Barrons: Health-Care Winner

Barrons posted last week how municipal bonds could be the surprising winner of the new health-care bill.  Excerpts below with my highlights:

....{A} less-obvious beneficiary of Obamacare may be tax-free municipal bonds. Upper-income individuals face significantly higher tax rates in the coming years, including new levies on "unearned" income from interest, dividends and capital gains to help pay for health-care reform. Beginning in 2013, individuals earning more than $200,000 and couples earning more than $250,000 will pay the 3.8% Medicare tax on investment income, which is projected to raise $87 billion over the next 10 years, according to ISI Group's Washington research team.

That would be on top of the rate increases slated to take effect next year with the phase-out of the Bush tax cuts. The top bracket on ordinary income (which includes interest income) will rise to 39.6% from 35% presently. Dividends, which have enjoyed a top tax rate of just 15%, would revert to being taxed as ordinary income.

The capital-gains tax rate, also 15% currently, would rise back to 20%. The Obama budget proposals for next year call for taxing both capital gains and dividends at a relatively investor-friendly 20% for singles earning $200,000 and couples earning $250,000, but that would require Congressional action, which hardly is a sure thing......

......Be that as it may, for singles earnings over $200,000 and couples making over $250,000, between the 39.6% top tax bracket and the 3.8% Medicare tax, investors will be paying a top rate on interest income of 43.4%, or nearly one-fourth more than the current 35% rate, according to a research note by Costas Kalaitzidis, an analyst and portfolio manager with Asset Preservation Advisors in Atlanta.  Those upper-income investors would face a 23.8% tax rate on dividends and capital gains starting 2013, versus 15% currently. That will result in a 59% tax hike on these forms of investment income for those in the top brackets.

All else being equal, those higher levies on investment income may persuade individuals and families they might just as well clip coupons on tax-free municipal bonds as bear the risk of taxable bonds or stocks.

For an investor taxed at the top rate of 43.4% slated to take effect in 2013, a 5% long-term, tax-free muni would equivalent to earning 8.8% on a taxable debt security. That is what corporate junk bonds are fetching these days.

For those same top-bracket investors in equities, they would have to earn a total return from dividends and capital gains of 6.6% just to match the return of a 5% tax-free bond. Of course, higher-risk stocks ought to return significantly more than munis.

Even at today's tax rates, long-term munis compare favorably with taxable investments, especially Treasury securities. For 30-year maturities, triple-A-rated general obligation bonds yield 4.44%, nearly as much as the 4.60% on the Treasury long bond....

{However shorter maturing municipals},  are overpriced, says Philip G. Condon, head of municipal bond portfolio management at DWS Investments, Deutsche Bank's U.S. retail asset-management unit. Investors fleeing money-market funds paying a pittance like 0.1% are sticking to ultra-safe, high-quality, short-intermediate munis....

....The problem is that states and municipalities tend to issue long-term bonds to finance capital projects while individual investors prefer shorter maturies, Condon explains. Ashton P. Goodfield, head of muni-bond trading for DWS, further points out taxable Build America Bonds have exacerbated the supply tightness by reducing the volume of traditional tax-free bonds coming to market. Indeed, given the effect of BABs, calls and maturities, the total of tax-free bonds outstanding may shrink outright this year, she adds.

The result is an extremely positively sloped yield curve, which means longer maturities provide significantly higher yields. Condon sees the migration of investors seeking higher yields from longer maturities resulting in higher prices at the long end, and thus, in a flatter yield curve....

....While most of the bill for health-care reform doesn't come due right away, the economy is certain to face higher taxes in 2011 with the sunset of the Bush tax cut, at least for upper-income earners. Meanwhile, the Federal Reserve is widely expected to begin raising interest rates in 2011, if not earlier. Given all that, could somebody explain the market's bullishness?

Link:  Barrons: Surprising Health-care Winner!

Housing

Chart of The Day on housing:

"For some perspective into the all-important US real estate market, today's chart illustrates the US median price of a single-family home over the past 40 years. Not only did housing prices increase at a rapid rate from 1991 to 2005, the rate at which housing prices increased -- increased. That brings us to today's chart which illustrates how housing prices have dropped 35% from the 2005 peak. In fact, a home buyer who bought the median priced single-family home at the 1979 peak has actually seen that home lose value (4.3% loss). Not an impressive performance considering that over three decades have passed. It is worth noting that the median priced home has moved back to the top of a trading range that existed from the late 1970s into the mid-1990s."

My comment:  Long term housing statistics look pretty similar to the stock market's numbers as equities are trading at the same levels they saw in 1998.

Link:  Housing

Happy Passover

an tSionna {Calling an Audible}

Been thinking a bit about what I posted over the weekend.  I'm going to call at least one audible here!  I think it is more likely that we'll see that down day sometime before the end of next week.  Of course it could happen this week or it might happen never!  I think the end of the month/quarter scenario and Good Friday might trump a pretty decent one day decline.

Of course I could be wrong about it all.  Bespoke Investors reminds us today that historically April has been one of the best months of the year for markets and it has been the 2nd best performing month for the market over the past 50 & 20 years!*

We'll just have to see.  Nothing changes however the more defensive nature in terms of the game plan that we've instituted at this point.

*B.I.G. Tips, "April Seasonality", Bespoke Investment Group, LLC, 3.29.2010.

an tSionna 3.29.10

I didn't like that reversal we saw on Thursday.  Stocks gave up those gains way to easy.  The excuse for the weakness at the end of the week was a poorly received treasury auction and geopolitical concerns.  I can't help but think another reason has got to be that traders are becoming increasingly nervous as the market trends higher without a correction and we remain so over bought. 

Next week is Holy Week and trading is going to tail off towards the end.  Also markets are closed on Friday for Good Friday.  Normally end of the month/beginning of the month trading patterns should come into play, especially as Wednesday is the end of the 1st quarter  Normally we could expect money managers to try and goose things a bit for performance reasons.  However I think there is a possibility that we could see at least one rather large down day next week based on how stocks have recently traded. 

We'll especially look to see how the market reacts to the old resistance line which is now support.  A significant move below it could be signaling a change in market trend.

Given the strength we've seen these past six weeks, we've done little right now.  But the playbook is saying based on the action at the end of the week  that we need to update the game plan.  Accordingly we've gone through and identified the defensive actions we might take in appropriate client accounts if certain events start to fall into place.  

Of course it's possible that nothing will happen and stocks will resume their climb.  It's also possible that stocks will correct in time instead of price.  But I think it's prudent to be ready as much as possible in case things take a turn for the worse here in the short term.

*Long ETFs related to the S&P 500 in client and personal accounts.

Palm Sunday

Sunday Funnies {Saturday Edititon}

Sunday Funnies published on Saturday due to Holy Week.

Sometime this year, we taxpayers will again receive another 'Economic Stimulus' payment.


This is indeed a very exciting program, and I'll explain it by Using a Q & A format:

Q. What is an 'Economic Stimulus' payment ?
A. It is money that the federal government will send to taxpayers.

Q.. Where will the government get this money ?
A. From taxpayers.

Q. So the government is giving me back my own money ?
A. Only a smidgen of it.

Q. What is the purpose of this payment ?
A. The plan is for you to use the money to purchase a  high-definition TV set, thus stimulating the economy.

Q. But isn't that stimulating the economy of China ?
A. Shut up.

Below is some helpful advice on how to best help the U.S. Economy by Spending your stimulus check wisely:
* If you spend the stimulus money at Wal-Mart, the money will Go to China or Sri Lanka .
* If you spend it on gasoline, your money will go to the Arabs.
* If you purchase a computer, it will go to India , Taiwan or China .
* If you purchase fruit and vegetables, it will go to Mexico, Honduras and Guatemala ..
* If you buy an efficient car, it will go to Japan or Korea .
* If you purchase useless stuff, it will go to Taiwan .
* If you pay your credit cards off, or buy stock, it will go to management bonuses and they will hide it offshore.

Instead, keep the money in America by:
1) Spending it at yard sales, or
2) Going to ball games, or
3) Spending it on prostitutes, or
4) Beer or
5) Tattoos.

(These are the only American businesses still operating in the U.S. )

Conclusion:  Go to a ball game with a tattooed prostitute that you met at a yard sale and drink beer all day !

No need to thank me, I'm just glad I could be of help.

The Rule of Threes.

One of our long term views of the US economy is what we call "The Rule of 3".  The rule of 3 simply states the following.

In the United States regarding the long term growth rate for stocks:
3%  population growth {either via birth or immigration} Plus
3%  inflation rate


Helps to support long term corporate profit growth of between 6-7% and a dividend rate of approximately 3%.

I'm linking today a paper, for those who enjoy readubg dry economic abstracts, which seems to back up my population thesis.  The authors investigate the relationship between the aggregate stock dividend yield and the ratio of middle-aged (40-49) to young (20-29) populations in the U.S.  They conclude that demographic projections suggest a reasonably stable long run real U.S. stock market return over the next 40 years.

This is long term and terribly wonkish stuff but I'll throw it out there for those of you who have nothing else to do on a late March Saturday.

Source:  "Demographic Trends, the Dividend/Price Ratio and the Predictability of Long-Run Stock Market Returns",  by Carlo Favero and Arie Gozluklu  Link:  Demographic Trends.

an tSionna 3.26.10- If You'd Been To Mars.

If you'd flown to Mars three years ago, were just now arriving home and somebody showed you the chart displayed above of the S&P 500; well you might be forgiven if you simply thought we'd been through a normal recessionary bear market.

Of course reality is much different. The first chart has something like 70 weeks lopped out. It's what you'd get if you folded over the beginning of the 08 credit crisis to our current week. The 2nd chart shows in between the two dark blue lines what really happened.

That trough, say the period between October 07 and July 08, was the depression sequence of the financial crisis. Fears of that liquidity depression were dissipating as the summer wore on last year. After that it has been markets getting back to analysing the economy and where we were in the current recession.

After our brief scare in January-early February markets have in my opinion been sniffing out better earnings for stocks than most analysts current suspect. This is the fuel that has kept this rally going. I think we're going to see better economic statistics going forward well into summer.

Stocks are still overbought. I am still short term net market neutral and longer term net market positive. {Click here if you would like a definition of these terms: Definitions} Commentators have hated this market for months now and they have come up with enumerable reasons why it should sell off. This has me wondering what kind of market move right now would cause the most amount of pain. I think that would be a sharp move upwards over the next few weeks.

On that note: One of the Boston Boys told me a guru he follows thinks the market could be at 1350 by May 1st. I don't see that happening because that's a huge percentage move in too short of a period. However there is no doubt that if that were to occur it would inflict huge pain on many investors who have been trying to short this market for the past six months. I still do think we could be between 1250-1350 by the end of the year though.

*Long ETFs related to the S&P 500 in client and personal accounts.

UUP

I think I should note that I bought for risk appropriate accounts some UUP-which is the Powershares DB US Dollar Index-after I posted on the dollar this morning.

*Long UUP in certain client accounts.

an tSionna Dollar

This was posted yesterday over at the Bespoke Blog:

US Dollar Breaks Out

Wednesday, March 24, 2010 at 06:42PM

As shown in the chart {Above}, the US Dollar index staged a significant breakout today. This comes at the same time that US stocks have been hitting new 52-week highs as well. This is something investors haven't seen in quite awhile.

Link:  Bespoke-Dollar.

Bloomberg Poll.

Excerpt from a Bloomberg national Poll.  I'm not surprised that a majority say they missed the stock market's advance as the public by and large is often wrong regarding big picture events with equities {Witness their stampede out of the markets at exactly the wrong time in March 2003 and again in March 2009}.  I'm also not surprised that the average Joe wants to stick it to the wealthy! 

Highlights mine!

Americans Say They Missed 73% Rise in S&P 500 as Economy Surged

By Mike Dorning

March 24 (Bloomberg) -- Americans are down on the economy and the markets even as stocks and growth indicators are up. By an almost 2-to-1 margin Americans believe the economy has worsened rather than improved during the past year, according to a Bloomberg National Poll conducted March 19-22. Among those who own stocks, bonds or mutual funds, only three of 10 people say the value of their portfolio has risen since a year ago.

During that period, a bull market has driven up the benchmark Standard & Poor’s 500 Index more than 73 percent since its low on March 9, 2009. The economy grew at a 5.9 percent annual pace during last year’s fourth quarter.

“It’s very difficult to turn perceptions around once you’ve been through the proverbial economic wringer,” says Mark Zandi, chief economist for Moody’s Economy.com. “Everything is colored by the fact that unemployment is near 10 percent. It doesn’t really matter what you ask, you’re going to get the same answer.” .....Even among investors with annual incomes exceeding $100,000, and who might be expected to follow their financial holdings’ performance, more say they have lost money compared with a year ago than say they have made money.

J. Ann Selzer, president of Selzer & Co., a Des Moines, Iowa-based company that conducted the survey, says the disconnect is typical of the way Americans think about the economy. “Economists look at their indicators and the American people see indicators in their everyday life,” she says. “It is hard to argue with what people observe in their own communities.”

The poll also finds that Americans remain skeptical about the health-care overhaul even after the U.S. House passed the legislation March 21, with fewer than 40 percent of respondents saying they favor the plan. While most say the government should play a role in ensuring everyone has access to affordable care, a majority say health care is a private matter and consider the new rules approved by Congress to be a government takeover.

.....Barely one-in-three Americans say the country is on the right track. Fewer than one in 10 say they believe the economy will be strong again within a year. Just 4 percent of Americans who cut back on spending during the recession now say they are confident enough to open their wallets, according to the poll, which has a margin of error of plus or minus 3.1 percentage points......

....The Obama Administration has made no progress over the past three months convincing the public that the $787 billion stimulus package passed last year either helped the economy or prevented greater deterioration. Only 37 percent of the public say they see positive effects, the same portion who said so in a December poll......

....Half of Americans say they believe the economy or unemployment is the most important issue facing the country. Health care was cited by 22 percent, followed by 20 percent who cite the federal deficit and government spending. Just 5 percent say the war in Afghanistan. Unemployment in February was 9.7 percent. Payrolls in the U.S. have dropped every month except one since December 2007. Economists expect job growth to turn around in March, with a median forecast that payrolls will rise by 192,000.

Poll respondents rate persistently high unemployment the greatest threat to the economy over the next two years, with 75 percent calling it a high threat. Chronically high budget deficits are cited as a high threat by 70 percent, followed by homeowners who can’t pay their mortgages, which is cited by 58 percent. Higher taxes are deemed a high threat by 57 percent.

Nine of 10 Americans believe that cutting the deficit, which is projected to reach a record $1.5 trillion this year, will require sacrifices from middle-class Americans. Still, when asked about a range of potential tax increases and spending cuts to address the problem, the large majorities of Americans favor tax increases that only affect the wealthy.

More than three of four Americans say deficit-cutters should consider removing the cap on earnings covered by the Social Security tax, currently set at just under $107,000. More than two-thirds say repealing the tax cuts for wealthy Americans enacted by President George W. Bush should be considered.

Smaller majorities favor considering three other options: a reduction in annual cost of living increases for Social Security recipients, which 52 percent say should be considered; cuts in spending on public works, which 54 percent say should be considered; and a penny-an-ounce tax on sugar-sweetened drinks amounting to 12 cents on a 12-ounce can of soda, which 57 percent say should be considered.

Majorities say other options shouldn’t even be on the table. Among them are higher out-of-pocket payments for Medicare services beyond basic care, an increase in the eligibility age for Medicare, a 2 percent increase in income-tax rates on middle-class Americans, and elimination of the home-mortgage interest deduction.

Link: Bloomberg Poll

*Long ETFs related to the S&P 500 in client and personal accounts.

Barrons: Morgan Keegan on Banks

Barrons published yesterday in their Soapbox section a Morgan Keegan article regarding the banking sector.  Excerpts, with my highlights:

VALUATIONS FOLLOWING THE recent rally in bank stocks are now factoring in a faster than previously expected improvement in credit quality and a return to normalized earnings on an accelerated time table. This view has been supported in recent weeks by the reaffirmation for a return to sustainable profitability in 2010 by several bank managements. As a result, the bar for first-quarter 2010 results has been set high and any disappointment on the rate of credit improvement could cause a near-term pull back.

While odds have increased for a near-term pullback after the spectacular rally in the banks (KBW Bank Index up 20% year to date), the trend has been the investor's friend, and "it's a bull market until it's not". Today, there is an increasing sentiment to trim positions and book some profits in banks that have significantly outperformed.

While we can't argue against taking some profits here and that it may be the right strategy in the short term, but we believe that the longer-term risk-reward opportunity in the group still remains attractive and we would use any pullback to build positions. Credit losses appear to have peaked with many banks guiding for improving problem-loan inflows and loss severities which coupled with an improving secondary loan-sale market for problem-loan sales should help push the aggregate amount of problem assets lower through 2010. It also appears that investors will soon get clarity on regulatory changes and capital levels as some form of a negotiated regulatory-financial reform is passed by the Congress.

The Morgan Keegan Bank universe currently trades at 10.1 times normalized earnings-per-share .....We believe improving macro-economic and credit data coupled with reduced-dilution risk should continue to support the transition toward investors valuing banks on a normalized-earnings basis as we move closer to 2011. Given our view that longer term the group is likely to trade near the 12 times price-to-earnings range, we see further valuation upside implying that bank stocks should be trading higher a year from now.....

....We believe that the Federal Deposit Insurance Corporation (FDIC) recognizes the need to move away from the loss-share arrangements, which have made assisted transactions far more attractive to potential buyers, essentially putting a halt on non-FDIC merger and acquisition activity. As one bank chief executive put it: "Why would you buy a troubled bank in the open market if you know you can get it with a loss guarantee from the FDIC at a later date?"

A change in this mentality would allow the significant amount of capital that is currently sitting on the sidelines (healthy banks, special purpose-acquisition companies, private equity) to come in more freely to acquire and rescue troubled banks allowing these institutions to avoid a potential failure while letting the FDIC avoid taking over broken franchises, absorbing losses and giving loss-share economics to the buyer....As the economics even-out, credit and the economy improve, this should accelerate bidding for problem banks.

--Robert Patten

--Ebrahim Poonawala

--Gregory Welliver

Link:  Morgan Keegan on Banks

*Long ETFs related to bank stocks in client and personal accounts.

New Taxes-Obama Spreads The Wealth Around

Excerpt of article penned @ Bloomberg.com yesterday on new taxes in healthcare bill.  Highlights mine.  

New Health-Care Taxes Help Obama ‘Spread the Wealth’

By Ryan J. Donmoyer

March 22 (Bloomberg) -- President Barack Obama said on the campaign trail in October 2008 that he wanted to “spread the wealth around.” With Obama on the verge of signing sweeping health-care overhaul legislation, he’s about to do just that.

If the final version of the legislation passes the Senate, high-income investors will pay higher Medicare taxes, tax breaks for out-of-pocket medical deductions will be curtailed, and it will cost insurance companies more to pay executives millions of dollars. Those levies will help fund expansion of Medicaid services for the poor and subsidize health insurance to cover millions who don’t currently have benefits.

“It’s very clear that taxes are levied on the wealthy and the benefits will spread across the entire income distribution, with a lot going to expanded Medicaid distribution and expanding health insurance,” said Roberton Williams, an economist at the Tax Policy Center, a Washington research institute backed by the Urban Institute and Brookings Institution....

....In all, the bill would generate $409.2 billion in additional taxes by 2019, according to an analysis by the congressional Joint Committee on Taxation, a nonpartisan agency. The bill also imposes about $69 billion more in penalties for individuals and businesses who don’t meet mandates to buy insurance, according to the Congressional Budget Office, another nonpartisan agency.....

...Most of the revenue would come from higher Medicare taxes on about 1 million individuals earning more than $200,000 and about 4 million couples filing jointly who make more than $250,000.  The legislation would for the first time apply Medicare taxes to investment income received by these households, beginning in 2013. The 3.8 percent rate would apply to unearned income such as realized capital gains, dividends, interest, rents and royalties. It wouldn’t apply to other income subject to income taxes, including interest from municipal bonds and retirement accounts such as 401(k) plans until funds are withdrawn.

Obama’s budget proposes to allow the existing 15 percent tax rate on dividends and capital gains to rise to 20 percent in 2011 for the same high-earners. Layering a 3.8 percent Medicare tax on top of that would mean a new top rate on dividends and capital gains of 23.8 percent. The top tax rates on interest and rental income would rise to as high as about 44 percent, assuming other Obama tax increases on high-earners are enacted...

....The bill also increases the individual’s share of Medicare tax currently imposed on salaries starting at $200,000 for individuals and $250,000 for couples to 2.35 percent, from 1.45 percent currently.The combination of the new Medicare taxes and Obama’s budget proposals, if they were in place this year, would cost a married couple with a household income of $5 million an extra $287,100 in taxes, according to analysis by the consulting firm Deloitte Tax in Washington.....Those thresholds would be indexed to inflation, which grows at a slower pace than the cost of health care, meaning more employers would likely face the levy over time.....

...Other provisions likely to affect higher-income individuals would scale back tax preferences associated with paying out-of- pocket medical expenses. Starting in 2013, Americans under 65 won’t be able to deduct medical expenses until they exceed 10 percent of income, up from 7.5 percent now; retirees would keep the lower threshold.  The bill in 2011 places new restrictions on what can be purchased using special savings accounts funded with pre-tax dollars including health savings accounts. Improper withdrawals from the accounts also would be hit with a new 20 percent tax.

And the legislation for the first time would place a $2,500 limit on what can be contributed to employer-sponsored flexible spending accounts, another type of account funded with pre-tax dollars that can be used to pay for medicines, co-payments, and other expenses.  Employers currently set their own limits, typically between $3,000 and $5,000 in the absence of a government cap. This change would cost an average worker about $625 in tax savings, according to WageWorks Inc., a San Mateo, California, company that administers 1.5 million accounts....

...Under the reconciliation bill that is now before the Senate, individuals who don’t purchase insurance would be subject to a fine of $325 in 2015 and $695 in 2016. Individuals may be subject to a charge equal to as much as 2.5 percent of their income in 2016, if the total is greater than the flat payment.Employers with 50 or more workers would pay $2,000 per worker if they don’t offer health insurance. The legislation offers a small business tax credit to help pay for employer- provided premiums....

Link:  Spreading Wealth 

There's a lot to chew on here and I'm going to step back and think about it for a bit.  First thoughts though are that we are going to have to continue to be aggressive about harvesting tax losses when available and we're going to have to think about those $200,000 & $250,000 income thresholds. 

an tSionna 3.22.10

*Long ETFs related to the S&P 500 in client and personal accounts.

Ireland-One Year Later

We'll end our yearly look at the Irish by taking a brief look at their economy one year after the great collapse.  Today we're going to excerpt an article done for The Street.com by a guest writer, Paul O'Connor. 

A year ago, Ireland was the worst-performing sovereign in the EU.....For most of 2009, Irish debt was perceived as more risky than that of Greece. Now, however, Ireland is no longer the focus of EU concern. Greece dominates the headlines, with Spain, Italy and Portugal in a supporting role.....This, in {Paul's opinion}, is largely due to strong and decisive action by the Irish authorities to address the problems of the Irish economy.

For 15 years prior to the current financial crisis, Ireland was an economic miracle. The turnaround in its previously recession-ridden fortunes began in the early 1990s, as progressive policies, including a sharp reduction in corporate tax rates, put Ireland on the road to economic prosperity. More than a decade of unbroken growth followed, with annual growth rates ranging from 3% to 11%. What was once a poor nation within the European Union became one of the best-performing and wealthiest countries. Public finances prospered......Ireland reduced its debt-to-GDP ratio from almost 95% in 1990 to 25% in 2007, giving it one of the lowest debt-to-GDP ratios in Europe. Known throughout history for its supply of emigrants to foreign shores, Ireland experienced an unprecedented wave of migration from many nations. The world talked of Ireland's "Celtic Tiger" economy.

But the boom years sowed the seeds of the problems experienced during the most recent crisis. Land and property values increased dramatically as the economy expanded, generating demand from both developers and consumers for more credit. The construction industry grew to 15% of the Irish economy in 2007, up from 6% 10 years earlier. Property-related taxes accounted for an increasing proportion of government revenues. The healthy state of public finances led to a relaxation of government spending and an expansion of the public sector......The rapid expansion of credit to the economy, which had accelerated from 2003, exposed the Irish consumer and banks to any potential change in economic circumstances.

Ireland had a number of major advantages at the onset of the credit crisis. Its low debt-to-GDP ratio, low level of unemployment and a reserve fund established from budget surpluses all helped to insulate it from the worst excesses of an economic decline. Nevertheless, the decline has been dramatic. The residential housing market has fallen more than 30% since its peak in early 2007 and prices are now at 2003 levels.....Retail sales have declined, incomes have been cut and unemployment has risen to over 12% from a low of 4.4% in tandem with the sharply contracting economy.....In response, the Irish government has taken tough and decisive measures.

Following the failure of Lehman Brothers and the dramatic impact on the international funding markets, the Irish government moved swiftly to announce a guarantee of all Irish bank liabilities. This ensured that the banks could continue to fund themselves while broader solutions were investigated......The initial Irish guarantee remains in place until October of this year. A new guarantee scheme has recently been approved by the EU, which allows Irish banks to issue guaranteed debt for up to five years.....

The second key feature of the Irish banking reforms is the recapitalization of the sector in line with developing international standards. The state issued a clear message at the outset of the financial crisis that it would support the Irish banking system.....A further and probably more significant round of recapitalizations will take place this year following the restructuring of the banks' loan books.

NAMA -- National Asset Management Agency

The establishment of NAMA is the third key factor. Faced with mounting losses in commercial loan books, the government decided to remove all major commercial and development loans from the banks' balance sheets into an asset-management agency. This step involves the removal of 77 billion euro of loans to the top 50 property developers from the balance sheets of the Irish banks. The transfer of assets to the new agency -- set up as a special purpose vehicle, so separate to public debt -- begins in the coming weeks and will be completed later this year. This shift removes the uncertainty surrounding future losses arising from these loans.

The lessons of the credit boom will be applied through a strengthening of the financial regulatory system in Ireland. A new head of regulation has been appointed and the Financial Regulator has been reintegrated into the Irish Central Bank, re-establishing the link between financial stability and financial regulation. A new strategy centring on risk-based regulation, implemented by a well-resourced regulatory and enforcement team, is under way.

Faced with a mounting budget deficit, the government has introduced three major budgets in the space of 13 months. This resulted in increased taxes, imposing a series of new and higher charges on all members of the workforce. The third budget imposed a levy of 7% on public-service workers, effectively reducing the government wage bill, and reversed the expansion of the public sector.

So, the picture has changed. The semi-joking comparisons with bankrupt Iceland have stopped. And while those members of the public hardest hit by the slump and the government's tough recovery strategy may not be smiling, the pricing of Irish sovereign debt shows that the market's reaction has been positive.   The crisis is not yet over. But the Irish authorities are showing a resolve to take whatever action is necessary to re-establish the fundamentals of growth for the Irish economy.

The Celtic Tiger Bites Back {Subscription may be required}

an tSionna The Dow

Today's chart comes to us from Chart of the Day.  Here is what they say about the Dow's current rally.

"The Dow continues to make new rally highs. To provide some perspective to the current Dow rally that began just over one year ago, all major market rallies of the last 110 years are plotted on today's chart. Each dot represents a major stock market rally as measured by the Dow. As today's chart illustrates, the Dow has begun a major rally 27 times over the past 110 years which equates to an average of one rally every four years. Also, most major rallies (73%) resulted in a gain of between 30% and 150% and lasted between 200 and 800 trading days -- highlighted in today's chart with a light blue shaded box. As it stands right now, the current Dow rally (hollow blue dot labeled you are here) has entered the low range of a "typical" rally and would currently be classified as both short in duration and below average in magnitude."

Link: Chart of the Day-the Dow

*Long ETFs related to the Dow in certain client accounts.

Employment Pyramid

Above is my crude and in no manner scientific analysis of where I think we are in the recovery cycle. While it is totally based on anecdotal evidence I think it does a better than average job of explaining certain things that we are seeing right now nationally regarding the economy.

This is an income pyramid which tries to approximate income by household. Obviously the higher you go on the pyramid the less people earn that type of money. It's likely not accurate in exact terms of population and percentage of income but it does the job of illustrating my point.

We've been in a recession now for close to two years. It feels to me like nationally we've spent the past six months bottoming out. Obviously certain regions are now doing better than others. I think here in Chicago for example we are just now entering the bottoming process. A client of mine that lives in Southern California says they are nowhere near the end. Florida in February felt better to me than a year ago.

What I've tried to show above is that I think that the farther up you go on the income scale at this point the better people are beginning to feel. That is if you make $80,000 a year and work for a large company, then I think most of these people are beginning to feel that if they've survived this long then they're probably in the clear as far as massive company lay-offs. Again remember I'm talking in generalities so don't send me the stories of how your Aunt Edna was laid off last week. Lay-offs are still going to occur, especially in the public sector where pressures on governments are going to start forcing cuts. But nationally corporations have probably in general cut about as much as they can. In fact I think hiring by the nation's companies will pick up by mid-summer for people with some level of higher education.

These groups above $50,000 account for something like 75% of all consumer spending. They have been on a buyers strike for over a year. The evidence seems to suggest that they are slowly opening their wallets again. They are not going on an all out spending binge. Most of them can't because they don't have the access to credit like they did 2-3 years ago. But they are spending money, albeit at a much lower pace, than a year ago.

Note that the income pyramid above is meant to represent something like 45% of the work force. While these groups have been hurt during the recession they have not born the brunt in lay-offs. That has happened to people earning less than $50,000 a year which represents a majority of the unskilled labor in the United States. This group has been in an employment depression. This is unlikely to end anytime soon. There is no pent up demand for their services. Very few new jobs are being created for them and they will remain a drag on the economy for years.

Again not meant to be scientific but meant it is my thesis for what is transpiring nationally regarding the economy right now. By-the-way if I'm right about what I'm seeing with consumer spending, then that has positive implications for stocks going forward.

Oíche Mhaith

Oíche mhaith Da


Ceol na nGael

Lá Fhéile Pádraig

Saint Patrick's Day (Irish: Lá Fhéile Pádraig) is a yearly holiday celebrated on 17 March. It is named after Saint Patrick (circa AD 387–493), the most commonly recognized of the patron saints of Ireland. It began as a purely Christian holiday and became an official feast day in the early 1600s. However, it has gradually become more of a secular celebration of Ireland's culture.

It is a public holiday on the island of Ireland; including Northern Ireland and the Republic of Ireland. It is also widely celebrated in places where there are large numbers of Irish immigrants and their offspring – this includes Great Britain, Canada, the United States, Argentina, Australia, New Zealand and Montserrat, among others.

Originally the color associated with Saint Patrick was blue. However,over the years the color green and its association with Saint Patrick's day grew. Green ribbons and shamrocks were worn in celebration of St Patrick's Day as early as the 17th century.  He is said to have used the shamrock, a three-leaved plant, to explain the Holy Trinity to the pre-Christian Irish, and the wearing and display of shamrocks and shamrock-inspired designs have become a ubiquitous feature of the day. Then in 1798 in hopes of making a political statement Irish soldiers wore full green uniforms on 17 March in hopes of catching attention with their unusual fashion gimmick. The phrase "the wearing of the green", meaning to wear a shamrock on one's clothing, derives from the song of the same name.

Irish Society of Boston organized what was not only the first Saint Patrick's Day Parade in the colonies but the first recorded Saint Patrick's Day Parade in the world on 18 March 1737.  The first parade in Ireland was not until the 1931 parade in Dublin. This parade in Boston involved Irish immigrant workers marching to make a political statement about how they were not happy with their low social status and their inability to obtain jobs in America. New York's first Saint Patrick's Day Parade was held on 17 March 1762 by Irish soldiers in the British Army. The first celebration of Saint Patrick's Day in New York City was held at the Crown and Thistle Tavern in 1766, the parades were held as political and social statements because the Irish immigrants were being treated unfairly. In 1780, General George Washington, who commanded soldiers of Irish descent in the Continental Army, allowed his troops a holiday on 17 March “as an act of solidarity with the Irish in their fight for independence." This event became known as The St. Patrick's Day Encampment of 1780.

Postcard postmarked 1912 in the United StatesIrish patriotism in New York City continued to soar and the parade in New York City continued to grow. Irish aid societies were created like Friendly Sons of St. Patrick and the Hibernian Society and they marched in the parades too. Finally when many of these aid societies joined forces in 1848 the parade became not only the largest parade in the United States but one of the largest in the world.

Today, Saint Patrick's Day is widely celebrated in America by Irish and non-Irish alike. Many people, regardless of ethnic background, wear green-coloured clothing and items. Traditionally, those who are caught not wearing green are pinched affectionately.

Seattle and other cities paint the traffic stripe of their parade routes green. Chicago dyes its river green and has done so since 1962 when sewer workers used green dye to check for sewer discharges and had the idea to turn the river green for Saint Patrick's Day. Originally 100 pounds of vegetable dye was used to turn the river green for a whole week but now only forty pounds of dye is used and the colour only lasts for several hours.  Indianapolis also dyes its main canal green. Savannah dyes its downtown city fountains green.  In the Northeastern United States, peas are traditionally planted on Saint Patrick's Day.[33

Source: Wikipedia.

Beannachtaí na Féile Pádraig!

One Year Ago Today.

Here's what we said one year ago today!  A Variant Thought!

But then to quote Grumpy "What Do I know!"

Guinness More Brillient than last year.

Last year we took a look at Ireland's iconic beer Guinness.  Guinness is owned by Diageo PLC {DEO}, a British based company that owns many of the world's most recognizable liquor brands.  Besides Guinness, some of its more recognizable brands are Johnnie Walker scotch, Smirnoff vodka and Tangueray gin.  A year ago we chronicled how bad economic times had been bad for DEO as penny pinching consumers were either trading down on brands or simply staying away from the pubs.  Guinness not so brilliant!

Happily Guinness drinkers & DEO consumers around the world seem to have rediscovered their mojo as the stock is up around 55% since we last looked at the shares.  While most of the reports we've read seems to indicate the company is fairly valued at these levels, the company does pay about a 3% dividend!  We of course are not recommending the name and do not own it in client accounts.  We can say we've sampled a guinness or two in our day and might tip a few back tomorrow! 


Slainte!

Ireland: IRL revisited

As is customary we spend a few posts this time of year taking a look at things Irish.  We'll kick off this week by taking a look at the New Ireland Fund.  We last posted on this back in Feb of last year.  New Ireland Fund.  Back then times had been as hard or harder for Ireland as for the rest of the world.  The IRL was no exception to that rule. 

Since then the IRL has outperformed US stock markets as it is up close to 90% vs something like a 60% rise off of its bottoms for the S&P 500.  However the IRL peaked last September and is still down from that level while the S&P is near its highs for the year.  The IRL is still down over 80% from its late 2007 highs!

Ná glac pioc comhairle gan comhairle ban!

an tSionna 3.12.10 S&P vs. Nasdaq

Chart of the S&P 500.  Double Click to enlarge.

Chart of the Nasdaq 1000 {Q's}.  Double click to enlarge.

I thought for a change I'd publish two charts side by side so you could see how other ETFs are trading.  While the patterns are similar, Q's have slightly outperformed S&P year to date and throughout this rally.

Both have rallied through resistance and both are over bought.  Q's rally seems more definitive at this point but both closed weaker on Friday.  In either case I think we'll be able to derive some important clues as to the next stage by how stocks react to the January high resistance levels next week. 

If we push higher in both indices then chances are that we are in the process of establishing a new price floor  {resistance} which would set the stage for higher prices sooner or later this year.

If we stumble and fail here though that would be much more indicative of a market that has simply rallied into resistance.  Probability would suggest then stocks still need time to consolidate their gains from last year.

I'm always reminded of the consiglieri's admonition that "Stocks will do what they have to do to prove to most amount of people wrong".  This market is so hated by individuals and the professional investing class that I think the direction of the most pain is up.  I melt up would be to obvious but a market that tacks on say a quarter a percent a day or so while remaining over bought would give folks no opportunity to get invested.  

Since we are up so much and over bought by our measurement, our short term stance is still net market neutral.  We are net market positive in our longer term orientation for the market and for certain market sectors.

*Long ETFs related to both the S&P 500 and Nasdaq 100 in client and personal accounts.

St. Patrick's Season

While I was out.....

Dia Dhuit!

P.S The first picture is old but it fits with the season!

Out Till Monday

I have to be out until the first of the week.  Next post will be Monday.

an tSionna- 13 Years

13 year weekly chart history of the S&P 500.  Note the similarities between the consolidation move we've seen since the beginning of the year and the consolidation move we experienced in the 1st quarter of 2004.

*Long ETFs related to the S&P 500 in client and personal accounts.

Less Than $10,000 In The Bank

I saw this over at CNNMoney.com.  Many are expressing astonishment at this survey.  Those that are have probably never been to some of the places that make up these numbers.  People often forget how big our country is.  For every Palm Beach there are 10 Hurley, Virginia's.  Hurley is a small hamlet deep in the heart of Appalachia where we went to build homes two summers ago.  For every higher net worth suburb such as a Kennilworth north of Chicago there are places that dwarf it in size such as Chicago's west side. 

{Excerpt}

The percentage of American workers with virtually no retirement savings grew for the third straight year, according to a survey released Tuesday.  The percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010, from 39% in 2009, according to the Employee Benefit Research Institute's annual Retirement Confidence Survey. That excludes the value of primary homes and defined-benefit pension plans.  Workers who said they had less than $1,000 jumped to 27%, from 20% in 2009.

Confidence in ability to save enough for a comfortable retirement hovered at 16% of respondents, the second lowest point in the 20-year history of the survey....

The percentage of workers who said they have saved for retirement fell to 69%, from 75% in 2009....

The gap between what Americans have saved and what they'd need for retirement is forcing workers to prolong their working years....According to the survey, 24% of workers said they have postponed their planned retirement age in the past year, up from 14% in 2008.  But even as fears over health care costs and job prospects mount, the survey found that only 46% of workers have tried to calculate what they need for a comfortable standard of living in their golden years.....

...In general, financial planners say that retirement savings, including Social Security benefits and pension, should be large enough to provide about 80% of pre-retirement income.  To reach that target, "most Americans need to be saving within the healthy range of 6% - 10% (of their salary)," said Beth McHugh, vice president of workplace investing for Fidelity Investments.  But the survey found that 54% of the workers with some form of savings said that they have less than $25,000 stowed away.....

....The EBRI surveyed 1,153 U.S. workers and retirees, age 25 and older, in January.

Link:  EBRI Survey.

What A Long Strange Trip It's Been!

Today marks the one year anniversary of the market bottom of the 2007-08 market decline.  We put up today a weekly chart of the S&P 500 so you could see that decline and our current advance in chart form. {Double click on chart to enlarge!}  A very long and strange trip!

*Long ETFs related to the S&P 500 in client and personal accounts.

an tSionna 3.08.10

*Long ETFs related to the S&P 500 for client and personal accounts.

Employment By Education.

This from Chart of the Day.  I'm going to have more on this subject next week.

"{Yesterday}, the Labor Department reported that the unemployment rate held steady at 9.7% during the month of February. For some perspective on the current state of the labor market, today's chart illustrates the unemployment rate by educational attainment. As today's chart illustrates, a higher educational attainment has correlated with a lower unemployment rate. For example, the unemployment rate for those that have not completed high school (red line) has increased from 5.8% to 15.6% over the past 40 months -- nearly a 10 percentage point increase. Compare that to the unemployment rate for those that have obtained a bachelor's degree or greater (blue line). The unemployment rate for those with a minimum of a bachelor's degree is currently three percentage points above where it was 40 months ago. In any event, the upward trend in the unemployment rate (for all education levels) has slowed in recent months."

Link:  Employment Rate by Educational Attainment.

5 Little Known Secrets of Ultra-Popular ETFs

While I think ETFs are the best way for most individual investors to get involved in equities they do have some drawbacks. In the interest of providing a fair and balanced forum I thought I would excerpt this article that I saw recently in last few weeks over at Seeking Alpha.

5 Little Known Secrets of Ultra-Popular ETFs by: Michael Johnston February 16, 2010

.....{T}he research done by many ETF investors {often} stops at the fund’s name, and perhaps a cursory look at the expense ratio. While the transparency and simplicity of most ETFs allow investors to get away with going light on the diligence, this doesn’t always hold true. Below, we take a look under the hoods of five ETFs to discover some surprising nuances about a number of exchange-traded funds.

5. The Truth About “Country-Specific” ETFs

The rise of the ETF industry has allegedly brought nearly every corner of the globe within reach of millions of investors. With country-specific funds targeting nearly every imaginable location, ETFs have been praised as a revolutionary new portfolio tool that allows investment in dozens of economies. Unfortunately, this is only half true. Most international ETFs are dominated by mega-cap companies that generate their revenues from around the world and just happen to be headquartered in a certain country. {For example a}n investment in Toyota and Honda through a Japan ETF doesn’t provide exposure to the local Japanese economy, as these stocks be impacted more significantly by a change in U.S. consumer habits than economic growth in Japan....

...There’s nothing faulty or deceptive about international equity ETFs, but investors should be aware of the limitations imposed by the mega-cap focus, and the significant differences in risk and return profiles between these ETFs and small-cap international funds (as detailed in this analysis).

4. The “BRIC-HIC” ETF

Investors usually seek out BRIC ETFs as a way to gain exposure to four of the world’s fastest-growing emerging markets. So it may be a bit surprising that about 14% of the iShares MSCI BRIC Index Fund (BKF) is allocated to Hong Kong, recognized as a developed market by most major index providers and economists. But BKF’s surprises don’t stop there. Most investors recognize the BRIC bloc of countries as consisting of Brazil, Russia, India, and China, so they may be a bit perplexed as to why BKF maintains exposure to a different “IC” combo–Ireland and the Cayman Islands. The allocations to these countries are minor–less than 1% in aggregate–but a dilution of true emerging markets exposure nevertheless.

3. Muni Bond ETFs Push Quality Limits

Muni bond ETFs have become popular among investors in a high tax bracket looking to enhance their fixed income exposure. Historically, these funds have been made up of high quality, investment grade debt issues. But in the current environment, countless state and local governments are facing unprecedented budget shortfalls, resulting in slashes to discretionary expenses and increased debt burdens....One of the side effects has been a widening disconnect between the target exposure of certain ETFs and their actual holdings. The index underlying the PowerShares Insured National Municipal Bond Portfolio (PZA), for example, “is designed to track the performance of AAA-rated, insured, tax exempt, long-term debt publicly issued by U.S. states or their political subdivisions.” But about 12% of PZA’s holdings maintain a rating below AAA, with another 5% unrated. The issue is even more pronounced among California muni bond ETFs....
...It should be noted that these two products are passively-indexed ETFs designed to track the performance of a certain benchmark, so the breach of the stated index requirements is out of PowerShares’ control. Still, the disconnect between the quality requirements of the underlying index and the actual holdings of these ETFs highlights the importance of diligence when researching potential investments.

2. AGG: Pushing The Limits

The iShares Barclays Aggregate Bond Fund (AGG) is one of the most popular ways to achieve fixed income exposure through ETFs. The fund’s popularity stems in part from it’s reputation as a “one stop shop” for bond exposure, as it includes Treasuries, agency debt, and investment grade corporate bonds. The index underlying AGG consists of more than 8,000 individual holdings, making it one of the best barometers of the U.S. investment grade bond market. The only problem is that AGG’s individual holdings number 276, meaning that it holds only about 3% of the issues that make up the Barclays Capital U.S. Aggregate Bond Index......AGG is billed as a passively-indexed fund, but the process of selecting a handful of fixed income securities to match the risk and return characteristics of such a broad benchmark is more than somewhat reminiscent of active management.

1. Emerging Markets ETFs’ Dirty Little Secret

Most investors are shocked to learn that a significant portion of the assets held by two of the most popular emerging markets ETFs aren’t actually emerging markets stocks at all–at least according to certain authorities on the matter. The International Monetary Fund (IMF) has classified South Korea and Taiwan as developed economies for more than a decade, yet these countries receive two of the largest four allocations in both VWO and EEM. Israel was upgraded to developed status by the FTSE Group in 2007 and MSCI in 2009, yet still has a significant weighting in both funds. Perhaps the most perplexing inclusion is Hong Kong, which is recognized by all major index providers as a developed market but accounts for about 6% of EEM (Hong Kong equities aren’t included in VWO).

Disclosure: No positions in most of the funds mentioned in this article. I am currently long EEM in certain client accounts and I do own certain municipal ETFs in certain client accounts.

Link: ETFs-Five Secrets.