Tuesday, November 30, 2010

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.

Monday, November 29, 2010

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.

Friday, November 26, 2010

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.

Thursday, November 25, 2010

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

Wednesday, November 24, 2010

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.

Tuesday, November 23, 2010

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.

Monday, November 22, 2010

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.

Friday, November 19, 2010

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.

Thursday, November 18, 2010

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.

Wednesday, November 17, 2010

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.

Tuesday, November 16, 2010

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.

Monday, November 15, 2010

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.

Friday, November 12, 2010

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.

Thursday, November 11, 2010

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.

Wednesday, November 10, 2010

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.

Tuesday, November 9, 2010

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.

Monday, November 8, 2010

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.

Friday, November 5, 2010

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.

Thursday, November 4, 2010


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.
  1. 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.

Wednesday, November 3, 2010

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.

Tuesday, November 2, 2010

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

Monday, November 1, 2010

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.