Friday, February 26, 2010

Funding the Pension Fund

The big news around New Jersey's fiscal status lately has been the lack of funds in the state's pension plan for its public employees. The pension system is now underfunded by $46 billion, up from $34 billion a year earlier. The state has been missing its contributions for years, but the largest problem remains the weak economy.

Consider that in 2008, more than half the state's pension fund was invested in common stocks, but by 2009, the percentage had dipped to 44 percent. The change in asset allocation apparently resulted not from a conscious decision but from the dismal year the equity market had in 2008. (This is one more reminder that your asset allocation can get seriously out of whack now and then through no fault of your own, and should be revisited regularly.)

The pension fund's stock portfolio lost about ten percent of its value in 2008, even though the top investments were all blue chips, headed by Exxon Mobil, Microsoft, Apple, Proctor & Gamble, and Citigroup. Obviously, the best thing for this pension fund, in addition to the state paying money into it, would be for the economy to get roaring again. Not only would this expand the tax base, but a strong bull market - the fund holds around $50 billion in equities - would go a long way toward alleviating the shortfall.

Thursday, February 25, 2010

Jailhouse Tax Cheats

As you're working out this year's tax return and wondering why you pay the government so much money every year, keep in mind a gang of lowlifes down in Key West, Florida, who managed to bilk the IRS out of $100,000 over the past few years. The gang filed fake returns that called for refunds of generally around $5,000 apiece, using standard IRS forms.

That might not sound so remarkable, except that the whole thing was run from the Key West county jail. A continuing ring of small-time criminals apparently taught each other how to file IRS forms for made-up businesses. The 50 or so inmates who were in on the scam were especially brazen: They asked that most of the checks be sent directly to the jail.

Police eventually did catch on to the scam, after one of the inmates left behind a note in his cell detailing exactly how they were ripping off the feds. "I'm through with street crime," another criminal was recorded as saying. "I'm strictly white-collar from now on. I love the IRS."

Let's hope that the IRS has now decided to take a second look at any tax returns sent to them from a prison.

Wednesday, February 24, 2010

Consumers and Stocks

January's consumer confidence figures, released yesterday, came back very disappointing, dropping to its lowest level since last April when analysts were expecting only a slight dip. The markets also had a bad day, with the Dow losing 100 points and the S&P 500 and Nasdaq both losing ground as well.

Naturally, the media tied the two events together (one Bloomberg headline read: "Weak consumer confidence data hammers US stocks"), and possibly there is a connection. At the same time, let's take a look at the individual Dow stocks. Three of the 30 Dow components actually rose yesterday: Kraft Foods, McDonald's, and Home Depot. The other 27 lost value, with the biggest losers (on a percentage basis) being Alcoa, JPMorgan Chase, American Express and Caterpillar.

So three consumer-oriented stocks did the best, and the laggards were two financials and two heavy-industry companies. Many things affect the movement of stocks prices each day; sometimes it is the day's biggest overall economic news, and sometimes it is not.

Monday, February 22, 2010

Mixed Signals in Foreclosures

The Mortgage Bankers Association released some new data on our housing troubles last week, giving the beleaguered industry some mixed signals. The delinquency rate on residences dropped 17 basis points in the fourth quarter of 2009, to a seasonally adjusted 9.47 percent. The delinquency rate tracks mortgages that are at least one month behind in their payments but have not yet gone into foreclosure - troubled mortgages, you might say. The percentage of loans on which the foreclosure process started also dropped slightly.

That's the good news. The bad news is that the combined percentage of loans either in delinquency or in foreclosure reached an all-time record in the fourth quarter of 2009. The percentage of loans that are 90 days past due also set a new high.

There is a reason to think that the most important of these figures is the number of delinquencies; that's the starting point of the whole downward spiral, houses don't go into foreclosure until people miss that first payment. But that's not the only point of demarcation - lots of people miss a mortgage payment without having their home go into foreclosure. The Mortgage Bankers are trying to spin this report as good news, but it's closer to a holding pattern.

Little Bits of Inflation

We mentioned last week that the spread on TIPS suggested that most investors didn't see inflation looming as a serious problem, and the inflation figures released by the Labor Department on Friday supported that. The consumer price index rose by a negligible 0.2 percent in January, while the core inflation rate fell by 0.1 percent. The difference between the two is that the core inflation rate doesn't include food and energy costs, which are considered too volatile, but the are included in the consumer price index.

The Labor Department doesn't just offer those two inflation figures but a whole range of them, sliced and diced in more ways than you'd think possible. So the food index, which rose 0.2 percent for the month, breaks down as a 0.4 percent for food at home, but just a rise of 0.1 percent for food away from home. That's a switch from the previous 12 months, in which food at home dropped 2.0 percent while food away from home rose 1.6 percent.

The biggest reason for the rise in food prices was the dairy and related products index, which rose 2.1 percent in January. That's closely followed by the fruit and vegetable index, which rose 1.3 percent - but we can see that the real culprit there was the fruit index, which was up 2.8 percent. These increases were counteracted by a drop in the cereals and bakery products index, which fell 0.5 percent on the month. Looks like this is a good time for a sandwich and some Twinkies.

For more on the inflation details, see the Labor Department report here.

Friday, February 19, 2010

The Fed's Small Step

In a surprise move on Thursday, the Fed announced it was raising the discount rate from 0.50 percent to 0.75 percent. This is the rate the Fed offers banks that run short of cash and need to borrow money quickly.

It's important to note what this move is not: It's not a hike in the Fed Funds rate, which remains near zero. The Fed Funds rate has an effect on anyone who borrows money, but a hike in the discount rate is likely to have no effect at all on the wider lending picture. In fact, Ben Bernanke says yesterday's moves "do not signal any change in outlook for the economy or for monetary policy."

So why make the move at all? One reason may be to help bolster the value of the dollar. Rising interest rates make the value of today's dollar just a little bit stronger. After the Fed's announcement, the dollar spiked up against both the euro and the Japanese yen in yesterday afternoon's trading. Any further effects beyond that remain to be seen.

Thursday, February 18, 2010

HP's Outlook

Hewlett-Packard released some strong first-quarter revenues yesterday, to get back to a topic we haven't discussed much lately. Wall Street had forecast HP's first-quarter 2010 revenues of $30.01 billion, but the number actually came in at $31.2 billion. (Earnings were disappointing, however, coming in at 96 cents a share after Wall Street had forecast $1.06.)

Even more impressive is the way HP raised its outlook for 2010. The company now says 2010 revenue will be somewhere between $121.5 billion and $122.5 billion, up from its previous estimate of $118 billion to $119 billion. The Wall Street revenue estimate was $120.3 billion. So HP has upgraded its outlook from less than the Wall Street consensus to the point where it now expects to beat that consensus.

Remember, much of stock movement is based on beating expectations. For a company to put forth numbers it knows are better than the Street's takes remarkable confidence. And for HP to show that kind of confidence in this economy is good news for all of us.

Wednesday, February 17, 2010

TIPSy Doodle

We've been hearing for a while now that inflation may be just around the corner, especially given the huge debt our federal government has rung up. That's been a central driver of the strategy employed by Fed chairman Ben Bernanke, who is wary of pumping up the economy so much that he ends up unleashing inflation.

But the market seems to be discounting that possibility a bit. The sale of TIPS - Treasury Inflation-Protected Securities - have been falling lately, with investors seeming to find them overpriced. The great selling point of these Treasury bonds is that the purchaser is protected against losing value because of inflation, since their interest rate is pegged to the inflation rate. Of course, you pay a price for that kind of security; at the moment, you price you pay is 2.25 percentage points less than comparable Treasurys. In other words, if you think inflation is going to be higher than 2.25 percent, you might want to think about TIPS.

Investors, though, are shying away from TIPS at that price. Many big bond funds have been unloading TIPS recently, according to Bloomberg News. Bloomberg says the bonds are on pace for their worst month since October 2008, at the very start of the banking meltdown.

That's bad news for TIPS investors, but good news for people who are fearing inflation. Anyone can spout off with opinions about where inflation is headed, but when people begin putting their money where their mouth is, it's time to start paying attention.

Tuesday, February 16, 2010

Dow 10K

With the markets closed yesterday, this might be a good time to take a longer look at where it's been in recent years. As I write this, the Dow Jones Industrial Average is at 10,999, although it dipped as low as 9,998 during the day on Friday. In fact, every single day last week saw the Dow traverse the magical 10,000 mark at some point.

Last Monday, as it happens, marked the 50th time in the history of the Dow that it had crossed the 10,000 line. The first time was back on March 29, 1999, and at that point a lot of people would have told you that it was more likely to hit 20,000 than it was to cross 10,000 on the way back down again. But after the dot-com collapse, the Dow was back under 10,000 in February 2000.

It's tempting to see 10,000 as a kind of barrier for the Dow, that it's inexorably drawn to that level or that there's a type of investing psychology that gives 10,000 some kind of significance for investors. That's bunk, of course. People buy and sell Merck and AT&T and Coca-Cola based on how much they think each individual stock is worth, not on how it affects the Dow Jones average. It does make for interesting trivia, though.

Monday, February 15, 2010

Thoughts for Presidents' Day

No People can be bound to acknowledge and adore the invisible hand, which conducts the Affairs of men more than the People of the United States. Every step, by which they have advanced to the character of an independent nation, seems to have been distinguished by some token of providential agency. - George Washington

I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts. - Abraham Lincoln

Friday, February 12, 2010

Cash on the Barrelhead

Bloomberg reported yesterday that the companies making up the S&P 500 have a total of $1.18 trillion in cash on hand. That sounds like an awful lot, doesn't it? A year ago, those same companies had $688 billion in cash. In the interim, nearly $500 billion in additional money has made its way into corporate coffers.

The fact that companies are sitting on so much cash helps explain why the recovery has been so jobless so far. Corporations are trying to ramp up through increased productivity and by shedding off excess capacity. They've also been trying to avoid indebtedness and creating leaner operations.

All that cash sitting on the sidelines represents a tremendous source of possibility for the economy. If the S&P 500 companies spent only the amount of cash they've accumulated in the past year, it would be a greater investment in the economy than the entire spending portion of Obama's stimulus plan. The nation has an awful lot of latent capability, which is one reason to believe that we will regain our full financial strength one of these days.

Thursday, February 11, 2010

Bernanke Checks In

In his published remarks yesterday, Fed chair Ben Bernanke tried to outline some tentative steps to pull the Fed back from its heavy investments in the American economy. (Bernanke's testimony before Congress got canceled by the snowstorm.) The Fed's portfolio is currently at $2.29 trillion, more than $1.3 trillion of which has been added since the onset of the banking crisis in September 2008. Obviously, no one wants that state of affairs to continue, so Bernanke announced plans to sell much of the most recent holdings, including mortgages, Treasurys and debt from Fannie Mae and Freddie Mac.

The Fed is also going to take on banks' excess reserves as a sort of CD, giving them a nominal interest rate in return. Put together, these plans should "drain hundreds of billions of dollars of reserves from the banking system quite quickly," Bernanke wrote.

Unfortunately, as we saw yesterday, bank liquidity might not be the foremost of our problems, and these moves might affect just the far edges of the economy. The big question is, when does Bernanke foresee that he will raise interest rates from the current near-zero level? "At some point," he wrote. It would be easy to ridicule such a lack of specificity, but better to admit that you don't know when the economy will improve enough to warrant such a move rather than to lock yourself in to an unknowable target. At least we know interest rates will remain zero for some time yet. At least until the snow lets up.

Tuesday, February 9, 2010

Small Business Woes

We've been talking for a while about the need for banks to begin the flow of loans in order to help get businesses growing again, but a new report out yesterday undercut that a bit. The National Federation of Independent Businesses - the small-business lobby - released a survey of small-business owners yesterday and reported that finding money wasn't their problem.

"Only 5 percent of small business owners cite 'financing' as their top business problem but 31 percent cite 'poor sales,'" reported the NFIB. That's a more difficult problem to fix: It's easier to grease the skids for lending than it is to persuade people to start spending money they may not even have.

The NFIB also compiles something called the Small Business Optimism Idex, sort of a consumer confidence report for small businesses. That's still in below-average territory, but it's been rising as of late. The NFIB said seven of its ten components were up in January, especially improved outlooks on jobs, inventories and capital spending. In other words, small business owners are much like the rest of us: still struggling, but hopeful of better times ahead.

Bernanke's Choices

Fed chairman Ben Bernanke is expected to offer his "exit strategy" tomorrow, disclosing what he expects the Fed to do in managing the final stages of the economic recovery. One problem is that their key lever is the Fed funds rate, which helps determine interest rates around the country. But it's already at a virtual zero level. Raising it would raise interest rates, at a time when borrowing is already very thin.

At the same time, Bernanke might feel the need to raise interest rates to fight off the specter of inflation, especially given the strong growth we saw in the fourth quarter of '09. But if he does it too soon, it could choke off a lot of that growth.

What does that leave? Bernanke could use his testimony to signal optimism in the American economy, hoping that would spur consumer confidence and loosen the credit spigots. But financial information is so plentiful these days, and so readily available, that it's hard to imagine Bernanke reporting enough news on the economy to make a solid difference.

Is there another trick up his sleeve? We'll find out tomorrow.

Monday, February 8, 2010

Super Bowl Winners

Remember the Super Bowl Stock Market indicator? Supposedly, if the winner of the Super Bowl is from the NFC or was originally a member of the NFL before the merger in 1970, the stock market will go up that year. If the Super Bowl champ originated in the old AFL, we're due for a bear market. The indicator has held true for more than three-quarters of the 43 Super Bowls played before yesterday.

In case you didn't know, there are three teams that started in the NFL but now play in the AFC: the Colts, Steelers and Browns. This year's game, featuring the Saints from the NFC and the Colts from the AFC, showcased two teams that started off in the NFL, so we were in good shape no matter who won. This freed up investors to root for whichever team suited their fancy.

Given that either team would have been suitable for the market in the upcoming year, we're happy that the Saints have finally won the big one and brought some much-needed good news to the city of New Orleans. Let's hope their victory brings some good news to the rest of us as well over the course of the year.

Friday, February 5, 2010

The Wheels of Justice Grind Slowly

Did you ever do business with a firm called First Jersey Securities? It was a well-known penny-stock pumper in the early 1990s, well-known for commercials featuring head honcho Robert Brennan dashing from his helicopter with the latest hot tip. Brennan and his firm were sued for securities fraud in 1995, and ordered by the SEC to pay back investors some $78 million.

Brennan tried to dodge that massive fine by declaring Chapter 11 bankruptcy, but he eventually agreed to a lesser settlement of $45 million. The only problem was the New Jersey Bureau of Securities was forced to track down whatever assets Brennan had left, which at one point included a half-million dollars in chips from a Las Vegas casino.

But now the securities bureau has collected about $5 million, and is ready to pay back some wronged investors, 15 years after the initial complaint. If all 27,000 affected investors submit a claim, they'll be due the whopping sum of $190 apiece.

If you're wondering whether you're a First Jersey claimant, you can get more information here.

Thursday, February 4, 2010

The Saga of AMBAC

The bond insurer AMBAC announced yesterday that it was going to restructure in an attempt to ward off a possible bankruptcy. AMBAC provides another example of the way our convoluted financial system got itself into trouble by overextending itself.

The first question to answer is: What does a bond insurer do? Municipalities issue bonds to raise money, as you all know; the top-rated bonds are rated AAA, and the ratings go down from there. A city with a AAA rating has to pay less interest on its bonds than a AA city, and so on down the line. What AMBAC and other bond insurers did was insure the bond issuances for the AA and A cities, allowing them to pay only the AAA interest rates.

Eventually, these companies saw the opportunity to make more money than they could by insuring simple municipal bonds, so they branched out into insuring mortgage-backed securities, credit default swaps, and things like that. You can probably see where this is going: AMBAC insured some things that weren't worth insuring, and eventually the ratings agencies downgraded AMBAC's own creditworthiness below AAA. A company without an AAA rating itself can't raise a AA municipality to AAA, which brings us to where we are today.

At least if AMBAC totally collapses, it shouldn't bring a lot of other entities down with it. But the loss of it and the other bond insurers will make it more expensive for cities to raise money through bond issues.

Wednesday, February 3, 2010

The Strength of the Region

The housing figures we're seeing now for December have shown that the Northeast region - and the state of New Jersey in particular - are outperforming the national averages. In the year-over-year measure of pending home sales, the nation as a whole saw an increase of 10.9 percent in December, but the Northeast region's growth was 14.9 percent. Only the West, at 18.8 percent, was stronger.

We don't have state data for that time period, but we do for the third quarter of 2009. In that time frame, New Jersey's existing-home sales rose 17.6 percent over the previous quarter. The national average was just 11.4 percent. Overall, there were 122,800 existing homes sold in New Jersey in the third quarter of '09.

It's worth pointing out again that despite the fact that these things tend to get reported on a national level, there isn't such a thing as a nationwide housing market. There are many smaller housing markets. And within that context, New Jersey seems to be doing quite well for itself.

Tuesday, February 2, 2010

The Big Quarter

The good news, as you may have heard, was that our nation's GDP grew by 5.7 percent in the fourth quarter of 2009. This was the biggest quarterly growth since 2003, and contributed to an annual GDP growth rate of 2.4 percent for the entire year.

How did we get there? Here are some of the factors in that fourth quarter growth:

* Exports grew by a whopping 18.1 percent for the quarter.

* Nonresidential investments grew by 2.9 percent.

* Personal consumption increased by 2.0 percent.

* Sales of domestic products grew by 2.2 percent.

* And consumption expenses for the federal government grew by a negligible 0.1 percent. So even if this expansion was helped along by earlier stimulus activities, the economy is growing on its own now.

Monday, February 1, 2010

TARP Troubles

The TARP program, as established by President Bush back in September of 2008 and continued by President Obama, had as its primary purpose to stabilize the banking sector and prevent any further collapses along the lines of Lehman Brothers. The secondary purpose was to get the nation's lending mechanisms moving freely again, keeping money circulating through the economy and spurring the recovery.

If TARP has succeeded in the first aim, it certainly has not in the second. Last week, special inspector general Neil Barofsky testified to Congress that TARP has failed to either halt the spread of foreclosures or to foster more lending on the part of affected banks.

Those are two major bottlenecks in the recovery - the housing market and the free flow of credit. Foreclosure rates remain frighteningly high, with one of every 45 U.S. homes in foreclosure, although we're a bit stronger here in New Jersey, at one in 55. (The worst state is Nevada, at one in 10.) And bank lending remains stingy: The 22 banks getting the most bailout funds from the federal government have cut their small business loan balances by $12.5 billion in the past nine months.

If the TARP program isn't able to help on either front, look for more action on the part of the feds. Obama's new banking restrictions could be just the beginning.