Thoughts for New Year's Eve

Year's end is neither an end nor a beginning but a going on, with all the wisdom that experience can instill in us. ~ Hal Borland

Dreams are renewable. No matter what our age or condition, there are still untapped possibilities within us and new beauty waiting to be born. ~ Dale E. Turner

May all your troubles last as long as your New Year's resolutions! ~ Joey Adams

Snow Days

Have you dug out from all this snow yet? If you haven't seen it yet, you should take a look at this time-lapse video from Belmar, showing about three feet of snow falling over the weekend:



What are the effects of this storm on our economy? Most obviously, it puts a tremendous strain on our local governments. Although we don't know a dollar figure yet, the mayor of Woodbridge estimated that he had to call out 100 trucks to help with the plowing, on a Sunday night. He thinks it will probably end up being the most expensive snowstorm in the town's history.

If the storm had happened before Christmas, it probably would have made a bigger dent in retail sales, but its positioning just after the holiday means it made less of an impact. Post-Christmas sales make up 15 percent of holiday shopping, so the fact that a lot of stores were closed and/or inaccessible on Monday could hurt that. On the other hand, many people have this entire week off, so there's plenty of time to make up for lost shopping. Overall, we're still on track to have 2010 be the biggest holiday shopping season of all time.

Hedge-Fund Bullishness

Yesterday we talked about how individual investors were optimistic about the future of the stock markets heading into the new year. A new survey shows similar bullishness on the part of hedge fund operators. According to a survey by TrimTabs Investment Research and BarclayHedge, 46 percent of the hedge-fund managers surveyed were bullish on equities, up from 31 percent in November.

Only 19 percent of the hedge-fund managers described themselves as pessimistic about U.S. stocks. In November, the number was twice as high, at 39 percent. The current figure is the lowest it's been since the survey started, back in May.

This survey is probably a more significant one than the one of individual investors. As bright and perceptive as individual investors can be, hedge fund managers make their living understanding the relative values of different investments. Plus, they are required to put their money where their mouth is.

A Happy New Year?

As we close the door on 2010 with an economy that is still far from healthy, one thing is certain: investors are very happy with the landscape they see ahead of them. According a survey last week by the American Association of Individual Investors, a full 63 percent of all investors consider themselves bullish. Only 16 percent are bearish, with the rest considering themselves neutral.

Back in July of this year, only 20 percent of investors were bullish, according to the same survey. As recently as earlier in December, right about half of investors were optimistic about the markets.

It should be noted, though, that all that investor optimism isn't necessarily a good thing. As Paul Lim of the New York Times notes, the survey found the number of bullish investors at 55 percent back in October 2007. A month later, the recession began; over the following 12 months, the S&P 500 lost 37 percent of its value.

Christmas Fallout

We won't know until the end of this week how well the Christmas retailing season has shaken out - officially, it runs till New Year's Eve. Even if it had ended at Christmas, it would be difficult to know where we stood, since Christmas Eve tends to be one of the biggest shopping days of the season. Some sellers call Christmas Eve "Father's Day," since so many laggard dads and husbands wait till then to head out to the stores.

The National Retail Federation has estimated that, when all the figures are in, Christmas spending will reach $451.5 billion this year. That would be the second-highest on record, after the $452.8 billion we spent in 2007. If they've undershot that even a little bit, we'll have a new record.

One number that is in already is the online retail sales figure, which is - not surprisingly - a record. Shoppers spent $36.4 billion by the end of last week, which was a whopping 15.4 percent increase over last year. But given that more and more people are shopping online every year, it would have been a terrible sign if we hadn't set that record.

Thoughts for Christmas Eve

Christmas is not a time nor a season, but a state of mind. To cherish peace and goodwill, to be plenteous in mercy, is to have the real spirit of Christmas. ~ Calvin Coolidge

Never worry about the size of your Christmas tree. In the eyes of children, they are all 30 feet tall. ~ Larry Wilde

My first copies of Treasure Island and Huckleberry Finn still have some blue-spruce needles scattered in the pages. They smell of Christmas still. ~ Charlton Heston

Moving On Up

The economy grew faster than previously reported in the third quarter, according to figures released by the Commerce Department yesterday. It's hardly a significant change: The initial report was that GDP increased by 2.5 percent, and now the government thinks it was actually 2.6 percent. That's the final revision for the GDP figure, so that's where the number will stay.

That revision wouldn't ordinarily have much impact - except that it has helped fuel the the idea that the growth of the American economy may be accelerating. The Wall Street Journal's survey of eight banks and economic research firms had earlier pegged fourth-quarter growth at 2.6 percent; now that number has been revised upward to 3.5 percent.

Those same entities are also upgrading their 2011 GDP outlook. Goldman Sachs, for one, recently revised its 2011 growth figure from 2.0 percent to 2.7 percent; JPMorgan Chase now has 2011 growth at 2.9 percent. In any case, it looks like the future has just become a tick brighter.

An Early Christmas Present

The stock market offered up an early gift yesterday, with the S&P 500 climbing past the 1250 mark for the first time since September 12, 2008. Why is that date significant? Because that was the final trading day before Lehman Brothers declared bankruptcy, sending the financial world into a tailspin.

Equities dropped like a rock through the remainder of that September, eventually hitting bottom on March 9, 2009, when the S&P 500 closed at 676. That marked a 12-year low for the index. But it's been pretty smooth sailing ever since.

Now that we've gotten back to the post-Lehman high, the next S&P 500 watershed would be reaching 1565. That's the index's all-time high, achieved in October 2007. You'll remember that as the month before the Great Recession officially began.

Investing with an Older Brain

As you get older, are your investments getting riskier? A new study from the National Institute on Aging suggests that elderly people may approach their decision-making with more risk than was previously thought. And it may not be a conscious decision - it might be hard-wired into our brains.

Researchers at Vanderbilt University asked participants of all ages to make investment-related decisions while their brains were being monitored. People who were over 65, the researchers found, made increasingly erratic decisions as the process went on, just when most people would have expected them to become more conservative.

The even stranger thing is, even though the researchers described themselves as "baffled" by the older people's investment decisions, they didn't turn out to be all that bad. In fact, the elderly subjects got returns just as strong as the younger people in the study. Maybe the supposedly erratic nature of older brains is simply a legitimate thought process that's beyond the understanding of science. For more information, click here.

The Leading Indicators

Last week's report on the nation's Leading Economic Indicators brought a lot of good news, with November's increase begin the biggest monthly rise in eight months. Nine of the ten indicators were positive; the only one that was negative was the measure of the nation's building permits, a sign that housing is still a problem.

But the other nine all went in the right direction in November. In order of their strength, they are:

* Supplier deliveries
* Interest rate spread
* Number of new weekly unemployment claims
* Real money supply
* Stock prices
* Consumer expectations
* Weekly manufacturing hours
* New orders for consumer goods and materials
* New orders for nondefense capital goods

Holiday Tips

Are you going to leave a tip for your garbagemen this holiday season? For the paperboy? For your regular baby-sitter? Tipping has become so commonplace in our society that, according to research by a professor at Lehigh University, the typical service provider receives the equivalent of an extra week's pay each year around Christmas.

The professor, Holona Ochs, has written a whole book about the efficacy of tipping. For example, she found that someone receiving a tip doesn't usually think the amount has much to do with the quality of their service. Rather, the amount of the tip reflects, for the receiver, simply the nature of person leaving the tip.

So if you leave a big tip in a restaurant, the waiter isn't likely to assume that he did a good job; more likely, he'll just think you're a good person. (Similarly, Ochs found that servers assume that certain people leave skimpy tips - like foreigners or teenagers - and act accordingly.) If you're feeling generous this holiday season, comfort yourself with the idea that your big tip says more about you than it does about the beneficiary of your largesse.

Glad Tidings for Retail

Yesterday the Census Bureau released its report on retail sales for the month of November, giving us our first concrete look at how this holiday shopping season is going. And the numbers are actually fairly encouraging. Retail and food service sales were up 0.8 percent over October, and 7.9 percent over November of 2009.

If you take a step back, the picture still looks good. We had that increase in sales between October and November even though, at the same time these figures were released, October's sales figures were revised upward as well. All told, retail sales from September through November of this year increased 7.8 percent from the same period a year ago.

Taking the first eleven months of 2010 as a whole, retail sales are up 6.5 percent over the same time frame for 2009. Some of the retail industries leading that growth are motor vehicle dealers (up 10.7 percent), building material and gardening equipment (up 6.0 percent) and sporting goods, hobby, book and music stores (up 5.2 percent).

"Longevity" Planning

Are we moving out of the age of retirement planning and into the age of "longevity planning"? That's the conclusion reached by two researchers who worked on a retirement study for The Hartford insurance company. They think that rather than looking for ways to manage their retirement, in the future people will increasingly seek out ways to make use of their additional longevity, after they've finished working. They point to the example of a 529 plan, which is usually funded for a child's college education - but can also be used to pay for a retiree to go back to college, and possibly pursue another career.

"The yacht is not the goal of retirement anymore," said one of the experts, John Diehl of the Hartford. "Advisors need to be talking about the issues of living longer."

A big part of that is that people are taking more of an active role in planning the latter stages of their lives. In the Hartford survey, 75. 2 percent of the respondents said they felt the need to rely upon themselves for resources in their retirement, up from 71.2 percent in 2006. That's a crucial first step toward keeping control of your life, even after your working days may be over.

Coming Up from Underwater

According to the research firm CoreLogic, Inc., the number of homes underwater on their mortgage dropped in the third quarter - making it three quarters in a row in which that figure has done so. While 23 percent of all mortgage holders owed more than their home's value at the end of June, that number has now edged down to 22.5 percent.

Sounds like good news, right? Not really - the reason for the drop has almost everything to do with foreclosures. There are 110,000 foreclosures happening each month right now, which is the primary cause of underwater mortgages coming off the market. All told, the value of real estate held by American homeowners dropped by $649 billion in the third quarter, according to the Federal Reserve.

One silver lining to all of this is that existing homeowners are slowly getting stronger and stronger in their positions. The foreclosures may be difficult, but they are a necessary step to getting the housing market back on its feet.

The Small-Cap Rally

The past decade has been rough for the stock market as a whole, but small-cap stocks have weathered the storm quite nicely. Small caps have returned an annual average of 8 percent over the past ten years, whereas the S&P 500 has returned less than 1 percent per year. Over the course of the past year, the S&P 600 small-cap index is up about 25 percent, while it's bigger brethren in the S&P 500 has brought back about half that.

But is that kind of performance nearing an end? As Paul Lim reported in his column in the New York Times yesterday, research shows that small caps tend to outperform in the beginnings of a bull market. When the market turns upward, small caps do much better than large-cap stocks in the first 12 months. Over the next year after that, small caps still lead large caps, but by a much smaller margin.

But the longer the bull market stays in business, the more conservative investors start to become. The third year of a market upswing, which is what we're coming up on, is where small-cap rallies sometimes run out of steam. We'll see if that's what in store for this one.

American Wealth

One of the most significant but little-discussed measures of American prosperity has begun moving in the right direction, according to a report released by the Federal Reserve yesterday. After falling by $1.4 trillion in the second quarter, household net worth in the U.S. climbed by $1.2 trillion in the third quarter, up to a total of $54.9 trillion. Net worth is now rising at an annual rate of 9.1 percent.

What's more impressive is that we managed to do this while also paring our debt. Total household debt fell at an annualized rate of 1.75 percent in the third quarter, down to $13.4 trillion. These are both encouraging figures heading into the holiday shopping season.

But they're also still a long way from where we need to be, or where we used to be. America's household wealth peaked in the second quarter of 2007 at $65.9 trillion. That's more than $10 trillion above where we are now, and adds up to a loss of around 17 percent of our wealth.

TV Shows and Market Tops

Financial pundits tend to see market tops as occurring when the whole world realizes that people have been making money off a particular investment. In a column at SeekingAlpha.com, Yoni Jacobs looks back at the housing market of the early 2000s, at a point when people began to buy up additional properties with the intention of spiffing them up and then quickly "flipping" them for, ideally, tens of thousands of dollars in profits. This was the province of real estate insiders for a while, but the idea eventually went mainstream.

Jacobs argues that the notion of flipping one's house reached its zenith when we suddenly had two separate TV shows devoted to the idea: "Flip That House" on the Discovery Channel and "Flip That House" on A&E, both of which debuted in July 2005. The very week the first of this shows had its premiere, Jacobs has been able to determine, was the day the American housing market reached its top.

Why is this relevant now? Because there's a show that debuted last week on the Discovery Channel called "Gold Rush Alaska," just as the price of gold reached new modern highs. Will history repeat itself? One historic data point does not signal a trend, but it's something to keep in mind.

The Tax Changes

The extension of the Bush tax cuts got all the headlines, but there was also an agreement reached on the estate tax between the Obama administration and Congressional Republicans earlier this week. The status quo was that after a year of no estate tax in 2010, it was scheduled to return in 2011 at a rate of 55 percent and an exemption level of $1 million per estate.

The new rules would have a tax rate of 35 percent, and an exemption level of $5 million. That would put inherited wealth on roughly an equal footing with ordinary income for tax purposes.

One thing to remember, though, is that this is an agreement in principle, between the president and the GOP leadership, and no actual legislation has been voted on. We still don't know such things as when all this would take effect (although January 1 is a pretty good guess). We don't even know that the final legislation will take this form. This whole package may still have a long way to go.

Naming the Fed's Customers

One of the provisions of the Dodd-Frank financial reform legislation passed last summer was that it forced the Federal Reserve to reveal who was making use of its emergency loan provisions, which got a real workout during the banking meltdown of 2008. Some of these do not exactly come as news, such as the troubled insurer AIG, which borrowed some $60 billion. Goldman Sachs borrowed nearly $25 billion.

But the Fed also loaned money to the American subsidiaries of foreign-owned banks, such as UBS, based in Switzerland, and Dexia, based in Belgium. The loans continued well past the end of the banking crisis, too: Korea's Shinhan Financial Group borrowed $100 million from the Fed in February of this year.

Will the Fed continue making emergency loans to foreign entities now that it will have to reveal the names of all its customers? That's not really clear, but at the very least, they will have to justify their actions going forward. More transparency is generally a good thing.

One Step Back

After so many positive signs for the economy during the week, things came crashing back to earth on Friday with a dismal jobs report. The American economy created just 39,000 jobs in November, driving the official unemployment rate back up to 9.8 percent. Despite the ADP report we cited earlier, the private sector added only 50,000 jobs, while the public sector lost 11,000.

A disturbing signal within the numbers: The industry showing the greatest job growth for the month was temporary help services. That accounted for 40,000 new jobs in November. As you can see, all the other industries combined lost a thousand jobs. In other words, the only thing that gave us any job growth at all was temp jobs.

Meanwhile, manufacturing lost 13,000 jobs in November. This economy is going to have to do better than that.

The Brooklyn Hotel Scam

A hotel investor from Brooklyn has been working a scam not unlike the infamous Nigerian email scam, wherein you have to give the Nigerian prince several thousand dollars so that he can share some of his frozen millions with you. The Brooklyn man, Robert McDonald, didn't have the anonymity of email to hide behind, so here's supposedly what he did: He agreed to spend $108 million to buy some hotels in the Midwest, then went out to find some investors to go in with him. He told another hotel investor that he had $22 million, and needed only another $8 million to make his down payment.

The other investor didn't seem to quite buy McDonald's pitch, and offered up only $1.5 million of his money. McDonald responded by offering him 20 percent of his company in return for that investment. In hindsight, these things always seem slightly ridiculous, and this one is no different: In order to procure that $1.5 million, McDonald supposedly showed him falsified documents that indicated he had $88 million in an account with JP Morgan. A $1.5 million investment should have been a drop in the bucket to him - so why did McDonald give away a fifth of the company for it?

The moral of the story is: If something seems too good to be true, it almost certainly isn't true. Forbes has more on this story.

Signs of Life

More positive signs for the economic recovery emerged this week, beginning with the Fed's Beige Book report, released yesterday, which said that economic conditions had improved in 10 of the Fed's 12 regional offices. The previous report, in October, had reported growth in only eight of the offices, so this is a step up. As usual, the state of New Jersey is divided down the middle, with the northern half covered by the New York City office and the southern half by Philadelphia. The New York office reported a stronger pace of economic activity, while Philadelphia reported "mixed" conditions.

Meanwhile, consumer confidence was up in November to its highest level in five months, and exceeded the economists' consensus expectations. That's a very positive sign as we move into the holiday shopping season, which can be make-or-break for many retailers' annual profits.

Finally, the ADP private payroll report indicates that 93,000 new private-sector jobs were created in November, which would be the highest number in three years. As we've said in the past, the ADP report is unofficial and sometimes inaccurate, but we'll hope this portends a positive official figure, which will be released on Friday.

On Deposits

According to a report from Bloomberg News, the amount of money being kept in bank deposits is reaching record levels. There's a total of $6 trillion now on deposit at American banks, after an infusion of $88.9 billion in the third quarter. That's the highest amount since 1992.

This reflects in part the fact that many investors are still spooked by the stock market. Bank deposits are now offering, on average, annual returns of 0.80 percent, which is the lowest they've been since at least 2000. But, of course, putting your money in the bank is a "safe haven," even if it's not getting you much more return than putting it under your mattress would.

But there's another factor at play here: Banks still aren't lending any money. Outstanding commercial and industrial loans have dropped by $65 billion so far this year. With loan growth flat, banks are taking all those deposits and buying Treasury bills with them: more than $120 billion worth so far in the second half of 2010, after buying $47 billion in the first half. That's a recipe for growing the banks' bottom line, but not so much for growing our economy.

The Insider Probe and the Fiduciary Standard

You've probably heard about the insider-trading probe going on here in the Northeast, in which several hedge funds have been investigated by the SEC over charges that they'd sought out nonpublic information from employees at publicly held companies and used that to buy and sell stocks. More than a dozen people have been charged so far, and one - a former executive with Connecticut's SAC Capital Advisers - has pleaded guilty. Attorney General Eric Holder has confirmed that the Justice Department is part of the investigation.

One bit of fallout from all this could be a renewed focus on an upcoming meeting between the SEC and the Committee for the Fiduciary Standard. As part of last summer's financial regulation bill, the SEC was mandated to study the fiduciary rules, which state that an investment advisor must always place the client's needs first and foremost. Wealth managers such as myself uphold that fiduciary standard, but they don't apply to some investment professionals, such as brokers.

"I think this will remind everyone in the regulatory and legislative arms that the only protection the public is going to have is by making those who are providing the advice personally responsible," said Harold Evensky, a financial advisor who's on the Committee for the Fiduciary Standard. His group meets with the SEC on December 8th. Will heightened concern about the propriety of hedge funds lead to tightened fiduciary standards? That could only help the individual investor.

Black Friday: The Fallout

So was this year's Black Friday a strong step forward for the economic recovery, or a sign that it's still stuck in the mud? It depends on whom you ask. Retail sales over the long weekend totaled $45 billion, but the trendlines being reported by various entities vary widely:

* According to the National Retail Federation, the average shopper spent 6.4 percent more this weekend than he or she had last year.

* A Chicago research firm called ShopperTrak says sales on Black Friday itself were up only 0.3 percent over the previous year.

* Traffic in the retail stores on Black Friday was a bit stronger than that, rising by 2.2 percent over 2009.

* The Black Friday numbers may have been depressed by people starting their shopping earlier. Retail sales for the first two weeks of November were up more than 6 percent over the same period last year.

* Online sales showed the biggest jump, with Internet sales increasing by almost 16 percent over last year.

Black Friday

Black Friday dawns this year with much more optimism than last year's. This traditional kickoff to the Christmas shopping season - when retailers hope to turn the year's accounts into the black - was a bit of a downer last year, when sales rose just 0.5 percent from the previous Black Friday, when consumers spent $18.6 billion. This year, the forecast from MasterCard Advisors Spending Pulse calls for an increase of 3.5 percent.

One factor that may complicate that growth: People are increasingly saying they will keep their credit cards in their wallets. Only 8 percent of shoppers say they will use more plastic this year, while 35 percent say they will use more cash. Overall, 90 percent of shoppers say they'll pay for their purchases with cash.

That could cut seriously into their spending habits. According to a study from the American Research Group, the average shopper using a credit card spends $87 per purchase; those using cash, check or debit cards spends just $41.

Thoughts for Thanksgiving

As we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them. ~John Fitzgerald Kennedy

When it comes to life the critical thing is whether you take things for granted or take them with gratitude. ~Gilbert K. Chesterton

The Pilgrims made seven times more graves than huts. No Americans have been more impoverished than these who, nevertheless, set aside a day of thanksgiving. ~H.U. Westermayer

Revising GDP Upward

You may remember a few weeks ago that we reported the American economy grew at 2.0 percent in the third quarter of this year. Yesterday, the Commerce Department announced that the figure was actually 2.5 percent. How could the original number have come in so wrong? There are three basic changes to the figures that were first reported:

* The original estimate of aggregate exports was increased by $5.9 billion.

* Consumer spending turned out to be higher than originally thought, to the tune of an additional $5.7 billion.

* The first GDP estimate showed that spending by state and local governments had dropped by $900 million in the quarter. In reality, their spending was up by $2.9 billion, so that's a $3.8 billion swing.

All told, that's a 25 percent increase in GDP growth over what was first reported. That's a pretty solid improvement.

Consumer Wariness in the Holiday Season

A new consumer confidence survey, intended to signal what we might see heading into the holiday buying season, shows some of the same contradictory attitudes we've been seeing for a while with this economy. The survey, from the Consumer Federation of America and the Credit Union National Association, makes two things clear: The outlook is brighter for consumer spending this year than it was last year, but it's still pretty bleak.

To be sure, the numbers are moving in the right direction. In last year's survey, only 19 percent of consumers said their financial situation had improved in the past year, and 8 percent said they'd spend more on the holidays this year than last. This year, those numbers are up to 23 percent and 10 percent. While the indicators are getting better, it's distressing that, in the economic recovery we find ourselves in, less than one in four consumers say they're in better shape this year than they were last year.

Maybe the brightest note in the survey is the one concerning credit-card debt: Only 10 percent of the respondents said they were worried about meeting their monthly payments. All told, the people running the survey said they expect the rise in holiday spending to be only about half the normal 5 percent increase. We'll be keeping our eyes on this in the coming weeks.

Adding Jobs, All Over the Country

You may have heard last week that New Jersey's jobless rate fell in October, dropping 0.2 percentage points to 9.2 percent. The growth was in the right area, with the private sector adding 4,800 jobs. The public sector dropped 2,200 jobs, 1,800 of them casualties of the end of the census.

Those kinds of numbers were repeated around the country. In the four largest states in the nation, we saw the following figures for October:

California added 39,000 jobs
Texas added 47,900 jobs
New York added 40,500 jobs
Florida added 6,900

October was the first month since May in which all four of those states added jobs.

GM's Old Owners

General Motors launched its IPO yesterday, providing another chapter in what has become an extraordinary turnaround story. The offering sold more than $15 billion worth of common stock, the second-biggest IPO on record (the biggest was for Visa Inc., two years ago). That's about 50 percent more than GM had anticipated when it first announced the offering.

GM, you'll recall, filed for bankruptcy on June 1, 2009. At that time, the existing shareholders were wiped out, and the new owners became:

The U.S. government: 60.8 percent
The United Auto Workers: 17.5 percent
The Canadian government: 11 percent
Unsecured bondholders: 10 percent

For the shares it sold yesterday, the U.S. Treasury received about $13 billion - but the total amount it invested in GM was nearly $50 billion. To make all its money back, the Treasury will have to sell the rest of its GM shares at about $53 each.

A Look at Our Property Taxes

Property taxes are a perennially painful subject here in the Garden State, and if we can't roll them back, we can at least use the Internet to learn more about them. On the NJ.com site, there is a section called New Jersey by the Numbers, which includes database tables with searchable property tax data. For example, if you go here, you can see that here in Middlesex County, the highest average property taxes are found in Cranbury, and the lowest are in South Amboy.

You can also see how the property taxes for each town has changed over the years, although the data is only complete through 2007. The site also has something called a Tax Trauma score, which ranks towns by the percent of household income going to taxes. By this measure, the least fortunate town in Middlesex County is Highland Park.

There's a lot of useful information on the site, and you might want to take some time looking around there, to see how much people around the state are paying in taxes. Just don't expect it to be much fun.

Modest Improvement

There were a couple of modest but positive reports on the economy this week. First of all, the National Association of Home Builders monthly index ticked upward for November. It reached a five-month high, and is more than double where it bottomed out last January. That's not a sign that a rebound is imminent, but it looks like we've already been through housing's trough.

Also, the Federal Reserve reported yesterday that factory output was up 0.5 percent in October, after rising 0.2 percent in September. Overall, industrial output was flat as well, but that was a modest increase from September, when it had dropped 0.2 percent. That was the first decline in industrial output since the end of the recession, so it's nice to see that trend ending quickly.

Of course, we'll need to see stronger numbers than this for this economy to get back into gear. But these are a couple of steps in the right direction.

Market Moves for Millionaires

Are you still fully invested in the stock market, after all the ups and downs of the last few years? A new survey from U.S. Bank found that nearly all Americans with a million dollars in investable assets have stayed in the market - 92 percent of them kept their money in equities, and 43 percent of them continued to actively buy and sell stocks.

These millionaires are also recovering quite nicely; 90 percent of them say their investments are performing at pre-2008 levels. A fifth of them report that they are ahead of where they were before the recession hit. Perhaps most significantly, a large number of them say that they haven't been chastened by the downturn, and that their risk tolerance is as strong as ever. Only 10 percent say they're on the defensive, and nearly half didn't change their asset allocation over the past three years.

This last item may not be such a good thing. It's always a good idea to periodically revisit your asset allocation to make sure you're not over- or underweighted in any specific area. That becomes even more true after the market upheavals of recent years. But to see so many investors remaining optimistic is good news indeed.

Making Best Use of 401(k)s

The past decade has been a disastrous one for many stock-market investors, but a new study from Fidelity Investments shows that many people's 401(k)s actually made it through OK. According to Fidelity, people age 55 and older who had a 401(k) for the entire decade saw its value more than double, from an average of $96,000 to $211,300.

The key, of course, is that most of that money came from the worker's contributions, rather than from market gains. People who were able to put at least 8 percent of their earnings into their 401(k)s saw their accounts increase by an average of 130 percent over the course of the decade.

At the same time, though, most Americans do not max out their 401(k) contributions. A survey by ING, released earlier this month, showed that 87 percent of all Americans say they could contribute more to their retirement plans. More than half, or 59 percent, said they could afford to raise their contribution level by 3 percent of their salary. Perhaps it's because they've been spooked by the investing environment of the past ten years, but clearly, Americans are not making the most of this important retirement-planning tool.

Problems With Long-Term Care

There is rarely significant news coming from the dry area of long-term-care insurance, but MetLife - the nation's largest life insurance company - announced this week that it was getting out of the long-term-care business. Apparently, MetLife just couldn't make the numbers work on this.

Here are some relevant stats that may have affected MetLife's thinking:

* Sales of long-term-care insurance for all insurers dropped by 32 percent between 2005 and 2009. It's an expensive policy, which makes it a tough sell in difficult economic times.

* The cost of assisted living has risen by 6.7 percent a year over the past five years, well ahead of the inflation rate.

* Here in New Jersey, even a semi-private room in a nursing home will cost you $100,000 per year.

* Nearly two thirds of all people over 65 will need some form of long-term care, whether that's in a nursing home, at an assisted living facility, or with home care.

A Second Look at Gold

There have been several stories in the news this week about the price of gold hitting an all-time high, reaching more than $1400 an ounce. That is indeed the highest price for an ounce of gold on record, but it doesn't tell the whole story. If you factor in inflation, the price of gold peaked in 1980 at $2,387 per ounce in 2010 dollars. But the nominal price was just $850 per ounce.

To be fair, though, that 1980 price spike was fairly anomalous in the history of gold. The prices of gold doubled in the space of a couple of weeks at the beginning of the year, then fell back almost as quickly. In terms of 2010 dollars, gold fell below $1000 per ounce in 1983, and didn't get back to those levels until 2008.

So while gold is still a long way from its inflation-adjusted peak, it has reached its peak if you don't count that weird spike from the very beginning of the 1980s. To see the trajectory of gold prices properly adjusted for inflation, click here.

Congress Takes Action, Already

After a bruising election with plenty of harsh rhetoric thrown around on both sides, the Democrats and Republicans actually made nice yesterday, on an issue that's vitally important to a lot of people: the alternative minimum tax. Leaders of both parties sent a letter to the IRS saying they wanted to tackle a flaw in the AMT, which has a way of sneaking up on middle-class taxpayers.

"We will work to craft the AMT provision so that, in the aggregate, not one additional taxpayer faces higher taxes in 2010 due to the onerous AMT," the letter says. It's signed by the chief Dem and GOP member of each of the tax-writing committees in the House and Senate. The AMT's original limits weren't indexed to inflation when the law was introduced in 1969, so without fixing, they tend to be fairly low. As it stands, married couples making as little as $45,700 would be subject to the AMT in 2010. In 2009, married couples making at least $70,950 were subject to the AMT.

Congress has done this before, raising the limit to protect taxpayers from the ravages of inflation. It's been a pretty regular thing, to index the AMT for inflation each year. Still, it's nice to see the two parties working together on something that could, if left unchecked, become a big problem.

Mixed Messages on Lending

Last week's decision by the Fed to buy $600 billion in Treasury bills was intended to give banks' greater incentive to make loans and help expand the economy. But a new report - from the Fed itself - seems to undercut that strategy somewhat. A survey showed that over the past quarter, banks had already begun to ease their standards for business lending. They also were more willing to make consumer installment loans and relaxed the terms on credit card loans.

But that doesn't mean that more of these loans are being made. The same survey found that demand for business lending had fallen during the quarter, after having been up somewhat during the previous quarter. Over the past two years, since December 2008, business lending has dropped from $1.62 trillion to $1.22 trillion. Demand for mortgages also remained weak during the quarterly survey period.

So apparently the expansion of credit is being held back as much by a lack of demand as it is by the banks' unwillingness to lend money. It is of course in the banks' interest to lend money, since that is how they make their profits. What they need now is not more money, but more customers.

Signs of Life

In the New York Times yesterday, financial columnist Gretchen Morgenson checked in with an economist named Ian Shepherdson, who was predicting a housing collapse to be followed by a recession way back in 2005. That kind of foresight deserves a lot of respect, so what does Shepherdson see on the horizon now? Economic growth.

The key, as Shepherdson sees it, is the amount of credit available to businesses. At this time last year, the total amount of commercial and industrial bank credit was at $1.32 trillion, and shrinking by $7 billion a week. It finally bottomed out this past June. Now that amount of credit has started building again, although very slowly.

The upshot of all that credit available for business expansion is growth, particularly among small businesses, although not exceptionally strong growth. Shepherdson predicts GDP growth staying at its current rate of around 2 percent for a while. By the second half of 2011, he says, we may be up to about 3 to 4 percent. At this point, that might be the best we can hope for.

The First Round of Quantitative Easing

Yesterday, we talked about the Fed's second bout of quantitative easing and what that might mean for our economy. As we wonder whether it will work like it's supposed to, it's worth taking a look back at the first round of QE and assessing its success.

It was just after the banking-system meltdown when the Fed announced, in November 2008, that it was planning to buy $500 billion in mortgage-backed bonds, at a time when 30-year fixed mortgage rates were at 6.09 percent. The following March, it increased that figure to $1.25 trillion in mortgage-backed bonds, and 30-year fixed rates had dropped below 5 percent, to their lowest level since records had been kept starting in 1971.

So on that level, the first round has to be considered a success. In the larger sense, its success has to be measured against how bad you think the downturn would have been without it. Some economists have given the Fed’s action credit for helping to avert a second Great Depression, but on the other hand, the recession and its recovery period have been extraordinarily difficult for the American economy, even with the Fed's action. The move have may have achieved its goal, but it didn't save us from a lot of hardship.

QE2

As expected, the Federal Reserve Bank announced yesterday it would try to jump-start the economy with quantitative easing. This would be the second bout of quantitative easing the Fed has engaged in, with the first coming back at the end of 2008, in the midst of the banking meltdown. That has some financial pundits referring to the new measure as QE2.

Quantitative easing is a fancy term for a simple concept: buying up Treasury bills, as a means for the Fed to put more money into circulation. This time around the Fed is purchasing $600 billion worth of Treasury bills, at a pace of about $110 billion per month. The Fed buys these securities from banks around the country, paying for them with assets it basically creates out of nothing aside from accounting tricks, which is why some people refer to quantitative easing as “printing money.” There are two basic results of this:

1. There is instantly a great deal more money in circulation, for banks to lend and for consumers to spend.
   

2. Since there are now more people invested in Treasury notes, it becomes cheaper for the Treasury to borrow money.

Will it work? There are a lot of different motors running in the American economy, and it’s hard to attribute is success or failure to any one instrument. But after watching this sluggish recovery drag on for month after month, we are certainly all ready for some good news.

Surging Personal Credit

Here are a couple of reports that are interesting in a reading-the-tea-leaves kind of sense: MasterCard announced its quarterly earnings yesterday and ended up far ahead of the analysts' estimates. Its third-quarter income came in at $3.94 a share, easily beating the estimate of $3.54 a share. Last week, MasterCard's rival Visa announced its quarterly revenue was up a whopping 51 percent.

Remember, these aren't the banks that issue these cards who are reporting these earnings. Visa and MasterCard are relatively small companies that process payments for member banks. Despite the fact that it serves 23,000 financial institutions worldwide, MasterCard itself has only about 5,000 employees.

So what we're looking at here is the growth in the use of credit and debit cards by consumers. Worldwide, Mastercard said that spending using one of its cards had grown by 7.9 percent, to $514 billion, in the past quarter. That kind of consumer spending and increased consumer confidence can only be good for our economy.

The Unelected Government

It's ironic that the day when we elect the people who will run our government for us is also the day that some of the most powerful people in government - people no one ever voted for - will sit down and determine certain key elements of our economy. We're talking about the governors of the Federal Reserve Board, who will meet today and tomorrow and decide if the economy needs another infusion of cash, and what form that infusion should take.

The members of the Fed's Open Market Committee - which includes the seven Fed governors and five presidents of the Fed's 12 regional banks, on a rotating basis - are appointed by the president. (There's a vacancy on the Board of Governors right now, reducing their number to six.) And they serve terms that are long enough to ensure that there is almost always a mix of viewpoints and political backgrounds. Here's how the people who are trying to plan the future of our economy got their jobs:


Chairman Ben Bernanke: appointed by George W. Bush and re-appointed by Barack Obama
William C. Dudley, president of the New York Federal Reserve Bank: appointed by Obama
James Bullard, president of the St. Louis Federal Reserve Bank: appointed by George W. Bush
Elizabeth Duke, board of governors: appointed by George W. Bush
William Hoenig, president of the Kansas City Federal Reserve Bank: appointed by George H.W. Bush
Sandra Pianalto, president of the Cleveland Federal Reserve Bank: appointed by George W. Bush
Sarah Bloom Raskin, board of governors: appointed by Obama
Eric Rosengren, president of the Boston Federal Reserve Bank: appointed by George W. Bush
Daniel K. Tarullo, board of governors: appointed by Obama
Kevin M. Warsh, board of governors: appointed by George W. Bush
Janet Yellen, board of governors: appointed by Obama

Revving Up the GDP

Friday's GDP report from the Commerce Department fell squarely where the estimates had it pegged: Our economy grew at 2.0 percent in the third quarter of 2010. The consensus view is that this rate of growth would be perfectly acceptable in normal times, but is not robust enough to get this stalled economy going again.

It is, however, a small improvement from the second-quarter figure of 1.7 percent. The biggest difference between the two quarters comes from a somewhat surprising area: carmakers. While the automotive industry subtracted 0.06 percent from the nation's economy in the second quarter, it added 0.42 percent in the third quarter.

Leading the way has been Ford, which last week announced its sixth straight quarterly profit. In fact, Ford's third-quarter profit of $1.7 billion was a record for the venerable company. Its rival General Motors is scheduled to have its IPO later this month, and the success or failure of that will be an indication of how broad the automaking rebound really is.

Jobless Claims: On the Right Track?

The number of new jobless claims dropped by 21,000 in the weekly report released yesterday, providing some hope that the employment figures may finally be turning the corner. The number of people filing new unemployment claims - 434,000 - was the lowest it's been since July. The four-week moving average, which is supposed to smooth out any hiccups in the figures, is also at the lowest rate it's been since July.

Except for that blip in July, new jobless claims were at their lowest since August 2008, or just a few months into the recession. The number of people who are continuing to receive unemployment benefits is at 4.36 million; that's the lowest that figure has been since November 2008. Of course, some of the drop in that figure is the result of people using up all their unemployment benefits.

The Labor Department's official unemployment report for the month of October will be out next Friday. At that point, we'll have a better idea of whether this was just a blip, or a genuine cause for optimism.

Cutting Down on Risky Trading

With last May's "flash crash" still heavy on their minds, the SEC is on the verge of banning a process called "naked access," in which brokerages permit their customers to trade on their computer codes without oversight. While brokers use risk controls and algorithms to prevent automated trades from spinning out of control, their clients are under no such obligations.

It's important to realize who the brokerage's customers are, the ones the SEC are concerned about. It's not some guy making trades out of his basement; more likely, it's what's known as quantitative trading firms. These are firms who buy and sell stocks based solely on what their computer algorithms are telling them to buy, which means they have a tremendous advantage if they're not limited by the broker's customary controls.

This is a huge business. By one estimate from earlier this year, naked access accounts make up nearly 40 percent of all stock trades. While eliminating this type of trading would reduce the possibility of enormous, instantaneous drops in the market, it's anyone's guess what other effects it might have.

Foreclosure-Gate Reaches New Jersey

The foreclosure mess is really hitting home here in New Jersey, with the announcement that seven plaintiffs have filed a class-action suit in Newark against Bank of America and two of its subsidiaries. According to the suit, BofA has been foreclosing on homes in New Jersey when it had no right to begin the proceedings.

Among the specific claims brought in the suit:

* A homeowner took steps to get his mortgage modified and began making his reduced payments, but he was foreclosed on anyway.

* Another homeowner took the bank to binding arbitration and won his case - only to have the bank ignore the arbitrator's decision and foreclose anyway.

The end result of all this won't be an end to foreclosures in New Jersey, of course; it will only slow them down. The vast majority of foreclosures are on homes that legitimately should be foreclosed upon, even if it's not clear who has the authority to begin the proceedings. One positive aspect of all this, other than forcing the banks to get their own houses in order, might be to stretch out the pace of foreclosures, resulting in a more orderly number of homes going up for sale. That could have a small but positive effect on our overall housing market.

Wages Dropping

The Social Security Administration has released its figures regarding wages and salaries for 2009, and they shed some light on the effects the recession has had on our national income. Overall, 150.9 million Americans reported earned income in 2009, down 4.5 million from the number in 2008. Not surprisingly, the average earner saw his income drop by $384, down to $39,269, in 2009.

Toward the upper end of the scale, a total of 78,149 Americans earned a million dollars or more in wages and salaries (not counting capital gains) in 2009. That number was down from 101,200 people making a million dollars in 2008. The number of Americans who made more than $10 million dropped from 2,539 to 1,620. And at the very top end of the scale, the number of Americans making $50 million or more dropped from 131 in 2008 to just 74 in 2009.

No matter where you fell on the wage scale, 2009 was not a good time to be in the workforce.

Forecasting the GDP

We're due to get the official third-quarter GDP report from the Commerce Department on Friday of this week. In the meantime, Bloomberg News has asked a group of economists for their forecasts, and they're expecting the growth number to come in at a quarterly increase of 2 percent. That would be up slightly from the second quarter GDP growth of 1.7 percent.

The primary cause of the upswing: the rise in consumer spending. Considered to constitute roughly 70 percent of the American economy, consumer spending is thought to be up an annual rate of 2.4 percent for the June-to-September quarter. The National Retail Federation projects holiday spending to up 2.3 percent over last year.

So that's the good news. If the economists' forecast is correct, it probably means that the recovery is strong enough to sustain itself for a while, making a double-dip recession even more unlikely. The bad news is that even 2.0 percent GDP growth probably won't be enough to make a dent in the unemployment rate.

Bad Cop

It's getting so you can't even trust the police anymore. Remember the TV show CHiPs, about two Callifornia highway patrol cops, which was on the air from 1977 to 1983? If you do, then you remember Officer Jon Baker, played by Larry Wilcox (pictured at right), who was the partner of Ponch Poncherello, played by Erik Estrada.

Well, Wilcox appears to be working on the other side of the law these days. After CHiPs ended, Wilcox moved into business, running a software company called MediaCore and a pharmaceutical firm called Team Elite. Lately, he's been running a firm called the UC Hub Group, which has been pushing penny stocks on stockbrokers and pension-fund managers - including, if you believe the SEC charges against him, offering kickbacks to the fund managers if they'd buy Wilcox's stocks.

Wilcox's problems began when he and his associates tried to sell some of the stocks to undercover FBI agents. He offered to set up phony consulting companies for the purchasers, paying them money to do nothing - except buy his penny stocks for their clientele. This is, of course, highly illegal. It's an embarrassing fall for a man who was once one of America's favorite policemen.

The Latest From the Beige Book

The Fed's Beige Book, reporting on economic conditions around the country, was released yesterday (and if you're thinking that this comes out somewhat irregularly, you're right - it comes out eight times a year). As always, the news on New Jersey is divided between the New York office, covering the northern half of the state, and the Philadelphia office, covering south Jersey.

Many of the reports from those two offices were in sync this time around. For instance, the commercial real estate market showed "practically no change in market conditions" in Philadelphia, while the New York office reports that commercial real estate has "generally been steady."Manufacturing appears to be picking up slightly in both regions. Overall, the northern half of the state reports that the economy "continues to expand at a modest pace," while the southern half says the business outlook is "positive, but not robust."

One interesting note: The Beige Book reported that although consumer spending was up slightly, it was mostly limited to necessities and non-discriminatory items, and consumers remained very price-sensitive. Separately, it noted that wholesale prices had been rising, but those costs had not been passed along to the consumer. One reason that inflation has been kept in check, perhaps, is that the consumer just won't stand for it.

To read more of the latest Beige Book report, click here.

Foreclosure-Gate

As you've probably heard, the latest iteration of the housing crisis is what's being called foreclosure-gate, in which many of the nation's largest banks have been foreclosing on properties that they may not even own. With thousands of homes in foreclosure around the country, and the ownership of many of them unclear, banks have been rubber-stamping foreclosure documents without, in some cases, ensuring that they hold the title to the property. In one case, Bank of America foreclosed on the house of a man in Fort Lauderdale, Florida - even though he had paid cash for it and didn't have a mortgage.

You'll recall that the housing crisis was driven by the practice of securitizing and selling off mortgages, often chopping them up into little bitty pieces. One of the results of this is that it's not clear, at this point, who owns many of the houses that have been foreclosed on. In many instances, the foreclosures have been initiated by a little-known company called MERS, which maintains an electronic registry of mortgage records. MERS doesn't actually hold any mortgages, just the records of them, but it has begun thousands of foreclosure proceedings anyway. Whether or not it's legal for it to do so remains very much an open question.

What we do know is that the attorneys general from all 50 states have signed on to an investigation of the foreclosure process, which shows how expansive, both geographically and politically, this problem has become. What all of this will do to a still-fragile housing market is anyone's guess.

Back and Forth

In keeping with the one-step-up, one-step-back nature of this economy, we had two contradictory economic figures released yesterday. The National Association of Home Builders found that confidence among homebuilders was at its highest level in October than it had been since early summer. The confidence level also exceeded the expectation of the economists surveyed by Bloomberg. That measure bottomed out in January of 2009, but it may finally be headed for positive territory.

So that's the good news. On the other side, overall production in the U.S. fell by 0.2 percent in September, which also came as a surprise to economists. That's a drop in the output of all American factories, utilities and mines. Now, 0.2 percent is a very small number, but still, it should be moving in the opposite direction.

The differences might be explained by the anticipation of the Fed's moves, in which they're expected to purchase a significant amount of Treasury bonds in early November. It could be that that's what causing the backwards-looking numbers to be more sluggish than the forward-looking ones.

The State of the Estate Tax

As we head into the home stretch of this election season, one issue that hangs in the balance for a new Congress to tackle is the estate tax. As you probably know, there is no estate tax for 2010, but it is scheduled to return in 2011, at a rate of 55 percent on estates valued at more than $1 million. But neither party seems comfortable with letting this situation stand. There are several proposals that may come into play, depending on who wins control of Congress in November:

* The most visible Democratic proposal, from Senate Finance Committee chairman Max Baucus of Montana, would set the new estate tax to its 2009 levels: a rate of 45 percent, with an exemption of $3.5 million.

* On the Republican side, Senate Minority Leader Mitch McConnell of Kentucky has suggested raising the exemption level to estates worth more than $5 million, and lower the tax to 35 percent.

* More than 250 congressional candidates, primarily Republicans, have pledged to permanently repeal the estate tax.

So that's three possibilities that are out there. We've got a new article on the Echelon Wealth Strategies Web site discussing how the estate tax got to this point, where it's headed, and what it means to you. To read the article, just click here.

Not Even the IRS Would Sink So Low

There's an email going around, purportedly from the IRS, claiming that there's something wrong with the recipient's electronic payment. It's October, and IRS payment are due in April, but bureaucracy moves at the sort of pace, right? The email offers the recipient an easy way to refile the payment online.

Of course, it's a scam, designed to get you to enter a credit-card number to make up for the missing payment. For one thing, if the IRS has any issues with your taxes, they will get in touch with you via the good old U.S. mail. If your electronic payment is ever rejected, you'll get a detailed letter in the mail explaining the situation. They're also very careful about giving you multiple points of access to them, including a phone number and information available at www.IRS.gov.

For its part, here's how the IRS responds to such "phishing": The IRS does not initiate taxpayer communications through e-mail. In addition, the IRS does not request detailed personal information through e-mail or ask taxpayers for the PIN numbers, passwords, or similar secret access information for their credit card, bank or other financial accounts.

The Worst Credit Cards in America

Consumer Reports recently announced its choices for the two worst credit cards in America. While it's unlikely that you've got either one in your wallet, their more horrific aspects can provide lessons in what to look for - or not look for - in a credit card.

The First Premier Bank Mastercard advertises that it charges a one-time $75 "first-year annual fee." What it doesn't advertise as boldly is that it also charges a subsequent-year annual fee of $75 as well. There's also a processing fee, ranging from $25 to $95, and a fee just for raising your credit limit.

That card is aimed specifically at people with poor credit, so you're not very likely to end up with one. But you might stumble into something like the Platinum Zero Visa from Applied Bank, which claims it has zero interest, zero application fees, and zero annual fees. But after six months, the card starts charging $9.95 per month - which means you end up paying over a hundred bucks a year for something with "zero" fees.

For more, see the latest issue of Consumer Reports.

The Presidential Effect

We talked recently about the effects of a deadlocked Congress on the stock market, but the presidential elections, of course, have a profound impact on the economy as well. And of course, as with every other possible effect on the market, someone has studied this too. It turns out that the period just after the midterm elections have been historically pretty solid.

There have been 17 elections in the middle of a presidential term since 1942. Each time, the following 200 days produced a gain in the S&P 500 of at least 18 percent. We'll be starting the next such period less than a month from now.

And there's another potentially positive indicator. The breakdown for the Dow Jones' return in the various years of a presidential term (from 1900 to 2009) are as follows:

Year 1: 5.5 percent

Year 2: 3.7 percent

Year 3: 12.6 percent

Year 4: 7.5 percent

Obama's Year 3 starts in January 2011. Does this mean anything? Is it all just a fluke? Who knows, but at this point, we'll take all the good news we can get.

Driving Down the Dollar

The economy may be getting a boost from a trend that sounds a little bit counterintuitive: the weakness of the dollar. In the past quarter, the value of the dollar fell by 8.5 percent in the Dollar Index, which tracks it against the yen, euro, British pound, Canadian dollar, Swiss franc and Swedish krona. That's the biggest quarterly drop since June 2002.

In a sense, that is also what the Fed would also be doing early next month if it buys up Treasurys, as Fed chair Ben Bernanke has signaled recently. If the Fed buys up a significant amount of these bonds - one estimate holds that it will purchase $600 billion worth - that will have the effect of injecting that amount of money into the economy. Basically, that's $600 billion in the pocket of whoever the Fed buys those bonds from.

And one of the effects of that is to put more dollars into the economy, thereby lowering the value of all of them. Just the speculation that the Fed would take this move drove the dollar last week to its lowest level versus the yen in 15 years. With a weaker dollar, our exports will cost comparatively less for foreign buyers, and they'll be able to snap up more of our goods and services. That's the plan, anyway; we'll see how well it works.

The Bad News on Jobs

So last week's unemployment figures were disappointing yet again. Although the overall unemployment rate was unchanged at 9.6 percent, the economy lost 95,000 jobs in September.

The worse news is that the broadest measure of unemployment, commonly called U-6, dropped again to 17.1 percent, the highest it's been since April. That includes people who have stopped looking for work and people who would like to find full-time jobs but have had to settle for less than that. Temp jobs are up 23 percent since September 2009.

If there's a silver lining in all of this, it's that the private sector did add new jobs for the month, with 64,000 workers hired. The reason overall job loss was so high was that the government shed 159,000 jobs. But even that is problematic. It's one thing when these are census workers losing their jobs, since we expected those jobs to be temporary in the first place. But in September, state and local governments lost more workers (83,000) than did the Census Office (76,000).

The Facebook Stock Fraud

You knew it was going to happen: The Manhattan U.S. attorney's office is investigating a stock-fraud case in which alleged criminals used social media Web sites - including Facebook and Twitter - to pump up stocks. Shareholders who fell for the fraudulent stock touting ended up losing over $7 million. There were 22 people involved here - mostly longshoremen, of all people - who posted "false and misleading statements," according to the complaint filed against them, then made "coordinated purchases and trades... in order to sell the cheaply purchased stocks at higher prices."

The fact that there were so many fraudsters involved here probably was instrumental in duping so many people. If you see 10 or 12 of your "friends" on Facebook all getting excited - and seeming to have insider knowledge - about a particular company's stock, it's easy to fall for the ruse. The wisdom of the crowds is a very real phenomenon.

But this is one more reason to stick with prudent, long-term investing. Once you hear about a hot stock tip, that should be the beginning of the research process, not the end. If all those people had looked into the longshoremen's tips and discovered for themselves whether the stocks were really worth buying, they'd be $7 million richer today.

Raises on the Rise

If you got a bigger raise this year than last year, you're not alone. According to the human-resources consulting firm Aon Hewitt, the average raise received by salaried American workers this year is 2.4 percent. In 2009, by contrast, that same worker got an average raise of just 1.8 percent. According to another survey, the average raise is expected to rise modestly again, to 2.7 percent, in 2010.

The 2009 figure was the lowest in the history of the survey. So in a way, there was nowhere to go but up.

Aon Hewitt also reports that it is getting hired significantly more often to give compensation advice in 2010, which it calls a good signal for the recovery. Put together, if people are getting bigger raises and companies are hiring more top-salaried employees, that's a sign that we may be seeing the first rumblings of a solid increase in employment.

Predictions on Financial Reform

Do you think that the financial reform legislation that was passed over the summer will help our financial sector be more competitive? For most people, that depends on where you live. In the United States, 48 percent of all executives surveyed by McKinsey expect the bill to be either somewhat or very negative with respect to the competitiveness of the U.S. financial-services industry. Only 29 percent expected the effects to be somewhat or very positive.

But in the rest of the world, it's a very different story. In areas outside the U.S., only 25 percent of the executives surveyed said the new law would make the U.S. less competitive. More than half thought it would make the financial sector more competitive.

Overall, 41 percent of the executives worldwide thought the financial reform was good for American banks. Just 38 percent thought it would be negative; only 3 percent saw it as very negative.

Behind the Flash Crash

Remember back in May, when the Dow plunged almost 1000 points within the space of an hour? The official report as to the cause of that little episode came out last week. Here's what happened in a nutshell: A trader put out an order to sell more than $4 billion worth of S&P futures, without specifying a price at which to sell those futures, which would have smoothed the sale out over time. That put 75,000 E-Mini S&P futures on the market all at once. With all those shares coming quickly onto the market, to be sold at whatever price they could fetch, their price came down very rapidly.

That trade was made by an actual trader, but several automated trading programs picked up on the big sale and the price drop, and automatically followed suit. Those S&P futures are considered bellwethers for the stocks in the S&P 500, so when traders saw the futures plunging, many of them began selling off the underlying stocks as well.

Eventually, cooler heads prevailed, and the market quickly made back all those losses when people realized the drop had been caused by, essentially, nothing. The SEC hasn't yet decided if it needs to implement additional regulations to keep such plunges from happening in the future, although it has put circuit breakers on the market to halt or slow trades of any stock that moves more than 10 percent in a five-minute period.

The End of TARP

Last week, the Treasury Department announced that it was in the process of unwinding the billions of dollars it had loaned AIG, the insurance giant at the center of the financial meltdown, and that the government might actually turn a profit on that aspect of the TARP program. TARP is in many ways officially over, so the New York Times yesterday provided a bit of a postmortem on the program. Some highlights:

* Although the bailout fund was initially funded with $700 billion, and is often described that way, it was actually reduced to $475 billion by the financial reform act passed last summer.

* Banks received $250 billion, of which $158 billion has been paid back. The government projects that this aspect of the program will eventually result in a profit of $5 billion to $20 billion for the Feds.

* The Big Three automakers got $82 billion, including money for lenders like Chrysler Financial and GMAC. Of that, about $15 billion has been paid back. For this part of the program, the government expects to eventually lose from $15 billion to $34 billion.

* A fund of $46 billion was created to help troubled homeowners modify their mortgages, but this has been a failure. Only 15 percent of eligible loans have been modified, and all the money is expected to be lost.

Double Dose of Strength

We had good news from two disparate sectors of the economy on Thursday, which may be a positive signal for this recovery. First of all, the manufacturing sector posted surprisingly strong figures in September, with the Institute for Supply Management's business barometer soaring to 60.4. Anything over 50 is considered to indicate expansion. The economists surveyed had expected the number to come in around 55.

Meanwhile, retail stocks posted their biggest quarterly gain since 2003 for the quarter that ended yesterday. The S&P Retail Index was up 19 percent, with the biggest gainers being Liz Claiborne (up 44 percent for the quarter) and the Warnaco Group (up 41 percent).

Those factors probably fueled the mild drop in workers filing new unemployment claims, which dropped by 16 percent last week. None of these figures on its own is the sign of a rip-roaring recovery, but the fact that they're so broad-based gives us reason for cautious optimism.

Trouble in the IPO Market

The Liberty Mutual insurance company has announced that it has postponed its planned IPO, which would have been by far the largest initial public offering in the U.S. this year; the company was seeking to sell $1.3 billion worth of stock. Liberty Mutual cited the sluggish economic recovery and weak stock market as its reasons.

The IPO market as a whole has been underperforming this year; at least 45 companies have announced IPOs only to withdraw or postpone them. The biggest IPO this year has been for the little-known oil company Oasis Petroleum, which raised $676 million for its offering back in June. By contrast, back in the crazy days of the Internet IPOs, Priceline.com was briefly worth $10 billion on its first day on the market.

There's still hope for a huge IPO this year: General Motors is planning to take itself public again in November. The word is that the car manufacturer will seek to raise $8 to $10 billion in that stock offering. Its success or failure will probably prove to be an important signpost for this economic recovery.

On the Home Front

So how's New Jersey faring in the economic recovery? It depends on which measure you look at. As is typical of this one-step-up, one-step back economy, conflicting measures of our state's economic health came out yesterday.

The good news is that household median income in New Jersey is just about the highest in the nation. The U.S. Census Bureau found that our 2009 household income of $68,342 was statistically indistinguishable from that of Maryland ($69,272) and Alaska ($66,953). For all intents and purposes, we're in a three-way tie.

On the other side of the ledger, that number was down some 2.3 percent from 2008. And the number of New Jersey families living in poverty rose from 8.7 percent in 2008 to 9.4 percent in 2009.

That probably sums up the New Jersey economy pretty well. We've weathered the storm better than a lot of other places, but make no mistake: It's still been a storm.

The Engines of Economic Growth

Where is the economic growth that will eventually get us healthy again going to come from? The McKinsey consulting firm has analyzed where the growth has been coming from for the past few decades, and one area stands out: No, it's not small business, but multinational firms. McKinsey found that since 2000, multinational companies have contributed 74 percent of the growth in our GDP.

Interestingly enough, though, multinationals have not contributed nearly as much to jobs growth. From 1990-2007, according to McKinsey, multinationals contributed only 11 percent of our total employment growth, with other U.S. firms accounting for the remaining 89 percent. Apparently, the larger firms are much more efficient: Despite hiring merely 11 percent of all workers, they accounted for 41 percent of the growth in labor productivity.

If those trends continue, we'll have two dynamics working at odds to each other. If we want to see economic growth, we should look toward multinationals, but if we want to see unemployment brought down, it's more likely to happen with U.S.-only firms.

Congressional Report

Many investors are waiting to see how a reshuffled Congress will affect our nation's economy after the November elections: Will a Republican-controlled Congress renew the Bush tax cuts? If the Democrats stay in charge, will there be another stimulus package? What will happen to the estate tax?

No matter who's in charge, it appears that the markets are not too fond of Congress. A 2006 study looked at the gains in the Dow Jones average when Congress was and wasn't in session, and found that more than 90 percent of the index's gains came on days when Congress was not meeting.

That's not to say that the economy is at its strongest when Congress accomplishes the least. According to the New York Times, since 1926, a large-cap stock index returned about 7 percent a year at those times when the federal government was gridlocked - that is, the same party was not in control of both branches of Congress and the White House. But when the government wasn't gridlocked, that same index returned 12 percent a year.

Fresh Indicators

The index of leading economic indicators was up for August, even more than the rise predicted by the economists polled monthly by various organizations. Still, the number rose by only 0.3 percent, portending a continuing but weak recovery.

In all, seven of the ten indicators were positive in August. They were:

* The interest rate spread
* The real money supply
* Average weekly manufacturing hours
* Building permits
* Stock prices
* Index of consumer expectations
* New orders for capital nondefense goods

The indicators that were negative:

* Unemployment
* Index of supplier deliveries
* New orders for consumer goods and materials

Obviously, the big one there is unemployment. Until that gets moving in the right direction, the recovery will continue to be sluggish.

A Rise in the Ratings

The giant credit-ratings service Moody's came out with a report yesterday indicating that default risk for the companies whose bonds it rates had dropped to its lowest level in two years. In June 2009, there were 288 American companies with a credit rating of B3, which is six steps below investment grade. Now, there are just 195. Moody's added 13 companies to its negative ratings in the quarter ended August 31, as opposed to 35 in the same period a year earlier.

And these aren't just fly-by-night penny stocks; among the corporations that Moody's upgraded were such well-known entities as Clear Channel and Neiman Marcus. That shows another step towards health for this economy, making it less and less likely that we'll see very many more collapses of large American corporations (although Blockbuster will apparently file for bankruptcy today).

It's interesting to see that, in a sense, the bond market had already taken note of this lessening of risk. Purchases of speculative-grade bonds - what used to be called junk - soared in the first half of this year to $119 billion, their highest level since Bloomberg began compiling those figures in 1999. Clearly, the bond buyers had already recognized that those bonds were not likely to default.

Commodities on the Rise

There's one market that has pulled out of the recession into full recovery: commodities. Prices of commodities - and especially agricultural commodities - plunged with everything else at the onset of the recession, rose throughout 2008, then dropped again in 2009. But now in 2010, according to a new report from McKinsey, some commodities prices have actually doubled from those 2009 lows.

One result of these rising commodities prices is that the threat of deflation seems to be easing. A deflationary environment combined with our already-sluggish recovery would have been bad news for our economy. If the markets can stop worrying about deflation, that would be good for equity prices.

Of course, the flip side of that is inflationary concern. But the inflation rate has been remarkably stable lately, hovering just above 1 percent in each of the past three months. This economy still has more than its share of trouble; it would be nice if we are now able to dispense with deflationary worries before we turn back to concerns over inflation.

Closing the Book on the Recession

It's now official: The recession that started in December 2007 ended in June 2009, according to the National Bureau of Economic Research, the group that's tasked with recording these things. We generally look at the GDP stats by quarter, but the bureau narrows that down with a little more finesse. It noted that the economy shrunk by only 0.7 percent in the quarter comprising April, May and June 2009, and figured that the economy was growing by the last of those three months. That June, real GDP, real income, employment, industrial production and retail sales all took a turn for the better.

So the recession officially lasted for 18 months, making it the longest economic downturn since the Great Depression. The earlier record-holders were the recessions of 1973-75 and 1981-82, which each lasted 16 months.

The official declaration also means that if the economy sinks back into contraction again, it will be a double-dip recession rather than a continuation of the earlier recession. The NBER economists estimate the likelihood of that happening at 25 percent.

An End to "Window Dressing"

The SEC wants to make it a little harder for public companies to disguise their level of indebtedness. In a vote taken on Friday, regulators took aim at what's called "window dressing." That's the practice of artificially trimming debt at the end of each quarter to make the company's financial statements appear a little stronger.

Banks are especially notorious for using this tactic; Lehman Brothers in particular had famously hidden its true levels of debt before its collapse in September 2008. The SEC is hoping that by changing the rules, investors will have better information about a company's health, and that the bottom line reported each quarter will be a little bit closer to reality. The new rule would force the affected companies to publicly disclose their levels of debt on a daily basis, rather than just at the end of the quarter.

At this point, the rules have simply been proposed. The next step is for the SEC to listen to public comments for the next 60 days. Only after that - perhaps in the next few months - would the regulation take effect. We'll keep you posted.

Bungling Bank Robbers

This week's ridiculous bank-robbery story comes from Coral Springs, Florida, where a woman walked into a SunTrust branch and handed the teller a note reading, "Give me cash, I have a knife." After the teller handed over $430, the unsatisfied robber declared that that wasn't enough, and sent the poor teller into the back room to get more money.

Of course, as soon as the teller was out of the thief's sight, she called the police. The cops arrived and arrested the would-be robber even before the teller returned from the back room.

There's a nicer story out of South Carolina, where a robber entered a Wachovia branch with a note demanding $30,000. When the teller told him she didn't have any money, he politely said, "Thank you," and departed. That didn't, however, prevent the police from arresting him for entering a bank with intent to steal.

The Wealth Gap Narrows

According to a new study of global wealth by the German insurance firm Allianz, the United States remains by far the richest nation in the world. The average American has $130,764 in stocks, bank accounts and insurance, easily the highest number on the planet. We now have 39 percent of the world's wealth, as compared with 31 percent in all of Western Europe.

But our share of the pie is shrinking. Since the recession hit in 2007, American wealth has dropped by 12 percent. The only country that has lost a bigger percentage of it collective wealth in that time has been Greece, Europe's biggest basket case, which has seen its wealth drop by 14 percent.

In the longer term, over the past decade, wealth has risen by around 3 percent annually in the United States. The biggest winner over that time frame? Eastern Europe, which has been up an average of 16 percent per year since 2000.

The Other Side

Yesterday we talked about how Warren Buffett remains bullish on the American economy, but it's worth pointing out that a number of American executives aren't quite so optimistic. McKinsey surveyed 868 American executives in August and found that 54 percent of them expect the country's economy to be either the same or worse over the next six months. As recently as June, it was just 45 percent of American executives who felt that way.

In the most recent survey, just 3 percent of the execs thought the economy would be substantially better in six months. Only 1 percent said it would be substantially worse, but 14 percent projected it to be moderately worse.

The last time McKinsey conducted this survey, in June, it was European executives who had the most pessimistic outlook for the future. Now, their American counterparts have taken over that dubious distinction.

"I Am a Huge Bull on This Country"

Warren Buffett made a speech in Montana yesterday that may have been the clearest sign yet that we are not headed for a double-dip recession. He's just one investor, of course, but Buffett has been the most successful long-term economic seer of our lifetimes. His investment vehicle, Berkshire Hathaway, owns insurance and real estate businesses among many other holdings, and recently bought Burlington Northern Santa Fe railroad.

And these businesses, Buffett reports, look pretty solid. "I've seen sentiment sour in the last three months or so, generally in the media," he told the Montana Economic Development Summit. "I don't see that in our business. I see we're employing more people than a month ago, two months ago."

There's no reason that Buffett has to be right about this, and that people predicting a double-dip are wrong. But Buffett has a lot of skin in the game, and as a famously long-term investor, he's got no reason to puff up his short-term prospects. "I am a huge bull on this country," he said. "We will not have a double-dip recession at all. I see our businesses coming back almost all across the board."