Year's End

As 2010 draws to a close, it might be helpful to see where we've been this past year:

* The Dow Jones average started the year just over 9000, plunged to 6547 in March, then climbed all the way up over 10,500, to finish with a positive gain of around 20 percent on the year.

* The S&P 500 followed the same trajectory: It opened at 931, fell to 676 in March, and finished at just over 1100. Same thing for the Nasdaq, which went from 1632 to 1268, then all the way back up to about 2300. Overall, the Nasdaq climbed more than 40 percent on the year.

* Inflation mostly hovered around zero. July saw the biggest rate of deflation on the year, when prices fell 2.1 percent on an annualized basis. The bad news about inflation is that the highest number was also the most recent one we have: It rose 1.8 percent on an annualized basis in November.

* Unemployment remains the big problem. In January we were at an already lofty 7.6 percent unemployment, but the number just kept going up, peaking at 10.2 percent in October, although it slipped back slightly to 10.0 percent in November, the most recent figures we have.

* Gold started the year at about $875 an ounce, then sagged a bit to $813 in mid-January. A big run in the precious metal, based in large part on the weak dollar, pushed it as high as around $1200 an ounce in early December, but it's now dipped back to just under $1100.

All in all, 2009 was a brighter year than most investors expected a year ago. Let's hope for even more good news in 2010. Happy new year!

Rising Confidence

The consumer confidence numbers released yesterday were up for December, which is another step in the right direction for this economy. But for 2009 as a whole, they represented the worst year on record, according to ABC's polling. Americans this past year felt worse about their economic situations than they had since at least 1985, when ABC began its Consumer Comfort Index.

That's not a reason for worry, though. As we've said repeatedly, economic statistical reports are always backward-looking, and the pessimism of the American people in the summer of 2009 isn't going to have anything to do with where the economy goes from here.

That's why it's a bit comical that the Conference Board revised its consumer confidence figures (taken from a different poll than the ABC one) for November. When it announced this week that December's reading had come in at 52.9, it also said that November's number had changed from 49.5 to 50.6. Why would they bother? It's not like a record of housing starts or GDP that's grounded in specific data; it's a measure of how people feel, and no one should mistake it for a hard-and-fast fact. So why would anyone care if people were, by this measure, slightly more optimistic in November than we initially thought?

The Season for Giving

The recent runup in the stock market, combined with the holiday season, may have left you in more of a giving mood than you expected to be at this time of year. There are still a few days left in which you can make charitable contributions and deduct them from your taxes.

In fact, if you're supremely indecisive about these things, you can wait until nearly midnight on December 31st nowadays, thanks to the Internet. Even if you're moving funds from a brokerage account, some places let you make an electronic funds transfer to the charity of your choice right up to the last minute on New Year's Eve.

But if you need to get a check from your account and send it to the church or charity of your choice, the rule is that it has to be postmarked by December 31st. So if this is something you want to pursue by year's end, you should call your brokerage or financial adviser now - as in today - to see what you need to do to make it happen.

One common option this time of year is to donate appreciated stock, which means you don't need to pay capital gains tax on the runup. But because of the unusual mature of this year's market, with a deep plunge in March, be careful that the stock is indeed worth more now than what you paid for it - you can't just measure the appreciation from the lowest point. And you must have held the stock for at least a year in order to qualify for the cap-gains writeoff.

A Light Week

Like we discussed during Thanksgiving week, the upcoming week in the stock market promises to be very quiet, which can also lead to greater volatility. Many traders remain on vacation this week, which has only four trading days to begin with. The news this week will be driven by a few different things:

* Tuesday, there will be a new consumer confidence report. The consensus is that the number will be up slightly.

* Also on Tuesday, the Case-Shiller report on home prices is due.

* Wednesday, the December index of business activity in the U.S. Midwest region comes out. The estimate is that the number will be down slightly from November, but still expansionary.

* Thursday, we'll have a new weekly jobless report.

Any of these could have an outsize effect on the market indexes on a very light trading day. Don't take the resulting market swings all that seriously.

Thoughts for Christmas

"When we recall Christmas past, we usually find that the simplest things - not the great occasions - give off the greatest glow of happiness." ~ Bob Hope

"Once again we find ourselves enmeshed in the Holiday Season, that very special time of year when we join with our loved ones in sharing centuries-old traditions such as trying to find a parking space at the mall. We traditionally do this in my family by driving around the parking lot until we see a shopper emerge from the mall, then we follow her, in very much the same spirit as the Three Wise Men, who 2,000 years ago followed a star, week after week, until it led them to a parking space." ~Dave Barry


"There's nothing sadder in this world than to awake Christmas morning and not be a child." ~Erma Bombeck

Merry Christmas, everyone!

Last-Minute, Big-Spending Gift Ideas

Still have a few presents to buy? If you really blow your budget, your loved ones will never guess you waited till the last minute to do your shopping. Here are some of this holiday season's most outrageous selections:

* Want to go with a simple gift card? Injet offers a private jet gift card, offering your favorite executive ten hours of flight time on a private jet. The price tag: $42,000.

* Do the kids still need a stocking stuffer? Goldstriker International has created the Nintendo Wii Supreme, coated in 22-karat gold and sporting front buttons decorated with 78 quarter-cut diamonds weighing a total of 19.5 carats. The price tag: $481,250.

* Looking for a high-fashion accessory that also offers everyday utility? Christian Dior has gone into the cell-phone business, with a slim model featuring the House of Dior's signature pattern and the exclusive "CD" initials. The price tag: starts at $5,000.

* One big-ticket item that's not so extravagant this year is Neiman-Marcus' famous fantasy offering from its Christmas catalog. For the first time in ten years, there's no million-dollar item; your friends and family will have to settle for "his and hers" two-seater airplane, plus flying lessons, going for a bargain-basement $250,000.

The Future of the Estate Tax

So where does the estate tax go from here? Senator Max Baucus, who is the chairman of the Senate Finance Committee, plans to introduce legislation early in 2010 to reinstate the estate tax. Baucus also seems determined to have the rates and exemption level stabilize: "It is an outrage that the Congress allows estate taxes to change so much," he said last week.

The tax is set to expire on January 1, and the new estate tax won't be settled until sometime thereafter. That has led some policy analysts to suggest that the tax couldn't be made retroactive, and any person who passes away during the first weeks of 2010 would end up not being subject to the tax. But that's not the case. For over a century, the courts have found retroactive taxes to be perfectly constitutional. They would surely find an estate tax, passed to retroactively cover what would be no more than a month or two, to be legal as well.

Even the Republicans have resigned themselves to an estate tax, suggesting a 35 percent rate on estates worth more than $5 million. The Democratic-controlled House has already passed a bill extending the current rate of 45 percent. Either way, it seems clear that you should expect to keep your estate plans in order and up to date, to ensure that your heirs will be treated fairly.

The Estate Quirk

Yesterday we mentioned that as things stand now, the estate tax is scheduled to go away for the entirety of 2010. But that doesn't mean the your heirs will be free of tax if you pass away during the next twelve months. A quirk in the capital gains tax law means they are likely to owe something anyway. Here's how it works:

In the past, estates have been taxed solely on the basis of what they were worth at the time of the decedent's passing. So if your grandfather had bought IBM at 5 in 1970, and it had risen to 100 by the time you inherited it in 2000, you would have owed estate tax on the stock at it present value of 100. But no one would have ever had to pay capital gains tax for that rise from 5 to 100.

In the absence of the estate tax in 2010, such transactions will be treated as gifts. So even though there would be no estate taxes due, there would be capital gains taxed owed on the entire appreciation of the gift, dating back to when the decedent acquired the asset. In this example, you would owe capital gains taxes on the entire 95-point appreciation in the stock.

This will have the result of subjecting more people to taxes on inherited property, not less. It will also lead to lots of scrambling through old paperwork to figure out exactly when someone bought a few shares of stock 40 or 50 years ago. Don't be surprised if horror stories arising from this situation lead Congress to finally address the estate tax again.

The Moving Target of the Estate Tax

As we approach the end of 2010, there is a nagging problem in most people's financial plans that looks like it will not be resolved by the end of the year: the estate tax. The estate tax is scheduled to be repealed as of January 1, but only for 2010. In 2011, it's scheduled to return, at an even higher rate than it's at now. All these changes are likely to play havoc with the type of estate planning that people have invested years of time and money in.

Here's how we got to this place: There was a law called the Economic Growth and Tax Relief Reconciliation Act, passed in 2001, that slowly phased out the estate tax. The exemption gradually increased from $1 million per person ($2 million for families) to the current $3.5 million ($7 million for families), while the tax rate fell from 55 percent to 45 percent. And the law allowed the estate tax to end completely in 2010 - after which the law itself would expire as well.

Lawmakers back in 2001 were scared by how future deficits would look after the permanent loss of revenue from eliminating the estate tax, which is why they didn't remove it for good. They just kicked the can down the road and figured lawmakers ten years hence could take on that responsibility. Now here we are, with ten days left in the decade, and nothing has been done. And if nothing gets done, after an estate-tax-free year in 2010, the figures automatically return to their 2001 levels in 2011: a $1 million exemption and a 55 percent tax rate.

It's a bit of a mess, and something no one seems happy with, either Republicans or Democrats. But at the same time, no one has stepped forward to fix it. Tomorrow, we'll talk about what an unchanged tax situation could mean for your estate in 2010, and what might happen in the years to come.

Million-Dollar Bill

We've all dreamed of stumbling across a big pile of money, but we recognize that it's just a fantasy. A man in Illinois refused to let go of his hopes when he came across a million-dollar bill recently. That's right, a million-dollar bill, with a picture of our 19th president, Rutherford B. Hayes, that was lying in a phone booth in East St. Louis, Illinois.

The gullible finder took the bill to a bank in downtown St. Louis, but the teller didn't quite know what to do with it and advised him to take it to the Federal Reserve Bank. The Federal Reserve told him to take it to the Bureau of Printing and Engraving. So he put it in the mail - a million dollars! - to the Bureau, in D.C., and awaited a reply, which finally arrived four months later. "I regret," the letter said, "that my reply is not favorable."

For the record, the most valuable bill printed in the U.S. today is the hundred. The largest ever printed by the U.S. Treasury was the $100,000 bill, last issued in 1935. The luckless fellow in Illinois had found a bill printed by a ministry in California, with a tiny religious tract on the back - too tiny for many people to even read. At least in this case, it didn't work.

Housing and Hovnanian

Just when you thought the recovery might be in place, there's news like yesterday's from Hovnanian Enterprises, the Red Bank-based construction company that is the state's largest homebuilder. Hovnanian's net loss for the quarter ending in October was $3.21 a share, compared with $5.79, a year earlier, they announced yesterday. Even though the losses are headed in the right direction, they were still worse than expected by Wall Street, which had a consensus estimate of a loss of $1.72 a share. Revenues, as we've said many times, are the key to growth, and Hovnanian's were down 39 percent.

For a while, the housing news appeared good on Wednesday, as the Commerce Department reported U.S. housing starts rose about 9 percent in November, exceeding expectations. Hovnanian was up 11 percent on the day, but when its figures were released at the end of the day - including an underwhelming 1 percent rise in new home contracts - the stock lost 6.6 percent in after-hours trading.

Hovnanian is moving in the right direction, but it still has a long way to go. I guess you could say the same about this economy.

Inflation and the Market

The big news moving the markets yesterday was the government's report that inflation rose higher than expected in November, with the producer price index jumping 1.8 percent. Most of that was because energy prices were up 6.9 percent, but even so-called soft goods rose 0.5 percent for the month, their biggest increase in over a year.

And since the Dow was down for the day, much of the press leapt to equate the two. MarketWatch wrote: "US stocks finish lower amid signs of inflation." "Spike in wholesale inflation sends stocks lower," said the AP. "European, US stocks drop after inflation data," said Business Week.

But that's probably not what happened. Inflation is actually good for stocks; when everything starts to get more expensive, one of the prices that tends to rise is the price of stocks. In fact, there was a research paper on this subject not too long ago, by an economics professor at Columbia and a statistician for the Fed, which found that "bond and equity yields comove strongly and positively with expected inflation."

Inflation could play all kind of havoc with our economy, if it does return with a vengeance. But it's not likely to have a negative effect on the stock market - and it almost certainly didn't drive stocks lower on Tuesday.

The Return of the Hedge Fund

The bull market of the past several months has created a renewed interest in hedge funds, which had a disastrous 2008, with record losses. But in the first nine months of 2009, roughly $150 billion was invested in hedge funds. The biggest winners were the biggest funds: Those with assets between $5 billion and $10 billion saw the most net inflows, while the largest outflows came from funds with less than $1 billion in assets.

The growth in hedge fund money has also led, predictably, to more hedge funds. During the third quarter of 2009, there were more hedge funds being created than there were hedge funds being shut down. That might not seem like much of a milestone, but it is the first time in over a year that that's happened.

The amount of money invested in hedge funds peaked in the summer of 2008, when they had $2.5 trillion in assets under management. By the end of this year, even with the rebound, the number will be roughly half of that.

The Value of Intelligence

Are you smart enough to pick the stocks you invest in? Obviously, brains are a big part of successful stock investing, but new studies from UCLA and the University of Chicago have helped to quantify just how much.

It turns out that investors with higher IQs do show stronger returns on their short-term investments. Specifically, high-IQ investors make 11 percent more on an annualized basis than lower-IQ investors after the first two days of an investment.

But after a month, the differences begin to wash out. In the long term, smart investors do no better than less-intelligent investors. In other words, in the long term, the market itself is smarter than any of the individual investors.

Bank Fraud of the Silliest Kind

Just in case you missed it: A 25-year-old man named Tita Nyambi arrived at the drive-through window of the Chase Bank in Franklin on Monday intending to withdraw some cash. But he apparently had no money of his own, so he tried to get the funds from his mother's account. He handed the teller his mother's driver's license, and he wore a pink blouse and a scarf on his head. He even spoke to the teller in a high-pitched voice.

The tellers were not fooled. They called the police while Mr. Nyambi was still in the drive-through lane, and he was arrested on charges of attempted theft by deception and forgery for faking his mother's signature.

Mrs. Nyambi does not appear to have commented on her son's thievery, nor whether he does a good imitation of her voice. Mr. Nyambi is still in jail, where he is still presumably wearing that pink blouse.

Rolling Back the TARP

The TARP program continues to slowly wind down with the news that Bank of America, now the largest bank in the nation, has repaid the $45 billion it received from the federal government. It had gotten $25 billion at the height of the banking crisis, back in the fall of 2008, then another $20 billion to help with its purchase of Merrill Lynch in January 2009.

BofA had been critical of the plans of Obama's pay czar, Kenneth Feinberg, to limit the compensation for executives at companies that were beholden to the U.S. government. That probably helped spur the payback.

Next up is Citigroup, which also got $45 billion in aid and is reportedly negotiating to pay that back as well. All told, the administration now expects the entire TARP program to cost taxpayers $141 billion, out of an original outlay of $700 billion. A big chunk of that lost money went to the Big Three automakers and to AIG, and that money is never coming back. But most of the money that went to banks will eventually be recovered.

Dollar Muscle

The recent rise in the price of the dollar has been highlighting some of the interrelations between various pieces of the financial landscape. Yesterday, the dollar gained against 14 of the 16 other leading currencies around the world. That helped fuel all of the following:

* Gold dipped to a three-week low. It's lost almost $200 per ounce from its recent peak, much of that simply due to the fact that the resurgent dollar now buys more of the precious metal; the underlying price of gold may not have changed much at all.

* Oil dropped $1.31 a barrel to $72.62. The price of oil is now down 7.3 percent in the past week.

* Treasurys were up somewhat, as investors sold off gold and other commodities for the safety of the American dollar.

* Both the Dow and the S&P 500 were down about 1 percent, as the stronger dollar put a little dent in the profits of companies with international operations.

That's not to say there's a one-to-one relationship between the dollar's strength and each of these other outcomes, but they are definitely influenced by the dollar's performance. In a sense, it's unfortunate that we refer to a "stronger" or "weaker" dollar, because it's not an unalloyed good to have the dollar up, nor is it all bad to have the dollar down. It's just another piece of the puzzle.

Credit Report

Consumer credit has been falling lately in lockstep with consumer confidence, as people with precarious employment situations have been reluctant to go into debt. So the fact that it shrunk by less than expected in October - and at less than half the rate on an annualized basis than it had fallen in each of the first three quarters - is good news indeed.

But that's not the whole story. The total drop in consumer credit was $3.51 billion in October, but revolving credit, which is primarily from the use of credit and charge cards, dropped by $6.95 billion. Nonrevolving credit, which includes fixed-term loans for items such as cars, boats and college education, rose $3.44 billion. (Mortgages and other loans linked to real estate aren't considered part of consumer credit.)

Both types of credit expand the nation's wealth in a sense, but the nonrevolving credit is a better measure of consumer confidence. People can charge items to a credit card on a whim, but buying a car is something that takes careful planning. And apparently, Americans are planning on having some reasonable income in the next few years.

November's Good News

Friday's report on the employment figures was the most heartening news we've had on that front in years, and could signal we're about to reach a turning point. The number of new jobless, at 11,000, was the smallest in two years, since the very start of the recession in December 2007. The consensus estimate from economic analysts had been 100,000 - meaning the real number was about a tenth of that.

Just as important, the numbers for the previous two months were revised downward; it turns out we lost 159,000 fewer jobs than the original reports indicated. Add it all together and the unemployment rate dropped from 10.2 percent to 10 percent.

There were still job losses in the construction, manufacturing, and information
industries, but those were offset by gains and professional and business services, and in health care. Professional and business services added 86,000 jobs in November, and health care another 21,000. It's nice to see that the growth is not in government-related areas; these increases aren't just from the stimulus package.

At the same time, let's not lose sight of where we are. There are still 15.4 million unemployed people in the country. At the start of the recession two years ago, when the unemployment rate was 4.9 percent, there were just 7.5 million unemployed people - less than half of what we have today.

Job Growth, at Last?

The latest jobless figures seem like more of the same: Last week the number of new people filing for unemployment dropped to 457,000, down 5,00 from the previous week, which is another step in the right direction although it's still much too high. Sounds like most of the jobless reports we get, doesn't it?

At the same time, the previous week's number of new jobless claims was revised downward as well, so there was a little bit of extra good news. And all these little bits of good news have added up to the point that some people are speculating that in December, we might actually turn the corner and begin adding jobs to the payrolls. See, for instance, this piece from The Economist.

The November unemployment figures are due out today. The consensus seems to be that we will have lost 125,000 jobs or so in the month, although estimates range as low as 50,000. If the numbers today come in much lower than expected, we may be approaching that long-awaited turning point.

UPDATE: The November report on job losses came in much better than anyone predicted, with the economy losing only 11,000 jobs for the month. The job-loss figures for the previous two months were revised downward as well. We'll have more to say about this on Monday.

New Jersey in the Beige Book

The latest edition of the Fed's Beige Book - a report on the U.S. economy, issued eight times a year - found the two districts that cover New Jersey moving in slightly different directions. The New York district was one of eight in which economic activity has generally improved, but the Philadelphia district was one of four that reported either little-changed or mixed economic conditions.

What's different between the two? One area is car sales. The northern half of the state has remained strong in auto sales after the end of the Cash for Clunkers program, but the southern half continues to be plagued by dealer closings. Commercial real estate on the New York side wasn't especially good - "steady to moderately weaker" was the phrase they used. But on the Philadelphia side, commercial real estate is still just plain weak.

Nationwide, the bright spots remain consumer spending and manufacturing, which has benefited from a rise in exports because of the falling dollar. Housing and employment both look better than they have been. The bad news: Lending conditions are still extremely tight, and the commercial real estate market looks worse than ever.

The Fallout From Cyber Monday

Cyber Monday - the day when holiday shoppers supposedly all sit down in front of their computers to spend money - seems even more gimmicky than Black Friday, but apparently there's really something to it. The average online order on Monday was $180.03, compared to $170.19 per shopper on Black Friday. That's up from $130.24 on last year's Cyber Monday. Shoppers on Cyber Monday also bought 10 percent more individual items than on Friday, and 30 percent more items than last year.

And Cyber Monday is not even the biggest online shopping day of the year. This year, the date to watch might well be December 14th. Why is that date significant? It's the last day to order products online and have them arrive before Christmas.

But it's easy to overstate the impact of all that. Online purchases still account for only 6 percent of all shopping. Even 15 or so years into the Internet era, it's going to take a long time before Web shopping takes a sizable chunk out of bricks-and-mortar shopping.

The Repercussions of Black Friday

Things move fast in the modern age: Investors were able to track sales figures from Black Friday on Monday and digest them quickly enough to move some stocks as a result. And even though overall sales inched higher than last year, up 0.9 percent by one estimate, there were plenty of losers in the retail sector on Monday:

* Kohl's was down 2.4 percent
* Coldwater Creek was down 3.2 percent
* GameStop was down 3.6 percent
* J.C. Penney was down 3.8 percent
* AnnTaylor Stores was down 4 percent
* Macy's was down 6 percent
* Saks was down 8.4 percent
* Talbots was down 6.9 percent
* Zale was down 8.9 percent

So were there any retail winners? Oddly enough, the biggest jump among retailers on Monday took place at two major online companies, who should have profited less from Black Friday and more from yesterday's so-called Cyber Monday: Amazon.com and eBay.