Tuesday, May 31, 2016

Rothschilds Prove that Elite Bankers Rule the World

Rothschilds Prove that Elite Bankers Rule the World — 
Establish Billionaire Tax Haven INSIDE America


Friday, May 20, 2016

The Average American’s Retirement Savings By Age -- And Where So Many Go Wrong

Would you like to know if you're on track for a financially secure retirement? This short piece will give you an excellent idea... complete with two easily readable graphs and a table. Trust me, it's worth five minutes of your time.


Wednesday, May 4, 2016

The Savings Rate Also Rises... By Michael K. Farr, May 3, 2016

Late last week we learned that Personal Income rose at a respectable pace of +0.4% in March, exceeding the consensus estimate of +0.3%.  As has become a recurring theme, though, the pace of consumer spending was unable to keep up with the growth in income.  Personal Spending rose just +0.1% in March, below the consensus estimate of +0.2%.  The net effect?  The savings rate rose again, this time to a 13-month high of 5.4%.  For the full first quarter of 2016, the savings rate of 5.2% matched the highest level since the fourth quarter of 2012.   

We have been talking about the likelihood of a higher savings rate for several years, and we continue to believe that further increases will be a significant drag on economic growth for at least the next several years.  Why?  Well the quickest explanation is that leading up the financial crisis, the savings rate had fallen far too low relative to historical averages.  Since World War Two, the US consumer has saved an average of 8.7% of his Disposable Personal Income (DPI) on an annual basis.  That rate fell to a low of 2.6% in 2005 but has since rebounded to 5.1% in 2015 - still well  below the long-term average.  So the recent increases in saving may simply be that the consumer is compensating for years of profligate spending and under-saving.    

But simply showing that the savings rate is low relative to history is not a great explanation for why we think the savings rate will continue rising from here.  The consumer savings rate can be affected by a number of different variables, including income levels, unemployment rates, housing prices, stock prices, inflation rates, consumer confidence, lending standards (access to credit), gas prices, interest rates, etc.  Given that many of these variables have been supportive of consumer spending in recent years, most economists have been somewhat confounded by the recent increases in the savings rate.  For example, the unemployment rate has been cut in half, incomes have risen, stock prices have tripled since March, 2009, the housing market has rebounded nicely, inflation is low, confidence has rebounded, lending standards have loosened, and gas prices and interest rates are very low.  There is not much in these indicators that would "spook" consumers into saving more.  So why the sudden urge to put more aside for a rainy day?

In our view, the most logical explanation is that many of the economic indicators cited above are not an accurate depiction of the typical middle-class family.  Most notably, middle-class incomes have risen at a much slower pace than the cost of non-discretionary expenditures, such as health care, education, child care, housing, and yes, saving for retirement (the cost of which goes up as asset prices rise and expected future returns go down).  The squeezing of the middle class has been a decades-long trend that shows little sign of reversing.  The average American is in precarious financial condition, without the means to address a minor short-term financial emergency much less fund a 30-year retirement.  The cover story in this month's The Atlantic magazine ("The Secret Shame of Middle-Class Americans", by Neal Gabler) is just the latest in a long series of news pieces that have shed light on this issue.  The entire article can be found at this link:http://www.theatlantic.com/magazine/archive/2016/05/my-secret-shame/476415/.  But let me offer some quotations taken directly from the article: 
  • The Fed asked respondents (to a national survey it conducted) how they would pay for a $400 emergency.  The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all.
  • Two reports published last year by the Pew Charitable Trusts found, respectively, that 55 percent of households didn't have enough liquid savings to replace a month's worth of lost income, and that of the 56 percent of people who said they'd worried about their finances in the previous year, 71 percent were concerned about having enough money to cover everyday expenses.
  • Median net worth has declined steeply in the past generation-down 85.3 percent from 1983 to 2013 for the bottom income quintile, down 63.5 percent for the second-lowest quintile, and down 25.8 percent for the third, or middle, quintile. According to research funded by the Russell Sage Foundation, the inflation-adjusted net worth of the typical household, one at the median point of wealth distribution, was $87,992 in 2003. By 2013, it had declined to $54,500, a 38 percent drop. And though the bursting of the housing bubble in 2008 certainly contributed to the drop, the decline for the lower quintiles began long before the recession-as early as the mid-1980s, Wolff says.
  • ...the study by Lusardi, Tufano, and Schneider found that nearly one-quarter of households making $100,000 to $150,000 a year claim not to be able to raise $2,000 in a month.
  • Real hourly wages-that is, wage rates adjusted for inflation-peaked in 1972; since then, the average hourly wage has essentially been flat. (These figures do not include the value of benefits, which has increased.)
  • Though household incomes rose dramatically from 1967 to 2014 for the top quintile (ie, the highest earning one-fifth), and more dramatically still for the top 5 percent, incomes in the bottom three quintiles rose much more gradually: only 23.2 percent for the middle quintile, 13.1 percent for the second-lowest quintile, and 17.8 percent for the bottom quintile. That is over a period of 47 years! But even that minor growth is somewhat misleading. The peak years for income in the bottom three quintiles were 1999 and 2000; incomes have declined overall since then-down 6.9 percent for the middle quintile, 10.8 percent for the second-lowest quintile, and 17.1 percent for the lowest quintile.
  • A 2014 analysis by USA Today concluded that the American dream, defined by factors that generally corresponded to the Commerce Department's middle-class benchmarks, would require an income of just more than $130,000 a year for an average family of four. Median family income in 2014 was roughly half that.
  • The American Psychological Association conducts a yearly survey on stress in the United States. The 2014 survey-in which 54 percent of Americans said they had just enough or not enough money each month to meet their expenses-found money to be the country's No. 1 stressor.
  • A 2014 New York Times poll found that only 64 percent of Americans said they believed in the American dream-the lowest figure in nearly two decades.
Again, it has become abundantly clear that the large majority of Americans are financially prepared for neither a major crisis nor retirement.  Moreover, the big increases in asset prices we've seen in recent years (stocks, real estate, bonds), combined with the very low level of interest rates, means that those underprepared Americans will have to set aside more money, not less, in order to reach their retirement and security goals.  Unfortunately, this is one cost that the Fed refuses to consider in its assessment of inflation.  If we can't expect to earn the historical 10%+ on stocks and something reasonable like 4%-5% on bonds, then we need to save more, especially if we have deferred the process of saving for retirement until now.  Setting aside more for retirement or an emergency is a very real cost that needs to be considered. 

As always when I discuss this topic, I ask you to please not mistake this as a political commentary.  I am simply trying to shed additional light on the problem as it relates to our future economic growth prospects.  A little less than 70% of our economy is comprised of consumer spending, so the consumer's financial condition is of utmost importance.  Possible solutions to the problem are outside the scope of this Market Commentary, but I'll give you a clue.  Congress...get your act together!



Wednesday, March 11, 2015

The Surging U.S. Dollar - by Michael K Farr Mar. 11, 2015

The Surging U.S. Dollar - by Michael K Farr

Earnings estimates are coming down.  In fact, the aggregate earnings estimate for the S&P 500 has dropped roughly 10% since late 2014.  According to data from the Standard & Poor's web site, S&P 500 operating earnings are now expected to grow just 5% compared to the estimate for 2014.  If the current trend of downward revisions continues, there may be no earnings growth at all this year when it's all said and done.  Negative revisions to earnings expectations are not typical of an economy that is gaining strength.  So what is going on?

There are several factors weighing on earnings expectations, and therefore stock prices.  One factor that is gaining increased attention is the dramatic rise in the value of the dollar.  The US Dollar Index (DXY), which measures the value of the dollar against a basket of major world currencies, is currently hovering at a 12-year high after appreciating around 23% since mid-2014.  The implications of a sharply higher dollar are many.  So let's dig into this further and see if we can't clarify what's going on. 

The most obvious problem with a soaring dollar is that US companies that generate revenue outside the US are at a competitive disadvantage compared to their foreign competitors.  The implicit assumptions here are that 1) US multinationals do not have effective currency hedging programs, and 2) the expenses at these multinationals are incurred in US dollars.  If either of these is untrue, specific companies may have reduced at least some of their currency exposure.  In any event, compounding the problem for multinationals is the fact that earnings will take a hit as they are translated back into US dollars in each reporting period.  Estimates vary widely, but given that at least 30% (and perhaps well over 40%) of S&P 500 revenue is derived outside the US, the dollar's strength is having a big effect on profitability for the index at large. 

A second effect from a higher dollar is that commodities, which are largely traded in US dollars, are falling in price.  We have already seen the fallout that plunging oil prices are having on the Energy sector, which now represents just 8% of the total S&P 500 index.  According to data from S&P, earnings for S&P 500 Energy companies are set to fall over 50% in 2015 as a result of the drop in black gold.  And while a surge in supply is responsible for much of the big decrease in oil prices, tepid demand and the stronger dollar are also certainly factors as well.  The dollar's strength also translates to weakness in other commodity prices, putting earnings in the Materials sector, for example, at risk of further negative revisions. 

  Source: Bloomberg
A rapidly rising dollar also creates significant systemic risks in the capital markets.  The Fed's aggressive monetary policy created "easy money" by pushing down interest rates to very low levels.  Higher-risk issuers in emerging markets and within the Energy sector found the interest rates too attractive to ignore.  Now that the Fed is set to raise rates and the dollar is rising, those same bond issuers may find themselves in trouble.  Issuers in emerging markets who generate revenues in their own currencies will find it much harder to repay the dollar-denominated debt.  In addition, capital flight out of emerging economies and into the US could cause rapid increases in interest rates for emerging market issuers.  Issuers in the Energy sector, particularly the smaller and less creditworthy companies, will struggle to repay huge amounts of debt issued before the dollar surged and oil prices plummeted.  At some point, these pressures could be felt throughout the global economy.  The Fed's aggressive monetary easing has forced investors in risky assets.  The unwinding of this process is unlikely to go smoothly. 

A higher dollar also has implications for US economic growth.  Exports add to domestic GDP, while imports subtract.  As the dollar falls, imports become cheaper relative to domestically produced goods and services.  In 2014, an increase in the trade deficit subtracted 23 basis points from GDP growth.  Most believe that figure will go much higher in 2015.  Moreover, the rapid growth in imports associated with the dollar strength results in the US effectively "importing deflation" at a time when the Fed is trying to generate more inflation.  In other words, the strong dollar is complicating matters for the Fed.   

Where is much of the recent earnings growth coming from?  Corporate buybacks.  According to a March 4 article in The Wall Street Journal, "In the six full years following and including the financial-crisis nadir - so, 2009 through 2014 - a net of $41.2 billion has gone into equity funds, according to data from Lipper Funds.  Meanwhile, in the first three quarters of 2014 alone, corporate buybacks rose 27%, to $567.2 billion."  This is a stunning statistic.  The article goes on to say that "buyback authorizations in February, at $118.32 billion, were the strongest for any February on record, according to data from Birinyi Associates."  Should investors pay up for earnings growth generated through buybacks?  So far they have, but this game of financial engineering is likely to lose its luster if for no other reason than stocks are no longer cheap.  All else equal, buybacks are set to be meaningfully less accretive when executed at dramatically higher prices.

We've argued that earnings quality is a factor that has been underappreciated by investors during the course of this bull market.  Corporate profit growth has benefited from several unsustainable factors, and margins that are running some 50% above long-term averages.  We have also argued that there cannot be a complete "decoupling" between the US and the rest of the world.  It appears as though the market is beginning to catch on to these notions.  We continue to believe it makes most sense to own high-quality, conservative large-cap companies with fortress balance sheets and superior management teams.  There is no wisdom in crawling onto the thinner branches if a storm is coming!



Monday, December 10, 2012

Defining a secular bear market - by Dr. John Hussman

One way to think about the effect of a secular bear market is to compare the absolute amount of volatility experienced by the market to the total distance it travels. In the chart below, the blue line represents the sum of absolute weekly percentage changes in the S&P 500 over the preceding 4-year period, divided by the absolute overall change in the S&P 500 over that period. A spike in that line indicates that the market experienced a great deal of week-to-week volatility over a 4-year period, without much net movement overall (Geek's note – this calculation is related to the concept of fractal dimension - the spikes are singularities where the ratio is undefined because the 4-year change is close to zero).

An extended period of blue spikes is the hallmark of secular bear markets. These periods have reliably followed periods of elevated valuations as we have observed, with little respite, since the late 1990s. A great deal of distance traveled, with little to show for it overall. Present valuations provide little reason to believe that this period is behind us. Things will change, and this period of distortion will be behind us. The transition is likely to be unpleasant for the market, but again, I expect that we'll observe good opportunities to accept significant market exposure even in the coming market cycle.

by Dr. John Hussman
December 10, 2012 
Secular Bear Markets - Volatility Without Return

Monday, September 24, 2012

Bull & Bear Markets Since 1950

Since 1950, there have been seventeen (17) bull & bear market cycles (more or less, depending on how you count). Here is a semi-log scale chart of the S&P 500 Index since 1950, which pretty clearly shows the bull markets, the market peaks, and the subsequent bear markets:

This semi-log scale chart is the one that stock brokers and financial advisors typically use, because it goes up and to the right which supports the concept of stocks for the long run, the observation that we are always either in a bull market, or just about to enter one, and that, to avoid the negative effects of inflation, you must invest a certain portion of your portfolio in equities, in the stock market. 

The semi-log scale chart has the advantage that it shows the earlier bull & bear market cycles much more clearly than does the equivalent linear scale chart, shown below: 

Since the purpose of this post is to show the details of individual bull & bear market cycles, let me explain my methodology:

(1) Downloaded S&P 500 Index monthly close data from 1950 to 2012, from Yahoo! Finance (symbol: ^GSPC).

(2) Identified monthly, absolute peak value (1549.38), Oct., 2007.

(3) Identified 17 bull & bear market cycles - start month, peak month, end month.

(4) Normalized monthly data for each of the 17 bull & bear market cycles so they could be plotted on the same Y-axis chart.

(5) Graphed the data:

Here is the chart of the 17 cycles. We notice several things:

(1) Bull markets are typically twice as long as bear markets. However, bull markets do not last forever. They all end. The longest, at 61 months, was the 2002-2007 bull market portion of the 2002-2009 cycle.

(2) Bull markets grow more slowly, at about half the rate that bear markets decline.

(3) Every bull market eventually peaks and becomes a bear market. 

(4) Earlier bear markets only gave up (retrenched) a portion of their bull market growth, so the overall market trend was upward over time. In the past 15 years, however, that has not been true.

The current 2009-2012 bull market is shown on the chart as a solid black line. Since it has not yet peaked, I had to estimate its position. I made the assumption that it will peak in February, 2013, five months in the future. The farther we are from the actual peak, the more the solid black line will be shifted to the left. 

The most important take-away from this analysis is the understanding that bull markets do not last forever. Furthermore, if you enter the stock market in the late stage of a bull market, you will likely sustain market losses in the subsequent bear market, losses that may take years, or even decades, to erase in the subsequent bull market. 

This is why analysts are consistent in saying that your expected stock market return over the decade following an investment is highly dependent on when you make the investment. Invest early in a bull market and you can expect decent returns; invest in the late stages of a bull market and you are practically guaranteed sub-par returns.

Monday, September 3, 2012

Ten Inviolable Rules for Dealing with Wall Street

Ten inviolable rules for dealing with Wall Street investment banks:

1 Reward is always relative to risk
2 Information is always asymmetrical
3 Good advice is always priceless
4 Always ask what the seller's motivation is
5 Legal documents always protect the preparer
6 Fees and commissions always impact performance
7 Investment banks always maximize shareholder profits
8 Investment banks always protect their own reputation
9 Keep it simple, stupid (KISS)
10 There is no free lunch, no free money, no riskless trade