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MONEY MANAGER KEN FISHER’S “LUCKY” 2003
Last year the consensus called for a rate rise, a weak market and weakened pension plans hurting earnings. But none of these things happened. Last year was probably my best in 20 years as a columnist here [at Forbes]. Beginning with my Jan. 6 column, I remained unwaveringly bullish. My forecast at that point called for the stock market to be up 35% in 2003, which would make it one of the best years ever. I was the most bullish forecaster in America publishing in a periodical of wide circulation. I was too optimistic -- but amazingly lucky.
My 2004 forecast is for a very positive year, too, with the Morgan Stanley World Index (in dollar terms) up 20% -- less blessed than 2003 but rosy nonetheless. The S&P 500 should do about 20%, too. Next month I will detail my reasoning behind this bullish forecast. The interest rate professionals are again saying rates will rise materially in 2004. But rates will not change much at all.Link here.
THE FALLING DOLLAR’S WORLD OF HURT
When not talking about the emergence of China as a global economic powerhouse, attendees at the World Economic Forum's annual meeting in Davos, Switzerland, pondered what impact the continuing decline of the dollar will have on international companies and the world financial system. The prevalent assumption is that the dollar will continue to fall, especially against the euro -- with a further 10 to 20% drop the concensus. Given the vast U.S. current-account and budget deficits, the greenback’s further depreciation “is all but inevitable”, says Alan S. Blinder, professor of economics at Princeton University.
Such a large drop -- coming on top of the 35% fall since early 2002 -- would put severe strains on the international financial system and the global economy. "It would be a disaster," says Hussain M. Sultan, group chief executive of Emirates National Oil Co. in Dubai. The dollar’s fall to date is having a dampening effect on Europe’s already weak export-led recovery. A further decline would make matters much worse. Energy-producers Russia and the Middle East countries, which price oil and gas exports in dollars but import large quantities of goods from Europe, would clearly be hurt.
But the weaker dollar is boosting U.S. exports in an election year. And so far, at least, it does not seem to be fueling inflation or riling the bond or equity markets. “The general feeling in the U.S. Administration is that the dollar is our currency, but your problem,” says Blinder.Link here.
HAS THE SWISS ECONOMY STOPPED TICKING?
Ever since the collapse of its former national air carrier, Swissair, Switzerland has been hovering between stagnation and recession. The economy, once said to hum as smoothly as a fine Swiss watch, has been struggling to claw its way back from a string of troubles unlike anything in recent memory. Its per capita income remains among the highest in OECD countries, but the economy is barely growing compared to the United States and the 15-nation European Union, the OECD said Friday. An OECD economist, said at a briefing in Bern that the Swiss economy was too slow to open up because it was “too regulated, too segmented” and “too isolated”.Links here, here.
SWISS HOPE TO MAKE A MINT OUT OF NEW COINS
Switzerland has minted its first-ever special edition coins designed to catch the eye of foreign collectors and tourists. One carries the image of the Matterhorn mountain, while the other shows Chillon Castle on Lake Geneva. Swissmint has announced it is only producing 200,000 of the special edition coins. Swissmint has already planned its motifs for next year: the Jungfrau mountain in the Bernese Oberland and the Kappel Bridge in Lucerne.Link here.
THE RISE AND RISE OF ON-LINE BANKING
Some analysts see a future where banking portals could grow to become one-stop shops for consumer financial needs, incorporating pensions, insurance and bill paying -- including products from third parties -- through a single portal. But there are hurdles. Though its impact is ebbing, security remains a concern. E-banking accounts are highly protected, but the stain of recent fiascos will not disappear anytime soon.Link here.
A NASTY SURPRISE AWAITS THE MIDDLE CLASS COME TAX DAY
The minimum tax, enacted to make sure that even the ultra-rich pay some income taxes, may hit 44 million households, including families making less than $50,000 a year simply because they have lots of children to claim as exemptions or take other tax breaks.
The non-partisan, private Tax Policy Center estimates the tax will: 1.) Add an average of $3,751 annually to a tax bill, with 52% of affected households making $100,000 or less a year. 2.) Let many ultra-wealthy people off the hook again: Only 24.3% of people making over $1 million will pay the tax by 2010.Link here.
Treasury announces review of Alternative Minimum Tax.
The Treasury Department’s assistant secretary for tax policy, Pam Olson, announced that the government is to examine alternatives to the increasingly unpopular AMT. Olson explained that, as part of the President’s proposals for the 2005 budget, the White House has asked the Treasury to formulate a “long term” solution for AMT reform.More on this story here.
CAN CHINA KEEP UP THE PACE?
A recent study by a Chinese Academy of Social Sciences claims the emerging Chinese middle class is a myth. All those interviewed who believe they are middle class, are actually deluding themselves or lying. Or are being lied to.Link here.
BESIDES MOBILE CAPITAL AND LABOR, GLOBALIZATION LEADS TO MOBILE PROFITS
Nobody wants to pay taxes, and so many companies spend so much effort trying to avoid them. Almost every big corporate scandal of recent years, from Enron to Parmalat, has involved tax-dodging in one form or another. Tax authorities around the world fret that such cases are the tip of a large iceberg, and they are starting to act. In America, home to many of the best-known corporate-tax scams of recent years, the Bush administration has announced a series of anti-tax-dodging measures in its new budget, which will be presented to Congress on February 2nd, including an extra $300 million to boost enforcement and the shutting of corporate-tax dodges that could bring in, it reckons, up to $45 billion over the next ten years.
Many disputes between multinationals and tax authorities, which rarely see the light of day, occur over transfer pricing. This is the method used by multinational firms to value goods and services bought and sold among subsidiaries, and is a big determinant of the profits booked -- and thus taxes paid -- in a given country. Two trends show the increasing rift. The first is a spike in so-called “advance pricing agreements” (APAs). In these, tax authorities and a nervous multinational essentially agree on its transfer-pricing methodology. The second revealing trend is the way in which the big accounting firms are beefing up their transfer-pricing departments.More on this story here.
Profitable US firms expect to pay less tax this year.
US-based multinationals expect to pay less tax this year than in 2002 in spite of rapidly rising profit levels, a study conducted by the Financial Times has shown. Proposed explanations for the downward trend after a year of healthy corporate profits include the growing tendency to outsource back-office administration offshore. Some firms have indicated that they have successfully employed tax strategies to minimize tax liability, despite the US government’s best efforts to stifle various minimization schemes. Companies also point to international growth as a reason for their reduced tax burden this year.Link here.
MUTUAL FUND MANAGERS FAILED TO RECLAIM BILLIONS IN TAX REFUNDS IN 2003
Figures indicate that $6.6 billion in total was left unclaimed by money managers globally in the ten months to the end of November 2003, up from a total of $6 billion a year earlier. The research shows that American-based investors left the largest chunk of money unclaimed at $1 billion, an increase of 23% from the previous year. Meanwhile, UK investors forwent $784 million, up 14% from a year earlier.Link here.
WAR FINANCE: THEORY AND HISTORY
That war is not productive may seem self-evident but it is not to the “educated” public who have been taught that World War II ended the Depression and that deficit spending spurs economic growth. Americans show not the slightest awareness that every dollar spent on the ongoing Afghan and Iraqi wars, the continuing occupations, and the rebuilding of those failed societies is one less dollar that can be spent at home, and that the whole adventure represents a giant transfer of American capital to the sweltering deserts and sun-baked slums of the Middle East.
Thus it bears repeating that warfare, whether victorious or not, retards the accumulation of productive and livable capital. It does this either by destroying capital outright or sinking it in logistics and war production, thereby rendering it incapable of reproducing itself or adding to the complex infrastructure and amenities of civilization. War can give the appearance of prosperity (full employment, busy factories, high prices), but it is not real. From the standpoint of productivity, it matters not whether a war is paid for by borrowing, taxing, or inflating. In all three cases, resources are diverted from the productive economy of wealth creation to the destructive economy of war-fighting. From other standpoints, it makes a great difference.Link here.
IN DEFENSE OF DERIVATIVES
Three of the six largest bankruptcies in American history -- WorldCom, Enron, and Global Crossing -- had more in common than just timing and size: All to varying extents involved the use of the controversial and poorly understood financial instruments known as derivatives. “We view [derivatives] as time bombs, both for the parties that deal in them and the economic system,” Warren Buffett wrote in his 2002 annual report for Berkshire Hathaway. “Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
What are these Wall Street WMDs, and what should be done about them? Technically, derivatives are financial products whose value is “derived” from that of an “underlying” asset. Stock options, perhaps the best-known derivatives, are based on the underlying value of the stock that the option enables the purchaser to buy at a later date. Futures contracts are derived from the root value of the good to be bought or sold in the future. Derivative products are not just a sophisticated way for investors to gamble. They also give producers a crucial tool for hedging against risk and uncertainty. There are derivatives betting on the likelihood of a natural catastrophe; consumer credit card debt has been converted into bonds; futures markets have been established for such things as barge rates; and options allow investors to speculate on the temperature, wind chill, and amount of rainfall in many cities.
By employing derivatives, David Bowie can focus on making music, the farmer can concentrate on farming, IBM can specialize in computer manufacturing, and financial market traders can worry about pricing assets and evaluating their risk. Still, derivatives are newfangled enough that traders, CFOs, accountants, and investors remain on the learning curve for properly using and analyzing these instruments. We can expect these specialists to make miscalculations, occasionally serious ones. The media and general public, meanwhile, are a few steps further behind in understanding.
Government regulators are not, generally speaking, in a better position than private investors to evaluate such risks. When regulations prevent or hinder transactions for which there is a genuine demand, they encourage the creation of securities designed simply for the purpose of dodging those regulations, in order to fulfill that demand.Link here.
WHEN DONALD TRUMP HITS THE LIMELIGHT MARKET PEAKS FOLLOW
Mr. Trump personified the shallowness, vanity, excesses and narcissism of a certain sort of affluence in the 1980s and 1990s. Yet we have noticed one feat of a different sort from Mr. Trump, which we can safely say he accomplished without trying over the past two decades, to wit: Thrusting himself into the limelight near important market peaks. Now Mr. Trump has announced his latest book, How to Get Rich: Lessons from “The Apprentice” and Other Big Deals. Coincidence?Link here.
SWISS RANK AMONG THE WORLD’S LEADING INVESTORS
Switzerland remains one of the world’s leading foreign investors, exporting capital worth more than the country’s GDP every year. A new study shows Switzerland made net overseas investments of almost $180 billion in 2002, putting it behind only Britain, Japan and France.Link here.
THE TROUBLE WITH TOBACCO BONDS
A steady stream of tobacco-settlement money into state coffers seemed like a sure thing after the $200 billion settlement between Big Tobacco and the states’ Attorneys General in 1998. But that well may run dry sooner than anyone anticipated. Both states and the holders of the “tobacco bonds” that they have issued have long been concerned that lawsuits by smokers could bankrupt the big tobacco companies that owe them money. Now they have another set of worries. Sales are plummeting at the four major tobacco companies. This in turn is rapidly shrinking the settlement fees that states collect, since payments correspond to tobacco sales. Also looming is an anti-trust suit that could destroy the tobacco settlement that made the bonds possible.Link here.
BANKERS: THEIR GAINS, OUR RISKS
Central banks are tools of the very rich to protect their capital. The central banks’ primary function is to protect large commercial banks. This reduces risk for the owners of those banks and their senior managers. But the cost of this risk reduction is transferred to the general public. The public is told otherwise. We are told that the Federal Reserve Bank and FDIC deposit insurance protects our wealth. What these government-imposed systems do is to protect the public from one kind of loss -- closed banks -- at the expense of another kind of loss: depreciating money. The second form of loss gets little attention. It does not hurt much. It is more like a low-intensity headache -- a headache that is caused by a malignant brain tumor.
The FED has done its work well. Yes, thousands of small banks went bankrupt in the 1930’s. But why should we imagine that this implies that the FED did not do its work well? Milton Friedman has argued endlessly that the FED made a mistake. Why not conclude that the FED did what was necessary to consolidate its own power? The FED was not entirely to blame for the magnitude of the depression; the politicians who passed high tariffs in 1930 are also blameworthy. But the FED’s loose money policies of 1924–29 created the boom, and its tight money policies led to the depression’s early stages.
The boom is politically desirable. The fiat money artificially reduces short-term interest rates and lures people and businesses to the loan windows of the banks. The bust creates the bargain sales for those with cash to pick up. When the FED is expansionist, people try to take advantage of the “buy now, pay later -- in cheap money”. It is an exceedingly dangerous strategy, because it lures people into markets that they never seem to be able to leave voluntarily because of the psychological thrill of making quick and easy money at the tail end of the boom. This is why I am not a promoter of debt, even in mass inflations. The best rule is cash and carry of the item that is likely to go up later.
Howard Ruff’s law of government is: “Government is dumb”. My corollary is: “So are its bankers”. But they are only intermittently dumb. For a long time, they look very, very smart. The Medicis looked like geniuses in 1400. The banks have buried themselves in government debt -- what economist Franz Pick called “certificates of guaranteed confiscation”. Eventually, the debt will be repudiated. There is a universal long-run law of all government debt: creditors eventually get skinned.
All of your long-run financial strategies should be based on the assumption that the world’s bankers will eventually make a mistake. A Big Mistake. They are not supermen. The system is vulnerable. The trouble is, we have to invest for both worlds: the one in which multinational banks are doing fine, and the one in which they will make the Big Mistake. My view is that the mistake will take place over time. It will not be a one-shot shock. We will have warnings. But in the meantime, we should not assume that the dollar will always stay high in relation to everything.Link here.
BUBBLES AND THE EFFICIENT MARKETS HYPOTHESIS
Many investors purchased absurdly overvalued stocks during the late 1990s and have since suffered devastating losses. The explanation now given for this is that the stock market was in a “bubble” which has burst, but those buying stocks at the time were not able to identify the bubble. What is clear in retrospect was a controversial proposition at the time. Many individual investors justified their own purchases of stocks at inflated values by the naïve belief that stocks at current prices are always a good investment. Their prices have been set in a competitive market and returns from the ownership of stocks will always be in line with historical averages, so the thinking goes. In 1999 Alan Greenspan argued that a stock market bubble could not be distinguished, while it was happening, from a rise in prices of stocks due to improvements in fundamentals -- expressing a form of what economists call the Efficient Markets Hypothesis (EMH) in rationalizing his inability to make such a distinction.
The EMH is the proposition that there are ultimately no profit opportunities in financial markets because the prices of securities already take into account all relevant information. This is equivalent to saying that no individual could systematically improve upon the financial forecasts already embedded in financial market prices. (A well-known joke illustrating the EMH concerns two finance professors walking down the street. One spots a $100 bill lying on the pavement. He brings this to the attention of his colleague, who says, “That cannot be a $100 bill or someone would have already picked it up.” And so they continue walking.) Thus there is no point for the investor in doing research on companies -- “The market” has already done this analysis and it is already priced into the stocks. Since the investor cannot beat the market, buying a broad-based market index is likely to earn as good a return with a lot less work.
The paradox of the EMH is that it assumes the existence of entrepreneurs seizing profit opportunities to prove that there are no profit opportunities for entrepreneurs. If there were no profit opportunities, then why would the smart money incur the expense of research and transaction costs? Companies that are listed on the stock market have been financed by entrepreneurs, been analyzed by financial analysts, and been bought and sold in the market by traders to establish their prices. The strategy of “buy and hold” of a market index works as well as it does because of the work already done by financial entrepreneurs such as analysts and traders. Individual investors are financial entrepreneurs as well, and as such are relieved neither of the burden of forecasting the uncertain future nor of helping to create it.Link here.
THE GIGANTIC OUTLAY PARTY
The president’s pronouncement in his State of the Union address that “we must spend tax dollars wisely” is at odds with the complete lack of opposition from the White House to the mile-high pile of pork in the recently passed fiscal 2004 Omnibus spending bill. In addition to an Iowa indoor rain forests, new Michigan swimmning pools and Alaska skating rinks, the Omnibus bill gouges taxpayers to the tune of $725,000 for the Please Touch Museum in Philadelphia, $2 million for the Appalachian Fruit Laboratory, $1 million for the Alaska SeaLife Center, $300,000 for the National Wild Turkey Federation, $500,000 for the Montana Sheep Institute, and $2 million for a golf awareness program in St. Augustine.
“The big story is Republicans have become a big spending party,” says Stephen Moore, president of the Club for Growth and a senior fellow at the Cato Institute. “And I think the White House is really the ring leader of the spending spree.” The numbers tell the story. The average annual real increases in domestic discretionary spending were 2.0% under Jimmy Carter, minus 1.3% in the Reagan years, 4.0% with George H.W. Bush, 2.5% in the Clinton years, and 8.2% with George W. Bush.Link here.
LOOK FOR OPPORTUNITIES IN LIQUIFIED NATURAL GAS
Outside of the Middle East, a new giant oil field has not been discovered in 30 years. Even in the Middle East, new oil fields are becoming harder to find. Meanwhile, China and India hunger for vast amounts of energy to satisfy a population of 2.3 billion people demanding the comforts of an industrial economy. Alternative energy sources are no elixir. Yet there are two energy sources that can indeed meet the world’s demands for the next half-century: oil sands and natural gas. The latter just happens to be the fastest-growing primary energy source in the world.
It would seem like a perfect marriage: The nations with the largest amounts of natural gas -- like Russia and of course, the Middle East -- are eager to sell, while the nations with the greatest need for natural gas are eager to buy. And since natural gas is a clean fuel, even the environmentalists are happy. There is one problem. How do you get that gas from the distant countries that hold major gas reserves to the United States? Unlike oil, which is liquid at room temperature, methane is gaseous. In its natural form, the only viable way to transport natural gas is via pipeline. But to move massive amounts of natural gas through pipelines from, say, Saudi Arabia to China is not only economically unfeasible, but politically foolhardy. Fortunately, there is a solution: Liquid Natural Gas, or LNG.
Great technical advances over the past half-century have made the conversion and transportation of liquid gas economically feasible. Any past prejudices against LNG and concerns surrounding producing and delivering it are dissipating. With production and delivery concerns subsiding, interest in LNG is growing. Currently, LNG makes up only 6% of the world’s natural gas trade. But as demand for natural gas grows the LNG industry will see a surge in growth. Look for exciting opportunities ahead in this sector, as the market for LNG really gets off the ground.Link here (scroll down to John Myers piece).
EU FINANCE MINISTERS VOTE TO TURN EURO INTO EUROTRASH. TIME TO CASH OUT?
In late November, EMU finance ministers voted to permit France and Germany to continue violating the “Stability and Growth Pact”, an agreement between the 12 countries using the euro as their official currency. If enough countries flout the Stability Pact, investors will begin suspecting that the politicians cannot be trusted to keep a disciplined fiscal policy underpinning the euro’s value. This could cause the value of the euro to fall quickly.
No one knows how quickly the EU’s fiscal irresponsibility will result in a euro-crisis. All we know is that the events of the last few months significantly increase the risks involved in owning euros on a long-term basis. Unless you are an active currency trader, it is perhaps time to use the current bull market in euros to begin taking profits. What should you purchase with your euros? I recommend gold, a currency that has actually outpaced the euro against the dollar, but that has not appreciated against the euro.Link here.
FED WANTS TO STEM THE DOLLAR’S DECLINE WITHOUT TAKING SUBSTANTIVE ACTION
Their latest statement reflects the Fed’s belief that growth and inflation risks are nearly equally balanced, and even though the Fed explicitly stated they had time to be patient about removing accommodative monetary policy, a shift to more neutral language was a surprise to most primary dealer economists, who interpreted this change in language as an indication the Fed knew something about incipient inflationary pressures reappearing that the rest of us did not. Bonds sold off as a consequence. Ironically, this sell-off came despite the first decent bounce in the dollar index for months.
We interpret the change in language differently. Last week, we spoke of a growing weak dollar constituency, but emphasized that no central bank had an interest in being party to a dollar collapse. The change in language of the Fed should be understood in this context: it at least creates some doubt in the minds of speculators that the dollar is a one way bet, thereby helping to avert a dollar collapse. This also provides some support to beleaguered Asian central bankers apparently fighting a losing battle against accelerating dollar weakness, notably the Bank of Japan. The BOJ announced last week that it spent 7.2 trillion yen in the month of January to forestall further appreciation pressures on the yen.
That the Bank of Japan has intervened on such a scale suggests that the dollar’s fundamental weakness is far greater than has been hitherto implied by the relatively gentle decline in the dollar index. But for the BOJ’s unprecedented support, and, equally important, the Chinese renminbi peg, the greenback might have already taken on status comparable to the Argentinean peso. Putting the odd bit of grit on the icy slope of dollar devaluation serves to prevent this fiasco from occurring, but it does not fundamentally change the underlying picture.
The dirty little secret about the American economy today (that no central banker dare acknowledge publicly) is that there is no anti-inflation constituency left within the United States. There cannot be, given the preposterously high levels of debt, which makes the only socially acceptable policy response at this stage a deliberate policy of debt-confiscating inflation. There is no political constituency for savings to speak of any longer which might oppose this policy. This position stands in marked contrast to the nations of the euro bloc, whose aging electorate has a natural predisposition to save, which helps to explain the ECB’s apparent obstinacy in refusing to cut rates further. These divergent political imperatives imply that the dollar’s recent recovery against the euro is likely to prove ephemeral.
What about Asia? It is rare that a central bank is actively engaging in so massive an effort to depreciate its own currency, but because the BOJ has evinced its clear willingness to use the powers of the electronic printing press (at least with the dollar trading around 105 to the yen) it is hard not to believe that it too has begun, albeit tentatively, to embrace a policy of competitive currency devaluation. There are political limits today to yen weakness, which suggests that in competitive currency devaluation race to the bottom, the US would win again.
All of which points to the burden of adjustment continuing to fall on the eurozone economies. The ECB is cooking its own collective goose to the extent it pursues price stability to the exclusion of all other policy considerations, as well as practicing benign neglect toward a firm euro, which allows the Chinese in particular to rob their manufacturing base blind. So it will only be a matter of time before the ECB too capitulates and the game of competitive currency devaluation goes truly global.Link here.
REMEMBERING JP AND HIS DEBT-FINANCED BOOM
Janardhan Poojary was a bright young minister from a Southern State and was widely viewed as being close to the Prime Minister. One year into his new term, and searching about for ways to jumpstart moribund India, which was struggling under enormous state expenditures and hugely inefficient state behemoths, he hit upon a radical new idea. He became the first minister to organize a “Loan Mela” (literally a “Loan Festival”) in our country. Before a Loan Mela, he spread the word through minions (or thugs) that anyone who needed a “loan” was welcome and all they needed to do was sign a paper (or in many cases, put in a thumbprint) and voila! they received a “Loan” or in many a poor, illiterate’s mind: a wad of cash beyond their wildest dreams.
For his first few Loan Mela’s only a few lucky ones showed up because many in India are extremely leery of debt and even more leery of bankers. But after the first few villagers confirmed that this was the real deal, word spread like wild fire. Pretty soon, Loan Melas were being held in every town and village in the country. The “loans” being handed out were for sums ranging from Rupees 1000 to 10,000, a princely sum those days. A town or village showered with such largesse, literally blossomed the next day (or shall we say, “boomed”?)
As the Loan Melas were repeated throughout the country, India boomed overnight. Sales of everything from tractors to televisions exploded as people in the countryside bought anything that caught their fancy with the government’s largesse. Needless to say, the government was very popular for about 2 years as the “boom” raged on. And one glorious day, without warning, the Loan Melas ended. There was no real explanation why. Once the Loan Melas’ ended, the boom ended and India was caught in a vicious spiral, even worse than where it was before the boom (hard as it is to imagine). The banks were caught with unbelievable amounts of bad loans and many were solvent only in name. The following recession and the near collapse of the banking industry hobbled India well into the early 1990’s. No one knows what became of JP.
Fast forward 30 years. A government in desperate times wanting to cheer up its populace with an artificial boom. A treasury that opens its doors wide open for private enterprise to lend out without any checks and/or balances. A banking system that plays middlemen to an overeager Federal Reserve whose political chairman’s only motto is “get reappointed or reap the whirlwind”. Sounds familiar? Dear Readers, the JP Era is back and bigger than ever. This time it’s happening 30 years later with all the attendant technological progress (in Finance) and the extra dollop of hubris that comes from its origins in the world’s only superpower. We have Fannie Mae and Freddie Mac asking each and every mortgage broker in the country to hold Loan Melas -- they are called “Loan Sales Events” now -- and Sallie Mae and other big private lenders are jostling to provide student loans to undergraduates (any amount).
This lending-without-consequence boom will end like all other booms that the JP’s of our history have instigated. They will end in tears and in an especially short time. The denouement will be silent and without announcement.Link here.
POPULARLY REPORTED MISCONCEPTIONS
You may be among the many who would answer yes to these questions. You would be wrong. There are a lot of popularly held beliefs out there that simply are not true. Yet the media tend to report on many of them as though they were hard facts. The list:
1.) Getting cold can give you a cold; 2.) We have less free time than we used to; 3.) American families need two incomes (people feel they need the extra income because they say they need to buy more things for their family); 4.) Money can buy happiness (money makes people significantly happier only if their family income is below $30,000, but by $50,000, money makes no difference); 5.) Republicans shrink the government; 6.) The rich do not pay their fair share of taxes (the IRS says the richest 1 percent of taxpayers already pay 34% of all income taxes -- twice what Al Sharpton thought they should pay); 7.) Chemicals are killing us; 8.) Guns are bad (36 states have concealed carry laws, and not one reported an upsurge in gun crime); and 9.) We are drowning in garbage.Link here.
GUIDE TO TAX SOFTWARE
A bewildering array of eight leading income tax packages awaits this season, to help with your bewildering taxes. Each offers a different mix and level of services and does some tasks well and others badly. Your first decision is whether to use a packaged product that runs the application on your desktop or to try a Web-based service. We review five Web sites and three shrink-wrapped packages to help you decide.
Desktop Tax Software: Three companies lead the pack for desktop tax software: TurboTax from Intuit; TaxCut, marketed by H&R Block; and TaxAct, sold by 2nd Story Software. The shrink-wrapped programs are very different, and each is available in several versions. TaxAct is the budget deal, offering a free download ($6 for a CD). TurboTax starts at $30 for the Basic package; most comments here are about the Premier version, however. TaxCut’s pricing starts at $15 for its Standard version, though this evaluation covers the Premier version. Various rebates reduce some of the prices. On the other hand, getting support for state income taxes costs extra in some cases. Their areas of focus vary -- a plus, because everyone’s tax situation is different.Link here.
Web-Based Tax Software: The Web sites reviewed are CompleteTax from CCH, TaxCut from H&R Block, TurboTax by Intuit, TaxBrain from Petz Enterprises, and 2nd Story Software’s TaxAct. An overview of our conclusions: If all you file is Form 1040EZ, head straight to TaxAct. Even though the site is sometimes painful to navigate, you cannot beat the price -- free to print and mail a return, or $8 to use electronic filing. However, if you have complex taxes, you should carefully consider which IRS schedule will cause you the most difficulty and choose the program most adept at handling that form.Link here.
Online tax preparation takes off. If you have shied away from doing your taxes online, maybe it is time to reconsider. While not for everyone, Web-based tax prep services have several distinct advantages over their desktop counterparts, especially for new users.Link here.
LAST HURRAH FOR STOCK OPTIONS
For many technology workers with stock options, the market rally of the past several months represented the first time in years that shares are worth more than the paper they are printed on. Consequently, as shares remained aloft, employees cashed in options with a vengeance. While it is not clear how many rank-and-file employees sold options in the rally, said Joseph Blasi, co-author of the book In the Company of Owners: The Truth About Stock Options, analysis of filings from top executives indicates that option sales were widespread. But as the fizz on the champagne settles, compensation experts say rank-and-file employees would be well-advised to celebrate while they still can. After this year, they say, the stock-option party may be drawing to a close.
The party pooper is an accounting standard change slated to take effect in 2005. The controversial rule, proposed by the U.S. Financial Accounting Standards Board, the standards-setting body for the profession, requires firms to record a charge on earnings statements to reflect the cost of employee stock-option grants. The practice, known as stock-option expensing, does not change the real cost of options to companies. Proponents of expensing, however, say that the rule change will make those costs more transparent to investors. Under current rules, companies are only required to record stock-option information in footnotes to their annual reports. The result of the rule change, according to an analyst, is that tech companies that once made a policy of granting options to a majority of workers are now reconsidering their generosity.Link here.
Bonuses bountiful at tech firms.
When it comes to executive salaries and bonuses, what goes down never stays there very long. Executives of technology firms, many of whom swallowed pay cuts during the industry downturn of 2001 and 2002, generally received higher cash compensation in 2003, according to preliminary data. An analysis of pay packages for chief executives of 90 technology firms, compiled by compensation research firm Equilar, found that cash bonuses rose 36% over the prior year to a median level of $198,000. The analysis covers public companies that ended their 2003 fiscal year by November and have filed annual compensation data with securities regulators.Link here.
GE CEO INTERVIEWED
Four days before 9/11, Jeff Immelt took the wheel of the global empire of media properties, financial services, consumer electronics, and jet engines collectively known as General Electric. Today, the 47-year-old CEO is betting billions of dollars on everything from nuclear energy to the next Friends.Link here.
NEED A TAX LOSS? INVEST IN EMERGING-MARKET DEBT
Like a large number of other risky assets around the world, the emerging-market debt market turned on a sixpence in the second week of October 2002 and, with a few wobbles, has flown ever since. Last year, emerging-market bonds returned some 28%, and J.P. Morgan’s EMBI+ index of such bonds tightened against American Treasuries by 347 basis points. Anyone lucky enough to pile into Brazilian debt (about a fifth of the index) in October 2002 at a spread of 23 percentage points over Treasuries would last month have been able to sell it at a spread of around four points. And that performance, remember, does not take into account the fall in long-term interest rates, from which investors have also benefited. Total returns from Brazilian bonds between October 2002 and the end of last year were a mouth-watering 124%.
Small wonder, then, that mutual funds, pension funds, emerging-market funds, hedge funds and just about everyone has been lapping up emerging-market debt as though it were going out of fashion, which it almost certainly will. Strikingly (and worryingly), the number of speculative investors in emerging markets is at its highest since before the Asian crisis of 1997, according to one strategist. These funds have been lured not only by the extraordinary returns but also by much talk of a “new asset class”, a term generally used by investment bankers to persuade punters that a market that they had thought dodgy is, in fact, eminently respectable. Investors are also comforted by the thought that many of the countries whose debt they are eagerly snapping up appear to have mended their economic ways. Hmmm.
Investing in bonds is, as Benjamin Graham and David Dodd -- authors of the 1934 investing classic Security Analysis -- put it, a loser’s game. Unless you buy debt at distressed levels, the upside is limited and the downside decidedly less so. In the case of sovereign debt there is, moreover, a difficulty putting a floor on the value of the bond because, unlike corporate debt, investors cannot get their hands on the assets; there is, in other words, no liquidation value. If they are lucky, investors get their money back and a coupon in the meantime. The upside over the life of the bond, if any, comes from any fall in interest rates and, in the case of corporate or emerging-market bonds, from a contraction in the credit spread. Investors have become a lot more confident about the latter: not a single borrower in EMBI+ widened against Treasuries last year.
Yet the likelihood of investors gaining from either of these in coming months is negligible; the chances of their losing heavily, by contrast, are very high. There is, for a start, the risk that the yield on Treasuries rises, perhaps sharply. And if anything, credit spreads are even more of a worry.Link here.
THE ASIAN BUBBLE
Asian countries are the current darlings of the financial press. But if you ask me, they are in a bubble. I am not trying to be negative about something most people seem to think is a “sure thing” just for the sake of being contrary, although the fact everybody likes something as an investment is reason enough to be contrary. I am a huge China bull, for instance, but the time to buy is during a crisis... not what is likely the peak of a boom.
There is no question in my mind the 21st Century will belong to China, much as the 20th did to America. Europe will mainly serve as a source of houseboys and maids for the Chinese. But, try as I might, I cannot see a safe direct way to take advantage of this megatrend at the moment. It is widely touted in the press that the Chinese yuan is an undervalued currency. That has become accepted as an article of faith by everyone from government officials to financial advisers. I am not so sure when I look at property prices in Beijing and Shanghai. Further, the reported money supply has been increasing over 20% per year. It might work out, but holding yuan in hopes of an upvaluation impresses me as a mediocre bet. Certainly if you hold them in a Chinese bank, most of which are insolvent.
How about buying Chinese stocks? I do not think it makes any sense. And when you do buy, what you will want are small, entrepreneurially run companies, not doddering behemoths that were spun off by the State, overloaded with self-dealing, concrete-bound managers and zillions of extra employees. That describes most public Chinese companies.
All of this has caused me to write off China for the time being. But China is just part (albeit a major part) of Asia. And in many ways, the Orient is still one of the best places for an investor to be on the lookout right now. Which leads me to Thailand. Thailand has always been my favorite country in the Orient as a lifestyle choice, and is actually the safest and surest way to play the boom in China as well. Of course, things can go wrong for a while; timing is important. I would hold off major investments until the forthcoming bust, which I expect within a couple years.Link here (scroll down to Doug Casey piece).
“LEAP” AHEAD OF THE MARKET
The market is overvalued on just about every measure. Yet it is not falling. Your neighbors are once again boasting about their gains from four-letter stocks that are trading at 100, 200 and even 300 times earnings. We are in Bubble land again, without a doubt. But, as far as bubbles go, they all share two things in common. They end badly... and no one knows how big they will get before they end.
So, you are stuck in one of two camps: you can sit in cash and earn a piddly return at best, or you can invest in a “musical chairs” market and hope that you have a seat left at the end. Or you could USE the market to enjoy the best of all worlds: low dollars at risk, a long time horizon, and unlimited upside with a very limited downside. All in a very convenient little tool called a LEAP option. Long-Term Equity Anticipation Products are options that expire in one, two, or three years.Link here.
WHAT IS JOHN TEMPLETON DOING NOW?
Warning to bull market enthusiasts: It is going to be a bumpy ride. That, at least, is the view of Sir John Templeton, the 91-year-old founder of the Templeton Funds who made $86 million four years ago shorting technology stocks. Now the legendary investor is predicting it will take “several years” before a sustained rise in U.S. stocks because he believes they are way overvalued. “You can always find bargains [in equities] somewhere but it’s difficult now,” says Templeton, who has been investing for his personal portfolio since retiring from the fund business 12 years ago. “My advice now is to own government bonds.”
He singles out for special criticism the Nasdaq 100. His big concern today: the U.S. consumer. He says Americans have taken on too much credit card and mortgage debt. Templeton predicts home prices will fall and defaults rise. Real estate may tumble, but Templeton gives only even odds on deflation over the next few years. He also gives even odds for the dollar continuing to fall against major currencies, except that he thinks Japan will eventually give up trying to support the dollar and the yen will then rise.
He particularly likes market neutral mutual funds, funds that bet short and long on stocks like hedge funds but do not have their high fees. He also likes government bonds from countries with no big trade or fiscal deficits, like those of Singapore, Hong Kong and South Korea, and thus less risk of steep currency devaluation.Link here.
FERRETING OUT FAST-GROWING TECH BARGAINS
When considering growth stocks as potential investments, one way to narrow the field is to find those with the best value characteristics. That can lead you toward the financial nirvana known as growth at a reasonable price (“GARP”). Looking at the 25 stocks on our fast-growing technology list, we focused on the five with the lowest price-earnings ratios based on estimated income for 2004 to see if there were any true bargains to be had. The bottom five have price-to-earnings ratios of 21 or below, while at the other end of the list eBay is going for 64 times its expected earnings. Some look interesting.Link here.
There are plenty of “bad bets” being made by investors based on the false premises currently promoted in the financial and political media outlets. But then, in an election year, we always seem to hear about how much better the stock market and economy do under Republican administrations. Except that during Democratic administrations, the market averaged positive returns of 12.3% while under Republican presidents, the market averaged gains of 8%.
Promoters tell you now that historically low interest rates are the perfect rationale for historically high price-to-earnings levels in the major indices like the S&P 500. But rates are a cyclical phenomenon, and typically, very low rates ignite economic activity. What follows has always been rates that move higher. Another bullish case for stocks has been that with yields on bonds and cash assets so low, investors really have no choice but to invest in stocks for the higher returns. However, during the past five or more years, with the current bull market included, both cash and bonds have produced higher positive returns.
We had three secular, durable bull markets during the last century. Each of them began with the average P/E in single digits or near 10 at most. And that was using net reported earnings, not operating earnings (earnings ex-“special items”). My fresh copy of Barron’s quotes the S&P as selling for just under 30 times trailing net earnings. Insiders are selling stock in their own companies at record levels. Those conditions have never marked the start of bull markets. They have been signs of market tops, though.Link here.
THE DECK IS STACKED TOWARDS MORE SPENDING
Cutting spending is nearly an impossible task in Washington, made even more difficult by the way budgets are proposed and enacted. Looking at more than $2.4 trillion in spending and how it is spent, a person of average intelligence could easily find hundreds of billions of dollars in programs that could be eliminated, including whole departments and agencies, with no harm to the health and safety of citizens. That citizen’s proposed cuts would wipe out the deficit within several years, permit further permanent tax cuts, and free up resources for productive use in the private sector, probably touching off a real economic boom and not the on-again, off-again recovery the U.S. has been experiencing.
But the fact that 2004 is an election year will make it virtually impossible for most members of Congress to find the backbone to cut any federal spending, regardless of how useless the program and/or wasteful the expenditure. Washington lives by plunder, and Bush’s latest budget proposal only perpetuates the buying off of various electoral constituencies, all to the detriment of the average taxpayer.
The good news is that more of the electorate are getting wise to the plunder that comes from Washington because of its vast scale. Whether it is disgust at the exploding welfare state or horror at how the U.S. has become a modern day version of the warfare state Roman Empire, more citizens see the federal government for what it is -- nothing more than an exercise in brute force by a power mad elite that is destroying the individual freedoms it is supposed to protect.More on this story here.
WHAT IS MISSING FROM RATE-HIKE DISCUSSIONS
The Fed believes a Bank of Japan rate increase in late 1994, during a time in which the Nikkei was recovering, although inflation remained low and the output gap was still negative, was the fatal blow tipping Japan’s economy into sustained deflation. Understanding that makes clear (at least to the author) the Fed’s rationale and also their cover if something goes “wrong” (“We followed the accepted theory”). If Alan Greenspan and the Fed are “wrong” and inflation comes roaring back, I expect he will simply declare “victory” over deflation and ride off into the sunset, with the spin that he saved America, and maybe the entire globe, from a “perilous deflation”. However, there are key differences between Japan’s the US’s experiences.
The Fed’s announcement last week was window dressing. They have no intention of raising rates any time soon. An increasing stock market in the face of continued soft employment and low capacity utilization in the USA today is exactly the situation in Japan just before the last BoJ rate increase. Therefore the Fed sees their course as clear -- NO rate increase now or for the foreseeable future. The fun comes in when you try to predict what happens next...More on this story here.
THE BALANCING OF GLOBALIZATION
If the U.S. economy catches cold, many of the nations of the world might also catch our colds or develop economic pneumonia. The hope among especially Asian Central Bankers is that they can build a middle class which becomes capable of supplying its own consumer spending and growth engine and they will become less dependent upon the American consumer. So far, they seem to feel that it is better to take dollars which are decreasing in value than to risk recessions and turmoil in their own economies. The goal seems to be to try and slowly transition to a more balanced world economy.
But whether that new balance is slow or fast, it will happen. Asia has tasted the fruits of a free market for decades. There is no turning back. Further, as these economies grow and become increasingly privatized and a new emerging middle class develops, they will increasingly become their own growth engines. While the transition may not be as smooth as the world might like, and in fact might be quite rocky when the United States falls into recession, this is a trend that is locked in place.More on this story here.
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