Recession Looming?

We've got cratering consumer confidence, slowing corporate earnings growth, a huge rally in bonds, banks disinclined to lend, and a generally bad set of circumstances for financials and retailers. The dollar has hit new lows against most major currencies (causing possible commodities increases and therefore inflation). Many of these issues are already priced in to stocks. The biggest risk could be investors seeing that their balances dropped more than 5% and selling, which would continue the drop in the market that started a month ago (although we are well off our lows).

I recommend stock investors consider sticking with 20-30% international and the remainder in large cap US multinationals. My prior recommendations [WMT (+9.5%), JNJ (+12.4%), BUD (+8.2%), AIG (-11.8%), PEP (+14.0%)] averaged a return of 6.46%, which outperformed the S&P 500 (2.61%) by 3.85%. I recommend at this time WMT, JNJ, BCS, BA, DIS, AA, AIB.

Overall record since I began posting recommendations on this blog on 7/31/07 has been +6.89%, compared to the S&P 500's +0.97%. For long positions in stocks I try to average outperformance of 1.5% per quarter, so I am happy with this return over 4 months.

Send me an email if you’d like at Mark.Hanna79@gmail.com. Many happy returns.

Bear's Woods

Per my previous post (a month ago) we have been in a bear market. As an interesting note on consumer confidence, it came in today at 105 (down from 111.9), and anything over 100 is positive (not to mention that the street's expectation was 104, which was exceeded). I believe that we are not out of the bear's woods yet, however I will be bold and call the bottom (in hindsight) as the intraday low on August 16th of (S&P 500) 1,370.60. At that point the market had sold off a little more than 10% from its high on July 16th. Overall I recommend the philosophy at this point of "when everyone is fearful, it is time to be greedy".

My prior recommendations [WMT (-5%), JNJ (+1.9%), BAC (+4.3%)] averaged a return of plus 0.4%, which beat the S&P 500 (-1.6%) by about 2%. So what? Well if the market averages [insert whatever long run average market return you believe in, most people use 10% to 12%], that average includes these types of markets. Beating by 2% in a month is a huge advantage for low-risk investors.

OK SO WHAT DO YOU LIKE NOW? REITERATE: WMT and JNJ. BAC will do great over the next 60 months, but I am not confident they will outperform over the next month. I still like the same play book 1) Growth at a reasonable price 2) Large Cap 3) With a dividend (or at least some indication management is allocating capital wisely). Think WMT, JNJ, BUD, AIG, PEP.

8 Months

Well it has been 8 months since my last post (math check: 7+12-11=8 whee). The stock market has rallied 4.6% over those 8 months. Doesn't sound like much. In actuality it is not that much, as earnings have increased well over this 5% gain, so stocks are cheaper.

That said, we are now in a bear market. We've just finished two down months for the indices (June and July) and are seeing chicken littleitis regarding financials (who doesn't like BAC - Bank of America at 9.5 times earnings and a 5.4% dividend yield???). I watched a little CNBC (dangerous) tonight and EVERY show featured EVERY person stating to stay away from financials and "don't bottom fish here".

I've been occupying some of my time (outside of moving from West TN to Knoxville, the family, the job, and everything else I do) looking at stocks and, more recently, stock options. To back up my case on a bear market we see 1) Elevated Volatility 2) Huge run up in short sales of stocks on the NYSE and 3) very cheap call options with expensive put options (IE the volatility index's run up has to do with puts becoming more expensive as everyone is buying downside protection). "Sell in May and walk away" is it?

OK SO WHAT DO YOU LIKE? I like 1) Growth at a reasonable price (some call this value some call this growth some blend, bottom line is earnings growth at a good discount to underlying value) 2) Large Caps 3) Those that fit #1 and #2 and pay a nice growing dividend. Think WMT, JNJ, BAC as the most obvious names.

Take care. Drop me a line if you'd like at Mark.Hanna79@gmail.com

Frist Drops out of Presidential Race

It was reported today that Bill Frist has announced that he will not likely be seeking the presidency in 2008. He wants a "sabbatical from public life" and to spend some time on health-care again. It has been noted that this leaves the South without a Republican candidate that is considered centrist for this race.

Economic Indicators

The Wall Street Journal today reported that the number of existing homes sold in October increased 0.5% month over month (+6.4% in West, UNCH in Midwest, -1.2% South, and -2.9% Northeast). These results were higher than the market expected. The median price of an existing home showed no change month over month, at $221,000 but was down $8,000 (-3.5%) year over year, the largest ever annual drop and record third monthly consecutive decrease.

Consumer confidence was expected to slightly rise to 105.8 from October's 105.1 but instead it has dropped to 102.9. A number over 100 is considered good.

I expect that my prediction on 11/11 ("Money has been flowing in the market in anticipation of a Q4 rally, which has driven the market up double digits. I think that if this rally does not materialize we could easily see a disappointing reaction") is beginning to pan out. I'd predict at this point Q4 will be fairly close to unchanged overall (if that is correct, we have about 4% to give back from large caps and 7% from small caps), and Q1 07 will be a downer. As pretty much always, I am bullish on the long-term outlook for the market, but today I am fairly bearish on the near-term.

To those who don't know my feelings on it - stay invested. It never really works to try to jump in and out of the market. Just consider these things and think about positioning your portfolio in a more conservative manner -- Focus more on mega cap companies with strong fundamentals. Make sure you have some (but not too much) foreign exposure for diversification.

Dollar Drops

http://seekingalpha.com/article/21258

Well the dollar is starting to matter.
We talked about this back in August and it
has always cast a shadow on our trading as I've never been able to get all
gung-ho while ignoring this pressing issue.
While we were all out having
turkey, the rest of the world took a long, hard look at our balance sheets and
downgraded us.
As our debt is looking riskier to foreigners, the rumors
that the Fed will LOWER rates to boost a slowing economy make no
sense at all to buyers of international paper (or to anyone who actually
understands economics).
So let's be very, very careful out there as things
may LOOK good over here but to other countries we look a lot more like this:

More comments on this later

Democrats Target Wealth Gap

I will post my thoughts on this article soon:


Rebalancing Act Democrats Target Wealth Gap And Hope Not to Hit Economy
Divide Between Rich and Poor Continues to Widen; Spurs 'Robin Hood' Plans
Can Growth Benefit Workers? November 21, 2006; Page A1
By almost every measure, the gap between winners and losers in the American economy has widened over the past 20 years. In this month's election, anxiety about that gap was not far behind voter anger over Iraq and congressional corruption in driving Democrats to victory. "We will make our economy fairer" vowed House Democrats, in a campaign manifesto.
Now they're in a position to try, raising a big question: What can Democrats do to resist inequality in a way that doesn't choke off economic growth? Can government slice the economic apple more evenly without shrinking it?
Today's inequality reflects a confluence of forces. Technology is increasing employers' appetite for some skilled workers, while diminishing it for assembly-line workers in auto and textile factories. Imports and outsourcing are doing the same. Schools aren't graduating enough of the workers in short supply, such as engineers. Immigration is contributing to a glut of others, visible wherever day laborers gather hoping for work. Unions are atrophying. Corporate boards, hedge funds and sports teams are increasingly willing to write super-sized paychecks to a chosen few.
At the extremes, some politicians (not all of them Democrats) believe the benefits of a globalizing, high-tech economy are outweighed by the costs to U.S. workers. They would build a fence around the U.S. to reduce immigration or erect tariff barriers to imports. Even at the Democratic middle -- where the virtues of technology and globalization are prized -- proposals to reduce inequality range widely. They include interceding in the market to raise pay at the bottom or limit it at the top, pushing "Robin Hood" take-from-the-rich tax policies, improving shock absorbers that protect workers when their employers crash, extending health and retirement plans to workers without them and spending more to promote education from pre-K through college.
Meddling With the Market
High on Democrats' to-do list is lifting the federal minimum wage. It's been steady at $5.15 an hour since 1997, while consumer prices have risen 25%. Although many economists warn a higher minimum wage means fewer jobs, the 1990s suggest that boosting the minimum wage can boost incomes of those at the bottom. But its potential to shrink the gap between the wealthiest and poorest wage-earners is limited, especially when wages at the top are soaring far away from the middle and bottom.
Limiting pay at the top has proven tough. A 1993 law that discouraged tax deductions for executive salaries above $1 million is widely regarded as a bust. "Executives responded by rewarding themselves with millions of dollars worth of stock options" instead of big salaries, lament former Clinton aide Bruce Reed and Chicago Rep. Rahm Emanuel, a key strategist in the Democrats' win, in their pre-election book calling for "a new social contract for the 21st century." They go on, "This time we should approach the problem from the other direction and require companies that provide stock options to their executives to provide stock options to every worker."
That's unlikely to become law. But Barney Frank, the Massachusetts Democrat in line to chair the House Financial Services Committee, vows to push legislation that would force companies to provide more and clearer details of CEO pay, devise policies to recapture incentive pay if earnings are later restated, and require shareholder approval of "golden parachute" payments to dismissed executives. Mr. Frank says he plans hearings into a "fundamental" economic question: "How do you do a better job of sharing overall economic growth with the average worker?"
Few Democrats would block employers from laying off workers or closing factories, as is often done in Europe. But several newly elected Democrats, particularly from the beleaguered Midwest, vow to slow the flood of imports and rethink the pacts that President Bush has been negotiating to lower trade barriers.
There also is strong support among Democrats for strengthening American labor unions to try to tilt the balance in the labor market more toward workers. A bill co-sponsored by 215 House members and 43 senators, would, among other things, require employers to recognize a union after a majority of workers sign cards asking for representation instead of secret-ballot votes.
Robin Hood
A popular alternative among Democrats is to champion the market -- that is, allow it to direct people and money to best use -- and then tax the rich to give more to the poor. Enlarging the earned-income tax credit, viewed by many economists as a smart alternative to a higher minimum wage, is an option likely to figure in Democratic tax deliberations. The credit offers up to $4,536 to a family with two or more children to offset payroll taxes that the working poor pay. And it offers a cash bonus if the credit exceeds taxes paid, rewarding low-wage workers without raising employers' costs.
But most of the focus is on taking more from the top. Many Democrats would let at least some of Mr. Bush's income-tax cuts expire in 2010 or roll them back. Many favor preserving the estate tax, which Republicans target for abolition. New House Speaker Nancy Pelosi has vowed to restore a 1990s rule requiring new spending to be offset by spending cuts or tax increases; upper-income taxpayers are the sure target.
The Senate Finance Committee, with the blessing of both parties' leaders, is circulating a list of ways to shrink the "tax gap" between taxes owed and taxes actually paid. Most are aimed at upper-income taxpayers, such as requiring stock brokers to report not only the price a client got for shares, but also the original purchase price paid.
Boosting taxes on upper-income Americans would reduce disparities and provide revenues for other attacks on inequality. Raising the top two tax rates, now 33% and 35%, by a single percentage point would yield $90 billion over five years, the Congressional Budget Office estimates.
Another favorite Democratic target is the lower tax rate -- a maximum of 15% -- on capital gains and dividends. The administration says the lower rates have strengthened the stock market and the economy. Some Democrats say they're unfair. "We must end the Republicans' war on work, which taxes a millionaire at a lower rate for his stock trades than it taxes the wages his secretary earns for placing the call to his broker," wrote Rep. Emanuel and Mr. Reed. Also under discussion, often in conversations about ways to shore up Social Security, is increasing the ceiling -- now set at $94,200 -- on wages subject to the Social Security payroll tax.
Republicans as prominent as Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke recently have warned in speeches of risks posed by widening inequality. But many conservatives fear taxing the rich in response would reduce incentives for innovation, entrepreneurship and education -- and thus reduce economic growth to the detriment of all. Their counsel: Try to lift incomes of the poor and middle class, and don't worry if the rich do even better.
Democrats argue that the 1990s proved that raising taxes on upper-income Americans can produce lots of revenue and coincide with a very strong economy. Republicans counter that the 2000s show tax cuts propel the economy and can coincide with surging tax revenues. Both arguments exaggerate the ability to isolate tax rates from other economic crosswinds. But the fundamental disagreement is over the extent to which higher taxes discourage work, savings and investment. "The market is not so good at spreading the gains. We need an activist government that pursues broad-based growth," says Mr. Reed.
Shock Absorbers
One direct response to workers' anxiety is expanded government programs to cushion the fall of those who lose jobs in today's rapidly changing economy. "Better preparation before adverse events happen and more...assistance after bad events occur" would both help workers and "diminish political demands for growth-reducing policies, such as protectionism," says Peter Orszag, who heads the Hamilton Project, a think tank spawned by former Treasury Secretary Robert Rubin to find way to promote "broad-based economic growth" and "economic security."
Targeted federal programs, created to lure congressional votes for free-trade pacts, now reach few people. There's a tax credit to help those who lose jobs due to imports buy health insurance. And there's wage-loss insurance, which offers cash to eligible workers dislocated by imports to compensate for taking lower-paying jobs. Inequality foes would greatly expand such programs.
Lori Kletzer of the University of California at Santa Cruz and Howard Rosen of the Peterson Institute for International Economics in Washington, for instance, would offer eligible dislocated workers up to half the difference between weekly earnings at their old and new jobs, up to $10,000 a year. This isn't cheap: They put the price tag at between $2.6 billion and $4.3 billion a year, financed through general tax revenues or an expanded payroll tax.
Universal Coverage
An alternative, albeit expensive, is to close the gap between those with health insurance and a retirement-savings plan (on top of Social Security) and those without. About 25% of people in households with incomes below $25,000 lack any health insurance, even government provided. Among the over-$75,000 crowd, only 8.5% are without insurance. About 45% of full-time workers on private payrolls aren't offered private retirement savings plans of any sort at work.
Gene Sperling, a former Clinton aide who published a 300-page "economic strategy for shared prosperity" last year, preaches to Democrats: "Simply voting yes [on trade pacts] and getting 5,000 more people on Trade Adjustment Assistance is a losing strategy. With control, Democrats can envision a more expansive social compact might make people less fearful about the pace of change and globalization."
Finding a politically palatable and affordable way to make health insurance universally available has been impossible, so far. Mr. Bush has pushed tax credits to help more people buy insurance on their own, and dangled rule changes and low-premium, high-deductible policies to encourage small firms to offer coverage. Although some Democrats still drool over proposals for government health insurance for all, others prefer piecemeal approaches. Among them: Allowing businesses with up to 100 employees tax credits to buy insurance through a government-sponsored pool modeled on the Federal Employee Health Benefit Plan, which gives federal workers a choice of private health insurance plans.
On retirement savings, outside the contentious Social Security debate, Democratic and Republican centrists are inching toward similar proposals, described differently. Mr. Sperling is pushing a "universal 401(k)" to which employees, employers and, in some cases, the government would contribute, a cousin to the private accounts Mr. Bush wanted to carve out of Social Security. Increasingly prominent Democratic Sen. Barack Obama cites it favorably in his new book, "The Audacity of Hope" and Ms. Pelosi backs a similar proposal. It would, in essence, narrow tomorrow's inequality by encouraging Americans to save more in their working years.
Education
Improving education is the feel-good solution, seen across the political spectrum as a way to promote growth and equality simultaneously. "The economy increasingly rewards education and skills," says Edward Lazear, chairman of Mr. Bush's Council of Economic Advisers. "We would not want it any other way. However, inequality in skills and education levels means inequality in income." His fix: Improve public schools for the disadvantaged through the No Child Left Behind Act and foster competition among schools.
Democrats are focused on doing more to help Americans pay for college, especially important since the typical college grad earns 45% more than the typical high-school grad. Ms. Pelosi's platform calls for making up to $12,000 a year in college tuition tax-deductible -- or the equivalent in a $3,000 tax credit -- as well as cutting interest rates on student loans and increasing the maximum Pell Grant for low-income students to $5,100 from $4,050.
A coalition that spans the political spectrum is pushing more government support of Pre-K education. The case: Low-income children are behind when they arrive at kindergarten and never catch up; spending more on them sooner would have a big payoff.
One political problem: Education has a long fuse. It can take a generation to see results.
In the end, government can do only so much, especially given Americans' traditional ambivalence toward big government and European-style social welfare programs. "It's not hard to think of government policies with redistributive aspects," says Mr. Sperling, the former Clinton adviser. "What gets hard is to say: Here's my vision for how the private sector is going to create jobs that lead to a strengthening, not a hollowing out, of the middle class."
Americans want government to protect their current jobs and tell them where their next job -- and their children's jobs -- will come from. "But government is not good at that," Mr. Sperling says.
• Send comments to capital@wsj.com6 and share your thoughts at the new online Capital Exchange forum7.

URL for this article:http://online.wsj.com/article/SB116407693876929096.html

Nine Ways to Manage Money Effectively

I will post my comments on this article soon.


GETTING GOING By JONATHAN CLEMENTS
Nine Ways to Manage Money Effectively November 19, 2006
You get the idea.
As a columnist, my goal isn't to report the news or to offer up an ever-changing list of experts' investment recommendations. Rather, there are some key financial insights that, I believe, should guide everyone's investing, and I pound away at them week after week.
I have been talking about some of these ideas for years, while others have only recently captured my imagination. Want to manage your money better? Here, I would argue, are nine of the most important financial ideas.
1) Just Say No
To save and invest successfully, nothing is more critical than self-discipline.
That means settling on a mix of stock, bond and money-market funds and then sticking with that mix, no matter how unnerving you find the market's daily turmoil and no matter how tempted you are to buy the latest hot stock.
More important, you also need the ability to delay gratification, so you save a healthy sum on a regular basis.
2) Get Off the Treadmill
You can't spend your way to happiness. But lots of folks try, setting themselves up for a lifetime of hefty credit-card bills and emotional disappointment.
You know the cycle: You see something in the store, you decide you just have to have it, you pony up the bucks and, a few weeks or months later, the purchase is all but forgotten -- and you're hankering after something else.
Academics refer to this as the hedonic treadmill. The lesson? If you want happiness, you won't find it at the shopping mall.
3) We Are the Market
Despite all the talk of beating the market, there's a devastating piece of logic that stands stubbornly in our path.
We can't all beat the market, because collectively we are the market. If somebody beats the market, somebody else must lag behind.
In fact, once investment costs are figured in, there are very few winners and most of us trail the market averages.
4) Their Gain, Your Pain
All this should be a reminder that, like it or not, you have two investment partners: Wall Street and the taxman. The three of you divvy up your investment spoils.
Want to keep more for yourself and pay less to the Street and to the taxman? Your best bet is to clamp down on investment costs and make the most of tax-sheltered retirement accounts.
5) Help Wanted
A decade ago, I would have argued that most investors were capable of investing on their own. I no longer believe that's the case.
It seems most folks don't have the time, interest and emotional fortitude to invest successfully on their own.
But unfortunately, you may not fare much better if you hire a broker or financial planner. Many advisers charge too much and have had scant formal financial education, so you really need to pick your adviser with extraordinary care.
6) Don't Be Left Behind
When experts argue the case for diversification, they will point out that buying a wide variety of investments can lower risk, because some of these investments will post gains when others are suffering.
The problem: Whenever we get a major financial crisis, diversification -- especially global stock-market diversification -- often proves pretty much useless, because everything plummets at the same time.
Yet I think this misses a key point. Even if, say, U.S. and foreign stocks tend to rise and fall in tandem, there are often startling differences in their annual return. Those who own just one market can end up suffering long periods of lackluster performance.
Moreover, diversification isn't just about tempering short-term swings in your portfolio's value.
You also want to limit the damage done by financial calamities, whether it's political upheaval that shutters a country's financial markets or the sort of devastating market collapse we saw in Japan in the 1990s.
7) Family Matters
Your children are your legacy. They will inherit your money and they will likely adopt your financial values.
Your family is also your greatest asset and your greatest liability. If your children or your parents get into financial trouble, you would likely help out -- and they would likely help you, should you get into difficulty.
It's worth keeping all this in mind. Talk to your elderly parents about their finances. Endeavor to teach your kids about money.
Think about how you manage your own money -- and what the consequences would be for your family, should something go badly wrong.
8) Invest for the Long Term
If you die young, it could be financially devastating for your spouse and children. But don't ignore the other risk: What if you live far longer than you ever imagined?
Many retirees are so concerned about dying young that they rush to claim Social Security early and they refuse to buy lifetime-income annuities. And this is indeed the right strategy if you're convinced that you and your spouse have a short life expectancy, and you want to die a little richer.
But what if you take Social Security early, don't buy the annuity and then live a surprisingly long time? Instead of dying young and rich, you could be very much alive -- and pinching pennies.
9) Last Resort
On days when the financial markets are open, I check the yield on inflation-indexed Treasury bonds every few hours.
As of Friday, for instance, 10-year inflation-indexed Treasurys were yielding 2.3 percentage points above inflation.
To me, inflation-indexed Treasurys are the investment against which all others should be measured. If I buy 10-year inflation-indexed Treasurys, I am guaranteed to beat inflation by 2.3 percentage points a year over the next decade.
Unless I am confident that another investment will outperform this benchmark, I stick with inflation bonds. They are, to me, the investment of last resort.
Jonathan Clements also writes the "Getting Going" column that appears Wednesdays in The Wall Street Journal. Write to him at: jonathan.clements@wsj.com1.

URL for this article:http://online.wsj.com/article/SB116388187938827618.html

Investing for 20-Somethings

There was a good article in the Wall Street Journal yesterday about retirement planning for 20-somethings. Here's a link to the full article. The article makes a few basic points:

• A Fidelity Investments study shows 16% of 20-somethings have no stock exposure
• Many 20's workers have all of their money in "stable-value" funds, which are glorified money-market funds
• You should always max out your employer's matching contribution
• Young people should have the majority of their money in stocks
• Vanguard's Target Retirement 2050 Fund is invested 90% in stocks
• The majority of your money should be in large-cap stocks like the S&P 500 Index
• Consider 10% in small and 10% mid-cap stocks
• Younger people are underserved by investment advisors because of their few assets

My recommendations to you, is that no one should have any retirement savings money in stable-value or money market funds unless you are within 10 years of retirement - and even then the percentage should be small. If you are more conservative, and you are in your 20's then you can consider investing up to 20% of your savings in bond funds - but don't expect to have as much money when you retire if you do.

Keep your eye on your goal - to have enough to retire on when you reach your target age. People who invest their money too conservatively will not have enough to reach that goal.

Flawless Execution

I recommend a book I have recently read titled Flawless Execution by James D. Murphy. It is a fairly easy read (208 pages - no big words) and it would be interesting to anyone who wants to know how to plan, execute, and improve processes (debrief).

Here are some excerpts from the chapter on Future Vision:

Flawless execution begins with a Future Picture. It’s a well-written, clear, high-resolution, and easily communicated big picture of what you want the future to be. Future Picture is a beacon that pulls the team into the designed future. Executing is not enough. You must execute in the spirit of a Future Picture or you will invariably execute against the wrong things.
Entrepreneurs are by default the masters in the art of painting Future Pictures. Why is this? It’s because entrepreneurs sell vision.


Examples of a clear Future Picture:

• Gulf War: "Iraq will be out of Kuwait. Allied casualties will be low. Collateral damage will be minimized (so Iraq can recover quickly). Saddam’s Army will not be a regional power for at least ten years. Oil will flow freely in the region.” Pretty simple. Very direct. Easy to understand, and yet, it’s a Future Picture with resolution and detail sufficient to give his commanders a starting point for the planning process that would lay down the specific strategies necessary to achieve his Future Picture.
• Hess Express: "Make our stores a destination, he said to his managers; give the people in our adjoining neighborhoods the products they want. Give it to them in a self-service environment that’s clean, with a shopping experience that’s quick. And, oh by the way, don’t charge more than the local grocery store but make me a good return on my money."

Rule 1: Focus on the Future
A Future Picture statement opens the door to creativity and outside-the-box thinking at exactly the right moment in the process – before anyone has locked down plans and started the execution phases. It also focuses the commanders on the future. If it doesn’t contribute to the Future Picture, it doesn’t belong on the table.

Rule 2: Key Descriptors: Painting with Colors
1) Financial Position 7) Workforce Characteristics
2) Market Position 8) Brand: Yes or No
3) Business Areas 9) Corporate Culture
4) Innovation 10) Corporate Citizenship
5) Insider Perception 11) Ownership
6) Outsider Perception 12) Incentive Philosophy

Rule 3: Measures of Merit
Measures of merit are the measures of success we attach to each key descriptor. These are the things that have to happen in order to achieve the key descriptors, which in turn, realize our Future Picture. They tell us we’re making progress – that the future is materializing. Measures of merit are absolutes, not comparative, and are written to focus on strategic progress versus any sort of tactical success. They are clear, concise, and easily communicated.