage points to a federal debt/GDP ratio that exceeds 100% by 2011. Chart 3 shows where the Office of Budget Management (OMB) sees the government debt/GDP ratio heading in the next decade under the status quo — try 107%. Think of the future tax liability that would impose on workers and investors. And think of how quickly voters would be to support the next round of stimulus if the chart below were presented to them.

To be sure, the question gets asked as to what Mr. Market sees that we don’t see. As we said, in the past, market peaks tend to occur when we have had the classic blowoff phase, which takes the Shiller normalized P/E ratio to a level that is 50% overvalued.

Currently, the market is 27% overvalued on a Shiller basis. So, as expensive as it is, it could easily get even more expensive, which would mean a final test of around 1,300 on the S&P 500. This part of the cycle is best left for day traders or massive risk-takers and not for serious long-term investors. The S&P 500 did not hit its peak until October 2007 and for at least a year, was either in denial or completely oblivious to what was happening to the economy:

• Home prices were already down 7% from their highs

• The ABX indices were imploding

• Financials had already rolled over from their peak (as they have already back on October 14 — now there’s a canary in the coalmine!)

• The credit crunch was already in full force as highlighted by the events surrounding BNP Paribas and those two Bear Stearns hedge funds

• The money market had blown up right in the Fed’s face forcing an unexpected cut in the discount rate, followed by a cut in the funds rate

All the while the equity market was still in the process of making new highs and the bears were too busy having an apoplectic fit to hear the derision from the crowd of bulls as to how wrong they were. That is now history; and not too long from now, today will be too.

Now is definitely not the time to live in the moment, to start hyperventilating and to begin to chase this market to a bubble peak; now is the time to think about what the economy is going to look like in a post-stimulus world because the only thing we know is that the Fed and the government, at this juncture, intend to start pulling back on their support for the housing market at the very least at the end of March. At that time, we will see what the emperor — the U.S. economy in other words — looks like disrobed. - David Rosenberg

"As I've noted frequently, when market conditions are characterized by unfavorable valuations, overbought conditions, over-bullish sentiment, and upward yield pressures, the market's tendency is exactly that - to make continued marginal new highs for some period of time, followed by abrupt and often steep losses virtually out of nowhere." - John Hussman

1/11/10

As you are all aware the subprime loan debacle is what fueled the ’08-‘09 financial meltdown. And now with all eyes on the residential Real Estate market with Alt-A and Option Arm resets coming due and the growing infection of Prime mortgages,

the Commercial Real Estate (CRE) is quietly sneaking up as a larger potential hazard for our remaining banks. The CRE market is gigantic (it is broken up into two categories - commercial/industrial and construction), as the estimates for CRE loans approach $3.5 trillion:

CRE loans are unique from their residential brethren as the terms are typically 10 years or less and the loans are simply rolled over into new loans.

With credit markets squeezed and most property severely underwater, lenders are ill prepared for the impact because of their troubled exposure to escalating residential defaults. Take a look at the chart below to get an idea of just how many commercial mortgage loans will be turning over and when:

As you can see, just when the last wave of the residential real estate loans have reset and been addressed (2013-2014), the CRE market is set to jettison skyward. Interestingly, many regional banks jumped into the commercial real estate market since they had little chance of competing with big residential subprime and Alt-A mortgage factories like WaMu or Countrywide. The regional banks saw this as a way to stay competitive in local regions across the country. As such, this is a much more diverse problem and the tentacles of the coming commercial real estate trouble will be felt across most every state. These loans were made on strip malls, business office space, and drive-through restaurants for communities that are still hurting from the recession. Take a look at the loan composition of over 8,000 banks and thrifts across the country:

The picture is not pretty especially if you consider credit card defaults rising to their highest levels in decades, residential real estate struggling for a bottom and now the CRE market soon to add to the illness, the banking system will be stretched to its limits for years.

The question isn’t whether there will be major CRE defaults but who will shoulder the cost and how much will it be? So far, all bailouts have largely been dumped onto the U.S. taxpayer. The problem of course is the cost of all these bailouts will eventually catch up through both the ongoing devaluation of the dollar and the huge long-term economic headwinds created from having to service the debt. It appears from the polls it is acceptable to bailout the residential real estate market and even the 2 large U.S. automakers. Yet bailing out the commercial real estate market is going to be a much more difficult proposition. But I expect, like other “pork” it will be buried deep within a massive spending bill that will be sold to the American public as necessary key to the long term health and viability of the American economy. Keep your hand tightly wrapped on your wallets as a familiar Uncle will soon be knocking on your door for another handout. Please, don’t be fooled when he does.

1/04/10

Without question the magnitude of the 2009 stock market turnaround was a shock to most in the investment community. With financial Armageddon off the table, the market rallied to wipe out a good portion of the losses caused from the 2008 collapse. As much of a surprise as 2009 turned out to be there is no question 2010 will continue to shock, just this time will be in different areas. For fun, we have put together our “predictions” of some newsworthy market events that if most come to pass, should make 2010 one of the most interesting years in financial history.

1. The dollar will continue its long-term trek downwards from highs in early ’09 but not without first rallying. The world has become awash in U.S. dollars as foreigners currently hold over $10 trillion in dollar-denominated assets that can be dumped at any time. With the Federal Reserve continuing to expand its monetary base to record highs, as soon as banks begin lending their excess reserves a spike in consumer prices and a rush to get out of U.S. dollars is possible setting up for a real $ collapse beyond 2010.

2. Oil will continue its march from the 2008 $30 lows to over $100/bbl at its peak in 2010. Oil will remain range-bound, $60-$100/bbl, unless we experience a major “event”.

3. Corporate profits will continue to improve in the first half but begin to stall out as the year progresses. Unless congress extends unemployment indefinitely, the continued decline in US household spending will take its toll and thereby cap corporate profits. As such, US Stocks will end slightly higher than they closed out 2009. But, increased volatility will cause the SP500 index to trade in a range between 850-1250

4. The consumer will continue their frugal ways. Boosting savings and paying off debt will become the “new chic” lifestyle. Minimalism will replace shopaholicism. While this has very positive long term effects for our economic future it will play havoc on short term growth and stall any sustained recovery.

5. Inflation on a CPI basis will remain relatively muted as U3 unemployment will peak at 10.5% but hover the majority of the year in the 9-10% range after peaking. U6, a more significant measure of unemployment, will touch 20%. A resultant lid on wages will be an unintended consequence of the more than ample labor pool.

6. Long term interest rates will rise at least 20% from where they ended ’09, maxing out in the 6+% range driven by the sheer volume of US Treasury debt issuance.

7. The credit crunch and the onerous effects of the soon-to-be-passed health care bill will severely hamper the small business growth engine (accounts for > 99% of all US businesses and >50% of employed) thereby limiting the prospects for a robust job recovery.

8. Some soft commodity prices will surge driven by strong worldwide demand and weaker output as a result of an angry “mother nature” (climate and meteorological changes).

9. Global growth will moderate nearing 4% GDP mainly driven mainly by growth in emerging markets. The Chinese economic machine will continue their upwards trajectory but will experience a correction along the way. This is because they have tied their currency, the Yuan, to the Dollar thereby indirectly allowing Washington to dictate their monetary policy. The US will shift from growth in the first half and begin to stagnate the second half of the year as the Gov’t punchbowl stimulus wears off.

10. At least one sovereign default will occur most likely within one of the PIGS (Portugal, Ireland, Greece or Spain) nations first. The impact to the financial markets will be felt worldwide with the potential of driving risky asset prices down 30-40% as it stokes fears and a flight to safety.

11. Commercial real estate will begin its ascent to the forefront of the real estate recovery concerns. The fragile banking recovery will, once again be challenged as the first phase of the commercial mortgage resets begin at the same time the second phase of the residential loans resets ramp up. The government will be compelled to step in and “assist” the banks by either being the lender of last resort or temporarily change laws to allow them time to recover.

12. The Republicans will see a net gain in both the house and senate seats during the midterm elections opened up by Obama’s missteps and falling approval ratings. Another push by the emboldened ruling Democratic party to create another stimulus package will be heatedly fought over and passed.

13. With healthcare reform passing and a continuing deficit the government has to find a way to pay for, making increasing income taxes inevitable. The 2 top marginal brackets will increase to their 1990s levels of 36% and 39.6%. Also, Congress will let the long-terms capital gains tax rate reset back to 20% once that provision sunsets at the end of 2010.

14. Because healthcare took up so much of the agenda in 2009, estate tax reform fell to the wayside. However, it is unlikely that the government would cut off even one possible source of revenue. Expect to see Congress tackle this issue fairly early into the New Year, passing a bill extending current provisions of a top tax rate of 45% and exclusions at $3.5 million, and making it retroactive so that the estate tax does not disappear for 2010.

15. Gold, commodities, emerging markets, utilities and food will be the sectors with the best 2010 risk adjusted returns basis.

Here's to a prosperous 2010.

12/28/09

I hope everyone had a wonderful Christmas holiday.

In consideration that it will be the last commentary of the year, I thought I would change things up a bit and end with some humor.

THE ECONOMY IS SO BAD..........

• The economy is so bad that I got a pre-declined credit card in the mail.

• The economy is so bad I ordered a burger at McDonalds and the kid behind the counter asked, "Can you afford fries with that?"

• The economy is so bad that CEO's are now playing miniature golf.

• The economy is so bad if the bank returns your check marked "Insufficient Funds," you call them and ask if they meant you or them.

• The economy is so bad Hot Wheels and Matchbox stocks are trading higher than GM.

• The economy is so bad President Obama met with three small businesses to discuss the Stimulus Package: GE, Pfizer, and Citigroup.

• The economy is so bad parents in Beverly Hills fired their nannies and learned their children's names.

• The economy is so bad Dick Cheney took his stockbroker hunting.

• The economy is so bad Motel Six won't leave the light on anymore.

• The economy is so bad the Mafia is laying off judges.

• The economy is so bad Exxon-Mobil laid off 25 Congressmen.

• The economy is so bad that a picture is now only worth 200 words.

• The economy is so bad I saw the CEO of Wal-Mart shopping at Wal-Mart.

• The economy is so bad that I bought a toaster oven and my free gift with the purchase was a bank.

Happy New Year!!!

12/21/09

I thought I would kick start your Monday morning off with a couple of news stories that might not have made the front page or evening news report.

According to a USA Today’s analysis of salary data, federal workers are enjoying an extraordinary boom time, in pay and hiring, during a recession that has cost 7.3 million jobs in the private. The number of Federal workers earning six-figure salaries has exploded during the recession. Employees making salaries of $100,000 or more jumped to 19% of civil servants during the recession's first 18 months — and that's before overtime pay and bonuses are counted. Unfortunately, the fiscal insanity does not stop with numbers of employees and their salaries as you also much consider a much larger cost which isn’t dealt with … the overly generous pension benefits received.

Defense Department civilian employees earning $150,000 or more increased from 1,868 in December 2007 to 10,100 in June 2009, the most recent figure available.

When the recession started, the Transportation Department (DOT) had only one person earning a salary of $170,000 or more. Eighteen months later, 1,690 employees had salaries above $170,000. (the DOT, whose mission is “to serve the United States by ensuring a fast, safe, efficient, accessible and convenient transportation system that meets our vital national interests and enhances the quality of life of the American people, today and into the future” was established in by an act of Congress in 1966 and currently employs more than 56,000 people)

The growth in six-figure salaries has pushed the average federal worker's pay to $71,206, compared with $40,331 in the private sector.

And finally …

The Treasury Department, via the IRS, has made a deal with Citigroup for TARP repayment: They repay $20 billion in borrowed TARP money, and in exchange we give them keep $38 billion in tax abatements. HUH? Let me see if I understand this. They give us back the $20 Billion we let them borrow so they could avoid bankruptcy and in return we give them $38 Billion in tax credits? I am sorry but I can’t comprehend this. I guess it sort of makes sense if you consider the guy that made the deal was same one cheating on his taxes and allowing AIG bonuses to be paid with taxpayer bailout dollars.

This is nothing but the blatant, ongoing fleecing of the American taxpayer at the hands of the Wall Street Banks who have the politicians in their back pocket. I don’t think this was the type of “change” that America voted for just over a year ago. As a country we have lost all moral high ground when it has anything to do with finance. Our financial system has become one big fraud. Instead of just tough political jawboning and doing nothing, let’s actually make a change and put an end to this once and for all. Since it starts at the top, we can begin with an audit of the FED. Opening them up to full disclosure and transparency may be akin to unlocking Pandora’s box but is something this nation has needed for decades. Please consider your support of this effort if it ever makes it out of the halls of Congress.

12/14/09

As 2009 draws to a close, the tax season’s opening looms upon us. Before the year finishes there may be some ways to reduce your tax burden with a few year-end planning tips. It is not too late to take advantage of some tax-savings opportunities that may not be around next year.

Investments

Take losses! Even after the run-up following the lows of last March, many investors still have long-term capital losses on investments. Taxpayers may deduct up to $3,000 of these losses per year against ordinary income, with the excess carried forward for use in future years. The assets must be held in taxable accounts, as opposed to IRAs and other tax-sheltered retirement plans. Capital losses also may be matched dollar-for-dollar against long-term capital gains—so if you have $20,000 of long-term losses on some investments and $15,000 of gains on others, after the $3,000 deduction, you'd only have a net loss of $2,000 to carry forward.

Something to keep in mind: the current top capital-gains tax rate of 15% is the lowest in decades, and it is almost certain to rise at some point as the government scrambles to pay down the deficit.

Retirement Savings

Although you have until April 15, 2010 or your extension deadline next year to make IRA contributions for 2009, right now is a good time to determine if you can maximize 401(k) contributions to their regular and catch-up limits.

For tax year 2009, the regular contribution limit in a traditional 401(k) is $16,500 and $11,500 for a SIMPLE 401(k). For anyone who is age 50 or older in 2009, you can make an additional contribution of $5,500 for a traditional 401(k) and an additional $2,500 for a SIMPLE 401(k). Traditional IRA contributions are limited to $5,000 for those under age 50; for those over 50 during 2009, the contribution limit is $6,000. The deduction for traditional IRA contributions is an above-the-line deduction. Contributions to a 401(k) are excluded from your gross income altogether.

On a related note, required minimum distributions (RMD) from IRAs and other defined contribution plans were suspended in 2009, but will resume in 2010. Make sure you are prepared to start taking the appropriate distribution amounts as required, so you do not become subject to the heavy 50 percent excise tax.

Unemployment Benefits

Given the tumultuous economy, the number of people receiving unemployment benefits has grown rapidly over 2009. Alas, these benefits are subject to income tax. But this year there is an exemption of $2,400 per individual. Keep in mind that many unemployed taxpayers receiving benefits may need to estimate and pay quarterly taxes or risk penalties when they can least afford them. However, all recipients can choose to have 10% of benefits withheld by the payer.

First-Time Home-Buyer Tax Credit

Congress has extended and altered this benefit, making it more generous for many. The new rules took effect on Nov. 6. The provision is a dollar-for-dollar tax credit of up to $8,000 for 10% of the cost of a home. The credit is also refundable, meaning that even if a buyer doesn't owe $8,000 of tax, she can claim the full benefit and receive a refund check.

The new law has more generous phase-outs. The credit now begins to disappear for single taxpayers with modified adjusted gross incomes of $125,000 and married couples with incomes of $225,000. The extension made the credit available for purchases through July 1, 2010 if the buyer has a contract in place before May 1, 2010. Unlike the prior law, however, this credit is capped: those buying homes for more than $800,000 get no credit at all, as of Nov. 6.

The new law also authorizes a similar $6,500 credit for buyers who already own a home. It too is a refundable credit for 10% of the purchase price of a house costing no more than $800,000.To qualify the buyer has to have owned and lived in the same home for five of the eight years preceding the new home purchase, and the new home must become the buyer's principal residence.

For two or more unmarried people buying a house together the law may allow you to allocate the credit as you wish, say to the lowest earner. Taxpayers who buy this year may also claim the credit on either a 2008 or 2009 return, and those who buy in 2010 can claim the credit either in 2009 or 2010. Some people claim the credit in one year rather than another to avoid phase-outs.

Charitable Gifts

Unless Congress acts, this will also be the last year for taxpayers over 70 1/2 to make a charitable contribution directly from an IRA. This provision is useful: without it, the donation would have to be withdrawn from the IRA, claimed as income and then deducted as a donation. That, in turn, can trigger deduction limits in the future.

Consider Gifting Strategies

Although not an income tax tip, annual gifting is one way to reduce the value of your taxable estate for estate tax purposes. For 2009, the annual gift tax exclusion allows each donor to give up to $13,000 to an unlimited number of individuals without being subject to federal gift tax. Because the exclusion applies per donor, spouses can give combined gifts up to $26,000.

12/07/09

I try and stay as far away from politics as I can and focus on all things financial but there are times when it is unavoidable as the two will occasionally intersect. I want to say I support the Obama administration in their attempt at address the health care issue. Now before you send me hate mail, I am not in favor of what is currently on the table being discussed as a solution but there is no question something needs to be done. As an insurance agent and working directly with small businesses for years, I have seen insurance premiums rise on average 12%/year for years. You may or may not be aware of the explosion of costs because if you are employed it may be your employer was picking up most of the tab or you are retired you most likely make use of the Medicare system. It’s important to remember that the ballooning of costs occurred during the period inflation was under 3%. The growth in costs is unsustainable and if nothing is done it will eventually overwhelm our economy. As you can see health care and other entitlements make up almost 33% of US government expenditures.

Looking at it another way, almost 16% of the US total annual gross domestic product is spent on health care and is, as you can see when compared to other economical leaders around the world, out of line.

Is our health care system that good that it is worth 60-100% more in cost than other nations? The statistics don’t bear that out as can be seen by recent 2009 estimated life expectancy table

I didn’t want to turn this week’s commentary so much as a rant on health care rather highlight the importance of getting health costs under control as a major piece of our nation’s long term economic endurance . To give you some personal insight as to the magnitude of the problem, below is a breakdown of my October '09 spinal fusion surgery. This exact same surgery in Singapore would have been about $30k including travel costs. And for those skeptics, Singapore (would come in 3rd in the above chart) has one of the most successful healthcare systems in the world, in terms of both efficiency in financing and the results achieved in community health outcomes while only spending 3% of their annual GDP to pay for it.

My surgery lasted 3.5 hours, I was in ICU recovery for 1 hour after the surgery, and stayed in the hospital for 3 days.

Total cost ~$162,000 broken out as follows

• $26,000 for the surgery (Dr’s fees)

• $21,700 for operating room (3.5 hours)

• $2000 for lab work

• $3600 for radiology

• $12,000 for sterile supplies (those were some expensive bandages)

• $60,000 for sterile implants – consisting of 4 titanium screws, two brackets and cadaver bone

• $1,800 for drugs

• $6500 for anesthesia

• $2000 for physical therapy (that was one expensive walk around the 3rd floor after surgery)

• $5,500 for recovery room (1 hour)