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The Headline May Be Goldman Sachs

Richard E. Haskell, Sr.


Inside Signature Update


• The Market – Trouble at Goldman More About Headlines Than News

• The Economy – 1st Quarter 2010 Earnings Reports

• The Takeaway – Become Focused on Quality and Healthy Balance Sheets


THE MARKET – Trouble at Goldman More About Headlines Than News

News of the Securities Exchange Commission’s (SEC) filings against Goldman Sachs (GS) dominated the financial news in mid-April 2010, but the real news was the surge in strong earnings reports from some of the nation’s most important corporations. Nonetheless, Goldman’s issues are substantial, and the impact on the firm many see as Wall Street’s premier investment banker may take years to sort out; not to mention the negative consequences the firm’s actions may have had on investors and the market. The firm’s association with John Paulson (Paulson and Co.) and Fabrice Tourre and the allowance of questionable trading and disclosure practices is troublesome.

The potential fallout for the financial services sector, stemming from the SEC’s charges against Goldman, is massive. Allegations and charges of abusive practices and fraud in Goldman’s hedge fund and CDO (collateralized debt obligation) operations will undoubtedly shake up much of Wall Street’s hierarchy, undermine investor confidence and rejuvenate legislative efforts to reign in the nation’s investment banking complex. But maybe that’s exactly what legislators and regulators had in mind when the SEC’s charges were announced.

There is growing concern that SEC leadership, the White House and Congressional Democrats may have timed the filing of charges with renewed legislative efforts focused on increasing federal investment banking regulation with the release of quarterly earnings from some of Wall Streets most important firms. Without attempting to discount the potential severity of Goldman’s alleged actions, Representative Darrell Issa (R-CA) called on SEC Chair Mary Schapiro to provide documentation of "any sort of prearrangement, coordination, direction from, or advance notice" between the SEC and the Obama administration or congressional Democrats. Within minutes of the SEC’s filing of charges, the internet and media were awash with reports and “spin”; including Democratic National Committee (DNC) fundraising ads aimed at making the most of the controversy.

Financial services industry regulatory reform efforts, led by Senate Banking Committee Chairman Chris Dodd (D-Conn) and Representative Barney Frank (D- Mass), began to make the national news again in a well orchestrated campaign aimed at legislators and voters, the timing of which was simply too coincidental with the SEC’s announcements to be mere happenstance. While it may not matter in the long run, it does suggest that the SEC, under Mary Schapiro’s leadership, may not be as independent as is intended.

For long-term market observers, this has an all-too-familiar ring to it and is beginning to feel similar to the scrutiny the SEC focused towards Drexel Burnham Lambert in the late 1980’s. Some will recall that Drexel, the Goldman Sachs of the 1980’s, was a leader in the underwriting of debt instruments known as “junk bonds”. These bonds were packaged and sold in an effort to provide less credit worthy firms with debt financing in such a way that it was difficult for many investors to comprehend their true origins, but they carried the promise of returns that made them extremely attractive to the markets. In affect, “junk bonds” were to the 1980’s what derivatives, CDO’s and CDS’s became to the 2000’s.

Wall Street’s “junk bond king”, Michael Milken, engineered Drexel’s underwriting and trading of these instruments and generated extraordinary profits for the firm. In 1988, the SEC brought separate charges against Milken and Drexel, culminating in a 10-year prison sentence for Milken and Drexel’s demise. As an interesting aside, it’s unlikely Milken would have faced prosecution in today’s environment where the risks, rewards and structures of the capital markets are more widely understood; Milken resurfaced in the late 1990’s to become one of Wall Street’s wealthiest and most philanthropic personalities.

The losses resulting from the Drexel/Milken scandal amounted to tens of billions of dollars and rattled the financial services industry, but brought about little change in the structure and marketing of complex debt instruments. In truth, the debt markets opening up in the 1980’s led to the more complex derivatives market under scrutiny today.

While the regulation of the derivatives market and its complicated instruments are necessary, the demonization of the industry and some of its important firms and leaders, is not. The Obama administration and Democratic leadership continue to lecture Wall Street and risk undermining the nation’s economic recovery. What appears to have been forgotten is that it takes investment capital to create jobs; which capital comes through personal savings, corporate profits and the capital creation efforts of the nation’s investment banking firms, of which Goldman Sachs is an important leader.

By November 2010 the political import of the investment capital/jobs creation relationship may become acute for members of the House of Representatives and incumbent Senators seeking re-election. Many Americans will cast their votes for political hopefuls they view as able to see past the rhetoric. As former US President Bill Clinton asserted, “it’s the economy, stupid.”

It’s time for our nation’s elected officials, governmental agencies, and media representatives to recognize that headlines and well timed campaigns focused on anything other than capital and job creation only serve to expose their biases. In the end, Americans spend and vote; the less they’re able to do of the former makes them that much more interested in exercising their right to affect change with the latter.


THE ECONOMY – 1st Quarter 2010 Earnings Reports

As the US markets continued to move past 11,000 points on the DOW in April 2010, investors and policy makers should focus their attention on earnings reports and away from distracting sideshows. Many expect that the gains of the last 12-13 months (almost 70% for the DOW) aren’t likely to be repeated any time soon and that the easier part of the recovery may be behind the markets. Moving forward, market gains are likely to face periodic headwinds and will continue to rely on growth in revenues and earnings.

With unemployment still in excess of 9%, the nation’s attention must continue to focus on earnings and investment. Economists will point out that only businesses create jobs and they only do so towards the latter part of a recovery, after there has been sufficient growth in revenues and profits to justify investing in growth to support the increasing demands of the market place.

As further proof of the strength of the current economic recovery, many of the nation’s most important firms have announced impressive revenue and earnings growth for the 1st Quarter 2010 compared to the same period in 2009. The following are a small sampling of those reported most recently:

• Apple posted profits of $3.07 billion compared with $1.62 billion.
• Illinois Tool Works posted $294 million in net profits versus $8.1 million.
• Citigroup’s earnings climbed to $4.4 billion from $1.59 billion.
• Yahoo’s profits increased to $310 million from $118 million.
• United HealthCare’s earnings rose to $1.19 billion from $984 million.
• Goldman Sachs posted a 91% increase to $3.46 billion from $1.81 billion.
• Union Pacific’s earnings jumped 43% to $516 million from $362 million.
  
  In the midst of the 1st Quarter 2010 earnings reporting season, the S&P 500 crossed the important 1,200 mark and the DOW fortified its position north of 11,000. These levels will only be supported by continued earnings growth as briefly discussed in the April 6, 2010 issue of Signature Update (Earnings Expectations and Tobin’s Q).
  
  Other earnings reports of interest are Harley Davidson and Coach; important brands when considering consumer preferences and higher-end consumption patterns. Though neither firm reported record earnings, both beat analyst expectations and reported both earnings and revenue improvements over prior periods.
  
  Though there will certainly be earnings disappointments as well, the trend towards higher revenues and earnings offers important evidence that the economy is headed in the right direction. Economist and former Assistant Secretary of Commerce, Dr. Quincy Krosby, points out that the markets may experience a “tug of war” in coming months as sovereign debt issues and likely interest rate increases become important factors. But even Krosby warns against betting on US small business and consumers, suggesting that businesses and consumer will always find a way to prosper.
  
  Among the “head winds” that may lie ahead are near-certain tax increases for consumers and increased borrowing costs for businesses. As unwelcome as these may be, it’s possible that they’ll come in moderation. If President Obama keeps his campaign commitment to lower corporate business tax rates, the aggregate impact on the economy could be negligible; sadly campaign promises are much like devalued currency – they’re hard to spend and most often buy very little.
  
  Though investors may have already gathered the easier gains from the recovery, the US markets are likely to trend higher on improving revenues and earnings. Once businesses have recovered sufficiently to round out inventories and replace outdated equipment, the employment market can expect to experience a sufficient rebound to move the economy into a post-recession/post-recovery period of sustainable growth and market gains.
  
  
  
  THE TAKEAWAY – Become Focused on Quality and Healthy Balance Sheets

• Financial stocks may have seen their near term highs as legislative and regulatory efforts are likely to increase costs and reduce revenues. Additionally, the federal government’s sale of Citigroup shares in the open markets may put downward pressure on banking stocks as a whole.

• Though most healthcare and pharmaceutical firms posted increased revenues and profits for the 1st Quarter 2010, many lowered their guidance for future quarters on concerns over potentially negative consequences of the recently passed healthcare legislation.

• Investors should become increasingly focused on quality issues and healthy balance sheets to avoid possible market headwinds. Dividend paying firms with limited debt may become increasingly attractive as the recovery begins to mature.

• Voters across the country are presenting an anti-encumbant attitude that should be concerning to elected officials of both parties. Jobs are more likely to win voter loyalty than party affiliation in the November elections.
  
  
  
  
  Signature Update is offered by Richard Haskell, CEO of Signature Management, LLC

Looking for Conviction in the Markets

Richard E. Haskell, Sr.


April 16, 2010 Edition, Volume IV

Inside Signature Update

• The Market – Looking for Conviction in the Markets

• The Economy – Bank Size is Not the Danger Some Believe

• The Takeaway – Higher Interest Rates Can Hurt and Help


THE MARKET – Looking for Conviction in the Markets

With the DOW squarely over the 11,000 point level, investors are looking for clear signs the index is headed higher. Recent economic reports representing increasing factory orders and retail sales suggest 1st and 2nd quarter GDP gains may be better than expected, but the labor market continues to offer concerns. Federal Reserve Chairman Ben Bernanke has stepped-up the tone of his comments regarding growth expectations, now calling for “moderate growth” rather than “slow growth” for the remainder of the year. These and other factors have helped move the major markets indexes by some 5% year-to-date, but there continues to be a significant amount of investor capital resting outside of the markets and concerns that lower market volumes may suggest a lack of investor confidence have some wondering if the current market levels may soon suffer from a lack of conviction.

Many investors have become curious at what some consider low volume levels. On an absolute basis, 2010 volume is averaging about 4.7 billion shares/day. This is down 15% vs. the 2009 average NYSE volume of 5.5 billion shares/day. Yet 2010’s average volume is only slightly less than the 2008 average of 4.96 billion shares/day. While some consider lower volume a problem, others recognize it as a sign the markets, and economy, have simply reached more sustainable levels of strength and stability.

Many forget that the NYSE single-day volume crossed 200 million shares for the first time in early 1984 and it wasn’t until the year 2000, some sixteen years later, that the daily volume reached one billion shares. Even though 2010 volume levels appear low when compared to those of 2008 and 2009, they’re more than four times higher than those of only a decade ago; at the height of the dot com craze.

On Monday, April 12th, 2010 the DOW crossed over the 11,000 point mark and invigorated investor hopes for meaningful market gains in 2010. Volume levels, as the index approached and then exceeded 11,000, were lower than average for the year and suggest to some that the gains may not be backed by sufficient conviction to remain at current levels. The DOW, though having experienced a sharp correction in late January/early February, has already seen 2010 gains of 5% and investors are looking for more. According to a recent investor survey released by CitiGroup (C), 62% of investors expect the markets to continue to improve over the next six months. With the VIX (volatility index) at its lowest point since the 3rd quarter 2007, it appears that few are expecting significant moves in the near term; rather, a continuation of the current positive trend looks likely to continue through the remainder of the year. Lower-than-average volume isn’t the problem some suppose and as investors continue to come in from the sidelines with their cash, both market levels and volumes will rise.



THE ECONOMY – Bank Size is Not the Danger Some Believe

The “Too Big to Fail” issue continues to be at the center of financial industry regulatory reform and rightfully so; neither the American people nor the economy are prepared to endure another capital markets crisis like that experienced in 2008 and 2009. At the heart of the issue is whether Congress should seek to limit the size and impact of major consumer and investment banks or should measures be adopted that allow for greater strength and stability at banks of any size and type.

The battle lines aren’t as clearly separated by party lines as many might suppose. Certainly, free-market conservatives want to see as little legislative intervention as possible, while those more interested in central planning remain committed to long-term nationalization of the banking industry. Fortunately, neither of these groups are likely to prevail. This is truly one of those issues where a more moderate, centrist compromise will likely best serve the nation’s economy and citizens.

There remains a fallacy in the “Too Big to Fail” concept. It’s not only the size of an institution that may offer risk to the economy if it is allowed to fail, but how interconnected the bank’s products are with other banks, in both the global and domestic markets. All one has to do is recall that Lehman Brothers accurately wasn’t considered “Too Big to Fail”, but it was so interconnected with investment and consumer banks the world over for its failure to send the global markets into a tail spin. Without significantly curtailing the capital market activity of our banks there is virtually no way to avoid this inter-connective exposure. Placing the sort of regulatory constraints on US capital market makers that might possibly minimize the impact would cripple the economy. There are other solutions, of course.

The problem we experienced wasn’t one of size, it had to do with strength and stability. The current legislative proposals requiring greater reserve requirements and capitalization ratios for those banks involved in the capital markets hold credible solutions to the problem. Not only would placing such requirements on our nation’s banks create sufficient strength to lessen the possibility of future crises, but it would also make it less likely for banks to become large enough to be of concern. Those legislators seeking graduated reserve and capital ratios on banks are, in effect, able to limit the size of the bank without placing specific limits on a bank’s size.

Additionally, legislation has been proposed that would require the formation of a “super” FDIC of sorts – an insurance pool funded through transaction fees that would be available to “bail out” troubled investment banks rather than needing to seek tax payer assistance. While there are pros and cons to this concept, it could be a sensible complement to increased capital and reserve requirements. It would take a substantial length of time before such a fund were to become of sufficient size to be impactful, but once established it may offer numerous benefits to the banking system and the economy. It could also become a tempting resource for legislators and would need to have every possible safeguard associated with it’s independence to protect it from those looking for fiscal advantages.

Important to remember, however, is that any additional pressure put on the US banking system may have troubling near-term consequences. The imposition of increased requirements, transaction costs or size limitations would reduce any bank’s ability to lend, and lending remains a critical element in the recovery of the US and global economies. With real interest rates near 0%, it is difficult for banks to lend to any but their best customers, and in this case those happen to be major corporations through which the economy has seen stagnant net job growth for decades. Small and medium size businesses create virtually all of this country’s new jobs, and in the aftermath of the recent recession they’re simply not able to attract sufficient lender attention to gather the credit needed to take advantage of important growth opportunities. In order for the US labor market to see meaningful improvement, small businesses will need to have access to credit capital and be free to fund job intensive growth.

What is left is a classic conundrum: the national and global economy need to be free from the potential damaging affect of an under resourced banking system and the national and global economy need the lending resources of a banking system with limited constraints. Fortunately, the type of compromise that it may take for Congress to bring current legislative proposals towards becoming law will take time; hopefully enough time to allow reason and sensibility to gain the upper-hand over party politics and extreme action.


THE TAKEAWAY – Higher Interest Rates Can Hurt and Help

• Even at volume levels below 2008 and 2009 peaks, there is sufficient strength in the markets to continue to experience gains through the remainder of 2010.

• Jobs reports are likely to appear inconsistent until there is a clear path for small businesses to have the credit capital needed to create jobs and fund growth opportunities. Higher interest rates will come after economic recovery is maturing and will provide incentives for banks to lend. As long as rates remain reasonable (below 2 ½% to 3% Fed Funds rate), job growth will speed up.

• China’s continued growth, in excess of 11%, may need to be slowed by government intervention to avoid overheating and damaging the global economy further; it’s a delicate balance for a nation not used to capitalist nuance.



Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC

Earnings Expectations and Tobin's Q

Richard E. Haskell, Sr.


April 6, 2010 Edition, Volume IV

Inside Signature Update

• The Market – Earnings Expectations and Tobin’s Q
• The Economy – Is a “Double Dip” off the Table?
• The Takeaway – There’s More to Come


THE MARKET – Earnings Expectations and Tobin’s Q

Market earnings expectations and ratios

As the DOW approaches the 11,000 point mark, market observers begin to wonder just how far the index can climb before the market becomes overvalued. It’s a difficult question to answer and has everything to do with corporate earnings and how investors value the future earnings potential of firms as the economy recovers.

The 11,000 point mark on the DOW is less of a technical benchmark than it is an emotional one; the S&P 500 is another story. The S&P closed Monday, April 5th at 1187, only 13 points shy of the important 1,200 point level. For the S&P to sustain itself beyond the 1,200 point level, the market will need to see increased corporate earnings.

The index’s current P/E ratio (price to earnings ratio) sits at 21.7 – meaning that for every dollar of earnings there is $21.70 of index value. That may seem high, but when compared to forward earnings expectations the ratio drops dramatically.

Market analysts expect to see aggregate, per-share earnings for those stocks comprising the index of $83-$85 for 2010 and $90 for 2011; compared to current earnings of $51.74 for 2009. Based on the current earnings ratio of 21.7, these earnings estimates, if reached, would indicate the S&P at a lofty 1,800 by the end of 2010.

Perhaps a more realistic expectation is based on the index’s mean (average) ratio of 15.73, which would indicate the S&P 500 index at 1,305. This represents an increase of 10% from current levels and falls directly in line with our 2010 estimates for the domestic equities markets.

Earnings Reports and Tobin’s Q

In the coming weeks publically held corporations will begin to release 1st Quarter 2010 earnings reports. Some investors and observers find themselves confused as to why some stocks will post gains in the face of strong earnings, while others might decline: the answer lies within Tobin’s Q.

In 1969, Nobel prize winning economist, Dr. James Tobin (Yale University) challenged the traditional theory that investments were valued as a function of economic interest rates and proposed an alternate valuation model that became known as Tobin’s Q. Tobin’s model suggests that investment values are based on how investors value a firm’s business plan, expected earnings, potential political and economic developments, and the replacement cost of the investment. It presumes that the market has full knowledge of those issues impacting a firm (transparency) and is predicated on a liquid market for the investment (publicly traded stock, etc.).

The issues of supply and demand, business cycles, global markets, etc. weren’t included in valuation models before Tobin published his theory, and most investors were simply left with P/E ratio and dividend yields when attempting to make good investment decisions. Based on Tobin’s theory and the complex mathematical formulas he developed to model it, market values rise and fall based on the aggregate affect of these factors, rather than simply on changing economic interest rates. While most investors won’t apply available data to the model, there’s sufficient recognition in the markets of those factors impacting values that the model is used implicitly to support price levels and predict future valuations.

When a company announces earnings estimates, the value of their shares change in direct relation to how the estimates compared with analyst expectations. Similarly, when earnings are reported, the actual is compared to estimates and expectations and share values may adjust accordingly. If good earnings are already expected, the share price has already risen to meet the expectation, and once actual earnings are reported the share value will only change if actual results differ from those anticipated.

When firms report their earnings, they normally update the firm’s guidance, or expected performance, against their business plan. This can also impact share values as investor and analyst expectations are heavily based on a firm’s guidance; if the firm has a track record of accuracy and reliability. For those firms that have a poor track record when it comes to meeting the expectations their own leadership cultivated, the market will rarely respond to a new set of optimistic expectations, but will react sharply to negative guidance.

Ready availability of information and a liquid market

The key to Tobin’s valuation concepts and to how today’s investors and markets value investments lies in the ready availability of information and a liquid market. Since Tobin formulated his theories these market elements have improved dramatically and market valuations have become more statistically significant than at any time in history. Likewise, expectations for earnings growth, though becoming more optimistic than in recent months, have solid foundations and are based more on observed trends than anticipation and hope.


THE ECONOMY – Is a “Double Dip” off the Table?

Mounting evidence and some optimistic expectations

There’s mounting evidence that the economy will continue to grow at a 3% to 5% pace for 2010; with some expectations reaching as high as 6% based on March 2010 economic activity reports. Factory orders and retail sales continue to make important gains and the labor market is just beginning to see the first signs of meaningful improvement. Inventory levels reflect demand-driven patterns as manufacturing increases and wholesale orders are only barely outpacing consumer demand. There is now enough upward momentum that many economists believe the US is no longer in danger of a “double dip” recession.

Perhaps the most important sign of real growth comes from the Federal Reserve itself. The Fed’s February 18th increase of the discount rate to .75% and other recent comments by Fed policy makers point to the agency’s firming belief that the US economy is approaching the point at which it will be able to sustain a broad-based rate increase.

Market reactions to higher rates

While the immediate stock market response of such an increase will most likely be negative, the longer term reaction will almost certainly be strong and to the upside; as investors accept that the Fed is committed to only raising rates in the presence of economic strength. The current 0%-1/4% Fed Funds target is so low that investors have little incentive to invest in interest bearing or dividend yielding instruments. As the rate environment shifts to more sustainable levels, investors will come back to the markets yet more aggressively than already experienced; first to bonds and then to stocks, as long as targets don’t rise above 3%-4%. As a result, the capital markets, so critical to business lending and capital formation, will open up and funds needed for growth will be widely available for the first time in years.

The bond markets will certainly respond negatively to rising rates, due to the inverse relationship between rates and bond prices. Higher interest rates also drive the dollar higher and as a result, commodities prices for agricultural products, precious metals and oil will rise in response to higher rates. The aggressiveness of rate increases will reflect the Fed’s concern over possible inflation. Moderated increases of ¼ to ½ point per announcement will suggest the Fed is simply trying to react to a stabilizing market; while aggressive increases of ¾ point or more are likely to signal the Fed moving into inflation fighting mode.


Federal Reserve Chairman Bernanke and other Fed Governors have already stated that when rate increases begin they’re likely to be meaningful. Though this may have been in response to inflation concerns, the markets will breathe a sigh of relief when the time comes. This is one of those issues that the market recognizes must be faced in order for the economy to move past the recovery stage and into longer-term growth. Once the announcements are made and the market digests the material impact, the mounting anticipation will likely give way to higher equity values and real post-recession growth.


THE TAKEAWAY – There’s More to Come

• The DOW is poised to cross the 11,000 point mark at any time, and will likely climb higher in coming months. Though interim corrections of 5%-7% will occur, market levels should rise with corporate earnings through the end of the year.

• The much anticipated “Double Dip” for the US economy appears to be highly unlikely based on economic reports and rising expectations. Further weakness in the real estate and employment markets could spell trouble, but most analysts expect the danger has passed.

• The Fed’s interest rate position remains unchanged, but small “adjustments” are being made and setting the stage for economically healthier rates in the future.






Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC

Think Twice Before Moving to the Sidelines

Richard E. Haskell, Sr.


April 1, 2010 Edition, Volume IV

Inside Signature Update

• The Market – Investors: Think Twice Before Moving to the Sidelines

• The Economy – Spring Economic Potpourri

• The Takeaway – Just What Were They Thinking?


THE MARKET – Investors Should Think Twice Before Moving to the Sidelines

Over the past few weeks we’ve experienced too many trading sessions where the DOW has climbed to double and triple digit gains before settling in with only modest improvement on the day. In some markets, this sort of activity is a sign the market is topping out and a correction is likely to follow. In others, it’s simply a response to other economic activity, news events or political issues. Regardless, it’s something to pay attention to.

A market correction of 5-10% is often the precursor to a rally sufficient to take the market to new heights; such as the correction and ensuing rally we experienced earlier this winter. The DOW closed at over 10,700 in mid January before pulling back to just above 9,900 in early February; the index closed Tuesday (3/30/2010) at over 10,900 and appears to be headed towards 11,000 or higher. In this case, the correction led to a healthy rally that has the markets at near-term highs. Investors pay little attention to corrections and rarely attempt to participate in the type of activity traders employ in an effort to exploit market dynamics. Barring unexpected political events or natural disasters, our expectation is that the DOW will continue to climb through the 11,000 level and close out 2010 well above current levels – perhaps 1,000 points higher than Tuesday’s close.

Most of us are familiar with the adage “Sell in May and go away”; it’s an old stock market saying, suggesting that investors should sell out of their portfolio’s in May, presumably after a Spring rally, and then buy back into the market in the latter part of the Summer or Fall, after an expected decline in market values. More often than not this strategy yields higher returns than investors might have experienced had they simply maintained a particular position in a given stock, but it’s highly dependant on when you sell, when you buy back in and whether or not you have the discipline to follow the markets movements.

In truth, it’s not a strategy most investors should employ unless they’re prepared to monitor the markets closely or have an advisor with whom they’re closely aligned and who utilizes tactical trading models. Such activity certainly has its risks and even savvy investors should carefully weigh them against the possible rewards. Traders, on the other hand, love the concept. Not only does it give them the potential for greater gains, but it lets them focus on other activities for the summer.

The “Sell in May” strategy has its roots in our nation’s agricultural history. From the 17th to mid-20th centuries, those institutions prepared to lend capital to farmers typically did so in time for them to purchase seed before the spring planting season. They would often sell other investments to raise the cash to do so, and in the fall, after the crops were harvested and farmers repaid their short-term loans plus profits and interest, these same institutions would put their resources back into the markets for the winter.

The act of liquidating investments to raise cash would put downward pressure on market values and by the end of May markets often began to show declines. When funds would then be reinvested in the fall, including profits, market values would increase due to the net capital inflows. Even though today’s markets aren’t subject to the same forces they were when the US was principally an agrarian economy, some still rely on the same market cycle to govern their holdings. It’s an out-dated strategy that becomes less statistically meaningful with every passing year.

Most investors aren’t prepared to do this of course, but for those that are the statistics are only sometimes in their favor. There are years, like 2009, when this strategy would have been very costly. In the July 2, 2009 issue of Signature Update we discussed the problem of selling off a portfolio in the face in of a recovering market. The DOW closed at just over 8,600 at the end of May 2009 and opened October 1st at over 9,700 – those employing the “Sell in May” strategy could have left 1,100 points of profit on the table. On the other hand, employing the strategy over the same time frame in 2008 might have saved investors as much as 1,700 points on the DOW. Obviously, 2009 was a recovery year for the markets while 2008 saw painful losses overall.

What about in other market years more similar to 2010? The data offers a mixed bag, with far too many variables to develop a reliable regression model. What is clear is that the forces that helped coin the term, “Sell in May and walk away” were more dominate in decades and centuries past than they are in our current economic era. Our markets and economy are still in recovery mode and will be for several years to come. We continue to assert that even though we’ll experience short-term market corrections, perhaps a few more times this year, the markets have a long way to go before topping out and becoming overvalued. P/E ratios on large caps are comparatively low, earnings remain robust, dividends are increasing, and the Treasury Yield Curve remains steep. This is a time of opportunity and growth and certainly not a time to “walk away” or move to the sidelines.



THE ECONOMY – Spring Economic Potpourri

The Consumer Confidence Board released the March Consumer Confidence Index this morning, reflecting a stark improvement over last month’s figure. The March CCI came in at 52.5, up from 46.4 in February and represented the fourth month out of five that the index reflected consumer’s improving attitudes. Details inside of the numbers tell an important story as well. In February, 45.1% of respondents described the economy as “bad” while only 42.8% offered the same analysis in March.

The March survey showed that 8.6% of those polled feel the economy is “good”; up from 6.8% last month. Not surprisingly, consumer spending offered a sufficient increase in March to yield a 1st quarter gain of 3.8%, adding to the 4.2% improvement in the 4th quarter 2009.

The factors most likely driving the improvement are the labor markets, stock market gains and Spring. Better weather and rising stock market values are always welcome signs and provide a meaningful improvement in consumer confidence levels, especially this year as we’ve recently passed the one year anniversary of the market lows that followed the economic crisis and resultant recession.

Analyst expectations for March job gains, to be reported at the end of the week, run as high as 200,000 for the month. The ADP report released this week shows a decline in private, non-farm, non-seasonally adjusted jobs of 23,000. At the same time, the Department of Labor reported initial jobless claims fell by 6,000. The difference between the reports and analyst expectations can be seen in government jobs, including those offered by the BLS (Bureau of Labor Statistics) for the 2010 Census. By May 2010, the 2010 Census effort will require as many as 800,000 part-time, temporary workers in addition to those full-time workers already hired. These numbers aren’t likely to have any significant impact on the BLS’s unemployment statistics due to their seasonal and part-time attributes, but may contribute as much as ¼% to 2nd Quarter GDP.

Newspapers reported a February increase of 13.1% in employment related classified ads and internet based classifieds rose by 19.6%. The results won’t drive the unemployment figure down as much as we might hope, but for those households in which workers returned to the ranks of the employed, the recession is finally over.

Inflation remained moderate in the face of a March personal income increase of .7%. The personal consumption expenditure price index (PCE) year-over-year gain fell to 2.1% versus 2.4% reported in February. Though “Inflation Hawks” and “Gold Bugs” continue to make sound inflation alarms, there simply isn’t anything on the horizon to support their fears.

The 1st Quarter 2010 ISM Report (Institute for Supply Management) reflected continued growth in the overall economy for the 11th straight month, with the manufacturing sector having gained for in each of the last 8 months. Notably, for the first time in 46 months inventories edged up slightly.

THE TAKEAWAY – Just What Were They Thinking?

• The US economy is continuing to rebound at a strong pace. Though the 5.6% GDP gains of the 4th Quarter 2009 may not be repeated for 2010 as a whole, overall gains will be respectable and are likely to exceed 3 ½ to 4%

• Look for gains in Large Cap stocks as earnings reports and dividend increases are announced over the next few weeks.

• In the aftermath of the recent passage of important healthcare legislation, reports have continued to come forward over the “sweetheart” deals the Obama Administration and House Leadership made to insure the bill’s passage. Added to the constitutional challenge filed by thirteen State’s Attorneys General in the United States District Court in Pensacola, Florida the reports have already began to undermine the legislative effort and call into question whether or not the bill, already signed into law, will have any meaningful impact.

• That the US wants and needs a plan to deal with our growing healthcare issues is no longer in question; that our citizens, legal system and constitution are ready to accept a bill passed “at any cost”, is not only questionable, but mounting evidence is already showing large scale dissatisfaction.



Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC

The Next 1,000 Points on the DOW

Richard E. Haskell, Sr.


March 22, 2010 Edition, Volume IV

Inside Signature Update

• The Market – The Next 1,000 Points on the DOW
• The Economy – Extremely Costly Lessons
• The Takeaway – Consumer Demand and Stronger Dollar Affects


THE MARKET – The Next 1,000 Points on the DOW

The DOW closed higher for the 8th day in a row Thursday, extending the index’s 52 week high to 10,821 points; though still far from the October 2007 high of 14,400, the rebound over the last twelve months represents a 66% gain over the DOW’s March 2009 low of 6,500. Friday’s close at 10,737, down 39 points on the day, presented an expected breather for the markets after such an extended run to the positive. And then came Sunday’s passage in the US House of Representatives of the Senate’s Healthcare bill and Monday’s double digit stock market gains.

With a major piece of uncertainty now out of the way, the next 1,000 points for the DOW could come quickly. You’ll recall that the markets disdain uncertainty above almost all else, and the recent political maneuvering towards a House of Representatives vote on the healthcare legislation presented just that. As late as Friday of last week, House Speaker Nancy Pelosi maintained that a passing vote would occur on Sunday; but with only 200 votes secured of the 216 votes needed, her assertion was viewed as more than optimistic by many. At the same time, President Obama suggested a passing vote may not take place until later the following week, and InTrade, an online market predictor, put the likelihood of passing healthcare legislation by June, 30, 2010 of approximately 80%. That’s all history now, and even though there’s still much work to be done to bring the House and Senate bills into law, there appears to be little in the way of halting the legislation’s progress.

The biggest winners in this effort have been the Obama administration and the Democratic Party; to whom congratulations are due, regardless of how you feel about the legislation. They’ve pulled off an effort at which others have tried and failed; one that I honestly didn’t think would succeed until after I spoke with a trusted business associate a little over a week ago. This conservatively minded, small-business owner friend explained that the only way he saw himself being able to provide reasonably priced health insurance for his family was through the passage of the President’s health care bill. Though he may not have fully appreciated the pending legislation’s nuances, it was clear that he had tied his family’s well being to the bill, and I immediately realized that if he had reached this conclusion, millions of others just like him had likely gotten to the same point. At that moment, my expectation of the bill’s passage became certain; the only question was when it might take place.

Other winners include hospitals, which now see a clear path to a funding source for the cost of care for previously uninsured patients; pharmaceutical manufacturers, that just had almost 30% of the market open up to them (the previously uninsured), and insurers which are likely to see the largest proportional shift in the size of their risk pool and customer base since the 1940’s.

The certain losers are those highest income earners, who will see their federal income tax obligations increase.

The US equities market may become a near-term winner as well. With the legislation’s passage and with no discernable, immediately-negative impact, the market is poised to extend its gains even further. In the longer run we’ll sort out the affect the increased tax on high-income earners will have had on capital investment, which is almost certainly negative, but even some highly respected economists disagree on this point.

An unfortunate aspect of the legislation’s passage is that it will likely move more important issues even further to the sidelines. The current legislation is more of a health insurance reform bill than healthcare reform. Its single largest benefit is to improve the risk pool for insurance companies by mandating the inclusion of healthier citizens who may not feel the need for coverage under the current system; and receiving premiums from them, of course. Demographers suggest that this portion of the newly covered won’t exceed those less-healthy individuals without coverage, but argue that the less-healthy, previously uninsured have been receiving de facto coverage through emergency rooms and free clinics funded by tax payer dollars and higher prices charged to those with insurance coverage.

This may fall under the heading of “good is the enemy of great”. While there are certainly good provisions in the bill, it falls well short of great, but may be enough to keep the focus off of enacting a solution to the nation’s larger problem of healthcare reform. In the August 11th (Just What Are We Reforming – part one) and September 3rd (Just What Are We Reforming – part two), 2009 issues of Signature Update we discussed some root causes of our nation’s healthcare problems. Sadly, the bill just passed doesn’t address them; consumers will continue to expect more from the healthcare system than can reasonably be expected; insurance fraud and abuse will continue; and medical malpractice and tort reform are as far away as ever.

Regardless, what has taken place is historic and may open the way for the next 1,000 points of gains on the DOW. That could also make winners out of anyone holding stocks, mutual funds, or other market based investment and insurance products.


THE ECONOMY - Extremely Costly Lessons

In the last few months I’ve had numerous thoughtful and intelligent people ask if the widely heralded economic recovery is real. With unemployment rates close to 10%, market values well below their highs, many businesses still reporting revenues well below those seen in the mid-2000’s, uncomfortable real estate values and relatively low consumer confidence levels, could we honestly be seeing a broad-based recovery? The answer is yes, but we need to differentiate between an economic recovery and a return to economic prosperity.

Economic recovery doesn’t mean that all is well and that good times have returned for every sector of the economy. It simply means that the economy is improving rather than declining. It suggests that today’s economic results are better than yesterday’s, with the recognition that yesterday’s were worse than those of the day before.

Unlike a return to economic prosperity, an economic recovery is simply the beginning, and in this case the road to prosperity is likely to be measured in years rather than months, as is a return to full employment. Though our economy will almost certainly see a return to prosperous levels of output and employment, we still need to deal with the affect of the recession and the remedies employed to bring us out of it. Unacceptably high levels of federal debt will need to be overcome, precautionary regulations will be enacted, and trust will have to be restored to the capital market system before we can declare prosperity across the board. In the mean time, appreciate that the economy is improving; enjoy any benefits this may bring to your business or household; and learn from what have been extremely costly lessons.


THE TAKEAWAY – Consumer Demand and Stronger Dollar Effects

• The US Department of Transportation reported a decrease in miles driven of 1.6% (3.7 billion miles) in January 2010 over January 2009, reflective of consumer sensitivity to increased oil prices (The Rising Price of Oil May Quickly Become Self Correcting - Signature Update 3/16/2010). The result is likely to be a moderation in oil prices due to decreasing consumer demand sufficient to offset the increased demands from global manufacturing and dollar fluctuations.

• The passage of healthcare legislation gave a small boost to the US dollar and put pressure on the gold and oil markets. Unlike the current relative stability in the price for oil, a byproduct of higher demand offsetting declines due to a stronger dollar, gold’s value looks to continue its erosion.

• Pharmaceutical and hospital stocks are likely to do well in the face of increasing insurance roles. Look for those with below average P/E ratios (the relationship between the per-share stock price and the company’s earnings per share) and those that may be in a position to increase dividends.




Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC

Luxury Retailing Gains Not Surprising... if you know Thorstein Veblen

Richard E. Haskell, Sr.


March 12, 2010 Edition, Volume IV

Inside Signature Update

- The Market – The Rising Price of Oil May Quickly Becomes Self Correcting
- The Economy – Luxury Retailing Gains Not Surprising
- The Takeaway – Gold Bugs Looking for Profits as Prices Decline


THE MARKET – The Rising Price of Oil May Quickly Become Self Correcting

Three years ago, at roughly this same time of year, we saw oil prices begin to climb to uncomfortable levels. Oil prices rose from the $60-$70 per barrel range in early 2007 to almost $150 in the summer of 2008, before crashing to $33 less than six months later. The rise was due to a combination of increasing demand and outright speculation and market manipulation; the crash came as demand collapsed and the economy presented one of the most difficult recessions in recent memory.

It’s difficult to tell how much oil’s bloated pricing weighed on the economy. Though it isn’t likely that it was a major contributor to the recession, it certainly hastened the event’s economic and market impact. Household budgets were stressed and producers struggled to maintain acceptable operating margins in the face of increased energy costs. That the scenario played itself out along side of a real estate boom and bust and the attending credit crisis is likely coincidental; regardless, it made a bad situation worse.

Today, we’re seeing oil trending higher once again. Global demand is expanding as the recession is subsiding and economies are once again increasing output. Unlike the demand and speculation driven increase in the price of oil during 2006-2008, today’s price levels appear to be supported by international exchange rate changes as the dollar has lost ground. Fully $30 of oil’s rising price tag may be related to the dollar’s value relative to that of other currencies. But that leaves room for another $20 of price increase due to expanded demand.

Though I don’t want to get caught in the trap of suggesting that “things are different this time”, it is important to point out that the fundamental causes for oil’s rise from $100 per barrel to near $150 in 2008 were heavily laden with market speculation and outright manipulation. These detrimental market forces are in no position to make a run at oil following the recent recession; their coffers aren’t filled with profits from real estate and stock market gains, and there simply isn’t the availability of credit capital to employ substantial leverage.

While this doesn’t mean that oil’s value won’t climb further, it does mean that the elements necessary to drive oil’s price beyond that which basic supply and demand influences can moderate are not only not present, but are effectively irrelevant for the foreseeable future; which is good news for the consumer and the economy. Consumers weren’t nearly as sensitive to oil’s price movement three years ago as they are today and it took almost two years of expanding prices before consumer demand began to wane. While still burdened by unemployment, low real estate prices and a shift in savings and consumption patterns, consumers are far more cautious today and will adjust demand more quickly than in 2006-2008.

When consumers finally shifted consumption patterns in 2008, oil’s price collapsed, leaving speculators and market manipulators with dire consequences, but it did so after substantial damage was inflicted on the economy. Not only have consumers begun to shift demand for fuel much earlier than several years ago, but the US dollar has stabilized and appears to be poised to make meaningful gains as interest rates return to more appropriate levels later this year and in 2011. A stronger dollar shifts the price of oil downward, and when combined with demand decreases by consumers, should moderate oil’s rise in price and avoid exaggerating oil’s impact on our recovering economy.


THE ECONOMY - Luxury Retailing Gains Not Surprising… if you know Thorstein Veblen

Higher-than-expected retail sales and unchanged inventory levels were reported early Friday morning; providing a boost to equity markets and showing greater strength than most had expected. February retail sales figures increased by 0.3% in spite of the winter storms expected to have kept many consumers in their homes and away from retail outlets. Analysts had anticipated a 2.1% decline in reaction to the worse-than-expected February weather trends and high unemployment levels, but once again, the US consumer showed their resiliency. At the same time, inventory levels remained virtually unchanged, rather than experiencing an expected increase.

Throughout the recent recession, economists and others debated whether or not the US consumer would be in a position to help lead the economy back towards recovery. The consensus has been that consumers would be too overcome by high unemployment, a transition to a net savings rate of close to 6%, and depressed housing prices to be in a position to improve the retail markets. All but the most optimistic analysts and economists supposed that consumers would break from a pattern on which we’ve come to depend by their continued avoidance of retailers even after the markets began to show signs of improvement. Each time retail sales reports have exceeded expectations in the last year, pundits have explained the increases as mere anomalies; it’s now become increasingly difficult to do so. In spite of bad weather, labor market difficulties, credit concerns and low inventory levels, consumers continue to make their presence known and the economic benefits are significant.

Manufacturers, both at home and abroad, have increased production to replenish depleted inventories, and the resultant improvement in GDP helped buoy the markets and calm fears. Despite pessimist’s concerns that increased production would equate to increased inventories, we’ve now observed that inventory levels remain low and expect production levels will need to expand yet further.

That’s good news for the economy and even better news for the nation’s unemployed. Though most manufacturing jobs have been exported to other countries, a sufficient number remain to make a meaningful difference. In addition, the domestic labor force required to support distribution represents a substantial number of job opportunities in transportation, administration, retailing, finance and advertizing. While it may not be sufficient to return our economy to full employment, it is certainly enough to improve employment figures by 1-2%.

High-end retailers across the country are seeing improvements in almost every measurable category. Sales volumes, transactions, in-store traffic, and margins have improved across the board, but more so for retailers such as Nordstrom’s and Neiman Marcus than discounters WalMart and Costco. Improved sales of luxury goods appears counter-intuitive when viewed in relation to the nation’s ongoing employment problems, increased savings rate, and limited gains in personal income, but sales at luxury retailers have made meaningful gains, many now with three and four month improvement patterns, while sales at discounters remain flat.

The rise in high-end retailing certainly isn’t due to improved employment or increasing real estate values, but may be indicative of an affect described by the 19th century economist Thorstein Veblen in his 1899 publication, The Theory of the Leisure Class. Veblen proffered that consumers at all levels will choose to purchase goods above that which may be prudent in an effort to increase utility and maximize satisfaction. Some do so to connect themselves to a higher level of society; others simply find greater enjoyment and sense of self-worth through the consumption of luxury goods.

These goods, referred to as “Veblen goods” have been at the heart of virtually every economic recovery of the 20th, and now 21st, centuries; prior to which time wide spread availability of higher end consumer goods was limited. Even though luxury goods are among the first to suffer sales declines when the economy tightens, they’re also among the first to rebound. Consumers simply demand them; regardless of how prudent such purchases may be.

Retail sales increases, particularly in respect to luxury goods has become one of the most certain signs that economic recovery is progressing. It has become an even more accurate barometer than consumer confidence indicators.

Many suggested that this recovery would be different than those of the past, that things were “different this time”, and have offered explanations for why the consumer couldn’t be expected to make any significant contribution to a rebound. We appear to be seeing, once again, that things are rarely different than at times in the past, and that supposing they will be may only lead to greater levels of difficulty for those unprepared to accept the path dependant nature of economic events.


THE TAKEAWAY –Gold Bugs Looking for Profits as Prices Decline

- The potential for meaningful financial and healthcare legislation to make its way through the Congress continues to fade. This may be one of those times when a plan driven by compromise is less attractive that no plan at all.

- After having lost over $100 per ounce in the last two months, the gold markets appear to remain top heavy and are likely to see further weakness. Not coincidentally, advertizing activity from purveyors of the precious metal have increased once again and the public is receiving messages of economic doom and gloom in an effort for these firms to sell as much of the commodity as possible while price levels remain above $1,000 an ounce. Don’t fall prey to inflation fears by Gold Bugs and others looking to off load their holdings while prices are still high.

- Consumers are likely to adjust energy demands more quickly than several years ago in the face of higher oil prices and a still-weak economy. Make sure you’re one of those that pay attention to the potentially damaging affect increased oil prices can have on our economy and take appropriate action. We’ll all be better off for it.



Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC

Beleive It or Not, We're All Liberals Now

Richard E. Haskell, Sr.


March 8, 2010 Edition, Volume IV

Inside Signature Update

- The Market – Believe It or Not, We’re All Liberals Now
- The Economy – Difficult Times for the Postal Service
- The Takeaway – Insurers in the Spotlight


THE MARKET – Believe It or Not, We’re All Liberals Now

The DOW closed up sharply Friday afternoon after posting gains of almost 250 points for the week. Better housing, employment and retail sales figures added to an active M&A (mergers and acquisitions) market, as well as more solid plans for a return to solvency for Greece. Oil and gold closed higher on the day ($1,138 and $81.50 respectively) based on increased US demand and a stabilizing, though weak, Euro. The DOW is now back to within 200 points of its near-term high of 10,767 and many analysts believe the index is poised to make a run at the 11,000 mark.

It’s a relief to enjoy a relatively calm and upward trending market at the moment. The VIX (volatility index) is at a near-term low reflective of the current calm, but it won’t likely stay this way for too long. So while we’re here, rather than delve into the market’s technical details or proclaim its fundamental virtues, I thought this might be a good opportunity to discuss the terms market liberalism and free market capitalism; terms that are not all that much different from each other and not at all what most believe.

In the US, most accept the label “liberal” to represent association with social liberalism and ideals representing the left end of the traditional political spectrum. It’s what conservatives like to call Democrats when they want to contrast their points of view. It’s also a label the Democratic Party has sought to shed as party leaders have worked to rebrand Democrats as “progressives”.

This is quite the opposite of what the term represents in economics and how it is used in political circles outside of the US. Since the 18th Century, the term “liberal” has represented those supportive of free and open markets, a social structure free from government or monarchal interference, or a political structure that allowed everyone open access. The terms “labor”, “welfare” and “socialism” have been more likely to be connected to left-of-center political groups in other polities. The fact is the vast majority of Americans, almost regardless of political affiliation, are considered “liberals” in the larger economic, political and social sense of the term. We’re committed to free and open economic, social and political markets, whether we all realize it or not.

In this context, a free market is a liberal market, and represents an economy in which open markets are encouraged and where most public services are the purview of the federal, state or local governments. Sound familiar? It should, we live in an economy and polity governed by such a structure. We also live in a market based on capitalism, and while most suppose the terms capitalist and liberal are contradictory terms, they are not. Moreover, they’re complimentary at the core and, right or wrong, both have come to be associated with democracy the world over.

Capitalism is the economic state in which those with property rights have the opportunity to invest resources in pursuit of productivity gains and returns on their investments, without the expectation of undue government competition or intrusion. Anyone who ever expects to earn interest on savings, invest in a retirement plan, thinks of having their own business and work for themselves, or even expects to receive the benefit of their own labor is, dare I say it, a capitalist; and a liberal. Capitalists recognize that economic growth and development are best cultivated in an open market structure where opportunity exists for each economic actor.

In this regard, property rights includes real property, but also extend to anything able to be used for the sake of production; including various types of intellectual, intangible and physical property, as well as the value of one’s own labor.

Many economists have come to believe that progression towards a liberal, or open, democracy is inevitable for virtually all developing economies and expect that some form of capitalism likely accompanies the trend. While we’ve seen some evidence that this form of political and economic development does occur, we’ve also seen numerous examples of meaningful economic development where capitalism has not been accompanied by democracy. It may be that regardless of how attractive capitalism or democracy are to a developing nation’s transformative leaders, other long-standing economic, political and social institutions are all but impossible to counteract.

In the US, even the most socially and politically “progressive” among us, including those who would shudder at being considered capitalists are in fact, capitalists. Likewise, many conservatives around us, including those who decry liberalism via various forms of popular media and hang their reputations on their conservative views, are committed economic, political and social liberals in the truest sense of the word.

So here we are a nation in which the most conservative among us are liberals and the most socially liberal are capitalists. All of a sudden the unpredictability of the stock markets, the vagaries of corporate and municipal finance and volatility of the commodity markets seem a lot less daunting and complex, don’t they?



THE ECONOMY - Difficult Times for the Postal Service

The US Postal Service, long a symbol of consistency and commitment in US culture, is once again at a cross roads, and this time the stakes are higher than ever. In an age in which hundreds of millions of emails and text messages have replaced traditional letters, and overnight carriers UPS and FedEx continue to employ low cost and innovative solutions to deliver documents and packages in a fraction of the time and resource of only 5-10 years ago, the US Postal Service is struggling to remain relevant.

The postal service, now a business-like, quasi-government agency is projected to lose $7 billion this year on its way to a cumulative loss of $238 billion over ten years. Recent rate hikes have only served to decrease operating income as higher postal costs and an ailing economy have repressed postal transactions so deeply that the service is finally looking at cutting delivery costs by excluding Saturday deliveries. This is certainly too little and may quite possibly be too late.

Daily mail delivery became the norm as transaction costs were lower (labor, benefits, fuel) and competition was virtually non-existent. Rather than being a necessity for households, it’s a luxury to which we’ve became accustomed; even if only for a sense of daily rhythm. With so many of the functions formerly assigned to the postal system now being handled electronically (paying bills, writing letters, delivering advertizing), few are able to make the argument that daily mail delivery is a luxury we can’t afford to do without. But there’s a problem with scaling back delivery at this particular time; and that is the job market.

It’s likely that the average American household would do just as well with three postal delivery days a week as it now does with six; as households now collect their mail less frequently than in years past and many allow mail to pile up until the weekend before being opened. Business and government offices may be a different story, but many of these now operate on a four-day work week, with Saturday business delivery already unavailable in most areas. Though reducing household delivery by half (three days versus six) would cut postal service operating expenses by over $10 billion a year and return the service to profitability, it would also cut some 90,000 direct employees and as many as another 120,000 indirect jobs, as the ripple spreads through sub-contractors and service providers. Our highly political and still-brittle economy isn’t in a position to deal with the issue right now.

However, if we chose to repurpose the newly available workforce into jobs in education, technology, energy and infrastructure development, the costs to the economy would remain constant, but the potential additional economic output could be enormous. Such an effort could not be affected overnight; the phasing out certain postal services and the efficient and effective ramping up of other educational and industrial structure takes several years; and that presumes complete cooperation from some of the most powerful labor unions in the country. Sadly, it’s not at all likely.

The only benefit of supporting jobs related to a bloated postal industry is the income of the employees and tangential service providers, but what if the resources were able to be re-tasked to those parts of our economy offering long-term growth and development? We can only imagine the benefits; unfortunately we can also imagine the near-term difficulties the transformation would create; the political maneuvering, the fiscal damage to thousands of households in transition and the prolonged weakness it would add to the nation’s real estate market.

In the February 19, 2010 issue of Signature Update we committed to discussing potential solutions to some of the difficulties facing our economy, and stated that they would not be easy, would require sacrifice, and could only be carried out by courageous and innovative leadership. This is one of those solutions.

Necessary though they may sometimes be, labor transformations are not short-term events. Most take at least several years before economic advantages can be realized. Perhaps the opportunity created by the postal service’s difficulties can be capitalized for the good of the country; the taxpayer is already set to bear the cost, we may as well direct it to a more productive purpose.



THE TAKEAWAY – Insurers in the Spotlight


- President Obama unleashed a surprisingly aggressive attack against insurers this morning (Monday) as he continued his push for healthcare reform. It showed a renewed commitment to the effort and may once again have an adverse affect on share values of insurers and healthcare related firms.

- AIG’s announced sale of its Alico unit (AIG’s international life insurer) to MetLife and AIG–Asia unit to Prudential PLC takes it closer to being able to pay its $180 billion bailout loan provided by the US taxpayer, but there are no signs that the federal government intends to sell its stake in AIG any time soon. The move boosted both AIG and MetLife’s value to shareholders in the short run; the real question is what comes next?

- Just as Greece seems to be making credible strides to shore up its sovereign debt crisis, Portugal fell under greater scrutiny by Moody’s Investor Services. Moody's warned that the debt and deposit ratings of Portuguese banks are at risk not just from a potential downgrade of the sovereign rating, but also from "an assessment of the government's decreasing ability and, potentially, willingness to support the country's banking system." As a result, the Euro’s remains weak and the US dollar stronger; if only on a relative basis.



Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC

Investments in Education as a Stimulus for Long-Term Economic Growth and Development

February 25, 2010 Edition, Volume IV

Inside Signature Update

- The Market – Pay Attention to Earnings
- The Economy – Investments in Education Stimulate Growth
- The Takeaway – Obama’s Surprising Support of Annuities


THE MARKET – Pay Attention to Earnings

For those who paid attention to Thursday’s equities market it was a wild ride and a tough day. The DOW opened sharply lower, down almost 190 points within the first hour of trading, before climbing back to close at 10,321, or down only 53 points. The combination of a weak employment report and an eleven point decline in consumer confidence was enough to send Bears to the forefront and reign in even the strongest of Bulls.

Here’s the irony: with most publically held corporations having reported 4th quarter and full year 2009 earnings, some 80% of them were not only profitable, but exceeded expectations. This supports current price levels and opens the door for higher stock prices in the future as 2010 earnings estimates suggest equity values 15-20% higher.

The S&P 500 aggregated forward earnings estimates of roughly $90 and a PE multiple (price/earnings) of 15 would suggest an S&P market valuation by year end 2010 of 1350 versus today’s closing value of 1,103. That represents an increase of 22.4%, in line with our 2010 expectations.


THE ECONOMY - Investments in Education Stimulate Growth

As many in our economy search for new standards against which we can measure future performance, we begin to look for ways to improve our current condition. Just as we discussed in the March 29, 2009 edition of Signature Update, When Markets Reset, our economy has a different look and feel today than it has in decades past, and the change will be reflected in long-term consumption and investment patterns. We also have an opportunity to impact the future of our nation as a leader in global economic and political policy and power; indeed, this is exactly why many voted for the sitting U.S. President, believing or “hoping” Mr. Obama to be a transformative leader. Whether he is or isn’t remains to be seen, but what is certain is that his political power alone can’t alter the trajectory of the nation. For that to happen, our state and national leaders will need to do what is seemingly most difficult for them; to put aside party differences, expect sacrifices to be made and to ask for more cooperation from businesses and households than at any time since WWII.

Over the past forty years, our economy has shifted from one strong on engineering and manufacturing to one lead by the financial markets. Much of our manufacturing capacity, and the jobs that went along with it, has been exported to the lower cost environments of developing countries. The expectation was that we would replace these jobs with higher paying opportunities in technology, medical sciences, and finance, and indeed we have, but we’ve also experienced an unforeseen trend which has begun to shift our economy and widen the income gap separating our households.

At the same time that foreign workers have benefited by fulfilling US manufacturing demand by offering lower labor costs, too many US workers have chosen to limit their educational opportunities, have unrealistic lifestyle expectations, and are only prepared to work at low paying jobs. The developing economies in which manufacturing has blossomed will one day demand labor prices at levels that will make it affordable to bring the jobs back to the US market, but we may not have a domestic labor force prepared to perform the necessary work when the time comes, and we risk the possibility that US manufacturing may never recover.

In addition to adding millions of higher paying jobs, we’ve also created a disproportionately large number of low paying jobs in food services, convenience, retail, and leisure. Some suggest these are the product of higher levels of discretionary income in households benefited by better paying employment and the increase in the incidence of two-income households. Others recognize it as being driven by a growing class of workers unprepared to make meaningful contributions to technology and industry and only able to fill less challenging positions.

During the very period of time in which we might have become better able to dominate the world’s technological, scientific and social innovations we’ve become less relevant when compared to other developed nations. In the name of social progress, we’ve been disadvantaged by too many policies and influences designed for social and financial redistribution and equalization. The unfortunate byproduct of these efforts has been to decrease the average level of preparation of our workers. Though we’ve continued to innovate and drive much of the progress evidenced in the global technology, scientific and manufacturing markets, we’ve fallen behind without most of our citizens understanding why. Sadly, we’ve recently come to realize that we’ve also caused some of the difficulties in the global financial markets.

We can change the negative trend, improve the lives of our citizenry, and stimulate long-term growth and economic development, but it’s going to take effort, inconvenience and enormous political and investment capital to do so. President Clinton often spoke of “investments” while working to gain public acceptance for tax increases. Similarly, the Obama administration has used some of the same language to gain popular support for stimulus proposals. In each case we can argue that high percentages of the funds disbursed following these efforts have been directed towards transfer payments and social programs. At the same time, meaningful amounts have also gone into job-creating infrastructure development and some has actually made its way into “investment”, or been used not just to create short-term jobs or support those dependant on social programs, but has been employed in such a way as to create surplus through production and innovation.

Most don’t look at funds directed toward education in this light, but when applied in such a way as to foster higher levels of competency and to raise educational standards, this sort of spending is “investment” of the most important kind. In 1981 Professor Richard A. Easterlin of USC published an article titled Why Isn’t The Whole World Developed?, in which he drew on research spanning centuries and continents. The data supported Easterlin’s hypothesis that economic development follows educational improvement. Those societies that supported mass education in the early 19th centuries became economic leaders of the 20th century (Germany, France, Great Britain, United States, etc.), while those that adopted broader educational initiatives later in their histories also experienced economic growth and development later (Romania, Yugoslavia, Russia, India, Brazil, China, Mexico, Philippines, Argentina, etc.). Those that continued to resist making educational investments remain among the poorest nations on earth, with unacceptably low standards of living (Nigeria, Ethiopia, Burma, North Korea, Haiti, etc.).

Similar comparisons and conclusions are now being drawn by economic researchers regarding state-to-state differences in educational investment and economic growth and development within the US. The research unequivocally shows that those regions that commit to higher levels of educational investment gain long-term economic advantages in engineering, technology and medical and environmental sciences over those that don’t. If we want to improve the future of our regional and national economy it is incumbent on legislators to increase funding, policy makers to expect more from educators, teachers to require more from students, and parents and their children to discipline themselves and take advantage of their opportunities rather than squander them, as do so many.

Now I’m biased in this regard. My wife and I both enjoy the benefits of having graduated from a major university and I’ve gone on to participate in graduate programs at yet others. My children have followed suit and are participants in higher education at varying levels. They haven’t been perfect students, but they’ve been active participants. They’ve worked hard, studied long, put up with a level of involvement and expectation from their parents that they certainly didn’t appreciate at the time; they’ve offered respect to their instructors, completed assignments, and prospered as a result. It wasn’t easy and it certainly hasn’t been without sacrifice or expensive, but it’s been among the most important things we ever have, or will do.

Our schools should be palaces of learning, our teachers among the best paid in our society, our expectations should be high and our outcomes extraordinary. But they aren’t, and until we deal with the reasons why, we’re not likely to gain the advantages we so desperately need. Likewise, an excellent college education should be free for all those willing to take advantage of it; those willing to perform and commit to using their education to return value back to our society.

This is a difficult time to discuss increasing investment in education. State budgets are under extraordinary pressure due to the recession and legislators are struggling to maintain basic services and commitments. But it’s more than that; legislators, tax payers, involved parents and many excellent educators are tired of the disappointment that often comes through compromise, through pressure to put up with unacceptable student behaviors, and requirements imposed that end up diluting the value and values of our educational system.

Our schools, teachers, children and futures deserve to be subject to higher expectations and must be allowed to benefit through innovation. One such educational advancement has come through the many charter schools emerging across the country. As a whole, they educate to a higher standard and at a lower cost. They prepare students such that years are able to be shaved off the time needed to gain a similar education in more traditional settings.

My youngest child has attended her junior and senior years of high school in a charter school setting. She enrolled in a school literally embedded in the local community college and completed her freshman and sophomore years of college concurrent with her last two years of high school. The requirement to participate in this charter school is committing to the curriculum and accepting that the school offers less in the way of sports, social activities and liberal arts programs; rather than being required to meet a high GPA level or bear an increased cost. After all, charter schools are public schools. The additional cost to our family over the cost of those years at the local high school was simply the added cost of transportation to a school 10 miles away; which we more than made up for in decreased costs of unnecessary programs and activities.

While most states struggle to support the net cost of higher education (tuition income and grants less total expenses) our daughter’s charter school produces high school graduates at a lower cost than does the local high school and eliminates the need for two entire years of post secondary education – as well as the added cost burden of those years.

Often times teacher’s unions and social advocacy groups discourage this type of innovation in an effort to protect their power and influence. In the end, it is short-sighted and has lead to higher costs and lower output.

The state and local leaders willing to increase funding for education, increase expectations for teachers and students and open the way for technological and economic development will find themselves benefiting from long-term growth and development and have a decided competitive advantage over those that don’t. Likewise, the added benefit to the nation is enough to expect increased federal funding for buildings, classrooms, teachers and programs sufficient to offset that which the states can’t reasonably provide on their own.

This is a time for state and national legislators to become courageous and adopt an expanded vision of what can and ought to be, but it will only work if performance standards are rigorously maintained at every level, including that of the student.


THE TAKEAWAY – Obama’s Surprising Support of Annuities

- Current market volatility may remain higher than normal as unemployment concerns persist and the national and global political climate retakes center stage over earnings reports.

- Bond values, little changed since last week’s announcement by the Fed, are likely to weaken through the year as we get closer to inevitable increases in interest rates.

- President Obama’s surprising support of annuities as value added investments in qualified retirement plans will put a spotlight on these insurance based instruments and may make those that are too complex or very costly easier to understand and more competitive.



Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC