Weekly "Mark-Enomic" Commentary

7/26/10

We’ve talked often about the precariousness of the Social Security system here, but few may understand exactly how this system is funded or why it would be in jeopardy. Basically there are two sources used to fund Social Security benefits – the payroll taxes workers pay into the system and the Social Security Trust Fund, which houses any surpluses the system may have generated. Until recently the system had been operating under a surplus with no need to dip into the Trust Fund, pulling more in from taxes than they were paying out in benefits. This allowed the Trust Fund’s balance to grow for 20+ years to $2.5 trillion. 2010 is the first year that Social Security will begin operating under a deficit, meaning taxes collected will not be enough to cover the expected benefits paid out. As a result the shortfall will be covered by pulling from Trust Fund. Now all things holding the same, the Congressional Budget office projects that annual shortfalls between outgoing benefit payments and incoming Social Security tax revenues will eventually whittle away the Trust Fund to nothing by the year 2043.

33 years seems like plenty of time to try to fix the system, but guess what the Social Security Trust Fund is invested in? US Treasury bonds! Mushrooming deficits in the system would cause a situation akin to if a major country who had always been a faithful purchaser of US Treasury debt, all of a sudden this year decided to not only stop accumulating new debt, but to actually start cashing it in. So while Social Security continues to pay out promised benefits in a system operating at a deficit, it will be at the expense of accelerating the federal government’s general debt crisis. This is what people mean when they say Social Security is broke - they are trying to get Americans to see that this is yet another automatic drain on the Treasury that is now starting to kick in.

The Social Security System as currently configured is insolvent. The present value of their expected revenue stream is less than the present value of their expected expenses. That’s what it means to be bankrupt. Yes, they can “fix” this situation by forcing people to cough up more money, or by paying people less than they had previously promised them (same thing happened in the last Social Security funding crisis back in the 1980s). And that’s the whole point of the warnings, to get the public ready for the probable tax hikes and benefit cuts.

7/19/10

Getting a gauge on the economy is especially difficult when there are as many indicators pointing in different directions as there are right now. Many view state tax revenues as one of the purest gauge of economic health or at least health of the largest component of the economy, the consumer. Not needing a lot of explanation, the tax revenue chart below helps underscore my concern around the potential for a state budget crisis this summer. The resultant flight to safety would not only push bond yields even lower than where they are now but also take stocks out to the woodshed for a good beating.

Source: Rockefeller Institute

Where hath the middle class gone?

Courtesy of the Business Insider, some interesting statistics on the disappearance of the US middle class

• 83 percent of all U.S. stocks are in the hands of 1 percent of the people.
• 61 percent of Americans "always or usually" live paycheck to paycheck, which was up from 49 percent in 2008 and 43 percent in 2007
• 66% of the income growth between 2001 and 2007 went to the top 1% of all Americans.
• 36 percent of Americans say that they don't contribute anything to retirement savings.
• A staggering 43 percent of Americans have less than $10,000 saved up for retirement.
• 24% of American workers say that they have postponed their planned retirement age in the past year.
• Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32 percent increase over 2008.
• Only the top 5 percent of U.S. households have earned enough additional income to match the rise in housing costs since 1975
• For the first time in U.S. history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together.
• In 1950, the ratio of the average executive's paycheck to the average worker's paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one.
• As of 2007, the bottom 80 percent of American households held about 7% of the liquid financial assets.
• The bottom 50 percent of income earners in the United States now collectively own less than 1 percent of the nation’s wealth.
• Average Wall Street bonuses for 2009 were up 17 percent when compared with 2008.
• In the United States, the average federal worker now earns 60% as much as the average worker in the private sector.
• The top 1% of U.S. households own nearly twice as much of America's corporate wealth as they did just 15 years ago.
• In America today, the average time needed to find a job has risen to a record 35.2 weeks.
• More than 40% of Americans who actually are employed are now working in service jobs, which are often very low paying.
• For the first time in U.S. history, more than 40 million Americans are on food stamps, and the U.S. Department of Agriculture projects that number will go up to 43 million Americans in 2011.
• This is what American workers now must compete against: in China a garment worker makes approximately 86 cents an hour and in Cambodia a garment worker makes approximately 22 cents an hour.
• Despite the financial crisis, the number of millionaires in the United States rose a whopping 16 percent to 7.8 million in 2009.
• Approximately 21 percent of all children in the United States are living below the poverty line in 2010 - the highest rate in 20 years.
• The top 10% of Americans now earn around 50% of our national income.


7/12/10

The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) registered negative growth for the fifth consecutive week, coming in at -8.3. The rate of decline from the peak in October 2009 is unprecedented since the metric was first devised in 1967.

The ECRI data goes back to as early as 1968 and is released weekly. From its start, the U.S. economy experienced seven recessions. If we look at the ECRI Growth Rate Index in the weeks prior to the beginning of each of the seven recessions, the Index hits negative territory signaling its forecasting effectiveness. Out of the seven recessions, six experienced consistent and mostly consecutive negative growth rates in the weeks leading up to the official start of the recession.

courtesy of The Pragmatic Capitalist

To understand what economic and investment direction this indicator provides, David Rosenberg broke it down into 4 different phases:

Phase 1. From the trough to zero (coming out of recession).

Phase 2. From zero to the peak (“sweet spot” of the cycle — from the end of the recession to the cycle peak in growth).

Phase 3. From the peak back to zero (past the peak in growth; economy slows but not back in recession).

Phase 4. Zero back to the negative trough (heading back into recession).

ECRI Weekly Leading Indicator: Growth Rate

courtesy of Gluskin Sheff

Rosenberg also goes on to explain

“From late 2008 to the fall of 2009, we were in Phase 2. Since last October, we have been in Phase 3.

In Phase 3, historically, the S&P 500 has provided tiny positive returns (average price appreciation of +1.3%). Tech, industrials and energy are the top performing cyclicals, along with health care and staples in the more defensive area. This cyclical-defensive barbell works well — basic materials, consumer discretionary, financials and utilities tend to lag the most. In the credit market, this is a period to be focusing on reducing duration and scaling into quality:

In Phase 4, the S&P 500 on average declines 6.3% with eight of the 10 sectors declining — a barbell of being long energy on the cyclical side and consumer staples on the defensive side has historically worked well. Consumer cyclicals, technology, industrials and financials are crushed in this segment of the ECRI cycle; telecom, utilities and health care do not perform as well as staples but are areas where at least you don’t typically get beaten up (for relative-return folks). The CRB is down an average of 3% but gold and oil tend to be supported by a weaker U.S. dollar. The yield on the 10-year note rallies an average of almost 40bps; as with equities, corporate bonds are hurt in this quadrant — Baa spreads widen about 60bps and high-yield by close to 100bps. We have to be mindful that this can very well be the next phase of the cycle even without the Fed raising rates.

In Phase 1 the equity market rallies on average by 12% with all 10 sectors in the green column, led by tech, consumer discretionary and basic materials. Energy, telecom and utilities tend to lag behind. Financials are basically market performers. The government bond market is still rallying in this segment and the curve is steepening — that along with a slight softening in the U.S. dollar provides a positive liquidity backdrop, which in turn is conducive to spread narrowing in the credit market (average tightening of around 40bps in investment-grade and 200bps in junk).”

The ECRI index, along with a number of other indicators, is pointing towards a slowdown and an increased possibility of a double dip recession. Unfortunately, prior successful Monetary Policy recession avoidance responses are no longer available as interest rates cannot go lower as they are already at zero. While the Govt does have other tools to stimulate, because of the current political climate and upcoming fall midterms, the will needed to enact them in order for them to provide pre-emptive support seems absent (at least until the fall election results have been determined).

7/04/10

On a birthday it’s important to pay respect and honor to those I you appreciate and revere … Happy Birthday America

IN CONGRESS, July 4, 1776.

The unanimous Declaration of the thirteen united States of America

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed.

But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.--Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let Facts be submitted to a candid world.

He has refused his Assent to Laws, the most wholesome and necessary for the public good.

He has forbidden his Governors to pass Laws of immediate and pressing importance, unless suspended in their operation till his Assent should be obtained; and when so suspended, he has utterly neglected to attend to them.

He has refused to pass other Laws for the accommodation of large districts of people, unless those people would relinquish the right of Representation in the Legislature, a right inestimable to them and formidable to tyrants only.

He has called together legislative bodies at places unusual, uncomfortable, and distant from the depository of their public Records, for the sole purpose of fatiguing them into compliance with his measures.

He has dissolved Representative Houses repeatedly, for opposing with manly firmness his invasions on the rights of the people.

He has refused for a long time, after such dissolutions, to cause others to be elected; whereby the Legislative powers, incapable of Annihilation, have returned to the People at large for their exercise; the State remaining in the mean time exposed to all the dangers of invasion from without, and convulsions within.

He has endeavored to prevent the population of these States; for that purpose obstructing the Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither, and raising the conditions of new Appropriations of Lands.

He has obstructed the Administration of Justice, by refusing his Assent to Laws for establishing Judiciary powers.

He has made Judges dependent on his Will alone, for the tenure of their offices, and the amount and payment of their salaries.

He has erected a multitude of New Offices, and sent hither swarms of Officers to harrass our people, and eat out their substance.

He has kept among us, in times of peace, Standing Armies without the Consent of our legislatures.

He has affected to render the Military independent of and superior to the Civil power.

He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:

For Quartering large bodies of armed troops among us:

For protecting them, by a mock Trial, from punishment for any Murders which they should commit on the Inhabitants of these States:

For cutting off our Trade with all parts of the world:

For imposing Taxes on us without our Consent:

For depriving us in many cases, of the benefits of Trial by Jury:

For transporting us beyond Seas to be tried for pretended offences

For abolishing the free System of English Laws in a neighboring Province, establishing therein an Arbitrary government, and enlarging its Boundaries so as to render it at once an example and fit instrument for introducing the same absolute rule into these Colonies:

For taking away our Charters, abolishing our most valuable Laws, and altering fundamentally the Forms of our Governments:

For suspending our own Legislatures, and declaring themselves invested with power to legislate for us in all cases whatsoever.

He has abdicated Government here, by declaring us out of his Protection and waging War against us.

He has plundered our seas, ravaged our Coasts, burnt our towns, and destroyed the lives of our people.

He is at this time transporting large Armies of foreign Mercenaries to compleat the works of death, desolation and tyranny, already begun with circumstances of Cruelty & perfidy scarcely paralleled in the most barbarous ages, and totally unworthy the Head of a civilized nation.

He has constrained our fellow Citizens taken Captive on the high Seas to bear Arms against their Country, to become the executioners of their friends and Brethren, or to fall themselves by their Hands.

He has excited domestic insurrections amongst us, and has endeavored to bring on the inhabitants of our frontiers, the merciless Indian Savages, whose known rule of warfare, is an undistinguished destruction of all ages, sexes and conditions.

In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.

Nor have We been wanting in attentions to our British brethren. We have warned them from time to time of attempts by their legislature to extend an unwarrantable jurisdiction over us. We have reminded them of the circumstances of our emigration and settlement here. We have appealed to their native justice and magnanimity, and we have conjured them by the ties of our common kindred to disavow these usurpations, which, would inevitably interrupt our connections and correspondence. They too have been deaf to the voice of justice and of consanguinity. We must, therefore, acquiesce in the necessity, which denounces our Separation, and hold them, as we hold the rest of mankind, Enemies in War, in Peace Friends.

We, therefore, the Representatives of the united States of America, in General Congress, Assembled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the Name, and by Authority of the good People of these Colonies, solemnly publish and declare, That these United Colonies are, and of Right ought to be Free and Independent States; that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved; and that as Free and Independent States, they have full Power to levy War, conclude Peace, contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do. And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor

Happy 4th of July everyone!!!

6/28/10

Something’s rotten in the state of public pensions?

Public pension programs around the world made headlines in recent weeks. First from across the Atlantic in France, where the once sacrosanct retirement age of 60 was raised by two years due to mounting debts in the system and high unemployment. The move is hardly the ultimate solution for a population that’s rapidly aging and thus facing more payouts for retirees than they would see in contributions from those still in the workforce, and unsurprisingly was strongly opposed by the country’s unions. Nevertheless, it is seen as an important break in the psychological barrier – with changing the retirement age from 60 no longer a taboo, it opens the door for the age to rise further in the coming years.

France’s predicament can easily be likened to the US’s own Social Security program – The US has a rapidly aging population who will all soon be expecting the benefits promised to them; the program has been projected to be grossly under-funded and thus in need of reform, and the sense of urgency to do so only increases as years pass; high unemployment has decreased the pool of workers currently paying into Social Security even more, thus exacerbating the under-funding problem. We’ve already seen an increase in the full retirement age (however NOT to the earliest age at which someone can begin receiving benefits, which is still at age 62), but again this has not been an all-in-one solution. More than likely it will take a combination of things (notably proposed: higher payroll taxes, reduced benefits, higher retirement ages, a needs-based system) to fix the ills of the program completely. But since there has yet to be a solution to the problem anyone can agree on, it’s hard to know what the future for Social Security may hold.

Public pension woes are not only a headache at the Federal level – some state public plans are in far worse shape. As such officials are also taking drastic measures to both ease their expense burden to bring budgets in line and stretch out the funds in plans:

• Illinois raised its retirement age to 67 and put a cap on the amount the plan would pay in benefits on an annual basis
• Arizona, New York, Missouri and Mississippi will make people work more years to earn pensions
• California is in the process of bargaining with its 12 unions to reduce the state’s own contributions and require current workers to pay sharply more for the same pensions – 4 have so far agreed
• Colorado reduced their annual pension increase from 3.5% to 2% - so far this is the only state to affect current retiree benefits, but if the reduction holds up against a court challenge, other states may follow their example

A factor that has added to public pension funds’ burden has been the recent downturn in the global markets. Losses sustained in the past couple of years have rendered funding projections as unrealistic. Unfortunately some fund administrators are hoping for a huge recovery in the markets or taking greater risks to keep their projections on track rather than making the tough decisions today.

The underlying dilemma for those of us who are not in line to receive a state pension is this: if the fund ran out of money, the state would be legally bound to make good on retirees' benefits, meaning that taxpayer dollars may very well have to be used to make up the difference. But paying public pensions straight out of general revenue would severely impact a state’s ability to fund other vital services, bringing them to a standstill. Most experts believe that if any state were caught in such a trap, it would have to seek a bailout from the US government, meaning we’d also feel repercussions on the Federal level.

Stay tuned because we will likely continue to see how this drama unfolds in the coming months.

6/21/10

Weekly Radom Musings

The permanent census

The White House, recently hit with criticism due to the recent May employment report, which showed virtually no job growth beyond the 411,000 temporary census workers, is attempting to find ways to put as many of the 411,000 in permanent government jobs.

According to White House sources, the Labor Department is spearheading efforts to identify government jobs created or enabled by federal stimulus programs, as well as unfilled bureaucrat jobs, where the temporary workers could be placed.

"There are policies in place that would allow us to put those people into federal or possibly stimulus-related jobs fairly quickly," says one White House source. "They are already in the pipeline given the employment forms they filled out for the census work."

Federal hiring rules modified over the past year will further enable placement of those temporary workers, according to the White House source. Some example of rule relaxation include the number of forms job seekers must fill out, ending the practice of a skills and knowledge essay, allowing the hiring process to take place with only the use of a résumé and writing samples, and, perhaps most important, elimination of rules based on the "most qualified" requirement, so that less experienced prospective employees might be hired over better qualified or more experienced competitors.

The best byproduct of census rehiring? It is counted as a new job (and in turn improves the unemployment report) created if the temps move back to the unemployment rolls and then to a fulltime job in the federal government. Finally, a path to better unemployment brought to you by the same group who were able to bring massive profits to insolvent banks.

State pension fun and games

M. C. Escher is apparently now running the New York State pension fund.

In an effort to get a handle on the state’s budget crisis, NY Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund.

And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund. Apparently these are the same people who pay their Mastercard bill with their VISA card. Let’s keep a close eye on our Golden state and see how our legislators will act – either face the problem head on or kick the can down the road once again till next year.

TARP update

As reported by Mish Shedlock at globaleconomicanalysis.blogspot.com/

Six hundred small banks still hold $130 billion in unpaid TARP payments with taxpayers on the hook. Records show over 90 banks missed their May TARP payment.

Statistics, compiled by SNL Financial from U.S. Treasury data, showed 91 banks and thrifts skipped the May dividend payment under the Troubled Asset Relief Program, or TARP. It was the first missed payment for 23 of the banks; for the others, it was at least their second miss.

The number of banks missing their TARP payments rose for the third straight quarter. In February, 74 banks deferred their payments; 55 deferred last November. SNL Financial’s analysis found 20 banks have missed four or more payments since the program began in 2008, while eight banks have missed five payments.

While many of the largest U.S. banks easily repaid billions in TARP aid, more than 600 smaller banks still hold $130 billion from the program, created at the height of the financial crisis. Most of the banks failing to make TARP payments are bankruptcy candidates.

6/14/10

As a follow on to last week’s commentary on HFT (high frequency trading)

Regulators probing the mysterious May 6 "flash crash" (the largest hourly drop in market history) found it was caused by the widespread use of high-speed algorithmic trading. FINRA CEO Rick Ketchum told Reuters its cause “is much more likely to be a proliferation of algorithmic trading that was all subject to the same triggers and didn't have the same controls."

Doesn’t this deserve some attention in the upcoming financial reform legislation?

Economic Forecast Update

The ECRI (Economic Cycle Research Institute), the leading, independent economic forecasting group warned of a possible cyclical reversal of economic expansion signaling the potential for a double dip recession. ECRI’s past signals have been a good indicator of future economic direction. They gave a strong signal at the start of last year’s equity-market rally. It bottomed at 30-year lows and soared to 30-year highs in a matter of months. It has now returned, just as quickly, to a roughly flat position. While a significant drop below zero has been a reasonably good indicator the U.S. economy is sliding into recession, the ECRI is not perfect as it has delivered a number of false alarms. So even if it continues its slide, it wouldn’t necessarily be a guarantee we experience a double dip. Though what is bothersome is the magnitude and speed of the decline.

When used with other evidence, the ECRI is an excellent harbinger of market direction. Many of the other leading indicators I follow have also started to roll over which is the reason for my recent risk reduction move in your portfolios.

6/07/10

HFT

You have heard me mention high frequency trading programs (HFTPs) and my loathing for the ongoing use of them.

In case you are unfamiliar with HFTPs, it’s important to know that most indexes or exchanges offer a 1/4 of a penny rebate for broker dealers (BD’s) who put in orders. So, simply putting in an order, even if there’s no profit to be made, can make a 1/4 of a penny in profit for the BD placing the trade.

The way these HF trading programs work is as follows. Let’s say an institutional investor has put in an order to buy 15,000 shares of XYZ between $10.00 and $10.07. The institution’s buy program is designed to place this large block order without pushing up the stock price (as a buyer they want to purchase at the lowest price possible), so it buys the shares in small chunks (usually in blocks of 100 shares or so).

First it buys 100 shares at $10.00. That order clears, so the program buys another 200 shares at $10.01. That clears, so the program buys another 500 shares at $10.03. At this point HFT software will recognize an institutional investor is putting in a large order in small increments.

The trading program then begins front-running the institutional investor. So it puts in an order for 100 shares at $10.04. Whoever was considering selling shares to the institutional investor at $10.03 would obviously rather sell at a higher price (even if it’s just a penny). So this investor sells his or her shares to the trading program at $10.04. The trading program turns around and sells its shares to the institutional investor for $10.04 (which was the institution’s next price anyway).

In this way, the trading program makes 1/2 a penny (one 1/4 for buying and one 1/4 for selling) AND makes the institutional trader pay a penny more on the shares. It doesn’t seem like much, but do this over and over on millions and millions of times a day (over time it is billions) of shares means you can generate some serious profits.

As Goldman (GS) and JP Morgan’s (JPM) latest trading records show (both had flawless quarters without a single losing day), this activity can be absurdly profitable. However, for those on the other end of these trades (everyone else), this is essentially stealing from them. The only reason that it is tolerated is because HFTPs are supposedly supplying “liquidity” to the markets. While this may be true (and is highly debatable) the harm it causes clearly outweighs any benefit (that is unless stealing from investors to bolster banks profits is considered a benefit)

Additionally as pointed out by Carl Deninger, HFT’s also create another hazard

Let's say that there is a buyer willing to buy 100,000 shares of ABC with a limit price of $26.40. That says, the buyer will accept any price up to $26.40.

But the market for ABC at this particular moment in time is at $26.10, or thirty cents lower.

Computers will detect that there is a demand for ABC shares and start to issue tiny (typically 100 share lots) "immediate or cancel" orders - IOCs - to sell at $26.20. If that order is "eaten" the computer then issues an order at $26.25, then $26.30, then $26.35, then $26.40. When it tries $26.45 it gets no bite and the order is immediately canceled.

Now the flush of supply comes at, big coincidence, $26.39, and the claim is made that the market has become "more efficient."

Nonsense; there was no "real seller" at any of these prices! This pattern of offering was intended to do one and only one thing - manipulate the market by discovering what is supposed to be a hidden piece of information - the other side's limit price!

With normal order queues and flows the person with the limit order would see the offer at $26.20 and might drop his limit. But the computers are so fast that unless you own one of the same speed you have no chance to do this - your order is immediately "stolen" at the full limit price! You just got taken, as the fill price is in fact 30 cents a share away from where the market price actually is.

A couple of years ago if you entered a limit order for $26.40 with the market at $26.10 odds are excellent that most of your order would have filled down near where the market was when you entered the order - $26.10. Today, odds are excellent that most of your order will fill at $26.39, and the HFT firms will claim this is an "efficient market." The truth is that you got bilked for 29 cents per share which was quite literally stolen by the HFT firms that probed your book before you could detect the activity, determined your maximum price, and then sold to you as close to your maximum price as was possible.

And you wonder why I continue to harp on about market manipulation. How do investors who don’t have a Cray mainframe and HFT algorithm in their arsenal avoid getting ripped off? More importantly why do the SEC and our Govt regulators allow this to continue? When you look at the magnitude of the problem this is a bigger scam than what Bernie Madoff pulled off. Once again and to make it even worse, it’s done right under the nose of the regulators who are supposed to be watching out for us.

5/31/10

Market update –

Last week Goldman Sachs raised its 2010 and 2011 earnings estimate for the SP500 to $78/share and $93/share respectively. In a backdrop of bullish sentiment, May opened the month with a 40% increase in the volatility index and closed it with the biggest monthly stock price drop since February 2009 and the worst percentage decline for May since 1940. With corporate earnings rising one wonders why the market has fallen and technicals have turned decidedly negative indicating a topping in share prices. John Hussman of the Hussman Funds says all sorts of warning lights are flashing

Technical indicators have only been this bad 19 times before in the last half century -- and on average the market plunged about 20% over the following 12 months. When markets were also high, like now, the picture's even worse.

From David Rosenberg of Gluskin Sheff:

We went back to the history books and found that at fundamental lows in the S&P 500, whether they be in real bear markets or in severe corrections in a bull market, the index bottoms when it gets 13% below the 50-day moving average and 24% below the 200-day moving average. As of Friday’s close, we are talking about a market that is barely below the 50-day m.a. now and 5% below the 200- day moving averages.

Russell Napier the noted stock market historian thinks like many that the secular bear market of 2000 is alive and that

“we're in a giant, generational slide that began in 2000 and has several years still to run. The stock market moves in long, decadal swings. Slumps like those in the 1930s or the 1970s, or in Japan after 1990, weren't simple, straight-down affairs. They were punctuated by huge "sucker" rallies that eventually faded away. But, overall, the market bounced along sideways, or down, for a decade or two.”

One final sobering statistic to keep in mind when looking for an indication of where prices are headed; In the past 130 years, whenever the Graham/ Dodd/ Shiller normalized P/E ratio goes above 20.6x, the market has experienced a correction of 31% on average over the next 16 months. It has never failed. Where is it today? Approximately 21x. Makes me immediately think the Dirty Harry market is here …

“Do I feel lucky? Well, do ya, punk?”</p>

State Pensions -

I continue to warn those who currently are and will, in the future, be relying on a state pension to fund their retirement that all is not well and that major changes are likely in store. Like all annuities and defined benefit plans state pensions were formulated based upon investment returns that were wildly optimistic. The crash of 2008-’09 has put them all behind the proverbial 8-ball and massive infusion of capital or a reduction in benefits will be essential if they are expected to survive.

In a recent report by the American Enterprise for Public Policy Research they found that state’s public-employee pensions are underfunded by over $3 trillion. As is mandated by law, should plan assets fall short, as is likely; taxpayers will be required to make up the difference. Yep, that means another bailout is in our future. This time it at least will not benefit than the banks.

Some additional highlights of their reported findings:

On average, public-sector pension plans have only a 16 percent probability of being able to cover accrued benefit liabilities with current assets

The total market value of public-sector pension unfunded liabilities as of mid-2008 were $3.04 trillion, a value that dwarfs explicit state government borrowing of $1.01 trillion. [sic]

It is speculated that an eventual federal bailout of state public-sector pension funds will be required. Such a step is not unimaginable given the scale of funding shortfalls. However, the significant disparities in unfunded liabilities between states imply that political consensus may be hard to obtain. Relatively well-prepared states such as Nebraska and Delaware may resist their residents' taxes being transferred to public-sector pensions in Ohio, Illinois, or other poorly funded states.

Supported by research from the Kellogg School of Management, taxpayers, public workers and state and federal officials alike have cause for serious concern about an issue that often falls under the radar but poses serious risk to the future health of the national economy: state pension liabilities.

They found that that several state pension funds will not last the decade, a situation that will place tremendous pressure on the federal government to bail out financially insolvent states at a price tag likely to match or exceed the recent bailout of the U.S. financial system.

Joshua Rauh, associate professor of finance of the Kellogg School of Management at Northwestern University, predicts that without basic reform to the current pension system, many large state pension funds will run out, even if they achieve predicted 8 percent annual returns. As a result, Rauh warns that promised benefit payments would be so substantial that raising state taxes to make the payments would be infeasible, offering no other choice than to call on the federal government to bail out the failing states.

"This is a problem of monumental proportion," said Rauh. "Given that we see the same issue in many states, the total size of a federal rescue plan could exceed the seriousness of the recent economic crisis and potentially cost more than $1 trillion total. Plus, this scenario could happen sooner if taxpayers flee to other states with lower taxes and higher services, if contributions are deferred or not made, or if returns are lower than expected," he said. While Illinois is currently at the highest risk, pension funds in other troubled states could dry up by the end of 2020: Louisiana, New Jersey, Connecticut, Indiana, California Oklahoma, and Hawaii. And, by 2030, as many as 31 states could be affected.

It is no wonder given the current state of the states (only one state not running a deficit and budgets are being hashed out this summer), the ongoing financial crisis in Europe and the change in market technicals, I continue to recommend paring back risk for the summer/fall and follow the sage market wisdom of “sell in May and go away”.

5/24/10

The last few years have hit near retirees really hard, and a few recent surveys conducted by prominent worker research groups have only highlighted this fact even more. Over the past month, the following statistics have been gathered about the plight of the near retiree:

• Employees will need 15.7 times their final pay when factoring in inflation and post-retirement medical costs to meet expenses in retirement
• Currently, Social Security is estimated to only cover 4.7 of this amount, leaving the remaining 11 times final pay having to be made up by employee savings
• Four of five Americans are expected to fall short of meeting all of their financial needs in retirement unless savings habits improve or they retire at a later date
• On average defined contribution plan savings (i.e. a 401k) will only be able to fund just 74% of financial needs in retirement, just 8.41 times the 11 expected to be needed
• Majority of employees are finding themselves in tougher financial situations because they’ve seen their retirement accounts decrease over the past 2 years

In a sign that the attitude of near-retirees is shifting, 40% of workers now expect to retire later than they did before the market downturn. Additionally, workers are reducing expenses and beefing up savings in the face of decreased portfolio values. Increased savings and delaying the time at which you need to start drawing money from your portfolio will definitely help curb any shortfall. Unfortunately, not enough people may realize the dire straits they are in and make these adjustments; only 18% of people in the survey conducted are expected to meet their retirement goal.

It has become more and more apparent that retirement in this country is being redefined, and as such adjustments to our expectations are needed. Individuals, not companies or the government, will be most responsible for how ill or well they live in retirement. With people living longer, our expectations of normal retirement age need to increase as well. And finally, while the recession has reversed years of negative savings, it’s imperative that this trend continue and that we increase the amount we are socking away. People have in their mind an age for their retirement, but if they ever started looking at the numbers most will be shocked. Employees should proactively calculate how much money they will need during retirement in order to make better decisions about how much they contribute to their company retirement plan (or how much to save in general), or how long they decide to work.

5/17/10

As reported by Bloomberg this week

In a feat that would seem to defy the odds, Goldman Sachs, said its trading desk made money every day of the first quarter. Its daily net trading revenue topped $100 million 35 times last quarter out of 63 trading days. The intrigue is high. If a too-big-to-fail bank’s traders were able to make money every day of a quarter, were they really trading in any normal sense of the word? Or would vacuuming be a more accurate term? What kinds of risks do such incredible profits entail, for the banks and the rest of us taxpayers? And are results such as these too good to be true?

In Carl Denninger’s (http://www.market-ticker.org/) geeky mathematical probability analysis of this feat he found

The odds of this outcome happening in any one quarter since the founding of the nation are approximately 8.1 x 10-16 or quite significantly (by close to 100,000 times!) less likely than a one-in-a-trillion chance.(that is one in ~10,000,000,000,000,000)

To put this in perspective you have a 1-in-500,000 chance each year of being hit by lightning while retrieving your mail, walking your dog, or taking a hike. In comparison to that risk in ordinary life the odds of Goldman pulling this off in a game of chance are approximately forty million times LESS than the probability either of that event happening to you in the next year

Now certainly trading is not a pure game of chance. Indeed, quite to the contrary; trading is allegedly a game of skill in the main. I will leave it to you, and those who investigate frauds, to determine whether the application of skill, without any sort of cheating such as front-running client orders, insider information or other forms of rigging the markets, can turn the random chance odds of 8.67 x 10-19 into an event that has, in fact, actually occurred.

Not to be out-done JPMorgan Chase, Citigroup and Bank of America each said they, too, were perfect for the quarter. These exact same banks were saved by the taxpayers last year from the brink of bankruptcy and with a second life they have found a new way to siphon off another layer of wealth from the unwary public.

5/10/10

Wow! What a week it was for the markets. When the week started, I had initially wanted to cover Greece, sovereign debt and how it may impact the US markets in this week’s commentary but then Thursday happened.

The Greek sovereign debt contagion finally created a spike in fear similar to what we saw in the 2008 Lehman default crash. Exactly what I have been concerned with in this low volume, 14-month Jason Bourne stock market melt-up happened (a Jason Bourne stock market is where everyone, as soon as they enter, are looking around for the closest exit because they all know the bullets will eventually start to fly). The music stopped and there were no chairs left. Thursday, May 6th, saw the single largest daily decline in the history of the U.S. Stock Market. The scary thing is that most of it occurred in a matter of 10 minutes, between 2:40 and 2:50 pm EST. During that period, the Industrials fell approximately 600 points. It was an abrupt drop, an all-out panic response where bids were absent, and selling pressure overwhelmed the few buyers. At the bottom of the trough, the Industrials had fallen 1,010 points. Any form of stop loss protection failed. As I was riveted to my screen watching this all unfold, I, like many others were locked out from taking action. Almost every major brokerage house and online trading platforms were non-functional for that fateful 10 minutes (and in some cases, much longer). Even if I wanted to take action, I was stopped from doing so. It was if everything was in slow-mo. I saw RSP (a SP500 ETF) move, within seconds, from 42 to 40 and then immediately drop to $8.50 (no, this is not a typo) and then within a matter of a few minutes, it spiked right back up to above 40. This means that the person who owned it at 42 and had a stop loss at 40 actually had their shares sold out from under them for $8.50, taking an 80% haircut in a matter of seconds. If those stop losses weren’t in place or actually didn’t trigger, when the day was done, RSP would have “only” lost a little more than 3%. Similar to the shut-off valves in the gulf oil platform, sometimes the best laid plans for safety and security can go awry.

Some interesting and unique observations in Thursday’s harrowing action included

• Volatility (fear) spiked 50% for the day (and up almost 100% for the week)
• Volume spiked more than 3x
• Many retail trading platforms shut down at the precise time the meltdown occurred
• As with 2008, we saw a flight to “safety“ as both the USD and gold, spiked as stocks got crushed
• All technical charts are now virtually “broken” for the short term and detailed near-term insight is extremely cloudy
• Procter and Gamble lost more than 50% of its value in less than 4 minutes
• Copper prices (“Dr. Copper” as it is known is used as a predictive indicator of future economic health and stock prices) have moved below their 200-day MA the first major technical warning shot since the market lows last year that all is not well.

Some insight from one of the best and closely followed market technicians on last week's action, Robert McHugh

“The Wilshire 5000 Index, which is really about 6,000 stocks, is essentially the entire U.S. listed stock market. This index tells us the U.S. stock market has lost $1.0 trillion of value over the past two weeks. All the gains over the past 2 months have been wiped out in the past two weeks. The big picture patterns have been warning in spades that something is very wrong with all major stock markets and economies globally. We are now starting to see the details and news unfurl which technical analysis showed the markets knew was coming. And it is not over. More danger lies ahead. That does not mean a bounce cannot occur from time to time, but patterns are warning that there are serious risks to economies and global stock markets, dangers that could wipe out 80 percent of more of the value of stocks over the next several years”

I couldn’t go another week without covering the Greece debacle. I think Peter Schiff of EuroPacific Capital (http://www.europac.net/) hits the Sovereign debt crisis perfectly in his weekly commentary. If you don’t know Peter he is the president of EuroPacific capital and is running for a Senate seat this year in his home state of Connecticut.

Is Sovereign Debt Crisis Contained to Subprime?

By Peter Schiff

As Americans observe the chaos in Greece, most assume that the strength of our currency, the credit worthiness of our government, and the vast expanse of two oceans, will prevent a similar scene from playing out in our streets. I believe these protections to be illusory.

Once again the vast majority fails to see a crisis in the making, even as it stares at them from close range. Just as market observers in 2007 told us that the credit crisis would be confined to the subprime mortgage market, current analysts tell us that sovereign debt problems are confined to Greece, Spain, Portugal, and perhaps Italy. They were wrong then, and I believe that they're wrong now.

During the housing boom, subprime and prime borrowers made many of the same mistakes. Both groups overpaid for their homes, bought with low or no down payments, financed using ARMs instead of fixed rate mortgages, and repeatedly cashed out appreciated home equity through re-financings. The market largely overlooked the glaring similarities, and instead merely focused on FICO scores. Yes, prime borrowers had better credit, but their losses on underwater properties were no less devastating. As the magnitude of home price declines intensified, prime borrowers defaulted in levels that were almost as high as the subprime crowd.

So when mortgage backed securities started to go bad, it wasn't as if the problems emanated in subprime and subsequently "contaminated" the rest of the market. All borrowers were infected with the same disease, but the symptoms merely expressed themselves sooner in subprime. The same is true on a national level, whereby Greece plays the part of the subprime borrower. Though the U.S. is considered to be the highest order of "prime" borrower, based on historic precedent, our debt to GDP levels are at crisis levels, and are not that much lower than Portugal or Spain. When off-budget and contingency liabilities are properly accounted for, one could argue that we are already in worse financial shape than Greece.

Most importantly, like Greece (and homeowners who relied on adjustable rate mortgages), we have a high percentage of short-term debt that is vulnerable to rising rates. The one key difference is that while Greece borrows in euros, a currency it cannot print, America borrows in dollars, which we can print endlessly. In reality however, this is a distinction with very little substantive difference.

What if Greece had not been a member of the euro zone and had instead borrowed in their former currency, the drachma? First, given its past history of fiscal shortfalls, Greece would not have been able to borrow nearly as much as it had (They may well have been forced to borrow in euros anyway). Under those circumstances, creditors would have been more reluctant to lend without the possibility of a German led bailout. Had Greece never adopted the euro as its currency, but nevertheless borrowed in euros, it would now face the same difficult choices, but would not be offered the carrots or sticks provided by other euro zone nations that are worried about the integrity of their currency. The IMF would have been Greece's only possible savior.

Many of our top economists now argue that all would be well in Greece if the country was in charge of its own currency. In such a scenario, Greece would indeed have had no problems printing as many drachmas needed to pay its debts. However, would this really be a "get out of debt free" card for Greece?

The main reason the Greeks are protesting in the streets is that they do not want their benefits reduced or taxes raised to repay foreign creditors. But despite the likely domestic popularity of a drachma-printing policy, would it really get the Greeks off the hook? They would stiff their creditors by repaying them in currency of diminished value. But the same result could be achieved through an honest debt restructuring, which would involve "haircuts" for all creditors. In a restructuring, the pain falls most squarely on those who foolishly lent money to a "subprime" borrower.

But with inflation it's not just foreign creditors who would suffer. Every Greek citizen who has savings in drachma would suffer. Every Greek citizen who works for wages would suffer. Sure nominal benefits are preserved and taxes are not raised, but real purchasing power is destroyed. If the cost of living goes up, the reduction in the value of government benefits is just as real.

Of course, the negative effects on the economy of run-a-way inflation and skyrocketing interest rates are worse than what otherwise might result from an honest restructuring or even out right default. It is just amazing how few economists understand this simple fact.

Just because we can inflate does not mean we can escape the consequences of our actions. One way or another the piper must be paid. Either benefits will be cut or the real value of those benefits will be reduced. In fact, it is precisely because we can inflate our problems away that they now loom so large. With no one forcing us to make the hard choices, we constantly take the easy way out.

When creditors ultimately decide to curtail loans to America, U.S. interest rates will finally spike, and we will be confronted with even more difficult choices than those now facing Greece. Given the short maturity of our national debt, a jump in short-term rates would either result in default or massive austerity. If we choose neither, and opt to print money instead, the run-a-way inflation that will ensue will produce an even greater austerity than the one our leaders lacked the courage to impose. Those who believe rates will never rise as long as the Fed remains accommodative, or that inflation will not flare up as long as unemployment remains high, are just as foolish as those who assured us that the mortgage market was sound because national real estate prices could never fall.

5/3/10

Tax cuts enacted into law under President George W. Bush expire at the end of the year and the sheer scale of the ongoing deficit spending is forcing lawmakers to scrutinize the US tax code for ways to generate revenues in an effort to slash into the shortfall. One very onerous possibility, floated by former FED chairman Volker, is to institute a VAT tax. While every option has been identified by President Obama as “on the table”, VAT appears to be the only single vehicle capable of raising enough money to cover the gigantic projected increases in spending and deficits.

VAT is not an option most Americans understand, or maybe ever hear discussed much. That is because it is the bulwark of an economic system alien to the American model — the social democratic economies of Europe. One important item of note on the economies that do use VAT, almost none have a local sales tax. So without other changes to our tax code, the adoption of VAT here in the US would be an additional tax tacked on to the Federal, state, local, payroll, property, capital gains, gasoline, gift and death taxes you already pay.

Background

VAT resembles a sales tax passed in the end onto the consumer at the register. But the government collects most of the money during the stages of a product’s manufacture. Since manufacturers are writing the checks, it’s an extremely efficient, virtually fraud-free way to collect money.

But it’s never gotten much support in the U.S. for two reasons. First, it’s a regressive tax meaning that low-earning families pay a bigger portion of their incomes than the wealthy. And second, the VAT — first introduced by a French civil servant in 1954 — has fueled the rapid growth of government in France, Germany, and even Japan. In fact, no other country spends the kind of money we’re planning to spend without a VAT.

About 150 countries around the world have a VAT. It comes in different shapes and sizes, ranging from 5% in Japan to as much as 25% in Sweden. It’s easy to see why it's popular for Governments: As a broad-based tax that's easy to collect and hard to see, a VAT can rake in a lot of money.

A VAT can be assessed in several different ways. In the most common method, the VAT is assessed on a good at each stage of production and distribution -- when the raw material is sold, when the product is manufactured, when a store stocks up, and when the consumer buys it. When a business calculates its VAT payment, it deducts the tax paid at the previous stage, based on records every company along the chain keeps. That's one reason the VAT is considered highly efficient -- it's hard to dodge since each link in the VAT chain keeps an eye on the rest.

This process effectively hides the VAT from open view -- unlike state sales taxes, the VAT is buried in the price of the good, not assessed at the cash register. But make no mistake: a 10 percent VAT would raise the cost of everything at least 10 percent. (High VAT taxes back home are one reason that Europeans love to shop in the U.S.) A VAT is also relatively simple to administer..

The VAT's efficiency in raising money is also why some oppose it. Even if a VAT started at a low level, say 5 percent, it's easy to increase the rate, as Europe has proved time and again. And it’s very simplicity and lack of visibility -- no tax returns, no obvious hurt at the cash register -- raises suspicions that a VAT gives free pass to Governments for higher spending.

The prettiest pig?

Despite long-standing political opposition, the VAT is starting to get attention for the simple reason that it may be the best among several bad options. Current U.S. fiscal trends are unsustainable. At some point, even Congress will recognize this fact and be forced to act. It has three options.

• Tax the rich: Always a popular idea, but the math doesn't add up. Top tax rates are already likely to go up to almost 40 percent. An increase much above that is counterproductive, reducing incentives to work and invest while creating incentives to find tax shelters and other ways to avoid paying. And the income tax well is neither wide nor deep enough to fill more than a small piece of the $13.8 trillion hole. Ditto for taxing big business more heavily. The U.S. 35% corporate tax rate is already among the highest in the world. Raising that is an excellent way to reduce competitiveness.

• Cut spending: If government spending were brought into line with revenues, new taxes wouldn't be needed. But that isn't happening. Ellis, of Americans for Tax Reform, points out that even if federal tax revenues return to their 40-year average of 18 to 20 percent of GDP (in 2009, it dipped to about 15 percent), the spending promises on the books for 2010 and beyond start at some 25 percent of GDP. That number is hard to knock down because the majority of federal spending is for Medicare, Medicaid, and Social Security, all of which are set to grow briskly as baby boomers retire. No one in either party seems interested in taming these leviathans. "It is almost literally impossible to close the gap on spending alone," says Michael Linden, associate director of Tax and Budget Policy for the left-leaning Center for American Progress.

• Find new sources of revenues: If more juice cannot be squeezed from the income and corporate tax code, the logical alternative is to tap a wider base. And the logical way to do that is to pass a VAT. Alan Greenspan, stated the VAT is the least worst way to narrow the budget gap.

An overhaul of the current federal tax code in an effort to improve fairness and simplicity is something I am confident most US citizens would be open to. But what scares me about the VAT possibility, is that instead of a major tax overhaul, a VAT will be instituted ON TOP of the existing complex taxation system. This is a something we all need to keep an eye on in the coming months.

4/26/10

Although America as a nation is aging rapidly, many people avoid thinking about the day when they or a loved one will need long-term care services and, therefore, fail to plan. Others wrongly assume that Medicare or standard health insurance policies will cover the costs of long-term care services. Since healthcare in general has been on the minds of all of late, more and more people have expressed an interest in long-term care. Below is an overview of long-term care insurance, covering issues such as when to purchase coverage and what to look for in a policy.

Long-Term Care Insurance

The aging of America is one of the biggest factors contributing to the growing interest in long-term care (LTC) insurance. According to U.S. Census Bureau data, the median age in America has been rising and the last of the 76 million Baby Boomers will reach age 65 by 2030 -- doubling the elderly population in America.

The U.S. Department of Health and Human Services estimates that about 40% of people aged 65 or older have at least a 50% lifetime risk of entering a nursing home. For its part, the Health Insurance Association of America estimates that by 2020, 12 million people may require long-term care.

At a time when the average cost of a private room at a nursing home tops $74,000 a year, long-term care insurance can be a solid investment for individuals who have assets they want to protect or who want to avoid becoming a financial burden to their family. But unlike other types of insurance, in which policies are standardized or fairly straightforward, long-term care policies are complex and vary widely. Virtually every company's policy differs on such matters as who qualifies for coverage, when the policyholder can begin receiving benefits, the amount of coverage, the term of the policy, and premium costs. Before you begin comparing policies on a feature-by-feature basis, it is important to understand some of the basics.

What Long-Term Care Insurance Is -- And Is Not

Long-term care insurance is not life insurance, disability insurance, or health insurance. Instead, LTC includes a range of nursing, social, and rehabilitative services for people who need ongoing assistance due to a chronic illness or disability. LTC insurance can be used by anyone at any age who suffers an accident or debilitating illness, but it's most frequently used by older adults who need assistance with essential physical needs, such as bathing, dressing, or eating.

For the most part, those who need long-term care are left to foot the bill on their own. Neither Medicare, nor Medicare supplemental coverage, also known as Medigap insurance, nor standard health insurance policies fully cover long-term care. That leaves most of us with two options when faced with such expenses: pay out-of-pocket or rely on private long-term care insurance.

Most LTC policies are "expense-incurred" or indemnity policies, which pay a fixed-dollar amount toward the cost of daily care. Policies tend to cover a variety of care settings, including nursing homes, home health care, assisted living facilities, and adult day care. Since premium costs increase depending on your age at the time of enrollment, the younger you are when you purchase a policy, the lower the premium you'll pay during the life of the plan.

Once you purchase a policy, premiums generally remain the same each year, so I recommend that individuals start thinking about long-term care long before they need it. Generally the earliest we recommend clients start looking into purchasing long-term care insurance is starting at age 60. Because long term care insurance premiums are based on age at the time of purchase, the younger you are when you purchase a policy, the less expensive it typically will be.

Shopping for Long-Term Care Insurance

When shopping for long-term care insurance make sure you take your time and compare the features of several policies provided by different insurers. State insurance regulators and the American Council of Life Insurance, and the Amermican Health Care Association recommend that you pay special attention to the following features.

Company Reputation and Legitimacy. Make sure the insurance companies under consideration are licensed in your state. Though ratings companies have fallen out of favor in recent years, they can still provide some historical credence to a company’s insurance strength, so look for favorable financial ratings from well-known agencies such as A.M. Best Company, Duff & Phelps, Inc., Standard & Poor's Insurance Rating Services, and Moody's Investor Services, Inc. Veterans in the long-term care insurance field consistently recommend these top-rated providers: Genworth, John Hancock, MetLife and Prudential. And if at all possible, try to talk to someone who may already have a long-term care policy with your company of choice, especially if they have had to draw benefits from it because that will be the true test of the provider’s mettle.

Coverage Parameters. Policies will differ in the types of services they support. Some cover nursing home care, others cover custodial or personal care in a variety of settings such as assisted living, adult day care, and home health care. Some include a combination of services. When looking at a long-term care policy it’s of utmost importance to choose a policy that best meets your particular needs, and comprehensive care is usually more amenable than cherry-picking coverage.

Benefits Payout. How much does the policy pay per day for care in a particular setting (e.g., nursing home, assisted living)? How does the policy pay out services (e.g., a fixed daily amount, as reimbursement for the cost of care up to a daily maximum)? Does the policy have a maximum lifetime limit? If so, what is it for nursing home care? Home health care? Choosing how much your policy should pay out per day will be highly dependent on how much services cost in your particular area, and whether or not you have additional funds available to supplement your benefit. National costs of a daily stay in a private room at a nursing home is ~$220, but cost of care has proven to be very localized.

Waiting Period. How long must the insured wait before he or she can begin receiving benefits? Most policies range from zero to 180 days. Typically the longer the period, the lower the cost of the policy.

Eligibility. Does the policy use certain benefit triggers to determine when you will be eligible to receive benefits? Such triggers could include activities of daily living that the insured needs help with, such as bathing, eating, and dressing; cognitive impairment, such as Alzheimer's disease; or a prerequisite hospital stay for nursing home benefits.

Benefits Protection. The policy needs to include an inflation adjustment feature to ensure that benefits stay in line with rising care costs. Determine what the rate of increase is, how often it is applied, and for how long. Additional protections include a "guaranteed renewable" clause, which states that the policy cannot be canceled when you get older or if you suffer physical or mental deterioration, and a nonforfeiture benefit, which ensures that some portion of your benefits are still available to you if you cancel your policy or unintentionally let it lapse.

Tax Implications. Most long-term care policies sold today are federally tax-qualified, which means premiums paid, as well as out-of-pocket expenses for long-term care, can be applied toward the 7.5% medical expense deductions contained in the federal tax code. Additionally, long-term care benefits received are not taxed as income up to certain limits. Consult with a tax advisor to learn more about the tax implications of long-term care insurance.

Because of the many variables involved in determining whether long-term care coverage is right for you, it is important to do your research or speak with an experienced long-term care insurance broker. When trying to decide between needing long-term care insurance and whether you could self-insure, generally if your liquid assets are less than $200,000 or more than $1.5 million, most sources agree you should pass on LTC (in the first case Medicaid would foot the bill once you had spent down your funds enough to qualify and in the second case you would be able to self-insure). The same is true if you can't afford the premiums now or in the future.

As a final note, before making a decision about what to do about long-term care, keep the following in mind:

• Speak with your spouse, parents, and/or adult children about your family's possible need for long-term care insurance.
• Think about the level of care that may be required. Costs can vary greatly, for a nursing home versus care at home, for example.
• Investigate the cost of care at facilities in your area, so that you can get an idea of how much coverage you might need.
• Assess your current and future financial ability to provide care.
• Be sure you read and understand all of the fine print on any long-term care insurance policy you are thinking about buying.
• If you already have long-term care insurance, review the paperwork to see exactly what type of coverage you have.
• Find out if your employer offers extra long-term care coverage as an optional benefit.

4/19/10

Market Perspective

While we are seeing widespread stabilization mixed with intermittent improvement in some areas of the economy, near-euphoric media driven optimism permeates the air. The Wall Street Journal declares, “Evidence mounts of strong recovery.” USA Today pronounces, “New jobs fan rising economic optimism.” Newsweek’s cover proclaims America “The Comeback Country” and Bloomberg’s BusinessWeek tells us, “Obamanomics is working better than you think.” The real, year-over-year percentage increases seen in various economic indicators are only a reflection of how far down we had gotten not about how far we have come back, As the stock market rally continues and the SP500 once again crosses the 1200 level, it’s good to take a look at what the conditions were like last time the S&P was at 1,200 and compare it to where we are now (it really proves the point that a rising stock market is not always a reflection of a healthy economy):

• Housing starts were 822k annual rate, not 575k;

• New home sales were running at a 436k annual rate, not 308k:

• Auto sales were running at a 12.5 million annual rate, not 10.3 million;

• The level of manufacturing shipments was $429 million, not $384 million

• Consumer confidence levels were at 61, not 46

• Credit card delinquency rates were 4.6%, not 5.8%

• Bank-wide residential loan default rates were 5.3%, not 10.1%

• Commercial bank credit was $7.3 trillion, not $6.6 trillion

• The fiscal deficit was $500bln, not $1.5 trillion

• The unemployment rate was 4.5% not 9.7%

• Total unemployed workers were 6.5Milllion not 15.7 million

• Consumer bankruptcies were 50% less than current levels.

• Home foreclosures were 55% lower.

• The consumer’s largest asset (housing) was worth 25% more.

The following nuggets (as reported in the Wall Street Journal) regarding the current rally continues to reinforce my belief this is just a bull market rally within the context of a secular bear and our capital preservation investment strategy is still strongly recommended

• The market recent gains have come with only marginal support from traditional long investors. Wall Street trading desks and the relatively new breed of high-frequency traders have been fueling the rest.

• Investors pumped only $396 million into domestic stock funds in March. Since the start of the year, they've only added only $1.8 billion. Compare those inflows with some other recent rallies. Between April and July 2009, investors poured $28.76 billion into U.S. stock funds and in the first three months of 2007 they moved $19.1 billion into such funds.

• Corporate insiders are dumping stock at an alarming pace, $15 billion so far this year, more than six times the $2.5 billion they've bought, according to Trim Tabs. Moreover, they've been dumping their stock more in recent weeks. Insiders sold $6.9 billion in March and bought just $831 million.

• Six stocks represented 27.51% of the overall stock market volume: American International Group Inc., Ambac Financial Group Inc., Bank of America Corp., Popular Inc., Fannie Mae and Citigroup Inc. Since the start of the year they've represented 16.55% of the composite volume on the New York Stock Exchange, and more than 22% on each of this week's first three trading days, reaching as high as 30.62% Tuesday.

• The rise in these stocks has mirrored, or perhaps driven, the recent broader gains. Through Wednesday, Bank of America was up 28.8%, Citigroup was up 48.9%, Ambac shares have doubled. Popular shares are up 74.3% since the start of the year and AIG shares are up 32.5% for the year through Wednesday.

• Program trading represented 27.9% of NYSE volume for the week ended April 2. Morgan Stanley, Goldman Sachs Group Inc. and Deutsche Bank AG were the three biggest program traders, according to the Big Board.

4/12/10

Because of the size of the economic contraction and unemployment hovering near 10%, Social Security system has now hit red ink, some 6 years before anticipated.

This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016 according to the Congressional Budget Office. The CBO’s 2016 estimated insolvency date was predicated on a quicker and stronger recovery from the crisis. Officials from the CBO forecasted an average unemployment rate of 8.2 percent in 2009 and 8.8 percent this year. Stephen C. Goss, chief actuary of the Social Security Administration, said that while the CBO projection would probably be borne out, the change would have no effect on benefits in 2010 and retirees would keep receiving their checks as usual.

The problem, he said, is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program's revenues have fallen sharply, because millions of jobs have disappeared, leaving fewer paychecks to tax. Analysts have long tried to predict the year when Social Security would pay out more than it took in because they view it as a tipping point - the first step of a long, slow march to insolvency, unless Congress strengthens the program's finances.

Like many European governments, the US is re-examining their commitments to the ever expanding entitlement programs while eyeing the bulging budget. What this will mean for the Social Security program is ultimately unknown. What we do know is the problem will only get worse in time as demographic forces are expected to overtake the fund, as more and more baby boomers leave the work force, stop paying into the program and start collecting their benefits. At that point, outlays will exceed revenues every year, no matter how well the economy performs. Washington has recently tabled the discussion of uncapping the 6.2% employer/employee pay roll social security tax as a short term band aid to the problem. Long term this will not come close to meeting the needs of the fund.

As Alan Greenspan said back in the 1970’s when social security was in a similar position: There are only three choices: Raise taxes, lower benefits or bail out the program by tapping general revenues. With a deficit in the Trillions of dollars and no general revenues to steal from, which outcome do you think likely? Based upon what we have seen so far, I would expect an immediate increase in taxes for those who are left working combined with lower future payouts for those who are not. It’s imperative you plan accordingly.

4/05/10

It shouldn’t come as such a big surprise when I come across parents frustrated with their children who have just left home for the first time to attend college and are having trouble managing their finances. I’ve heard tales of overdrawn checking accounts, misuse of the credit card given “only for emergencies” and overall fiscal irresponsibility time and time again. The reason why it shouldn’t come as such a shock is simple – pre-college education prepares you for everything you should expect at the university level except for practical concepts like fiscal responsibility. Nowhere in the curriculum is there a built-in lesson for creating a personal budget or understanding the world of consumer credit. As one study recently pointed out, only a measly 10% of surveyed seniors in high school could satisfactorily answer questions about personal finances, with many not having a clue how to balance a checkbook (I’ve had experience with this one - someone I knew had never even heard of a checkbook register let alone cracked it open even though she’d had a bank account for over a year – not surprisingly she’s run into overdraft problems more than once).

Life as an adult clearly requires knowledge of personal finance. That doesn't mean children need an MBA in security analysis or that you need to hire a financial adviser to tutor your preschooler. But kids obviously need better information to more effectively manage their own financial resources one day. And if the school system is not picking up the slack, the lessons need to start in the home, and start early.

It is true that the older you get, the more set in your ways you become, and kids are no exception. Kids really are far more impressionable when they're younger and much less likely to have any sort of experiences outside of family that could shape their thinking before you do. That's not to say you can't erase the habits or beliefs they pick up, but by the time they’ve become teenagers, your messages won't resonate nearly as strongly.

Ultimately, the aim isn't to mold children who only care about getting rich. It's to raise children who grow into financially aware adults that are comfortable managing the various aspects of money -- whether spending, saving, investing or giving back.

Maybe your child does accumulate financial riches. Maybe not. But the true measure of success in this endeavor is that your child, as an adult, never struggles to understand the basics of personal finance. That will prove a far greater legacy than any inheritance you might one day leave behind. And unless we want our children to find themselves in the debt pickle our state and country finds itself in, fiscal responsibility should become a lesson well learned.

Below are 15 great pointers to starting your children on the path to personal financial responsibility:

4/05/10

Weekly random musings

China Stock Market Warning

FXI – the China exchange traded fund indicators have just signaled a “death cross” warning. This ominous sounding signal portends price weakness in this investment.

As you can see from the chart below the 50 day MA crossed the 200day MA line both in May ‘09 and Mar ‘10. The May 09 indicator was triggered a buy while the most recent one constituted a sell. Keep in mind that just because the indicator is triggered and because it is not perfect I wait for confirmation before taking action. Waiting for further price action confirmation reduces the risk of a whipsaw. Once this signal is triggered, if the price holds below the trend line, it then becomes a hard “sell” signal necessitating action. As you can see, it has held its trend line cross since the start of the month and as such I am liquidating this position in those accounts where it is appropriate. I would recommend for those of you who hold this outside my management and have a shorter term time horizon or are exceedingly concerned with downside risk consider selling at least some of your position to reduce exposure to potential losses.

Now let’s take a look at the affectivity this indicator and why it shouldn’t be ignored. If we look at the SP500 chart below from just before the 2008 crash to present we find the exact same indicator provided well timed buy and sell trigger points as is detailed in the chart below.

The indicator triggered a sell signal in Jan 2008 at SP500>1400.

It then gave a buy signal at SP500 of ~ 870 last June

Both of these calls, in retrospect, were excellent timing

Keep in mind, the indicator is not perfect or infallible but what it does do is increase your odds of reducing the potential for large losses. Because it is not 100% accurate, it does this at the sake of smaller returns. It greatly enhances the risk/reward ratio which in this investment environment, is exceedingly attractive. Successful investing is about increasing your odds of being right thereby maximizing returns AND minimizing losses. Over the long haul, it’s the overall return during both good and bad markets that is key.

Two opposing views

My favorite money manager, John Hussman, continues to maintain a defensive position on stocks, saying that two dangers — an overbought, overvalued market and the coming to roost of a second wave of credit losses — mean investors should be cautious.

“It is important to note that our current defensive position is driven by the present combination of overvalued, overbought, overbullish conditions, coupled with upward yield pressures, and is independent of my larger concerns about the potential for a second wave of credit strains,” Hussman writes in his latest market commentary. “So there are two distinct sets of concerns here, one that would exist even in the absence of credit concerns, and the other that directly involves those concerns.”

Hussman, whose funds have excellent long-term track records and was one of the few funds who actually had a positive return during the ‘08-‘09 crash, has been anticipating a second round of credit problems for a while. He says we are now reaching a point when those problems could be appearing in economic data in the form of spikes in delinquencies, large increases in loan loss provisions, or a rise in foreclosures. First-quarter earnings reports will also offer the first look at how corporations are bringing onto their balance sheets entities that previously could be kept hidden, he says.

An opposite view comes from the Bay Area’s own advisory marketing machine, Uber-bull and Forbes columnist, Ken Fisher, who believes we are entering the second year of the bull market that began last March. He remains high on stocks.

“One year into the current bull market I like what I see,” Fisher writes in his latest Forbes column. “Globally improving fundamentals plus strong societal skepticism. Snarky, cranky sentiment and better fundamentals are the classic ingredients of the second phase of bull markets.”

Fisher who remained fully invested and bullish during the ’08-’09 crash, says economic data continues to show improvement and be better than expected, though many are dismissing that data.

“In part this is because the fastest recoveries from the recession are happening in the 25% of global GDP found in emerging markets countries,” he says. “Maybe it’s unnerving that China and Brazil are leading us. Americans are way too U.S.-focused.”

Say it ain’t so

I have always been a bit naïve I guess because in the past whenever I heard grumblings about market intervention and complaints from traders/investors of manipulation I have dismissed them. I have always been a believer in free markets. There are just too many people and too many dollars for someone or something to be able to directly affect prices. Plus, the only one big enough to even have enough money to have any effect on market prices is the US Govt since they have unlimited resources. But it’s not constitutionally approved for them to buy stocks, right? Plus, how are they going to buy them? Use tax revenues or money hot off the printing press to invest in the stock market? There has always been a rumor floating around of a Govt working group, affectionately referred to as the Plunge Protection Team (PPT), put in place for just that purpose during the Reagan administration.

From Wikipedia

Plunge Protection Team

"Plunge Protection Team" was originally the headline for an article in The Washington Post on February 23, 1997, and has since become a colloquial term used by some mainstream publications to refer to the Working Group. Initially, the term was used to express the opinion that the Working Group was being used to prop up the markets during downturns. Financial writers for British newspapers The Observer and The Daily Telegraph, along with U.S. Congressman Ron Paul and writers Kevin Phillips (who claims “no personal firsthand knowledge” and is “not interested in becoming a conspiracy investigator”) and John Crudele, have charged the Working Group with going beyond their legal mandate. Claims about the Working Group, which are labeled conspiracy theories by some writers, generally include that it is an orchestrated mechanism that attempts to manipulate U.S. stock markets in the event of a market crash by using government funds to buy stocks, or other instruments such as stock index futures—acts which are forbidden by law. In August 2005, Sprott Asset Management released a report that argued that there is little doubt that the PPT intervened to protect the stock market. However, these articles usually refer to the Working Group using moral suasion to attempt to convince banks to buy stock index futures.

Former Federal Reserve Board member Robert Heller, in the Wall Street Journal, opined that "Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole." His statement has been used to claim that the Fed actually did act in that way. Mainstream analysts call those claims a conspiracy theory, explaining that such claims are simplistic and unworkable.

Market Crisis of 2008

On 06 October 2008, the working group issued a statement indicating that it was taking multiple actions available to it in order to attempt to stabilize the financial system, although purchase of stock shares was not part of the statement. loans.

Facts & Support

From the most recent Federal Reserve publication http://www.federalreserve.gov/releases/z1/Current/z1.pdf, we see that the Fed and Treasury has indeed been stepping in and buying stocks since Q408.

In Section L.213 on pg 92

A new line appears in the report, Line 10 - Showing $25.1 billion in US corporate equity purchased by the monetary authority in 4Q-09.

Section F.213 - Shows an additional 4Q-09 amount of 100.4 Billion for the preferred shares issued to the Fed under TARP & the monetary authorities preferred interests in AIG subsidiaries AIA and ALICO. Now keep in mind this is just the Federal Reserve.

The figures for the direct purchase of equities by the US Federal Government itself is covered in Section L.106 - Line 11 Corporate Equities. This line item was only created Q408. Here are the numbers since the Govt became equity traders..

Q4-08 - 188.7 Billion

Q1-09 - 219.8 Billion

Q2-09 - 153.5 Billion

Q3-09 - 154.8 Billion

Q4-09 - 65.1 Billion

That’s a total of 781.9 Billion of direct equity purchases by the US Government in 15 months, & 125.5 Billion by the Fed. This totals a staggering $907 Billion.

What this means is the Govt and Fed spent more than $3000 per every man, woman and child in the US in a period of 5 quarters in an attempt to prop up the stock market. If you had any doubts about why it is hard to invest in today’s environment this is it in a nutshell. Where would the stock market be if the Govt didn’t step in? If you are fully invested what happens tomorrow if the Govt decides it is no longer going to print money or they run out of tax dollars to prop up the market? What do you think will happen to share prices? Is there any wonder why some advisors are wary of this market and cautious about putting their client’s hard earned wealth at risk? Or should we ignore the risks and blindly put faith in the fact the Govt has our back, accept the markets are not truly free and therefore party like its 1999 because the Govt will backstop all bad investment decisions? The Government, by definition, is creating moral hazard.

3/22/10

With all eyes on Washington D.C. and the outcome of the heath care bill I thought I would spend this week on breaking down last week’s encouraging announcement that point to an early economic revival. My ongoing unease about this recovery has always been that the consumer needs to step in and take the place of rampant government spending if we are expected to have a sustainable upturn. Last week it was reported that for the first time in a year consumer spending increased leading to the increased expectation and hope of a return to normalcy. If true, this is great news as the Central Bank is running out of bullets and the printing presses are overheating.

In an encouraging sign for the economy, U.S. consumers increased their debt in January for the first time in a year, just the latest hint that household demand may be on an upswing.

– Marketwatch

When we dig a bit deeper into the guts of the data we not so surprisingly see the devil is in the details.

Today, the market spiked in the last hour of trading after it was announced that total consumer credit increased for the first time in a year (not all credit, mind you, just car loans; consumers are still eagerly paying down their credit cards). And who was the source for this generosity you may ask? Why, the US Government of course. Non-Seasonally Adjusted Consumer credit was actually down by $4 billion. On a non-seasonally adjusted basis, consumer credit has declined by $108 billion in the past 12 months. What may be surprising, is that were one to strip away the contribution from the Federal Government of $78 billion, the decline would have been almost double, or $187 billion. Furthermore, in January, NSA consumer credit would have declined by $14 billion had it not been for the... wait for it... Federal Government, which sourced $10.4 billion in new consumer credit. So here is what happens in case you haven't figured it out already: the government takes taxpayer money, and lends it out. When the news of the government's generosity hits the market, and the spin is that Americans are again confident enough to borrow, the total capitalization of the market grows by about $20 billion, putting money straight into the pockets of Goldman Sachs and other recent bailoutees (who without a doubt deserved a $70 billion bonus season in 2009). And now you know where your money goes to.

– Zerohedge.com

3/15/10

As a follow up to my 1/25 commentary ..

While we hear about the problems and the political arm-wrestling during the annual state budget process, it can be hard to get an accurate idea of what kind of fiscal situation our state is truly in. If we look outside the talking heads of the media for a moment and turn to the investment markets we see that they give a pretty sad snapshot.

If you don’t know, credit default swaps (CDS) are a measure of risk of an investment via their spreads. Currently, the credit default swap rates for California put us among the top ten most likely to default among all major governments worldwide. No, that is not a typo it does say “worldwide”.

According to CMA, which is a leading credit default swap data service, California is the tenth most likely major government to default in the world, with a 26% chance. Currently, California has roughly five times the probability of default as the US (roughly 25% to roughly 5%). As you can see below, we are in poor company with the likes of Argentina, Venezuela, Pakistan, Latvia, Iceland, Dubai and Greece.

Interestingly, California has the largest state economy in the US, and its economy is larger than all but the top 7 to 10 sovereign nations. As you can see from the chart, California ranks just below Greece, which sent the world’s stock markets into a tail spin recently. The recent downward pressure on stocks was relieved last week as support from the EU and IMF via oversubscribed bond issuance help turn the focus away from Greece, for now. Given the size of CA as compared to Greece, can you imagine what would happen to our outstanding debt and its affect on the overall markets if we were to default? It’s clear we currently have neither a plan nor solution (other than kick the can down the road a year) to get us out of the current economic mess. The best we can hope for short term is a Federal bailout if it should come to that.

With the upcoming California gubernatorial contest in full swing, I encourage the residents of this beautiful state to spend time to seek out and elect the best leader to address the biggest and most immediate problem facing our state, our economic viability. In reality the Governor is really hamstrung in their ability to control the budget and set fiscal policy (it is done by the legislature), finding the right leader to help straighten the ship is a first step in the right direction towards true recovery.

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.”