Friday, October 30, 2009

It's (Almost) Official

The Commerce Department released figures on Thursday showing that the American economy expanded at a annual pace of 3.5 percent from July through September. That growth for an entire quarter would mean that the recession has ended - except that the "official" numbers come from the private-sector National Bureau of Economic Research. They will generally take months to make a thorough, unchanging assessment of the economic conditions before issuing a formal declaration on growth.

And while we've seen many economic figures revised well after their release, it would seem strange for the government's initial numbers to be off by 3.5 percentage points. Over the past five years, we have had only four quarters with a GDP growth rate that high.

Assuming this is the real conclusion to the recession, it's a welcome end. The four consecutive down quarters mark the longest stretch of declines since these records started to be kept in 1947. The 3.8 percent contraction in the economy for the 12 months ending in June was the worst in 70 years.

Thursday, October 29, 2009

Bad News for the Rich and Shady

The IRS has announced that it has created a task force called "the Global High Wealth Industry group," targeting taxpayers who have assets or income in the tens of millions of dollars. The idea is that agents will be specially trained to ferret out highly complex financial arrangements like "royalty and licensing agreements, revenue-based or equity-sharing arrangements, private foundations, privately held companies, and partnerships and other flow-through entities that require looking at the entire, and often huge, spectrum of transactions and entities," says an IRS official.

At bottom, it sounds like there are two main triggers for all of this: someone with ownership of several related business entities, and individuals who invest in hedge funds that are set up, or raise money, offshore.

You can certainly understand why the IRS would want to take a closer look at those things to make sure people are paying their fair share. But on the other hand, shouldn't they already have tax agents who know how to dissect an equity-sharing arrangement or an offshore fund?

Wednesday, October 28, 2009

Swaps in New Jersey

You may have seen the story in the news recently about how the state of New Jersey is paying Goldman Sachs $1 million a month for protection against rising interest rates affecting bonds that the state paid off last year. This story is really about credit swaps, and how they have ended up affecting each of us.

The details in the New Jersey case are still a bit murky, as they tend to be with these Wall Street rocket-scientist deals. But what happens, in a nutshell, is that the state sells bonds at an auction rate, which fluctuates with the market on either a daily or weekly basis. A banker like Goldman Sachs comes along and offers a swap, in which the state sells the bonds to Goldman at a rate that has historically tracked the auction rate. In return, the state agrees to pay off Goldman at a fixed relatively low rate of, say, 3.6 percent.

As long as the auction rate continues to track the rate of the swap, New Jersey has essentially traded the uncertainty of selling bonds at the variable auction rate with the certainty of the fixed rate. But what happens when those rates fall out of sync with each other, and the auction rate goes up? That's exactly what happened when the credit markets began freezing up last year. The state ends up paying the difference between those two rates and the 3.6 percent to Goldman.

The whole purpose of the swap was to protect the state against interest rates rising much above 3.6 percent. Now, though, interest rates are close to zero - and the state is stuck paying the higher rate to Goldman as well as the out-of-whack auction rates.

So even if the state has redeemed those now-toxic variable-rate bonds, it can still end up owing huge sums to the bankers who presented it with the swap in the first place. Even in this simplified version of the saga, you can see that what was sold as a way to guard against higher interest rates has become, in an age of sinking interest rates, a massive bill for our state's taxpayers.

Tuesday, October 27, 2009

Earnings in Bloom

We've talked before about the difference between companies reporting strong revenue numbers and those reporting strong earnings numbers. Businesses can bolster revenue by slashing costs, such as inventories and headcount, but the only way to really boost your earnings is by selling more product. So especially in turbulent times such as these, earnings is the number you want to keep your eye on.

There was some concern that the market rally had been fueled by budget-cutters, but now we've seen a bona fide trend on the other side. According to the business-news service Thomson Reuters, 81 percent of the 199 S&P 500 companies that have reported results this quarter have beaten those estimates. In a typical quarter, 61 percent of companies beat their earnings estimates - which tells you something right there. Most earnings estimates come in low to begin with, so you can expect a little good news - and a stock pop - on earnings report day.

But this quarter has been different. If that 81 percent figure stays that high, it would be a record high. In total, earnings have come in 18 percent above the analysts' estimates so far this quarter.

As you can see, we've still got 60 pwercent of the S&P 500 yet to report this quarter, but so far, we're sitting mighty pretty indeed.

Monday, October 26, 2009

Which Way for Housing?

Last week we mentioned that there was a fresh round of home-sales figures due at the end of the week. And it turned out to be doozy: Purchases of existing homes in the U.S. rose to their highest level in more than two years in September. Sales surged 9.4 percent to an annual rate of 5.57 million units, after they had risen at a 5.09 annual rate in August. It was the highest rate of existing-home sales since July 2007.

But the other number we mentioned last week, the number of new housing starts, turned out to be a dud. New-home starts came in at a seasonally-adjusted annual rate of 590,000 in September, when economists were expecting the number to jump to 610,000. It was up just 0.45 percent from the previous month.

There's a common factor in both of these. Many analysts attributed the jump in home sales to the $8,000 first-time buyer tax credit that's due to expire at the end of November. That's what is supposedly fueling all those home sales.

But those same people are probably driving down the new housing starts. If they need to complete their home purchase by November, there's no point in builders starting construction on a new house for them now. And by rushing to buy a house before the tax credit expires, these people are also taking themselves out of the pool of potential new-home buyers for the foreseeable future.

There's now talk that Congress will extend that $8,000 credit past November. If that happens, we could continue to see anomalies like this in the housing market for quite some time.

Friday, October 23, 2009

Penny Watching

Got any old pennies in your car's ashtray or on top of your dresser? Take a closer look at them - they might be worth a few hundred dollars. A coin collector named Scott Travers bought a pretzel in Times Square a while back and paid for it, in part, with a rare 1914 penny worth $300. He also spent a 1909 penny - the first to feature Lincoln, on the occasion of the centennial of his birth - worth about $1,000 and a 1908 penny worth about $200.

The purpose of Travers' stunt was to foster the love of coin collecting in some unsuspecting change-recipient. It's not clear whether it worked, because no one has ever reported getting back one of those rare pennies. It's been three years now since they were put into circulation, and they can't have just disappeared.

If you're really lucky, you'll dig out of your pocket a 1943 penny made entirely of copper, which had been mostly taken out of circulation for the war effort. About 40 of them are known to exist. That one's worth about $200,000.

Thursday, October 22, 2009

New Jersey, America

In many ways, New Jersey remains a microcosm of the United States as it emerges into recovery. The unemployment rate for the U.S. as a whole in September was 9.8 percent; the unemployment rate here in New Jersey was 9.8 percent. A year ago, the state's jobless rate sat at 5.8 percent, while the nation's was 6.2 percent.

On the other hand, we're laggards in the Northeast Region. The region as a whole has a 9.0 percent unemployment rate, the lowest of the Labor Department's four regions of the nation.

The two behemoths at either end of the state have jobless rates pretty much in line with the Northeast average. The New York City metropolitan area is at 9.3 percent, while Philadelphia is at 8.8 percent. Within the state itself, the unemployment rates are all over the place, from Ocean City at 7.6 percent to the Vineland-Millville area at 12.7 percent. Here in Somerset County, the jobless rate is a relatively low 7.9 percent, third-lowest among New Jersey counties after Hunterdon and Morris.

Wednesday, October 21, 2009

The Housing Crisis and Your Retirement

One of the most difficult things about the meltdown in the housing market is the effect it will have on so many people's retirement plans. One recent study showed that home equity represents 21 percent of the typical pre-retiree's net worth, second only to their investment in Social Security. For most people, even the affluent, their home represents a huge portion of their retirement plan.

But the housing crisis has meant that that leg of the retirement strategy has suffered as much as our 401(k)s. That's a double whammy that's going to be tough to get out of. According to a survey conducted earlier this year by the Employee Benefits Research Institute, only 13 percent of all workers feel very confident about having enough money for a comfortable retirement. This is the lowest figure in the survey’s history and represents a 50 percent drop just since 2007.

How can you avoid losing your confidence in your ability to retire? It's important to keep in mind that your home is a big part of your portfolio, and should be managed as such. That doesn't mean that you should buy and sell houses like you do a basket of stocks, but your real estate holdings should be, for example, accounted for in your asset allocation. And you should always keep your long-term housing decisions in mind when plotting out your long-term financial strategies.

To talk more about how your housing situation fits into your financial goals, feel free to give me a call.

Tuesday, October 20, 2009

The Week in Housing

We'll get a real good view of how the housing market is shaping up this week. Yesterday afternoon, the National Association of Home Builders released its monthly Market Index, which measures builders' confidence in the market for newly built single-family homes. It dipped slightly, from dipped to 18 in September from 19 in August. The drop was attributed to the fact that the government's $8,000 tax credit for first-time buyers expires on November 30, which means that just about everyone who was going to take advantage of this has done so already.

Today, we get a more real-world version of this, when the U.S. Housing Starts and Building Permits numbers for September are released. For housing starts, the consensus expectation is 610,000, up a bit from 598,000 in August. Building permits are expected to post an even smaller increase, from 580,000 in August up to 590,000 in September.

To conclude the week in housing, we'll have fresh numbers on existing home sales on Friday. The projections for all these are pretty conservative; if we can exceed them, we'll have further signals that the housing market is moving in the right direction.

Monday, October 19, 2009

Around the World

So now the Dow Jones average has crossed the 10,000 mark, and is up about 14 percent on the year. That's pretty good, but how do we compare to the rest of the world?

Well, it depends on how you frame the question. The Dow hasn't done nearly as well as some of the other indexes around the globe. The German DAX index is up 19 percent this year, while the Amsterdam AEX index is up 31 percent, and the Shanghai Composite Index is up 63.5 percent.

But most of those indexes had more ground to make up than the Dow did. The Dow is still off 29 percent from its high in October 2007. But the German index is also off 29 percent, the Dutch index is off 43 percent from its high, and the Chinese index is still down 51 percent from its high. So other countries have seen more upside so far in 2009 - because they fell that much further from their peaks.

Who's done the best if you look at both 2009 and the distance from the peak? Probably Chile. The Chile Stock Market is up 45 percent in 2009 - and that's down a mere 1.5 percent from its peak, reached in July 2007.

Friday, October 16, 2009

Recovery Numbers Round-Up

Lots of fresh data on the economic recovery came out this week. Here are some of the key figures:

* Some good news on the unemployment front, where the Labor Department reported that first-time jobless claims dropped somewhat, to 514,000 from 524,000 the previous week. The number remains headed in the right direction - but we're still losing half a million jobs a week.

* The Labor Department also said consumer prices rose 0.2 percent in September. Over the past 12 months, consumer prices have fallen 1.3 percent. Inflation, if it indeed returns, still looks a long way off. Gold prices, which many take as a bellwether of inflation, made a small retreat this week as well.

* Bad news on housing: Third-quarter foreclosures were up 5 percent from the second quarter - up 23 percent from the same period in 2008. Overall, third-quarter foreclosures totaled 938,000.

* And of course, the Dow made it back to five figures, closing above 10,000 for the first time in more than a year.

Thursday, October 15, 2009

Shady Planning

There was a scary story yesterday out of Ohio, where two estate planning companies were forced to pay a fine of $6.4 million after providing fraudulent financial services to more than 3,800 people. The scheme worked like this: Older Ohioans were subjected to high-pressure, in-home presentations where they were told that buying living trusts would save them a lot of money over a traditional will.

The cost for this living trust: $1,995, even though it came from the company that was doing the presentations and was a canned living trust agreement drawn up by people in California who weren't even lawyers. And once a consumer had signed up for the living trust, the companies had sales agents descend on them trying to push deferred annuities. The Better Business Bureau had expelled these companies in Pennsylvania back in 2006, and a North Carolina judge had ordered them out of that state as well.

Sales representatives for financial products are always required to identify themselves as such and not claim to be estate planners or financial advisers. This kind of thing is related to what we were talking about last week with regards to the advantages of hiring a fee-only adviser (as I am): When you're making any sort of key decision about your financial future, make sure the person giving you recommendations has your best interests at heart. There are 3800 people in Ohio who could have used that advice.

Wednesday, October 14, 2009

The State of the Garden State

New Jersey has its own version of the monthly consumer confidence report with the quarterly consumer survey conducted by Fairleigh Dickinson University's Silberman College of Business. The latest version showed that a frightening 53 percent of New Jerseyans still say they are worse off now than they were a year ago. As high as that sounds, it's down six points from the previous quarter. Not surprisingly, the hardest cases are at the bottom of the ladder: 65 percent of those making less than $50,000 a year say they're worse off than a year ago.

Credit remains tight in our state: 86 percent of consumers say they will not let their unpaid credit card balances increase, and even among the well-off, just 2 percent of those making over $150,000 say they'll let their credit card balances increase. It seems very telling that even the more comfortable are remaining cautious in their spending. Overall, more than 36 percent of Garden Staters say that paying their outstanding credit card balances is somewhat or very difficult.

For those who might still be in danger of losing their jobs - New Jersey's jobless rate is 9.8 percent, same as the national average - 48 percent say they could live off their savings for more than six months if necessary. But the number who say they could live for less than three months off their savings rose by 6 percentage points from the previous survey. Life may slowly be getting better around here, but it is still very precarious.

Tuesday, October 13, 2009

The Economists Speak

More indication that the recession is over: The National Association of Business Economists has declared it to be so, following in the footsteps of Ben Bernanke. These people watch the economy - and especially how it affects the nation's corporations - as well as anyone, so their opinions are worth a little something. At the same time, it bears repeating that the recession is over when the GDP starts expanding again, and not when someone opines that the recession is over.

The economists' panel foresees a bit of a jobless recovery coming up: Like a lot of people they forecast it to hit 10 percent before it eases back down. The economists see unemployment as high as 9.5 percent by the end of 2010, a full year after the end of the recession. The jobless rate hasn't been that high since June of 1983 - about the same time frame after the end of the 1981-82 recession.

They do expect the housing market to be turning around, with housing starts expected to be up a solid 38 percent next year. But they see the dollar continuing to fall, remaining weak well into 2010.

Monday, October 12, 2009

Fund Watching

Mutual funds have been greatly benefiting from the recent runup in stocks. The third-quarter numbers - for the period that ended on September 30 - are now in, and some sectors looked very strong. These were the leading mutual fund sectors for the quarter:

Real estate: up 32.6 percent
Financial: up 22.0 percent
Equity precious metals: up 20.2 percent
Equity energy: up 18.8 percent
Technology: up 17.6 percent
Communication: up 15.1 percent
Natural resources: up 14.7 percent
Health: up 11.6 percent
Utilities: up 9.7 percent

Overall, U.S. stock funds were up 16.0 percent for the quarter. International stock funds did slightly better, up 18.7 percent.

Friday, October 9, 2009

Credit Card Woes

Two news stories from the credit card industry caught my eye this week. First of all, the government came out with a report showing that consumer credit dropped in August, for the seventh straight month. Credit is important, as I've written before, because it expands the wealth we have and creates new wealth. All the consumer confidence in the world doesn't matter if people aren't out there spending money.

The other story reported that Wells Fargo was planning to increase its credit card rates, in anticipation of Congressional regulations that will limit their ability to do so. Someone at Wells Fargo seems to think this will boost its bottom line, and maybe it will. But think about it: Imagine your annual credit card rate is now 14.9 percent. If your bank raised that to 17.9 percent, are you going to use that card more than you do now, or less? If your bank cut the rate to 11.9 percent, do you think it would get more charges out of you?

It's certainly not my place to tell Wells Fargo how it should run its business, but it seems like it would be worth a try for one of the credit card issuers to drop its rates and see how much that improved its bottom line. But more importantly, at a time when we need to expand credit to help get this economy going, it's frustrating to see issuers of credit doing the exact opposite.

Thursday, October 8, 2009

The Revenues Game

The other day we mentioned that much of the positive news in the stock market was the result of companies increasing earnings by cutting costs rather than boosting their revenue. We had an important test case of this yesterday: Alcoa was scheduled to release its numbers for the third quarter, with the consensus forecast being that the aluminum giant would report a loss.

But Alcoa not only beat expectations, it beat them in the right way. Its revenues were $4.62 billion for the third quarter, up 9 percent from the previous quarter. Earnings came in at 4 cents a share, handily beating the consensus estimate of a 9-cent loss. It was Alcoa's first quarterly profit of the year.

There are other key stocks due to release earnings reports this week, including PepsiCo and Marriott International. Remember, the most important factor will be the movement in their revenues, how much money people are willing to spend on their products. That will help us understand not just how these companies are doing but how our American economy is doing.

Wednesday, October 7, 2009

Taking the Investor's Side

To follow up on yesterday's post, there is a bill called the Investor Protection Act that has been floating around Congress since this summer that would also tighten up the fiduciary responsibilities of financial professionals. One provision would require broker/dealers to live up to the same fiduciary standards that financial advisers are already required to adhere to.

Fiduciary simply means that that a person is ultimately obligated to act in their client's behalf. That's what a wealth manager such as myself has been doing along, but it would be a new role for brokers, who may have your interests at heart but also require a considerable amount of stock sales to make their living.

Other provisions in the IPA are designed to prevent another Madoff-type scandal, by increasing the number of people investigating potential frauds and rewarding whistleblowers who help the SEC catch such people. It would also bar the inclusion of mandatory arbitration clauses in securities contracts; as it stands now, most people who feel they've been wrong by a brokerage have to take their case to an arbitrator rather than having the right to sue. We'll keep you posted on the progress of this bill.

Tuesday, October 6, 2009

Citigroup Catches Up to Us

Citigroup discovered yesterday what many of us in the financial services industry have known for years: The best and most honest way to serve your clients is through a fee-only structure. We here at Echelon Wealth Strategies have always been fee-only, meaning we charge our clients a small percentage of the assets we manage for them. Until yesterday, Citigroup's financial advisers worked for commissions, but now they're switching to fee-only.

Why is that important? A fee-only adviser has no incentive other than to increase his clients' assets. On the other hand, a commission-based adviser has other incentives. A client who wants to pursue a buy-and-hold strategy, for instance, may get pushed into stock trades he or she doesn't want, because there's no commission to be earned on money that simply holds on to a stock for ten years. To earn commissions on asset management, there must be transactions.

We do earn commissions on such things as insurance sales, but when it comes to managing assets, we are purely fee-only. That frees us up to serve our clients' interests and only our clients' interests. It's an attitude that has served us well, and we wish Citigroup all the best now that they've seen the light.

Monday, October 5, 2009

Expenses vs. Revenues

There was a fascinating piece in yesterday's Times looking at an important aspect of the stock market's recovery. The writer, Paul Lim, points out that the surge in many companies' earinings - which has been accompanied by a surge in their stock prices - has been fueled more by cost cutting than by growth in sales. Selling and administrative costs among the S&P 500 companies fell by 5.7 percent in the second quarter of '09 as opposed to the second quarter of '08. But corporate revenues fell by almost 20 percent in the same time period.

Obviously, there's a limit to how much businesses can cut expenses. If these companies don't start increasing sales some time soon, earnings will start to suffer, as will their share prices. (This also helps explain why unemployment keeps rising even as the stock market is showing signs if life.) At some point, revenues will need to rebound.

And when will that happen? Warning: This isn't good news. According to Lim, research says that sales hit bottom and start to turn back upward approximately nine months after a recession ends. If the recession is ending now, that puts the next upward movement in revenues early next summer.

Friday, October 2, 2009

October Winds

Well, October is off to lousy start, with the Dow losing more than 200 points yesterday. What does the rest of the month have in store? History suggests that it will be a bumpy ride.

Stockwatcher and columnist Mark Hulbert points out that October has historically been the most volatile month on the investing calendar. Measuring the standard deviation of the daily change in the Dow, October has been a whopping 40 percent more volatile than the other 11 months.

For long-term investors, this shouldn't be much of a problem. As hard as it can be to stomach market swings, at this point we should be expecting them - and in every month, not just October. And remember, volatility doesn't signal bad news; the market can be volatile on its way up as easily as it can be volatile on its way down.

Thursday, October 1, 2009

A Tangled Web

One of the things that made Bernie Madoff's schemes work was that he followed through on a lot of details, issuing sophisticated reports to his clients so they wouldn't suspect the numbers were all made up. We have a junior-league Madoff here in New Jersey, a man from Spring Lake who sold unsuspecting investors shares in a company that barely even existed.

The company was called Digital Gas. The swindler, Brian Smith, concocted phony press releases that he posted on the Internet to deceive the investors into thinking that there was actual demand for its shares. Digital Gas was once a real company, a supposed incubator for energy businesses, but it has had no revenues or even bank accounts since at least 2006.

That didn't stop Smith from portraying it as a viable business - and getting penny-stock investors to believe him. This week, Smith was ordered to pay over $5 million in penalties and restitution. The wonder is that there were enough gullible investors willing to give him so money. Your investments are critically important to your future and that of your family, and it saddens me to see people not treat them with all the care and preparation they deserve.