The Sporting Life

Many of us have fantasized about what it might be like to be a star athlete, and sign one of those big free-agent contracts bringing in tens of millions of dollars, especially while we're still young enough to get full enjoyment out of the money. Well, what it turns out to be like for a lot of those players is that they go broke. Last year, Sports Illustrated did some research into what happened to some of these megabucks athletes after their playing careers ended, and the results were not pretty:

* Within two years of their retirement, 78 percent of all former NFL players are bankrupt or under some kind of financial stress.

* Within five years after the end of their career, an estimated 60 percent of all NBA players are bankrupt.

* Former Nets star Kenny Anderson spent all of the $63 million he made in his basketball career and declared bankruptcy just months after his retirement.

And the list goes on and on. Clearly, it takes more than millions of dollars to be set for life. It takes a plan.

Good Retirement News

We have some good news on the retirement-planning front: According to the Employee Benefits Research Institute, 29 percent of upper-middle-class Americans will run out of money 20 years into their retirement, and even 14 percent of wealthy people will be in the same boat. Among age groups, 47 percent of older baby boomers (those now aged 56 to 62) will be in trouble 20 years after retirement, 44 percent of younger baby boomers, and 45 percent of Gen Xers.

Why is that good news? Because even though the numbers are a little scary, they're at least moving in the right direction. In 2003, the same survey showed that 55 percent of older baby boomers and 59 percent of younger baby boomers were similarly unprepared for retirement.

The EBRI credits the improvement to the growth of 401(k), which have enforced a certain amount of compulsory retirement savings on people. Another thing 401(k)s have done is force people to learn about retirement savings and take more control of their future. That's always a good thing.

Consumer Confidence Woes

Consumer confidence dipped again in July, landing at its lowest point since February. Two key factors took the hardest hit: The index of consumer attitudes fell even lower than analysts had forecast, and the number of people reporting that jobs are hard to get rose sharply. One in six Americans now expect their income to be lower six months from now.

These kinds of consumer surveys aren’t just a temperature-taking; they have a solid effect on the economy we can expect in the months ahead. Consumers who have a hard time finding work or who expect their incomes to drop aren’t going to be spending a lot of money, and consumer spending constitutes 70 percent of our economy.

Friday of this week will see the release of an even more important figure: the first estimate of GDP for the second quarter. The consensus expectation is that it will be 2.5 percent, down slightly from 2.7 percent in the first quarter. Among other reasons, this number will be important for its effect on consumer attitudes. A stronger-than-expected number can help shore up confidence; a lower one will probably bring it down even further.

Hoping for Gridlock?

Political pundits have forecast that the Republicans stand a pretty good shot at taking back the House of Representatives in this November's elections. No matter how you feel about this from a political standpoint, it could be good news for your portfolio. When a Democrat has controlled the White House and the Republicans have controlled the House, the S&P 500 has gained an average of 15 points per year, according to Bloomberg News. That's the highest rate of any combination of party control of the various branches of government.

The last time we had a Democrat in the White House and the GOP in charge of the House, it was when Bill Clinton and Newt Gingrich were facing off after the 1994 midterm elections. In 1995, the S&P 500 gained 34 percent, its largest increase in 37 years.

Of course, the high-tech stock boom probably had more to do with that then any government in-fighting did. But many investors see government gridlock as a real plus for the markets. Billionaire investor Kenneth Fisher told Bloomberg, "What the markets want to see is no change: less legislation that engages in changes in taxes, spending, regulation or property rights."

The Dow Surge

The Dow Jones average was up by more than 100 points on Friday, bringing the index all the way back to even on the year. As we've said many times, the media's reasoning as to what moved the market on any particular day is usually little more than guesswork, but it's clear what happened on Friday: earnings. Look at some of the reports we just had:

* Caterpillar's second-quarter profits came in at $1.09 a share, easily beating the analysts' estimates of 84 cents a share. Its stock gained nearly 2 percent on Friday and is up 19 percent on the year.

* 3M beat analysts' estimates by posting a second-quarter profit of $5.80 a share; its second-quarter net income was up 43 percent over last year.

* UPS posted second-quarter profits that were up a whopping 90 percent. Its per-share profits of 84 cents beat the analysts' estimate of 77 cents.

So that's strong performance from three companies that are not just Dow stocks, but macroeconomic bellwethers. Most of their business derives from the success of other businesses. If these three companies are doing well, that's a sign of strength throughout the economy.

Credit Card Reform: A Checkup

As we wait to see what the fallout from the financial-reform legislation will be, there is some good news resulting from new credit card regulations that took effect last year. According to the Pew Charitable Trusts, hair-trigger interest rate increases for minor violations have been eliminated from 100 percent of credit-card issuers, and the fear that the new regs would lead issuers to impose annual fees has proved unfounded. In fact, the percentage of cards charging an annual fee has dropped slightly since last June, from 15 percent to 14 percent.

The bad news: Interest rates continued to rise, as did the fees for cash advances and balance transfers. More than 90 percent of bank cards still impose penalty fees, and what's most troubling is that many issuers have stopped informing their customers what those fees are.

There's one provision yet to take hold - next month, the rule kicks in requiring all credit card issuers to make "any penalty fee or charge" to be "reasonabe and proportional." We'll have to wait and see what kind of effect that has.

New Mutual Fund Rules?

On the same day the president signed the landmark financial-reform legislation, the SEC also announced some proposed rules for mutual funds that might benefit the individual investor. We're all familiar with 12b-1 fees, the charges added on to some mutual funds for marketing and distribution costs. As it stands, funds must disclose what they're charging in the way of 12b-1 fees, but the new rules would force them to break down those charges - how much is spent on advertising and broker commissions as opposed to distribution costs, for example.

Now, most investors aren't going to pore through a prospectus looking for how every dollar in a fund is spent. But more disclosure is always better, and the threat of this kind of thing becoming common knowledge would probably reduce some of the more exorbitant marketing fees being charged.

The rules also call for brokers to change the way they're compensated for selling mutual funds. Now, fund companies pay brokerage firms a percentage of their assets for selling their funds - which of course come out of the investors' assets. If the new rules are implemented, brokerage firms would start directly charging investors sales fees whenever funds are sold. As with the 12b-1 rule, the result would be more transparency in how investors are charged fees. That's always a good thing.

Mixed Signals in Housing

Some grim news from the housing market this week: New-home starts in June were down 5 percent from May and fell to their lowest level since October. The expiration of the $8,000 tax credit for first-time homebuyers is the likely culprit. The decline here in the Northeast was the worst in the nation, dropping by 11 percent. The National Association of Realtors said that homebuilder sentiment has fallen to its lowest level since April 2009.

But at the same time, three key homebuilding stocks rose on the day yesterday: Lennar was up 4.6 percent, Pulte up 4.3 percent, and Toll Brothers up 3.9 percent. Why would they do this, if the housing picture looked so dire? Because building permits were up, rising 2.1 percent in June over the May figure.

Remember, the number of housing starts in June constitutes old news, and doesn't have anything to say about homebuilding companies moving forward. The number of homebuilding permits issued speaks to what's going to be happening to the housing industry in the days ahead. When it comes to the stock market, forward-looking data carry much more weight than backward-looking data.

Downgrading New Jersey's Towns

Last week, North Haledon up in Passaic County became the 18th municipality in New Jersey to have its creditworthiness downgraded by Moody's Investors Service. This is a result of Governor Christie's 2 percent cap on increases in property values. But what exactly does it mean? How will towns having their credit rating lowered affect you?

Cities and other local governments finance things like schools and wastewater treatment plants by floating bonds, then paying off those bonds with tax revenues. The lower their credit rating is, the higher the interest a city has to offer to investors who are interested in buying the bonds. Christie's property-tax plan will increase (ever so slightly) the risk of default, and limit cities' ability to raise money for such public-works projects.

The Moody's downgrade doesn't affect any bonds that have already been issued, but it raises the cost of borrowing going forward. The end result will likely be that communities that have been downgraded will scale back some of their public works projects - which is a likely effect of the tax restraints anyway. Will the increased bond payments offset the savings in property taxes? That's hard to say, but it will have the effect of kicking the increase down the road a few years. Bonds are paid off over a period of years, but you owe your property taxes every year.

The Long-Term Future

The stock market has spent most of 2010 moving more or less sideways, but where is it headed over the next five years? If you believe Jeremy Siegel, the author of the 1994 classic Stocks for the Long Run, things look pretty good. The New York Times checked in with him over the weekend, and found him still fairly optimistic.

The key, according to Siegel, is the price-to-earnings ratio. The P/E ratio of the S&P 500 currently stands at around 13, while the historical average since World War II is 15.2. If the P/E ratio meets is historical rate, that should lift stock prices a little. The upshot is that Siegel calculates there is a 96.6 percent chance of stocks going up over the next five years. Over the longer term, in the next ten or twenty years, Siegel thinks that the chance of the stock market's value increasing is 100 percent.

No one knows with any certainty, of course, where the market is headed, but Siegel is a very smart man with decades of experience following every move of the equity markets. If he's this confident about the long-term direction in which they're headed, we can all feel better about what lies ahead. 

Financial Reform Passes

The Senate passed the Financial Reform Bill yesterday, and it's expected to be signed into law by the president next week. There are many aspects to this legislation: A new consumer financial protection agency, the much-discussed Volcker Rule, a new resolution authority intended to prevent implosions like the Lehman Brothers bankruptcy, and lots more.

There are also many things the law doesn't deal with, like a plan to handle Fannie Mae and Freddie Mac. And too many important issues have been handed off to commissions for further study, such as the potential requirement for brokers to take on a fiduciary responsibility.

We've got a full report on the new law up at our Web site. To read more on how financial reform will affect you, just click here.

The Fed's Caution

The Fed released the minutes from its June committee meeting yesterday, and the upshot is that the members saw no need to change what they were doing as far as jump-starting the American economy. But at the same time, there are many signals of the economy softening, if not entering another slowdown:

* The Fed's unemployment forecast for 2010 dropped from 9.1 to 9.5 percent to a new estimate of 9.2 to 9.5 percent.

* Retail purchases dropped for a second straight month. They were down 0.5 percent in June, after falling by 1.1 percent in May.

* The overall forecast for 2010's GDP growth, which had been in the range of 3.2 to 3.7 percent, has slipped down to 3 to 3.5 percent.

All of these changes are fairly marginal, but they're also all in the wrong direction. And even more troubling is that there isn't any countervailing evidence, no indicator leading strongly in a positive direction. The Fed noted that "further policy stimulus might become appropriate if the outlook were to worsen appreciably." So apparently what we're seeing is the economy worsening, but not at an appreciable level.

The Small-Business Dilemma

Earlier this week, Fed chair Ben Bernanke claimed that he was concerned about the ability of small-business owners to have sufficient access to credit. "Making credit accessible to sound small businesses is crucial to our economic recovery, and so should be front and center among our current policy challenges," Bernanke said on Monday.

As if in response, the National Federation of Independent Business released its monthly survey of small businesses on Monday, and showed that confidence among small-business owners is distressingly low. The biggest drop in the index of indicators was that a majority of small-business owners now expect business conditions to be even worse in six months than they are now. According to the NFIB's chief economist: “What businesses need are customers, giving them a reason to hire and make capital expenditures and borrow to support those activities.”

Note that his opinion is backwards from Bernanke's. Bernanke is focused on keeping credit flowing freely to small businesses; the small-business owners say that until they have more customers, there's no need for more credit. To have these people working at cross-purposes to one another is not a good sign for our economy.

World View

The biggest threat to a full-fledged American economy remains the situation in Europe. This point was driven home by a recent survey by McKinsey & Co. consultants, which asked executives around the world two questions: Is your nation's economy in recovery? And is the world's economy as a whole in recovery?

For executives in countries other than the European Union, a full 69 percent thought their home country's economy was recovering. But for countries within the EU, only 43 percent said their country was in recovery.

That's not a big surprise, but the question about the world economy generated a more interesting answer. Only 39 percent of the executives outside the EU thought the world economy as a whole was recovering, while 60 percent of European executives thought it was recovering. Perhaps executives around the globe, no matter what country they're in, see the world outside their own borders as more powerful than it really is.

Earnings Season Returns

Earnings season is back upon us, starting this week with reports from five of the 30 Dow stocks as well as two behemoths that aren't in the Dow, Google and Citigroup. Remember, the key thing to watch (if you're interested in how these stocks will move in the short term) is not whether earnings are up or down, but whether they beat or fall short of expectations. With that in mind, here's the lineup for this week:

Alcoa (reporting earnings today): The consensus is for revenue to be up 19 percent, with earnings expected to come in at 12 cents per share, as opposed to a loss of 26 cents a share a year ago.

Intel (Tuesday): Revenue is expected to be up 28 percent, with earnings at 43 cents a share after a loss of 7 cents a share a year ago.

JPMorganChase (Thursday): Earnings are expected to be up 72 cents per share, up from 28 cents a share a year ago.

Google (Thursday): Expectations are for earnings of $6.55 per share, up from $5.36 a year ago.

Bank of America (Friday): This stock is expected to be down from a year ago, with a consensus forecast earnings of 20 cents per share, after posting earnings of 33 cents a share in 2009.

General Electric (Friday): The consensus calls for earnings of 27 cents per share, up a tick from 26 cents a share last year.

Citigroup (Friday): Expectations are very low for the onetime banking giant. Last year it reported earnings of 49 cents per share; this year, the consensus estimate is 5 cents per share.

The Good Side of the Heat Wave

Remember last winter, when the heavy snowstorms here in the Northeast helped drive down the home sales figures in February? We may have a similar situation on our hands this summer with retail sales. Many retailers have already reported sales gains for June, including Penney's, Abercrombie & Fitch and Macy's. Same-store sales at Nordstrom were up a surprising 14.1 percent in June.

One factor here may be the heat wave we've had in the past couple of weeks. Hundred-degree temperatures deter people from spending their Saturday afternoons out in the hot sun, and create a pretty good incentive to stay inside an air-conditioned mall or department store.

Whatever the reason for the June uptick, the rise has been going on for a good long time now. According to the International Council of Shopping Centers, retail sales rose at their fastest pace since 2006 from February through June. That's something that can't be simply attributed to the hot weather.

Credit Card Defaults

One would think that hard times such as we have been living through the past couple of years would lead to people borrowing beyond their means in an attempt to keep up their lifestyle. It's kind of heartening to read the latest report from the American Bankers Association, which finds that Americans are actually acting more responsibly with their credit cards.

According to the ABA, only 3.88 percent of all credit-card accounts are now more than 30 days past due. That's down from 4.39 percent in the fourth quarter of 2009. In fact, it's the lowest that figure has been since the first quarter of 2002. Imagine - throughout the bull market of the past decade, more people were delinquent on their credit cards than they are now.

Of course, there's another issue at play here: During the recession, thousands of credit-card holders went into what's called full defaults, where the cardholder is clearly going to be unable to pay off the balance, so the card issuer writes off the debt as a loss. While the lowering of the credit-card default rate is admirable, it is probably a bit wind-aided because full defaults have already cleared out many of the deadbeat accounts.

Stocks and Bonds in Lockstep

Investment watchers may have noticed that stocks and Treasury bills have been moving pretty much in lockstep over the past couple of months. How close? Over the past 60 trading days, the correlation between movements in the S&P 500 and 10-year Treasury rates has been 0.84, out of a maximum of 1.00. This is the strongest such linkage between those two figures since 1962.

The next question: Is this an interesting bit of trivia, or is there something of more significance to this? Well, the last time the correlation between stocks and T-bills was close to this level was in 2002, at the beginning of the bull market of the last decade. You can make of that what you will.

What is certainly means is that investors lately have been following the ups and downs of the overall economy more than they have the values of different sectors or the fundamentals of individual stocks. The shaky situation in Europe and the sluggishness in the unemployment figures continue to be of great importance to investors, moreso than the concerns affecting specific stocks.

Is Unemployment Really That Bad?

Last week's unemployment figures were like a punch in the gut: After five months of adding jobs, the American economy lost 125,000 jobs in June. But the reality is a bit more complicated than that. The census jobs we've added over the past few months are starting to be removed from the equation, including 225,000 of them in June alone. That's the biggest reason for June's job loss.

The private sector, on the other hand added 83,000 jobs over the course of the month. There's good news and bad news in that. The raw number is higher than we saw in May, when the private sector added only 41,000 jobs. So we're moving in the right direction - but on the other hand, it's still not enough growth to substantially reduce our overall unemployment when population growth is considered.

But the unemployment rate dropped in June, from 9.7 percent to 9.5 percent. Why did that happen, when we lost jobs overall? Two reasons: More workers left the workforce, with another 124,000 people moving into the "discouraged" category, and the seasonal adjustment brought the figure down as well. So while the raw number of jobs lost probably makes the situation look a little worse than it actually is, the unemployment rate makes it look a little better than it actually is. As we've seen so often with this economy, it's one step up and one step back.

Thoughts for Independence Day

I like to see a man proud of the place in which he lives. I like to see a man live so that his place will be proud of him. ~Abraham Lincoln

There are those, I know, who will say that the liberation of humanity, the freedom of man and mind, is nothing but a dream. They are right. It is the American dream. ~Archibald MacLeish

You have to love a nation that celebrates its independence every July 4, not with a parade of guns, tanks, and soldiers who file by the White House in a show of strength and muscle, but with family picnics where kids throw Frisbees, the potato salad gets iffy, and the flies die from happiness. You may think you have overeaten, but it is patriotism. ~Erma Bombeck

What's Going On With the Financial Reform Bill?

The financial reform bill, which looked like a foregone conclusion at the beginning of this week, has now been put on hold for a couple of weeks. There's a simple explanation for this: the death of West Virginia senator Robert Byrd, who was a reliable vote for the bill. The bill that emerged from the House-Senate conference at the end of last week had 60 senators in favor of it, but without Senator Byrd, that number dropped to 59. Republicans, who were mostly opposed to the bill, can hold up any vote on legislation unless the Democrats can get 60 votes to agree to end debate on the measure, so the bill's passage was suddenly less likely.

To ensure some Republican votes for the bill, Senate Democrats have gone back to do a little more horse-trading. Holding things back even further was the fact that Senator Byrd's memorial service was held yesterday, stopping pretty much all Senate business. Then of course, we have the Fourth of July break.

The House has already passed the legislation, so all that's left is for the Senate to take action. The initial plan was to have the president sign the bill on July 4th, but now the Senate will take it back up when they return from recess on July 12th. Expect to have a financial reform bill on the president's desk by the end of that week.

The Future of Inflation

The latest data on the core inflation rate was released this week, along with a report from the Federal Reserve Bank of Cleveland on its expectation for inflation over the long term. In the near term, the inflation expectation for the next 12 months is 1.34 percent. Over the longer haul, the Fed expects inflation to average just 1.84 percent over the next ten years. That's the lowest this figure has been in decades.

The Cleveland model is based not just on the spreads built into TIPS securities, which can offer a hint into what the collective market sees as the breakeven point for inflation, but also uses other models to incorporate investors' appetite for risk and trends in interest rates. The fact that this stuff is being produced by some of the brightest economists at the Fed puts a stamp of authority on it.

Inflation fears were rampant after the Obama Administration's stimulus plan passed, since massive government deficits are considered a cause of inflation. The Fed's ultra-low interest-rate policy can be seen as a success in this context, since one of its purposes is to ward off inflation. With these inflation estimates from another arm of the Fed coming in so low, it will be interesting to see if the Fed adjusts its policies any.