Tags: investments

Andy’s July Liberty Talk Radio Appearance

by TwoCentsEditor
Published on: 07/19/2011
Categories: Appearances, Centsible Investor Info., Economics
Tags: , , , , , , , , ,
Comments: No Comments

Dear Subscribers, Clients, and Friends of the Firm,

This Wednesday, July 20th, I will be appearing again on Liberty Talk Radio. I am determined to get some more folks to call in – so here it is. Anyone who calls in and mentions this email will get a complimentary three-month subscription to The Centsible Investor! How’s that for simple? See below for call-in information.

Among other things, Joe and I will be discussing the idea of leading, coincident, and lagging economic indicators. The Conference Board has been attempting to dazzle the markets and goose consumers with reports of good leading indicators for many months now, but the question remains leading to what?

We’ll take this topic as a follow-up to my August 21, 2009 editorial regarding the various types of indicators and their relevance in terms of forecasting. The rest of the show will be dedicated to your questions, plus some comments and observations I’ve gotten from people on Main Street over the past several months. We’ll be more than happy to take your calls. You can reach the show directly at (646) 652-4620 or toll-free at (888) 773-4496. You can also listen at his Blog Talk Radio Page.

 

13% of Homes Now Empty – CNNMoney

by TwoCentsEditor
Published on: 03/29/2011
Categories: Current Events, Economics, Financial Markets
Tags: , , , , , , , , , , ,
Comments: No Comments

Editor’s Notes: The last time we reported on this, the number was 11% and that was only a month or two ago. The 11% figure was reported by CNBC. Obviously, we have no inside knowledge as to the actual number of empty homes, but if the numbers are in fact worsening that quickly, then somebody needs to grab Steve Liesman over at CNBC and tell him he’d better lay off the ‘everything’s great’ propaganda he likes to push. (Steve majored in journalism in school by the way, not economics).

High residential vacancies are killing many housing markets, as foreclosed homes sit on the market and depress sale prices and property values.

And it’s only getting worse: The national vacancy rate crept up to just over 13% according to last week’s decennial census report. That’s up from 12.1% in 2007. So which is it guys?

“More vacant homes equal more downward pressure on home prices,” said Brad Hunter, chief economist for Metrostudy, a real estate information provider.

Maine had the highest proportion of empty housing stock, at 22.8%. Other states with gluts of empty houses included Vermont (20.5%), Florida (17.5%), Arizona (16.3%) and Alaska (15.9%).

The way the census calculates the vacancy rates, however, is problematic. It includes properties such as ski lodges, beach houses and pied-à-terres that many real estate statisticians would not.

These are often summer homes or second homes, but census lumps them together with homes that have been sold but not occupied, empty homes for sale or rent, and homes used by migrant workers. Basically, anything other than a primary residence is considered vacant.

“You can only live in one home,” said William Chapin of the Census Bureau’s Housing Statistics Branch. “If you own five homes that you occasionally live in, four of them will be counted as vacant.”

But Paul Bishop, the vice president for research for the National Association of Realtors, countered that these properties aren’t vacant in the usual sense of the term. “A vacation home is hardly the same situation as a foreclosed home that has been taken back by the bank,” he said.

In Maine, more than two-thirds of the 160,000 vacancies were vacation homes in 2009; Vermont had a similarly high concentration.

Compare them with Connecticut, which has a vacancy rate of just 7.9%, the lowest of all the states. If you back out the vacation properties from the statistics, the states have very similar vacancy rates: 6.1% for Connecticut and 7% for Maine.

Some states have high vacancy rates even after backing out the second homes: Florida’s is about 10%; Arizona’s is 10.7%; and Nevada’s 11.4%.

Besides Connecticut, the other states with lowest vacancy rates are California, Iowa, Illinois, Virginia and Washington, all at 9.2% or lower.

Portfolio Diversification & Risk

by TwoCentsEditor
Published on: 07/25/2009
Categories: Financial Markets, My Two Cents
Tags: , , , , , , , , , , , , , , ,
Comments: No Comments

The cliché’s are plentiful and well known. Putting all of one’s eggs in a single basket is probably the most popular example. One of the biggest manifestations is when an investor looks at their portfolio and realizes that it is grossly underperforming a particular market index or that the same portfolio has performed much worse than a given benchmark. Even if you’ve done everything right and selected the right themes, industries, and firms, if you get the portfolio mix wrong, you can still have problems. This is one of headaches that mutual funds are generally supposed to relieve investors of, but for a litany of reasons, it doesn’t seem to always work out that way. In truth, every individual portfolio is a mutual fund of sorts, and so the same rules apply.

Types of Risk

In general, there are two broad types of risk: systematic (non-diversifiable) and non-systematic (diversifiable). Keep in mind that what we are discussing here is slightly different from geopolitical risk, currency risk, interest rate risk, etc although each of those specific types of risk do contribute to the overall riskiness of a particular stock and as such cannot just be ignored.

The data in the chart below is from a 1987 study on diversification just after the market crashed. Obviously, at that time, diversification was a hot topic as investors scrambled to adjust portfolios and recoup the losses. The data below lists the number of components, the standard deviation of annual returns for each portfolio, and a comparison of the standard deviation of the portfolio to that of a single component.

Number of Components in the Model Portfolio Average Std. Deviation of Annual Portfolio Returns (%) Ratio of Portfolio Std. Dev. to Std. Dev. of a Single Component

Number of Components in the Model Portfolio
Average Std. Deviation of Annual Portfolio Returns (%)
Ratio of Portfolio Std. Dev. to Std. Dev. of a Single Component
1 49.24 1.00
2 37.36 .76
4 29.69 .60
6 26.64 .54
8 24.98 .51
10 23.93 .49
20 21.68 .44
30 20.87 .42
40 20.46 .42
50 20.20 .41
100 19.69 .40
200 19.42 .39
300 19.34 .39
400 19.29 .39
500 19.27 .39
1000 19.21 .39

Below is a graphic representation of the data in the chart above. It may clearly be observed that standard deviation of the portfolio is asymptotic (law of diminishing returns) as it relates to eliminating the systematic (diversifiable) risk. In fact, once the number of portfolio assets surpasses 30, the standard deviation does not drop appreciably, even when another 970 components are added! Obviously, this reality enforces that quality is better than quantity.

Think of the case of the individual investor who buys 100 stocks thinking he is diversifying away all his risk. He has borne a significant opportunity cost in the form of commissions without purchasing much in the way of additional protection from non-systematic risk. The upper portion of the chart deals with non-systematic risk, which can be largely diversified away. Notice though that even when the portfolio contains 1000 components that the standard deviation is still 19.21%. That constitutes the systematic risk.

Systematic vs. Non-Systematic Risk

A good example of systematic risk is pure market risk. Obviously if the capital markets crash again as they did in 2008, it will be exceedingly difficult to put together a basket of stocks that will withstand such a downward draft. There are other types of risk such as geopolitical, currency, inflation, interest rate, industry, and geographic. By using a crosscut approach to diversification, one is able to not only mitigate much of the non-systematic risk, but a good portion of the systematic risk as well. This is accomplished by looking at your themes selected several weeks ago, then addressing each type of systematic risk in your selection of assets. This approach is one of the main reason that our Centsible Investor Model Portfolio has done so well while the broad markets have languished.

Beta (ß)

Quantitatively, Beta is the generally accepted measure of systematic risk for a stock and is defined as the amount of systematic risk present in a particular risky asset relative to that in an average risky asset. Essentially what Beta does is compares a particular stock in this case with an average stock, or more accurately, a benchmark basket of stocks:

Beta

where ra measures the return of the asset, rp measures the return of a portfolio of risky assets (often the stocks in an index), and Cov(ra,rp) is the covariance of the returns.

Interpreting Beta is rather simple. 1.0 is the Rubicon so to speak. Betas lower than 1.0 indicate that the stock in question has a lower level of systematic risk than the ‘market’ while a Beta of greater than 1.0 indicates a stock that has a greater level of systematic risk than the ‘market’.

Knowing this, it becomes a rather simple matter to calculate the Beta of your portfolio simply by ascertaining the weight of each component and then multiplying it by that component’s Beta. Let’s use a hypothetical example where we have a 3 stock portfolio; Stock A is 25% of the portfolio, Stock B is 40% of the portfolio, and Stock C is 35% of the portfolio. The Beta of Stock A is .75, Stock B is .50, and Stock C is 1.25:

Betaportfolio= .75(.25) + .50(.40) + 1.25(.35)

Betaportfolio = .83

This calculation indicates that this 3 stock portfolio has systematic risk that is lower than that of the market, however, its non-systematic risk would be considerably higher than one would desire since there are only 3 components. All else being equal, the ideal would be to find a portfolio of perhaps 25-30 stocks that has a Betaportfolio of .83, as this would mitigate much of the non-systematic risk as well.

Beta and the Risk Premium

While using the term risk-free in today’s financial and economic climate might result in a shower of protest, the concept of the risk-free asset has an important place in the discussion of risk vs. reward, particularly when selecting portfolio assets.

Let’s use an example of a stock with an expected return of 20% and a Beta of 1.6. Let us also assume (entirely for illustrative purposes) that the risk-free asset has a return of 8%, with a Beta of zero since it has neither systematic nor non-systematic risk. In the case of expected return, we are relying on an educated guess, but in the case of stocks that pay dividends, one could easily plug the dividend yield into the expected return as well. When we plot out our stock and the risk-free rate and generate a Security Market Line (SML), we get the following:

SML - Single Stock

The chart above is relatively easy to interpret; we consider the ‘risk-free’ asset Rf with its corresponding Beta of zero and return of 8% and our stock with its Beta of 1.6 and its expected return E(RA) of 20%. When we connect the dots and measure the slope of the line (rise/run), we get a slope of 7.5%. From this graph, we can ascertain that our stock has a reward to risk ratio of 7.5% meaning that our stock has a risk premium of 7.5% for each ‘unit’ of systematic risk. Obviously, the higher the reward to risk ratio, the better, meaning we’d want to see higher E(RA) and/or lower Beta; either of which would increase the slope.

In a final example, let us now compare our stock in the previous example (called Stock A) with a second stock (Stock B). Stock B has a Beta of 1.2 and an expected return E(RB) of 16%. When we construct our Security Market Line, we end up with a slightly different picture than we had with Stock A.

The reward to risk ratio (or slope of the line) for Stock B is 6.67%.

SML Comparison

What this tells us (all other things equal) is that in essence, Stock A is a ‘better’ choice than Stock B simply because it generates more reward for each unit of systematic risk undertaken.

This analysis is especially useful when one is selecting portfolio components and wants exposure to a particular industry or sector, has multiple candidates, but doesn’t want to include them all for fear of being overweight that particular area. In this manner, the candidates may be lined up and compared to see both visually and quantitatively where the best bang for the buck lies.

Of all the areas discussed in our sample exercise over the past few weeks, diversification and risk are the two areas where investors are most likely to stumble. Many fail to properly diversify because they don’t understand the value of it or because they don’t have enough capital to diversify by purchasing individual stocks and should look to ETFs, open-end or closed-end funds as an alternative.

While the analysis above was primarily for stocks, those investors seeking to hedge their portfolios with precious metals can certainly plug their favorite shiny coins into this analysis. For those so inclined, Betas may be hand/Excel-calculated for commodities using the major indexes, or commodity indexes, such as the CRB as the ‘market’ portion of the calculation.

In summation, probably the most important takeaway from this article should be that a portfolio doesn’t need 100 components to be adequately diversified in terms of non-systematic risk. 30-40 will do just fine. A second important point is that by using your economic themes and how they relate to systematic risks in your selection of an appropriate number of assets, you can mitigate a good deal of the systematic risk to your portfolio as well.

Confirmations and Conclusions

by TwoCentsEditor
Published on: 05/29/2009
Categories: Current Events, Economics, Financial Markets, My Two Cents
Tags: , , , , , , , , , , , , ,
Comments: 5 Comments

In a mid-February editorial we took a look at some factors that were beginning to confirm one of our proprietary indicators that pointed to a bottoming in consumer prices in December 2008. Writing such an article at the time was a big risk since it flew in the face of a trend that had been firmly in place for the past half-year. The price of nearly everything was falling – or so it seemed. For those who understand and appreciate the function of money supply in the determination of prices, the article made perfect sense. However, for those who believe that economic growth or the absence thereof determines prices, there was a great deal of consternation regarding our assertions.

Nearly three months have passed since then and almost every piece of data that has come across this desk has validated the claims made back in February.

Just aside of the factors we mentioned in the February article, which were the CRB Index, Gold, and West Texas Intermediate Crude, there is another major indicator of this phenomenon and that is the stock market. From the 3/6/2009 bottom through today, the Dow Jones Wilshire 5000 Index raced from 6935 to 9342; an increase of 34.71%. More importantly though, lets look at it in terms of dollars. The value of the Wilshire 5000, which is one of the broadest measures of US market capitalization increased by $2.407 Trillion during that relatively short period of time.

It is utterly preposterous to assume that Mr. and Mrs. America dug in the couch and found that kind of money and decided to invest it. It is even more preposterous considering the environment that the real economy is dealing with at this time. Job losses have been staggering and persistent, it is demonstrably difficult for the unemployed to find work, and house prices are still falling like an elephant dropped from the Empire State Building. How else do we know this increase didn’t come from the real economy? Let’s look at past behavior. When the government handed out $168 billion in stimulus checks – essentially ‘free money’ – did the public invest it in the stock market? No. The public paid bills, or saved it – much to the consternation of the government.

So where did this dramatic bear market rally come from? In my opinion, it came from large institutional investors – many of the same people who had their coffers stuffed with TARP money over the past 6 months and the same folks who were essentially given a free pass a while back when the rules for mark to market accounting were relaxed. So what we have here is largely an inflationary rally. Certainly, this is not the first such rally, and it will most assuredly not be the last.

But it isn’t just the stock market. It is the commodities markets as well, and this is where it gets bad for consumers. We are about to witness a wave of inflation, a magnitude of which has never before been seen in America. Dr. Marc Faber had this to say about the subject:

“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate. He also added, “The global economy won’t return to the “prosperity” of 2006 and 2007 even as it rebounds from a recession”.

Let’s revisit our charts and positions from February and see how much things have changed in just three months:

Reuters/Jefferies CRB Index

CRB Index

The 15% increase in just the past 3 months will not immediately be seen on store shelves, but it is already being seen at the gas pump and in the prices of many consumer items. It must be noted that the US economy contracted at a rate of 5.7% (annualized) in the first quarter of 2009, which is on the heels of a 6.1% decrease in the fourth quarter of 2008, yet consumer prices, commodities, and other inflation assets are rising. If this doesn’t strike down the notion that demand (economic growth) alone determines prices, then nothing will.

West Texas Intermediate Crude Oil (WTIC)

WTIC

This one says it all – a 45% increase in the price of oil just since the middle of February. Keep in mind this increase in price has occurred during a period of a contracting US economy. It is high time that the mainstream press and every one of us stop being US centric when it comes to oil – and everything else for that matter. World demand has remained robust, but at the same time has not exploded over the past six months for sure. The problem is there are untold trillions of dollars parked around the globe. Remember last fall that it wasn’t just the US Fed who was printing like crazy. The Europeans were following suit, much to the dismay of any country that possesses a scarce resource.

Gold – Contract Price

Gold - Contract Price

Despite a major rally in equities and assertions from media and government alike that the economy has bottomed and will begin to heal soon, Gold has not taken the bait. After once again breaking through the $1000/oz level for a brief period in late February, Gold was pushed down to the $860 area, but has rallied nearly $100/oz in relentless fashion and is looking for its fourth straight week of gains. It is very obvious that the powers that be would prefer if Gold remained below the psychologically critical $1000/oz mark. A serious breakout to the upside would once again light the 1970’s-esque fire of inflationary expectations.

The US Dollar – Heads they win, tails we lose

US Dollar Index

The story for the US Dollar over the past year has been a fairly simple one: if there is a major crisis and stock markets are falling 700 points in a day, then people want dollars. Otherwise, forget it. So the only way holders of dollars get a break is if the wheels are falling off everything else. During periods of relative calm, such as what we are seeing now, the Dollar has retaken its outcast position as the whipping boy among currencies. The damage done by numerous bailouts and stimulus packages is common sense. The future damage of persistent trillion dollar annual deficits and tens of trillions in unfunded liabilities from Social Security and Medicare still remains.

The 11% move in the Dollar from 2/20/09 to the present will result in higher prices paid for imports, and in part has been one of the reasons for oil’s recent surge. However, oil’s move has been far in excess of what would have been necessary to merely keep pace with the dollar’s decay. Look for a return to higher trade deficits unless demand drops concomitantly, which is entirely possible.

The return of the Bond Vigilantes

Perhaps worst of all has been the Fed’s inability to keep bond yields under control. Despite open monetization to the tune of $300 Billion, and the 2009 purchases of upwards of $1.25 Trillion in mortgage bonds in an effort to keep rates low, bond rates have shot up dramatically. Perhaps even worse, mortgage bond yields are now starting to move up as well. The most alarming trend is the 10-2 spread for 10-year and 2-year Treasury notes. It cannot be ignored that with each recession, the spread grows. That is because each time the fears of inflation as well as actual inflation itself increase dramatically. It cannot be ignored that with each spike we have seen a large bolus of inflation enter the system resulting in a period of ‘prosperity’.

2-10 Spread

Anyone care to stretch their thinking a bit and notice how those periods of ‘prosperity’ are getting shorter and shorter despite greater infusions of fiat cash?

It should now be apparent to all that a massive inflationary wave has been unleashed. Policymakers are aware of this and are already preparing the public by discussing deficits in the trillions rather than billions as the government will make a futile attempt to keep pace. What is most alarming in all of this is the precarious position of the consumer. Nearly wiped out in 2008 by job losses, falling home prices (which had previously been regarded as income), stagnant wages, and dramatic losses in retirement and other investments, the consumer is not in the position to deal with the inflationary blow that is now in progress.

The green shoots theory was a nice try, but those shoots are about to be buried under an avalanche of another type of green – the green of increasingly worthless fiat paper money.

In our ‘Spin Cycle’ podcast, we are currently doing a 7-part series in which we depict the factors affecting the US economy as sides of a Rubik’s Cube – independent, yet interrelated. On June 3rd, we welcome Professor Laurence Kotlikoff to discuss generational accounting and our mounting unfunded liabilities. To listen to this or other shows, visit www.my2centsonline.com/radioshow.php

Triple-A or Bust?

by TwoCentsEditor
Published on: 05/22/2009
Categories: Current Events, Economics, Financial Markets, My Two Cents
Tags: , , , , , , , , , , , , , , ,
Comments: 7 Comments

If you take a short walk down memory lane, it will not take you very long to find the carcass of New Century Financial along the side of the road back in March 2007. It would be a full 12 months before the word recession would be mentioned in the US mainstream media and stock markets would roar into their all-time highs six months after the disintegration of New Century. Much of the early portion of the credit crisis as it was called focused on mortgages and after that, mortgage-backed securities. Wow, haven’t heard that term in a while, have we?

Much of the scuttlebutt at the time centered around the ratings which were assigned to these mortgage bonds and people started asking questions about how all of these Triple-A rated bonds could suddenly be worthless and why bonds with this high of a rating were paying historic spreads above and beyond US government debt of the same maturities (which are also rated Triple-A).

Bond Spreads

An Example of the spread between Triple-A rated securities

Of course the foundations for this comparison in the first place are the quality and status of US government debt, which, until recently, was sacrosanct in borrowing circles. In the past week there have been headlines galore (again) that the US is in jeopardy of losing its Triple-A credit rating. Given what we already know about the government’s finances, how can a pristine credit rating and Uncle Sam be mentioned in the same sentence? And perhaps more importantly, can ratings issued by the major agencies be worth more than a defaulted mortgage tranche after the ratings fiasco of the past few years? Consider the following:

“According to the Financial Times report, “Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch Triple-A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.” Yet the ratings were maintained at Triple-A.”

So why the big todo about the US Government and its Triple-A rating? The point is it shouldn’t have one to begin with. While I am sure this statement doesn’t constitute a revelation to anyone, it is a point that most in the main stream media are once again missing. Some big names have lost Triple-A credit ratings over the past few months. General Electric and the venerable Berkshire Hathaway are two notable examples. AIG lost its Triple-A rating in 2005, and bond insurer Ambac lost its Triple-A rating in 2008.

In the case of normal businesses, the credit rating is a reflection of the firm’s financial position and the market forces that are likely to impact the firm over various periods of time. The firm’s balance sheet is examined. Its revenues and obligations are dissected. The credit rating is then assigned based on the preponderance of these factors and indicates to investors the likelihood of default on the firm’s debt. Investors are then able to make informed decisions. At least this is how it is supposed to work.

Default Probability Models

Moody’s / S&P Default Probability Models

However, there is one major difference between a normal business and the US Government. Unlike a normal business enterprise, the US Government has a bank on retainer that can create money from nothing and is willing to lend at ridiculously low rates. It can accomplish this task in many ways, but the most direct is called monetization, which consists of the Fed buying bond issues directly from the government. Ostensibly, this is done to prevent the government from having to fund its massive appetite for funds externally. As if there is something honorable about owing your future to a private bank as opposed to another sovereign nation. Further evidence of the Fed’s willingness to monetize additional debt emerged this week:

“Some members noted that a further increase in the total amount of purchases might well be warranted at some point to spur a more rapid pace of recovery.”

Is an entity that requires this type of arrangement for its financial survival deserving of the highest credit rating? How about an entity that is going to have to borrow 46 cents for every dollar it spends during FY 2009? How about an entity that is institutionalizing trillion dollar deficits for the next decade? How about an entity that has a bare minimum of $53 Trillion in contingent unfunded liabilities (nearly four times GDP)?

After this most recent bevy of news headlines regarding the rating situation, Treasury Secy. Tim Geithner promptly got on TV to talk about cutting the budget deficits.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.

Putting this in the context of our current situation, this would require the deficit to be cut from a projected $1.8 Trillion to just $418 Billion – which is where it was before the current blowout. This is an important distinction as promises by government officials to actually balance the budget are fading quickly into the ether. Now we’re only worried about carrying ‘sustainable’ debt. The problem is that none of these debts are ever paid back and as such, they accumulate all the while piling on interest.

In order to pay off our debt, not only would we have to stop running deficits, we’d actually have to run surpluses. If we ran could manage a surplus that was 3% of GDP each year, it would take us over 30 years to pay off what we already owe on the national debt. That is three decades of smaller government, bare essential expenditures, and the complete dissolution of the ‘cradle to grave’ mentality our government has espoused for the last half century.

Geithner, 47, also said that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”

This is nothing more than just economic pumping. What the rise in yields is really saying is that when the Fed doesn’t step in and buy US Government bonds that nobody else wants them either. Why would any sane individual lend to somebody that is up to their eyeballs in debt and isn’t even the least bit interested in changing their behavior? To make matters worse, why would any sane individual lend to an entity that proposes to repay the loan in currency that is losing its value?

30-Year Bond Yields

30-Year Bond Yields

In the above chart, we can see the yield for the 30-year bond. The Fed began indirectly monetizing in the fall of 2008 as the proceeds of TAF, TSLF, etc. went directly to the Treasury window driving yields to nothing. Another spurt of direct Fed monetization in March led to a quick drop in yields, but since then they have been moving relentlessly higher. Foreigners have not stopped buying US Treasuries by any means, but they have certainly slowed their purchases. This leaves the Fed as the buyer of last resort. Certainly Secy. Geithner understands all this, especially considering he used to be the President of the NY Federal Reserve Bank.

Does any of the above sound financially virtuous and deserving of a pristine credit rating? In the end it matters not what Moody’s or S&P have to say about the creditworthiness of the US Government. Our creditors are already speaking. And they aren’t singing our praises.

In our ‘Spin Cycle’ podcast, we are currently doing a 7-part series in which we depict the factors affecting the US economy as sides of a Rubik’s Cube – independent, yet interrelated. On June 3rd, we welcome Professor Laurence Kotlikoff to discuss generational accounting and our mounting debt. To listen, visit www.my2centsonline.com/radioshow.php

A Look Inside the Numbers

by TwoCentsEditor
Published on: 03/06/2009
Categories: Economics, My Two Cents
Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
Comments: 3 Comments

The much-anticipated employment situation report for February 2009 has now been released. Markets breathed a sigh of relief, following recent conventional wisdom that things could have been much worse. Clearly they could have been. Clearly they are. December and January’s numbers were both revised much higher (577,000 to 681,000 and 589,000 to 655,000 respectively). There is little doubt that when next month’s report rolls around that the current stated loss of 651,000 will be revised much higher as well; likely to the 700,000 area.

Unemployment Chart

What is even more alarming is that these numbers don’t include what could be called partially discouraged workers. These are the folks who are working part-time, but not by choice. They’d like to work full-time, but have either had their hours cut or are unable to find full-time employment. There are now over 9 million of these folks in the United States according to Bureau of Labor Statistics (BLS). We’ll take a closer look at this segment of the labor force later in the article. While it is understood that the methodologies of BLS are largely political and are compromised in terms of relevance, the trends are still helpful in terms of extracting clues about where things are headed, and getting an idea of exactly how many folks are under job-related duress.

Forced Part-Time Workers

Looking at the aggregate numbers – in what has become a recurring theme – government, education, and healthcare were the only three areas in which there was growth in February. These three areas added 35,000 jobs during that time. Here is a brief summary of some of the more notable industries:

• Goods-producing industries lost another 276,000 jobs in February for a grand total of 1.456 million just since September 2008.

• Manufacturing lost 168,000 jobs in February for a total of 891,000 since September 2008. Most of these losses were concentrated in the durable goods, tool, and machinery sub-sectors.

• Construction lost 104,000 jobs and the once-venerable sector has shed a total of 551,000 jobs since September 2008. The industry has lost 1.1 million jobs since peaking out in January 2007.

• The service sector has been hit particularly hard, losing 375,000 jobs in February and a grand total of 1.77 million just since September of last year. A healthy portion of these losses have occurred in the financial arena including investments, credit intermediation, real estate, mortgages, and banking.

One area that has held up reasonably well so far is leisure and hospitality. This industry is ripe for a pullback, however, as Americans continue to cut back on discretionary purchases. Stories of free hotel rooms in Las Vegas and other trendy tourist spots are becoming more and more commonplace as firms in the sector engage in a frantic race to capture waning consumer dollars and cover their fixed costs.

Compromised workers – a more accurate measurement?

Perhaps a more useful measure is the degree to which incomes and earnings have been compromised. To get a reasonable representation of this, we can take the total amount of individuals on unemployment and add to that the number of individuals who are working part-time for economic reasons. This does not include people who choose to work part-time, but have to. When you add these two groups together, you come up with almost 23 million Americans or nearly 15% of the workforce. Compare this with the BLS advertised 8.1% rate and you see a very different picture.

Unemployment Rate

To get a better idea of the scope of the ‘unemployment’ problem, add in the people who are given the choice of taking a pay cut or losing their job plus those who have fallen off the unemployment rolls. Let’s mention one more group in here too. What about the people who retired over the past few years only to find their retirement accounts wiped out and who are now in need of work? While there is no way to easily track these folks, the anecdotal evidence suggests that this group is much larger than most policymakers and pundits would care to admit.

'Compromised' Workers

Like it or not, to one degree or another, all the aforementioned folks are unemployed, even if only partially, in that they’ve lost a portion of their income. Compromised incomes translate directly to lost consumer spending, which translates directly to lost GDP. The bottom line is that these folks don’t spend much money. Nor can they easily be induced to borrow especially to purchase discretionary items.

MTC Economic Distress Index

Confusing isn’t it? So many numbers lead to even more interpretations, so we’ve tried to make this a bit simpler for folks. To do this, we created a weighted index which takes into account compromised workers (from the data in the chart above), consumer prices (domestic purchasing power), the trade-weighted Dollar (purchasing power abroad), and the burden of consumer credit. We update the numbers each month and the chart (seen below) each quarter. Due to the lag involved in gathering credit numbers, the current index is for January 2009. To give a better graphical representation of the impact over time, we ran the data series back to January 2000. Further explanation of the chart and data as well as updates may be found at:
http://www.my2centsonline.com/edi.php

MTC Economic Distress Index

12/08 = 160.93; 01/09 = 163.37 (1.52% – 18.19% Annualized)

All of the data listed herein only serve to illustrate and underscore the need for America to focus on productive employment. Emphasis on productive. Government attempts to spur employment by increasing the hiring rate of paper-pushers, government bureaucrats, and regulators produces nothing and in fact constitutes a further drag on economic growth. Private sector investment at this time is key to reviving America. What we need in this country is another industrial revolution. ‘Free trade’ agreements need to be recognized as being unfriendly to American prosperity and summarily fed to the shredder. The sooner the better. Otherwise, there will be little in the way of prospects for future employment reports and our economy will be further devastated.

Don’t miss out on your free copy of our report “The 7 Mistakes Investors make..and how to avoid them”. Get your copy today by going to our website www.suttonfinance.net and clicking the free report banner.

Disclosures: N/A

Who runs the Country?

by TwoCentsEditor
Published on: 03/02/2009
Categories: Current Events
Tags: , , , , , , , , , , , , , ,
Comments: 7 Comments

By Fred Carach

In American history there have been two great defining elections. All other American elections are insignificant in comparison. The first great defining election was the election of Abraham Lincoln in 1860 that ushered in the great period of Republican Party dominance, which lasted from the civil war until the Great Depression. The second great defining election was the election of Franklin Roosevelt in 1932, which ushered in the great period of Democratic Party dominance.
This dominance has just been re certified by the recent election of President Obama.

After the historic election of 1932, the Democrats faced a shattered opposition. Just as they do today. The Democratic Party then dominated politics at every level of government. The overwhelming majority of all the mayors in the country were Democratic . The overwhelming majority of all the state legislatures were Democratic. The overwhelming majority of all the state governors were Democratic. Democrats dominated both houses of Congress and the president was a democrat. Nothing has changed in 77 years. Eight decades later the dominance of the Democratic Party at every level of government is almost as total as it was in 1932.
Nothing better demonstrated their strangle hold on political power than their absolute domination of the House of Representatives for 62 straight years from 1932 to 1994. Under our system, command of the house alone granted Democrats perpetual blocking power over all legislation.

What two party system are people talking about? The simple truth of the matter is that we do not have a two party system in this country and have not had one since 1932. What we have is a one and a half party system, which is pretending to be a two party system. The only level of government at which the Republican Party is competitive is the presidency. Remove that and there is nothing left.

The question that has to be asked is how has the press missed this? Are they really that stupid or are they just pretending to be that stupid? The truth of the matter is that I just do not know. Both presumptions seem equally plausible to me.

As for the Democrats, the Republicans serve a very useful purpose. They are the perpetual fall guy and whipping boy of the Democratic Party whenever things go wrong. Just ask yourself what would the Democrats do if it ever dawned on the people that the lion’s share of everything that has gone wrong in this country since 1932 was the fault of the Democratic Party? Things could get very ugly. Besides they like having the Republicans to kick around.

We now come to the vexing problem of the alleged power of the presidency to influence the economy. This idiotic belief is something that the Democrats have had a field day promoting ever since they rose to power in 1932 with their vicious attacks on President Hoover. Since their control of congress since 1932 has been almost perpetual and the presidency is the only branch of government in which the Republicans are competitive. There are enormous rewards for the Democrats in shifting the blame for economic hard times from congress where it belongs and in promoting the myth of presidential economic responsibility.

This domination not only extends to their control of the press but to popular beliefs as well.
Consider this, all my life I have wondered why the Hoover Dam was called the Hoover Dam
instead of the Roosevelt Dam. After all, we all know that after the stock market crash of 1929 President Hoover and the Republicans sat around in a stupor and did nothing while the country went to hell. Don’t we? Then the heroic Democrats took over and saved the country in the 1930s with their huge public works projects. The most massive of which was the Hoover Dam and the magnificent Golden Gate Bridge.

Recently, I was stunned to discover that the Hoover Dam and the Golden Gate Bridge and god only knows what other major public works projects of the 1930s were authorized not under Roosevelt which is what we all believe but under President Hoover!

How sweet it is! This is domination, total and complete.

When the Democratic Party took control of the country in 1932 their position was ideal. They had assumed power when the country was at rock bottom. Things could not possibly have gotten any worse. The stock market had lost 91% of its value and 5,000 banks had failed. The unemployment rate was at 24%. If they had done nothing for the rest of the decade except giggle stupidly at themselves the economy would have improved.

They instead embarked on the most advanced economic thinking of the day. Keynesian economic theory, which held that vast government public work programs was the solution to the depression. It should have worked but it didn’t.

I would have supported these programs. Just as I support public works programs for today’s recession.

The failure of these public works programs to end the depression is astonishing. The unemployment numbers are so bad that it is hard to believe them. In 1932 the unemployment rate was 23.6%. In 1933 it was 24.9%. In 1934 it was 21.7%. In 1935 it was 20.1%. In 1936 it was 16.9%. In 1937 it was 14.3%. In 1938 it was 19%. In 1939 it was 17.2%.

Then salvation came. It was the armaments production of World War Two that saved the day. Not Keynesian public works projects.The 1929 GDP was not exceeded until 1943 well into the war. It was not until 1955 that the 1929 stock market peak was exceeded.

The Democratic propaganda machine is a Juggernaut. Almost everyone believes that the Democratic Party and its vast public works projects saved the country in the 1930s after the stupid, do-nothing Republican Party had wrecked it. The Republicans don’t stand a chance. They don’t have a chance!

The American people in their ignorance have been adamant since day one that when the economy goes south the person to blame is the president. The problem with this cherished belief is that when the economy blows up the president cannot possibly be blamed because the constitution does not grant the president economic powers. Only congress is granted economic powers. There can be only one possible explanation for this belief. At least 80% of the American people must have been in a stupor when the constitution was being explained to them in civics class.
The president is commander-in-chief of the armed forces and the chief executive officer or CEO of the federal bureaucracy. And he is the co-equal with the congress in diplomacy and foreign affairs. And that is where his powers end. His powers to influence the economy for good or ill are zero, Nada, zip.

The constitution grants congress total political power to influence the economy through its monopoly power to write laws effecting the economy and its power to spend money. Consider this; congress has the power to remove the president from office. But the president cannot remove one single member of congress from office. Congress can override the president by overriding his veto and thus impose its will on the president.But the president is powerless to override the will of congress if his veto is not sustained.

At this point some cretin will step forward and allege that while all this is true it is usually the case that congress follows the will of the president. You cannot be serious! What fantasy land have you been living in! Everything depends on which party controls congress. If his party controls congress, the president has a reasonable chance of getting something that vaguely resembles his proposal through. And this holds true only if you do not make the mistake of reading the legislation. If you read the legislation you are in for a rude disappointment. You will find that there is a yawning gap that looks like the Grand Canyon between what the president proposes and the legislation that he finally ends up signing. If on the other hand the president’s party does not control congress, forget it.

Recently, we have had a textbook demonstration of who holds the whip hand. When Treasury Secretary Paulson on September 20, 2008 presented President Bush’s now notorious $700 billion TARP program to congress. The proposal was written on three and a half pages. After he got through whining and begging the imperial congress presented the president with its own TARP program. A 450 page detailed document that after the president signed it had the force of law. Case closed!

Who runs the country,the Democratic Party? Who is responsible for the economy, the United States Congress?

Fred Carach is the author of the book, “Forty Years A Speculator” and his essays and pod casts can be viewed on his blog at fortyyearsaspeculator.blogspot.com

A Game of Confidence

by TwoCentsEditor
Published on: 02/27/2009
Categories: Current Events, Economics, My Two Cents
Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
Comments: 4 Comments

A scan of the financial and economic landscape of any society during solid, genuinely prosperous times will always reveal a populace brimming with confidence. Confidence in their ability to make a living, confidence in the ability of their leaders, confidence in the workings of their financial markets to whatever extent they exist, and ultimately confidence in the strength of their money. These factors are all interlocking directorates; take any one of them away and you’ll witness an economy that is no longer efficient and begins to stumble. Take them all away and you’ll witness unbridled economic chaos.

It is the latter statement that causes me to reflect this week on the prospects for our return to prosperity. We have had the opportunity over the past year to listen to many speeches from Presidents to heads of Treasury and the Federal Reserve. Many men and women – bright men and women, have weighed in and opined on our current situation. They’ve spoken of stimulus, of consumer spending, government spending, bridges, roads, healthcare, energy, banks, and many other topics too numerous to count in this short space. However, what I haven’t heard nearly enough mention of is confidence even though the stated purpose and intent of these speeches has been to inspire the same.

The confidence of consumers

One report in particular has made some inroads in terms of getting coverage of the precipitous drop in overall consumer confidence. And in fact, the most recent release of the Conference Board’s measurement of consumer confidence was the worst in history since measurements began more than 40 years ago. Perhaps the worst part of this report was the expectations component, which absolutely fell off a cliff, plunging from a level of 42.5 to a 27.5 level. The jobs component of the report was no better. 47.3% of those surveyed expect there to be fewer jobs in the future with a mere 7.1% expecting more jobs. 4.4% thought jobs are easy get with nearly half (47.8%) opining that jobs are very hard to get. The chart below tells the awful story.

Consumer Confidence Chart

It is fairly easy to see how the lack of confidence has translated into overall drops in retail sales. Sure people are spending less for gasoline (a major component of retail sales) than they were a year ago, but they certainly aren’t buying anything else in its place either.

This situation, however, goes way beyond some numbers reported every month. It goes to the very heart of the opening paragraph. Confidence is the key to a successful economy, particularly ours, which is so heavily dependent on the consumer taking on debt and spending money. In order to perpetuate this dynamic, the consumer needs to have utmost confidence. As last 2008’s failed stimulus package demonstrates, simply handing money to consumers who are not confident will result in the money being saved or used to pay off existing bills. No confidence, no spending. It’s as simple as that.

Collapse of retirement contributions a referendum on confidence in the financial system

Whether it is along with, beside, or because of consumer’s confidence, equity markets on a global scale have crashed in grand form over the past year. Sure, not all of that was caused by the little guy selling his 401(k)/IRA and going to cash. It is our opinion that the little guy actually represents a relatively small component of the overall money invested in the markets when leverage is factored in. However, the little guy’s actions have still had major ramifications. Consider the following:

• 529 plan contributions are down an average of 60% from 2007 according to a 529 plan representative who materialized at my office door a few weeks ago

• According to TD Ameritrade, 63% of people with retirement plans stopped contributing to them in 2008

• Only 21% of individuals surveyed in the above study had more than $50,000 in investable savings

• Unemployment (32%) and increases in health care premiums (25) were the leading reasons why people stopped contributing to retirement plans in 2008

• Nearly 25% of survey respondents in the 35-44 age group said they’d completely stopped contributing to retirement accounts in 2008. This more than any other group

While complete data for 2008 contributions is incomplete due to the fact that 4/15/09 is the deadline for 2008 IRA contributions, it is relatively clear that 2008 contributions will be down significantly. This problem is two-fold. The first is many people don’t have the funds to invest. The second is that they have lost confidence in the markets and their ability to protect (let alone grow) capital. This reality is unfolding at an unprecedented time in history – a time when people can least afford to be caught without savings.

Job loss – the ultimate confidence-killer

As now more than 600,000 Americans each week are realizing, the loss of a job is one of the most stressful events one can endure. There is an old adage that it is a recession when your neighbor loses his job, but it is a depression when you lose yours. This is not meant to trivialize the matter of unemployment in the least, but rather to underscore the effect that the loss of one’s livelihood has on confidence. As can be expected, consumer confidence has plunged as job losses continue to increase.

Unemployment Graph

Next Friday’s unemployment report is likely to feature an unemployment rate well north of 8% not counting the thousands of workers who lost their jobs in late 2007 and early 2008 that have now fallen off the unemployment rolls and as such are no longer counted. By our count, there have been nearly 2.4 million first time claims for unemployment in the past 4 weeks alone and the trend shows no signs of slowing, at least not in the short term. While unemployment insurance lasts up to a year (depending on the state), it only covers a portion of lost earnings. A good average is probably around 60%. I don’t know about you, but I don’t know too many people who can maintain their current standard of living on 60% of their income – or are even willing to try.

Money – A True Crisis of Confidence

Confidence in the monetary system of the United States has been a true lagging indicator. Inflation at a rate of 5% or so per year has been institutionalized in the system for as long as anyone can remember. Keynesian economics teaches us that this inflation is a normal by-product of growth and should be accepted with glee, which is absolute nonsense. This is akin to welcoming a burglar into your home and offering him 5% of your belongings then chalking it up as a cost of living.

However, even the most regular of folks are starting to wonder where the trillions of dollars for their retirements, healthcare, financial system bailouts, various industry bailouts, state bailouts, government spending, and other pet political projects are going to come from. The fact is we’ve crossed the Rubicon in this regard. The world no longer creates enough savings to cover our massive balance of payments and fiscal deficits. And remember, one in three Americans have less than $50,000 in savings to deal with this. Everyday Americans are starting to wake up to the reality that this money doesn’t exist and must be created from nothing. That certainly doesn’t bode well for their confidence in the value of the currency they carry in their pockets. It can no longer be called money, because to call it money is to imply that it is a store of wealth and acts as a standard unit of exchange.

A real store of wealth holds its value and maintains purchasing power. The US dollar has lost around 96% of its purchasing power since the Fed was created in 1913. Other paper currencies are not far behind. This reality has driven record demand for gold and silver coins as the public awakens and attempts to diversify out of paper. This overall loss in confidence in paper assets is what drives mainstream columnists to attack gold as a ‘useless rock’ and float the false notion that people who bought stock after the 1929 crash got their money back in a few years when in fact it took a few decades. Remember, it is all about confidence.

In the end, the financial crisis of 2007-? will be summed up as a fairly simple process:

1) Confidence shaken

2) More debt accumulated to maintain confidence

3) Confidence further shaken

3) Even more debt accumulated

4) Confidence lost because of all the debt accumulated

For in fact during the early stages of the crisis, policymakers and pundits alike were busy talking about strong economic fundamentals and failing to address the root causes of the problem when it might have mattered. For nearly 9 months the current depression brewed before Fed head Bernanke and Treasury Secy. Paulson were even willing to admit that a problem existed outside the banking system. The entire sum total of their efforts was to maintain confidence. It was a dangerous gamble that has proven disastrous and they’re about to learn the hard way that while you might be able to create a bailout for big banks and big government, there is no bailout for confidence.

Don’t miss out on your free copy of our report “The 7 Mistakes Investors make..and how to avoid them”. Get your copy today by going to our website www.suttonfinance.net and clicking the free report banner.

Disclosures: Long GDX

Digging in the Couch

by TwoCentsEditor
Published on: 10/27/2008
Categories: Current Events, Technical Analysis
Tags: , , , , , ,
Comments: 7 Comments

Amazingly, despite the fact that nearly every one of Wall Street’s big firms is crying poverty and pining for your tax dollars, they have somehow found billions for year end bonuses. When I read this story, I had the unmistakable image in my mind of Wall Street executives dispatching their legions of idle associates to scour the couches looking for spare change. Let’s keep score a second. In 2008,

  • 5 major financial firms have gone broke or required a bailout
  • At least 3 others narrowly averted bankruptcy (thanks JP Morgan – oh WHERE do you get all that money?)
  • More than a dozen banks have failed with more on the way
  • Thousands of jobs have been lost just in the financial sector
  • Shareholders didn’t just lose their shirts; they lost their pants and socks too
  • US taxpayers will bear the cost for at least 10 generations – Yes I did say 10.

And after all that there is still plenty of money for bonuses? Are you kidding me? Bonuses are supposed to reward a job well done. Instead, these folks have been allowed to bankrupt a nation and will get to hit the cookie jar one more time.

page 1 of 2 »

Recent Posts
  • "All is Quiet on the E… by TwoCentsEditor

    2011 had been touted as the year that everything would change. Massive paradigm shifts would rock our world and many a prophecy was made regarding financial crises, currency crises, wars, rumors of wars, and there was even one fellow who said the world itself would end, although he later retracted [...]

  • France Downgraded by S&P by TwoCentsEditor

    Editor’s Note: As long as the bankers don’t get their way, the downgrades and raids on national treasuries / economies will continue. When they bankers get their way, the pain stops. Just go back and take a look at the chronology of what has happened over the past several years [...]

  • Greece's Clock is STIL… by TwoCentsEditor

    Editor’s Note: Not again! Weren’t we told a month ago that this problem was fixed? Guess it had to be kept quiet over the shopping season so that spending would be healthy.. Lucas Papademos, Greece’s new technocrat prime minister, faces a race against time to secure a second financing package [...]

  • IMF: World Economy at '… by TwoCentsEditor

    Editor’s Note: The IMF should know; they’re the ones moving the chess pieces in this game… chief Christine Lagarde warned Tuesday that the world economy is at a “very dangerous juncture,” speaking of the potential impact on poorer nations during her first visit to Africaas head of the fund. The [...]

  • A Look Behind the Paradigms… by TwoCentsEditor

    Co-Authored by Gregory Olson, CEO – GRO Enterprises One of the traps all analysts fall into from time to time is their inability to see the forest through the trees. We are all guilty of this from time to time, and those who would deny this simple reality only set [...]

  • Jon Corzine - Permanent Amnesia by TwoCentsEditor

    Editor’s Note: “No I don’t know where the money is”.. “No, I didn’t intend to break any rules”.. Does anyone really believe a word that comes out of the former Goldman boy’s mouth??? As the first former U.S. senator to be subpoenaed by Congress in more than a century, Jon [...]

  • Just When You Thought You&#… by TwoCentsEditor

    As I wrote in the last installment regarding the situation in Europe, matters are progressing there much more quickly now as the continent sways back and forth between financial oblivion and a nervous peace brought about by paper promises (yes, paper promises) by central banks around the world. The purpose [...]

  • Kicking the Can Down the Road 101 by TwoCentsEditor

    Editor’s Note – Even the mainstream press is coming to the realization that there is no fixing the Eurozone’s debt problems; just postponing the inevitable. BRUSSELS (AP) – Under pressure to deliver shock treatment to the ailing euro, European finance ministers failed to come up with a plan for European [...]

  • How Paulson Gave Hedge Fund… by TwoCentsEditor

    Treasury Secretary Henry Paulson stepped off the elevator into the Third Avenue offices of hedge fund Eton Park Capital Management LP in Manhattan. It was July 21, 2008, and market fears were mounting. Four months earlier, Bear Stearns Cos. had sold itself for just $10 a share to JPMorgan Chase [...]

  • Businesses Prep for Death S… by TwoCentsEditor

    International companies are preparing contingency plans for a possible break-up of the eurozone, according to interviews with dozens of multinational executives. Concerned that Europe’s political leaders are failing to control the spreading sovereign debt crisis, business executives say they feel compelled to protect their companies against a crash that can [...]

Categories
Recent Comments
  • Stacey Derbinshire about Leading to What?
    I found your site on technorati and read a few of your other posts. Keep up the good work. ...
  • Mike Harmon about Payroll Tax Receipts vs. SP…
    I discovered your homepage by coincidence. Very interesting posts and well written. I will put your site on my blogroll. :-)
  • Jose Sinclair about Roubini's Reversal?
    We all know that "national security" trumps all - in fact, if you don't do something the feds claim is ...
  • TwoCentsEditor about Basic Financial Analysis - Part II
    Hi, We don't take donations, however, anyone interested in helping us continue to provide this information should feel free to ...
  • penny stock pick about Basic Financial Analysis - Part II
    Do you take donations or is this free like some of the penny stock pick site I know that take ...
  • Sarah about Basic Financial Analysis - Part I
    Pretty nice post. I just came across your blog and wanted to say that I've really liked browsing your posts. Any ...
  • Kelly Brown about Transition to Radio CICN complete
    Hi, gr8 post thanks for posting. Information is useful!
  • Steven Kadison about A response to Senator Arlen Specter
    Nice piece - tell these clowns how it is. I am sick and tired of them spending my kids' futures ...
  • TwoCentsEditor about Will 2009 be the year?
    Apparently, CIC had some troubles the past few days. I am told that everything should be fixed soon. Regards, Andy Sutton
  • chris banick about Will 2009 be the year?
    Great site Mike, But I seem to have trouble with the links to www.contraryinvestorscafe.com for some reason. Do you have ...
Welcome , today is Sunday, 02/05/2012