Housing Looks to be Starting a Double Dip

Home prices in the U.S. nosedived in October, with the worst declines coming from areas with high numbers of foreclosures.

US House Prices Decline

The S&P/Case-Shiller 20-City Composite Index for October posted a 1.3% m/m non-seasonally adjusted drop, with home prices about 29% below the mid-2006 peak.

Hulbert's Top Advisors are Bullish for 2011

US Slowing Population Bad for the Economy

Slowing U.S. population growth doesn't help the economy. Based on the experience of Japan, slowing population growth in the U.S. is nothing to celebrate, according to The Economist. After population growth in Japan slowed and eventually turned to decline, income growth slowed with it, the government accumulated a crushing debt and deflation took hold. "Population growth isn't a cure-all, but in the present economic situation it's likely to make the resolution of a range of problems much easier," the magazine noted. The Economist/Free Exchange blog (23 Dec.) , TIME/The Curious Capitalist blog (21 Dec.)

The Economist Article Link

Time Article Link

U.S. Economy

U.S. economy is going great -- except for 9.8% unemployment. A trickle of good economic news has turned into a torrent and things are wonderful, except for the 6 million people who have been out of work for more than six months, according to The Economist. The labor market is the wild card in the recovery, and 9.8% unemployment might be the reason the Federal Reserve isn't moving to withdraw stimulus. "The Fed wants markets to bet on recovery, and since August it has done a pretty decent job convincing them they should," the magazine notes. "But whether that can continue without a substantial improvement in jobs figures in the very near future is far from clear." The Economist/Free Exchange blog (15 Dec.) , Reuters (15 Dec.)

The Econonmist Article Link

Goldman's 2011 Predictions

Nobel Winner Thinks We Are a Long Way From Normal

TARP Needed But Is Nothing To Celebrate

The Troubled Asset Relief Program was necessary and probably cheaper than letting the U.S. crash into a depression, but it is wrong to describe it as a wonderful success that should be celebrated, according to The Economist. The government has become firmly on the hook for the cost of bailing out big companies that get into trouble. "The too-big-to-fail banks are bigger than ever, and the regulatory reform law didn't come close to setting up a framework through which a large, complex, international firm could go down in a period of crisis," the magazine notes. The Economist/Free Exchange blog (01 Dec.) , Los Angeles Times (30 Nov.)

Economist Link

LA Times Link

Housing Update

U.S. Home Prices Show Broad-Based Declines in Q3 2010. U.S. home prices fell back by 2% q/q non-seasonally adjusted and 1.5% y/y in Q3 2010, according to the quarterly S&P/Case-Shiller National Home Price Index; all three home price indexes have shown monthly declines beginning in July and continuing into September.

Focus on the data not the headlines. If you use the headlines to invest you would have experience a crazy roller coast ride in the past week only. Yes we are seeing improvements, but it is going to be a slow lengthy recovery. Greater than normal volatility (swings up and down in the indexes) are expected over the next 12 to 18 months. A focus on the long-term is needed for an investor to prosper.

US Banks Brace for Lossess

U.S. banks brace for losses related to mortgages. Most major banks in the U.S. have repaid their government aid and generally seem to be plugging away, but a threat is emerging in the form of mortgage losses. Amherst Securities Group estimated that losses on nonagency mortgage securities will be more than $700 billion. Meanwhile, investors are demanding that banks buy back mortgages and eat much of the related losses. Barron's (free content) (20 Nov.)

Barron's Article

Interesting Post from Cullen Roche

It is titled Three Things I Think (I Think About the Current Economic Climate). The post focuses on the following:

1) The recession IS over. But WHICH recession?

2) What really caused the equity markets to rally since September?

3) Is this the ultimate hedge?

I agree with a majority of the post. It is my belief that a larger portion of the stock market rally was due to dollar debasement (QE2) than economic improvements. I am not sure how much of an overall sustainable economic improvement we can have with continued high unemployment and a likely double dip in housing. I do agree with his comments about gold acting more like currency. David Eihorn of Greenlight Capital has the same sentiments. Check out the latest Market Watch on PBS.

SeekingAlpha Post Link

Analyst Predicts Shrinking Universe of Banks

Meredith Whitney predicts U.S. banks will close 5,000 branches. As profit shrinks and loan demand falls during the next 18 months, U.S. banks will close 5,000 branches, analyst Meredith Whitney said in a report. "The most regrettable unintended consequence of some of the quickly written regulatory reform, we believe, will be the inevitable 'debanking' of the U.S. financial system," she said. Bloomberg (22 Nov.)

Bloomberg Link

October Core CPI

U.S. core inflation is the lowest ever measured. U.S. core inflation is at its lowest level since the government started collecting consumer-price data in 1957, the Bureau of Labor Statistics said. October was the third consecutive month that core inflation, a benchmark for the price of a basket of consumer goods that excludes energy and food, was zero. CNNMoney.com (17 Nov.) , NYTimes.com/Economix blog (17 Nov.) , Bloomberg (17 Nov.)

Hence the reason the Fed is doing everything they can to create inflation. Their biggest concern is DEFLATION.

Article Link

Housing Foreclosures a System Risk to Banking

Foreclosure crisis might be a systemic risk for banking. The U.S. Treasury Department was "premature" in assuring that the foreclosure crisis presents little systemic risk to the banking system, the Congressional Oversight Panel said in a report. The discovery of inaccurate and fraudulent documents used in foreclosure proceedings calls into question the ownership of millions of properties that aren't in foreclosure, the panel said. "Clear and uncontested property rights are the foundation of the housing market," according to the report. "If these rights fall into question, that foundation could collapse." The Washington Post (16 Nov.) , The New York Times (free registration) (16 Nov.) , Housing Wire (15 Nov.)

Washington Post Article Link

NY Times Article Link

Is The American Dream Lost?

A major of American retirees believe their children and grandchildren will not participate in the "American Dream" and afford retirement. A survey by Protect Seniors.Org (www.ProtectSeniors.org) finds. The survey finds that three quarters of the retirees believe their children and grandchildren will be worse off.

Link to Survey Report

Housing - Double Dipping

According to Zillow.com the housing market is Double Dipping. A few key facts:

1) U.S. home values continued to decline in the third quarter, falling 4.3 percent year-over-year, and 1.2 percent quarter-over-quarter.
2) With home values 25 percent below their 2006 peak and 17 consecutive quarters of declines, the length and severity of the current downturn is unprecedented since the Great Depression.
3) Negative equity rose to 23.2 percent of single-family homes with mortgages, the highest it has been since Zillow began tracking it in the first quarter of 2009.
4) In five markets, all in California – Los Angeles, San Diego, San Francisco, San Jose and Ventura – home values turned negative quarter-over-quarter after five quarters of gains.
5) Foreclosures reached an all-time high at the end of the third quarter, with more than one out of every 1,000 homeowners losing their homes to foreclosure in September.

Zillow Article Link

QE2 = Partial Default?

Analysis: Fed's quantitative easing is a partial default. The Federal Reserve's latest round of quantitative easing is quite different from cutting interest rates, which is nothing more than monetary policy, according to The Economist. The U.S. is a debtor nation that borrows U.S. dollars from other countries. "Printing money to repay those debts ... is, in essence, a partial default," the magazine notes. "It is as if you tried to pay your supermarket bill with Monopoly money, on the grounds that it was the only paper money you could find in the house." The Economist/Buttonwood's Notebook blog (08 Nov.) , iMarketNews.com (08 Nov.) , Forbes/The Bottom Line blog (08 Nov.)

Economist Link

Forbes Link

QE2 -- Uncharted Territory

Fed will purchase $600 billion in government debt over 8 months. Federal Reserve policymakers addressed a faltering economic recovery in the U.S. by launching another round of quantitative easing. The central bank said it will buy $600 billion in Treasurys during the next eight months and is ready to expand the program if the economy remains persistently weak. The aggressive move is considered a risky one for the Fed because it might make the central bank a target of the new Congress. The Wall Street Journal (03 Nov.) , Bloomberg (03 Nov.) , The New York Times (free registration) (03 Nov.) , The Washington Post (04 Nov.)

NY Times Article Link

Portfolio Impact Article Link

Home Ownership Lowest Since 1999

Census Bureau: U.S. home ownership is at its lowest since 1999. Home ownership in the U.S. was 66.9% in the third quarter, down 0.7% compared with the same period last year and the lowest rate since 1999, according to the Census Bureau. The high point for home ownership came in the fourth quarter of 2004, when it reached 69.2%. Fitch Ratings said it will take the housing market more than three years to absorb a shadow inventory of lender-owned houses, properties in foreclosure and homes with mortgages that are delinquent. Housing Wire (02 Nov.) , The Atlantic (02 Nov.)



Hosing Wire Article Link

The Atlantic Article Link

Deflation or Inflation???

Good question. The Fed is doing anything and everything to create inflation. QE2 being the latest effort to motivate inflation. But with a deleveraging consumer, top line revenue growth will be soft for US focused companies. They will be pressured to produce earnings growth through additional cost cutting, i.e. wages and maybe additional layoffs.

The following is a interesting article providing additional insight into the argument.

Article Link

Markets Await the Fed

Market braces for an expected move by the Federal Reserve. Wall Street is focused on a possible plan from the Federal Reserve to accelerate a struggling recovery in the U.S. Traders are bracing for volatility Wednesday because the central bank's announcement would come while the market is still considering the effect of Tuesday's midterm election. For the moment, the U.S. dollar and market interest rates are down, while gold and stocks are up. The New York Times (free registration) (31 Oct.) , The Wall Street Journal (01 Nov.)


NY Times Article Link

Foreclosures Pick Up

U.S. foreclosures pick up and spread beyond typical areas. U.S. residential foreclosures accelerated and expanded in area during the summer, researcher RealtyTrac said. From July to September, Arizona, California, Florida and Nevada remained the hardest hit regions, but increased foreclosures also were seen in Illinois and Washington state. USA TODAY/The Associated Press (28 Oct.)

USA Article Link

US Auctions Negative Yields

Demand pushes 5-year TIPS into negative yield. Treasury Inflation-Protected Securities sold at a negative yield Monday for the first time since the U.S. launched them in the 1990s. Buyers paid $105.50 for $100 worth of debt, effectively paying the government to hold their money. The New York Times (free registration) (25 Oct.) , The Business Insider (25 Oct.)

NY Times Article

Cost of Rescuing Fannie and Freddie Is Expected to Hit $154 billion

Bailing out Fannie Mae and Freddie Mac could require an additional $124 billion, but the amount likely will be about $19 billion, making the total price tag $154 billion, according to the U.S. Federal Housing Finance Agency. The regulator of Fannie and Freddie said the amount might soar to $259 billion if the nation slips into a double-dip recession. The Washington Post (22 Oct.) , The New York Times (free registration) (21 Oct.)

Washington Post Link

From Currency to Trade War

By Nouriel Roubini:

Currency tensions have reached a boiling point. Everyone desires a weaker currency to sustain growth via net export improvement. But the zero-sum game in currencies and net exports means one country’s gain is some other country’s loss, and a competitive devaluation war has ensued. Currency wars eventually lead to trade wars, as the recent U.S. trade legislation threatening China shows. With the U.S. unemployment rate at almost 10% and Chinese growth at almost 10%, it is no wonder that the drums of trade wars are beating harder.

Source:RGE Daily Top 5

What’s Holding Back the Recovery?

U.S. Small Business Sector: What’s Holding Back the Recovery?

The National Federation of Independent Business Index of Small Business Optimism improved by 0.2 in September, rising to 89.0. Still, the index remains in recession territory. The downturn may be officially over, but small business owners have for the most part seen no evidence of it. Indicators of activity in the small business sector have continued to show weakness in 2010 even as GDP growth returned to positive territory in H2 2009, suggesting that the nature of the recovery has been uneven and largely concentrated in larger businesses.

Source: RGE Monitor - Daily Top 5

Sept. 2010 Fed Minutes - Continue to be Accomadative

Members of the Federal Open Market Committee (FOMC) stated at the September 2010 meeting that additional "accommodation may be appropriate before long," though the decision will depend on the future economic situation. The meeting minutes revealed that debate over the method of additional stimulus centered on the purchase of Treasurys and possible steps to affect inflation expectations. There are high expectations that the committee will announce an additional round of stimulus at their November meeting.

Translation: Fed is doing everything and anything to create inflation.

Is The Market a Ponzi Game?

Attached is an article that addresses this questions. John Hussman of the Hussman Funds, states it very clearly:

To some extent, I view current market conditions as something of a “Ponzi game” in that valuations appear neither sustainable nor likely to produce acceptably high long-term returns, and speculators increasingly rely on finding a greater fool. As the mathematician John Allen Paulos has observed, “people generally worry only about what happens one or two steps ahead and anticipate being able to get out before a collapse… In countless situations people prepare exclusively for near-term outcomes and don’t look very far ahead. They myopically discount the future at an absurdly steep rate.” Undoubtedly, we have periodically missed returns due to our aversion to risks that rely on the ability to find a “greater fool” in order to get out safely. But it is important to recognize that speculative risks are not a source of durable long-term returns. At a Shiller P/E of 21 and a historical peak-to-peak S&P 500 earnings growth rate of 6%, a simple reversion to the historical (non-bubble) Shiller norm of 14 would require seven years of earnings growth and yet zero growth in prices. Stocks are not cheap here.

Meanwhile, the U.S. financial system appears to be a nicely painted dam, behind which a massive pool of delinquent debt is obscured. A significant correction in valuations and resolution of the growing backlog of delinquent debt may finally restore strong “investment merit” to the U.S. stock market, but only after a greater amount of pain and adjustment than most investors seem to anticipate.

I'm not going to call it a Ponzi Game; but in my view stocks are overvalues. But in the long run Stock will outperform Bonds and Cash, based on history.

Seeking Alpha Link

Did the US Forget The Growth Option?

After trying many different government intervention programs maybe focusing on simple economic growth is best. Growth defined as "what they do best: innovate, compete and work -- things that are brought by long-term economic growth". Both monetary and fiscal policies have come up short. So let's try a KISS (Keep it Simple) approach.


Article Link

CEOs Turn Pessimistic

CEO Roundtable just released their findings, Q3 2010. They are more pessimistic than the prior quarter. Below is a chart from the report (click to enlarge).



Copy of Press Release

BAD TIMING - Enemy # One for Investors

Morningstar published a interesting article noting that investor's "Bad Timing" destroyed their investment returns. The past decade ("The Lost Decade") helped demonstrate this as investors chased returns. They bought last year's winner and sold last year's loser, i.e. bought high sold low. The article is linked below for further reading. In the end it was the investors who caused his own destruction.

Morningstar Article

Second Wave of Short Sales

U.S. homeowners in trouble increasingly turn to a short sale. A second wave of distressed-home sales is sweeping through the U.S., but it is much quieter than the first because borrowers who cannot pay leave before foreclosure, turning instead to a short sale. The volume of short sales has tripled since 2008. Researcher CoreLogic forecast 400,000 short sales for this year. The Washington Post (26 Sep.) , Sun-Sentinel (Fort Lauderdale, Fla.) (23 Sep.) , Bloomberg (27 Sep.)

Washington Post Link

Fed Comments and More

At the September Federal Open Market Committee (FOMC) meeting, the Fed announced that it is "prepared to provide additional accommodation if needed to support the recovery" and "return inflation to levels consistent with [the Committee’s] mandate." The Fed maintained the view that the recovery in output and employment had slowed and acknowledged that current inflation was running below target. The tone of the statement released in August was more cautious than that of the previous meeting in June, reflecting the softer economic data in the intervening period.

So they have "deflation" concerns, i.e. do to deleveraging. And their answer is to put us back on the crazy borrowing treadmill that got us in this mess to begin with.

Must Read Article

Recession Ended in June of 2009

U.S. recession officially ended in June 2009, committee says. The Business Cycle Dating Committee, an arm of the National Bureau of Economic Research that decides when U.S. recessions start and stop, ruled that the most recent recession ended in June 2009. That makes the downturn, which started in 2007, the longest recession in the U.S. since World War II. The Economist (20 Sep.)

Article Link

Note sure if America agrees.

Shiller: There Will Be More Bubbles

It’s amazing how much money and effort the government has thrown at the financial crisis over the last few years and yet it’s looking more and more like they’ve accomplished very little. The stimulus was a short-term fix, the housing stimulus has simply propped up prices, and the financial regulatory reform bill is unlikely to prevent future crises.

In the following segment Robert Shiller discusses how the government actions have failed us. He believes the economy remains very weak and that the government has not done enough to target the right areas of the economy. He is worried that house prices could decline further and that we’re entering a soft patch that could reveal underlying private sector weakness:

Video Link

Unlimited Support and First Hints of Inflation

In response to a string of weak economic data in July and early August, Bernanke announced a new round of quantitative easing. He said he will do whatever it takes to keep the economy growing. “Whatever it takes” could include purchasing more treasuries, corporate bonds, or possibly even stocks. There is no limit to how much money Bernanke can print, but excessive printing will eventually lead to severe inflation. We have begun seeing the first signs of moderate inflation. Prices are rising at a pace of about 2% a year. This is not meaningful in itself, but has significant policy implications. When the country was experiencing deflation, Bernanke could print money with impunity. Now that we have low inflation, more printing could quickly lead to high inflation. To be clear, without a significant negative shock to the economy, significant inflation is a high likelihood within the next year or two. A negative shock like a debt crisis or severe double dip recession would likely postpone the inflationary pressure for at least a few more years.

The above was pulled from the following post on SeekingAlpha.com - Article Link

When we add Fannie Me and Freddie's latest "zero down" offering into the equation I believe the Fed is doing every and any thing they can to ignite INFLATION, i.e. artificially holding asset values up. Isn't this part of the problem that got us into trouble to begin with???

US Failures to Turn Tech into Profit

U.S. failure to turn technology into profit worries experts. Researchers and engineers in the U.S. have turned out a stunning array of technological breakthroughs in the past 20 years, only to see jobs and economic benefits they generated end up overseas. Without better policy, foreign manufacturers likely will to continue to reap the benefits of U.S. innovation, experts said. For decades, while the U.S. adopted tax and other policies to encourage companies to move offshore, Germany, Japan and South Korea used their government power to keep production at home, the experts said. Los Angeles Times (13 Sep.)

LA Times Article Link

Next Bubble - China's Property Market

China's property-market bubble is poised to burst. Property has emerged as the preferred investment choice for the Chinese, and the situation is fueling concern that the market is bubbling. A prominent economist said China's property market has overheated. "Many of them are bought by property speculators betting on a constantly rising property market," Yi Xianrong wrote in a commentary in People's Daily. "This is a serious threat to the sustainability of China's economy." FinanceAsia.com (08 Sep.)

Article Link

US Dividend Yield High Than Bond Yields

U.S. stock dividends are exceeding bond yields the most in 15 years. With U.S. corporate profit increasing at the fastest rate in two decades, more stocks are paying dividends higher than bond yields than at any time in the past 15 years. Shares in Johnson & Johnson, the world's biggest health-product company, pay a 3.66% dividend, compared with a 2.66% interest rate on the company's 10-year debt sold last month. Companies increased payout by 6.8% in the second quarter, according to data compiled by Bloomberg. Bloomberg (07 Sep.)

Krugman is Wrong!

Zombie Economy - Japanification

Below is a link to an interesting post which compares the current day USA situation to the past 20 years of Japan. Well worth the read, but please keep in mind we are not Japan. One of the main reasons is that USA banks recognizes bad debt and proactively manage a resolution of the debt.

Zombie Economy - Japanificaton

Possible Treasury Bubble Coming???

Heavy buying of U.S. Treasurys sparks a warning of a bond bubble. Buyers' appetite for 10-year U.S. Treasurys has grown so much that experts are starting to worry about a government-bond bubble. The flight to Treasurys might indicate that investors are getting carried away with their enthusiasm, similar to investors' infatuation with technology stocks in 2000, analysts said. After yielding nearly 4% in April, the 10-year note's yield had fallen to 2.62% by Friday. USA TODAY (22 Aug.) , Bloomberg (22 Aug.) , NPR.org (20 Aug.)

China Is Number 2 Economy

China replaces Japan as the world's second-biggest economy. Japan's gross domestic product for the second quarter confirmed that China is the biggest economy in Asia and the second-largest in the world, after the U.S. The Cabinet Office said second-quarter economic output reached $1.28 trillion, slightly less than China's $1.33 trillion. Experts said China is on track to replace the U.S. as the world's biggest economy as soon as 2030. The New York Times (free registration) (15 Aug.) , Nikkei Business Publications/The Nikkei (16 Aug.) , Mainichi Daily News (Tokyo) (16 Aug.)

Deflation Risk On The Rise - Is The USA The Next Japan???

St. Louis Fed President James Bullard authored as white paper noting the issue. Below is a link to an interview he gave discussing the paper.

CNBC Link

8 More Reasons Why a Double Dip Is Coming

The article highlights potential problems with our recover or lack there of. I am not sure if it is a double dip or more that we never came out of the recession. I am leaving that up to the reader to decide.

Seeking Alpha Article Link

Potential Next Shoe to Drop

Banks worldwide need to repay or roll over trillions in loans. The International Monetary Fund, the Bank of England and the European Central Bank warned that financial institutions worldwide need to repay or refinance trillions of dollars in short-term borrowing during the next two years. "There is a cliff we are racing toward -- it's huge," said Richard Barwell, an economist at Royal Bank of Scotland. "No one seems to be talking about it that much. ... [But] it's of first-order importance for lending and output." The New York Times (11 Jul.)

NY TIMES LINK

The Truth About Gold As An Investment

The link article highlights why gold fails as an investment. Well worth the read and education.

Gold Article

First Half of 2010 Disappoints

Below is a link to a post by Gary Alexander regarding first half 2010 stock market results. He points out the divergence of the market's returns with earnings. In addition, he highlights the historical perspective of mid-term elections in sparking market rallies. Though it is interesting, no one knows for sure that it will hold true going forward.

linked post by Gary Alexander of Navellier and Company

Krugman and The Coming Depression

G 20 Perspective Creditor vs Debtor

Let's compare and contrast quotes from the world's largest Creditor and Debtor nations:

1.) China's President Hu Jintao - "The deeper impact of the global financial crisis has yet to be overcome, and systemic and structural risks remain very serious."
2.) US President Barack Obama - "We can't all rush to the exits at the same time. What we have to recognize is that the recovery is still fragile."

One can only walk away with the idea that the structural and systemic problems still exist.

U.S. Money Supply Plunges to Levels Unseen Since the Great Depression While Housing Index Dives

Advice is what we ask for when we already know the answer but wish we didn’t -- Erica Jong

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history. The M3 figures – which include a broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of institutional money market funds fell at a 37pc rate, the sharpest drop ever. "It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

Seeking Alpha link

Do Universities Share The Blame For The Financial Crisis?

The linked article says "yes". But more importantly it points to the bigger issue; long-term investment portfolios are now focus on gambling behaviors. They lost sight of the short-term risk. But should this be corrected through additional regulations or the Free Market? My vote - the Free Market.


Do Universities Share The Blame For The Financial Crisis???

Interesting Perspective on Korea

We recently had the opportunity to listen to Professor Charles Hill, a political science professor from Yale University who came by our office to lead a discussion with our clients on the emerging risks in the Korean peninsula.

Charlie's ultimate conclusion was that despite saber rattling, the North Koreans would continue to be rational actors. While the recent sinking of a South Korean warship was an act of war, it was a well thought out action, with expected responses. North Korea pushed the envelope, and while the response has been negative, the likely expected outcome will be some sort of appeasement of the North Koreans by the world community.

After walking us through the history of the Korean conflict and probabilities of increased conflict between the two Koreas (which according to Charlie is less than 10% and would only occur in a scenario where an action was grossly misunderstood), Professor Hill began describing an emerging Geopolitical Risk Zone in the waters of Asia. He described a scenario in which the U.S. would have to reassert itself and its domination of the global shipping lanes to protect its allies against rogue attacks such as the North Korean submarine attack, but also reassert its strength vis-à-vis China in the Asian waters.

Obviously this type of new strategy would not come without a cost for the United States, and could require a massive build up and redeployment of the Navy. As George Friedman from Stratfor noted in his recent book, "The Next 100 Years":

"The U.S. only emerged as the decisive global power after World War II and is still immature. The U.S.'s power is based on its Navy and ability to control both
oceans, the Atlantic and the Pacific, which no other power has been able to do."

Over the coming year, we will be contemplating more of these Geopolitical Risk Zones as war, historically, has been a great way to outgrow sovereign debt burdens.

Source: HEDGEYE, daily e-mail alert.

Warren Buffett's comments on Moody's

The following is an excerpt from Hedgeye e-mail, titled "EARLY LOOK: TRIPLE-A USA".

Never before has the US portfolio patriarch, Warren Buffett, been forced to answer questions about his market positioning against his own will.

If any of us Buffett fans thought the man was going to be forthright and transparent about what it is that the ratings agencies actually do, we should think again. I felt like I was listening to a professional politician when Buffett excused Moody's by suggesting that they simply "made a mistake that 300 million other Americans made."

We get what Buffett gets - politicians created and perpetuated a ratings system that could be gamed. What Buffett is really doing is playing the game that's in front of him. Current conflicts, compromises, and constrains aside, his mandate is to make money - not to make you believe how he is making money is "right."

To contextualize Buffett's aforementioned quote about whether or not the states of America should be rated AAA, let's take a quick step back and understand where this designated ratings system of Perceived Wisdom comes from.

In 1909 a gentleman by the name of John Moody (who is currently rolling in his grave) started selling independent research like Hedgeye's (he was paid by subscription, not by the issuers of bonds he was rating). Over the course of time, independent research became a profitable business and it, predictably, found competition with firms like Poor's Publishing.

By the time the 1970s rolled around and the USA was newly minted with its endowment of the world's reserve currency (1971), the SEC "decided to penalize brokers for holding bonds that were less than investment grade. The SEC then faced the question of investment grade according to whom? The agency decided to create a new category of officially designated ratings agencies and grandfathered the big three - S&P, Moody's, and Fitch." (Roger Lowenstein, The End of Wall Street, page 39).

This, of course, created the kind of business that I, the Saudis, and Warren Buffett love - cartels who have a lock on supply and pricing via government mandate. All you needed to make this the "bubble that none of us saw coming" (Buffett) was more and more government intervention and price supports. Enter Greenspan and some moneys from the heavens and you can all of a sudden see how, from 2002 to 2006, that a conflicted firm like Moody's saw profits triple and MCO stock go to $74/share.

"Given the agencies profits were soaring it paid for them to stay on good terms with Wall Street. Moreover, when Lehman took a mortgage pool to Moody's, it paid the fee only if it was pleased with the rating." (Lowenstein, The End of Wall Street, page 41).

Sure, even though some of us actually did see this coming... Mr. Buffett, with all due respect, maybe it was because we weren't being paid to be willfully blind to the problems, in principle, that are obvious here...

So, after another great low-volume rally to lower-highs in the US stock market yesterday - fully trusting in the good faith of the USA's Triple-A rating, we should chase stocks higher here on the open, right? C'mon. Let's get serious here folks. This time there will be no finger pointing at 300 million Americans. No one will be allowed to say they didn't see this US Sovereign Debt crisis coming with a straight face.

Per Warren Buffett

"Anyone who believes a growth rate in excess of 15% per annum over the long term is attainable should pursue a career in sales, but avoid one in mathematics"

Seven Things Your Broker Doesn't Want You Know

Have you entrusted your nest egg with a stock broker? There are many things your broker would rather you just didn't know. We can come up with seven. Maybe there's more but we can't spend all day on this...

1) The expenses of the mutual funds I'm recommending to you are really, really high. What they tell you is "You don't have to pay me. Let the industry pay me," which is to say, he gets a commission for selling you a mutual fund. That works fine in real estate so why not for your investments? Well, here's why not: The mutual fund recuperates the commission they pay the broker by charging you a fee. Some charge fees up front (front load), some when you sell the fund (back load), and many charge a fee every year. But all your broker will point out is that you aren't paying him anything.

2) Your portfolio has more risk in it than you think. Many broker clients assume their broker is creating a portfolio that fits with their individual risk tolerance, and maximizes expected return based on that risk level. But that isn't typically the case. A stock broker's principle business is selling you products and collecting commissions. Furthermore, the broker's duty is to his employer, not you. Because commissioned products charge high fees, they need to take more risk to compensate for those higher fees to net you the same return you would have in a fund with lower fees.

3) I didn't pick your stocks... someone else did. Typically, a broker buys stocks, bonds and funds from a list provided to all brokers at the company. Those are often the products that company management stands to make the most profit by selling, and they change from week to week or from day to day. So what you end up with is a hodge-podge of items that don't follow a logical investment plan.

4) I get a trip to Tahiti because of all the stuff I sold you! The industry is coming down harder on this one than just a few years ago. But the reality remains that brokers compete with each other and are given sales rewards, perks and benefits from management upstairs.

5) Your 22% return was 6% below market. Now maybe you think a 22% return is fine, and anyone who is unhappy at not getting 28% is just being greedy. Well, maybe so if you could get that 22% return every year. But you can't. You will also have 5% return years, and flat years, and years with small and large losses. Your investment goal should be to capture a high average annual return over many years. That's why it's vital that you capture all of the returns in the good years, to offset mediocre and down years.

6) The interests of my employer come first. Brokers do not have to act as fiduciaries, which means they don't have to put your best interests ahead of their own. They only need to sell you investments that are "suitable." That says nothing about costs. They take your life savings and invest it according to someone else's interest? Does that seem crazy? They do, and it is.

7) Your account is not diversified. Your broker will point to the 57 stocks he bought for you, or the 20 different mutual funds and tell you that you're diversified. From what I've seen most brokerage accounts are not well diversified.

That's because almost all of the stocks your broker will buy for you are U.S large cap stocks. And most of the funds they buy, the ones that pay those commissions, have managers who chase returns by overbuying U.S. large cap stocks. You may have 20 mutual funds, and 15 of them may own Apple. Is that diversification? Of course not. A portfolio filled with different stocks that tend to move together isn't diversified, no matter how many stocks are in there.

A truly diversified portfolio is built on various asset classes that have as little correlation to each other as possible. That way, when one goes south it doesn't necessarily mean they all go south. That's diversification.

The solution is simple. Seek out a competent fee-only financial advisor who has no affiliation with any broker dealer. A financial advisor will charge you a fee based on assets managed, and will then create a portfolio specifically designed to help you reach your lifelong financial objectives. They receive no compensation for selling particular investments, and are therefore unlikely to fill your portfolio with high cost or overly risky products. They also have a legal fiduciary obligation to put your best interest ahead of their own.

Source: ezinearticles.com

Outlook on Interest Rates

Withdrawal of stimulus must be prudent, China and U.S. say. The U.S. and China agreed that the global economic recovery is "not yet solid" and that the nations must continue to stimulate their economies, said a senior official participating in the U.S.-China Strategic and Economic Dialogue. "Given the uncertainty embedded in the European sovereign debt crisis, the two countries agreed that the pace of retreat from stimulus should proceed in a steady manner," said Zhang Xiaoqiang, vice chairman of National Development and Reform Commission. China Daily (Beijing) (25 May.)

Source Site

Quote

"In a capitalist society, all human relationships are voluntary. Men are free to cooperate or not, to deal with one another or not, as their own individual judgements, convictions and interests dictate."
- Ayn Rand

Interesting Question

With six consecutive intraday triple digit swings from high to low in the DJIA index, where is the safest bet during these uncertain times?

Beginning last Thursday, volatility has returned to US markets with a vengeance. So who's going to win the battle between the bulls and bears now? With the loss in confidence in global markets and the further exposure of the rigging games of markets precipitated by the 700 point drop in the DJIA in ten minutes last Thursday, sustained volatility and further corrections are likely in our near future. If so, then where's the safest place to be now? (Source: SmartKnolwedgeU, LLC)

This is a "Sales Tactic". It's being used to promote FEAR.

One should not listen to this NOISE. The portfolio should be managed based on the intended use of the money (duration management). It is impossible to continuously guess the direction of the markets and the economy. Historically, economist have correctly predicted the direction of the economy +/-30% of the time, therefore they were wrong +/-70% of the time. Why would anyone individually or with professional help then search for the "best investment in uncertain times"? By the time it's identified it's too late.

Solution - Strategic Portfolio Management based on your specific risk/return profile. Think of it as the roller coast ride you are willing take with your portfolio, before panic sets in. It's not easy to Identify and it is dynamic. Behavioral Finance studies have shown that it is a moving target (feeling) based on what most recently happened to you. So you must use logic (easier said than done) and education to manage the panic/emotion reaction. A prudent portfolio starts with a focus on the following:

1) Capturing Market Returns, not chasing the "hot dot"
2) Diversification
3) Asset Allocation
4) Reducing Cost
5) Rebalancing to target

It's focusing on the things you have control over.

This is not an active vs. passive argument. In the long run, I think both with get you where you need to be, i.e. it's a push. One just reduce the knee jerk reactions - I'll let you decide which.

Outlook for the U.S Housing Market

Dean Baker doesn't see a sustainable housing recovery. The U.S Government's subsidize are coming to an end. Interest rates are expected to rise.

Are the Feds Trying to Nationalize Your Retirement Savings?

The following link addresses the issue.

powerlineblog

Fed Worried About Housing Bubble In 2004, Transcripts Show

Some members of the Federal Open Market Committee were starting to worry as early as March 2004 that the housing market was overheating, transcripts show. "A number of folks are expressing growing concern about potential overbuilding and worrisome speculation in the real estate markets, especially in Florida," said Jack Guynn, then-president of the Federal Reserve Bank of Atlanta, according to the transcripts. The New York Times (free registration) (03 May.)

Source: NY Times Link

U.S. Home Prices: Signs of a Double Dip?

The S&P/Case-Shiller 20-City Composite Index rose 0.6 y/y on a seasonally adjusted (s.a.) basis in February 2010, the first y/y gain since December 2006. However, on a monthly basis, home prices in the 20 metro areas fell 0.1% between January and February 2010, after eight consecutive months of monthly gains. On a seasonally unadjusted basis, the 20-city composite index fell for the fifth consecutive month, down 0.8%, following a 0.4% decline in January 2010. Only one of the 20 cities showed a monthly gain in prices in February 2010, compared to a peak of eighteen cities in July 2009, when the first time home buyer tax credit was in full effect. Some analysts assert that the recent stabilization will pave the way to a gradual recovery in home prices in 2010. Others argue that the stabilization is temporary and that further downward correction of home prices is likely once government support to the housing sector is withdrawn, beginning with the phasing out of MBS purchases by Q1 2010 and the expiration of the home buyer tax credit in April 2010. The marginal success of mortgage modification programs and the expiration of foreclosure moratorium also pose the risk of a wave of distressed homes entering the market and pressuring home prices in 2010.

RGE Analysis by Prajakta Bhide and Christian Menegatti: Recent housing data reports are consistent with our predictions for a double dip in home prices. Prices were expected to stabilize temporarily but fall as government support is phased out. Positive data in the run-up to the expiration of the extended home buyer tax credit may push home prices higher over the coming months, but fundamentals indicate that a sustainable pick-up is unlikely. Additionally, vacancies, foreclosure rates and mortgage rates deserve careful attention, as they are expected to exert further downward pressure on struggling prices.

Source: www.roubini.com, Roubini Global Monitor

S&P 500 Overvalued?

According to the Shiller P/E ratio, the S&P 500 is now 35% overvalued — a full one standard deviation event.

The April data was just updated and showed the inflation-adjusted normalized P/E, premised on “bird-in-the-hand” (as opposed to consensus earnings forecasts, which is historically more than 20% higher than we actually get — one reason why Wall Street banks are dubbed “the sell side”) 10-year trailing profits, expanded to over 22x from 21x in March.

This is not nosebleed territory, but it is expensive; the historical average is 16.4x. So, this implies that the market is currently 34.7% overvalued benchmarked against the historical norm. It would be nice to say that a higher-than-normal P/E is justified by low inflation and low interest rates. But frankly, real bond yields are not that far from their long-run averages; however, equity valuation is, and something is going to give at some point.

Valuation metrics are not meant to be timing devices. Assets, securities, and currencies can stay overvalued for extended periods of time, but inevitably Bob Farrell’s rule number one on the concept of “mean reversion” will come into play. The operative strategy is to buy low and sell high, not the opposite; and to be paid to take on risk as opposed to be paying for taking on the risk.

Defensive income-oriented strategies, at this point, make perfect sense from our lens.

Source Article

Is This The Great Recession?

Below is a link to three WSJ graphs measuring different attributes of past recessions. Based on the three attributes it appears we are truly in the "worst" recession since The Great Depression. Final judge will be left to history.

WSJ Graph Link

Not All ETF's Are Created Equal

Below is a link to a great article highlighting the differences between ETFs that on the surface, according to the name, look to be the same. The author offers five factors that have an impact on the underlying ETF’s performance. They are as follows:

1.Method of Construction
2.Expense Ratio
3.Fund Size
4.Capital Structure of the ETF
5.Composition

This is way doing your homework is so important.

Seeking Alpha Article Link

Bill Gross Prefers Stocks Over Bonds

Gross said:

Let’s suggest the economy looks good, that risk assets – whether it’s high-yield bonds or whether it’s stocks – have a decent return relative to the potential of declining bond prices. I’ll go with the stock market.

Seeking Alpha Link

Nouriel Roubini's 2010 Outlook

U-Shaped at best with a rising risk of a Double Dip.

A slew of poor economic data over the past two weeks suggests that the U.S. economy in 2010 is headed for – at best – a U-shaped recovery. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic 2.7% growth which RGE forecast for H1. With the positive effects of the historic levels of fiscal stimulus due to fade this year, the U.S. faces at best a 1.5% growth rate in H2, which looks too close for comfort to a tipping point of a double-dip [...]

Source: RGE Monitor, 3-26-2010

More $s For Companies, Less $s For Workers

The reason people are unhappy about the economic recovery, take a look at where the money is going, as calculated by Dhaval Joshi of RAB Capital, according to The Economist's Buttonwood's Notebook blog. "This recovery has benefited companies a lot and workers not at all," the blog notes. U.S. corporate profit has increased $280 billion since March 2009, while wages fell $90 billion. "One would have to go back to the 1950s to find profits outperforming wages in absolute (cash) terms, and even then it was on a much smaller scale," according to the blog. The Economist/Buttonwood's Notebook blog (22 Mar.)

The Economist Article Link

Is Real Estate Recovering?

Very interesting article. Based on this and other post I have made recently we my be heading into a double dip. Or an elongated U shape recovery.

On Nouriel Roubini's Global EconoMonitor, Nouriel argues that unsustainable private-debt problems must be resolved by defaults, debt reductions, and conversion of debt into equity and warns that if instead private debts are excessively socialized, the advanced economies will face a grim future.

I hope I wrong.

Article Link

Are We In The Eye of The Financial Huricane?

US Could Lose It's Triple-A Credit Rating

Triple-A credit rating of U.S. could be at risk, S&P warns. Standard & Poor's issued a warning that the U.S. needs to adopt a plan to rein in spending or its triple-A credit rating will be in jeopardy. There is a risk that "external creditors could reduce their U.S. dollar holdings, especially if they conclude that eurozone members are adopting stronger macroeconomic policies," S&P said in a report.

Source: Financial Times

Market Comments

Government stop-and-go policies have fostered an environment of intense volatility for equity markets over the past 12 years. The market has basically been flat for a buy-and-hold investor during this period. While this may make a great case for active portfolio management, chasing performance at this juncture is probably unwise. Housing is the quintessential leading indicator for economic activity, and many realtors still say business is slow. As the Japanese experience shows us, a double-dip recession may come faster than we think.

Source: Seeking Alpha

Bloomberg Report: China to Nullify Financing Guarantees by Local Governments

Watch out for China, it may not be the investment haven many think it is.

Now comes news, from top regulators in Beijing, that “China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt surges.” (According to the report, the Ministry of Finance is also drafting rules to ban local governments from issuing any more such guarantees in the future). Without the guarantees in place, Shih believes, China could face a “gigantic wave” of bad debts and halted projects.


Resource Article - "Seeking Alpha"

Nouriel Roubini's US Growth Outlook

U.S. Growth Outlook: Still Anemic and U-Shaped but Risks of a Double-Dip Recession Are Rising by Nouriel Roubini. A slew of poor economic data over the past two weeks suggests that the U.S. economy in 2010 is headed for – at best – a U-shaped recovery. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic 2.7% growth which RGE forecast for H1. With the positive effects of the historic levels of fiscal stimulus due to fade this year, the U.S. faces at best a 1.5% growth rate in H2, which looks too close for comfort to a tipping point of a double-dip recession.

Source: RGE's Daily Top 5, 3-5-2010

CNBC Interview With TX Fed Gov.

Uncertainty in "Social Cost" is holding back hiring.

Earlier on Squawk, Fmr. Gov Corzine announced unemployment + underemployment + no longer track at approximately 25%.

Fed Increases and The S&P 500

Fed Increases and The S&P 500

Months to recover

The stock market’s initial reaction in all three instances was a sell-off, with the S&P 500 Index ending down on average by 3.2% after a one-month period. During the second month the market was slightly negative on two occasions (1999 and 2004) but tumbled in 1994. In that year it took seven months for the S&P 500 to return to the pre-rate hike levels, while in 1999 and 2004 it took five months.

Source: Plexus Asset Management (based on data from I-Net Bridge).

Can the US States Default?

U.S. states face questions about possibility of default. Much attention has been given to Greece's debt crisis, but U.S. states are facing difficulty as well, prompting questions about whether default is a possibility. "For U.S. states, it is not a debt problem, it is a spending problem," said Peter Hayes, head of the municipal bond group at BlackRock. "The length and depth of the downturn is so much greater than anything we have seen that states cannot cut spending fast enough and they cannot really raise taxes further." Financial Times (26 Feb.)

Financial Times Article Link

Bank Will Profit From Greece's Default

Banks that hid Greece's debt aim to profit from default. Many of the banks that helped Greece create derivatives that concealed its borrowing are betting on default, hoping to make additional profit from the nation's financial troubles, according to The New York Times. Banks' and hedge funds' purchases of credit default swaps on Greek bonds are driving up the cost of borrowing that Greece needs to roll over its maturing debt, according to the newspaper. "It's like buying fire insurance on your neighbor's house -- you create an incentive to burn down the house," said Philip Gisdakis, head of credit strategy at UniCredit. The New York Times (free registration) (24 Feb.)

NY Times Link

Analysis: Crisis might bring discontent to EU's "Club Med": Spending cuts and other austerity measures are likely to touch off discontent, possibly creating strikes and protests, across the southern edge of the EU, called "Club Med," The Times reported. Spain, Portugal and Italy, along with Greece, have a soaring budget deficit, high unemployment and a troubled economy. "The young are struggling to find work, the middle-aged are having their earnings squeezed and the old will see pension and benefit cuts," according to the newspaper. The Times (London) (24 Feb.)

Greek Bank Face Downgrade

Greek Banks: Could Downgrade to BBB Lead to a Downward Spiral?

Fitch's downgrade of Greece's four largest banks to BBB from BBB+ on February 24 comes at a very sensitive time, when the ECB is starting to withdraw its liquidity support and tightening its credit standards. Moreover, the ratings outlook is negative, which points to the risk of further downgrades ahead. Expanding on its decision, Fitch cites the negative repercussions the austerity program will likely have on credit quality and loan demand. Fitch also notes limited access to wholesale funding and interbank markets at reasonable prices due to sovereign rating pressures. Fears of a self-fulfilling prophecy are justified given that the eligibility of Greek collateral might be at risk when the ECB tightens its collateral requirements to an A- rating (by at least one ratings agency) at the end of 2010. On the positive side, Fitch notes that Greek banks are mostly deposit-funded.

Source: RGE Monitor 2-25-2010

Bob Prechter Interview

Bob thinks we are at a top. I to am very concerned. But in the end no one truly knows where the market is heading.

The first 5 to e-mail me will receive a copy of the book. You will need to provide complete contact information for me to send a copy of the book.

Wealthtrack Asset Allocation Question

This week on Wealthtrack, Consuelo Mack poses the question: What place do U.S. Treasuries, bonds in general, stocks and alternative investments have in an investment portfolio in today’s markets?

Round Two on Real Estate - Commercial RE

Analysts warn of foreclosure crisis in commercial real estate. Analysts said a wave of foreclosure on commercial properties in the U.S. likely will hit community banks especially hard. "There's been an enormous bubble in commercial real estate, and it has to come down," said Elizabeth Warren, chairwoman of the Congressional Oversight Panel. "There will be significant bankruptcies among developers and significant failures among community banks." The Washington Post (19 Feb.)

Article Link

Muni Crisis - The Next Hurrdle

The logic here is quite simple:

Lower wages + higher unemployment= lower tax revenues.

Lower tax revenues + greater government spending= greater deficits.

Greater deficits eventually = insolvency or default.

Article Link

Greece Melt Down - Who is Next???

Eurozone gives Greece 1 month to make progress on cutting deficit. Finance ministers from the eurozone took a get-tough approach with Greece, warning the country of additional spending cuts and taxes if a report due March 16 shows that the Greek government is not making progress in slashing its budget deficit. They told Greece it must stick with an austerity plan presented to the EU that promises to cut this year's budget deficit from 12.7% to 8.7% of GDP. "Greece has to actually deliver and is beginning to deliver," said French Finance Minister Christine Lagarde. Google/The Associated Press (15 Feb.) , Financial Times (tiered subscription model) (16 Feb.)

Google/The AP Article Link

In addition, EU wants details of Wall Street deals related to Greek debt: The European Commission wants an explanation from Greece regarding reports that Wall Street banks put together derivatives deals that allowed the country to hide billions in debt. Statistics agency Eurostat told the Greek government to provide details of the transactions by the end of this month, said the commission's Amadeu Altafaj Tardio. EUObserver (Brussels) (15 Feb.) , Financial Times (tiered subscription model) (15 Feb.)

Euobserver Link

Good News for Homeowners

Homeowners are building up equity again, Fed says. After three years of homeowners' equity contracting in the U.S., the longest ever, the trend has reversed. The Federal Reserve's "flow of funds" survey shows that between the first and third quarters of 2009, homeowners' net equity increased almost $1 trillion. Los Angeles Times (14 Feb.)

LA Times Article

Fed Prepares for Fiscal Stimulus Withdrawal

Fed prepares for cautious withdrawal of fiscal stimulus. The Federal Reserve is preparing to talk publicly about its strategy for withdrawing liquidity from the U.S. economy, after flooding it with trillions of dollars. Central bank policymakers and private-sector economists said the process will be tricky and dangerous, coming at a time when unemployment is projected to remain historically high. The Washington Post (09 Feb.)

Washington Post Article Link

Debt Refinancing May Be a Bigger Problem

Moody's warns on debt risks. In Moody's annual report on risks, the rating firm warned nearly 1,000 companies with a junk rating will face significant refinancing needs over the next several years, with around $700B of debt coming due between 2012 and 2014. "Longer-term maturities are vulnerable if the economic recovery doesn't continue to take hold," said Kevin Cassidy, a senior credit officer at Moody's. If unemployment and credit conditions worsen, "things could get tough pretty quick for some companies."

Source: SeekingAlpha.com, "Wall Street Breakfast"

Proposed $3.8 Trillion budget, WHAT???

Obama's budget seeks $100 billion for jobs, sets deficit record. U.S. President Barack Obama is expected propose a $3.8 trillion budget that includes a record-high deficit of $1.6 trillion as well as a $100 billion program to create jobs, Obama administration and congressional sources said. The spending to create employment includes tax cuts for small businesses, financial assistance for state and local governments, and extra money for social programs. To bring the budget deficit under control, Obama will rely on proposals including a freeze on domestic programs, taxes on big banks and the expiration of tax cuts for families with an income of more than $250,000 a year. The Washington Post (31 Jan.) , Los Angeles Times (31 Jan.) , The New York Times (01 Feb.)

Looks Can Be Very Deceiving

Below is a paragraph from a good read pointing out that the investment markets(valuations) have decoupled from the fundamentals. Does this point to another bubble, me thinks possible.

Given the data hasn’t improved much, neither has my cautious view. The world really is not that much more of a better place, as an economy, than it was in April (2009). But events since April have proven it is possible to have asset prices rise, whilst economic activity declines. This is the real ‘decoupling’. The core question is why, which gets us to whether this is healthy, and whether this is sustainable. Such a divergence from underlying fundamentals usually signals price bubbles, particularly when the fundamentals are so weak, and the range of assets so uncorrelated.

The full article can be here: Decoupling of Markets and Economies

New DOL Employee Deferral Deposit Rules

DOL finalizes safe harbor rule on employee contributions for small retirement plans. Late last week, the U.S. Department of Labor announced the finalization of a rule to protect employee contributions deposited to retirement plans with fewer than 100 participants by providing a safe harbor period of seven business days following the receipt or withholding by employers.

This replaces the current rule stating that employers of all sizes must transmit employee contributions to pension plans as soon as they can reasonably be segregated from the general assets of the employer, but no later than the 15th business day of the month following the month in which contributions are received or withheld by the employer.

The department did not expand the safe harbor to cover plans with 100 or more participants due to a lack of information and data sufficient to evaluate current practices of these larger employers. The final rule is effective Jan. 14, 2010, and can be found in the Federal Register. Further detail about the announcement can be found at: http://www.dol.gov/opa/media/press/ebsa/EBSA20100056.htm.

Joblessness - An American Trap

Analysis: U.S. is increasingly locked into long-term unemployment. There seems to be little hope of escape from a truly jobless recovery, given the dismal rate of job creation in the U.S., according to The Economist. The population grew by almost 30 million between December 1999 and December 2009, but at the end of that period, only 400,000 more Americans had jobs. "Without job growth, household indebtedness will linger as a problem, depressing spending and hiring," according to The Economist. "Joblessness is a trap the American labour force may not soon escape." The Economist (14 Jan.)

Highest Yielding, Dividend Paying, S&P 500 Stocks Best in the Long Run

Prieur du Plessis,SeekingAlpha.com, January 15, 2010

A recent article in Kiplinger magazine by Jeremy Siegel, Scoop Up Dividends, notes the highest yielding dividend payers in the S&P 500 Index have
outperformed the lowest yielding dividend payers going back to 1957. In Siegel's research he points to the fact:

If an investor had put $1,000 in a portfolio of the 100 highest-yielding stocks on January 1, 1957, by December 1, 2009, he would have
accumulated more than $450,000 (assuming all dividends were reinvested). That’s a hefty annualized return of 12.5%, an average of almost 2.5
percentage points per year greater than the return on the S&P index. That same $1,000 invested in the 100 lowest-yielding stocks returned only
8.8% per year.

As I have noted in past posts, the absolute dollar amount of dividends in 2009 has declined significantly. Most of the decline has occurred in the financial sector.
The article notes:

• For 2007, at the height of the bull market, the dividend stream -- total dividends paid on all U.S. stocks -- was $288 billion.
• For 2009 through November, the dividend stream had dropped to $216 billion -- the greatest decline in that measure since the end of World War II
• The entire decline in dividends can be attributed to the financial sector, which cut its total payouts by $79 billion over the past two years. (Siegel includes General Electric because GE’s dividend reduction was caused solely by the losses at GE Capital.)
• In other sectors of the economy -- energy, health care, technology, consumer discretionary, consumer staples, telecom -- dividends have actually risen over the past two years, even with the recession.

Although Jeremy Siegel cites the higher return of the highest yielders, investors should perform their own due diligence and not chase yield blindly. The
dividend paying stocks in the S&P 500 Index (http://www.indexarb.com/dividendYieldSortedsp.html)can be found at indexArb's website.
Source: Scoop Up Dividends (http://www.kiplinger.com/columns/goinglong/archives/scoop-up-dividends.html)