Friday, December 31, 2010

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

Thursday, December 30, 2010

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.

Wednesday, December 29, 2010

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.

Tuesday, December 28, 2010

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.

Monday, December 27, 2010

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.

Friday, December 24, 2010

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

Thursday, December 23, 2010

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.

Wednesday, December 22, 2010

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.

Tuesday, December 21, 2010

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.

Monday, December 20, 2010

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

Friday, December 17, 2010

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.

Thursday, December 16, 2010

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).

Wednesday, December 15, 2010

"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.

Tuesday, December 14, 2010

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.

Monday, December 13, 2010

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.

Friday, December 10, 2010

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.

Thursday, December 9, 2010

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, 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.

Wednesday, December 8, 2010

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.

Tuesday, December 7, 2010

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.

Monday, December 6, 2010

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.

Friday, December 3, 2010

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.

Thursday, December 2, 2010

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.

Wednesday, December 1, 2010

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.