November 25, 2009 Edition, Volume III
Inside Signature Update
- The Market –Tough Decisions for California; and the Nation
- The Economy – Unemployment and Inventory Levels
- The Takeaway – Gold, Retail, Consumer Discretionary and Healthcare
THE MARKET – Tough Decisions for California; and the Nation
Most of my extended family lives in California; in fact I’m leaving my Utah home in a few hours to join them for the Thanksgiving holiday. My oldest daughter and her family, as well as all of my siblings and virtually all of my cousins, aunts and uncles continue to live in the state I called home for more than half of my life. We were often proud of the trend-setting nature of the state’s social and economic patterns, though admittedly some of California’s populist culture has made even the most open-minded of us occasionally pause with wonder and amusement.
California now faces a dilemma of nearly unimaginable proportions as budget problems continue to mount and a multi-year drought puts pressure on the state’s agricultural and recreation/tourism industries. The state’s real estate and construction industry has been devastated and may take several more years to regain its footing. Long a favorite state for potential business expansion, California’s once rising real estate market and labor costs repelled many would-be employers and provided incentive for others already housed in the state to relocate. Now, with property values at bargain levels throughout much of the state and a motivated labor pool, one might expect California to once again be favored for corporate relocation and economic development; but the opposite is more likely the case.
The state’s budget woes and the need to either face massive tax increases or suffer dramatic cuts in spending now keeps potential employers at bay. The weight of the problem now thwarts hopes for growth among the state’s existing businesses and further depresses future revenue projections. Even CalPERS, the state’s pension and retirement plan, the nation’s largest, is facing hard choices as unfunded liabilities continue to mount.
But all is not lost. California faces the opportunity to once again be a trendsetter as the state remakes itself. The state’s problems are not all that far removed from some of the nation’s economic difficulties. The public policy decisions of California’s decision makers may either serve as an example for good governance and effective leadership in moving the state beyond crisis mode or become an example of what to avoid. The choice is taking shape as the race to replace Governor Schwarzenegger includes candidates ranging from pro-business conservative Meg Whitman (former EBay CEO and senior McCain campaign advisor) to longtime liberal activist Jerry Brown (the state’s current Attorney General and former Governor).
These two candidates could hardly represent more divergent choices. But regardless of where the race leads, one thing is certain: California is in for some tough decisions requiring strong, creative and able leadership as well as a daring electorate. Once again, California may simply be a step ahead of the curve and offering a glimpse into some of the issues facing the rest of the nation.
THE ECONOMY - Unemployment and Inventory Levels
Most might suppose that employment and inventory levels have little to do with one another, but the correlation is significant. In the 3rd quarter of 2008 as Bush administration officials and the Federal Reserve were working to fend off a debilitating credit crisis, business owners and managers found themselves more fearful than at any time in recent memory. In an effort to move the US congress to action, the rhetoric coming out of the Washington helped shift employers into depression mode; within weeks the labor markets were under extraordinary pressure.
As the Obama administration came to power there was a decidedly anti-business tone, raising concerns yet higher and resulting in today’s unemployment rate of more than 10%. Retailers and distributors moved to curb inventories, sending employment downward and creating some of the recessive pattern into which the economy continued to fall.
Now the tide has begun to turn. Inventory levels have sunk so low that even modest sales growth demands manufacturing levels return to normal. The weaker dollar has made import goods less attractive and domestic manufacturing growth is now in the earliest stages of development. Within the coming months, this will lead to noticeable employment increases.
The US consumer, battered and bloodied this past year, has once again shown signs of resiliency. Retail sales figures have begun to post gains in important areas and appear to be set to rally for the holidays. Though this is far from certain, it’s important to note that sales growth in consumer electronics and other high tech sectors is surprising even the most ardent pessimists. Microsoft’s recent revenue report reflecting a surge in Xbox sales simply punctuates the developing trend already observable in Intel and other high tech manufacturers.
By the time domestic manufacturers top off inventory levels, the Obama stimulus plan should have pumped several hundred billion more into the US economy - benefiting the labor market further and bringing sufficient discretionary income to the market, thus offering consumers the ability to take advantage of complete retail inventories and driving retail sales yet higher. Though we’re not likely to see the excessive retail sales growth of 2003 – 2007, it now appears that retailers are poised to return to more appropriate activity levels without having to cut prices and costs at every turn.
October’s real estate sales increase of 6.2%, though perhaps an anomaly with most of the growth coming from southern states, adds another facet of hope for the distressed construction industry. Real estate inventories are among the most critical as it relates to price changes and employment levels; at 6.7 months of supply at current sales rates, they’re lower than at any time in almost two years.
Even still, unemployment is likely to remain high through 2010 and may not fall below 7% until 2011. That’s tough thing to bear for those already out of work, but the trend is clearly improving and the worst may be over for the labor market.
THE TAKEAWAY – Gold, Retail, Consumer Discretionary and Healthcare
The price of gold continues to climb and appears likely to cross $1,200 an ounce in a matter of days thanks to ongoing weakness in the US dollar. The announcement earlier this week that powerful hedge funds have taken positions in gold only adds fuel to speculative concerns. Though gold may have become a very profitable trading vehicle in recent months, it lacks the fundamentals to be considered for long-term inclusion in a well-thought-out investment portfolio.
Consumer spending and personal income gains bode well for the retail sector and add to hopes for a strong holiday buying season. Consumer discretionary and retailing stocks may continue to do well in the coming months.
The Senate’s decision to send its healthcare bill to debate keeps hopes alive for passage of sweeping healthcare legislation in early 2010. While the Senate and House’s proposals are still miles apart, it now seems clear some form of healthcare reform legislation will pass; hospital groups and insurers may be poised for meaningful gains as a result.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Wednesday, November 25, 2009
Wednesday, November 18, 2009
Take Advantage of Low Rates While You Can 11-18-2009
November 18, 2009 Edition, Volume III
Inside Signature Update
The Market – Crisis in Commercial Real Estate?
The Economy – Delicate Balance Between Rates & Inflation Pressures
The Takeaway - Take Advantage of Low Rates While You Can
THE MARKET – Crisis in Commercial Real Estate – it’s not what you may think!
Reports have circulated in recent months regarding a possible ‘melt down’ in the commercial real estate market; needlessly raising fears of a second credit crisis, similar to that which we experienced in the fall of 2008. As recently as mid-October, billionaire investor Wilbur L. Ross Jr., was quoted by Bloomberg as saying the U.S. is in the beginning of a “huge crash in commercial real estate.”
Sounds ominous doesn’t it? Relax, this is not what some would have us think. To understand the potential problem, we need to understand the dynamics of the market.
According to a December 2008 report from the Federal Reserve Bank of Dallas the value of the entire US commercial real estate market stood at just over $3 trillion in 2007 and represented $1.7 trillion in mortgage debt. At the same time, the value of the residential market was estimated to be as high as $21 trillion (now less than $17 trillion) with $14.6 trillion in mortgage debt. Not only did the commercial market enjoy an average loan-to-value ratio of less than 57%, compared to almost 70% for the housing market, but the difference in the sheer size of the residential market is staggering, with residential real estate being valued at 7 times the commercial market. Additionally, the underwriting requirements for residential mortgage lending became notoriously weak leading up to 2007, while commercial requirements remained far more stringent.
It’s not that there aren’t difficulties in commercial real estate; it’s simply that they pale by comparison. The Bloomberg report projected U.S. commercial property sales to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s. In the interview Ross, the 71-year-old chairman and chief executive officer of WL Ross & Co. LLC, said he would use ‘extreme caution’ before putting money into commercial real estate, especially office space, because properties are losing tenants. ‘I think it’s going to take quite a while to work itself out,’ Ross said.
Commercial real estate, like employment, is a lagging indicator of economic activity, and similar to employment is experiencing some of the lowest occupancy rates at any time since the 1980’s. In such circumstances, property owners with highly leveraged projects may find it difficult to meet mortgage obligations and the risk of default rises. But with commercial mortgages representing less than 12% of those in the residential market, the impact is of significantly less consequence.
Likewise, as the economy improves both employment and commercial occupancy levels will rise. The US stock markets have correctly responded to the risks by modestly adjusting stock values for those banks and insurance companies representing the bulk of the mortgage exposure. Even still, the equity markets have continued their climb above 10,000 on the DOW, with little in sight to curb current trends.
THE ECONOMY – Delicate Balance Between Low Rates and Inflation Pressures
Wednesday morning’s release of the October CPI figures (consumer price index) reflected an increase of .3% and re-ignited ongoing concerns over just how long the Federal Reserve can keep interest rates at ultra-low levels while waiting for the employment market to recover. The pressure on the Fed is mounting as the gold and oil markets continue to climb and inflation concerns replace fears of deflation.
The Fed’s monetary policy of low rates and open markets is running into increasing opposition from central bankers around the world as the dollar continues to weaken. Aggressive monetary policy alone can yield an increase in inflation; when coupled with the free spending fiscal plans of the Obama administration and current House and Senate leadership, the inflationary pressures become more than we may be able to bear. Rates may have to rise sooner than most of us might like and the labor market may face extended pressure as a result.
Policy makers have hoped to keep rates low and spending levels high in an attempt to stimulate the job market, but we’re now beginning to see that other factors may soon take the forefront. The economy has clearly begun to expand in recent months and continued growth is critical to putting America back to work; with low interest rates being one of the more important aspects to recovery efforts. They’re also starting to jeopardize needed international capital relationships, threaten currency rates and trade balances, and compromise price stability at home and abroad.
The Fed has taken great care thus far to limit the potentially negative impact of low interest rates and continues to have a strong grasp on the situation. It’s unlikely that Bernanke will allow rates to stay at low levels long enough to do more harm than good, but the balancing act becomes increasingly more difficult with each passing month.
If unemployment levels stabilize and begin to retreat by the end of the 1st Quarter 2010, as many are now predicting, the Fed’s job will be much easier. The Fed can then signal to the international market its intent to increase rates, even if plans to do so are still 2-3 months in the future. Bernanke and company’s pledge is more valuable than gold in the international markets and bankers around the world will act on the Fed’s intentions as long as there is a time frame they find plausible.
As was suggested by Dallas Federal Reserve President Richard Fisher, when US monetary policy shifts to tighten rates it will do so swiftly and aggressively. Those having bet against the US dollar, or who might have added gold or other commodities to their portfolios, will need to take swift action to protect themselves.
In the mean time, it’s becoming more evident that the US Congress must undergo a budget trimming process similar to what most families have had to endure – otherwise fiscal excess will undo too much of the good the Fed has worked so hard to accomplish.
THE TAKEAWAY – Take Advantage of Low Rates While You Can
Those able to take advantage of declining lease rates and commercial property values may find the current climate can help trim budgets and increase long-term asset values – fears over a commercial real estate bubble are overblown and don’t even come close to the impact of what we’ve experienced in the housing market.
The US equities market continues to offer the best returns available, and there appears to be little on the near-term horizon to counter the current trend. Year-end asset sales for tax purposes may have an impact, but most investors will realize gains rather than losses for 2009.
The Fed’s low rate policy is beginning to show signs that a shift will have to take place earlier than we might prefer – the labor market and those who have bet against the dollar (gold, currency hedges, etc.) are likely to get caught in the squeeze.
Health care proposals between the House and Senate are still so far apart that passage seems unlikely. Though many of the legislation’s sponsors are touting similarities, the reality is that there are simply irreconcilable differences on which neither side appears willing to concede.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Inside Signature Update
The Market – Crisis in Commercial Real Estate?
The Economy – Delicate Balance Between Rates & Inflation Pressures
The Takeaway - Take Advantage of Low Rates While You Can
THE MARKET – Crisis in Commercial Real Estate – it’s not what you may think!
Reports have circulated in recent months regarding a possible ‘melt down’ in the commercial real estate market; needlessly raising fears of a second credit crisis, similar to that which we experienced in the fall of 2008. As recently as mid-October, billionaire investor Wilbur L. Ross Jr., was quoted by Bloomberg as saying the U.S. is in the beginning of a “huge crash in commercial real estate.”
Sounds ominous doesn’t it? Relax, this is not what some would have us think. To understand the potential problem, we need to understand the dynamics of the market.
According to a December 2008 report from the Federal Reserve Bank of Dallas the value of the entire US commercial real estate market stood at just over $3 trillion in 2007 and represented $1.7 trillion in mortgage debt. At the same time, the value of the residential market was estimated to be as high as $21 trillion (now less than $17 trillion) with $14.6 trillion in mortgage debt. Not only did the commercial market enjoy an average loan-to-value ratio of less than 57%, compared to almost 70% for the housing market, but the difference in the sheer size of the residential market is staggering, with residential real estate being valued at 7 times the commercial market. Additionally, the underwriting requirements for residential mortgage lending became notoriously weak leading up to 2007, while commercial requirements remained far more stringent.
It’s not that there aren’t difficulties in commercial real estate; it’s simply that they pale by comparison. The Bloomberg report projected U.S. commercial property sales to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s. In the interview Ross, the 71-year-old chairman and chief executive officer of WL Ross & Co. LLC, said he would use ‘extreme caution’ before putting money into commercial real estate, especially office space, because properties are losing tenants. ‘I think it’s going to take quite a while to work itself out,’ Ross said.
Commercial real estate, like employment, is a lagging indicator of economic activity, and similar to employment is experiencing some of the lowest occupancy rates at any time since the 1980’s. In such circumstances, property owners with highly leveraged projects may find it difficult to meet mortgage obligations and the risk of default rises. But with commercial mortgages representing less than 12% of those in the residential market, the impact is of significantly less consequence.
Likewise, as the economy improves both employment and commercial occupancy levels will rise. The US stock markets have correctly responded to the risks by modestly adjusting stock values for those banks and insurance companies representing the bulk of the mortgage exposure. Even still, the equity markets have continued their climb above 10,000 on the DOW, with little in sight to curb current trends.
THE ECONOMY – Delicate Balance Between Low Rates and Inflation Pressures
Wednesday morning’s release of the October CPI figures (consumer price index) reflected an increase of .3% and re-ignited ongoing concerns over just how long the Federal Reserve can keep interest rates at ultra-low levels while waiting for the employment market to recover. The pressure on the Fed is mounting as the gold and oil markets continue to climb and inflation concerns replace fears of deflation.
The Fed’s monetary policy of low rates and open markets is running into increasing opposition from central bankers around the world as the dollar continues to weaken. Aggressive monetary policy alone can yield an increase in inflation; when coupled with the free spending fiscal plans of the Obama administration and current House and Senate leadership, the inflationary pressures become more than we may be able to bear. Rates may have to rise sooner than most of us might like and the labor market may face extended pressure as a result.
Policy makers have hoped to keep rates low and spending levels high in an attempt to stimulate the job market, but we’re now beginning to see that other factors may soon take the forefront. The economy has clearly begun to expand in recent months and continued growth is critical to putting America back to work; with low interest rates being one of the more important aspects to recovery efforts. They’re also starting to jeopardize needed international capital relationships, threaten currency rates and trade balances, and compromise price stability at home and abroad.
The Fed has taken great care thus far to limit the potentially negative impact of low interest rates and continues to have a strong grasp on the situation. It’s unlikely that Bernanke will allow rates to stay at low levels long enough to do more harm than good, but the balancing act becomes increasingly more difficult with each passing month.
If unemployment levels stabilize and begin to retreat by the end of the 1st Quarter 2010, as many are now predicting, the Fed’s job will be much easier. The Fed can then signal to the international market its intent to increase rates, even if plans to do so are still 2-3 months in the future. Bernanke and company’s pledge is more valuable than gold in the international markets and bankers around the world will act on the Fed’s intentions as long as there is a time frame they find plausible.
As was suggested by Dallas Federal Reserve President Richard Fisher, when US monetary policy shifts to tighten rates it will do so swiftly and aggressively. Those having bet against the US dollar, or who might have added gold or other commodities to their portfolios, will need to take swift action to protect themselves.
In the mean time, it’s becoming more evident that the US Congress must undergo a budget trimming process similar to what most families have had to endure – otherwise fiscal excess will undo too much of the good the Fed has worked so hard to accomplish.
THE TAKEAWAY – Take Advantage of Low Rates While You Can
Those able to take advantage of declining lease rates and commercial property values may find the current climate can help trim budgets and increase long-term asset values – fears over a commercial real estate bubble are overblown and don’t even come close to the impact of what we’ve experienced in the housing market.
The US equities market continues to offer the best returns available, and there appears to be little on the near-term horizon to counter the current trend. Year-end asset sales for tax purposes may have an impact, but most investors will realize gains rather than losses for 2009.
The Fed’s low rate policy is beginning to show signs that a shift will have to take place earlier than we might prefer – the labor market and those who have bet against the dollar (gold, currency hedges, etc.) are likely to get caught in the squeeze.
Health care proposals between the House and Senate are still so far apart that passage seems unlikely. Though many of the legislation’s sponsors are touting similarities, the reality is that there are simply irreconcilable differences on which neither side appears willing to concede.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Friday, November 13, 2009
An Ill-Conceived Attack on Fed Powers
November 13, 2009 Edition, Volume III
Inside Signature Update
- The Market - Expectations for Steady, Though Modest, Growth
- The Economy I – Get Ready for the VAT – Value-Added Tax
- The Economy II – An Ill-Conceived Attack on Fed Powers
- The Takeaway – Higher Equity Values and Tax Rates
THE MARKET – Expectations for Steady, Though Modest, Growth
The continued rally in the US equities market is simply a reflection of a weakening dollar, low interest rates, moderated inflation pressures, and earnings growth in most market sectors. With widely reported corporate earnings growth and 3.5% GDP expansion for the 3rd Quarter, as well as promising retail sales reports, the DOW stands firmly above the 10,200 level. Most market analysts, traders and investors expect relatively steady, though modest improvement in the markets as we move into 2010.
Likewise, gold has continued its rally, and while there may still be room for gold to appreciate above these levels, especially in the face of a weak US dollar, most prudent investors are nervous at what has all of the earmarks of a bubble in the precious metals market.
Oil’s upward movement towards the $80 per barrel level is more fundamentally supported by increases in demand, but has also enjoyed the weaker dollar. When the Fed finally moves to increase interest rates and strengthen the dollar, precious metals and oil will give up their exchange related gains. These commodities are ripe for speculation at these levels and ought not to be considered as long-term investment assets.
For months we’ve suggested that this rebound is far from over and evidence continues to mount suggesting that a recovery, both in the economy and the stock market, has plenty of room for continued expansion – and profits.
THE ECONOMY I - Get Ready for the VAT - Value Added Tax
Both the Obama administration and House and Senate Democrats have vowed to increase taxes on high income Americans while providing tax cuts for the middle class and bringing yet more relief for lower income earners. While this may make for great campaign rhetoric, it’s not at all likely. Not only have the administration and legislators introduced bills which would expand federal budgets by trillions of dollars for many years to come, they’ve begun to talk about a new kind of tax with which most Americans are unfamiliar.
House Speaker Pelosi confirmed plans to introduce a value-added tax in an effort to offset the rising costs associated with federal spending plans, saying ‘somewhere along the way, a value-added tax plays into this’.
Those who’ve traveled through Europe may be familiar with the VAT tax, or value- added tax. VAT is a form of national sales tax and now ranges between 17% and 25% in most European countries. Introduced as an alternative to income taxes, it quickly became a companion to personal and business income tax and represents much of the increase in taxation experienced throughout Western Europe in the last 50 years.
Simply put, the value added tax is a tax levied on most business transactions and on most goods and services. Though policy makers may discuss it in terms of taxing higher consumption families more aggressively than those with less discretionary incomes, the VAT tax raises the cost of virtually everything in a marketplace, regardless of one’s income level. Even if a tax credit is applied to help offset value-added tax payments made by lower income Americans, it will be virtually impossible to mitigate the impact of the rising cost of goods and services associated with VAT throughout the production and manufacturing process.
President George H.W. Bush’s infamous phrase, ‘read my lips, no new taxes’, used first in the 1988 New Hampshire primary and then most famously in his acceptance speech at the Republican Party National Convention in New Orleans that same year, came back to haunt him and helped Clinton unseat the once-popular President. One has to wonder how often President Obama replays that scenario in his mind as he considers just how difficult his re-election bid may become.
THE ECONOMY II - An Ill-Conceived Attack on Federal Reserve Powers
Senate Banking Committee Chairman Chris Dodd (D-CT) announced Tuesday plans to curtail the powers of the Federal Reserve and the FDIC in a sweeping piece of legislation promising to reform banking and avoid future crises. Dodd cited the ‘abysmal failure’ of the Fed’s role as banking regulator and moved to create a new regulator, the Financial Institutions Regulatory Administration (FIRA). Fortunately the legislation faces nearly as many challenges as the ill-fated health care bill recently passed by the House of Representatives; it hasn’t sufficient support to make it out of the Senate.
Dodd, like most bureaucrats, believes the best solution to a bureaucratic challenge is another layer of bureaucracy. This latest proposal shows how little he and his committee understand about how close we came to financial calamity before then Treasury Secretary Paulson and Fed Chairman Bernanke used the Fed’s considerable powers to avert disaster. Certainly, Bernanke and company had a hand in creating the crisis, as did many others; including Dodd and his party’s leadership. To attempt to limit the problem solving ability of the central bank is more dangerous than most might suppose.
Treasury Secretary Timothy Geithner and House Financial Services Committee Chair Barney Frank laid some of the groundwork for Dodd’s proposal in late October as they discussed the need to reform and bring oversight to the financial markets. Though the outward intent of proposed reforms appears reasonable in light of recent events, they expose policy makers’ interest in gaining influence over the Federal Reserve and FDIC.
While the FDIC may arguably be fair game, it is critical that the Federal Reserve remain as independent as possible in order to maintain the relationship of trust it enjoys in the financial markets and with central bankers around the world. A Federal Reserve overseen by a politically organized federal agency would yield a weaker US dollar and impotence while striving to maintain modest inflationary pressures and domestically advantageous exchange rates. Without its full range of powers the Fed simply cannot affect is primary mission.
FDIC Chairwoman Sheila Bair sharply criticized the proposal and added ‘The oversight council described in the proposal currently lacks sufficient authority to effectively address systemic risks.’ Though some level of regulation in response to the financial crisis through which we have now lived for more than a year is inevitable and even necessary, the current administration’s direction, as proposed by some of its most loyal operatives, is simply counterproductive, perhaps even power-seeking. What we need are objective and progressive reserve requirements to aid in preserving liquidity for banks operating in the capital markets, and a regulatory structure long on accountability and short on political motives.
The current rhetoric appears as ill-conceived as was the Graham-Leach-Bliley Act’s 1999 repeal of Glass-Steagall without structuring capital market requirements for those banks playing both sides of the market. In its current form, the proposal could weaken policy makers’ authority to get us out of the turmoil it may well get us into in the future.
THE TAKEAWAY – Higher Equity Values and Tax Rates
Investors sitting in cash or other fixed instruments may have already missed the largest part of the current market recovery, but modest, steady growth in equities appears likely through 2010. This is not a time to stay on the sidelines.
It’s virtually impossible for tax rates to rest at current levels, well enough improve, given the planned level of spending. The revenue to be garnered by taxing only the highest income earners isn’t enough to pay the bill. Tax rates for all but the lowest income levels are likely to increase, starting with the sun-setting of major portions of the Bush tax cuts in 2011.
Democratic leadership in the House and Senate are frustrated at their inability to pass major legislative initiatives as members of their own party thwart a too-liberal agenda. One needn’t be ultra conservative to see the flaws in their reasoning.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Inside Signature Update
- The Market - Expectations for Steady, Though Modest, Growth
- The Economy I – Get Ready for the VAT – Value-Added Tax
- The Economy II – An Ill-Conceived Attack on Fed Powers
- The Takeaway – Higher Equity Values and Tax Rates
THE MARKET – Expectations for Steady, Though Modest, Growth
The continued rally in the US equities market is simply a reflection of a weakening dollar, low interest rates, moderated inflation pressures, and earnings growth in most market sectors. With widely reported corporate earnings growth and 3.5% GDP expansion for the 3rd Quarter, as well as promising retail sales reports, the DOW stands firmly above the 10,200 level. Most market analysts, traders and investors expect relatively steady, though modest improvement in the markets as we move into 2010.
Likewise, gold has continued its rally, and while there may still be room for gold to appreciate above these levels, especially in the face of a weak US dollar, most prudent investors are nervous at what has all of the earmarks of a bubble in the precious metals market.
Oil’s upward movement towards the $80 per barrel level is more fundamentally supported by increases in demand, but has also enjoyed the weaker dollar. When the Fed finally moves to increase interest rates and strengthen the dollar, precious metals and oil will give up their exchange related gains. These commodities are ripe for speculation at these levels and ought not to be considered as long-term investment assets.
For months we’ve suggested that this rebound is far from over and evidence continues to mount suggesting that a recovery, both in the economy and the stock market, has plenty of room for continued expansion – and profits.
THE ECONOMY I - Get Ready for the VAT - Value Added Tax
Both the Obama administration and House and Senate Democrats have vowed to increase taxes on high income Americans while providing tax cuts for the middle class and bringing yet more relief for lower income earners. While this may make for great campaign rhetoric, it’s not at all likely. Not only have the administration and legislators introduced bills which would expand federal budgets by trillions of dollars for many years to come, they’ve begun to talk about a new kind of tax with which most Americans are unfamiliar.
House Speaker Pelosi confirmed plans to introduce a value-added tax in an effort to offset the rising costs associated with federal spending plans, saying ‘somewhere along the way, a value-added tax plays into this’.
Those who’ve traveled through Europe may be familiar with the VAT tax, or value- added tax. VAT is a form of national sales tax and now ranges between 17% and 25% in most European countries. Introduced as an alternative to income taxes, it quickly became a companion to personal and business income tax and represents much of the increase in taxation experienced throughout Western Europe in the last 50 years.
Simply put, the value added tax is a tax levied on most business transactions and on most goods and services. Though policy makers may discuss it in terms of taxing higher consumption families more aggressively than those with less discretionary incomes, the VAT tax raises the cost of virtually everything in a marketplace, regardless of one’s income level. Even if a tax credit is applied to help offset value-added tax payments made by lower income Americans, it will be virtually impossible to mitigate the impact of the rising cost of goods and services associated with VAT throughout the production and manufacturing process.
President George H.W. Bush’s infamous phrase, ‘read my lips, no new taxes’, used first in the 1988 New Hampshire primary and then most famously in his acceptance speech at the Republican Party National Convention in New Orleans that same year, came back to haunt him and helped Clinton unseat the once-popular President. One has to wonder how often President Obama replays that scenario in his mind as he considers just how difficult his re-election bid may become.
THE ECONOMY II - An Ill-Conceived Attack on Federal Reserve Powers
Senate Banking Committee Chairman Chris Dodd (D-CT) announced Tuesday plans to curtail the powers of the Federal Reserve and the FDIC in a sweeping piece of legislation promising to reform banking and avoid future crises. Dodd cited the ‘abysmal failure’ of the Fed’s role as banking regulator and moved to create a new regulator, the Financial Institutions Regulatory Administration (FIRA). Fortunately the legislation faces nearly as many challenges as the ill-fated health care bill recently passed by the House of Representatives; it hasn’t sufficient support to make it out of the Senate.
Dodd, like most bureaucrats, believes the best solution to a bureaucratic challenge is another layer of bureaucracy. This latest proposal shows how little he and his committee understand about how close we came to financial calamity before then Treasury Secretary Paulson and Fed Chairman Bernanke used the Fed’s considerable powers to avert disaster. Certainly, Bernanke and company had a hand in creating the crisis, as did many others; including Dodd and his party’s leadership. To attempt to limit the problem solving ability of the central bank is more dangerous than most might suppose.
Treasury Secretary Timothy Geithner and House Financial Services Committee Chair Barney Frank laid some of the groundwork for Dodd’s proposal in late October as they discussed the need to reform and bring oversight to the financial markets. Though the outward intent of proposed reforms appears reasonable in light of recent events, they expose policy makers’ interest in gaining influence over the Federal Reserve and FDIC.
While the FDIC may arguably be fair game, it is critical that the Federal Reserve remain as independent as possible in order to maintain the relationship of trust it enjoys in the financial markets and with central bankers around the world. A Federal Reserve overseen by a politically organized federal agency would yield a weaker US dollar and impotence while striving to maintain modest inflationary pressures and domestically advantageous exchange rates. Without its full range of powers the Fed simply cannot affect is primary mission.
FDIC Chairwoman Sheila Bair sharply criticized the proposal and added ‘The oversight council described in the proposal currently lacks sufficient authority to effectively address systemic risks.’ Though some level of regulation in response to the financial crisis through which we have now lived for more than a year is inevitable and even necessary, the current administration’s direction, as proposed by some of its most loyal operatives, is simply counterproductive, perhaps even power-seeking. What we need are objective and progressive reserve requirements to aid in preserving liquidity for banks operating in the capital markets, and a regulatory structure long on accountability and short on political motives.
The current rhetoric appears as ill-conceived as was the Graham-Leach-Bliley Act’s 1999 repeal of Glass-Steagall without structuring capital market requirements for those banks playing both sides of the market. In its current form, the proposal could weaken policy makers’ authority to get us out of the turmoil it may well get us into in the future.
THE TAKEAWAY – Higher Equity Values and Tax Rates
Investors sitting in cash or other fixed instruments may have already missed the largest part of the current market recovery, but modest, steady growth in equities appears likely through 2010. This is not a time to stay on the sidelines.
It’s virtually impossible for tax rates to rest at current levels, well enough improve, given the planned level of spending. The revenue to be garnered by taxing only the highest income earners isn’t enough to pay the bill. Tax rates for all but the lowest income levels are likely to increase, starting with the sun-setting of major portions of the Bush tax cuts in 2011.
Democratic leadership in the House and Senate are frustrated at their inability to pass major legislative initiatives as members of their own party thwart a too-liberal agenda. One needn’t be ultra conservative to see the flaws in their reasoning.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Thursday, November 5, 2009
When Warren Buffett Goes 'All In'
When Warren Buffett Goes ‘All In’
November 5, 2009 Edition, Volume III
Inside Signature Update
- The Market – Warren Buffett Goes ‘All-In’
- The Economy – Economic Potpourri
- The Takeaway – Cautious Optimism is Still the Prudent Stance
THE MARKET – When Warren Buffet Goes ‘All-In’
The DOW broke the 10,000 point mark again Thursday in late trading to close at 10,006, suggesting Warren Buffett’s announced purchase of Burlington Northern (BNI) earlier this week may well be the most solidly bullish report the US stock markets have seen for months. Not only is the $26 billion investment the largest Buffett has made to date with his Berkshire Hathaway holding company (BRK.A, BRK.B), but it also marks the first time Buffet and his partner Charlie Munger have been willing to include Berkshire Hathaway stock as part of a deal.
Though Buffett is still sitting on an enormous amount of cash, measured in the tens of billions of dollars, he’s essentially ‘all-in’ relative to the domestic equities market. There’s little any other investor or government report could offer that would speak more boldly for the future of the US economy and investment market.
M&A (Mergers and Acquisitions) activity often confirms the strength of a bull market rally, and this week announcements, including Stanley Works’ (SWK) acquisition of Black and Decker (BDK), add weight to the term ’M&A paves the way!’. Expect more activity on the M&A front as cash-rich firms look to merge with others in an effort to increase sales and benefit from cost efficiencies – both lead to higher earnings and share values.
Ford’s posting of a $1 billion profit for the 3rd quarter on better-than-expected revenues lent an added measure of optimism for the US auto market. Ford, the only one of the ‘big three’ auto makers to turn down federal bailout funds, looks to post yet stronger 2010 and 2011 results. US auto sales, expected to lag following August’s end to ‘cash for clunkers’, have now posted monthly sales increases for August, September and October. The annual sales pace now exceeds the critical 10,000,000 unit mark for domestic manufacturers and suggests consumers are finally willing to replace outdated vehicles with newer models from dealer inventories.
Don’t be surprised to see Ford (F), now trading below $7.50 per share, to climb back to double digits. There’s still room for growth in the US stock markets for 2009 and recent activity is simply strengthening the case that 2010 will provide yet more for forward-thinking investors.
THE ECONOMY – Economic Potpourri
The Federal Reserve’s FOMC Statement released Wednesday added some focus to what must occur before interest rates are likely to increase, but not enough to strengthen the still-weakened dollar. The release once again affirms the Fed’s commitment to low rates for an extended period and support for a stable inflation environment.
Gold Bugs and other commodities speculators point to the report to strengthen their argument that the declining dollar will push prices higher; seemingly ignoring the Fed’s repeated focus towards a stable inflation environment. An article posted on Minyanville draws an argument for strong growth in precious metals pricing, and even discusses the International Monetary Fund’s (IMF) recent sale of 200 tons of bullion to India, but draws poorly supported conclusions. Gold Bugs, you’ve gotta love ‘em.
September’s ISM report (Institute of Supply Management) fueled hopes for stronger-than-projected 3rd quarter revision and 4th quarter GDP figures. Though the 3rd quarter number is already in at a positive 3.5%, the all-important revised figure isn’t due out for weeks. Consensus expectations have held at the 2-2 ½% level for the 4th quarter, but may update towards 3%+ as September’s manufacturing gains of more than 1% left inventory levels still lower than in previous months.
Lower inventories, coupled with increasing demand, equate to growing labor needs in 2010; in spite of a likely increase in the national unemployment rate to 9.9% when the Bureau of Labor Statistic (BLS) reports Friday morning. The turn around in the labor market is slow in coming, as it always is following deeply recessive periods, and will likely offer meaningful improvement in 2010, but 4%,5% and 6% unemployment levels aren’t likely to be seen for some time to come.
Though the ‘cash for clunkers’ program served to take advantage of dealer inventories and helped stimulate manufacturer and dealer employment levels, it didn’t provide the anticipated environmental benefit. Reports suggest that the $3 billion program will have reduced US oil consumption by only .2%, or less than $700 million (US News and World Report). Additionally, the program focused sufficient demand for certain models that dealers were able to sell them with little other financial incentive, and most buyers ended up paying more of a premium for the new vehicle (over what the same model could have been purchased for just one month earlier) than they received in added trade-in value for the old one.
In sum, the US taxpayer would have been better off, both long and short-term, had the Obama administration simply given money directly to auto manufacturers and dealers – it would have cost less and provided just as much benefit. Oh well…
THE TAKEAWAY – Cautious Optimism is Still the Prudent Stance
Expect further gains in the US equities markets, though not at 2nd and 3rd quarter double digit levels. Manufacturing and consumer goods are likely to benefit the most in coming months. Cautious optimism is still the prudent stance.
Don’t get caught up in ‘gold fever’ along with the Gold Bugs – it may make you feel all warm inside at first, but most often leads to disappointing results.
Look for more M&A activity to point to market segments for growth and opportunity
Don’t expect stronger dollar policies from the Fed or Treasury until after employment conditions improve by at least 2-3%.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
November 5, 2009 Edition, Volume III
Inside Signature Update
- The Market – Warren Buffett Goes ‘All-In’
- The Economy – Economic Potpourri
- The Takeaway – Cautious Optimism is Still the Prudent Stance
THE MARKET – When Warren Buffet Goes ‘All-In’
The DOW broke the 10,000 point mark again Thursday in late trading to close at 10,006, suggesting Warren Buffett’s announced purchase of Burlington Northern (BNI) earlier this week may well be the most solidly bullish report the US stock markets have seen for months. Not only is the $26 billion investment the largest Buffett has made to date with his Berkshire Hathaway holding company (BRK.A, BRK.B), but it also marks the first time Buffet and his partner Charlie Munger have been willing to include Berkshire Hathaway stock as part of a deal.
Though Buffett is still sitting on an enormous amount of cash, measured in the tens of billions of dollars, he’s essentially ‘all-in’ relative to the domestic equities market. There’s little any other investor or government report could offer that would speak more boldly for the future of the US economy and investment market.
M&A (Mergers and Acquisitions) activity often confirms the strength of a bull market rally, and this week announcements, including Stanley Works’ (SWK) acquisition of Black and Decker (BDK), add weight to the term ’M&A paves the way!’. Expect more activity on the M&A front as cash-rich firms look to merge with others in an effort to increase sales and benefit from cost efficiencies – both lead to higher earnings and share values.
Ford’s posting of a $1 billion profit for the 3rd quarter on better-than-expected revenues lent an added measure of optimism for the US auto market. Ford, the only one of the ‘big three’ auto makers to turn down federal bailout funds, looks to post yet stronger 2010 and 2011 results. US auto sales, expected to lag following August’s end to ‘cash for clunkers’, have now posted monthly sales increases for August, September and October. The annual sales pace now exceeds the critical 10,000,000 unit mark for domestic manufacturers and suggests consumers are finally willing to replace outdated vehicles with newer models from dealer inventories.
Don’t be surprised to see Ford (F), now trading below $7.50 per share, to climb back to double digits. There’s still room for growth in the US stock markets for 2009 and recent activity is simply strengthening the case that 2010 will provide yet more for forward-thinking investors.
THE ECONOMY – Economic Potpourri
The Federal Reserve’s FOMC Statement released Wednesday added some focus to what must occur before interest rates are likely to increase, but not enough to strengthen the still-weakened dollar. The release once again affirms the Fed’s commitment to low rates for an extended period and support for a stable inflation environment.
Gold Bugs and other commodities speculators point to the report to strengthen their argument that the declining dollar will push prices higher; seemingly ignoring the Fed’s repeated focus towards a stable inflation environment. An article posted on Minyanville draws an argument for strong growth in precious metals pricing, and even discusses the International Monetary Fund’s (IMF) recent sale of 200 tons of bullion to India, but draws poorly supported conclusions. Gold Bugs, you’ve gotta love ‘em.
September’s ISM report (Institute of Supply Management) fueled hopes for stronger-than-projected 3rd quarter revision and 4th quarter GDP figures. Though the 3rd quarter number is already in at a positive 3.5%, the all-important revised figure isn’t due out for weeks. Consensus expectations have held at the 2-2 ½% level for the 4th quarter, but may update towards 3%+ as September’s manufacturing gains of more than 1% left inventory levels still lower than in previous months.
Lower inventories, coupled with increasing demand, equate to growing labor needs in 2010; in spite of a likely increase in the national unemployment rate to 9.9% when the Bureau of Labor Statistic (BLS) reports Friday morning. The turn around in the labor market is slow in coming, as it always is following deeply recessive periods, and will likely offer meaningful improvement in 2010, but 4%,5% and 6% unemployment levels aren’t likely to be seen for some time to come.
Though the ‘cash for clunkers’ program served to take advantage of dealer inventories and helped stimulate manufacturer and dealer employment levels, it didn’t provide the anticipated environmental benefit. Reports suggest that the $3 billion program will have reduced US oil consumption by only .2%, or less than $700 million (US News and World Report). Additionally, the program focused sufficient demand for certain models that dealers were able to sell them with little other financial incentive, and most buyers ended up paying more of a premium for the new vehicle (over what the same model could have been purchased for just one month earlier) than they received in added trade-in value for the old one.
In sum, the US taxpayer would have been better off, both long and short-term, had the Obama administration simply given money directly to auto manufacturers and dealers – it would have cost less and provided just as much benefit. Oh well…
THE TAKEAWAY – Cautious Optimism is Still the Prudent Stance
Expect further gains in the US equities markets, though not at 2nd and 3rd quarter double digit levels. Manufacturing and consumer goods are likely to benefit the most in coming months. Cautious optimism is still the prudent stance.
Don’t get caught up in ‘gold fever’ along with the Gold Bugs – it may make you feel all warm inside at first, but most often leads to disappointing results.
Look for more M&A activity to point to market segments for growth and opportunity
Don’t expect stronger dollar policies from the Fed or Treasury until after employment conditions improve by at least 2-3%.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
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