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
Monday, March 22, 2010
Monday, March 15, 2010
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
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
Tuesday, March 9, 2010
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
Monday, March 8, 2010
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
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
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