The Cliff Notes: Insurance for 31 million people who don't already have insurance.
Congress is trying to accomplish the following: Insure all Americans (excluding illegals), prevent insurance industry "abuse", check or reduce skyrocketing healthcare costs, and have the medical profession adopt a model that incentivizes results, not expensive procedures.
Most changes take effect in 2014, but there will be some small changes taking place immediately should the bill pass. Some of the small changes include:
The Good
--uninsured people with pre-existing conditions will get temporary affordable coverage
--children will be protected from exclusion due to pre-existing conditions
--children will be able to stay on their parents' plan until age 26
--preventative care, like check-ups, won't cost anything out-of-pocket
--no annual or lifetime caps on coverage
--medicare beneficiaries will have help buying prescription drugs
The Bad
--Insurance companies, medical device makers, and drugmakers will be subject to material tax increases and will probably pass on the cost.
--nothing important will happen for most people right away
Premiums
If you buy your own insurance, your premiums quite possibly may increase. Although, depending on your income, your premiums may actually drop due to federal subsidies. If your insurance is covered through your employer, the legislation should have very little effect on your premiums. But why would premiums rise? The law would require to offer more comprehensive coverage, which would be partly offset by the larger pool of people buying insurance. President Obama claims premiums will fall by 14-20%, but that only applies to people who buy their own insurance and who choose plans with similar coverage to what they would be able to buy currently.
Taxes
Your taxes will go up, starting in 2013, if you make more than $200,000 per year, or $250,000 as a couple. Theoretically, the law could raise everyone's taxes indirectly if it ends up adding to the federal deficit (Congressional Budget Office estimates this bill will REDUCE the deficit by $130 billion).
Federal Budget Deficit and COSTS
We are about to fund a $930 billion project over the next 10 years, and most critics agree that the CBO and democrats are far too optimistic as far as the actual costs are concerned. The portions of the bill that were written to stem rising healthcare were watered down or dropped during the shaping of the final version of the bill.
Individual Mandate
Starting in 2014--with the exception of some low-income individuals--everyone will be required to have health insurance or pay a fine. That same year will see the start of healthcare exchanges where individuals will able to shop for private policies.
Employers
If your employer doesn't offer insurance, they will have a strong incentive to do so. For companies with 50+ employees, a $2,000 fee will be charged for each worker who gets government-subsidized insurance.
So what else is happening in 2014? The government will stop subsidizing private Medicare Advantage programs, potentially forcing seniors to enrolled in them to pay more or switch back to traditional Medicare. The biggest drawbacks are tightening regulation of private industry and a potentially higher budget deficit. Also, adding 10's of millions of people to the healthcare system has raised concerns that there will be longer waits for doctor visits and surgeries. People who wanted a government-run public insurance option or even a single-payer Medicare-like system for everyone are also disappointed at the limited scope of this plan.
Source:theweek.com
Friday, March 19, 2010
Monday, March 8, 2010
1970's Inflation: Can We See This Again?
The economic conditions of the 70's brought about inflation, unemployment, and recession. These conditions led to price controls and new programs to combat poverty and the employment situation. Vietnam was also causing political and social unrest during this time.
Possible Causes:
-August 1971 wage and price controls
-Price shock due to the Oil Embargo in 1973
-Disruption in oil supply in 1979
-Renegotiation of Union Contracts
-Women entered the workforce in material numbers
It is interesting to note that from 1970-74 the unemployment rate was 5.4% (it is 9.7% today) and inflation was at an uncomfortably high 6.6%. As the decade progressed, the pessimism worsened: 7.9% unemployment with inflation pacing at 8.1%. What is interesting is the deficit the US was running, at the beginning of the 70's it was about 42% of GDP, and 10 years later it was about 37% of GDP. It steadily flattened; this could not have been a source of inflation. Today, all the talking heads expound (read: Larry Kudlow) that current deficits are going to cause massive inflation. Let's recall that inflation requires a rapid increase in velocity (the number of times the supply of money is used to buy final goods and services), and we are not quite seeing that yet. As long as we have cheap credit--not to be confused with easy credit--and no increase in lending, we will not have inflation in the general sense. This does not mean we will not see a rise in prices of certain assets (like stocks and commodities)--it simply means that on average prices should remain stable.
Labor disputes were a major topic during the turbulent 70's. 210,000 Postal workers, 4 railroad unions, 2 major longshores (strikes closed ports in both coasts as well as the gulf), 80,000 Pennsylvania state employees, coalminers, and 219,400 truckers went on strike and ended up renegotiating their wages and benefits. The added costs to operators and businesses was--without a doubt--passed on to the end-user. These labor disputes were not all bad as they led to the creation of ERISA and the Revenue Act. The former adopted the Pension Benefit Guarantee Corporation (which insures employees' pension benefits should an employer terminate the plan for whatever reason) and the latter adopted the 401k (which allowed employees to defer taxes on their earnings until retirement). Another added benefit that set higher standards for working conditions was the establishment of OSHA. Finally, in 1974 legislation changed the way Social Security benefits were calculated every year. The amendment including a cost-of-living adjustment--a mechanism that would force the US Treasury to overhaul Social Security through the aid of Alan Greenspan. The cost-of-living adjustment would have worked well in times of low inflation but that was not the environment we were in during the late 70's and early 80's.
Women in the workforce
Only 15% of females between the ages of 25 and 45 participated in the workforce in 1890; in 1985 the number was 71%! The biggest contributor to this number came after World War II. In 1950, only 10 percent of mothers with children under 6 years old were employed, and by 1985 HALF the mothers in the same demographic were working. From 1970 to 1984, the number of female butchers in packinghouses rose by 33%, and by 1980 80% of bartending jobs went to women. These statistics may seem astonishing on the surface, but there is more than meets the eye. The Sexual Revolution is merely a reflection of the Industrial Revolution. The entrance of women into the workforce has accompanied, at a slower pace, their departure from farms. Nearly 36% of families were involved in farming in the early part of the 20th century, by 1985 that number shrank to 3%. Although the statistics show a record number of women coming into the workforce, the fact is that they have always worked. The only difference is how their labor was accounted for. The statisticians never counted farming. The rise of the two-income family gave rise to "consumerism", the pinnacle of the rise of the middle-class. Women entering the modern workforce allowed families to consume beyond their basic needs, creating new industries and growth of fledgling services. Christine Frederick said it best, "the way to break the vicious deadlock of a low standard of living is to spend freely, and even waste creatively".
From 1970-1979 average Personal Consumption Expenditure (the biggest contributor to GDP) was 1.98%, and from 1981-1990 it rose to 2.27%. This is significant as it is a difference of billions and billions of dollars in inflation-adjusted numbers. That is what I call a rise in the standard of living. Let us not forget that the exponential rise of technological power also contributed to a rise in the standard of living. It was perhaps a shift in technology that required women to shift their efforts to support the growth of telecommunications and computer industries.
My conclusion is that a number of factors played a role in the severe inflation of the 1970's that are not showing up in today's economy: unions, price controls, and supply shocks of commodities. A major factor that can play a contributing role in future inflation is the expansion of capital expenditure by businesses. As they build inventories and hire staff, they will have to borrow money from financial institutions, which will have a direct impact on the cost of goods and services. This is currently not happening as lending to small business is still tight and expansion by big business is yet to be seen. Another potential contributor is the wage rate; this can be further affected by political interference. A few great market indicators to watch are the Employment Cost Index, ISM, and the 10-year Treasury yields.
Possible Causes:
-August 1971 wage and price controls
-Price shock due to the Oil Embargo in 1973
-Disruption in oil supply in 1979
-Renegotiation of Union Contracts
-Women entered the workforce in material numbers
It is interesting to note that from 1970-74 the unemployment rate was 5.4% (it is 9.7% today) and inflation was at an uncomfortably high 6.6%. As the decade progressed, the pessimism worsened: 7.9% unemployment with inflation pacing at 8.1%. What is interesting is the deficit the US was running, at the beginning of the 70's it was about 42% of GDP, and 10 years later it was about 37% of GDP. It steadily flattened; this could not have been a source of inflation. Today, all the talking heads expound (read: Larry Kudlow) that current deficits are going to cause massive inflation. Let's recall that inflation requires a rapid increase in velocity (the number of times the supply of money is used to buy final goods and services), and we are not quite seeing that yet. As long as we have cheap credit--not to be confused with easy credit--and no increase in lending, we will not have inflation in the general sense. This does not mean we will not see a rise in prices of certain assets (like stocks and commodities)--it simply means that on average prices should remain stable.
Labor disputes were a major topic during the turbulent 70's. 210,000 Postal workers, 4 railroad unions, 2 major longshores (strikes closed ports in both coasts as well as the gulf), 80,000 Pennsylvania state employees, coalminers, and 219,400 truckers went on strike and ended up renegotiating their wages and benefits. The added costs to operators and businesses was--without a doubt--passed on to the end-user. These labor disputes were not all bad as they led to the creation of ERISA and the Revenue Act. The former adopted the Pension Benefit Guarantee Corporation (which insures employees' pension benefits should an employer terminate the plan for whatever reason) and the latter adopted the 401k (which allowed employees to defer taxes on their earnings until retirement). Another added benefit that set higher standards for working conditions was the establishment of OSHA. Finally, in 1974 legislation changed the way Social Security benefits were calculated every year. The amendment including a cost-of-living adjustment--a mechanism that would force the US Treasury to overhaul Social Security through the aid of Alan Greenspan. The cost-of-living adjustment would have worked well in times of low inflation but that was not the environment we were in during the late 70's and early 80's.
Women in the workforce
Only 15% of females between the ages of 25 and 45 participated in the workforce in 1890; in 1985 the number was 71%! The biggest contributor to this number came after World War II. In 1950, only 10 percent of mothers with children under 6 years old were employed, and by 1985 HALF the mothers in the same demographic were working. From 1970 to 1984, the number of female butchers in packinghouses rose by 33%, and by 1980 80% of bartending jobs went to women. These statistics may seem astonishing on the surface, but there is more than meets the eye. The Sexual Revolution is merely a reflection of the Industrial Revolution. The entrance of women into the workforce has accompanied, at a slower pace, their departure from farms. Nearly 36% of families were involved in farming in the early part of the 20th century, by 1985 that number shrank to 3%. Although the statistics show a record number of women coming into the workforce, the fact is that they have always worked. The only difference is how their labor was accounted for. The statisticians never counted farming. The rise of the two-income family gave rise to "consumerism", the pinnacle of the rise of the middle-class. Women entering the modern workforce allowed families to consume beyond their basic needs, creating new industries and growth of fledgling services. Christine Frederick said it best, "the way to break the vicious deadlock of a low standard of living is to spend freely, and even waste creatively".
From 1970-1979 average Personal Consumption Expenditure (the biggest contributor to GDP) was 1.98%, and from 1981-1990 it rose to 2.27%. This is significant as it is a difference of billions and billions of dollars in inflation-adjusted numbers. That is what I call a rise in the standard of living. Let us not forget that the exponential rise of technological power also contributed to a rise in the standard of living. It was perhaps a shift in technology that required women to shift their efforts to support the growth of telecommunications and computer industries.
My conclusion is that a number of factors played a role in the severe inflation of the 1970's that are not showing up in today's economy: unions, price controls, and supply shocks of commodities. A major factor that can play a contributing role in future inflation is the expansion of capital expenditure by businesses. As they build inventories and hire staff, they will have to borrow money from financial institutions, which will have a direct impact on the cost of goods and services. This is currently not happening as lending to small business is still tight and expansion by big business is yet to be seen. Another potential contributor is the wage rate; this can be further affected by political interference. A few great market indicators to watch are the Employment Cost Index, ISM, and the 10-year Treasury yields.
Thursday, February 25, 2010
U.S. Government Debt, How Is $11 Trillion Divided Up?
15. Russia $128.1b
14. Depository Institutions (banks and savings & loans) $145.4b
13. Hong Kong $146.2b
12. Brazil $157.1b
11. Insurance Companies $162.2b
10. Caribbean Banking Centers $179.8b
9. Oil Exporters $187.7b
8. United Kingdom $277.5b
7. Pension Funds $490.2b
6. State and Local Governments $528.3b
5. Mutual Funds $694.5b
4. Japan $757.3b
3. China (Mainland)$789.6b
2. Other Investors/Savings Bonds $1.114 Trillion
1. Federal Reserve and Intragovernmental Holdings $5.127 Trillion
14. Depository Institutions (banks and savings & loans) $145.4b
13. Hong Kong $146.2b
12. Brazil $157.1b
11. Insurance Companies $162.2b
10. Caribbean Banking Centers $179.8b
9. Oil Exporters $187.7b
8. United Kingdom $277.5b
7. Pension Funds $490.2b
6. State and Local Governments $528.3b
5. Mutual Funds $694.5b
4. Japan $757.3b
3. China (Mainland)$789.6b
2. Other Investors/Savings Bonds $1.114 Trillion
1. Federal Reserve and Intragovernmental Holdings $5.127 Trillion
Retirement...the big variable
There are 8 major variables to the final balance of your retirement account before you start drawing from it (preferably while financially free!).
1. The age at which you start saving. Obviously the sooner the better; not just because of compounding but also because of the time and risk trade-off.
2. One's willingness to stay the course. By this I mean automatically investing $X per month/paycheck into your investment strategy. This will smooth out your drawdowns over a long period of time.
3. The date of retirement. The further out you push retirement the more certainty there will be that the assets will last a lifetime. If you work 2 extra years, that's a positive on two fronts: you don't draw out of your retirement account, and you grow the amount of income you will receive during a shorter period of time.
4. Salary. The more one earns the easier it is to save for retirement. Your employer match on a $40,000 salary is only half of an $80,000 401k employer match. This can compound to a substantial amount over 25 years. The match plus growth on the match can be over $200,000; this does not include the amount the employee has contributed.
5. Employee's contribution. A general rule of thumb is that if you defer consumption, you end up richer than the guy who could not wait. Add to the account as much as you can without affecting your lifestyle in a drastic way.
6. Asset mix. Diversification is one of the most ubiquitous terms used when it comes to investing. There is a balancing act between safety and the need to grow assets for retirement; thus, investors diversify across stocks, asset classes, and even time periods.
7. Fees. If you're in a 401k, make sure to check what all the fees are. The mutual fund or pooled investment units (for those in a Group Annuity) can get quite expensive. Not dissimilar to a traditional business model, your expenses eat away at your bottom line, which in this case is your rate of return. You can't write off fees you paid to a mutual fund company through their expense ratio, but you can write-off fees paid to a money manager (Registered Investment Adviser).
8. Withdrawals before age 55. Cashing in is extremely costly and will devastating effects on your long term savings plan. The IRS charges a 10% penalty to those investors who withdraw before age 55, PLUS ordinary income tax on the entire amount cashed in. Ask your adviser about other options before pulling the money out.
1. The age at which you start saving. Obviously the sooner the better; not just because of compounding but also because of the time and risk trade-off.
2. One's willingness to stay the course. By this I mean automatically investing $X per month/paycheck into your investment strategy. This will smooth out your drawdowns over a long period of time.
3. The date of retirement. The further out you push retirement the more certainty there will be that the assets will last a lifetime. If you work 2 extra years, that's a positive on two fronts: you don't draw out of your retirement account, and you grow the amount of income you will receive during a shorter period of time.
4. Salary. The more one earns the easier it is to save for retirement. Your employer match on a $40,000 salary is only half of an $80,000 401k employer match. This can compound to a substantial amount over 25 years. The match plus growth on the match can be over $200,000; this does not include the amount the employee has contributed.
5. Employee's contribution. A general rule of thumb is that if you defer consumption, you end up richer than the guy who could not wait. Add to the account as much as you can without affecting your lifestyle in a drastic way.
6. Asset mix. Diversification is one of the most ubiquitous terms used when it comes to investing. There is a balancing act between safety and the need to grow assets for retirement; thus, investors diversify across stocks, asset classes, and even time periods.
7. Fees. If you're in a 401k, make sure to check what all the fees are. The mutual fund or pooled investment units (for those in a Group Annuity) can get quite expensive. Not dissimilar to a traditional business model, your expenses eat away at your bottom line, which in this case is your rate of return. You can't write off fees you paid to a mutual fund company through their expense ratio, but you can write-off fees paid to a money manager (Registered Investment Adviser).
8. Withdrawals before age 55. Cashing in is extremely costly and will devastating effects on your long term savings plan. The IRS charges a 10% penalty to those investors who withdraw before age 55, PLUS ordinary income tax on the entire amount cashed in. Ask your adviser about other options before pulling the money out.
Wednesday, February 24, 2010
Divorces and Retirement Assets
As the Great Recession rolls creating a wake of destruction, one of the worst outcomes is divorce. When money gets tight a natural derivative of that is an increase in stress, and stress can be harmful to relationships. If you or someone you know is filing for divorce, make sure they ask their attorney about Qualified Domestic Relations Orders. These affect retirement assets (his or her 401k's, IRA's, and other tax-deferred assets). Negotiating assets is one thing, it is an entirely different thing to pay them out according to the outcome of the negotiation. One of the worst things that can happen is giving up more than you budgeted for. Let's see a couple of examples that may affect both spouses.
Example 1: A divorce is finalized and the husband's 401k will be split in half. They both know that at the time the agreement was made, the total value of the account was $100,000, so they agree that she would get $50,000. Now, this agreement happened to have taken place in the summer of 2008; we all know what happened in the 4th quarter that year and the husband is now an owner of $65,000 401k. He still believes the wife is only getting half of that, but the trouble is that they agreed to a hard number: $50,000. He is shocked to find out that after he pays her, he is only left with $15,000 in his account.
Example 2: Once the divorce has been finalized and the wife accepts to get a negotiated portion of the husband's pension, she thinks everything is squared away. While she thinks she is getting half the pension guaranteed amount, in reality there is no asset. Her attorney failed to negotiate the spousal continuation benefit upon her husbands death.
These are devastating and common outcomes due to deep recessions. Make sure a knowledgeable attorney is involved in splitting up esoteric assets, whether retirement or otherwise.
Example 1: A divorce is finalized and the husband's 401k will be split in half. They both know that at the time the agreement was made, the total value of the account was $100,000, so they agree that she would get $50,000. Now, this agreement happened to have taken place in the summer of 2008; we all know what happened in the 4th quarter that year and the husband is now an owner of $65,000 401k. He still believes the wife is only getting half of that, but the trouble is that they agreed to a hard number: $50,000. He is shocked to find out that after he pays her, he is only left with $15,000 in his account.
Example 2: Once the divorce has been finalized and the wife accepts to get a negotiated portion of the husband's pension, she thinks everything is squared away. While she thinks she is getting half the pension guaranteed amount, in reality there is no asset. Her attorney failed to negotiate the spousal continuation benefit upon her husbands death.
These are devastating and common outcomes due to deep recessions. Make sure a knowledgeable attorney is involved in splitting up esoteric assets, whether retirement or otherwise.
Thursday, January 21, 2010
Large Banks and Obama's Overhaul Proposal
That’s why we are seeking reforms to protect consumers; we intend to close loopholes that allowed big financial firms to trade risky financial products like credit defaults swaps and other derivatives without oversight; to identify system-wide risks that could cause a meltdown; to strengthen capital and liquidity requirements to make the system more stable; and to ensure that the failure of any large firm does not take the entire economy down with it. Never again will the American taxpayer be held hostage by a bank that is “too big to fail.”
Now, limits on the risks major financial firms can take are central to the reforms that I’ve proposed. They are central to the legislation that has passed the House under the leadership of Chairman Barney Frank, and that we’re working to pass in the
Senate under the leadership of Chairman Chris Dodd. As part of these efforts, today I’m proposing two additional reforms that I believe will strengthen the financial system while preventing future crises.
[...]Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated
to serving their customers.
[...]I’m also proposing that we prevent the further consolidation of our financial system. There has long been a deposit cap in place to guard against too much risk being concentrated in a single bank. The same principle should apply to wider forms of funding employed by large financial institutions in today’s economy. The American people will not be served by a financial system that comprises just a few massive firms. That’s not good for consumers; it’s not good for the economy."
-President Obama Jan 21, 2010
The big banks it seems will no longer be able to profit via cheap funding from the Federal Reserve. Be that is may, the banks were able to make healthy profits last year, with the exception of Bank of America as it absorbed Merrill Lynch and took loan losses from credit cards and mortgages.
Goldman Sachs continues to make massive profits in its major segments of business: $8.40 per share for a total of $4.95 billion. They are broken down as follows: investment banking ($1.6b in Q409, up from $899m in Q309), trading/principal investments ($6.4b in Q409, down from $10b in Q309), and asset management ($1.6b in Q409, slightly up from $1.4b in Q309). In the first 9 months of 2009 Goldman set aside $16b for its 35,500 employees.
Morgan Stanley just recently turned around in the final 3 months of 2009 as they were late to recovery. Net income was $413m, but overall in 2009 they lost 93 cents per share on a diluted basis. They have been getting a lot of attention due to their large compensation and bonus pool which amounts to 62% of revenue. One of the best things Morgan Stanley has going for it is the absence of a big consumer-based (retail) book of business. In 2009, they set aside $14.4b for its 62,000 employees.
Bank of America lost a total of $2.2b in 2009, mostly due to retail customers' inability to pay their mortgage. Also, they charged off a large amount in order to pay back TARP. It was their first loss in 20 years (last one was during the savings and loan debacle). In the 4th quarter alone they lost $5.2b or 60 cents per share. They have set aside $10.1b to cover potential loan losses in the future, a gigantic number for such a provision.
Now, limits on the risks major financial firms can take are central to the reforms that I’ve proposed. They are central to the legislation that has passed the House under the leadership of Chairman Barney Frank, and that we’re working to pass in the
Senate under the leadership of Chairman Chris Dodd. As part of these efforts, today I’m proposing two additional reforms that I believe will strengthen the financial system while preventing future crises.
[...]Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated
to serving their customers.
[...]I’m also proposing that we prevent the further consolidation of our financial system. There has long been a deposit cap in place to guard against too much risk being concentrated in a single bank. The same principle should apply to wider forms of funding employed by large financial institutions in today’s economy. The American people will not be served by a financial system that comprises just a few massive firms. That’s not good for consumers; it’s not good for the economy."
-President Obama Jan 21, 2010
The big banks it seems will no longer be able to profit via cheap funding from the Federal Reserve. Be that is may, the banks were able to make healthy profits last year, with the exception of Bank of America as it absorbed Merrill Lynch and took loan losses from credit cards and mortgages.
Goldman Sachs continues to make massive profits in its major segments of business: $8.40 per share for a total of $4.95 billion. They are broken down as follows: investment banking ($1.6b in Q409, up from $899m in Q309), trading/principal investments ($6.4b in Q409, down from $10b in Q309), and asset management ($1.6b in Q409, slightly up from $1.4b in Q309). In the first 9 months of 2009 Goldman set aside $16b for its 35,500 employees.
Morgan Stanley just recently turned around in the final 3 months of 2009 as they were late to recovery. Net income was $413m, but overall in 2009 they lost 93 cents per share on a diluted basis. They have been getting a lot of attention due to their large compensation and bonus pool which amounts to 62% of revenue. One of the best things Morgan Stanley has going for it is the absence of a big consumer-based (retail) book of business. In 2009, they set aside $14.4b for its 62,000 employees.
Bank of America lost a total of $2.2b in 2009, mostly due to retail customers' inability to pay their mortgage. Also, they charged off a large amount in order to pay back TARP. It was their first loss in 20 years (last one was during the savings and loan debacle). In the 4th quarter alone they lost $5.2b or 60 cents per share. They have set aside $10.1b to cover potential loan losses in the future, a gigantic number for such a provision.
Tuesday, January 19, 2010
What's Happening in Greece?
Greece can bring down the European Union! Well maybe that's an exaggeration, but in a report by a Moody's analyst a mention of "slow death" for Portugal and Greece was made. Although Greece isn't the powerhouse it was thousands of years ago, its currency is the euro and they are one of 16 members of the European Union. A crisis in either Greece or Portugal can have a scathing ripple effect across larger Eurozone members which would eventually hurt the "recovering" global economy. Of course, with the growth in China and USA out of the abyss, Europe is less threatening than it appears to be.
PIGS, the contemptuous name for Portugal/Italy/Greece/Spain, are under pressure as the rating agencies are hitting them with negative outlooks. The deficits being run in these countries are being supported by low interest rates, but as soon as institutional investors pull the plug on cheap financing, things could start to crumble. There are ways to protect portfolios from this, one of them--and the most direct way--is to short the currency. Another is to buy put options on ETFs that have exposure to these countries.
PIGS, the contemptuous name for Portugal/Italy/Greece/Spain, are under pressure as the rating agencies are hitting them with negative outlooks. The deficits being run in these countries are being supported by low interest rates, but as soon as institutional investors pull the plug on cheap financing, things could start to crumble. There are ways to protect portfolios from this, one of them--and the most direct way--is to short the currency. Another is to buy put options on ETFs that have exposure to these countries.
Wednesday, January 13, 2010
California Furthers Its Financial Issues: Debt Downgraded
Just what we need--more difficulty in getting out of a terrible $20 billion deficit. Standard & Poors' recent downgrade puts general obligation bonds 7 notches down from the coveted AAA rating to an A-. The state already had the lowest rating in the Union and as the credit crisis ran its course things got worse. California will now have to pay a slightly higher interest rate on new and refinanced debt, exacerbating the state's budget crisis. It's a downward spiral that has just begun; hopefully with enough cuts in spending and fiscal conservatism we will see the $20 billion gap close going forward. Tax revenues have declined in the wake of the real estate bubble bursting which caused unemployment to rise (the states biggest source of revenue is taxes on employed individuals as well as businesses).
Investment opportunities abound in the municipal bond market. A 30 year California bond now yields 7.7%, and that's after taxes (muni bond interest is usually not taxable by the federal government and if you reside in the state that pays interest on the bond, the state tax is also usually exempted). For a more in-depth look at California muni bonds check with your local investment advisor, as this is general information and your situation may differ.
Investment opportunities abound in the municipal bond market. A 30 year California bond now yields 7.7%, and that's after taxes (muni bond interest is usually not taxable by the federal government and if you reside in the state that pays interest on the bond, the state tax is also usually exempted). For a more in-depth look at California muni bonds check with your local investment advisor, as this is general information and your situation may differ.
Tuesday, January 12, 2010
Federal Reserve Posts Record Profits For 2009: $52.1 BILLION
Where did the capital and production capacity come from to generate such a successful year? This money comes from a different source than the $700 billion TARP fund. The source: keystrokes (we'll come back to this). Quantitative easing, Repurchase Agreements, Securities Lending, Commercial Paper Facilities, and other programs created in late 2008 allowed the Fed to purchase mortgage pools, Treasury Debt, Commercial Paper (short term corporate loans), Fannie Mae/Freddie Mac bonds, and consumer credit receivables. The Fed will turn over a big portion of the profits to the Treasury, about $46.1 billion. Here is a visual of the Fed's expansion:
Keystrokes create billions and trillions of dollars in most modern societies that can be later destroyed or absorbed. If I enter the number 1,000,000,000 on one side of my balance sheet I will need to offset that with something. My job would be to manage the credit risk of the people I'm lending $1b to so that I can continue to provide a lending service. It sounds like I'm getting interest on debt that I couldn't afford to buy in the first place, which is true, but a mechanism like the Fed has to exist to expand and contract the money supply in different economic cycles. They are the only ones authorized to do this currently.
In the picture above The Fed entered liabilities into their accounts and offset them with the aforementioned assets: Treasury Debt, Commercial Paper, Credit Card Receivables, Mortgage Pools, and so on. This was why we kept hearing that the Fed was the lender of last resort. The private debt markets (banks and investors) had literally stopped lending to us and did not want to refinance existing debts. As the Fed bought these assets as a lender of last resort (remember your company's debt or your personal debt is someone else's asset) the debtors like consumers, the US Treasury, and private corporations continued to make periodic payments of principal and interest.
The interest portion of the debt accumulated to the $52.1 billion number we saw. The issue is with the principal...what is it worth? If the health of the economy does not improve or if credit contracts even slightly once more, the debt will be marked down in value and could potentially drive down the value of the dollar since dollars are backed by what the Fed holds as assets and what the market deems those assets to be worth. In reality the currency of any fiat system is backed by government enforcement of that currency as legal tender.
Source: econbrowser.com, Federal Reserve Press Release, The Associated Press
Keystrokes create billions and trillions of dollars in most modern societies that can be later destroyed or absorbed. If I enter the number 1,000,000,000 on one side of my balance sheet I will need to offset that with something. My job would be to manage the credit risk of the people I'm lending $1b to so that I can continue to provide a lending service. It sounds like I'm getting interest on debt that I couldn't afford to buy in the first place, which is true, but a mechanism like the Fed has to exist to expand and contract the money supply in different economic cycles. They are the only ones authorized to do this currently.
In the picture above The Fed entered liabilities into their accounts and offset them with the aforementioned assets: Treasury Debt, Commercial Paper, Credit Card Receivables, Mortgage Pools, and so on. This was why we kept hearing that the Fed was the lender of last resort. The private debt markets (banks and investors) had literally stopped lending to us and did not want to refinance existing debts. As the Fed bought these assets as a lender of last resort (remember your company's debt or your personal debt is someone else's asset) the debtors like consumers, the US Treasury, and private corporations continued to make periodic payments of principal and interest.
The interest portion of the debt accumulated to the $52.1 billion number we saw. The issue is with the principal...what is it worth? If the health of the economy does not improve or if credit contracts even slightly once more, the debt will be marked down in value and could potentially drive down the value of the dollar since dollars are backed by what the Fed holds as assets and what the market deems those assets to be worth. In reality the currency of any fiat system is backed by government enforcement of that currency as legal tender.
Source: econbrowser.com, Federal Reserve Press Release, The Associated Press
Monday, January 11, 2010
Tax Topic: Roth IRA Conversions
There has been a lot of press regarding conversions, especially now that it is 2010 when the IRS is officially set to lift a provision that precludes tax-payers making more than $100,000 from converting their Traditional IRAs to ROTH. This opens the doors to a tremendous tax planning strategy to millions of Americans holding tax-deferred IRAs and defined contribution that has been out of reach for years. This may be even more compelling if plan assets are depressed in value.
One of the most attractive gems in the 2010 provisions is that you can defer tax payments if the conversion occurs this year (tax-payers making less than $100,000 have been able to convert but have had to pay taxes in the year of conversion). If a tax-payer converts this year they will owe half of the taxes on April 15th of 2012 and the other half on April 15th 2013.
If most of the Traditional IRA is made up of non-deductible contributions, the ROTH conversion makes a lot of sense. Also, if you expect to be in a higher tax bracket in retirement or expect to see a hike in overall tax rates (due to unprecedented government spending) then this strategy will work well. The main advantages are hedging against a rise in taxes, tax diversification (tax-free source of income in retirement), and estate planning (no minimum required distribution and spousal continuance).
A couple of things to look out for:
-If the conversion pushes the tax-payer into a higher tax bracket, this strategy may lose efficacy. Converting a partial amount that keeps in the same bracket is optimal.
-The taxes owed should not come out of the IRA, as there is a penalty on monies not converted. Taxes owed should come from existing taxable assets or savings.
This should be considered general guidance; a complete analysis of individual tax-payer situations should be done before acting on any strategy.
IRS Circular 230 Disclosure: This communication was written in connection with the promotion or marketing, to the extent permitted by applicable law, of the transaction(s) or matter(s) addressed herein by persons unaffiliated with Monoceros Capital Management, LLC. Monoceros Capital Management, LLC and its affiliates do not provide tax advice. Accordingly, to the extent this communication contains any discussion of tax matters, such communication is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties. Any recipient of this communication should seek advice from an independent tax advisor based on the recipient’s particular circumstances.
Sources:
Financial Advisor Magazine, January 13, 2009 - Roth Conversion Rule Changes Will Help Many Advisory Clients, by Ben Norquist and Michael Slemmer
Internal Revenue Bulletin: 2008-12
fivecentnickel.com - Look before You Leap: Roth IRA Conversions in 2010
401kLookUp.com: Rules You Must Know to Convert a 401(k) to a Roth - IRS Notice 2008-30, Minimum Required Distributions on Inherited Roth IRAs & Restrictions for Beneficiaries, July 1, 2008
SmartMoney: New Math for IRA Savings by Peter Keating, April 1, 2009
Comparison of Roth 401k, Roth IRA, and Traditional 401k Retirement Plans by John E. Buckley, Economist, U.S. Department of Labor
One of the most attractive gems in the 2010 provisions is that you can defer tax payments if the conversion occurs this year (tax-payers making less than $100,000 have been able to convert but have had to pay taxes in the year of conversion). If a tax-payer converts this year they will owe half of the taxes on April 15th of 2012 and the other half on April 15th 2013.
If most of the Traditional IRA is made up of non-deductible contributions, the ROTH conversion makes a lot of sense. Also, if you expect to be in a higher tax bracket in retirement or expect to see a hike in overall tax rates (due to unprecedented government spending) then this strategy will work well. The main advantages are hedging against a rise in taxes, tax diversification (tax-free source of income in retirement), and estate planning (no minimum required distribution and spousal continuance).
A couple of things to look out for:
-If the conversion pushes the tax-payer into a higher tax bracket, this strategy may lose efficacy. Converting a partial amount that keeps in the same bracket is optimal.
-The taxes owed should not come out of the IRA, as there is a penalty on monies not converted. Taxes owed should come from existing taxable assets or savings.
This should be considered general guidance; a complete analysis of individual tax-payer situations should be done before acting on any strategy.
IRS Circular 230 Disclosure: This communication was written in connection with the promotion or marketing, to the extent permitted by applicable law, of the transaction(s) or matter(s) addressed herein by persons unaffiliated with Monoceros Capital Management, LLC. Monoceros Capital Management, LLC and its affiliates do not provide tax advice. Accordingly, to the extent this communication contains any discussion of tax matters, such communication is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties. Any recipient of this communication should seek advice from an independent tax advisor based on the recipient’s particular circumstances.
Sources:
Financial Advisor Magazine, January 13, 2009 - Roth Conversion Rule Changes Will Help Many Advisory Clients, by Ben Norquist and Michael Slemmer
Internal Revenue Bulletin: 2008-12
fivecentnickel.com - Look before You Leap: Roth IRA Conversions in 2010
401kLookUp.com: Rules You Must Know to Convert a 401(k) to a Roth - IRS Notice 2008-30, Minimum Required Distributions on Inherited Roth IRAs & Restrictions for Beneficiaries, July 1, 2008
SmartMoney: New Math for IRA Savings by Peter Keating, April 1, 2009
Comparison of Roth 401k, Roth IRA, and Traditional 401k Retirement Plans by John E. Buckley, Economist, U.S. Department of Labor
Thursday, January 7, 2010
Conspiracy Theorists: Government Shoring Up S&P 500
By my calculation, the S&P 500 has rebounded an astounding 70% since its March 2009 lows! $600 billion of new cash needed to lift the market's capitalization by $6 trillion is puzzling...where did all that money to bid up stocks come from?
TrimTabs (an institutional research firm) CEO Charles Biderman expresses a possible explanation, "We know that the US government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well? We have no way of proving this,” Biderman said, “but what we do know is that it was neither the economy nor traditional sources of capital that created the boom in equities.” According to Biderman, the Fed or Treasury could have easily manipulated the market by covertly buying futures contracts at a monthly pace of $60-$70 billion.
It would make for a great movie if it actually happened, but it was the Fed's liquidity injections and Treasury's borrowing binge that made its way into risky assets through financial institutions and institutional investor borrowing cheaply and buying higher yielding assets. The amount of money required to lift global equities, commodities, bonds, cross currencies, and anything with risk is beyond what our government can influence. Risk appetite increased. You can't and shouldn't short stocks when the Fed's rates are near 0%. People and institutions alike need yield and when banks as a group are offering 0.25% then the former group turns to other assets; hence the rise across the board. Not to mention, the markets had been severely over-sold due to irrational expectations of another Great Depression.
The growth in conspiracy theories has risen dramatically since the markets became unglued in late 2008. The PPT (plunge protection team, or more formerly the President's Working Group on Financial Markets) has been brought up more than ever before since its inception in March of 1988. In response to the October 1987 stock market crash, President Reagan established this group to provide recommendations on private sector solutions and maintain integrity, orderliness, and competitiveness of financial markets. Most of all, this was theoretically put in place to boost investor confidence.
Psychologically, this can be described as a cortex response to a limbic system-driven behavior. Exogenous forces, according to the conspiracy theories, are what cause events. So when corporate earnings are good and unemployment is low, stocks go up. Since earnings have dropped and unemployment has risen, the cortex-based reasoning is that someone or something is artificially pushing stocks higher. The market is forward-looking about 18 months and is a highly dynamic and complex system with many participants. So many profit-seeking participants that it would be extremely difficult to get away with any kind of mass manipulation.
Sources: Minyanville.com and Marketwatch.com
TrimTabs (an institutional research firm) CEO Charles Biderman expresses a possible explanation, "We know that the US government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well? We have no way of proving this,” Biderman said, “but what we do know is that it was neither the economy nor traditional sources of capital that created the boom in equities.” According to Biderman, the Fed or Treasury could have easily manipulated the market by covertly buying futures contracts at a monthly pace of $60-$70 billion.
It would make for a great movie if it actually happened, but it was the Fed's liquidity injections and Treasury's borrowing binge that made its way into risky assets through financial institutions and institutional investor borrowing cheaply and buying higher yielding assets. The amount of money required to lift global equities, commodities, bonds, cross currencies, and anything with risk is beyond what our government can influence. Risk appetite increased. You can't and shouldn't short stocks when the Fed's rates are near 0%. People and institutions alike need yield and when banks as a group are offering 0.25% then the former group turns to other assets; hence the rise across the board. Not to mention, the markets had been severely over-sold due to irrational expectations of another Great Depression.
The growth in conspiracy theories has risen dramatically since the markets became unglued in late 2008. The PPT (plunge protection team, or more formerly the President's Working Group on Financial Markets) has been brought up more than ever before since its inception in March of 1988. In response to the October 1987 stock market crash, President Reagan established this group to provide recommendations on private sector solutions and maintain integrity, orderliness, and competitiveness of financial markets. Most of all, this was theoretically put in place to boost investor confidence.
Psychologically, this can be described as a cortex response to a limbic system-driven behavior. Exogenous forces, according to the conspiracy theories, are what cause events. So when corporate earnings are good and unemployment is low, stocks go up. Since earnings have dropped and unemployment has risen, the cortex-based reasoning is that someone or something is artificially pushing stocks higher. The market is forward-looking about 18 months and is a highly dynamic and complex system with many participants. So many profit-seeking participants that it would be extremely difficult to get away with any kind of mass manipulation.
Sources: Minyanville.com and Marketwatch.com
Wednesday, January 6, 2010
"Countrywide" Dodd Will Not Seek Senate Re-election in CT
There is some speculation as to why Dodd will not continue as Senator of Connecticut: low approval ratings, inability to secure seat once more, failed presidential bid, or political damage due to favorable treatment by Angelo Mozilo of the now Bank of America subsidiary Countrywide.
His power grew enormously as he authored and co-authored some major pieces of legislation: $700b TARP, $787b Stimulus, Credit Card Reform, and now the $900b Healthcare bill. His party has had growing concerns, though, despite his influence that he wouldn't win a mid-term election, so he is stepping down for the good of the group.
What will the Senate Banking Committee look like now?
His power grew enormously as he authored and co-authored some major pieces of legislation: $700b TARP, $787b Stimulus, Credit Card Reform, and now the $900b Healthcare bill. His party has had growing concerns, though, despite his influence that he wouldn't win a mid-term election, so he is stepping down for the good of the group.
What will the Senate Banking Committee look like now?
Residential Housing?
With the tax credit expiring in Spring, the Fed slowing or completely stopping the purchases of Fannie and Freddie mortgages, mortgage rates on the rise, and a still brittle jobs market--will housing continue to improve? We still have quite a bit of foreclosure inventory that has yet to hit the market.
It's hard to say yes, not because it's a loaded question but because so much fundamental data is working against a sharp rise in prices. The latest pending home sales numbers were dismal (16% drop from October to November) as the $8,000 tax credit was extended. It goes to show how our government is propping up the market.
More to come...
It's hard to say yes, not because it's a loaded question but because so much fundamental data is working against a sharp rise in prices. The latest pending home sales numbers were dismal (16% drop from October to November) as the $8,000 tax credit was extended. It goes to show how our government is propping up the market.
More to come...
Federal Open Market Committee Minutes of the Board
Today the Fed releases minutes of its meeting that occurred three weeks ago. Why do we care and what should we look for?
The minutes reveal changes in monetary policy that can and will affect markets around the world. They contain all economic data that the Fed has compiled to make decisions on which direction to take interest rates. They also reveal whether any FOMC members voiced dissenting opinions...
This is what we look for: more and more dissent from current policy. The more dissent the more volatility. Depending on our exposure, volatility can work for us or against us, but either way, there will be volatility. The talk last time--released Nov 24--discussed asset sales, and there seemed to be disagreements as to whether that would be a smart decision in light of intentions to raise short term interest rates. Asset sales would undoubtedly affect longer term interest rates (10/30 year Treasuries).
A palatable solution to an exit strategy discussed was a combination of term deposits (paying interest on deposits at the regional banks) and reverse repo's (selling loans with the promise to buy them back in the future).
The Federal Reserve has a dual objective to maximize employment and have stable overall prices.
The new minutes will be out today at 2 pm est...
The minutes reveal changes in monetary policy that can and will affect markets around the world. They contain all economic data that the Fed has compiled to make decisions on which direction to take interest rates. They also reveal whether any FOMC members voiced dissenting opinions...
This is what we look for: more and more dissent from current policy. The more dissent the more volatility. Depending on our exposure, volatility can work for us or against us, but either way, there will be volatility. The talk last time--released Nov 24--discussed asset sales, and there seemed to be disagreements as to whether that would be a smart decision in light of intentions to raise short term interest rates. Asset sales would undoubtedly affect longer term interest rates (10/30 year Treasuries).
A palatable solution to an exit strategy discussed was a combination of term deposits (paying interest on deposits at the regional banks) and reverse repo's (selling loans with the promise to buy them back in the future).
The Federal Reserve has a dual objective to maximize employment and have stable overall prices.
The new minutes will be out today at 2 pm est...
Still Losing Jobs...
Planned layoffs in December 2009 fell to 45,094. That's as positive as it gets. There were economists and some institutions that forecasted growth in the job market, I still think we're a ways away from seeing real job growth. In some way, the number is somewhat a relief as the numbers for December 2008 were so bad (166,348 jobs lost) that it makes today's numbers look small.
2009 showed a total loss of jobs of 1,288,030, most of which came in the first half as bank failures and housing continued to collapse. 2010 may show some positive number, but to make up for all the lost jobs is a tough proposition in the next couple of years. We're going to have to learn to do more with less for awhile.
This data is from the Challenger Job-Cut Report which can serve as a leading indicator for new jobless claims.
2009 showed a total loss of jobs of 1,288,030, most of which came in the first half as bank failures and housing continued to collapse. 2010 may show some positive number, but to make up for all the lost jobs is a tough proposition in the next couple of years. We're going to have to learn to do more with less for awhile.
This data is from the Challenger Job-Cut Report which can serve as a leading indicator for new jobless claims.
Tuesday, January 5, 2010
Brokers Flee Large Firms, Start Their Own
Independent advisers are gaining ground on Wall Street firms to manage Americans' $5 trillion in savings. Wall Street firms are shrinking in market cap size and in their share of the retail-investing public.
As large firms' reputations are tarnished and some completely vanished, brokers and clients are making the move to independents. Cerulli Associates' research shows that in 2009 $188 billion moved out of large Wall Street firms and into independents, they forecast that in 2010 there will be even more funds transferred.
Having said that, large firms still held a large piece of the pie: 48% at the end of 2008 while independent firms handled 19%. Cerulli now estimates that by 2012, the big-firm share will down to 41% and the independents will be up to 23%. The balance is managed by small investment firms, banks, and insurance companies.
Large firms are fueling this movement by pushing out (making operating expenses higher) brokers, and the brokers are now approaching independent firms they never thought would be worth pursuing. The payout to brokers may be reduced substantially, from 40% of revenue generated to 20%!
These moves have caught the attention of discount brokers like Interactive Brokers, Scottrade, TD Ameritrade, Fidelity, and Charles Schwab. Brokers and advisers need a platform to clear trades through, custody assets, manage client statements, etc, so these discount brokers are picking up the slack. They are wooing brokers in a big way, and clients like the fact that the firm doesn't sell proprietary products or make big bets on structured finance (CDO, CDS, Equity Derivatives).
Source:WSJ
As large firms' reputations are tarnished and some completely vanished, brokers and clients are making the move to independents. Cerulli Associates' research shows that in 2009 $188 billion moved out of large Wall Street firms and into independents, they forecast that in 2010 there will be even more funds transferred.
Having said that, large firms still held a large piece of the pie: 48% at the end of 2008 while independent firms handled 19%. Cerulli now estimates that by 2012, the big-firm share will down to 41% and the independents will be up to 23%. The balance is managed by small investment firms, banks, and insurance companies.
Large firms are fueling this movement by pushing out (making operating expenses higher) brokers, and the brokers are now approaching independent firms they never thought would be worth pursuing. The payout to brokers may be reduced substantially, from 40% of revenue generated to 20%!
These moves have caught the attention of discount brokers like Interactive Brokers, Scottrade, TD Ameritrade, Fidelity, and Charles Schwab. Brokers and advisers need a platform to clear trades through, custody assets, manage client statements, etc, so these discount brokers are picking up the slack. They are wooing brokers in a big way, and clients like the fact that the firm doesn't sell proprietary products or make big bets on structured finance (CDO, CDS, Equity Derivatives).
Source:WSJ
A Look Back: Last Decade of Investing
A $10,000 investment on Dec 31, 1999 would have turned out like this:
*Venture Capital $8,800 (1999 funds)
*S&P 500 $9,090
*Raw Materials $13,803 (Similar to CRB Index)
*Residential Real Estate $15,000
*10-Year Treasuries $18,000
*Gold $37,852
Hindsight and all that...
*Venture Capital $8,800 (1999 funds)
*S&P 500 $9,090
*Raw Materials $13,803 (Similar to CRB Index)
*Residential Real Estate $15,000
*10-Year Treasuries $18,000
*Gold $37,852
Hindsight and all that...
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