De-Politicizing the Fed

Federal Reserve Chairman Ben Bernanke was confirmed by the Senate yesterday and will now serve another four-year term as Fed chair. It may seem odd that a Democratic president would re-nominate someone originally nominated by a Republican to such a crucial government position, but it's actually been quite a long time since a president tried to change a Fed chairman put into office by the opposing party. Here are the last few men to hold the job:

Bernanke, first appointed by Republican Bush in 2006, re-appointed by Democrat Obama in 2010.

Alan Greenspan, first appointed by Republican Reagan in 1987, re-appointed by Republican Bush, Democrat Clinton, and Republican Bush before retiring in 2006.

Paul Volcker, first appointed by Democrat Carter in 1979, re-appointed by Republican Reagan.

G. William Miller, first appointed by Democrat Carter in 1978, left the Fed to serve as Carter's Treasury Secretary.

Arthur Brown, first appointed by Republican Nixon in 1970, but Carter chose to replace him with Miller in 1978. That makes it over 30 years since a president failed to re-nominate a Fed chair initially appointed by the opposing party.

The Bonds of Taxes

This year, for the first time ever, taxpayers can receive their refunds from the IRS in the form of a savings bond, or even in a good old U.S. Treasury Bond, for up to $5,000. Or you can have the money directly deposited in your IRA. The idea is that your refund can end up helping out the U.S. Treasury while also going directly to work as part of your portfolio.

There are rumors and emails going around, though, insisting that the savings-bond plan has become the default option for IRS refunds. According to one such email, "the IRS has decided that all refunds due clients will be paid in US Savings Bonds unless you choose to 'opt out.'"

This is not true. To get your refund in a savings bond, or in any other of the unconventional forms, you have to "opt in," by filling out IRS Form 8888. If you don't, you'll get a check or a direct deposit of any refund due you, just as in years past. No one is going to be surprised by receiving a savings bond from the IRS.

Consumer Confusion

Consumer confidence is up a tick in January, according to the Conference Board's Consumer Confidence Survey, which is the granddaddy of all these surveys. Although it's not usually reported this way, because the numbers don't actually represent anything, the number stands at 55.9, up from 53.6 in December.

But one thing you can keep in mind is that the standard, based on where consumer confidence registered in 1985, is 100. Now, 1985 was a pretty good year, as we had fully emerged from the recession in the early part of that decade, but it's kind of sad to think we're barely halfway as confident as we were back then.

Where we are at this point, in 2010, is in a bit of a muddle. The number of respondents who said business conditions were good increased in January; unfortunately, so did the number of respondents who said business conditions were bad. The number of people expecting there to be fewer jobs in the months ahead decreased, but the number of people expecting there to be more jobs in the months ahead also decreased. The bottom line is: Consumers don't know what to expect from this economy.

The Housing Market: Back to Square One?

You may have heard that the housing-sales figures released yesterday showed the biggest drop in existing-home sales in 40 years. It's actually a little worse than that: The National Association of Realtors reported that seasonally adjusted existing-home sales showed their largest monthly drop since they began keeping such records in 1968. So it's impossible to know for sure, but this could have been the biggest one-month drop ever.

But let's get a little perspective: The reason existing-home sales fell so much is that they had been artificially pumped up by the $8,000 first-time homebuyers tax credit. That was originally scheduled to expire in November, although it's been extended, so much of the homebuying public rushed to get their purchases done before then. And even that precipitous drop only took the existing-home market back to where it had been in August. In other words, it's not December that was the outlier, but the fall months that preceded it.

Indeed, for the entirety of 2009, sales of occupied U.S. homes rose for the first time in four years. The cost of that was that prices fell by more than 12 per cent last year, the most they've fallen in a single year since the 1930s. Those annual figures bear much more significance than the monthly changes.

The Tech Quandary

Google continued a curious phenomenon when it unveiled its earnings last week. Like a lot of other tech companies this quarter, Google reported very strong earnings, up roughly fivefold from the year previous, exceeding even the analysts' estimates. But the stock still slipped by 5.7 percent on Friday.

The same thing happened with Advanced Micro Devices, which lost 12 percent of its value on Friday after posting another strong earnings report. Earlier in the week, Intel, you'll remember, blew past the analysts' estimates to post revenue of 40 cents a share, a whopping tenfold increase from the year earlier. For that performance, investors repaid the company by driving the stock down by nearly 10 percent last week.

Are investors expecting too much from these tech companies, or from this market? Are there countervailing forces bringing their stocks down to earth? Or do earnings reports not carry the same weight they used to? It's hard to say, but it's a phenomenon worth watching.

Bank Shot

President Obama proposed yesterday that banks should be prohibited from owning their own proprietary trading desks, among other restrictions. The idea here is that many large banks are now operating with infusions of cash from the American taxpayer. That gives them the opportunity to invest that money into various securities - but if they lose money on those investments, they can expect the American public to bail them out, since many of them are in the familiar "too big to fail" category. That creates a no-lose situation for the banks.

So the administration doesn't want banks to gamble with taxpayer money. But what then do we do about an institution like Goldman Sachs? Goldman is best known as an investment bank, except that in September 2008, it and Morgan Stanley officially changed their charters to become bank holding companies, freeing them up to build up their assets through retail deposits. That was supposed to help them avoid the leverage-heavy failures suffered by the likes of Bear Stearns and Lehman Brothers, who financed many of their transactions through bond deals. But the proprietary trading desk remains a big moneymaker for Goldman Sachs.

It was a totally different environment back then, a very dangerous one for the investment banks. Bear Stearns and Lehman had just collapsed; Merrill Lynch was on its way out. When Goldman announced its switchover, its stock was at $120; it was at $170 before Obama's announcement. The change away from calling itself an investment bank may have been a boon in the short term. But depending on where Obama's proposal goes, it may cause problems in the future.

The FHA Clamps Down

The Federal Housing Administration has tightened the rules for lending to homeowners, raising mortgage insurance premiums and requiring larger down payments for buyers with poor credit records. In addition to offering home loans of its own, the FHA also insures mortgages offered by other lenders, so the reach of these new rules is wider than it might otherwise appear.

These tighter regs might have prevented some of the damage that's been done to the housing market in previous years. It might have eliminated some of the rampant speculation that caused investors to buy eight or ten houses in Arizona and Florida, and might have kept people who really had no business getting an expensive mortgage out of the housing market. It might have tamped down the bubble before it had a chance to get out of control.

Now, of course, it's a bit late for all that. The bubble has blown up and popped. One side effect of these rules is that it will make it a bittougher for people to get mortgages, further slowing the housing recovery, although most lenders have already tightened their lending standards. This is a good first step toward preventing the next bubble - whenever that might have been.

IBM Moves Ahead

IBM made its entrance into earnings season on Tuesday with a dazzling performance: Revenues were up to $27.23 billion, beating the analysts' forecast of $26.96 billion. Profits were $3.59 per share, well beyond the $3.47 per share forecast by the analysts, and 9 percent higher than the $3.28 per share IBM earned in the same quarter last year.

Maybe even more significant, IBM raised its outlook for 2010. Where before it had expected profits to come in between $10 and $11 per share, now it sees them coming in at $11 or more. A major American corporation that thinks its future is getting brighter - that's something we've been seeing far too little of.

Coming on the heels of Intel's positive reports last week, that's very good news. In addition to reporting earnings above analysts' expectations, Intel too noted that it had raised its expected profit margins for 2010. It's very heartening to see these technology behemoths thriving in this still-uncertain economic landscape.

The Persistence of Fear

One thing you have to say about this precarious recovery we find ourselves in: It sure hasn't calmed very many people's fears about their long-term financial prognosis. Even the wealthiest of us have very serious concerns about the future, according to a recent survey by Bank of America. It found that 53 percent of Americans with more than $250,000 in investable assets are worried that they won't have enough money to last them through their lifetimes.

In a way, that's a good thing: Getting complacent about your money and your investments is not an optimal strategy. But it also doesn't say a lot for the confidence people have in today's economy.

The survey also found that 29 percent of the wealthy respondents now plan to retire later than they had originally expected. And more than half had to make lifestyle adjustments in 2009, like spending less on luxuries. Even more interesting, 67 percent of retirees said they did not use a financial advisor in creating their retirement plans, but half of the non-retired are using an advisor. Maybe the younger generation has realized how difficult it is to plan your financial future on your own.

Earnings Repercussions

We discussed last week that a couple of important companies were about to release earnings reports: Intel on Thursday and JPMorgan Chase on Friday. Intel's numbers were fantastic: $10.6 billion in revenues for the fourth quarter of '09, a jump from $8.2 billion in the same quarter the year previous and a tick better than the analysts' consensus of $10.2 billion. JPMorgan's fourth-quarter revenues were also up solidly, increasing 32 percent from the year-earlier period, although at $25.23 billion, they fell a tick short of the forecast of $26.81 billion.

Although the earnings reports make both companies seem pretty healthy, both stocks lost a little ground on Friday. It's a useful reminder that the direction a stock takes - particularly on one specific day - may not say a whole lot about the overall solidity of the company. And it especially doesn't say a whole lot about the direction of the economy.

Wall Street had already factored in the expected revenues for both companies, so unless they missed the mark by a great deal, the share price wasn't going to move a whole lot on the news. The question is, are you interested in the earnings reports because you're invested in those stocks or because you want to see how the recovery is progressing? If it's the former, you might have been a little unimpressed, but if it's the latter, the reports were pretty good news.

The Rising Cost of Water

These have been tough times for a lot of folks lately, but look on the bright side - you didn't get a water bill for $4,500, like a lot of people in Pittsburgh did. Here's how it happened: The Pittsburgh Sewer & Water Authority hired a firm in California to do its billing, and that firm had a European-born technician. In Europe, they write their numbers differently from the way we do it. Something that reads $4,500.00 here in the U.S. would read $4.500,00. Or a water bill for $45.00 would be written as $45,00.

But the computer couldn't read that comma, so all those figures went in as $4500. And Pittsburghers began receiving water bills that were exactly 100 times what they should have been.

The Pittsburgh water people heard about the error immediately, and sent out new water bills to the 13,000 customers who had gotten inflated ones. (They also announced that any poor saps who had actually paid the hundred-times-too-big bill would get a refund.) No word on whether that European technician was fired, or simply taught how to write his numbers properly.

The Fed's Big Windfall

You may have seen the news the other day that the Federal Reserve turned a profit of $52.1 billion last year. How does the Fed end up making so much money? And where does that money go?

The money came not from the Fed investing in banks through the TARP program, but primarily via other securities it bought to help prop up the economy. The Fed bought up $300 billion in government debt, which returns a nice bit of cash, as well as big chunks of Fannie Mae and Freddie Mac. All told, the Fed holds more than $2 trillion on its balance sheet, so $50 billion isn't really all that much to make from its investments. It also made $2.6 billion on currency swap arrangements with central banks in other countries and $700 million from fees for services it provided to banks.

Where are all those profits going? Right back into the U.S. Treasury. With the deficit running at $1.4 trillion, every little bit helps.

Earnings Season

As we entered the quarterly earnings season, two big companies posted disappointing results on Tuesday. Alcoa announced that it had earned a profit of just 1 cent per share - the consensus forecast was more like 6 cents per share - and Chevron warned that its fourth-quarter numbers would be disappointing. Both stocks fell on Tuesday, Aloca by a lot and Chevron by a little bit. Since they're both components of the Dow Jones Industrial Average, the Dow fell too, losing 37 points.

We're about to see a lot more economic snapshots of the fourth quarter of last year. KBHome, a Los Angeles-based homebuilder, reports earnings today, and although analysts are predicting a loss of 42 cents per share, it could be a bellwether for the entire housing market. Intel provides its earnings report on Thursday, which should give us a good window into the strength of the tech sector, both in what they report for the fourth quarter of '09 and in what they see ahead for the first quarter of '10. JPMorgan Chase is up on Friday, which should give us a glimpse into the health of the financial sector.

That's three key stocks in three critical sectors of the economy. All three reports will be well worth watching.

The Jobs Dilemma

You may remember that back when the November employment figures came out, many speculated that with the direction they had taken, December might actually be the first month with job growth since the onset of the recession. December's figures came out last week, and the good news was that we overshot the estimate: Revisions showed that jobs were added in November, to the tune of 4,000 new jobs across the country.

And that's the end of the good news. The jobless numbers took a turn for the worse in December, when we lost another 85,000 jobs. Unfortunately, that's not the end of the bad news: A bigger problem in December was that an incredible 661,000 persons left the American labor force. The share of the population that is actually in the labor force is now just 64.6 percent, the lowest that figure has been since 1985.

The number of people who have jobs is a more significant figure than the unemployment rate (which, because of all those people leaving the labor force, was unchanged in December). It's not the number of people who don't have jobs that matters; it's the number of people who do have jobs and are contributing to the economy.

The underemployment rate, including part-time workers who want to find a full-time job and people who want work but have given up looking, is now at 17.3 percent. That's the figure to keep an eye on.

Today's Good News

Paul Lim's "Fundamentally" column in the New York Times is often a source of fertile investing ideas, but at the same time, it's good to remember that it's just a newspaper column, and susceptible to creating concern where none might exist. In yesterday's article, Lim cautions that the stock market rally seems to be petering out: The S&P 500, which gained 62 percent from March to mid-October, has climbed just 4 percent since then.

Let's contemplate those numbers for a moment. A 62 percent rise over the course of six months is an annual increase of well over 100 percent - it's safe to say that no one expected that rate of increase to last for any length of time. And a 4 percent increase over the past three months equates to an annual increase of 16 percent. Most of us would be very happy with returns like that.

Similarly, Lim laments that the S&P 500's earnings, which were forecast to be up a whopping 200 percent in the fourth quarter of '09, are expected to rise somewhere between 22 and 38 percent in each of the next three quarters. A 200 percent rate of increase is obviously unsustainable; a rate of increase around 25 percent per quarter is most welcome.

Newspapers have to have an immediate hook to their stories to get people to read them. But if you're invested for the long term - which I certainly hope you are - you should have a longer view than most newspaper columnists.

The FDIC Rumor

As last year was coming to an end, there was a rumor going around that Bank of America was planning to drop its FDIC insurance coverage as of the beginning of 2010. This certainly would have been of great concern for BofA customers, but everyone else was supposed to notice the larger point. The email spreading this rumor read in part:


This development not only suggest that the FDIC is insolvent, it suggests that U.S. fiat money, placed in interest-bearing accounts, will soon be defaulted in bank losses or replaced. How many other banks will quickly follow?

There's a grain of truth to this, but only a grain. What Bank of America ended on January 1 was its participation in the FDIC's Transaction Account Guarantee Program, which guaranteed the money in checking accounts and other non-interest-bearing accounts, with no limit. This was a temporary program anyway, designed to help promote banking stability during the crisis and scheduled to end at the close of 2009. The FDIC still insures deposits of up to $250,000, even in checking accounts, even at Bank of America.

So the only reason to be concerned is if you're a Bank of America customer with more than $250,000 in your checking account. And if you are, I'd suggest it's time to put that money to work elsewhere anyway.

The Commercial Real Estate Glut

The housing market seems to be stabilizing finally, but is commercial real estate still due for a crash? There was a sobering report out yesterday from Grubb & Ellis, a commercial real estate advisory firm based in California, about the business climate in North and Central Jersey. The amount of available office space has actually increased over the past year, despite the economic recovery. At the end of 2008 there was 6.5 million square feet of office space on the market in the area, but by the end of 2009, that was up to 7 million.

The hardest hit areas were on the so-called Gold Coast in Hudson County, which has been built up incredibly fast over the past several years, and the Parsippany area. Grubb & Ellis further forecasts that there's not much reason to expect drastic changes in this area throughout 2010.

There's a bit of a silver lining to that, as business startups would benefit from having cheap office space available, which would help fuel the entrepreneurial economy. But there are going to be an awful lot of real estate firms and investors in trouble, and the construction sector will suffer as well, possibly for years to come.

Car Sales Rev Up

Is the American auto industry poised for a comeback? December's sales figures were strong for many beaten-down automakers:

Ford sales were up a whopping 33 percent from December 2008.

Subaru's were also up 33 percent for the month.


Hyundai Motor America's sales were up 40 percent.

Toyota's were up 32 percent.


American Honda sales were up 24 percent.

Nissan North America sales were up 18 percent.

Several of these companies are headquartered elsewhere, of course, but they generally have extensive operations here. Hyundai has facilities in California, Michigan and Alabama, for instance, while Subaru has a huge manufacturing plant in Indiana. Good news for those companies is good news for American workers.

The bad news is that both GM and Chrysler were down slightly for the month, by 6 percent and 4 percent respectively. On the other hand, many people are suspicious of these numbers because of the government's attempts to jump-start auto sales with things like the Cash for Clunkers program. But Canada's auto sales were also up sharply in December, by 17 percent, without any government shenanigans. Even poor old Chrysler saw its sales rise in Canada.

The January Effect

Around this time of year you hear a lot of talk about the January Effect, which supposedly causes the stock market to traditionally have good months in January. The idea is that people have sold off many of their positions at the end of the previous year for tax reasons, which both drives down the prices of those stocks, and drives up the prices of the stocks they buy when they get back into the market in January.

There's even research behind this. Between 1940 and 1974, researchers found, stocks went up in January an average of five times more than they did in the average month. That's something worth hopping onto, isn't it?

Except that right around the time people began recognizing this January Effect, it started to dissipate. The market tends to adapt to any sort of anomalies very quickly. Both 2008 and 2009, for instance, had weak Januaries.

The larger problem is that it's wrong as a tactical move. People who invest in the stock market for a month at a time generally don't fare nearly as well as those who are in for the long term.

Heading Into 2010

After a 2009 that turned out to be surprisingly positive for most investors, can we look forward to that momentum carrying over into 2010? Unfortunately, there's no indication of such a phenomenon. Veteran stock-watcher Mark Hulbert looked into the possibility of a carry-over factor for annual stock returns for the New York Times, and found that in years after the Dow posted an annual gain, there was a 64 percent chance that the index would post another positive year.

That sounds great - except that in those years when the Dow didn't post a gain, there was a 65 percent chance of following that up with a year in positive territory. In other words, as far as what happens in the next year, there's no distinction to be made between up years and down years. (But the good news, you may have noticed, is that the Dow rises in almost two thirds of all calendar years.)

One area in which Hulbert did find some evidence of year-to-year momentum: small caps. After years in which small-cap stocks outperform the rest of the market, they continue to beat large-cap stocks by an average of 6.5 percentage points. Something to think about for 2010.

Thoughts for the New Year

"Be always at war with your vices, at peace with your neighbors, and let each new year find you a better man." ~Benjamin Franklin

"An optimist stays up until midnight to see the New Year in. A pessimist stays up to make sure the old year leaves." ~Bill Vaughan

"We spend January 1 walking through our lives, room by room, drawing up a list of work to be done, cracks to be patched. Maybe this year, to balance the list, we ought to walk through the rooms of our lives... not looking for flaws, but for potential." ~Ellen Goodman